Global Themes / Global

The future of payments: Could Covid-19 end cash’s reign?

  • Covid-19 is pushing people to look at alternatives to cash, increasing the adoption of electronic payments
  • Markets with anomalously high levels of cash usage include Pakistan, Morocco and Russia
  • We think these are the types of economies that benefit most from the end of cash’s reign

Total cash in circulation at end-17 was US$37tn, equivalent to over 40% of global GDP, or cUS$5k per capita, and over 80% of transactions globally are still conducted in cash. Its key advantages include its ubiquity and universal acceptance, low transaction costs (typically one-third of a debit card, for example) and anonymity.

However, for governments, the popularity of cash is a double-edged sword. Although they can control the absolute volume of cash in circulation, transactions cannot easily be tracked at a micro level, resulting in fiscal leakages. Meanwhile, for the private sector, cash entails costs in terms of security and fraud, and is not a productive asset.

Moreover, cash has been shown to carry germs – coronaviruses, including Covid-19, can survive on paper for up to five days. To reduce transmission risks, governments, regulators and private sector businesses are encouraging individuals to avoid cash transactions. But, with large swathes of the globe now in lockdown, an alternative medium of exchange has become necessary to stop the wheels of commerce grinding to a complete halt. Electronic payments seem poised for sharp growth.

Nordic countries have shifted away from cash, which shows it can be done, and some EMs are attempting to follow suit – in Kenya, Rwanda and Pakistan, central banks scrambling to respond to Covid-19 have lowered fees on mobile payments/electronic banking to help reduce cash usage. 

Market implications

Which EM economies could benefit most from the end of cash’s reign? We think markets with high levels of digital infrastructure are most able to sustain a switch away from cash, and those with anomalously high levels of cash usage will see the greatest change, including Pakistan, Morocco and Russia.

How can banks benefit from this cashless trend? We see two primary routes:

  1. Operating costs can be reduced; cash handling consumes up to 10% of a bank’s cost base. A switch away from cash should also allow banks to reduce their branch networks – this is already happening in several EMs like Malaysia and Nigeria. 
  2. Electronic payments can be a valuable revenue generator, as seen in Kenya and Nigeria, for example.

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Macro Analysis / Global

Emerging Market sovereign bond issuance rises in June, but more still to come

  • EM hard currency sovereign bond issuance rose to US$21bn in June, with Q2 issues of US$83bn more than double that in Q1
  • HY issuance continues, with 11 sovereigns accessing the market since it reopened, issuing US$20bn, but access is limited
  • Large crisis-related funding needs suggests much more issuance is on the way; the surprise is we haven't seen it yet
Stuart Culverhouse @
Tellimer Research
1 July 2020

EM hard currency sovereign bond issuance was US$20.8bn in June, a rise of 11% compared to May, bringing total issuance YTD to US$123.5bn, based on our calculations using data from Bond Radar. This implies Q2 issuance of US$83bn, slightly more than double that in Q1.

Within overall issuance in June, Investment Grade (IG) issuance was US$10.3bn (49% of the total) and High Yield (HY) was US$7.8bn (37%), up 17% and down 21%, respectively from the preceding month. Crossover issuance of US$2.7bn (13%) accounted for the remainder. For Q2 20 as a whole, nearly three quarters has been IG, nearly a quarter HY, and 3% crossover. IG accounts for 72% of EM sovereign issuance YTD.

Within HY, we saw issuance from five countries in June, and a diverse set at that, as issuance continues to go down the rating scale. Issuance came from Albania (B1/B+/-), Brazil (-/BB-/BB-), Belarus (-/B/B), Jordan (B1/B+/BB-) and Honduras (B1/BB-/-), but with the exception of Brazil, none of these have been regular issuers. The crossover issuance came from two countries – Croatia (Ba2/BBB-/BBB-) and Trinidad and Tobago (Ba1/BBB-/-). We think, since market access resumed for HY in April, Belarus has been the lowest rated issuer so far. However, issuance has yet to transcend into the B- rating category. Even more interesting perhaps, Honduras, which is eligible for temporary debt service relief on its official bilateral debt under the G20's Debt Service Suspension Initiative (DSSI), was able to issue, although that might be partly due to its slightly better rating (as high as BB–) than many of the other eligible countries.

