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Should Mexico issue diaspora bonds?
 

Should Mexico issue diaspora bonds?

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Sample master project in International Trade, Finance and Development program, Barcelona GSE 2011.

Sample master project in International Trade, Finance and Development program, Barcelona GSE 2011.

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    Should Mexico issue diaspora bonds? Should Mexico issue diaspora bonds? Presentation Transcript

    • SHOULD MEXICO ISSUE DIASPORA BONDS? Policy Memo to the Ministry of Finance in Mexico, Dr. Ernesto Cordero Dileimy Orozco Fabio Sola Sergio Vera
    • 1.  Diaspora bonds: idea and rationale2.  Why Mexico? The Emigrants: a)  Importance b)  Potential market for diaspora bonds The Government: a)  Attraction of diaspora bonds3.  Implementation challenges a)  Expansion of banking services b)  Marketing strategy4.  Policy Recommendation
    •   Definition: debt instruments which are denominated in hard currency, addressed to the diaspora (ownership restriction)  World Bank: “attractive vehicle for securing a stable and cheap source of external finance”  Main examples: Israel (since 1951), India (since 1991)  In recent years others (Lebanon, Sri Lanka, Ethiopia, Philippines), also planned by Greece1. Diaspora bonds 2. Why Mexico? 3. Implementation challenges 4. Policy Recommendation
    • Relevant facts:  Increasing importance of international migration: more than 215 million people (3 percent of the world population) live outside their country of birth  Remittance flows have become an important source of external financing in many developing countries ($325 billion in 2010) - more than official development aidRationale:  Innovative way of tapping into the diaspora’s wealth accumulated abroad  Potentially cheaper source of borrowing, possible reasons:  patriotism (Kethar and Ratha, 2010)  lower default risk (Gande and Puri, 2002)  lower default costs   lower renegotiation costs   bigger value of the collateral (domestic currency)  Attractive alternative investment opportunity for the diaspora1. Diaspora bonds 2. Why Mexico? 3. Implementation challenges 4. Policy Recommendation
    •   Mexico - United States is the largest migration corridor in the world (destination for approximately 97% of Mexican emigrants)  The remittances to Mexico have become a significant source of external inflows, and are the second largest source of external finance after oil, surpassing FDI 35,000 Mexico-United States 11.6 30,000 Bangladesh - India Turkey - Germany 25,000 India - United Arab Emirates 20,000 China- Hong Kong SAR, 15,000 China Puerto Rico - United States 10,000 India- United States Afghanistan - Iran, Islamic 5,000 Phillipines -Rep United States 0 China- United States -5,000 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 0 2 4 6 8 10 12 14 Source: Migration and Remittances Factbook 2011 FDI ODA Portafolio Equity Remittances Source: World Bank Indicators database1. Diaspora bonds 2. Why Mexico? 3. Implementation challenges 4. Policy Recommendation
    • In order to address the potential for diaspora bonds, the World Bank has developed amethodology to estimate the diaspora savings of developing countries (Ratha and Mohapatra,2011): Source: Migration and Development Brief, 2011 DiasporaSavingsi = Ʃj DiasporaStockij * si * (ωj * yij)where:DiasporaStockij = number of diaspora members from country i residing in destination jsi = average propensity to saveωj = share of diaspora in the working age groupyij = average earnings of the diaspora members in the working age1. Diaspora bonds 2. Why Mexico? 3. Implementation challenges 4. Policy Recommendation
    •   Based on the World Bank calculations, Mexico has highest diaspora savings of all developing countries (46.9 billion USD) Source: Migration and Development Brief, 2011Main assumptions:a)  Share of emigrants of working age (15-64) is similar to that of the country of destinationb)  Average migrant income: •  High skilled = average US household income •  Low skilled = 35% of average US household incomec)  Propensity to save of migrants = 20% (average saving rates of developing countries)1. Diaspora bonds 2. Why Mexico? 3. Implementation challenges 4. Policy Recommendation
    • However, there are two main flaws in the World Bank approach that lead to anoverestimation of the potential market:  The assumption that all remittances are considered as potential savings   The largest fraction of remittances is used for consumption   In Mexico, 91 percent of remittances are used for consumption (MMP 2008*)  Standardization of the assumptions to make the analysis comparable across countries   Important to consider country specific data regarding the determinants of migrants income and savings (e.g. education attainment, wage, occupation, marital status, duration of the trip)* Mexican Migration Project 2008.1. Diaspora bonds 2. Why Mexico? 3. Implementation challenges 4. Policy Recommendation
    • Alternatively, by using the Mexican Migration Project (MMP) survey database 2008*, whichcaptures country specific characteristics, we estimate a more conservative potential marketwhich only considers part of the remittances as savings: Consumption in host country Consumption in origin country Diaspora Diaspora Remittances stocks income Savings in origin country Savings in host Potential country market for Diaspora Bonds DiasporaSaving = DiasporaWorkingStock * (AnnualizedSavingsHostCountry + AnnualizedSavingsOriginCountry) 8.3 USD billions* The MMP provides reasonably representative data on authorized and unauthorized Mexican immigrants in the United States (Amuedo-Dorantes,Bansak et al. 2005)1. Diaspora bonds 2. Why Mexico? 3. Implementation challenges 4. Policy Recommendation
    •   Comparatively, both the World Bank and the conservative estimates of potential market represent an important amount of resources in the case of Mexico World
Bank
 Conserva-ve
 Es-mate
 Es-mate
 46.9
USD
billions
 8.3
USD
billions
 As
percentage
of
main
economic
indicators
2010
 GDP

