Remittances and bond yield spreads in emerging market economies

• Published date: 01 February 2019
• DOI: http://doi.org/10.1111/roie.12384
• Author: Hippolyte Wenéyam Balima,Jean‐Louis Combes
• Date: 01 February 2019

448

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© 2019 John Wiley & Sons Ltd wileyonlinelibrary.com/journal/roie Rev Int Econ. 2019;27:448–467.

Received: 26 April 2017

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Revised: 17 September 2018

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Accepted: 8 October 2018

DOI: 10.1111/roie.12384

ORIGINAL ARTICLE

Remittances and bond yield spreads in emerging

market economies

Hippolyte Wenéyam Balima1

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Jean‐Louis Combes2

1International Monetary Fund, Washington,

DC

2Université Clermont Auvergne, CNRS, IRD,

CERDI, Clermont‐Ferrand, France

Correspondence

Hippolyte Wenéyam Balima, International

Monetary Fund, 700, 19th Street,

Washington, DC.

Email: hbalima@imf.org

Abstract

This paper tests whether remittances reduce bond yield

spreads in emerging market economies. Drawing upon

instrumental variable techniques, our paper reveals that

remittance inflows significantly reduce bond yield spreads.

This result is robust to different specifications, alternative

instrumentation techniques, additional control variables,

and the use of credit default swap spreads in place of bond

spreads. In addition, we find that the effect of remittances

on spreads (i) is larger in (more) poorly developed finan-

cial systems, (ii) increases with the degree of trade open-

ness, (iii) is larger in low fiscal space regimes, and (iv) is

larger in nonremittance‐dependent countries. The paper

concludes that policies that improve the measurement of

remittance inflows and reduce their transfer costs or that

enable countries to develop securitization of remittances

and diaspora bonds could help emerging market econo-

mies to leverage remittances for international capital mar-

ket access.

JEL CLASSIFICATION

E44, E62, F24, F35, G15

The relatively stable nature of remittances suggests that countries with access to signif-

icant remittance inflows may be less prone to damaging fluctuations […]. In extreme

cases, remittances might reduce the probability of financial crises.

—International Monetary Fund, World Economic Outlook (April 2005,

chapter II, p. 73)

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449

BALIMA And COMBES

1

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INTRODUCTION

Access to international capital markets has dramatically deteriorated for many countries, particularly

for emerging countries, in the wake of the 2008 to 2009 financial crisis. According to Arellano (2008),

emerging market countries generally tend to bear highly countercyclical borrowing costs as a result of

the cyclical changes in the access to international credit. The countercyclical nature of interest rates

means that borrowing costs increase in times of recession and decrease in times of expansion. This

poses significant challenges for policymakers, leading many academic researchers to investigate the

determinants of sovereign bond yield spreads.

There is a large body of literature on the determinants of government bond yield spreads. Bond

spreads are generally associated with two main drivers: (i) domestic macroeconomic fundamentals

(Aizenman, Hutchison, & Jinjarak, 2013; Arezki & Brückner, 2011; Baldacci, Gupta, & Mati, 2011;

Baldacci & Kumar, 2010; Comelli, 2012; Costantini, Fragetta, & Melisa, 2014; Edwards, 1984; Eichler,

2014; Hatchondo, Martinez, & Roch, 2012; Hilscher & Nosbusch, 2010) and (ii) global conditions on

financial markets and international factors (Arora & Cerisola, 2001; Arslanalp & Poghosyan, 2014;

Bellas, Papaioannou, & Petrova, 2010; Jaramillo & Tejada, 2011; Sy, 2002). The factors considered

as important determinants of spreads include GDP growth, fiscal space, public debt, foreign exchange

reserves, inflation, crisis episodes, the VIX index, and the FED policy rate.

Despite the amount of literature on the determinants of bond spreads, with the notable exception

of Ratha (2007), little attention has been given to the potential impact of countercyclical capital in-

flows, namely remittances. In a survey, this author defines a standard country creditworthiness model

and shows that in Lebanon and Haiti including remittances in the debt‐to‐export ratio can result in a

spread reduction of 130 to 334 basis points. Apart from this stylized fact, to the best of our knowl-

edge, no empirical study has examined the effect of remittances on bond spreads. This is somewhat

surprising since the empirical literature on capital flows suggests that some forms of capital are more

countercyclical than others. More specifically, it has been pointed out that remittances inflows may

be countercyclical, increasing for the recipient country during crisis and times of economic hardship.

For instance, Figure 1 plots the evolution of remittances both as a percentage of GDP and in billions

of U.S. dollars on the left‐hand side, and remittances‐to‐GDP and real GDP growth on the right‐hand

side, for our sample of emerging market economies. A picture emerges that the amount of remittances

has been increasing over time, reaching U.S.$230 billionin 2012 (see the left‐hand side of the figure).

In addition, the ratio of remittances‐to‐GDP has increased during some valleys of the business cycle

(see the right‐hand side of the figure). Given the countercyclical nature of the borrowing costs borne

by emerging market countries, this begs the following question: are remittances reliable stabilizers

FIGURE 1 Evolution of remittances and real GDP growth

Source. Authors’ computation using word development indicators. [Colour figure can be viewed at wileyonlinelibrary.

com]