REGIONAL FUNDS ENHANCE STABILITY AND WELFARE
Ana María Carrasquilla
Acting Executive President
Coherence and Coordination of Macroeconomic Policies
Global and Regional Framework
ECOSOC, Geneva, July 2, 2007
REGIONAL FUNDS ENHANCE STABILITY AND WELFARE
Regional Reserve Funds _01
Latin American Reserve Fund (FLAR) _ 02
The Role of FLAR: the Current Debate _ 03
FLAR and the Coordination of Macroeconomic Policy _ 04
Conclusions _ 05
REGIONAL FUNDS ENHANCE STABILITY AND WELFARE
Introduction
Due to the greater interdependence among countries in the financial and
trade areas, international policies are required to contribute to national
efforts, promoting poverty- and inequality-reducing growth.
In line with this aim, coordination of macroeconomic policies plays a key role
in the creation of stable conditions for growth.
At the regional level, developing economies should generate financial
support mechanisms that not only allow protection against adverse shocks
and illiquidity, but also encourage cooperation and macroeconomic
coordination.
REGIONAL FUNDS ENHANCE STABILITY AND WELFARE
01
Regional Reserve Funds
REGIONAL FUNDS ENHANCE STABILITY AND WELFARE
Regional Reserve Funds
Why Pooling?
•
Create a shared insurance against current account crises.
•
Help to establish stronger national and international financial
systems.
•
Stimulate introduction of contingent lines of credit to limit the
vulnerability of emerging markets to financial crisis.
REGIONAL FUNDS ENHANCE STABILITY AND WELFARE
Regional Reserve Funds
Why Pooling?
•
Use reserves as insurance against:
– Shocks on exchange rate, terms of trade and current account.
– Changes in global or local growth conditions.
– Sudden stops.
•
Calvo (2005): sudden stops (SS) could reflect inefficiencies in the
international financial markets => global fund to assist economies that
face SS.
If SS are infrequent and affect different countries at different moments,
self-insuring by acumulating reserves could be expensive.
•
REGIONAL FUNDS ENHANCE STABILITY AND WELFARE
Regional Reserve Funds
Why a Regional Fund?
•
Action could be faster and better timed.
•
Greater knowledge of the economic and political situation.
•
Higher level of confidence and cooperation.
•
Reputation and moral commitment: institution owners club.
•
Fewer requirements of conditionality => credit and payment negotiations are more
expeditious.
•
Complement of other multilateral efforts.
•
Possible disadvantages: limited capacity to provide financial assistance in
simultaneous adverse shocks and moral hazard problems (Surveillance and SS).
REGIONAL FUNDS ENHANCE STABILITY AND WELFARE
Regional Reserve Funds
The Asian Experience
•
Asian Surveillance Process (ASP) (1999).
•
ASEAN countries, China, Japan and Korea agreed the Chiang Mai Initiative (CMI) (2000).
–
Core objectives
• to address short-term liquidity difficulties in the region.
• to supplement the existing international financial arrangements.
–
Network of bilateral swap arrangements.
–
Bilateral Swap Arrangement (BSA) network has increased to USD 80 billion, consisting of 16
BSAs among 8 countries.
–
In May 2007, Finance Ministers agreed in principle that a self-managed reserve pooling
arrangement governed by a single contractual agreement is an appropriate form of
multilateralisation, proceeding with a step-by-step approach.
•
Asian Bond Markets Initiative (ABMI) (2003).
REGIONAL FUNDS ENHANCE STABILITY AND WELFARE
Latin American Reserve Fund (FLAR)
Latin American Experience
• ECLAC: Surveillance of regional macroeconomic and financial
performance.
• Latin American Reserve Fund (FLAR): balance-of-payments,
foreign debt restructuring, liquidity, contingent and treasury
loans.
• These initiatives have been less ambitious and visible than
Asia’s.
REGIONAL FUNDS ENHANCE STABILITY AND WELFARE
02
Latin American Reserve
Fund (FLAR)
REGIONAL FUNDS ENHANCE STABILITY AND WELFARE
Latin American Reserve Fund (FLAR)
FLAR
Member Countries: Bolivia, Colombia, Costa Rica, Ecuador, Peru, and Venezuela
Subscribed Capital (as of May 2007): USD 2.1 billion
Paid-in Capital (as of May 2007): USD 1.54 billion
Costa Rica: USD 147.7 million
Bolivia and Ecuador: USD 174.1 million each
Colombia, Peru, and Venezuela: USD 348.2 million each
Population (2006 estimate): 124.4 million
GDP (2006 estimate): USD 485 billion
International Reserves of Member Countries (as of May 2007): USD 76.9 billion
REGIONAL FUNDS ENHANCE STABILITY AND WELFARE
Latin American Reserve Fund (FLAR)
Objectives of FLAR
•
Support the balance of payments of member countries by granting loans
or guaranteeing third-party loans.
