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Weaker Remittances Dampen Benefits of Low Oil Price
World Economy

Weaker Remittances Dampen Benefits of Low Oil Price

Lower remittances from Persian Gulf nations, which have been hit hard by the slump in oil prices, will cut the benefits of cheaper oil imports for several Asia Pacific countries including India, Moody’s Investors Service said on Wednesday.
“Generally, weaker remittances will immediately impact the recipient countries’ credit profiles via their balance of payment positions. A prolonged fall would also hurt economic growth, given the importance of remittances to household incomes,” PTI quoted a report as saying.
Moody’s in a report titled ‘Sovereigns—Asia Pacific: Falling Remittances from the Persian Gulf Dampen Benefits of Lower Oil Prices’ analyzes the potential credit implications of weaker remittances from their citizens working abroad for six Asian countries—Bangladesh, India, Pakistan, the Philippines, Sri Lanka and Vietnam.
For these six economies, remittances are equivalent to 3 to 10% of gross domestic product, and between 22 and 188% of foreign reserves. India gets 52.1% of its remittances from the Persian Gulf nations while the exposure of Pakistan to the region is the highest at 61.2% of remittances. Bangladesh gets 54.8% of its remittances from Persian Gulf while Sri Lanka gets 50.9%.
“As a percentage of GDP, remittance receipts are larger than net oil imports in all countries barring India, so changes in remittances will have a greater effect on the current account balance,” it said.
Moody’s said the 25% drop in oil prices since the start of 2015 is large, and it expected that future declines in remittances will be much lower than that in percentage terms. “So, unless remittances decrease significantly more in percentage terms than we anticipate, their decline will dampen, but not completely offset, the benefits of lower oil prices on the current account,” it said.

  Worst Yet to Come
It estimated that it would take a 10 to 30% fall in remittances to outweigh a 50% drop in net oil imports for most countries. “Given its larger net oil import bill, India is an exception, and can thus withstand a much greater fall in remittances,” it said. While the beneficial effects of a lower oil bill on current accounts have already fed through, most of the negative impact from remittance inflows may be yet to come, it said.
The report finds that while previous oil price shocks had limited and short-lived effects on remittances to Asian countries, the current more pronounced and prolonged decline—coupled with fiscal tightening in many oil-exporting countries—is likely to hurt migrant worker earnings and consequently remittances.
“For India, the Philippines and Vietnam, the diversified locations and vocations of their overseas workers could help reduce the fall in remittances overall,” Moody’s said.
For most of the countries in Moody’s study, remittances inflows are greater than net oil import payments as a percentage to GDP. However, the 25% decline in oil prices since the start of 2015 is large, and Moody’s expects “the declines in remittances to be much lower than that in percentage terms.”
“Unless remittances fall significantly more than it expects, their decline will dampen, but not completely offset, the benefits of lower oil prices for the current account,” Moody’s said. It said a decline in remittances is unlikely to be a primary credit driver, although a prolonged fall would impact economic growth, given the importance of transfers to household incomes.

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