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Stress-testing a shock to remittances in a post-Covid world – what impact on liquidity?

Monahov, Alexandru (2020): Stress-testing a shock to remittances in a post-Covid world – what impact on liquidity?

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Abstract

Remittances have historically been a stable source of funding which has played a key role in the development efforts of many nations worldwide. As a consequence of the Covid crisis and the lockdown measures imposed to counteract the spread of the disease, the World Bank estimated a drop of 20% in remittances by the end of 2020. To study the effect that such a conjuncture would have on the financial stability of developing economies, this paper develops a remittance stress test that investigates the impact of the projected shock on banking sector liquidity at a country level. The study encompasses 112 countries and finds that small, emerging economies with underdeveloped financial sectors suffer the most, with six of the ten most affected nations experiencing a drop in their liquid asset ratios that would place their banking sector at significant liquidity risk.

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