 4.5%
 0.8%
 Net
Public
Debt
 16.8%
 3.0%
 Current
Account

 824.3%
 145.9%
 RemiHances

 220.5%
 39.0%
 FDI

 264.6%
 46.8%
 As
percentage
of
government
budget
2011
 Infrastructure

 635.2%
 112.4%
 Educa-on

 238.0%
 42.1%
 Social
Development

 683.5%
 121.0%
1. Diaspora bonds 2. Why Mexico? 3. Implementation challenges 4. Policy Recommendation
    •   Diaspora bonds are commonly considered a stable source of finance to overcome financial constraints and to raise resources for development  Although Mexico is experiencing a relatively stable economic environment, with a declining trend in its public debt and a moderate deficit… 45 42.5 40 38.9 38.1 37.5 36.8 35.5 35 32.4 32.5 31.1 ** 30 2006 2007 2008 2009 2010 20111. Diaspora bonds 2. Why Mexico? 3. Implementation challenges 4. Policy Recommendation
    •   …the gap between the US and Mexican interest rates opens the opportunity for the government to make diaspora bonds a profitable savings instrument for the immigrants  And, at the same time, a potentially cheap government source of financing   The return of the bonds could be similar to the shortest-term domestic Mexican bonds (Cetes), which are also the ones with the lowest return 10 5 8 4 6 3 4 2 2 1 0 0 Mar-14 Nov-14 Mar-15 May-15 Mar-14 Nov-14 Mar-15 Jan-14 Jul-14 Jan-15 Jan-14 Jul-14 Jan-15 Sep-14 Sep-14 May-14 May-14 3 years 5 years 10 years CETES 1 year 1 year 3 years 5 years 10 years  Additionally, as mentioned before, diaspora bonds could represent an attractive way of financing development goals (e.g infrastructure, education)1. Diaspora bonds 2. Why Mexico? 3. Implementation challenges 4. Policy Recommendation
    • Other effects of diaspora bonds By increasing the emigrants incentives to open a bank account:   Contribute to overcome the emigrants low access to financial services and savings alternatives, gradually correcting a missing market   Increase their savings by reducing transactions costs (in remittances and cashing cheques), and reducing the impulse to spend (by holding less cash)   Chin, Karkoviata and Wilcox (2009) estimate that banked migrants increase their saving as a share of income by 9 percent and reduce their remittances to Mexico by 6 percent   Shift the savings decisions to the emigrants   The evidence suggest that emigrants have stronger preferences to save compared to their recipient households – 21% vs 3% of remittances (Ashraf et al. 2008)1. Diaspora bonds 2. Why Mexico? 3. Implementation challenges 4. Policy Recommendation
    •   It is critical to extend access to financial services to the emigrants  Even though the percentage of banked emigrants is low (20 percent in the early 2000s), there has been a significant change in the way they remit money100 96.8   Interestingly, Mexican emigrants 80 have already experienced a change of financial behavior, 60 51.5 moving from money transfer 40 orders to wire transfers 39.7 20 higher access to and use of 8.1 1.8 1.4 bank services. 0 0.7 0.0 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Personal Checks Wire Transfers Cash Money Orders Source: World Indicators, World Bank.  A key factor was the acceptance of the Matrícula Card as a valid ID to open a bank account in 2001, regardless of their legal status in the US1. Diaspora bonds 2. Why Mexico? 3. Implementation challenges 4. Policy Recommendation
    • A marketing strategy to reach the emigrant potential market will consider:  Attractive bond characteristics   Eligibility: restricted to Mexican immigrants living in the US   Denomination: US dollars   Low minimum investment   Tenure: short term maturity   Secondary markets: Brazilian experience   Similar return to domestic bonds (Cetes) and higher than US Treasury bonds   Possibility to cash the investments at any time in the US or Mexico  Promotional campaign not very expensive   Well established emigrant networks   Use existing government infrastructure   Banks in the US already targeting Mexican immigrants (e.g. Citigroup Inc., Bank of America Corp. and HSBC)1. Diaspora bonds 2. Why Mexico? 3. Implementation challenges 4. Policy Recommendation
    • To sum up, the assessment suggests that the Mexican government should issue diaspora bonds  Reasons:   Increasing size and wealth of Mexican diaspora   Attractive amount of potential savings that could be channeled to diaspora bonds  Policy benefits:   For the immigrants: less risky, cheaper and more profitable instrument   For the government: cheap and stable source of financing  Further policy effects:   Contribute to correct market imperfections (increasing the access and use of bank services and savings instruments)   Optimize the use of diaspora wealth in Mexico decreasing the cost of remittances, increasing the wealth directed to Mexico and making it more productive1. Diaspora bonds 2. Why Mexico? 3. Implementation challenges 4. Policy Recommendation
    • THANKS FOR YOURATTENTION