The Impact of Remittances on Economic Growth and Poverty Reduction

o-ECONOMIC-GROWTH-facebookMigrants remit money to their homeland. It is a key instrument to decrease the scale and harshness of poverty across the globe. Other than monetary benefits, remittances relate to better human development outcomes covering various areas such as health, education, and gender equality. The revenue is a source of income for the poor.

Some of the expenditures and investments made by remittances receiving households accrue to the entire society. Remittances are countercyclical, unlike other monetary flows. For several nations, remittances surpass the official international aid. The flow of foreign exchange from migrants into the home nation enhances its creditworthiness and could enable them to receive positive terms of debt service since lenders recognize a lower risk of default.

Migration could have both positive and negative economic, social and cultural indications for the homeland. Financial stakeholders must devise strategies to reduce cost and enhance benefits, thereby maximizing the positive impact of remittances. Intense competition among institutions delivering money transfer services has resulted in decreasing the costs in high-volume remittance corridors.

Other than cost reduction, measures must be initiated to ensure the recipients of funds can access other financial services such as microfinance. This would significantly bolster development outcomes. The technology for connecting remittances to the programs exists. Policy makers must establish incentives/mechanisms for the investment of remittances.

It is not easy to emphasize the magnitude of remittance flows to developing nations. One negative opinion about remittance income is that it is not viable since recipients spend the money on consumption. However, the facts are different. Families spend income disproportionately on human capital building functions in comparison to other forms of income.

According to research, remittances in the household also result in positive health benefits. Migrants also influence health practices such as safe drinking water, improved sanitation. Migration has also had a positive effect on the educational standards.

Statistical evidence confirms that households receiving remittances are financially doing better across various dimensions than households not receiving them. Remittances are countercyclical financial flows; the flow of money enhances when financial markets decline.

Remittances have moved upwards during depressions, natural disasters since migrants send more money from overseas. Migration and the remittances flow it creates should not be looked at as a replacement for official development aid. Official funds are critical for resolving the unmet requirements of the vulnerable population.

Remittance income that eliminates poverty would indirectly contribute to economic growth. Remittance income enables households to engage in high risk, but profitable economic functions. On the other hand, from a macro perspective, the benefit from the remittance is closely related to the robustness of regional institutions and macroeconomic scenario.

Cash flows in the future can be used as collateral by governments and private sector units in developing nations to secure funds in global capital markets. As per some research, remittances could have a negative effect on currency valuation and labor market contribution.

The stakeholders concerned with remittances can augment the impact of remittance flows by ensuring they are cost effective, safer and extremely productive both for the migrants and nations receiving it.

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Downside Risks for The US Stocks

1022341906Market experts believe there is substantial downside risk for the US stocks in the near term as interest rates continue to be low and a rising dollar could threaten the rally in crude oil.

The S&P is projected to decrease to around 1,950, or maybe, even lower. In the recent past, the global markets have dropped $3 trillion post-Brexit.

The leave vote is expected to obstruct the Fed’s plan to increase interest rates in 2016. Low-interest rates facilitate multiplication of stock and equities that act as a substitute to the bond. Again, they are a significant challenge to the financial domain.

Low rates of interest indicate that banks would not be able to easily generate revenue from lending.

The market is also dealing with currency uneasiness following the Brexit vote. If the dollar strengthens, it would be very difficult for oil prices to rise to higher levels.

A robust greenback would indicate that the dollar-denominated oil would become very expensive to those holding other currencies.

Several sectors, including oil & gas drillers and service firms, have been affected by an almost two-year oil price fall.

Though crude prices decreased post-Brexit, they have not been impacted severely, in spite of an increase in the strength of the dollar.

The Fed is projected to be dovish with regard to rates. The US could become a safe haven because of the impact of Brexit on the pound.

According to Paul Hickey, co-founder of Bespoke Investment Group, “When you have one of the largest economies in the world see their currency drop like an emerging market currency, people are going to shift capital out of those areas.”

The crash of the pound could make emerging economies assets very attractive. The market players are forecasting greater downside with regard to assets in the EU. It would be prudent on the part of investors to hold cash.

