Four Insights To Reduce GCC Remittances

This Article was published in Arab Times, Al Qabas, Khaleej Times, Arab News, Financial Express, All Pinoy News, Daily Star, The Peninsula, The Sen Live, Gulf News, Egypt Independent, AME Info, Economic Times; Gulf News

During 2014, GCC countries experienced an outflow of over $100 billion in the form of remittances from expatriates that work in the region. The amount is an estimated 6.2% of GDP, a significant cost compared to the United States (0.7% of GDP) or the United Kingdom (0.8% of GDP). The figure was roughly $50 billion in 2010, implying steady and strong growth in remittances.

S.No	Net Outflow  (2014-USD Billion)	Country	GDP  (USD Billion 2014)	Net Outflow as % of GDP
1	124	United States	17,418	0.7%
2	44	Saudi Arabia	752	5.9%
3	29	United Arab Emirates	401	7.3%
4	23	United Kingdom	2,945	0.8%
5	21	Canada	1,788	1.2%
6	16	Hong Kong SAR, China	289	5.8%
7	14	Russian Federation	1,857	0.8%
8	13	Australia	1,444	0.9%
9	12	Kuwait	172	6.9%
10	9.5	Qatar	210	4.5%
Source: World Bank, IMF

There are several factors that contribute to this remittance pattern, as described below:

Home Bias: The majority of Gulf expatriates originate from India, Egypt, Philippines, Bangladesh, Pakistan, Indonesia, Sri Lanka, and Yemen. These countries have a large diaspora population living and earning income off-shore, most often in low paid jobs that require them to leave their families behind in order to save money and support them.

Closed Market: GCC countries have restrictions on what foreigners can own and invest in, which crowds out investment opportunities for expatriates. While some markets such as Dubai have opened up for foreigners, most of them are still out of bounds.

Absence of Tax: GCC countries charge no income tax on salaries paid to expatriates, which is a huge factor that attracts expatriates to opportunities here. However, the model that other countries follow (like the US or the UK), where the local population is taxed as well as provided with social security, actually increases the “engagement quotient” and motivates them to invest in local markets. The required tax also reduces the savings pot, and thus the money available to remit. Therefore, the absence of tax on income acts as a huge attraction towards remittance in the GCC.

Strict Labor Laws: In the GCC, expatriates are able to legally work for a significant period of time, but cannot claim citizenship. As opposed to the US and UK where the possibility of obtaining citizenship is high, the lack of securing citizenship for expatriates in the GCC encourages them to concentrate their investments back home.

Remittances represent a huge lost opportunity for the GCC countries. While GCC countries enjoy high liquidity, attributable to oil revenues, this state of oil dependency is neither assured nor desirable.

I believe the following are ways in which the GCC can curb the growth and outflow of remittances:

Create Jobs/Reduce Unemployment: The GCC is highly dependent on an expatriate labor force, primarily due to the economy size (requiring large scale labor) and a skill shortage among nationals. The expatriate population comprises 49% of the total population in the GCC; additionally, nationals are highly concentrated in the public sector, often as a result of a wealth distribution process rather than actual job needs. Therefore, there is genuine need to create jobs and enable the nationals to secure and retain those positions. This will reduce local unemployment and shift the balance away from expats in the long term, which may then reduce the remittance flow impact.

Incentivize Domestic Investments: GCC countries can incentivize local investments for expats by launching specialized products that cater to their needs and preferences. This will allow the region to tap into the 25 million expats that reside in the region and maximize investment potential.

Open the Markets: GCC countries can start opening up their markets to foreigners, especially expats. Real estate is a great example of an untapped opportunity. Investment by expatriates should be differentiated from foreign investment, as the former provides a more stable source of investment given the length of time they spend in the region. The toughest obstacle would be reaching out to low-wage workers, who constitute the bulk of remittance. An employer engagement strategy (similar to 401k) can be implemented to tap into this segment.

Improving Hard and Soft Infrastructure: The GCC should strive to improve their infrastructure, including  airports, roads, and railways to consistently provide state-of-art lifestyle avenues. This can attract new expat groups that view infrastructure sophistication as important criteria. Areas like healthcare and education should be elevated to best in class, so that expats are motivated to bring and live with their families.

