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

2

The role of regional and sub-regional financial The role of regional and sub-regional financial institutions in Latin Americainstitutions 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.

3

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.

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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.

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3.9

1.1

7.2

2.7

5.3

2.8

7.1 6.6

8.99.7

0

1

2

3

4

5

6

7

8

9

10

1990

1995

2000

2005

2007

Regional Subregional Banks

Loans by regional and sub-regional development Banks in the region. 1990-2007 (US$ Bn)

US

$ B

illi

on

Regional and sub-regional development banksRegional and sub-regional development banks have increased their relative importancehave increased their relative importance

IDB

6

Financing InvestmentFinancing Investment

16.3

7.6

47.7

41.3

12.2 12.715.5

25.0

8.2

13.5

0

5

10

15

20

25

30

35

40

45

50

Sectores productivos Infraestructura Social Intermediación financiera Otros

1997-2001 2003-2007

Andean development Corporation

Loans portfolio by sector of economic activity (Percentage of the total) 1997-2001 and 2003-2007 (% of total)

Per

cent

age

7

Others8%

Productive sectors10%

Infrastructure41%

Financial intermediation

14%

Energy27%

Source: BCIE. Annual Report (2007)

Central American Bank for Economic Integration

Loan portfolio by sector of economic activity (Percentage of the total)

2007

Financing InvestmentFinancing Investment

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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.

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The provision of counter-cyclical financeThe provision of counter-cyclical finance

-15,000

-10,000

-5,000

0

5,000

10,000

15,000

1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003

-4.0

-2.0

0.0

2.0

4.0

6.0

8.0

10.0

Aprobaciones CAF BF+E&O Crecimiento

GDP GROWTH, LOAN APPROVALS AND INFLOW OF PRIVATE CAPITAL

Andean CommunityMillions of US$ GDP growth %

GDP Growth

Loan approvals

Inflows of private capital

10

The provision of counter-cyclical financeThe provision of counter-cyclical finance

GDP GROWTH, LOAN APPROVALS AND INFLOW OF PRIVATE CAPITAL

Central American Common Market

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

4,500

1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

Aprobaciones MCCA BF+E&O Crecimiento

Millions of US$ GDP growth %

GDP Growth

Loan approvals

Inflows of private capital

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Additional advantage that facilitates intermediation Additional advantage that facilitates intermediation of development banks is their investment gradeof development banks is their investment grade

A+10%

A-8%

A11%

NR19%

BB19%

B- BBB+1% AA-AAA

32%

RISK RATING OF PUBLIC AND PRIVATE FINANCIAL INSTITUTIONS IN LATIN AMERICA (745 INSTITUTIONS)

CAF= A+BCIE= A-

Source: Fitch Corporate (2008)

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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

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Latin American Reserve Fund Latin American Reserve Fund Granted credits per year for balance of payments support and liquidity provision

1980-2005

0

100

200

300

400

500

600

700

800

1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1995 1996 1998 1999 2002 2003 2005

Balance of payments Liquidity

Source: On the basis of official data.

US$ Millions

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The Latin American Reserve Fund

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

IMPACT OF FLAR ON FINANCIAL VULNERABILITY

(SHORT-TERM DEBT/INTERNATIONAL RESERVES, MARCH 2003

Source: Titelman (2006)

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.

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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.

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