This supports what we have said before, that the market is open for (good quality) HY issuers, although access has still been limited. So far, since the market reopened, we count just 11 HY sovereigns that have come to market for a total of US$20bn (13 if we include the two crossover issuers in June). HY issuance YTD has been US$32bn. But the number of issuers still seems a remarkably low subset of the number of possible HY, and frontier, issuers. And we still haven't seen any issuance from Sub-Saharan Africa. South Africa, however, and Ukraine, are in the pipeline.

That the international bond market is, or could be, open to some HY issuers as a source of new money may be an important message to global policy makers and EM sovereign debt managers as they assess funding options and navigate their way through this crisis. Large crisis-related funding needs suggest much more issuance could be on the way, and it may be a surprise that we haven't yet seen the wall of issuance we might have expected. For instance, the IMF's new WEO update for June projects a budget deficit for Emerging Markets and Developing Countries this year of 10.6% of GDP, and a deficit for low-income developing countries of 6.1% of GDP (which is probably around US$100bn).

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Sovereign Analysis / Nigeria

Nigeria: Muddle through is the new normal

  • The recent NGN devaluation is a positive step, but policymakers probably lack the will to see it through to the end
  • Government has paid lip service to diversifying the economy away from oil and gas, with little to show for their efforts
  • If government continues to prioritise FX stability then growth will remain stagnant
Patrick Curran @
Tellimer Research
25 June 2020

The Covid crisis and collapse in oil prices (c85% of Nigeria’s exports, c50% of revenue and c8% of GDP) has hit Nigeria hard, with real GDP growth expected to drop from 2.3% in 2019 to -3.4% in 2020. However, low growth is not new to Nigeria, averaging an anaemic 1.2% annually over the past five years and only once surpassing the population growth rate of 2.6%.

While the government has paid lip service to diversifying the economy away from oil and gas, there has been little to show for their efforts. The Economic Recovery and Growth Plan (ERGP) that government rolled out in March 2017 in response to the 2014-16 oil crash envisioned a growth rebound to 7% by 2020 (see our initial take on it here), but numerous structural factors have led to a lack meaningful progress on industrialisation since then.

However, despite these challenges Nigeria was able to achieve robust growth rates averaging c7% in the decade prior to the 2014 commodity crash. Why, then, does Nigeria now appear to be stuck in the mud with structurally low growth?

A silver lining has emerged from the recent oil crash, with the Central Bank of Nigeria (CBN) devaluing the official NGN exchange rate by 15% and the Importer & Exporter (I&E) rate by 4% against the US$. However, we do not believe the recent devaluation has gone far enough and doubt the government’s stated commitment to unify its multiple exchange rates under one market-determined rate. Barring further liberalisation of the FX regime and wider fiscal reform, we think Nigeria will continue to muddle through as it has done for the past five years.

We explore all these issues in depth in our full report, which is available for Insights Pro subscribers.

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Global Themes / Global

Global remittances: Opportunities and risks in an industry upended by Covid-19

  • Inflows of hard currency from citizens, workers and families overseas are the financial lifeblood of emerging markets.
  • But remittance volumes could decline 20% in 2020, according to the World Bank, compounding a 35% drop in FDI.
  • Technology is also disrupting this US$50bn industry. Digital channels are c50% cheaper than using banks.
Rahul Shah @
Tellimer Research
7 May 2020

International remittances totalled US$714bn in 2019, sent by 272mn migrant workers. We think a further cUS$500mn was sent via informal channels. The largest source markets for remittances are the US, UAE and Saudi Arabia. Key recipient markets include India, China and Mexico. But this industry is changing fast, disrupted by new technologies and the economic impact of Covid-19.

Remittance volumes could decline 20% in 2020, according to the World Bank. Key drivers of this decline include negative GDP growth, lower trade volumes, tighter border restrictions and lower commodity prices.

Remittances will nonetheless top FDI and portfolio inflows in 2020. According to the World Bank, FDI inflows to EMs will decline by 35%, while portfolio debt and equity inflows will decline by 80%.

The most popular corridors are USA-Mexico, USA-China, UAE-India. The most exposed recipient countries include the Philippines, Sri Lanka, Egypt. EMs with large outbound remittances include the GCC, Mauritius, Malaysia. 