In conclusion, remittances offer a low hanging fruit to GCC governments to implement strategies that can stem and reverse the flow. It is in the long-term interest of GCC countries to reduce at least some of them through proper incentives and investment opportunities.

India's Remittance –Change it to FDI

India tops the league table when measured in terms of net inflow of remittance even outsmarting China though India’s diaspora is only half that of China. As per IMF data, India received a net flow of nearly $63 billion in 2014 while China received $61 billion. India’s net flow accounts for 3.1% of its GDP while for China it is 0.6%.

How come India enjoys such a large diaspora strength and have they done enough to smart that crowd in terms of a better engagement model?

The 24 million diaspora population is mostly concentrated in Asia (11m), Americas (5 m), Middle East (4.2), Africa (2.8m), Europe (1.8m) and Oceania (1 m) in that order. Together they remit $63 billion with contributions from Middle East (37 b), Americas (14b), Asia (10b), Europe (5b), Oceania (2b) & Africa (0.3 b). The highlight of this structure is clearly Middle East that accounts for 17.5% of Indian diaspora population, but account for nearly 60% of total remittance.

On the other hand, the Chinese diaspora is twice that of India at 50 million mostly concentrated in Asia (27m), Americas (8m), Europe (2.3m), Oceania (1.1m) and Africa (1m) with insignificant presence in the Middle East. The $61 billion net inflow of remittance to China comes predominantly from Asia (32b), Americas (21b) with the rest having minor contributions.

The connect to Asia for both China and India can be explained due to ethnic, historical and geographic reasons. While for China, Asia link will continue to be important and growing, for India Middle East and Americas will count as sweet spots. It is interesting to note that while Indian diaspora strength is more or less equivalent in both Middle East and Americas, Middle East remittance are nearly 3 times that of Americas.

The Indian diaspora in the Middle East is primarily comprised of low-wage earners who mostly live alone with a need to support families back home. Also, most of the Middle Eastern countries have tough labor laws which avoids providing citizenship even after long periods of stay. This invariably reduces spending options and forces remittances back home. In other words, the “engagement quotient” with the local economy is lower from investment (equity, real estate etc.) and consumerism (tourism, education etc.) point of view. Absence of tax also increases the savings and therefore remittance.

On the other hand, the Americas Indian diaspora is different in character. Though they are larger than the Middle East Indian diaspora, they account for only a third of Middle East remittance. This is due to larger “engagement quotient” in Americas than in the Middle East. Non-resident Indians that migrate to US and Canada have deeper roots in terms of local investments and eventually become citizens of those countries. They also come under the tax ambit and receive social security benefits in return. All these increases the engagement quotient and reduces the remittance pot from Americas.

Compared to China, India has wooed its diaspora relatively milder. There is an important lesson to be learnt from China. China has wooed its Non-resident Chinese to come and invest in China rather than just send remittance. They enabled the process through forming a special cabinet ministry, establishing Overseas Chinese Affairs Commission (OCAC), All-China Federation of Returned Overseas Chinese (ACFROC), establishing special economic zones, passing preferential laws, etc. All these encouraged overseas Chinese to actively “invest” in the Chinese economy rather than just “remit”.

India’s red tape, and bureaucracy still acts as a strong deterrent to the diaspora if they were to invest in the country. While patriotic and cultural sentiments will continue to run high among Indians, the decision to come back and contribute to the growth of the country is rooted in much larger reforms and attitudinal change towards non-resident Indians. Merely giving them tax free status will not be enough to encourage this group to do more for India. 

Bollywood Investment Conference

And you thought Bollywood is just for fun and entertainment. Legendary Bollywood actors and actresses have words of wisdom that can help professional fund managers and investors alike. After all, investment is art as much as it is science. Hence, there is no shame in taking some cues from film artists!

The conference will focus on five important investment themes viz., Investment Strategy & Financial Planning, Stock Selection, Role of Advisors, Risk Management and Ethics. Present day celebrities, yesteryear stars, and even dead Bollywood legends will spring to life and deliver masterpieces from their movies to investors and fund managers.