The FTSE 100 could benefit in the near-term since the lower pound would be a positive news to several multinationals in the index. The turbulence in the global markets is expected to continue due to the geopolitical uncertainties.

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Data Movement Post Brexit

expat-investments-post-brexitBrexit is expected to have an impact on the unrestricted movement of individuals. However, there is another serious issue due to the leave vote.

It could hinder the movement of data to and from the UK to the rest of the continent. This could have a negative impact on the business. This originates from the EU and the UK’s probable departure in data safeguard laws post-Brexit.

According to Chris Jeffery, Head of UK IT, Telecoms and Competition at law firm Taylor Wessing, “The uncertainty as to whether the U.K. will be considered safe for data flows relating to citizens from the rest of Europe is causing concern, and making some companies consider whether data center capacity in mainland Europe is the safer bet.”

The service-oriented economy in the UK would indicate that the transfer of data across borders is central – impact sectors from automobiles to financial services.

At present, the UK has agreed to execute the EU’s General Data Protection Regulation (GDPR). It is expected to come into effect in May 2018. The main objectives of the GDPR are to enable individuals to regain control of their personal data and reduce red tape for global businesses by standardizing all the rules within the 28-country bloc.

Though businesses are getting ready for GDPR, their efforts could be undone in the future.

The impact of Brexit on cross-border data transfer would have a far-reaching effect than initially anticipated. If a firm based in the UK monitors the activities of people in the EU, it would be subject to the data protection law in the EU.

In order to secure the UK’s role in international data flows and as promote itself as a location to initiate & expand the digital businesses, several experts believe that the nation must be in sync with the EU’s GDPR.

It would be prudent on the part of businesses to focus on facilitating compliance with the EU data protection framework with regard to the future.

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Crisis Management and Emergency Response in The Banking Sector

feaA distinct corporation needs to have a strategic plan and management style to stay relevant in the competitive business environment. Ensuring customer trust is critical to a successful banking relationship and a strategic plan that a banking corporation needs to adopt.

The banking sector must create policies that elucidate the organization objectives while ensuring that the functioning of the IT department is in sync with plans and objectives of the organization. They must abide by prescribed rules, law, standards and acts which safeguard the customers’ information.

By evaluating the risk factors which could restrict the corporation from aligning the system with the organization, corporation depends on risk management. This area of crisis management is relatively new.

If the unpredicted takes place, crisis management is a method to proactively manage functions that would result in business continuity after an attack.

Normally, proactive crisis management functions consist of predicting probable crises and planning to deal with them. Crisis management tries to identify the nature of the crisis, reduce the ill effects, and recover from the crisis.

Since information systems are also social systems, disruptions to a system include vibrant factors within the organization. It is evident that each risk that could damage a corporation influences various audiences and an organization must counter the audiences in different ways. The organization must be prepared to fight for litigation processes.

However, it must have a strategy to connect with the audience and manage the scenario. The market revenue decreases because of the litigation and this could result in a significant loss of the customer.

A critical risk that corporations have to content is of litigation and cases. In the existing business scenario, corporations have digital liabilities which could be impacted if the business is not managed properly. Lawyers can file privacy invasion on behalf of employees, customers, and business partners.

In the banking sector, there is a key law that needs information security and confidentiality of customer records.

Crisis management consists of a strong emphasis on public relations to recover any harm to the public image and assure stakeholders that recovery would be done. Crisis in organizations could have a negative impact on the brand image. The media could leverage the corporate crisis to sensationalize the issue. A crisis communication plan is a blueprint that would specify the measures to ensure all communication to the public is accurate.

The various elements must be assessed to effectively come out of a crisis. A critical aspect of crisis planning and communication is that the crisis should be forecasted. Some impact the organization directly and the community’s expectation to overcome the issue would be high. At times, organizations have to negate a crisis that doesn’t impact the organization directly, but due to the actions of a third party.

The planning process for a crisis management blueprint must consist of key features that the entire organization comprehends across the hierarchy. It is vital that a distinct organization has an emergency response to each crisis.

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Cooperation Among Major Central Banks

major-central-banksMarket players believe that after the G20 meeting in Shanghai in February 2016, there has been an implied agreement among the central banks to avoid using monetary policy to determine the exchange rates. This has led to the comparative stability across G4 exchange rates.