The average cost of international remittances is 6.8% of the volume sent. This translates to a US$50bn annual fee pool. Costs vary significantly by corridor, mode of transmission and ticket size. Remittance costs are typically highest in Sub-Saharan Africa, and lowest in South Asia.

The bulk of remittance fees are generated at the source rather than en-route or at the destination. Banks with meaningful remittances fee exposure include ALBI AB, RJHI AB, DBS SP.

Technology is disrupting the industry. Banks are typically the highest cost channel, while informal channels are cheapest. We think digital channels are c50% cheaper than using banks. Listed vehicles with exposure to this trend include SAFCOM KN, BRAC BG, EQBNK KN. There are also many payments operators in the unlisted fintech space.

Domestic remittances are likely larger still, as workers in cities send money to their families in rural areas. Globally, there are likely 680mn domestic migrants, with more than 100mn each in both China and India. Alternative channels are already capturing a significant share of these flows in EM (e.g. MPesa in Kenya, bKash in Bangladesh, Easypaisa in Pakistan).

Fast facts

The formal remittance market is estimated by the World Bank at US$714bn in 2019, up 5% yoy. This is equivalent to 0.8% of global GDP.

The informal remittance market could be as large as US$500bn per year. Published studies have estimated this market to be between 35% and 75% of the formal market. Our small international in-house survey points to a range of 10-60%, with greater penetration in South Asia than elsewhere. Due to a lack of data, we have excluded these informal sums from our analysis.

There are an estimated 272mn international migrant workers, of whom 26mn are refugees. They each send home US$2,600pa on average via formal channels.

Domestic migrant workers likely number 680mn, ie 2.5x the international number (Source: World Bank). China and India each have more than 100mn internal migrants. Although these workers each likely remit smaller amounts home, aggregate domestic remittances volume likely exceeds international remittances.

Economic activity is a key driver of global remittance flows, which have historically been closely linked to global GDP growth and trading activity. Structural drivers include income disparities, demographic differences, geographical proximity and political/ social ties.

Additional drivers of small-ticket remittances include poverty, illiteracy and the rigidity of the host country’s labour market.

Covid-19 could result in a 20% decline in remittances in 2020f, according to the World Bank. The Europe and Central Asia region is likely to witness the biggest decline (27.5%) followed by Sub-Saharan Africa (23.1%).

Remittances will likely overtake FDI and portfolio flows in 2020. FDI inflows for low and middle-income countries are expected to decline by 35% (to US$332bn) and portfolio flows by over 80% (to US$59bn). At US$443bn, even after a projected 20% fall, remittances will exceed the sum of these other flows.

India, China and Mexico are the largest remittances recipient countries. These three markets receive over a quarter of all international remittances. Other key recipient countries include the Philippines, Egypt, France and Nigeria.

The US, the UAE and Saudi Arabia are key source countries for remittances. Together with Switzerland, Germany, Russia and China, these seven countries are the source for almost half of global remittances.

Relative to GDP, remittance outflows are most material for Luxembourg, Oman, UAE, Kuwait and Maldives, with values ranging from 10% to 13%. Other notable markets include Mauritius, Saudi Arabia and Malaysia.

Relative to GDP, remittance inflows are most material for Nepal, Honduras, El Salvador, Jamaica and Georgia, with values ranging from 14% to 27%. Other economies in EM and FM dependent on remittance inflows include Zimbabwe, Lebanon, Philippines, Egypt, Pakistan, Sri Lanka.

The largest remittance corridor in the world, by far, is USA-Mexico. In 2017, US$30bn was transmitted through official channels (ie 5% of global remittances volume). The next biggest channel was USA-China, at US$16bn.

Investment conclusions

The total remittances fee pool likely amounts to US$50bn per annum. This is based on the 2019 global transaction volume of US$714bn and average transaction fees of 6.8%.

The bulk of the value in the remittance chain lies at the source. Remittance sending fees are typically 5x times remittance receiving fees, whether the transaction is conducted via banks or other media.

Banks do not rely much on remittances income. Remittance income is generally a small proportion of banks revenues, therefore a decline in remittances related to Covid-19 is unlikely to be material for most banks. Nonetheless, in Tables 1 and Table 6 we highlight banks that are active in remittances in selected markets. 

