By Emilio Morales

The rapid emergence and expansion of COVID-19 throughout the planet has become the most catastrophic event that humanity has had in this still young XXI century. The impact of COVID-19 is stronger than natural disasters such as category 5 hurricanes, tornadoes, or earthquakes, not because of its destructive power, but because of its paralyzing and triggering power. Tornadoes, hurricanes, and earthquakes have a very short life and lack propagation power unlike the virus, which its elimination depends on the appearance of a vaccine to prevent it or of medicines that serve to effectively treat the disease. No natural disaster has the ability to impact the entire planet at the same time, nor stop the entire global economy, except the COVID-19. Therefore, estimating the impact this pandemic can generate is very difficult.

It is a fact that COVID-19 has practically stopped the world economy, collapsed the stock markets, and put the sale price of oil in the international market at a value below its cost of production. In the case of the leisure industry, it has generated the bankruptcy of multiple companies, massive layoffs, interruption of supply chains, paralysis of air and land transport, closure of hundreds of thousands of hotels, restaurants, entertainment centers, etc., and most importantly, it has stopped the industry from being a source of wealth generation.

This effect of paralyzing the sources of wealth generation has extended to most sectors of the global economy, and this is the fundamental reason why remittances are going to be impacted worldwide. If there is no possibility of working, there are no remittances, it is that simple, as simple as the virus that attacks us: a stupid protein with an insignificant RNA chain, that does not even live to kill or feed on others. It exists to multiply, cluttering itself into other cells without any meaning, showing us how vulnerable we humans and economies are.

In the specific case of Latin America, remittances come mainly from the United States, Canada, and Europe. These countries and regions have been strongly impacted by COVID-19, especially Europe (very strong impact in Italy and Spain at the time of writing this article) and the United States. The latter -- which has already become the epicenter of the pandemic -- is the main issuer of remittances worldwide and specifically to Latin America, as more than 78.2% of remittances reaching most of the recipient countries in Latin America, on average, come from the USA, while the remaining 31.8% is shared between Canada, Europe, and other countries. Some countries like Venezuela, Brazil, Paraguay, Colombia, and Peru, to name the most notable, depend less on the US and Europe and more on markets geographically close to them in Latin America itself.

Taking into account how the pandemic is behaving and the impact it is currently having on the economies of the United States, Europe (mainly Spain and Italy), and Latin America, we estimate that for an optimistic scenario, remittances could fall by around 20% and for a pessimistic scenario, as much as 30%. Everything will depend on how long it takes the remittance-sending countries to control the pandemic and stabilize their respective economies. Our projection forecasts double-digit declines for all countries in the region (see Table 1).

 Table 1. Remittances received in Latin America, 2019 and projection for 2020.

Source: Created by Havana Consulting Group based on information published by The World Bank, Central Banks from 20 countries, and press reports and own sources.

Factors to consider to estimate the impact

In order to estimate the impact of the pandemic, it is necessary to take into account various factors that are in some way related to each other.

1. Remittance-issuing countries that have been impacted by COVID-19.
2. The level of impact in the cities of countries that send remittances where the migrations of Latinos settle.
3. The level of unemployment generated by quarantine and the closure of companies.
4. Government responsiveness to financially assist affected families.
5. Governments' responsiveness to financially assist unregulated migrant families contributing hundreds of millions of dollars to the economies of this countries.
6. The capacity of governments to combat the pandemic and effectively use the resources required to confront it (financial resources, logistics of supplies, medicines, medical equipment, structure of services, hospital capacity, workforce in the health sector, etc...).
7. Duration of the pandemic.
8. Recovery time of the economy of the affected countries.
9. The time it takes for a drug or combination of drugs to appear to effectively treat the disease and help stop the pandemic.
10. Time it takes for a vaccine to appear that allows its prevention and with it the stabilization of the economy.
11. The economic recovery time of the migrant population in each of the countries that send remittances once the pandemic has been controlled.

After reviewing this list in order to estimate the impact of COVID-19, it becomes very difficult to do so since there is no history of this type of situation in the modern world.

At the time of writing this article, none of the remittance-sending countries we have mentioned have reached a peak in the number of positive cases with COVID-19. Therefore, it is very likely that this situation will last for 8-10 weeks at least, which would put us in a work stoppage of almost three months since the governments gave the alarm signal for the pandemic.

In this scenario that we will call optimistic, the number of remittances sent to Latin America will gradually decline as the crisis grows. Therefore, the volume of transactions will decrease, as well as the value of the amounts as the days go by. Many of these economies are beginning to go into hibernation to try to contain the spread of the virus. This will generate a greater closure of companies and a greater wave of layoffs, which in the end will considerably reduce the sending capacity of the migrant population, which will prioritize their subsistence: trying to minimize the cost of resources to be able to face the months of work stoppage that the fight against the pandemic will generate.

