Falling Remittances from the U.S. to Latin America as Evidence of the Housing Slump
Nouriel Roubini | Apr 23, 2007
Last week this blog interpreted the mystery of the apparent lack of fall of housing jobs in the official US statistics - in spite of a fall in housing starts of over 30% - as being partly due to layoffs of undocumented and illegal workers in the housing sector.
As reported today in the Wall Street Journal there is now evidence - coming from research by Walter Molano at BCP Securities - that remittances to Latin America from the U.S. are significantly falling signaling that documented and undocumented workers with families in Latin America are now suffering because of the housing slump. As reported by Molano:
The rapid slowdown of the U.S. housing sector could have dangerous implications for Latin America and the other emerging market countries that depend on remittances for their balance of payment needs.
Remittances became important a few years ago, when they began to eclipse other forms of capital flows, such as foreign direct investment, multilateral assistance and loans. In 2005, the World Bank estimated that the total level of money sent home by immigrants from emerging market countries was $223 billion. In 2006, Latin America received $62 billion in remittances, of which 75% was from the U.S. The multilaterals and Latin American governments were ecstatic about the increase in remitted funds. They attributed the inflows to changes in regulatory framework, the proliferation of financial transfer networks and a reduction in transfer costs. Some Central American governments issued long-term bonds, modeling their balance of payments on the steady increase in remitted funds. However, few people bothered to realize that much of the generated money was a result of the large increase in U.S. home construction and associated services. A jaunt around most U.S. construction sites revealed a cacophony of Spanish and Portuguese accents, along with a sea of Latino food vending cars. Latin American electricians, masons, painters, carpenters, plumbers and landscapers thrived as North American homeowners used second mortgages to modernize their dwellings. Unfortunately, everything that goes up must come down—and the decline in the U.S. housing market has dangerous implications for some emerging market countries.
A look at the remittance data and U.S. housing starts reveals a worrisome correlation. Regressing panel data provided by the IMF on annual remittances to Latin America against annual U.S. housing starts shows a high degree of correlation between 1997and 2005. The panel data consists of 15 countries, and the correlation was higher than 90% in 12 of the cases. The outlier was Paraguay, which had a negative correlation of .03%. This was not too surprising, given that most Paraguayan immigrants head off to Argentina. Unfortunately, Argentina suffered a severe crisis during the sample years, explaining the massive decline in Paraguayan remittances. Although the conclusions were fascinating, the sample sets had a small N (number of observations). Therefore, we decided to examine another sample set. Banco de Mexico has monthly remittance data through February 2007, and the fit was remarkable. Monthly remittances peaked in May 2006, at the same time that housing starts reached their zenith. However, the decline in remittances is occurring at a faster pace than the drop in housing starts, falling 26% from the peak. This is logical, given that Mexican immigrants will harbor their savings as they see job opportunities evaporate. The implication of these results is that some Latin American countries could see pressure on their current account balances, despite the increase in commodity prices. The contraction in remittances will dampen domestic consumption and hamper GDP growth rates. Countries which are extremely dependent on remittances, such as Mexico, Colombia and the Central American states, could see weaker exchange rates as transfers decline. The problems in the U.S. housing sector could have dire implications for home construction activity in Europe and the Middle East. This could affect emerging market countries in North Africa, as well as Pakistan and the Philippines, which also depend on remittances to cover their balance of payment requirements.
This is one more piece of strong evidence that official US employment statistics do not properly capture the loss of housing jobs that has accompanied the most severe housing recession in decades.
1 comment:
Remittances help Latin American governments avoid their responsibility of providing for their citizens, who are being supported by relatives that emmigrated to other countries, in particular the USA. Unfortunately, the assistance provided by the remittances has created in most Latin America a culture of lazy people, that don't like work and waste their money on liquor and other vices simply waiting for the day when their remittances arrive to their hands.
Maybe now that the flow of money sent to them is being reduced, they will be motivated to work and spend less time in the bars with ladies of ill repute.
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