Moody's: Weaker remittances will dampen benefits of lower oil prices for Asia Pacific sovereigns

Moody's Investors Service says that lower remittances from Gulf Cooperation Council (GCC) economies, which have been hit hard by the slump in oil prices, will reduce the benefits of cheaper oil imports for several Asia Pacific countries.

Generally, weaker remittances will immediately impact the recipient countries' credit profiles via their balance of payment positions. A prolonged fall would also hurt economic growth, given the importance of remittances to household incomes.

The Moody's report analyzes the potential credit implications of weaker remittances from their citizens working abroad for six Asian countries: Bangladesh (Ba3 stable), India (Baa3 positive), Pakistan (B3 stable), Philippines (Baa2 stable), Sri Lanka (B1 stable) and Vietnam (B1 stable).

For these six economies, remittances are equivalent to 3% to 10% of GDP, and between 22% and 188% of foreign reserves.

The report finds that while previous oil price shocks had limited and short-lived effects on remittances to Asian countries, the current more pronounced and prolonged decline -- coupled with fiscal tightening in many oil-exporting countries -- is likely to hurt migrant worker earnings and consequently remittances.

For India, the Philippines and Vietnam, the diversified locations and vocations of their overseas workers could help reduce the fall in remittances overall.

For most of the countries in Moody's study, remittances inflows are greater than net oil import payments as a percentage to GDP. However, the 25% decline in oil prices since the start of 2015 is large, and Moody's expects the declines in remittances to be much lower than that in percentage terms. Therefore, the agency says, unless remittances fall significantly more than it expects, their decline will dampen, but not completely offset, the benefits of lower oil prices for the current account.

In India, where oil import costs exceed the value of remittances as a percentage of GDP, the net impact of lower oil prices on the current account should remain positive even if remittances fall.

Moody's report finds that in sovereigns that are already facing external pressures, or where growth is weakening or anemic, a slowdown in remittances will exacerbate such challenges. Sri Lanka stands out in this regard, due to its large financing needs and thin foreign reserve cushion, while Bangladesh and Pakistan face similar challenges to a lesser degree.

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