How remittance securitizations can help developing countries during a credit crisis


This page in:

Despite the current economic climate, a recent Standard & Poor's research report found that remittance securitization and securitization of other future flow receivables in emerging markets are performing well, bucking the trend in global credit markets.

In a 2005 paper by Suhas Ketkar and Dilip Ratha, the authors found the securitization of future remittances and trade, tourism, credit card and other future receivables (together called "Diversified Payment Rights" or DPRs) are a useful tool that can help developing countries maintain access to international capital markets especially in times of crisis.

Dilip’s research as well as the World Bank’s 2006 Global Economic Prospects report, emphasizes that one of the reasons for the robust performance of this asset class is the "countercyclical" nature of remittances.

The S&P report backs this up by stating, "Some of these, such as worker remittances, also offer the benefit of countercyclical performance: that is, their flows often increase when domestic economies weaken...Investors often value worker remittances for their countercyclical nature: that is, workers typically send more money home during periods of economic crisis in their native countries."

A typical remittance securitization transaction is in the investment grade (BBB- or higher) category since future flows are heavily "over collateralized". S&P reports that it would take a huge slowdown in future remittances (of more than 95 percent) for a typical remittance securitization to default.  This makes them a safe bet for "buy and hold" investors such as pension funds and institutional investors. 


Sanket Mohapatra

Associate Professor, IIM Ahmedabad

Join the Conversation

September 16, 2008

You are right, Sanket. The crisis in the international capital markets is likely to encourage many developing countries to look for cheaper and longer-maturity external financing, and that can only be obtained by using marketable collateral. If countries do not have existing assets that are attractive to foreign investors, they will need to tap future assets such future export receivables or remittances and other hard currency payment rights. Pakistan reportedly is considering a future-flow securitization deal involving issuance of bonds backed by foreign currency remittances (about $6 bn a year).

Following the sub-prime crisis, the word securitization is being avoided by many, but note that future-flow securitization of the kind mentioned above is very different from existing mortgage loan securitization. To date, there has been no real case of default involving a future-flow securitization deal. Pakistan had an earlier securitization deal involving future telephone receivables (by Pakistan Telecommunication Company). That deal performed well even as Pakistan's credit was downgraded to distress levels.