Transcript Slide 0 - World Bank

Leveraging Remittances for International
Capital Market Access in Poor Countries
Dilip Ratha
(with Prabal De and Sanket Mohapatra)
Migration Thematic Group
World Bank
October 19, 2006
Outline
1. Should poor countries borrow from international
capital markets?
2. Remittances improve sovereign rating
3. Improving rating through securitization of future
flows of remittances
Outline
1. Should poor countries borrow from international
capital markets?
2. Remittances improve sovereign rating
3. Improving rating through securitization of future
flows of remittances
Should poor countries borrow from
international capital markets?
Sanskrit saying by sage Charbak:
"Yavat jivet sukham jivet
Runam krutva ghrutam pivet"
"Live luxuriously as long as you live
Borrow if need be,
but enjoy your ghee"
Borrowing cost rises exponentially as
credit rating deteriorates
Interest spread, basis points
900
2003
800
700
600
Below inv. grade
500
400
Investment grade
2005
300
200
100
Launch spreads and S&P ratings for sovereign issues of size $100
million and 7 years tenor. Source: Bondware, S&P, and authors’
calculations
CCC+
B-
B
B+
BB-
BB
BB+
BBB-
BBB
BBB+
A-
A
A+
0
Borrowing cost rises exponentially as
credit rating deteriorates
Interest spread, basis points
900
2003
800
700
600
Below inv. grade
500
400
Investment grade
2005
300
200
100
Absence
of sovereign rating constrains
Launch spreads and S&P ratings for sovereign issues of size $100
private
access
international capital
million
and sector
7 years tenor.
Source:to
Bondware
CCC+
B-
B
B+
BB-
BB
BB+
BBB-
BBB
BBB+
A-
A
A+
0
A-
Austria
Canada
Denmark
Finland
France
Germany
Ireland
Luxembour
Netherlands
Norway
Singapore
Spain
Sweden
Switzerland
UK
Australia
Nzland
Japan
Iceland
Belgium
Bermuda
Italy
Portugal
Slovenia
Taiwan
Hong Kong
Kuwait
Israel
Bahrain
Sovereign ratings in high-income countries
BBB+
Moodys
S&P
Fitch
A
A+
AA-
AA
AA+
AAA
B-
Czech Rep
Hungary
China
Poland
Korea
Saudi
Malaysia
Chile
South Africa
Thailand
Russia
El Salvador
Bulgaria
Kazakhstan
Romania
Egypt
India
Costa Rica
Colombia
Peru
Philippines
Brazil
Turkey
Ukraine
PNG
Indonesia
Venezuela
Lebanon
Uruguay
Dom Rep
Bolivia
Argentina
Ecuador
Sovereign ratings in low-income countries
CC
Moodys
S&P
Fitch
BB
BBB+
AA-
B-
Czech Rep
Hungary
China
Poland
Korea
Saudi
Malaysia
Chile
South Africa
Thailand
Russia
El Salvador
Bulgaria
Kazakhstan
Romania
Egypt
India
Costa Rica
Colombia
Peru
Philippines
Brazil
Turkey
Ukraine
PNG
Indonesia
Venezuela
Lebanon
Uruguay
Dom Rep
Bolivia
Argentina
Ecuador
Sovereign ratings in low-income countries
CC
Moodys
S&P
Fitch
BB
BBB+
AA-
Most poor countries are not rated
Top recipients of remittances, 2005
$ billion
24
23
% of GDP
32
22
27
India
China
Mexico
13
13
France
Philippines
26
24
22
Moldova Tonga Lebanon Lesotho
Haiti
Remittances tend to be large in poor countries
Remittances tend to rise following
crisis, natural disaster, or conflict
Remittances as % of private consumption
2.0 2.0
2.0
1.7
1.8
1.4
1.2
year before
year of crisis
year after
1.0
0.5
Indonesia
Mexico
Thailand
Outline
1. Should poor countries borrow from international
capital markets?