Banks exposed to remittances in sending and receiving markets. Major banks active in remittances in sending markets include Albilad and Al Rajhi in Saudi Arabia, DBS in Singapore, Societe Generale in France. On the remittances receiving side, UBL in Pakistan, BPI in Philippines, Bank of Rakayat in Indonesia, and Bank of Ceylon and People’s Bank in Sri Lanka are most exposed. 

Alternative ways to gain investment exposure to the remittances industry. Digital payments (mobile money) channels are typically 50% cheaper than traditional remittance channels, as well as being more convenient and (to the extent that no physical cash needs to be transported) safer for the customer. They are already popular for domestic remittances in many markets and we think they could also witness strong growth in international remittances. Potential listed investment vehicles include Safaricom and Equity Bank in Kenya, BRAC Bank in Bangladesh. There are also many options in the unlisted fintech start-up space.

The full report is available to Insights Pro subscribers.

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Macro Analysis / Global

Emerging Market sovereign bond issuance eases in May

  • EM hard currency sovereign bond issuance slipped to US$19bn in May from US$43bn in April
  • However, there was a rebound in HY issuance, with Egypt showing the door is open for even B-rated sovereigns
  • Large crisis-related funding needs suggests more issuance is on the way
Stuart Culverhouse @
Tellimer Research
1 June 2020

EM hard currency sovereign bond issuance eased back in the month of May after its April rebound. We estimate EM sovereign bond issuance was US$18.7bn last month, bringing total issuance YTD to US$102.7bn. But monthly issuance was well down on the US$43.5bn issuance in April, which marked a return after a two-month lull due to the impact of coronavirus. 

Figure 1: EM hard currency sovereign bond issuance YTD by month* (US$bn)

*We exclude Israel, Latvia, Lithuania and Slovenia from our definition of EM.
Source: Tellimer Research, Bond Radar. 

High yield (HY) issuance was stronger last month, compared to the previous month, although overall issuance was fairly evenly split between investment grade (IG) and HY, unlike April when IG issuance firmly led the way. HY issuance reached nearly US$10bn, consisting of four issuers (Bahrain, Egypt, North Macedonia and Serbia), accounting for 53% of the month's issuance, compared to 47% for IG. But IG still accounts for 76% of EM issuance YTD. 

Within HY, we saw issuance from further down the rating scale compared to April, although admittedly in a small number of countries (one or two issuers), with issuance from countries with B ratings, Bahrain (-/B+/BB-) and Egypt (B2/B/B+). These accompanied North Macedonia (-/BB-/BB+) and Serbia (Ba3/BB+/BB+). This contrasts with HY issuance in April which was concentrated in the BB rating bucket (and just two issuers – Paraguay and Guatemala). Indeed, the issuance highlight of the month was probably Egypt's US$5bn triple tranche issue, thereby accounting for half the month's HY issuance, and we think the first solidly B-rated sovereign to return to the market since Ghana in early February. Still, Egypt had to pay for this – 12yr at 7.625% and 30yr at 8.875%.

This supports what we said last month, that the market is open for (good quality) HY issuers – although whether Bahrain is a good quality issuer given its own credit concerns is moot. So far, six HY sovereigns have issued since the market reopened after March, although clearly that is only the tip of the iceberg among the total number of non-IG, and frontier, issuers. 

HY issuance was no doubt helped by the decline in overall EM spreads. The spread on the Bloomberg Barclays EM USD aggregate index fell by 171bp on the month, and has fallen by 272bp (40%) since its peak in March, to 448bp (Figure 2). The average EM nominal US$ yield on the same index is now c5%. Meanwhile, the spread on the EMBIGD fell by 90bp over the month from 610bp to 521bp, although it is still some 210bp wider than it was in mid-February just before Covid erupted on global markets. Hence, market access, for now at least, may still be out of reach for some of the weaker-quality HY names that had previously enjoyed it – and even relied on it, especially for those operating under the shadow of the G20 debt service suspension initiative (DSSI). 

Indeed, that the international bond market is, or could be, open to some HY issuers as a source of new money may be an important message to global policy makers and EM sovereign debt managers as they assess funding options and navigate their way through this crisis. Large crisis-related funding needs suggest more issuance is on the way.

Figure 2: Spreads and yields on the Bloomberg Barclays EM USD aggregate index (%)

Source: Tellimer Research, Bloomberg

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