•
Contribute to the harmonization of exchange rate, monetary, and
financial policies of member countries.
•
Improve the conditions of international reserve investments made by
member countries.
REGIONAL FUNDS ENHANCE STABILITY AND WELFARE
Latin American Reserve Fund (FLAR)
Services to Central Banks
Type of Credit
Term
Availability
Limits 1
Granted by
Balance of
Payments
3 years, including 1year grace period for
capital amortization
2.5 times the
paid-in capital
Board of
Directors
Foreign Debt
Restructuring
3 years, including 1year grace period for
capital amortization
1.5 times the
paid-in capital
Board of
Directors
Until 1 year
1 time the paidin capital
Executive
President
6 months that may be
extended
2 times the paidin capital
Executive
President
1-30 days
2 times the paidin capital
Executive
President
Liquidity
Contingent
Treasury
1
In the case of Balance of Payments, foreign debt restructuring, liquidity, and contingent loans,
the Central Banks of Bolivia and Ecuador can obtain 0,1 times more than the other member
countries.
REGIONAL FUNDS ENHANCE STABILITY AND WELFARE
Latin American Reserve Fund (FLAR)
FLAR: Granted Credits Per Year
(Liquidity Credits included)
700
650
600
Colombia
Costa Rica
Ecuador
Peru
Venezuela
500
450
400
350
300
250
200
150
100
50
2004
2002
2000
1998
1996
1994
1992
1990
1988
1986
1984
1982
1980
-
1978
Million of USD
550
Bolivia
REGIONAL FUNDS ENHANCE STABILITY AND WELFARE
Latin American Reserve Fund (FLAR)
FLAR: Credits Granted during Crisis Periods
700
650
600
Colombia
Venezuela
Ecuador
Costa Rica
500
450
Asian Crisis
Hiperinflation
400
Oil Strike
350
300
Foreign Debt Crisis
250
200
1/
2/
150
100
50
-
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
Million of USD
550
Bolivia
Peru
1/ For porpuses of debt restructuring. Ecuadorian financial system crisis.
2/ For porpuses of debt restructuring. There was not crisis in Costa Rica.
REGIONAL FUNDS ENHANCE STABILITY AND WELFARE
Latin American Reserve Fund (FLAR)
Other Services to Central Banks and Official Institutions of Member
Countries
2.100
Deposits
Asset and trust management
Million of USD
1.800
Legal, financial, risk and operational mamagement, advisory services
1.500
1.200
900
600
300
Dec-04
Dec-05
Dec-06
May-07
REGIONAL FUNDS ENHANCE STABILITY AND WELFARE
03
The Role of FLAR: the Current Debate
REGIONAL FUNDS ENHANCE STABILITY AND WELFARE
The Role of FLAR: the Current Debate
How to Increase the Capacity of FLAR to Enhance Stability?
•
Increasing the paid-in capital by member countries.
•
Incorporating new members (increase of potential demand).
–
Uruguay has formally requested its entrance into FLAR and we expect to have it as a full
member by year-end 2007.
•
Leverage: medium-term liabilities, maintaining a positive differential between yields of liquid and
aceptable risk investments and costs of deposits, so that the Statement of Income is not
negatively affected (Urrutia, 2006).
–
FLAR has increased its liabilities, including issues in the international market.
REGIONAL FUNDS ENHANCE STABILITY AND WELFARE
The Role of FLAR: the Current Debate
How to Increase the Capacity of FLAR to Enhance Stability?
FLAR has conducted two issues in the international market, under favorable conditions.
Year
2003
2006
Amount (Million
of USD)
Term
Coupon
150
3 years
Fixed: 3%
5 years
Floating: 3 months
Libor + 20 basis
points
250
FLAR Credit Rating
AA Composed Rating: Highest in Latin America
Moody’s: Aa2 /Stable/ P-1
Standard and Poor’s: AA-/Positive/A-1+
Maturity
August 2006
February 2011
Lead Managers
USB and BNP
Citigroup and Morgan Stanley
REGIONAL FUNDS ENHANCE STABILITY AND WELFARE
The Role of FLAR: the Current Debate
What else Could Be Done?
