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The International Growth Wire

Written By Brian Hicks

Posted May 16, 2007

The force behind emerging market growth is not high-tech or infrastructure investment. Nor is it drug trafficking or organ smuggling. It’s the $300-billion-a-year money transfer network, which The New York Times Magazine says churns three times as much money as the total world budget for foreign aid.

Haitians working outside of Haiti bring in a staggering 39% of their country’s gross domestic product (GDP). Across the world and up the Himalayas, in Nepal, 17% of GDP comes from Nepalese elsewhere. The Inter-American Development Bank says that in 2006, ten Latin American countries attributed 10% or more of their GDP to money sent from abroad.

These transfers, called remittances in finance circles, are as profitable as they are plentiful. Average rates around 10% per remittance correlate easily to national totals.

In India, the government spends less on education and health care than the country receives in remittances. And they’ve got a special acronym for Indian workers who send money home, calling them NRIs (Non-Resident Indians). There are even special NRI bank accounts that serve as a handoff point, so an uncle in California can drop digital dollars for a niece in Calcutta, where they are converted to rupees.

In the Philippines, overseas Filipino workers (OFWs) sent home 12.8 billion USD in 2006, according to official statistics. That accounts for just over 10% of the GDP, and at 10% fees, 1.28 billion went to the top line of companies like Western Union.

Western Union started off in 1851 as a telegraph company with an integral role in the westward expansion of the United States. With a sprawling and sophisticated telegraph service, the company introduced money transfers in 1871. Most importantly for you as an investor, Western Union also produced the first stock ticker in 1866, and was one of the original eleven components in the Dow Jones Transportation Average.

But with the decline of telegraph communication, WU (NYSE:WU) turned away from the ticker. Nowadays, you are likely to see Western Union signs that read “Envios de Dinero” next to the company logo, advertising their remittance services to the plethora of Spanish-speaking workers in the United States.

Mexican workers sent 23 billion dollars home in 2006, up from $12 billion in 2003. That near doubling of remittances is impressive, but the amount of money sent doesn’t give the whole picture.

Remittances can help or hurt. More often, they do both.

About three quarters of international remittances flow from developed countries to developing ones, according to the European Commission.

By bolstering family incomes that would otherwise come in at a single-digit fraction of the potential income abroad, remittances provide opportunity for improved housing, education, and nourishment. They can also discourage other family members from working, as the amount contributed from the home country would seem paltry next to the whopping checks reeled in from elsewhere.

In towns where remittances flow heavily, local workers have to deal with price distortion caused by torrents of converted dollars and euros. On a national scale, remittances cause heavy inflationary pressure in countries whose economies are already wobbly (e.g., Zimbabwe, with its 1,000% inflation).

National governments must also confront complacency in the face of massive citizen-based inflows. The basic fact is that the more trouble a country is in, the more likely a family member is to leave to search for lucrative work. In Iraq and Zimbabwe, local events are inimical to international investors, but the remittance flows will increase with each passing year of domestic chaos.

That is, if the money ever gets to from one end of the remittance umbilical cord to the other.

The most recent addition to the Orbus Investor portfolio is a leader in bank-to-bank transaction systems, with key clients like Barclays and Citigroup using its technology to securely swap currency and settle payments.

The company is also moving in on the international market for remittances, which is growing much faster than traditionally highlighted sources of economic improvement.

The European Commission said in its remittance industry survey last fall that global foreign direct investment (FDI) to developing countries, which refers to entrepreneurial capital, rose by 57% from 1995 to 2004.

Over the same period, workers’ remittances grew by 147%!

My new pick is committed to establishing itself in customer service, fraud prevention, and all the nuts and bolts of moving money from one place to another.

While Western Union’s share price teeters, it is also confronted with protests in the United States by foreign-born workers who oppose some of the company’s fee hikes on transfers.

My pick is behind the scenes, making sure the wheels turn safely and doing a damn good job of it. That’s why the market has rewarded it with a 43% share price increase so far this year.



Sam Hopkins