MICROCAPITAL STORY: Microfinance Continues to Play a Key Role in Developing Economies as Remittances to Latin America and the Caribbean Decline in 2009.

The Inter-American Development Bank (IBD) predicts 2009 with be the first year that remittances will decline in Latin America and the Caribbean after a decade of growth. The IBD has been tracking these flows since 2000. Remittances are transfers of money by foreign workers to their home countries. With the already shaken international banking system, following the collapse of Lehman Brothers in September 2008, Immigrants are feeling the credit squeeze as they reduce money sent to family in their home countries.

As early as March 2008, the IDB reported that remittances to Mexico only grew one percent, while Brazil fell by four percent. While the total amount of money sent home (Latin America) was estimated at USD 66.5 billion in 2007, concern is growing that 2009 and possibly 2010 will appear bleak or flat at best. Latin American and Caribbean expatriates, according to the Multilateral Investment Fund (MIF), transferred USD 69.2 billion to their homelands in 2008. This was a slight increase of 0.9 percent versus 2007. In comparison, remittances in 2000 were at USD 30.0 billion.

Remittances, in addition to microfinance, play a key role in many of the regions developing economies. When compared to development assistance from the World Bank as well as direct foreign investment, remittances make up more than half of the funding provided by the combined two. Such examples include the (El Salvador, Guatemala, Guyana, Haiti, Honduras, Jamaica and Nicaragua) Central American and Caribbean nations that receive at least 12 percent of their GDP from immigrants abroad.

Chief Economist Walter Kemmsies of infrastructure engineering firm, Moffat and Nichol believes that a key sector of decrease of remittances comes from immigrants in the construction industry in the United States. Particularly, Mexican migrants that comprise 20 percent of the labor force in the construction industry.

According to IBD, money send to Latin America and the Caribbean Q4 2008 dropped significantly. Remittances to Central America experienced a 4 percent drop, while the Caribbean slid 6 percent in the same period. South America was virtually flat with only a 1 percent increase in Q4 2008. This drop for the region roughly equates to a decrease of USD $17 billion. While it is too early to predict, reports from analysts at the IDB suggest that January 2009 may see as much as a 13 percent drop. For a graphical depiction, historical data and remittance estimates see “Remittances to Latin America and the Caribbean 2008 (US$ millions)”

As reported by MicroCapital on March 20, 2009, Microfinance institutions have been impacted by the global recession (higher food, rise in energy prices, and especially lower remittances) with the financial performance of MFIs (especially organizations unable to take deposits) being the most negatively impacted. However, the global ratings agency, Fitch Ratings has reported that while remittances have seriously impacted these countries, the size and integration of MFIs in the respective countries may help determine the resiliency of the region.

MicroCapital also recently published a two-part series Paper Wrap-Up entitled, “2008 Microscope on the Microfinance Business Environment in Latin America and the Caribbean (LAC).” For additional information on the state of the business environment for Microfinance in these regions please see LAC (Part I) and LAC (Part 2).

More than ever, remittances and Microfinance as key poverty reduction tools

More profoundly, the financial crisis has effected employment migrations and the flow of remittances. In addition to funding provided by MFIs in the LAC region, a report by the IBD entitled “Remittances in times of financial stability” has concluded that more than 60% of remittances are used to purchase daily necessities, such as food, clothing and shelter with only 30%-50% of remittance recipients having access to bank accounts. Thus, more than ever, microfinance plays a critical role in helping reduce dependence on traditional remittance sending nations, while focusing on providing innovative microfinance services/solutions and creating greater transparency of the flow of credit to developing nations.

By Zoran Stanisljevic

Additional Resources:

McClatchy: Latin American, Caribbean migrants sending less money home

Voice of America News: US Financial Crisis Slows Immigrant Workers’ Remittances

International Herald Tribune: Development bank says remittances sliding for 2009

MicroCapital Story, March 2009: MICROCAPITAL STORY: Microfinance Insights Reports Over 80% of Investors Haven’t Reduced Microfinance Investment Portfolio Due to Global Recession

Inter-American Development Bank (IBD): Remittances to Latin America and the Caribbean 2008

Fitch Ratings: Home

Inter-American Development Bank (IBD): Remittances in times of financial stability

MicroCapital Story, February 2009: PAPER WRAP-UP: 2008 Microscope on the Microfinance Business Environment in Latin America and the Caribbean (LAC), (Part I of a II part series)

MicroCapital Story, March 2009: PAPER WRAP-UP: 2008 Microscope on the Microfinance Business Environment in Latin America and the Caribbean (LAC), (Part II of II)