2. Remittances improve sovereign rating
3. Improving rating through securitization of future
flows of remittances
Remittances improve a countries’
ability to service external debt
Present value of external debt as % of
exports of goods, services, and remittances
800
700
600
Excluding remittances
Including remittances
500
400
300
200
100
al
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Predicting ratings
1. Fit a regression model to explain
ratings
2. Predict shadow ratings
3. Calculate effect of remittances on
shadow ratings
Conversion from Letter to Numeric
scale
Investment Grades
S&P and Fitch
Moodys
Letter Numeric Letter Numeric
Grade Grade Grade Grade
Sub-Investment Grades
S&P and Fttch
Moodys
Letter Numeri Letter Numeric
Grade c Grade Grade Grade
AAA
AA+
AA
AAA+
A
ABBB+
BBB
BBB-
BB+
BB
BBB+
B
BCCC+
CCC
CCCCC
C
1
2
3
4
5
6
7
8
9
10
Aaa
Aa1
Aa2
Aa3
A1
A2
A3
Baa1
Baa2
Baa3
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
Ba1
Ba2
Ba3
B1
B2
B3
Caa1
Caa2
Caa3
Caa
11
12
13
14
15
16
17
18
19
20
Regression Results (work-in-progress)
 Rating as a function of
– macro variables
– rule of law
– debt and international reserves
– volatility
 R is high
2
Regression Results (work-in-progress)
Dependent variable: Rating
GDP growth (5-yr MA %)
S&P
-0.45***
Moody’s
-0.10
Fitch
-0.26***
Log of GNI per capita
-1.33***
-0.87**
-2.7***
Rule of law
-1.69***
-1.58
-0.76*
Ratio of external reserves to
import and ST debt
-2.51**
-3.90***
-3.87***
Ratio of ext. debt to exports
0.54**
1.07**
1.11***
Inflation
0.07**
0.14***
0.18***
GDP Volatility (5 years)
0.32*
Observations
47
23
30
R2
0.85
0.89
0.92
* significant at 10%; ** significant at 5%; *** significant at 1%
Regression Results – using dated control
variables (work-in-progress)
Dependent variable: Rating
GDP growth (3-yr MA %)
S&P
-0.44***
Fitch
-0.30***
Log of GNI per capita
-1.38***
-0.97***
Rule of law
-2.65***
-2.29**
Ratio of external reserves to
imports and ST debt
-2.57***
-2.19**
Ratio of ext. debt to exports
0.76***
1.09***
GDP Volatility (5 years)
0.24**
0.38***
Observations
43
53
R2
0.85
0.81
•significant at 10%; ** significant at 5%; *** significant at 1%
Predicted ratings for unrated countries (work-inprogress)
Maldives
St. Vincent &
Grenadines
St. Lucia
Dominica
Albania
Yemen, Rep.
Belarus
Gabon
Swaziland
Chad
Tajikistan
Angola
Tanzania
Cambodia
Guyana
S&P Model
Fitch
S&P Model
'05
Model '05
'05
BBB
BBB
Bangladesh
BBBB
BBBKyrgyz
BRepublic
BBBBBBLao PDR
CCC+
BB
BB
Solomon
CCC+
Islands
BBBB
Comoros
CCC+
BBBBNepal
CCC+
BBBB
Togo
CCC
BBBB
Cote d'Ivoire
CCCB+
BB
Congo, Rep.
