Regional Financial Architecture Side Event: The Role of Regional Cooperation and Global Partnership in Financing for Development Organized by United Nations Regional Commissions Follow-up International Conference on Financing for Development to Review the implementation of the Monterrey Consensus. Doha, November 2008 Alicia Bárcena Executive Secretary, ECLAC The role of regional and sub-regional financial institutions in Latin America • Regional financial institutions must play an important role in the new international financial architecture by complementing global financial institutions: • Mobilizing financial resources for development. Counter cyclical financing. Reserve pooling. Surveillance. Macroeconomic coordination. Regional financial institutions have specific characteristics which makes them particularly valuable: They provide a sense of ownership of resources and of their destination. They posses the knowledge that is specific to the workings of the region. They have the capacity to act and provide a response in a timely manner. 2 The regional architecture in Latin America • The regional architecture comprises: Development Banks Inter-American Development Bank (1959). Andean Development Corporation (1968). Central American Integration Bank (1961). Caribbean Development Bank (1969). Reserve pooling institutions Latin American Reserve Fund (1978). Mechanisms for Trade Facilitation. 3 Development Banks • The functions of development banks include: Investment finance. Provides loans and extend lines of credit to corporations, and banks financing foreign trade and working capital operations. Provides the financial sector with credits for channeling resources to a variety of productive sectors. Offer governments and government bodies development bank services for special financing of physical infrastructure and integration projects. Provides financing for projects to promote human development and integrate marginalized groups. 4 Regional and sub-regional development banks have increased their relative importance Loans by regional and sub-regional development Banks in the region. 1990-2007 (US$ Bn) 10 8.9 9.7 9 7.2 7.1 6.6 7 5.3 6 5 3.9 4 2.8 2.7 3 2 1.1 Regional IDB Subregional Banks 2007 2005 2000 0 1995 1 1990 US$ Billion 8 5 Financing Investment Andean development Corporation Loans portfolio by sector of economic activity (Percentage of the total) 1997-2001 and 2003-2007 (% of total) 50 47.7 45 40 41.3 Percentage 35 30 25 25.0 20 15 16.3 15.5 5 13.5 12.2 12.7 10 8.2 7.6 0 Sectores productivos Infraestructura Social 1997-2001 2003-2007 Intermediación financiera Otros 6 Financing Investment Central American Bank for Economic Integration Loan portfolio by sector of economic activity (Percentage of the total) 2007 Others 8% Productive sectors 10% Infrastructure 41% Source: BCIE. Annual Report (2007) Energy 27% Financial intermediation 14% 7 Development Banks • The functions of development banks include: Provision of liquidity. Andean development Corporation (CAF) established in 2008 a contingency line of credit of US$ 1 to 2 billions Provision of countercyclical finance. Intermediation of financing funds from international markets to the countries of the region. Plays an important role in stabilizing access to financial flows. 8 The provision of counter-cyclical finance GDP GROWTH, LOAN APPROVALS AND INFLOW OF PRIVATE CAPITAL Andean Community Millions of US$ GDP growth % 15,000 10.0 8.0 10,000 Loan approvals 6.0 5,000 Inflows of private capital 4.0 0 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2.0 -5,000 0.0 -10,000 GDP Growth -2.0 -15,000 -4.0 Aprobaciones CAF BF+E&O Crecimiento 9 The provision of counter-cyclical finance GDP GROWTH, LOAN APPROVALS AND INFLOW OF PRIVATE CAPITAL Central American Common Market Millions of US$ GDP growth % 4,500 7.0 4,000 6.0 GDP Growth 3,500 Loan approvals 3,000 5.0 2,500 4.0 2,000 3.0 1,500 2.0 Inflows of private capital 1,000 1.0 500 0 0.0 1991 1992 1993 1994 1995 1996 Aprobaciones MCCA 1997 1998 BF+E&O 1999 2000 2001 Crecimiento 2002 2003 10 Additional advantage that facilitates intermediation of development banks is their investment grade RISK RATING OF PUBLIC AND PRIVATE FINANCIAL INSTITUTIONS IN LATIN AMERICA (745 INSTITUTIONS) A 11% NR 19% A8% A+ 10% BB 19% B- BBB+ 1% Source: Fitch Corporate (2008) CAF= A+ BCIE= A- AA-AAA 32% 11 The Latin American Reserve Fund • The Latin American Reserve Fund covers: • Bolivia Colombia Ecuador Costa Rica Peru The Latin American Reserve Fund’s main functions are: To provide financial support for its member countries’ balances of payments complementing IMF financing (this is the main function of the FLAR). To improve the terms for its member countries’ reserves investments. To help harmonizing its member countries’ monetary and financial policies. • In order to provide balance of payments financing, FLAR operates as a credit cooperation in which the member countries’ central banks are able to take loans in proportion to their capital contributions. There are different credit facilities: Credits for balance of payments support. Credits for restructuring the external national debt. Liquidity credits Standby credits. Treasury credits 12 Latin American Reserve Fund Granted credits per year for balance of payments support and liquidity provision US$ Millions 1980-2005 800 700 600 500 400 300 200 100 0 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1995 1996 1998 1999 2002 2003 2005 Balance of payments Source: On the basis of official data. Liquidity 13 The Latin American Reserve Fund IMPACT OF FLAR ON FINANCIAL VULNERABILITY (SHORT-TERM DEBT/INTERNATIONAL RESERVES, MARCH 2003 Bolivia Colombia Costa Rica Ecuador Peru Venezuelan (Bolivarian Rep. of) Subscribed capital 234 469 234 234 469 469 Paid-up capital 157 313 133 157 313 313 IMF Quotas 233 1 053 222 414 878 3 721 Short-term debt 370 3 800 1 499 2 316 2 335 3 720 International Reserves 893 10 844 1 497 1 004 9 721 12 107 Short-term debt/international reserves (%) 41 35 100 231 24 31 Short-term debt/international reserves (%) 26 33 82 149 22 29 Note: The quotient of short-term debt over increased international reserves is calculated by adding to international reserves the debt capacity in FAR/FLAR, which is equal to 2.5 times the paid-up capital, except for Bolivia and Ecuador, where it is 3.5 times. Source: Titelman (2006) 14 Challenges in improving the regional financial architecture • The process of financial globalization has heightened the need to strengthen regional financial architecture to help reduce financial volatility and vulnerability in the region. • To deepen regional financial integration development banks should: Continue to provide countercyclical financing. Expand their functions to include supporting and facilitating the countries’ access to international financial markets. Actively support national and regional financial development. • With respect to reserve pooling intitutions FLAR should: Support coordination of the macroeconomic and monetary policies of the countries in the region. Contribute to establish common standards for regulation and financial supervision. Expand its reserve pooling and countries coverage to improve its resource base helping to reduce contagion between countries. • New initiatives such as Bank of the South can complement the objectives and functions of the existing regional financial institutions. 15 Regional Financial Architecture Follow-up International Conference on Financing for Development to Review the implementation of the Monterrey Consensus. Doha, November 2008 Alicia Bárcena Executive Secretary, ECLAC