Before the formal sessions begin, there will be a conference flag off. You guessed it right, an item number by Shah Rukh Khan and Bipasha Basu! No Bollywood event ever happens without a Shah Rukh Khan dance.

There will be no Q&A after the sessions since Bollywood actors can only play pre scripted roles, and cannot react to sudden questions.

Investment Strategy and Financial Planning

The opening session will be star-studded with 6 leading actors (living and dead!) sharing their views and ideas on investment strategy and financial planning.

Amjad Khan will kick start the session with his famous dialogue from Sholay “Only one man can save you from Gabbar’s anger; only one man…Gabbar himself”. He is politely asking you as an investor to take responsibility about your savings and be accountable. At the heart of any good strategy is its simplicity which Hrithik Roshan expounds through his Kaho Na Pyaar Hai dialogue “beauty lies within simplicity”. The podium will then be shared by the legendary Raj Kapoor and Dilip Kumar, who will explain to the audience the importance of portfolio diversification. Raj Kapoor’s Shree 420 lines “My shoes are Japanese, these pants are British, I have a Russian red hat on my head…but still my heart is India” will explain diversification even to a layman, while Dilip Kumar’s hard-hitting dialogue from Karma “To protect his cubs, a tiger does not need wild dogs” advises us to keep it simple, and protect one’s portfolio with a little bit of smart diversification.

Anil Kapoor and Hrithik Roshan will then dwell on the timing aspect of the investment strategy. In Jodha Akbar, HR says “There is a big difference between winning and ruling”. Winning is a short term gain, while ruling is a long term perseverance. Investment world will provide you with countless short term winning opportunities but the trick is to convert them to long term growth and stability. In other words, don’t be short term focussed. And Anil Kapoor is there to warn you about bad timing, just like he did in Masafir, where he said “Whether the policemen are real or fake…bloody, they always comes late”. Farhan Akthar and Madhuri Dixsit will end the session with some sage advice. FA will motivate you to have conviction, like when he said in Luck by Chance “keep walking on your road, keep on walking… and slowly the whole world will come on your road”. So what if you make mistakes, are we not here to learn from it? These parting words will come from Madhuri Diksit, “Every sorrow is the beginning of a probable happiness…and every loss is an indicator of an upcoming profit” (Devdas). Life is a cycle; cut your losses, learn your lessons, and work towards your inevitable profit!

Stock Selection

The next session is lead by the don of all dons, Amitabh Bachan, who along with 5 others will give you some tips on stock selection. They will dwell on complicated concepts like valuation, volatility, behavioural finance, and even luck!

In deference to his stature, the senior Bachan will take the floor to extoll the virtue of saying no. “To make progress in this world…it is very important to say no” (Agneepath). This is especially true during bubbles when stock valuations reach dizzy levels. It is during times like this you should be able to say no. In stock selection there are some dos and don’ts. Govinda (Deewana Mastana) will encourage you to have patience, “This world is a bus stop and a girl is a bus. If you run behind it then you will miss it, but if you stay in the same place then another one will come from the front”. Jackie Shroff (Farz) will reinforce the importance of patience “The fun of hunting comes only when…the prey does not get captured quickly”. The don’ts will be driven home by Dharmendra (Yamla Pagla Deewana 2), where he will explain the behavioural finance concept of not getting emotional in your stock selection, “How many times have I told you…have fun, but don’t fall in love”. The junior Bachan (Abhishek) will take the discussion to a more technical level where he will emphasize on the contrarian theory (When people are talking against you…then you are making progress-Guru) and volatility (Every hurdle…is a chance to get to the destination-Sarkar Raj).