CCCB+
BMadagascar
CCCB+
BBZambia
CC
B
B+
Sudan
CC
B
B
Niger
CC
B
B+
Sierra Leone
CC
BB
Ethiopia
C
* Indicates out of range
Fitch Model
'05
B
BBCCC+
CCC
CCC+
CCC
CCC+
CCC
CCCC
C
CC
O*
C
Shadow-rated vs. rated countries (work-inprogress)
(Shadow ratings underlined and italicized)
Country
S&P rating Moody's rating Fitch
rating
Botswana A
Aa3
Barbados BBB+
Baa2
Oman
AA2
Country
Poland
South
Africa
Thailand
Armenia
Bulgaria
Croatia
Mexico
India
Macedonia
Morocco
S&P
rating
BB+
BB+
BB+
Moody's
rating
Baa2
Fitch rating
BBBBB+
Ba1
BBB+
BBB+
A2
Baa1
BBB+
BBB+
Cape Verde
Sri Lanka
BB+
BBB+
Baa1
Baa3
Baa3
Baa3
Baa1
BBB+
BbBBB
BBBBBB
Brazil
Colombia
Costa Rica
Jordan
Panama
BB
BB
BB
BB
BB
Ba2
Ba2
Ba1
Baa3
Ba1
BB
BB
BB
Peru
BB
Ba3
BB+
BBB
BBB
BBB
Maldives BBB
B+
BB-
BB+
Russia
BBB+
Baa2
BBB+
Gabon
BB-
Tunisia
BBB
A3
BBB
Guatemala
BB
Ba2
BB+
Philippines
BB-
B1
BB
Mauritius
Baa1
Kazakhsta BBBn
Romania BBBSeychelles B
Baa2
BBB
Serb.& Mont. BB-
Ba1
BBB
Ba1
BB+
Turkey
Ukraine
Venezuela
Georgia
Albania
BB-
Egypt
BB+
BBBBBBB+
BBBa3
B1
B2
BBBBBB-
Shadow-rated vs. rated countries
(work-in-progress) (Shadow ratings underlined and italicized)
Country
Senegal
S&P rating Moody's
rating
B+
Belarus
BBSwaziland B+
Moldova
Congo, Rep.CCCTanzania
B
Benin
Ghana
Indonesia
Pakistan
B
B+
BBB+
Caa1
B1
B2
Fitch
rating
Mongolia
Mozambique
PNG
B-
B
B+
BB-
Guyana
BYemen
BBKyrgyz Rep BHonduras
Burkina Faso
Dom. Rep
Jamaica
Madagascar
Mali
Ba3
B
B
B
B
B
B3
B1
Country
B
B-
S&P
rating
B
B
B
Moody's
rating
B1
Ba2
Fitch rating
B+
B
B
Bangladesh BArgentina
Bolivia
Cameroon
Lebanon
Paraguay
Suriname
B+
BBBBB-
Nigeria
BB-
Nicaragua
B-
Uganda
CCC+
Kenya
B+
Ecuador
CCC+
Togo
Cote d'Ivoire
Niger
Ethiopia
CCC
CCCCC
C
B3
B3
B3
B3
Ba2
B
BB
BB
BB-
B3
B
Caa1
B-
These model-based ratings should be treated as indicative; they are clearly not a substitute for the broader and deeper
Shadow-rated vs. rated countries (work-inprogress)
(Shadow ratings underlined and italicized)
Country
Senegal
S&P rating Moody's
rating
B+
Belarus
BBSwaziland B+
Moldova
Congo, Rep.CCCTanzania
B
Benin
Ghana
Indonesia
Pakistan
B
B+
BBB+
Guyana
BYemen
BBKyrgyz Rep BHonduras
Burkina Faso
Dom. Rep
Jamaica
Madagascar
Mali
Caa1
Fitch
rating
Mongolia
Mozambique
PNG
B-
B
B+
BB-
S&P
rating
B
B
B
Moody's
rating
B1
Ba2
Fitch rating
B+
B
B
Bangladesh BArgentina
Bolivia
Cameroon
Lebanon
Paraguay
Suriname
B+
BBBBB-
Uganda
CCC+
Kenya
B+
Ecuador
CCC+
Togo
Cote d'Ivoire
Niger
Ethiopia
CCC
CCCCC
C
B3
B3
B
BB
B-
B3
Many
unrated
countries
likely
have
B1
B3
B2
Ba2
B
better market access than currently
Nigeria
BBBBbelieved
B3
Nicaragua BBa3
B
B
B
B
B
Country
B3
B1
B
B-
B
Caa1
B-
These model-based ratings should be treated as indicative; they are clearly not a substitute for the broader and deeper
Remittances can help obtain and improve
credit rating
Lebanon
Remittances
Rating
Rating
Spread
(% of GDP,
excluding including reduction
2004)
remittances remittances (basis
pts)
14
B+
BB150
Haiti*
28
CCC
B-
334
Nicaragua*
11
CCC+
B-
209
Uganda*
5
B-
B
161
* Calculated using a model similar to Cantor and Packer (1995)
Including remittances may improve potential
