Sunday afternoon in Hong Kong’s Statue Square: – the normal hum of traffic replaced by thousands of voices. Hard working migrants using their day of rest to meet, catch up and visit neighbouring money transfer offices to send money home that support their faraway families. Similar scenes play out in Riyadh, Dubai, and London’s Whitechapel Road. Migrant worker remittances exceeded $600 billion in 2017, larger than portfolio flows supporting the lives of over 800 million people back home. The flows also matter to investors as they can smooth currency volatility in recipient nations and provide an important opportunity for fintech to reduce high transaction costs.
Cross border migrant remittances have more than doubled over the last 12 years exceeding $600 billion in 2017 once unofficial flows are included. Over 85% of these flows are to developing countries and in 71 cases exceed 3% of GDP in the recipient countries. They are 3 times the level of official aid and once China is excluded larger than foreign direct investment. They are more stable than portfolio flows (which they also exceed in size).
This growth reflects rises in migration driven by the economic needs of host and recipient countries. Most migrants come from poorer rural areas with limited employment opportunity and fill roles in host countries which though often menial are better paid than at home. Ageing populations in developed countries and relative economic opportunity drive over 1.5 million new economic migrants every year moving from developing to developed countries. IFAD, a UN agency estimates that the total migrant stock of 125 million peoples from developing countries earn over $3 trillion a year and remit around 15% of this back home.
Where do migrants originate and where do they go? Measured in absolute numbers the greatest supply comes from Asia, Africa and Latin America. Some 60% of migrants come from rural areas (World Bank estimates). Their destination will typically be developed countries seeking low paid workforces to support burgeoning service sectors and basic manufacturing. The major migration corridors include South Asia to the Middle East, Latin America to the US and Africa to Europe. Geographic proximity, history and politics play major roles in this distribution.
A typical migrant is low paid yet manages to remit up to 15% of their income. Contrary to populist rhetoric, employment levels among migrants tend to be high albeit frequently in informal sectors.
Remittances have proved less volatile than other financial flows because the proceeds are critical for family support back home. World Bank and OECD estimates reckon that around 75% of remitted funds are used for basic consumption needs by recipient families. IFAD estimates remittances represent around 60% of family incomes for recipients. No wonder therefore that whilst FDI and portfolio flows declined during the financial crisis migrant flows increased.
Yet migrants cannot wholly escape the economic and political realities of the countries where they relocate. Those from South and West Asia for instance are heavily represented amongst workers in the Gulf region: -in consequence flows to Bangladesh, Sri Lanka and Nepal have stagnated in recent years alongside the impact of falling oil prices on demand for labour. By contrast African migrant reliance on Europe for employment opportunity is boosting remittances. Meantime Mexico waits anxiously on US political developments and the fate of the many millions of immigrants across the Rio Grande. A considerable slowdown in growth rates of cross border flows has already taken place in the last 2-3 years. Nonetheless the ongoing needs of ageing populations to import labour should sustain payment levels.
Why do these flows matter for investors in growth markets and what opportunities can Actis see arising?
At a pure macro level, the flows raise demand for local currency and except in periods of extreme stress go some way towards smoothing exchange rate volatility. As investors know full well such volatility has an unpleasant impact on portfolio valuations. In poorer countries with narrowly traded exchange rates a stable and important demand for domestic currency mirrors a similar effect seen in richer countries with domestic contractural savings movements: – think Mexico, Chile and Malaysia in this latter category.
Sending this money is expensive running on average at 7% plus for a $200 remittance. Happily technology is helping lower these costs. Currently around 90% of migrant remittances by value are cash to cash transfers, mainly through Money Transfer Operators (‘MTO’) who represent around two thirds of transactions. MTO’s have large and expensive networks of agents and correspondents which together with increasing concentration of ownership have kept transaction prices high. Postal networks and agents (costly to maintain) and informal channels which operate where infrastructure is poor are also expensive. By contrast traditional players who invest in digital capabilities and Mobile Network Operators (‘MNO’s) offer cost savings of over 50%. Among many examples of use of digital payment systems are payments for groceries, agricultural produce, education and electricity and remittances should be no different.
Whilst most remittances go into basic consumption the remainder (estimated at more than $100bn per annum) is saved or spent on education and healthcare, furthering investment opportunities in those spaces.
Technology leapfrog and financial deepening are crucial themes in the markets where Actis invests. Cross border remittances benefit from and fuel these trends. Flows may well not grow as sharply in the future as the past but reduced transaction costs and still growing migrant levels suggest their importance as an investment theme is unlikely to wane.