 In case you thought stock selection is all about skill, Jackie Shroff is here to explain the role of luck as well “Sometimes luck comes before death”.(Farz)

The Role of Advisors

Bollywood actors are very much used to the concept of advisors, and hence can succinctly explain their importance while making investment decisions. This short session will be anchored by three people, led by Hrithik Roshan “I will never leave your hand…not today, not now, and not ever” (Aap Mujhe Achhe Lagne Lage). This is exactly what every financial advisor should swear to his clients! Dilip Kumar (Saudagar) will emphasize the point further “A right is not asked with head bowed down…but with the head held up”. As a client you have every right to question  your advisor, until you are satisfied with the answer. And don’t be a Dharmendra from Sholay who said “we work only for money”. A financial advisor should never give such a feeling to his/her clients.

Risk Management

“To live life there are only two ways…one whatever is happening let it happen, keep tolerating it..or else take responsibility to change it” (Rang De Basanti). Aamir Khan will take the floor on risk management with this opening. While risk management is hard work, it eventually pays off. Jackie Shroff in Border did tell viewers “The more you sweat in peace…the less you bleed in war”. Prepare and position your portfolio from a risk perspective, so you bleed less during a financial crisis. And what is the consequence of ignoring risk management. “In trying to achieve a lot a human sometimes loses everything”. Govinda in Andolan is not talking about ponzy schemes!

Ethics

From a grand start of 6 in the opening session, the last session will have only two doyens speaking about ethics, as most of the attendees eagerly await the close. “Rather than living under the roof of humiliation…it is better that a person lives without any roof, but with respect intact” (Khudgarz). Jeetendra is simply driving the point that ethics in investment world will ensure no humiliation at all times. Dev Anand (Johny Mera Naam) will give us the thumping end by screaming “I can sell the moon for you…but not my honesty”.

Closing Session

The conference will end with the screening of a yet to be and never to be released movie “Black money, Bollywood and Switzerland!”

The Mega Rupee Strength!

During the last 15 months, Euro fell by nearly 25%, Brazilian Real by 30%, Russian Ruble by 50% and Canadian dollar by 18% all against the USD. The INR is down only by 2%!

My previous article on Indian rupee was written during August 2013 titled “The Mega Rupee Slide” when Indian Rupee (INR) was sliding down as if there was no tomorrow. The question back then was, how low the INR will go and how can this be stopped.

Within two years, that question is now flipped over its face. This time around, the motivation to look at INR was for the opposite reason. When almost all global currencies are sliding down against US Dollar (as if there is no tomorrow!), INR is holding up quite well.

This indeed is a very strange situation for an emerging market like India. Can this hold up or Is this just a calm before the storm? This question is important for CFO’s, Foreign Investors, Importers, Exporters and finally NRI’s.

Depreciation Relative to USD	2014	2015-YTD (18th Mar)
Brazilian Real	-11.1%	-18.4%
Euro	-12.0%	-12.4%
Canadian Dollar	-8.6%	-9.3%
Australian Dollar	-8.4%	-7.1%
South African Rand	-9.7%	-6.6%
Indonesian Rupiah	-1.8%	-6.0%
Malaysian Ringgit	-6.2%	-5.7%
Russian Ruble	-43.3%	-5.4%
Singapore Dollar	-4.7%	-4.7%
Mexican Peso	-11.6%	-4.2%
Korean Won	-4.0%	-3.2%
Japanese Yen	-12.0%	-1.3%
Chinese Yuan	-2.4%	-0.5%
Hong Kong Dollar	0.0%	-0.1%
Thai Baht	-0.7%	0.0%
Taiwanese Dollar	-5.7%	0.2%
Indian Rupee	-2.0%	0.6%

But before we answer that question, let us understand what has caused this rapid USD strength against Euro and other currencies. Euro has plunged by nearly 25% since 2014 beginning from 1.4 to nearly 1. The simple explanation to this unprecedented plunge of Euro is the divergent monetary policy of US and Eurozone. US is now in a tightening mode (means increasing the rates) while Eurozone is now in a loosening mode (means reducing the rates). So, when US rates go up and Eurozone rates fall, the spread widens and therefore causes more capital to flow back to US in search of more yields which then results in currency appreciation.

Why is INR so strong?

