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. I. La idea que ha regido la creación de estas instituciones es cumplir con funciones específicas y localizadas que no siempre otras instituciones financieras abarcan adecuadamente. BDC, BCIE y CAF tienen especificidades propias. BCIE es el brazo financiero de la integración CA. Constituyen una fuente indispensable de información y conocimientos especializados sobre el crecimiento económico y el desarrollo. Los bancos de desarrollo regionales y subregionales son instituciones complementarias a los bancos de desarrollo multilaterales. Los bancos de desarrollo regionales y subregionales tienen además especificidades propias. Otorgan mayor voz y voto a los países en desarrollo. No utiliza mecanismos de condicionalidad. Responde de manera más eficiente a las demanda de los países en desarrollo. Relaciones entre shareholders and constituencies son más simples y flexibles. Asimetrías de información tienden a ser menores al el nivel regional (subregional). Regional development bank’s ability to transmit and use region specific knowledge can make them particularly helpful to countries designing policies mot appropriate to their economic needs and political constraints. II. Préstamos ordinarios constituyen más de la mitad de la cartera de los bancos de desarrollo subregionales y mas de un tercio son operaciones con el sector provado e instrumentos de gestión de riesgo. CONSENSO DE MONTERREY (2002) Aseguran un volumen adecuado de recursos financieros a países que no tienen suficiente acceso a los mercados de capital. Atenúan las repercusiones de la inestabilidad excesiva de los mercados financieros. Prestan un apoyo financiero flexible que complementa la labor de desarrollo.

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.

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.

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) US$ Billion II. Un rol con mayor protagonismo según se refleja en el aumento de sus préstamos y en particular en la participación de la cartera de préstamos de la banca comercial regional en la cartera de préstamos de la banca de desarrollo regional y subregional. IDB

Andean development Corporation Financing Investment Andean development Corporation Loans portfolio by sector of economic activity (Percentage of the total) 1997-2001 and 2003-2007 (% of total) Percentage

Central American Bank for Economic Integration Financing Investment Central American Bank for Economic Integration Loan portfolio by sector of economic activity (Percentage of the total) 2007 Source: BCIE. Annual Report (2007)

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.

The provision of counter-cyclical finance GDP GROWTH, LOAN APPROVALS AND INFLOW OF PRIVATE CAPITAL Andean Community Millions of US$ GDP growth % Loan approvals Inflows of private capital GDP Growth

The provision of counter-cyclical finance GDP GROWTH, LOAN APPROVALS AND INFLOW OF PRIVATE CAPITAL Central American Common Market Millions of US$ GDP growth % GDP Growth Loan approvals Inflows of private capital

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) CAF= A+ BCIE= A- Source: Fitch Corporate (2008)

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

Latin American Reserve Fund Granted credits per year for balance of payments support and liquidity provision 1980-2005 US$ Millions Source: On the basis of official data.

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 Paid-up capital 157 313 133 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 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)

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