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Are Workers' Remittances Relevant for Credit Rating Agencies?

Listed author(s):
  • Rolando Avendaño


  • Norbert Gaillard

    (Institut d’Etudes Politiques)

  • Sebastián Nieto Parra


Remittance flows are an important source of financing for developing countries. In addition to the microeconomic impact at the household level, remittances have grown into an important pillar of macroeconomic stability, reducing volatility of external flows, lessening the probability of current account reversals, thus strengthening creditworthiness. By studying 83 developing countries covering the period 1993-2006, we analyse the impact of workers’ remittances on sovereign rating assessment. First, we look at the traditional determinants of sovereign ratings and assess to what extent remittances are taken into account. Second, we build a model for high-remittance receptors to capture the potential effect that remittances may have on Fitch, Moody’s and S&P ratings. Third, we assign ratings to unrated Latin American countries for which remittance flows are generally high. Our conclusion supports the view that credit rating agencies (CRAs) do take remittance flows into account to rate sovereigns. Nevertheless, this variable turns out to be significant for a limited set of countries, small in size and classified in the low and middle income categories. We derive policy implications and recommendations from our findings for boosting rating coverage. Les fonds que les travailleurs immigrés envoient dans leur pays d'origine constituent une source de financement majeure pour les pays en développement. En plus de leur impact microéconomique sur les ménages, ces transferts financiers sont devenus un facteur important de stabilité macroéconomique, contribuant à réduire la volatilité des flux de capitaux et le risque de dégradation de la balance des comptes courants, renforçant ainsi la solvabilité. A partir d'une étude portant sur 83 pays en développement et couvrant la période 1993-2006, nous analysons l'impact de ces transferts financiers sur la notation souveraine. D'abord, nous considérons les déterminants traditionnels des ratings souverains et déterminons dans quelle mesure ces envois de fonds sont pris en compte. Ensuite, nous construisons un modèle pour les pays qui sont les premiers récipiendaires de ces transferts afin de mesurer leur effet potentiel sur les notes des trois grandes agences, Fitch, Moody's et S&P. Finalement, nous attribuons des ratings aux pays latino-américains non notés pour lesquels ces transferts financiers sont élevés. Nous concluons que les agences de notation tiennent compte de ces transferts dans leur appréciation du risque souverain pour un petit nombre de pays; les États en question étant généralement de petite taille et ayant un niveau de revenus faible ou intermédiaire. Ces résultats nous permettent enfin de tirer toute une série de recommandations d'ordre politique pour améliorer la couverture des ratings.

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Paper provided by OECD Publishing in its series OECD Development Centre Working Papers with number 282.

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Date of creation: 09 Oct 2009
Handle: RePEc:oec:devaaa:282-en
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