The statement issued by the Fed Chairman, Janet Yellen, “the spill over effects through exchange rate changes are an important factor in designing monetary policy”, along with the reluctance of the Bank of Japan & ECB to push for very aggressive policies with regard to negative interest rates post the G-20 summit and the comparative lack of turbulence in the global FX markets, strengthened this belief.

It is not easy to prove that such an accord does exist, while some experts believe it is also not relevant.

On the other hand, China’s transformation to a basket-peg and its critical role in the Group of 3 (Japan, the EU, and the US) trade-weighted exchange rate indices could theoretically provide the similar impact as a currency pact.

The influence of China’s transformation to a basket peg regime on its monetary policy has been monitored closely by international policymakers. However, not much attention has been given to the impact of the move on the trading partner’s monetary policy.

For e.g., if the Fed tries to estimate the movement of interest rate normalization prior to December 2015 (at that time the yuan (CNY) was almost fixed to the dollar). A critical consideration would have been the appreciation in the trade-weighted dollar index due to a rise in the Fed Funds Rate (FFR).

This is based on the weight in the dollar trade-weighted index of the nations whose exchange rates are fixed to the dollar. Since CNY’s weight in the dollar basket is significantly higher, it must hold the burden of the dollar appreciation.

However, this mathematical equation changes if the CNY is fixed to the trade-weighted basket in China instead of the dollar.

Under such a scenario, any depreciation of the CNY would increase the appreciation of the dollar basket and vice versa.

It would be difficult to establish if the considerations have been a part of the monetary policy decisions by the G4 central banks. Experts believe the G4 monetary policy would mainly be guided by regional considerations.

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Behavioral Finance

Behavioral-FinanceThe cyclical investment process which consists of information procurement, stock picking, and selling investments among others is full of obstacles. If the markets rise and the stock exchanges record highs, business magazines report on these success stories. However, not all companies perform well. These success stories capture the imagination of the amateur investors.

Some investors based on the media report would invest in the bull trend. The performance is grossly overestimated. Investors are also a victim of the stimulation. They invest a huge amount in a distinct stock which could result in a cluster risk. Thereby, they could lose all the investment.

Often investors assess information based on the time taken for recall. Often, alternatives are considered.

Investors are influenced by several biases:

Confirmation Bias

It denotes the procedure of obtaining specific information to support the opinions or interpret the facts in line with our expectation. Investors want authentication for the inferences. They evade key opinions/reports.

Availability/Attention Bias

The attention bias explains that products, organizations, and issuers often highlighted in the media would be evoked expeditiously by investors when they seek a viable investment. Negative information is not looked at.

Home Bias

Data reflects that investors tend to purchase stocks from organizations in the country of location. The stocks appeared to be reliable as investors frequently heard the organization’s name.

Anchoring

Investors’ do not depend on fundamental factors for decision making. Instead, they usually base the decision on the price at which the stock was purchased. The purchase price is the anchor that leads to illogical decisions.

Myopic Loss Aversion

Often, investors are afraid of losses. If they evaluate the stock performance, they would immediately feel they have lost money and sell all the things. A long-term perspective would be advisable

Mental Accounting

Several private investors make mental projections that are not financially feasible. Usually, losses acquired are perceived discretely from paper losses

Representativeness Bias

A brief duration of positive returns on the financial markets would make us believe things have changed forever. They conclude on a result quickly, on the basis of inaccurate information.

A segment of behavioral finance that has developed is in the area of cultural research. Behavior varies across cultures. Cultural finance delivers a vital foundation for internationally operating banks.

Behavioral finance has not only established a long list of obstacles, it has also created authentic diagnostic methods and viable solutions for averting them. Again, behavioral finance incorporates research from the neurofinance.

Normal finance, based on the premise of effective markets and the maximization of statistical data implies that investing is connected to mathematics. However, behavioral finance has highlighted the importance of people. Behavioral finance has developed methods that can assist investors in identifying errors while identifying the suitable portfolio.

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Traders Analysing Global Manufacturing Data

AnalysisThe third quarter of 2016 could begin with an uncertainty before the traders take a break for the 4th of July weekend.

