Remittance inflows hit new highs, but doubts emerge

Remittance flows in Latin America and the Caribbean (LAC) grew by double-digits annually in February, extending the pandemic support immigrants working in the US provided to their families.

Steadily declining US unemployment rates, the US$1.9tn stimulus package, and an efficient vaccination will help sustain remittance flows into the region, according to BBVA and Banorte analyses. 

Regional central banks reported growing remittances inflows: Mexico’s were up 16.2% in dollar terms, Guatemala's grew 16.7%, El Salvador’s 13%, the Dominican Republic’s 27.6%, and Colombia’s 15.4%.

The Mexican figure represents the highest inflow for any February since record-keeping started 25 years ago and the month’s average was US$351, up 9.3% year-on-year, BBVA said.

BBVA reported remittances flowed in just over 9mn operations, up 6.3%. 

Is the boom sustainable?

But economists are unsure that the pandemic-related surge is sustainable, considering a likely US recovery this year and improving regional labor markets. 

Mexican remittances, for example, jumped 35.1% year-on-year in March 2020, and grew by double digits for six months since September, and averaged an increase of 21% in January and February.

While “these pandemic distortions” may trigger lower 2021 growth rates “we believe the trend remains very favorable,” according to a Banorte note. 

The US stimulus package approved March 10 is “one key factor that could compensate for a potential deceleration in annual terms.” But “some measures in the initiative are more favorable for migrants when compared to other rounds,” Banorte wrote. One such favorable measure includes eligibility for direct transfers of citizens that are married to an undocumented migrant.

Citing data by the US Federal Reserve, Banorte wrote that the accelerating vaccination roll-out is already positively impacting mobility levels, which will mostly benefit the migrant community.  

Positive US labor data 

In this context, Banorte upgraded its US growth forecast to 6.1% from 5.4%, adding that while unemployment among Latin American immigrants only declined to 8.5% from 8.6%, according to the US Bureau of Labor Statistics, the participation rate soared in February.

The working-age population of Mexican migrants, for example, rose by 59,400 while 208,400 jobs were created – including ‘natives’, ‘non-native citizens’, and ‘non-citizens’ (legal or illegal).

Gains went to the first group with 287,500, the third group with 89,000, while 168,100 were lost in in the second group.

“We believe it is relevant that ‘non-citizens’ regained some positions, as in our view these are the most likely to send back remittances,” Banorte wrote.

Downside risks 

The Bank highlighted a potential fourth coronavirus wave and mounting tension over immigration at the Mexican border as downside risks to remittance growth.

The US Centers for Disease Control recently warned about another wave which could be triggered by new and more contagious variants of the virus and/or the relaxation of social distancing measures. The risk could diminish as the vaccination program advances.

“But the reality is that its evolution could complicate again – as in Europe – and affect the economy,” Banorte wrote. 

On immigration tensions, the bank wrote, “although we still think the current administration’s policies will be more favorable than those enforced by Trump, its importance has increased enough for Biden to designate this issue directly to vice president Kamala Harris.”

The note added that rising emphasis on migration increases the potential for sudden policy shifts that impact remittances.

Given this backdrop, Banorte maintained its 2021 growth forecast of 7-10% for remittances to Mexico. 

“Nevertheless, we believe the balance of risks is skewed to the upside … For now, we reiterate this estimate waiting for more information about inflows in the short-term.” 

Regional snapshot

The following graphic, provided by BBVA, details annual growth rates in  to Guatemala, El Salvador, the Dominican Republic and Colombia going back to January 2020.

  Remittance flows to selected countries. Source: BBVA