Coherence and Coordination of Macroeconomic Policies Global and Regional Framework

1. Ana María Carrasquilla Acting Executive President Coherence and Coordination of Macroeconomic Policies Global and Regional Framework ECOSOC, Geneva, July 2, 2007

2. 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

3. 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.

4. 01 Regional Reserve Funds

5. 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.

6. 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.

7. 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).

8. 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).

9. Latin American Reserve Fund (FLAR) Latin American Experience • ECLAC: Surveillanceof 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.

10. 02 Latin American Reserve Fund (FLAR)

11. 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

12. 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.

13. Latin American Reserve Fund (FLAR) Services to Central Banks

14. Latin American Reserve Fund (FLAR)

15. Latin American Reserve Fund (FLAR)

16. Latin American Reserve Fund (FLAR) Other Services to Central Banks and Official Institutions of Member Countries

17. 03 The Role of FLAR: the Current Debate

18. 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.

19. 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. FLAR Credit Rating AA Composed Rating: Highest in Latin America Moody’s: Aa2 /Stable/ P-1 Standard and Poor’s: AA-/Positive/A-1+

20. 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.

21. 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).

22. 04 FLAR and the Coordination of Macroeconomic Policy

23. 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 MacroeconomicStabilization” • 2007: “International Reserves in Middle- and Low-Income Countries: Background of Recent Accumulation, Management, Monetary and Exchange Rate Policy, and Outlook”

24. 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.

25. 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.

26. 05 Conclusions

27. 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.

28. 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.

29. Ana María Carrasquilla Acting Executive President Coherence and Coordination of Macroeconomic Policies Global and Regional Framework ECOSOC, Geneva, July 2, 2007