Use a portion of the regional reserves to promote the development of financial
markets and instruments that increase the capacity to resist capital flows
volatility (Eichengreen, 2006).
Motivation:
- The lack of liquid and deep markets for instruments with returns negatively
correlated with the domestic economic conditions increases financial fragility.
- External intervention is necessary as a way to improve the operation of these
markets.
REGIONAL FUNDS ENHANCE STABILITY AND WELFARE
The Role of FLAR: the Current Debate
What else Could Be Done?
•
Example: Asian Bond Fund (ABF)
- Allocate one fraction of the countries’ reserves to buying government securities, both in foreign
(ABF-I) and local currency (ABF-II) => increase the liquidity and volume of transactions.
- Create regional bond market indexes => surveillance by investors .
•
Several instruments have been recommended for Latin America:
–
CPI-indexed bonds in local currency. Their payments do not increase if there is a deterioration in
the exchange rate and/or the terms of trade (Eichengreen and Hausmann, 2005; Machinea and
Titelman, 2006).
–
GDP-indexed bonds (Borensztein and Mauro, 2004; Machinea and Titelman, 2006).
–
Commodity-indexed bonds (Caballero, 2001).
For them to be attractive to investors, the markets must be liquid and the indexation indicators free from
manipulation (delegated to third-party agents).
REGIONAL FUNDS ENHANCE STABILITY AND WELFARE
04
FLAR and the Coordination of
Macroeconomic Policy
REGIONAL FUNDS ENHANCE STABILITY AND WELFARE
FLAR and the Coordination of Macroeconomic
Policy
•
FLAR promotes technical activities in the region by participating in forums,
conferences, and technical discussion groups about topics and problems
relevant to our economies.
•
FLAR International Conferences:
– 2006: “The Role of Regional Funds in Macroeconomic Stabilization”
– 2007: “International Reserves in Middle- and Low-Income Countries:
Background of Recent Accumulation, Management, Monetary and
Exchange Rate Policy, and Outlook”
REGIONAL FUNDS ENHANCE STABILITY AND WELFARE
FLAR and the Coordination of Macroeconomic
Policy
•
FLAR is part of the Permanent Technical Group (PTG) of the Andean
Community (CAN). PTG supervises the convergence goals regarding public
finances and inflation of the CAN member countries (Bolivia, Colombia,
Ecuador, and Peru). Chile has recently joined as an asociate member.
•
In the last meeting (March 2007), representatives from each CAN member
country, Chile, ECLAC, FLAR and the private sector described the
performance of the CAN convergence goals during 2006.
– All member countries have achieved one digit inflation.
– Since 2005, member countries achieved Non Financial Public Sector deficit below
3% of GDP.
REGIONAL FUNDS ENHANCE STABILITY AND WELFARE
FLAR and the Coordination of Macroeconomic
Policy
• FLAR participates in the Network for Macroeconomic Dialogue
Project (REDIMA). This project was launched by ECLAC, in 2000,
and it has the financial and technical support of the European
Union.
• REDIMA is a communication and dialogue tool available to
macroeconomists of central banks, and finance or economy
ministers in Latin America. Its aim is to support regional integration
by promoting macroeconomic dialogue and cooperation among the
countries of each sub-region.
REGIONAL FUNDS ENHANCE STABILITY AND WELFARE
05
Conclusions
REGIONAL FUNDS ENHANCE STABILITY AND WELFARE
Conclusions
•FLAR has a key role in the promotion of the stability and welfare of member
countries.
• FLAR is complementary to the task of other global funds. Accordingly, any
initiative, reinsurance or development of financial markets, must be coordinated
with the global institutions.
•FLAR could become a mechanism for development of local financial markets
and instruments.
REGIONAL FUNDS ENHANCE STABILITY AND WELFARE
Conclusions
• FLAR has a limited capacity to provide assistance in a simultaneous crisis. This
capacity could be increased with financing through markets, increasing
membership and services. We are working successfully on all fronts.
•FLAR plays an important role in macroeconomic coordination through
macroeconomic dialogue groups.
•Much more has to be done.
REGIONAL FUNDS ENHANCE STABILITY AND WELFARE
Ana María Carrasquilla
Acting Executive President
Coherence and Coordination of Macroeconomic Policies
Global and Regional Framework
ECOSOC, Geneva, July 2, 2007