MBS Blog

As the world’s rich economies sink into recession, the flow of remittances into developing countries is expected to see a corresponding decrease. In the CIS countries that rely heavily on payments from migrant workers abroad, the effect could be highly damaging. The construction and consumer-related sectors are expected to be particularly badly hit. 

The Organisation for Economic Co-operation and Development (OECD) forecasts a drop of 6% in remittance payments to developing countries from their nationals working abroad in 2009. CIS countries are among the largest recipients of remittance payments measured in comparison to their GDP. 

The Remittances Factbook 2008, published by the World Bank, finds that Tajikistan and Moldova are tied as the top remittance receiving countries – remittance inflows amount to 36% of their GDP. One NGO worker in Tajikistan reports seeing a jet leave from Dushanbe every week to Moscow, with 500 young men on board, while observers of the Moldovan market joke that “will the last Moldovan left please turn off the light.” Other CIS countries are also high on the list: Kyrgyzstan was in 4th place, with transfers from migrants equal to 27% of its GDP; in Armenia the figure is 18%. Only Russia and Kazakhstan have net outflows of money. 

Speaking at the World Bank/IMF annual meeting recently, Shigeo Katsu, World Bank vice president for Europe and Central Asia, warned: “This money sent back home is second only to foreign direct investment as a source of external finance across the region, and is the largest source of external finance for a number of low income and lower middle income countries.” 

Laid low 

There are already signs the flow of money into the CIS’ poorer economies is tailing off as the US and West European economies suffer from the second wave of the credit crisis, while the previously strong growth in Russia and Kazakhstan dissipates – forecasts for 2009 are 3% and 2.7-4.1% respectively. 

Reliable data on the situation in Central Asia is hard to come by, but anecdotal evidence suggests that migrant workers from Kyrgyzstan and Uzbekistan were the first to be laid off when work slowed or stopped at Kazakhstan’s construction sites. In Moscow and other Russian cities, many sites are also staffed by workers from other CIS countries. As in Kazakhstan, the Russian government has recently announced it will take measures to shore up the struggling construction sector. 

A slowing of growth in the Russian economy is likely to be particularly damaging to Armenia, where 70% of remittances are sent from Russia; the amount is closely correlated with Russian GDP. Meanwhile, Moldova has seen many migrants return home in recent months, according to Matthias Lücke, senior economist at the Kiel Institute and head of the institute’s project on migrant remittances in CIS countries. “Based on the available statistics, the number of migrants is now lower than a year ago, by one fifth,” says Matthias Lücke, though he points out that there has not yet been a decline in remittances, according to available data. 

The Kyrgyz government has already sounded the alarm. Economy Minister Akylbek Japarov warned in November that the international crisis could tip the country into financial collapse. He forecast that both FDI and remittances to the country would fall steeply in 2009, with a damaging effect on the already struggling. “Our government is in real terms on the threshold of a financial crisis. A decline in Kyrgyzstan’s economic situation is quite possible by February or March 2009,” Japarov said in a televised address. 

Aside from consumption, the sector that has benefited the most from remittance inflows is real estate. Poor business environments and under-developed stock markets mean there are few alternatives to investing in real estate - aside from saving abroad or keeping their money under the mattress. As a result, the housing sectors in most of these countries have boomed lately, out of proportion to continuing low wage levels. 

“What do migrants do with their money? The business climate in Moldova is so awful that unless you are well connected, you can’t invest it in the country since everyone will be demanding payoffs,” says Lücke. “The options are to renovate your house, to keep it under the mattress or to save it abroad in preparation for when you emigrate permanently. People are also buying real estate in the capital – there is a real property bubble for apartments in Chisinau.” The cost of an apartment in Chisinau increased on average by 5.5% in September 2008, and new buildings are still going up – the city mayor recently unveiled the Malldova shopping centre and at one upscale estate, developers are throwing in a free car with each house bought. 

Real estate prices in both Bishkek and Dushanbe have increased rapidly in recent years. In Armenia, where money transfers are highly correlated to real estate prices, according to the IMF the construction sector overtook industrial production this year to become the largest sector of the economy, accounting for 23.2% of GDP. But just as this happened, the trend started to reverse. After seven years of continuous growth in real estate prices, a slight fall was recorded in 2008, said government agency State Real Property Cadastre. Prices in central Yerevan have fallen by an average of 3%, while in the rest of the country they are down by an average of 1.5%. There was also an 11% year-on-year decrease in the number of property deals registered from August through September. A similar story can be expected in other economies highly reliant on remittances.