Right now, many of the people who send remittances are out of work because they are quarantined or because they have lost their jobs. However, they have to keep paying their bills (mortgages or rents, telephone bills, electricity, water, food, health insurance, car, etc.). These people have to dip into their savings (those who have) or wait for government help (in the US, migrants who do not have a Social Security Number at the moment will not receive help), which will be welcome but not enough. Even then, these people will not have surpluses in their income, nor will they have any subsequent income. Therefore, their ability to send money will be drastically reduced. As the contagion curve continues to rise, the quarantine time and hibernation time of economies will increase, whereby the curve of people's financial income will continue to decrease. It is obvious that there is a direct relationship between both curves. As the contagion curve decreases, the financial income curve will begin to recover. But how long will this scenario take? This will be the signal that will initiate the recovery of the remittance market, which when it happens will not be sudden, but gradually at the rate of recovery of the economies.

Who is affected and benefits in the remittance industry?

Within the business network of the remittance industry, there are some that will be affected more than others. Many MTOs do not have the resources to withstand a closing situation for more than two or three months; they will have to close. MTO agents who do not have the service digitized through a mobile application will be very vulnerable: they risk losing hundreds or thousands of customers. The question is, how long can they endure the work stoppage and quarantine caused by the pandemic?

Given the circumstances, COVID-19 could catalyze the migration of many customers to the use of digital applications to send remittances, which is a great opportunity for MTOs that already have their digital platforms operating through an application. In this sense, FINTECH companies have a golden opportunity to take hold and expand. Aspects such as security, comfort, and speed will become assets that will make customers migrate to digital services faster. After all, all Latin American markets are ready to jump. Cellular technology is present in all of them and with practically 100% coverage. It only needed to experience something drastic to change the industry in a massive way towards digital platform.

Apparently, this transition could be caused by COVID-19. It is incredible that this change occurs under these circumstances and not because of a calculated and planned strategic marketing operation. This shows us that crises and vulnerability also generate opportunity.

The need and customs of human beings change with the circumstances. The remittance industry will be no exception. The companies that bet on the digital transformation of their services will be the winners. In this scenario, the FINTECH companies emerge as major competitors. Many of them could absorb non-digitized MTO networks that are now in danger of extinction. This could make FINTECH the fastest way to bank the unbanked clients. The big losers will be the MTOs who refused to transition to digital platform, those that did not draw long-term strategies, those that did not invest resources when they could, and those that remained in their comfort space due to their tradition and leadership.

Conclusions

Remittances from Latin America will decline sharply in 2020 as a consequence of the impact that the COVID-19 pandemic is having on the main issuing markets to the region, mainly the United States and Europe.

Almost 80% of the remittances that arrive in the region come from the United States, which is the first issuer of remittances in the world and is currently the epicenter of the pandemic. This pandemic has triggered a strong wave of company closures, entire cities in quarantine, and the paralysis of the leisure industry and the service sector, among other sectors of the economy. In the US alone three million people applied for unemployment benefits at the end of March 21^st, a number that will continue to increase over the next few days as the crisis worsens. There is no doubt that the migrant population will be one of the most affected. The most vulnerable are those who are not officially registered and those without social security, a requirement that leaves them out of the aid recently approved by the US Congress.

For the second quarter of the year, layoffs are projected to reach 47 million workers in the US, which would mean an unemployment rate of 32.1%, much higher than the unemployment rate of the Great Depression in 1948, according to estimates posted on the blog of the St. Louis Federal Reserve Bank [1]. This would be a unique shock for the North American economy.

Taking the 2008 recession as a reference to estimate the impact that we will now have with this new scenario created by COVID-19 is a bit risky, since both crises differ in their origins, behaviors, and solutions.

Taking into account the impact this crisis is having on the world economy, and specifically on the US economy, there is lots of uncertainty that stems from not knowing how long it could take to control the crisis and return to the norm, especially because an effective cure to combat the disease or a vaccine to prevent it have yet to be discovered. For the moment, social isolation and quarantine have been imposed as the best remedies we currently have to prevent its spread. We visualize a scenario of several months in this state of economic hibernation. As a result, we estimate that remittances to Latin America could fall between 20% and 30% in 2020.

As a negative aspect of the crisis, we could predict that this situation could mean the bankruptcy and disappearance of many MTOs that do not have the resources to withstand the crisis. As a positive aspect, it provides a good opportunity for MTOs that have opted to digitize the service and for FINTECHs that have developed applications for the remittance industry. From a market perspective, a change in the behavior of customer consumption could occur, supported by a strong migration of customers to digital services, depending on how long this crisis may be. In other words, the COVID-19 crisis has created a chaotic scenario for the industry, but at the same time a great opportunity for it and the market to adapt to technology. After all, when this crisis ends the remittance industry will rise again, perhaps with new leaders and new shipping highways.

REFERENCES

[1] Davison, Paul. “Unemployment could top 32% as 47M workers are laid off amid coronavirus: St. Louis Fed”. USA TODAY. March 2020. https://currently.att.yahoo.com/att/xandr/unemployment-could-top-32-47m-222902847.html