Washington, DC, June11-12, 2009

1. Measuring the Impact of the Financial Crisis on Workers’ Remittances, Using High-Frequency ITRS Data Fernando Lemos and André Villela Banco Central doBrasil Washington, DC, June11-12, 2009

2. The Brazilian International Transactions Reporting System (ITRS)

3. Description of the ITRS The ITRS is the main balance of payments data source in Brazil. It is reminiscent, as in many countries, from an exchange control system. Although controls were lifted, the exchange registration structure was kept for statistical and market surveillance purposes. The ITRS coverage is very broad for transactions that involve transfers of payments in cash or deposits in which one party is located in the country, which is the case for workers’ remittances. This is due to the foreign exchange market as well as to the banking system structures in Brazil.

4. ITRS Coverage Foreign exchange market and banking system structures in Brazil: • Transactions in foreign currency are illegal; • Observance of law regarding foreign exchange transactions are enforced; • Furthermore, • The banking system is widespread, easily accessible and technologically advanced; • Purchases and sales of foreign currency face no restrictions, either for residents or non-residents. • These market structures present strong restrictions and no economic incentives for the use of foreign currency for payments of transactions in the country. Therefore, foreign currencies, in practice, are not used as a means of payment.

5. ITRS Framework The ITRS is the main balance of payments data source • Mandatory immediate registration of each foreign exchange transaction (high frequency data) • No reporting threshold (all transactions must be reported) • Exchange contracts are generated “inside” the Banco Central do Brasil Information System (SISBACEN) by means of inputs by banks and other foreign exchange dealers • Database owned and managed by Banco Central do Brasil

6. ITRS Framework Information obtained from ITRS • Transaction: • Economic nature • Amount • Currency • Residents: • Name • Tax payer code • Economic activity • Nonresidents • Name • Country of residence Shortcomings: channeling by MTO through headquarters/financial centers hinder the quality of geographic breakdown.

7. ITRS Framework The characteristics of the ITRS described previously allow for the collection of highly detailed information regarding the flows and structure of the workers’ remittances market.

8. Recent Findings Using Flow and Market Structure Data

9. Recent Findings in Workers’ Remittances Inflows The analysis of data for the first five months of 2009 show that inflows of workers’ remittances remained on a strong downward path that began in 2008. This same trend is observed in two very distinct labor markets for Brazilian immigrants: Japan and the United States. In Japan, practically all Brazilians (of Japanese descent, who immigrate under specific regulation) work in the formal labor market. In the United States, the vast majority of Brazilians are self-employed and many work without a legal permit and/or are illegal immigrants.

10. Workers’ Remittances Inflows The inflows of remittances in terms of geographic allocation by the United States, Japan and Other countries have not changed significantly over the last years.

11. Workers’ Remittances Inflows Statistics for the last eight years seem to show that inflows of remittances have not deviated significantly from its upward trend.

12. Workers’ Remittances Inflows – Recent Periods But a closer look at more recent periods shows inflows below the US$ 200 million mark for the first time since early 2006.

13. Workers’ Remittances Inflows – Recent Periods It must be acknowledged that a strong and sudden depreciation of the Real in US$ terms had a significant impact on remittances. A surge was followed by a steep descent.

14. Workers’ Remittances Inflows – Surge and Descent The surge and descent are likely connected, the surge being an anticipation of remittances saved (which could in fact be transfers other than workers’ remittances) and the descent being a result of the complete depletion of savings that serve as reserves in previous periods. Note that there is no evidence that the descent is a consequence of an appreciation of the Real. US$ million

15. Workers’ Remittances Inflows – Accumulated Inflows This could lead to the conclusion that the inflows of workers’ remittances will soon return to the US$ 200 million to US$ 250 million range, but the annual accumulated inflows, having reached in May 2009 the lowest level since May 2006, seem to support the perception of a downward trend.

16. Workers’ Remittances from Japan Bilateral data reinforce the idea that a recovery in the short run is unlikely. Workers’ remittances from Japan, which fell at a steeper rate than those from other regions, are the best example.

17. Workers’ Remittances from Japan The decline in value of remittances from Japan was due mainly to the sharp fall in the number of recipients that began in the last quarter of 2008. This is very likely linked to reduction in the number of remittances senders, a result of the significant number of layoffs of Brazilian workers in Japan.

18. Workers’ Remittances from Japan Furthermore, the average amount received per remittance from Japan in the beginning of 2009 entered a downward path towards the lowest level in recent years.

19. Workers’ Remittances from The United States Although less intensely, workers’ remittances from the US have also fallen sharply. Data for the last three months are at the lowest level since the beginning of 2006.

20. Workers’ Remittances from The United States Workers’ remittances from the US in annual terms are at the lowest level since the beginning of 2004. Although monthly data - as seen in the previous graph - show a possible settlement, the slope for the12-month accumulated flows is still pointing downwards.

21. Workers’ Remittances from The United States As in the case of Japan, the number of recipients of remittances also fell sharply in the first months of 2008, to the lowest level in the compiled series. The 12-month moving average shows a persistent downward trend.

22. Workers’ Remittances from The United States The average workers’ remittances received per person from the US have a curve similar to those from Japan. The slight difference – the descent in this case is less pronounced – may be due to the differences in structures of job markets for Brazilian immigrants, insofar as jobs and remuneration for Brazilian immigrants in Japan are comparatively more homogeneous.

23. Workers’ Remittances from Other Countries Workers’ remittances from countries other than the US and Japan have fallen as well, although not as sharply. Inflows are at a level slightly lower than the average since 2006. The 12-month moving average is practically unchanged and presents a very slightly negative slope.

24. Thank you for you attention.