There are many reasons, but three stand out:

      1.       “Strong”  and improving Economy

      2.       “Prudent” RBI &

      3.       “Rocking” Capital markets

 “Strong” Economy:

“India’s near-term growth outlook has improved and the balance of risks is now more favorable, helped by increased political certainty, several policy actions, improved business confidence, lower commodity import prices, and reduced external vulnerabilities” IMF, March 2015. That is a neat summary of where India is in terms of its economy.

Economic Indicator	2014/15	Current Assessment	Future Assessment
Real GDP growth (%)	5.6	Rebounding	Positive
Inflation (%)-CPI	6.7%	Reducing	Stable
Current Account Deficit (% to GDP)	-1.8%	Narrowing	Stable
Fiscal Deficit (% to GDP)	-4.4%	Declining	Declining
Forex Reserves ($b)	340	Strong	Strong
Public Debt (% to GDP)	64.3	Moderate	Moderate
Data Source: IMF

India is among very few countries in the world that is expected to clock decent real GDP growth for 2015 and beyond. IMF projects a growth of 5.6% for the current fiscal and 6.3% for the next fiscal, a healthy number indeed. The rebound in growth is happening on the back of improved political climate, lower oil prices, increasing confidence among business and investors, and reduced external vulnerabilities as IMF summarized. However, if you look at the projections for say 2019/20, it still remains only at 6.7%, not the 10% that the media loves to tout all the time. If India’s medium-term prospects were to be improved, we should focus removing supply-side bottlenecks.

The reduction in consumer inflation is commendable and timely. The reducing inflation is credited mainly to lower oil prices though RBI’s relentless pursuit to contain inflation is finally paying off through its monetary policy actions. The government’s effort to contain food inflation is also a key contributor here.

India also suffers from the twin deficit problem i.e., fiscal deficit and Current Account Deficit (or what is popularly called CAD). CAD is now at -1.8% of GDP, far lower than -4.7% witnessed during 2012/13. The improving situation is mainly because our import bills are coming down while exports have picked up. Imports have come down mainly due to lower oil prices as well as fall in gold imports (thanks to higher import duties and administrative measures). India has received an unexpected gift in the form of lower oil prices translating into lower import bill. Oil comprised nearly 40% of our import bill before the oil price collapse and hence it is a great relief to be experiencing a lower oil price. But, we do not know how long this gift will last. Future assessment of CAD is also very stable at -2.5%.

Presently India’s fiscal deficit stands at -4.4% showing a declining trend relative to history. As per IMF, it is further poised to reduce though the task is one of great challenge. The fiscal deficit can be reduced only if we increase the revenues or decrease expenditure or do both. Reducing expenditure will involve overhauling the subsidy regime mainly to stop leakages in food subsidies. Improving revenues will involve tax administration reforms.

Our forex reserves at $340 billion is increasing and provides decent cover for our imports (7 months). The growth in our forex reserves is happening on the back of strong FII inflows and narrowing CAD. This is further augmented by NRI deposits and overseas borrowing by corporates through ECB’s. Indian corporates are highly leveraged and normally unhedge their forex exposure. If you notice carefully, all these sources are short-term and volatile. India should look to building its forex reserves through long-term stable forms like FDI. A good comparison here would be China whose forex reserves are close to $4 trillion dollars mainly built on the back of export surpluses. Due to this, China in fact enjoys a current account surplus.

India’s public debt as a % of GDP is about 65% and is considered moderate compared to other countries. Moreover, our total debt is about 135% of GDP (Government: 66%, Corporates: 45%, Households: 9% & Financial Institutions: 15%). Contrast this with say China at 282% of GDP (Government: 55%, Corporates: 125%, Households: 38%, & Financial Institutions: 65%). China’s total debt has grown four times in the six years since global financial crisis and its debt-to-GDP ratio has doubled between 2007 and 2014 according to an analysis done by C.P. Chandrasekhar and Jayat Ghosh and as published recently in Business line. Even though the aggregate debt level for China is high, its current account surplus can weather any storm, while India does not have that luxury. That said, Indian public debt scenario is highly sustainable with favorable maturity structure, currency composition as well as domestic investor base according to IMF.