However, before the long holiday weekend, the global financial markets would receive a significant quantity of manufacturing data from across the globe (Europe, the US, China, and India).

Other than the Markit PMI data, the US data also contains the key ISM manufacturing index pertaining to June. It is projected to increase moderately from 51.3 in May 2016 to 51.4 in June 2016.

The other data in the US pertains to construction expenditure and vehicle sales every month. They are estimated to be more than 17 million on an annualized basis.

The stock market witnessed an upward movement to close out the previous quarter with a gain. This was possible mainly due to the rally in the last week of June, which assisted in removing most of the losses post-Brexit.

The new quarter could probably attract more money. The global PMI data could be extremely critical from a long-term perspective. It could most probably be indicating a stabilization in the manufacturing sector.

However, it would also be considered being not very informative because it is old data and before-Brexit.

Analysts have indicated that any data that will have the possibility to display the impact of Brexit would be more crucial, but that data would not be available until later in the year.

Economists estimate Brexit to check growth in Europe and may send the UK into a recession. The US is expected to witness modest paring of growth.

At present, the manufacturing data could help in understanding if the inventory correction in the first half of 2016 is coming to an end. There are unsettled signals that manufacturing is starting to pick up.

The markets have calmed since Brexit is not going to be implemented in the short-term. The stock market would react to the elections in the US. The third quarter also consists of August and September (two months that are not strong). The manufacturing data have always influenced market sentiment. Traders always analyse the global manufacturing data before making investment decisions. The forecast for trade is positive in the near future.

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The Leap into The Unknown for The Global Economy

images (2)Alan Greenspan (an economist has served as the Fed Reserve Chairman) has witnessed many challenging global markets crisis. However, the economist defined the market turbulence sparked by the UK’s decision to exit the EU as the worst period.

According to Alan Greenspan, “There’s nothing like it, including the crisis – remember 19 October 1987, when the Dow went down by a record amount of 23%? That I thought was the bottom of all potential problems. This has a corrosive effect that will not go away.”

Brexit is much more than a financial market disorder. The referendum has resulted in the leave vote winning by a narrow margin against the background of tremendous economic and political ambiguity.

The problem for other EU leaders is that the UK’s decision to leave the EU would trigger a domino effect across the continent. Several nations could witness the nationalistic forces and anti-immigration leaders gaining momentum and taking centre stage in active politics.

As far as the EU’s delicate economic recovery is concerned, this new period of uncertainty could restrict consumer expenditure, hinder business contracts, and possibly make the European Central Bank initiate unconventional measures to add money into the economy and boost investor confidence.

There is a possibility that the economic consequences of Brexit could result in the collapse of the nation’s vulnerable banks. The shock waves could spread across the globe. There could be serious consequences for the EU, the UK, and the global community.

In a complex environment, policymakers would find it difficult to identify and resolve issues. The global economy has relied on China for growth. The slowdown in China has always been witnessed as an international risk. Again, Brexit is expected to increase the economic problems in China because it has invested heavily in the UK.

A serious credit crunch and recession has triggered a wave of bankruptcies in Brazil. Though trade connections with the UK are modest, the nation’s currency and stock market have felt the pressure because of fears that Brexit could have a negative impact on emerging economies.

The US economy is also not immune from Brexit. The risk that Brexit would worsen the economic slowdown has increased the uncertainty associated with the US economy.

Brexit could restrict the decision making capability of global policy makers at a time when the global economy cannot afford it.

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Risk Based Pricing in Consumer Lending

peer-to-peer-loans-disrupt-consumer-lendingHistorically, it would be difficult to secure a loan because of a bad credit history. However, things have improved vastly in the recent times. Credit providers created efficient tools to determine the risk for distinct consumers and price credit as appropriate. The data-driven risk-based pricing methodology has been to a large extent responsible for providing credit to several consumers.

Risk-based pricing in consumer finance customizes the price and terms of a loan to a borrower’s capability to repay, enabling lenders to provide credit to many consumers. All creditors have to overcome a risk spectrum of probable borrowers. Distinct borrowers have a specific uniqueness that determines the possibility of default on a loan.