ratings for Bangladesh by two notches
Rating
model
Shadow rating w/o Shadow rating
remittances
with remittances
Moodys
B3 (16)
B1 (14)
S&P
B- (16)
B+ (14)
Fitch
B (15)
BB- (13)
Countries in similar rating category as
Bangladesh
 Argentina, Dominican Republic, Indonesia,
Pakistan, Paraguay, Uruguay, Venezuela
 Benin, Bolivia, Burkina Faso, Ghana,
Jamaica, Mali, Surinam
Outline
1. Should poor countries borrow from international
capital markets?
2. Remittances improve sovereign rating
3. Improving rating through securitization of future
flows of remittances
Securitization of future remittances can
improve credit rating above investment
grade
Year Issuer
1998 Banco
Cuscatlan
Amount Flow type Transa(US$
ction
mn)
rating
50
Remit.
BBB
Sovereign
rating
BB
2004 Banco
Salvadoreño
25
DPRs
BBB
BB+
2002 Banco do
Brasil
250
Remit.
BBB+
BB-
Remittance securitization structure
Beneficiary’s
account
Remittance senders
Remittance
payments
(foreign
currency)
Issuing bank credits
beneficiary’s account in
domestic currency
Issuing bank
Correspondent banks
Offshore
Domestic
Remittance securitization structure
Beneficiary’s
account
Remittance senders
Remittance
payments
(foreign
currency)
Correspondent banks
Trustee collateral
account
Issuing bank credits
beneficiary’s account in
domestic currency
Message
Issuing bank
Excess cash
(foreign
currency)
Debt service payment
Offshore
International investors
Domestic
Securitization of remittances has increased in
recent years 2,837
$ million
1,600 1,690
1,175 1,170
1,055
540
65
206
350
115
1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004
to
July
- Led by Brazil, Mexico and Turkey
Kazakhstan
El Salvador
1%
6%
Brazil
Mexico
31%
24%
Panama
1%
Peru
2%
Turkey
35%
Potential - $ 10-12 billion a year?
Remittances by region, 2005 ($ billion)
East Asia and the Pacific
44
Europe and Central Asia
25
Latin America & Caribbean
46
Middle East & North Africa
25
South Asia
35
Sub-Saharan Africa
7
Low-income countries
45
All developing countries
181
Constraints
 Paucity of highly rated entities
 Long lead times
 High fixed costs (legal and others)
 Non-transparent legal structure
Policies: to improve ratings
 Improve rating methodology
 Develop local currency rating agencies
 Improve data, macroeconomic management,
and investment climate
Policies: to facilitate securitization
 Master Trust arrangements, and receivable pooling, may
alleviate the constraint of high fixed costs
 Beware of negative pledge in the case of public sector
borrowers
 IFIs can help
–
–
–
–
–
Provide seed money
Improve legal framework
Assume counter-party risk as in Unibanco
Educate policy makers
Improve remittance data
Summary
 Poor countries need to access to international capital
markets
 Absence of sovereign rating constrains their (especially
sub-sovereign and private entities) access to international
capital markets
 Remittances, properly accounted, can contribute to
establish/improve sovereign rating
 Future remittance flows can further improve the rating of
external financing transactions
 Master Trust arrangements, and receivable pooling, may
alleviate the constraint of high fixed costs