Weaker remittances will weigh on the balance of payments of remittance-dependent sovereigns, compounding the impact of lower exports and private investment inflows as the global economy weakens and investors seek safe havens.
Many affected sovereigns such as Tajikistan (293% in 2020),Ukraine (204%), Sri Lanka (201%) and Pakistan (181%)already exhibited significant external vulnerability before the coronavirus outbreak. For these sovereigns, lower remittances will exacerbate their already weak external positions,according to a latest Moody’s Investors Service Report.
“Even taking into account mitigating factors such as lower imports and increased concessional financing from development partners, we expect the EVI scores of Jamaica, Kyrgyz Republic and Kenya (B2 negative) to also approach or exceed 100% by 2021, broadly indicating a more material heightening of external risk.”
“We expect lower-rated remittance-dependent countries to meet their external obligations in 2020, in particular through increased availability of concessional financing from various multilateral and bilateral programs in response to the coronavirus pandemic. However, prolonged weakness in remittance flows, perhaps stemming from structural shifts in economic growth potential in source countries such as Russia – would put severe stress on the balance of payments positions of these especially vulnerable sovereigns.”
The global economic downturn precipitated by the coronavirus outbreak has led to a slump in demand for oil. This caused the price of Brent crude to collapse to a low of around $18 in April 2020, from $64 at the start of the year, before partially recovering to $40 in June, according to the latest Moody’s Services Report. “We expect Brent crude to average $35 per barrel and the West Texas Intermediate spot to average $30 per barrel in 2020. This will trigger falls in incomes and investment throughout hydrocarbon-focused economies, weighing on demand for migrant labour.”
As such, many countries that source a large share of their remittances from the GCC and Russia, where oil production plays a dominant role in the economy, will be indirectly hit by the fall in prices.A retrenchment in the Russian economy would feed into much of the Commonwealth of Independent States (CIS), with remittance reliant Kyrgyz Republic and Tajikistan being especially vulnerable.
The report also highlighted that weakness in the Gulf Cooperation Council (GCC) will especially hurt South Asian economies such as Bangladesh , Pakistan and Sri Lanka.
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