REGIONAL FUNDS ENHANCE STABILITY AND WELFARE
Coherence and Coordination of Macroeconomic Policies
Global and Regional Framework
ECOSOC, Geneva, July 2, 2007
Ana María CarrasquillaActing Executive President
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
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.
Introduction
REGIONAL FUNDS ENHANCE STABILITY AND WELFARE
01 Regional Reserve Funds
REGIONAL FUNDS ENHANCE STABILITY AND WELFARE
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 Reserve Funds
REGIONAL FUNDS ENHANCE STABILITY AND WELFARE
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 Reserve Funds
REGIONAL FUNDS ENHANCE STABILITY AND WELFARE
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 Reserve Funds
REGIONAL FUNDS ENHANCE STABILITY AND WELFARE
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 Reserve Funds
REGIONAL FUNDS ENHANCE STABILITY AND WELFARE
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.
Latin American Reserve Fund (FLAR)
REGIONAL FUNDS ENHANCE STABILITY AND WELFARE
02 Latin American Reserve
Fund (FLAR)
REGIONAL FUNDS ENHANCE STABILITY AND WELFARE
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
Latin American Reserve Fund (FLAR)
REGIONAL FUNDS ENHANCE STABILITY AND WELFARE
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.
Latin American Reserve Fund (FLAR)
REGIONAL FUNDS ENHANCE STABILITY AND WELFARE
Services to Central Banks
Type of Credit Term Availability
Limits 1Granted by
Balance of Payments
3 years, including 1-year grace period for capital amortization
2.5 times the paid-in capital
Board of Directors
Foreign Debt Restructuring
3 years, including 1-year grace period for capital amortization
1.5 times the paid-in capital
Board of Directors
Liquidity Until 1 year 1 time the paid-in capital
Executive President
Contingent 6 months that may be extended
2 times the paid-in capital
Executive President
Treasury 1-30 days 2 times the paid-in capital
Executive President
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 membercountries.
Latin American Reserve Fund (FLAR)
REGIONAL FUNDS ENHANCE STABILITY AND WELFARELatin American Reserve Fund (FLAR)
FLAR: Granted Credits Per Year (Liquidity Credits included)
-
50
100
150
200
250
300
350
400
450
500
550
600
650
700
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
Mil
lio
n o
f U
SD
Bolivia Colombia Costa Rica
Ecuador Peru Venezuela
REGIONAL FUNDS ENHANCE STABILITY AND WELFARELatin American Reserve Fund (FLAR)
1/ For porpuses of debt restructuring. Ecuadorian financial system crisis.2/ For porpuses of debt restructuring. There was not crisis in Costa Rica.
FLAR: Credits Granted during Crisis Periods
-
50
100
150
200
250
300
350
400
450
500
550
600
650
700
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
Mil
lio
n o
f U
SD
Bolivia Colombia Ecuador
Peru Venezuela Costa Rica
Foreign Debt Crisis
Asian Crisis Hiperinflation Oil Strike
2/
1/
REGIONAL FUNDS ENHANCE STABILITY AND WELFARE
Other Services to Central Banks and Official Institutions of Member
Countries
Latin American Reserve Fund (FLAR)
-
300
600
900
1.200
1.500
1.800
2.100
Dec-04 Dec-05 Dec-06 May-07
Deposits
Asset and trust management
Legal, financial, risk and operational mamagement, advisory services
Mill
ion
of
US
D
REGIONAL FUNDS ENHANCE STABILITY AND WELFARE
03The Role of FLAR: the Current Debate
REGIONAL FUNDS ENHANCE STABILITY AND WELFARE
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.
The Role of FLAR: the Current Debate
REGIONAL FUNDS ENHANCE STABILITY AND WELFARE
How to Increase the Capacity of FLAR to Enhance Stability?
FLAR has conducted two issues in the international market, under favorable conditions.
The Role of FLAR: the Current Debate
FLAR Credit Rating
AA Composed Rating: Highest in Latin America
Moody’s: Aa2 /Stable/ P-1
Standard and Poor’s: AA-/Positive/A-1+
Year Amount (Million
of USD) Term Coupon Maturity Lead Managers
2003 150 3 years Fixed: 3% August 2006 USB and BNP
2006 250 5 years
Floating: 3 months Libor + 20 basis
points February 2011 Citigroup and Morgan Stanley
REGIONAL FUNDS ENHANCE STABILITY AND WELFAREThe 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
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).
The Role of FLAR: the Current Debate
REGIONAL FUNDS ENHANCE STABILITY AND WELFARE
04 FLAR and the Coordination of
Macroeconomic Policy
REGIONAL FUNDS ENHANCE STABILITY AND WELFARE
• 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”
FLAR and the Coordination of Macroeconomic Policy
REGIONAL FUNDS ENHANCE STABILITY AND WELFARE
• 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.
FLAR and the Coordination of Macroeconomic Policy
REGIONAL FUNDS ENHANCE STABILITY AND WELFARE
• 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.
FLAR and the Coordination of Macroeconomic Policy
REGIONAL FUNDS ENHANCE STABILITY AND WELFARE
05Conclusions
REGIONAL FUNDS ENHANCE STABILITY AND WELFARE
•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.
Conclusions
REGIONAL FUNDS ENHANCE STABILITY AND WELFARE
• 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.
Conclusions
REGIONAL FUNDS ENHANCE STABILITY AND WELFARE
Coherence and Coordination of Macroeconomic Policies
Global and Regional Framework
ECOSOC, Geneva, July 2, 2007
Ana María CarrasquillaActing Executive President
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