A squeeze on jobs and wages in the US and other developed countries will translate into fewer remittances, affecting less-developed regions such as Central and Latin America.
Remittances—the money that immigrants working abroad send home to families on a regular basis—have become a major source of funding for developing countries. In 2019, total global remittances exceeded $550 billion, putting them on a par with levels achieved by foreign direct investment.
The remarkable growth trajectory of remittances was expected to continue into next year, but a global Covid-19-induced recession this year is likely to put a stop to that, causing additional economic distress in recipient countries.
A squeeze on jobs and wages in the US and other developed countries will translate into fewer remittances, affecting less-developed regions such as Central and Latin America.
Mexico has been one of the largest recipients of worldwide remittances, behind India and China. In 2019, Mexico received $36 billion from expats repatriating money back home from the US. Smaller countries in Central America have a lower absolute value of inflows, but remittances make up a larger percentage of their small economies. For example, in Honduras, remittances made up 21.4% of GDP last year, and in El Salvador they were 20.8%.
“Remittances will face downward pressure as social-distancing measures affect the US service sector,” said ratings agency Fitch in a recent report on Latin America and the Caribbean. The median Fitch-rated country in the region receives the equivalent of 10% of GDP from remittances. In 2009, the last recent year with a comparably large output contraction in developed markets, remittances to Latin America and the Caribbean fell 15%, Fitch said.
The International Monetary Fund’s April update concluded that Latin America and the Caribbean could see GDP contract by 5.2% in 2020, with Mexico’s GDP shrinking by 6.6% under the impact of a contracting oil industry. That compares with zero growth in 2019 and an expected global worldwide contraction of 3% this year.
