Tag Archives: Remittance

How the Current Slump in Resource Prices is Affecting Remittance

In recent years, the prices of commodities such as oil, gas, sugar, copper, and iron ore have been in a free fall. According to Bloomberg Business, a 46% decline in resource prices has been witnessed since 2011, and we should expect more. With the slowing down Chinese economy, the commodity prices are in for a deeper dive.

As the prices continue to slump, many exporting countries are experiencing financial distress. The decline in commodity prices is eating on their net export revenues, hence pushing them towards a recession. On the other hand, importing countries are experiencing a boom as their disposable income increases with the fall in commodity prices.

How then does the current slump in resource prices affect the exchange market? Even though there is no rule to determine the correlation between currencies and commodities, the relationship cannot be ignored. For instance, the current slump in oil prices has seen the Canadian dollar and the Russian Ruble decline in value. Other currencies affected by the fall in oil prices include the Brazilian Real, Norwegian Krone, and the Colombian Peso.

The decline shows a strong correlation between a country’s major export and the value of its currency in the foreign exchange market. In the case of Canada, as the fourth largest exporter of crude oil, a decline in oil prices is likely to result in the weakening of the Canadian dollar. The decline in revenues from oil will weaken the currency in the exchange markets.

When it comes to importing countries, a slump in resource prices can mean two things. First, the decline in commodity prices means reduced expenses and hence higher profits for companies. With the increased revenues, the importing countries will get a chance to improve their current accounts hence strengthening the value of their currency in the foreign exchange markets.

Among the greatest importers of oil, the Chinese Yuan should be blossoming in the current oil prices, but due the slowing economy, things are different. India, which imports 75% of its oil is expected to ease its current account deficits if the oil prices maintain their low.

On the other hand, a slump in commodity prices can mean deflation to importing countries. A decline in commodity prices results in a decline in related product prices, thus encouraging exports and discouraging imports. In the long run, all factors considered, this leads to the strengthening of the given currency.

As the resource prices continue to tumble, there is a likelihood of a decline in remittances from the affected economies. For instance, in the wake of the falling oil prices, the remittances from Indian citizens working in major oil producing countries has declined. The World Bank warns that if the oil prices are to remain low, the remittance flow from the Gulf Cooperation Council will decline further. Even when India is benefiting from an increase in disposable income, the decline in remittances to the country is a reason to worry.

The main reason for the decline in remittances is the weakening of a currency of the affected economy. When the prices of exports fall, the decline in revenues is likely to weaken the position of a given currency in the global foreign markets.

For instance, the weakening of Russia economy is affecting the economies of neighboring countries as a result of the declining remittances, trade and investments. The areas most affected by the slowing Russia economy include Central Asia and Caucasus. Given that most developing countries depend on remittances from developed nations, the plummeting oil prices have a negative effect on the stability of their currencies.

Even as some countries continue to enjoy the increase in disposable income as a result of the slump in resource prices, there is a reason to worry. As the commodity markets continue to plummet, there is a likelihood of a contagious financial disaster to the global economy. When coupled with other factors as the crumbling China economy, the prices are likely to go down further leading to more trouble.

As analysts continue to encourage investors that this is the best time to buy commodities, there is a reason to be more careful. Unless the Chinese markets stabilize, the commodity prices are likely to crumble further.

Bitcoins $430 Billion Remittance Opportunity

The rise to prominence of bitcoin has produced a lot of talk around the world for its supposed potential to transform the global remittance industry. This is no small feat, having a potential of $430 billion in global trade. Given that this online currency is almost as easy to implement as sending mail is, it’s hard to believe that only fringe attention has been given. There has been tremendous talk of it’s growing potential,  however, despite all the promise, the platform for the use of bitcoin and other digital currencies is yet to be adopted on a wide international scale.

Looking at the figures

Looking at the Philippines as example, a country that receives the third highest amount of remittances in the world. The figures are quite interesting. In 2013, the Philippines received $26 billion worth in remittances. In 2014, the figure rose to $27.5 billion. At the moment, the annual growth of the remittance industry in the country is between 1 and 2 billion dollars annually. Behind Philippines comes Mexico, which enjoyed a $23 billion windfall in 2013. However, Mexico’s stake in the remittance has been on the decline since the beginning slowing of main street in the US starting in 2008.

For both Philippines and Mexico, the bulk of this money seems to originate from the United States. 98% of Mexico’s remittances come from the States while the Philippines obtains 30% of its total from the same source. Taking a closer look on the other hand, tells you that over $10 billion of the Philippines’ totals does not actually come from the US; it is simply re-routed there from countries in Europe, Australia and Asia.

What this tells us is that despite seeing a slow down the US economy, financial services in the US remained healthy. The United State having the world reserve currency is still the financial hub of the world. Many of the world financial institutions funnel economic trade through its American financial centres and this is a factor when transferring money. Not only does this make put transactions under US regulation it also increases transactional fees. The current monetary and economic system is still fairly centralized and lacks commercial diversity. The industry is ripe for innovation.

Putting the argument in perspective

It is not easy to imagine a bitcoin company starting from scratch and beating established money transfer services like Money Gram or Western Union. However, it is very possible to start a bitcoin transfer service to serve a small, targeted clientele. Establishing yourself if you do not have the financial wherewithal to open branches around the world can be an issue but through global collaboration, peer networks can be created? Independent businesses will have to work together to build a divers money transfer landscape. You will also have to assume that most of the migrant populations in many countries do not understand or care about the machinations of crypto currency, but this will slowly evolve.

The solution

Rebit (Philippines), Bitpesa (Africa) and Airbit (Indonesia) are some of the services that receive and convert bitcoins into currency ,sending them out to recipients at the end . There are no risks here because the final user is never gets to handle any part of the transaction.

The snag here is that to make a transfer, a client has to first convert currency to bitcoins. This technicality allows for the inclusion of an informal intermediary, a strategy that could potentially put a different business out of work. From the outset, this assertion seems laughable, but it is far from it. An in-depth look will give you an exact picture.

How it works

Bitcoin companies do not keep a supply all the time. They find sources of the crypto currency mostly when there is demand. Once they get a hold of a batch, they will try to sell enough to make payouts to the beneficiaries of their customers. A trader who knows their way around can manage to sell a decent amount of bitcoins for cash and make a decent profit. Though in harsher times, breaking even is always appreciated.

Whether the operation is on or off ramp, there will always be a need to integrate technologies that make transacting in bitcoins easier.  The problem however, is that only the countries with the best banking infrastructures will benefit from a setup like this. Sample this: in the Philippines, there is a markedly higher number of pawnshops than there are ATM machines while in India, money transfer services are very informal in approach. Dealers will have to integrate within these existing systems.

Legal aspects of the transfer of BTC’s

Some countries around the world will require that any business wishing to trade in bitcoins to obtain a license, and even then, the procedures are not exactly straightforward. In the United States, very few companies have managed to obtain licensing in every state because the costs are simply outrageous. In the ASEAN region, the costs will be in the tens of thousands of dollars while authorities in the Middle East will ask for between one and two billion dollars. Apart from financial implications, these start ups have to comply with anti-laundering rules that complicate everything all over again.

At this point, we are about to start a race, with $42 billion worth of global savings at stake. The good thing is that after all, we do not need a central authority to trade in bitcoins. The nature of the currency will make it easier for decentralized brokerages to exist in each country. This strategy may not topple giants like Western union, but it will make such transfer entities stand up and take notice.