Outline

1. Leveraging Remittances for International Capital Market Access in Poor CountriesDilip Ratha(with Prabal De and Sanket Mohapatra)Migration Thematic GroupWorld BankOctober 19, 2006

2. Outline • Should poor countries borrow from international capital markets? • Remittances improve sovereign rating • Improving rating through securitization of future flows of remittances

3. Outline • Should poor countries borrow from international capital markets? • Remittances improve sovereign rating • Improving rating through securitization of future flows of remittances

4. 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"

5. Borrowing cost rises exponentially as credit rating deteriorates Launch spreads and S&P ratings for sovereign issues of size $100 million and 7 years tenor.Source: Bondware, S&P, and authors’ calculations

6. Borrowing cost rises exponentially as credit rating deteriorates Absence of sovereign rating constrains private sector access to international capital Launch spreads and S&P ratings for sovereign issues of size $100 million and 7 years tenor.Source: Bondware

7. Sovereign ratings in high-income countries BBB+ A- A A+ AA- AA AA+ AAA

8. Sovereign ratings in low-income countries CC B- BB BBB+ AA-

9. Sovereign ratings in low-income countries CC B- BB BBB+ AA- Most poor countries are not rated

10. Top recipients of remittances, 2005 $ billion % of GDP Remittances tend to be large in poor countries

11. Remittances tend to rise following crisis, natural disaster, or conflictRemittances as % of private consumption

12. Outline • Should poor countries borrow from international capital markets? • Remittances improve sovereign rating • Improving rating through securitization of future flows of remittances

13. Remittances improve a countries’ ability to service external debt Present value of external debt as % of exports of goods, services, and remittances

14. Predicting ratings • Fit a regression model to explain ratings • Predict shadow ratings • Calculate effect of remittances on shadow ratings

15. Conversion from Letter to Numeric scale

16. Regression Results (work-in-progress) • Rating as a function of • macro variables • rule of law • debt and international reserves • volatility • R2 is high

17. Regression Results (work-in-progress)

18. Regression Results – using dated control variables (work-in-progress)

19. Predicted ratings for unrated countries (work-in-progress) * Indicates out of range

20. Shadow-rated vs. rated countries (work-in-progress)(Shadow ratings underlined and italicized)

21. Shadow-rated vs. rated countries(work-in-progress) (Shadow ratings underlined and italicized)

22. Shadow-rated vs. rated countries (work-in-progress)(Shadow ratings underlined and italicized) Many unrated countries likely have better market access than currently believed

23. Remittances can help obtain and improve credit rating * Calculated using a model similar to Cantor and Packer (1995)

24. Including remittances may improve potential ratings for Bangladesh by two notches

25. Countries in similar rating category as Bangladesh • Argentina, Dominican Republic, Indonesia, Pakistan, Paraguay, Uruguay, Venezuela • Benin, Bolivia, Burkina Faso, Ghana, Jamaica, Mali, Surinam

26. Outline • Should poor countries borrow from international capital markets? • Remittances improve sovereign rating • Improving rating through securitization of future flows of remittances

27. Securitization of future remittances can improve credit rating above investment grade

28. Remittance securitization structure Remittance senders Beneficiary’s account Remittance payments (foreign currency) Issuing bank credits beneficiary’s account in domestic currency Correspondent banks Issuing bank Offshore Domestic

29. Remittance securitization structure Remittance senders Beneficiary’s account Remittance payments (foreign currency) Issuing bank credits beneficiary’s account in domestic currency Correspondent banks Message Issuing bank Excess cash (foreign currency) Trustee collateral account Debt service payment International investors Offshore Domestic

30. Securitization of remittances has increased in recent years - $ million

31. - Led by Brazil, Mexico and Turkey

32. Potential - $ 10-12 billion a year?

33. Constraints • Paucity of highly rated entities • Long lead times • High fixed costs (legal and others) • Non-transparent legal structure

34. Policies: to improve ratings • Improve rating methodology • Develop local currency rating agencies • Improve data, macroeconomic management, and investment climate

35. 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

36. 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