Borrowers with high risk are very costly for lenders to serve in comparison to lower-risk borrowers. Risk-based pricing looks at connecting the price a borrower pays for the cost incurred by the lender by adapting the price of the loan to distinct borrower’s possibility of default.

In the last two decades, consumer lenders have depended on statistical credit scoring models to forecast a borrower’s default risk and establish loan interest rates relevant for the risk. The significant expansion of credit to consumers in the US in the last three decades developed concurrently with the large scale adoption of risk-based pricing by bank credit card providers.

By customizing pricing to distinct borrowers, a specific creditor can efficiently vie for low-risk customers, while extending credit to higher-risk borrowers at higher prices. In comparison with the single price that caters to all practices, risk-based pricing reduces the cost of credit for most of the borrowers, but also extends credit availability to higher-risk borrowers and results in a wider range of loan products being available across income groups.

The major credit decision at present is on the basis of specific data pertaining to a borrower’s previous payment history and existing obligations. The utilization of credit scoring and risk-based pricing has drastically enhanced the stability of a creditor’s lending outcomes.

Credit scoring and risk-based pricing facilitated a huge growth in credit opportunities for consumers across the socioeconomic range. One of the positive features of credit scoring as a decision-making tool is that data enhances the capability of the models to revamp a lender’s evaluation and pricing or risk.

Several consumers have accessed credit to finance their consumption requirements. Small businesses utilize credit to finance the purchase of equipment/materials.

Restrictions such as regulation would limit the utilization of credit report information or the multiple scoring and pricing tools that have been constructed with the data. In other words, without top-notch risk-based pricing, several higher-risk consumers would not have access to traditional loans.

All loans have a distinct feature. Each consists of transactions wherein the lender delivers funds based on the expectation that the borrower would pay back in the future. However, lenders are often not sure about the risk related to a particular applicant. Credit reporting assisted in decreasing the costs.

Credit scoring enabled lenders to use the data in credit reports effectively. Risk-based pricing has transformed the loan sector from a single price fits all model and extended credit and options across various segments. Most of the credit decisions at present are on the basis of accurate data pertaining to a borrower’s previous payment history and existing constraints.

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Good Returns from The Asian Bond Market

4028-head-12-things-asian-bondCertain investors are rushing to Asian fixed income assets; attracted by the outlook of excellent returns even as huge quantities of the international bond market are witnessing yields entering the negative territory.

Income-seeking bond investors have not had good returns in the last few years. A record crash in developed market bond yields, which progress in the reverse direction to prices, has caught various sections of the market by surprise.

In Japan, the bonds maturing in 40 years yield less than 0.10 percent, while investors have no choice but to pay for the privilege of lending money to Spain and Italy in the short-term (nations where fiscal recklessness has resulted in a crisis a few years back).

After the Brexit vote disorder, the total bonds with negative yields has increased to $11.7 trillion (an increase of 12.5% since May 2016).

The percentage of the bond market in the negative-yielding area would most probably only deepen, especially in Europe & Japan, and that is expected to drive funds into the bond markets in Asia.

According to Stephen Chang, head of Asia fixed income at JPMorgan Asset Management, “The quantitative easing coming out of Japan and coming out of Europe continues to drive flows into other high-yielding assets.”

Experts are looking at emerging market nations and Asian nations for their yield. Investors are projected to move towards this destination to secure excellent yield.

Though the market is not against the dollar-denominated bonds by borrowers in Asia, it preferred local-currency issues in Asia. Certain central banks in Asia still had the capability to reduce rates and currencies seemed to be inexpensive after the dollar rallied in 2015. That indicated the local-currency bonds would increase.

Some market experts are calling Asian fixed income as the only bright spot in the markets. The local currency bonds issued by Indonesia and China were starting to display the value.

The positive outlook towards the fixed income in Asia was in contrast to Credit Suisse advising clients to adopt a low-risk strategy toward equities and asking them to move towards cash.

The reason for such a rally in the bonds in Asia is due to a negative yielding scenario. The demand for the Asian bonds has increased amid the Central Bank’s plan to purchase nearly 21 billion euros of corporate bonds each month.

It would be prudent for investors to seek investment-grade dollar-denominated Asian bonds to ensure the safety of the cash and junk-rated issuers must be avoided.

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