 “Prudent” RBI

Raghuram Rajan is arguably one of the deft Central Bank governors in the world today. When the new Modi government took charge, one of the best decisions they made is to retain him as the governor of RBI. RBI’s main mandate is to contain India’s uncontainable inflation and he managed to do that exactly, though with a little bit of help from oil price. However, he did not wait for the “lower inflation” thesis to play out fully before decreasing India’s interest rates. He surprised the market with a 25 basis point cut on March 4. Remember, our interest rates are high in response to high inflation and this has been touted as one reason for economic growth not picking up. In other words, many were blaming Raghuram Rajan as obstructing and delaying India’s economic growth. He surprised many when he made a sudden announcement to increase the rates. It shows his conviction that the reduction in India’s inflation is here to stay.

 “Rocking” Capital Markets

A strong capital market attracts foreign investments which contributes to rupee strength. Indian stock market is one of the best performing stock markets in the world. It netted a return of 30% for 2014 and is up by 3% so far in 2015. Strong capital inflows, optimism about reforms by the new Modi government, proactive RBI and huge expectations of infrastructure spending augurs this strong performance of the stock market. Foreign investors are also eagerly buying Indian debt. As markets perform well, the foreign inflows will tend to appreciate the currency and this can be one reason as well. However, Indian markets are not cheap as measured by price to earnings ratio at 17.8 for MSCI India based on forward earnings, which is nearly 25% higher than the long-term average. Valuation can get affordable only if earnings catches up.

What can spoil the party

Two things can spoil the party in my assessment:

      1.       Global market volatility &

      2.       Anemic credit growth magnifying NPA problem

Global Market Volatility:

Everyone from Raghuram Rajan to Arun Jaitley (India’s Finance Minister) is bracing for the “winter” in global financial markets when US Fed will start raising interest rates after a prolonged period of low interest rates. The question is no longer “if” but when. And the rate rise can start either as early as June or at the worst by the end of the year. When US did a “taper tantrum” last time around in 2013, every emerging market felt the heat including India. This time around this event of rate rise is even more powerful than “taper tantrum”. Given the negative yields in Eurozone, a rate rise in US is definite to pull back capital to US. This means hot money will leave the shores of other markets (especially emerging markets) in search of more yields in US. Indian markets are predominantly served by hot money and hence it may have a chilling effect for sure. Let us hope that the policy normalization is not disorderly and inflicts minimum pain for India.

Anemic Credit Growth

The other major concern is the huge swathe of non-performing loans building up in public sector banks coupled with weak credit growth. Accordingly to IMF, the profitability of public sector banks remains weak, due to lower operating efficiency. Large exposure of these banks to infrastructure has turned their asset quality very poor. Due to this, the capital requirements for public sector banks has increased. Basel 3 adoption also increases this pressure. Weak credit growth (at 10%) may not help matters.

Concluding Thoughts

INR is currently trading at Rs.62/USD. Leading investment banks mostly predict Rupee to continue to be strong in 2015 as we can see in the table. While Nomura call is aggressive at Rs.57.5/$, Goldman Sachs predicts INR to reach Rs.63, not too different from the current levels.

	INR Forecast -2015-per USD
ZyFin Research	58
Bloomberg survey	61
Nomura	57.50
Deutsche Bank	64
BoA Merril Lynch	60
Goldman Sachs	63
Reuters poll	62.50

The rapid rise of US dollar and the concurrent rapid fall of Euro surprised many analysts. However, what is even more surprising is the strength of Indian Rupee. This may well reflect the solid Indian economic story. However, currency is a volatile game and few can predict its movement accurately. Among the key risks discussed, IMF flags a surge in financial market volatility as the highest risk for India in 2015 apart from protracted period of slower growth in advanced economies. Hence, it is quite clear that the storm is coming. The question is how well we can cope with it. When that storm arrives, the Indian Rupee should give up and move down to say 65 or even 70 levels if the Fed monetary policy unwinding is orderly. The role of RBI is to make sure that this downward movement of INR is orderly and does not create panic among market participant. Given Raghuram Rajan’s track record so far, it is quite to be expected that he will manage the process well.