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1. Expanding Global Liquidity Insurance: Myths and Realities of the IMF’s Precautionary Credit Lines

Author:
Nancy Birdsall, Liliana Rojas-Suarez, and Anna Diofasi
Publication Date:
02-2017
Content Type:
Working Paper
Institution:
Center for Global Development
Abstract:
Despite increasing volatility in the global economy, the uptake of the IMF’s two precautionary credit lines, the Flexible Credit Line (FCL) and the Precautionary and Liquidity Line (PLL), has remained limited—currently to just four countries. The two new lending instruments were created in the wake of the global financial crisis of 2008 to enable IMF member states to respond quickly and effectively to temporary balance of payment needs resulting from external shocks. Both credit lines offer immediate access to considerable sums—over 10 times a country’s IMF quota in some cases with no (FCL) or very limited (PLL) conditionality. This paper addresses four misconceptions (or ‘myths’) that have likely played a role in the limited utilization of the two precautionary credit lines: 1) too stringent qualification criteria that limit country eligibility; 2) insufficient IMF resources; 3) high costs of precautionary borrowing; and 4) the economic stigma associated with IMF assistance. We show, in fact, that the pool of eligible member states is likely to be seven to eight times larger than the number of current users; that with the 2016 quota reform IMF resources are more than adequate to support a larger precautionary portfolio; that the two IMF credit lines are among the least costly and most advantageous instruments for liquidity support countries have; and that there is no evidence of negative market developments for countries now participating in the precautionary lines.
Topic:
International Trade and Finance and Global Political Economy
Political Geography:
Global Focus

2. Financial Regulations for Improving Financial Inclusion

Author:
Stijn Claessens and Liliana Rojas-Suarez
Publication Date:
03-2016
Content Type:
Special Report
Institution:
Center for Global Development
Abstract:
As recently as 2011, only 42 percent of adult Kenyans had a financial account of any kind; by 2014, according to the Global Findex, database that number had risen to 75 percent. [1] In sub­Saharan Africa, the share of adults with financial accounts rose by nearly half over the same period. Many other developing countries have also recorded gains in access to basic financial services. Much of this progress is being facilitated by the digital revolution of recent decades, which has led to the emergence of new financial services and new delivery channels. Whereas payment services often are the entry point into using formal financial services, they are not the only low­cost and widely accessible financial services being delivered in recent years. Driven by advances in new digital payment services, small­scale credit and new modes for delivering insurance services are being offered in several developing countries. Digital (payment) records are being used to make decisions about provision of credit to small businesses or individuals who do not have traditional collateral or credit history to secure loans. Additionally, affordable mobile systems have led to the provision of new and innovative financial services that would not be economically sustainable under the traditional brick­and­mortar model such as mobile­based crop microinsurance in sub­Saharan Africa and pay­as­you­go energy delivery models for off­grid customers in India, Peru, and Tanzania. [2] Increased access to basic financial services, especially payments services, by larger segments of the population reflects the growing use of digital technologies in developing countries. Simultaneously, the adoption of proper regulation based on country­specific opportunities, needs and conditions has been critical.
Topic:
International Political Economy, International Trade and Finance, and Financial Markets
Political Geography:
Global Focus

3. Capital Requirements under Basel III in Latin America: The Cases of Bolivia, Colombia, Ecuador and Peru

Author:
Liliana Rojas-Suarez, Arturo J. Galindo, and Marielle del Valle
Publication Date:
05-2012
Content Type:
Working Paper
Institution:
Center for Global Development
Abstract:
A number of banks in developed countries argue that the new capital requirements under Basel III are too stringent and that implementing the proposed regulation would require raising large amounts of capital, with adverse consequences on credit and the cost of finance. In contrast, many emerging market economies claim that their systems are adequately capitalized and that they have no problems with implementing the new capital requirements. This paper conducts a detailed calculation of capital held by the banks in four Latin American countries—known as the Andean countries: Bolivia, Colombia, Ecuador and Peru—and assesses the potential effects of full compliance with the capital requirements under Basel III. The conclusions are positive and show that while capital would decline somewhat in these countries after they make adjustments to comply with the new definition of capital under Basel III, they would still meet the Basel III recommendations on capital requirements. More importantly, these countries would hold Tier capital to risk-weighted-asset ratios significantly above the 8.5 percent requirement under Basel III. That is, not only the quantity, but also the quality of capital is adequate in the countries under study. While encouraging, these results should not be taken as a panacea since the new regulations are only effective if coupled with appropriate risk management and supervision mechanisms to control the build-up of excessive risk-taking by banks. Further research into these areas is needed for a complete assessment of the strength of banks in the Andean countries.
Topic:
Debt, Economics, International Trade and Finance, and Monetary Policy
Political Geography:
Colombia, Latin America, Peru, Ecuador, and Bolivia

4. Competitiveness in Central America: The Road to Sustained Growth and Poverty Reduction

Author:
Liliana Rojas-Suarez, José Luis Guasch, and Veronica Gonzales
Publication Date:
06-2012
Content Type:
Working Paper
Institution:
Center for Global Development
Abstract:
Over the last decade, Central American countries—Costa Rica, El Salvador, Guatemala, Honduras, and Nicaragua—have made significant progress in social and economic areas. In particular, they have stabilized their economies after decades of civil war and the economic volatility that plagued the region through the 1990s. Most countries in Central America have taken important steps to improve their business climates, particularly by enhancing macroeconomic stability, improving the soundness of their financial systems, making improvements in infrastructure services and trade facilitation, reducing red tape, and simplifying their regulatory and tax frameworks. As a result, before the 2008 financial crisis, GDP per capita in Central America grew at an average rate of 3 percent per year from 2003 to 2008, which, albeit modest, was the most robust and stable period of growth the region had witnessed since the early 1990s. However, despite this achievement, Central American economies are still lagging behind the rest of Latin America and other middle-income countries by per-capita growth rates of 0.5 to 2 percentage points. Even more worrying are the levels of poverty and inequality, which show the lack of inclusiveness in their growth models. Moreover, recent developments in the region show a number of red flags that are weakening macroeconomic and democratic stability. Significant structural changes are urgently needed to secure sustained and inclusive growth.
Topic:
Development, Economics, Emerging Markets, and International Trade and Finance
Political Geography:
Latin America and Central America

5. The International Financial Crisis: Eight Lessons for and from Latin America

Author:
Liliana Rojas-Suarez
Publication Date:
01-2010
Content Type:
Working Paper
Institution:
Center for Global Development
Abstract:
The international financial crisis of 2008–09 exposed the strengths and weaknesses of the current paradigm of development in Latin America, a paradigm based on liberalized capital accounts and significantly improved macroeconomic conditions. This paper presents lessons derived from the crisis, not only for the region itself, but also for other developing countries that might seek economic growth in the context of greater integration to the international capital markets. Some of the lessons are not new but have been reinforced by the crisis, such as Latin America's imperative need for export diversification (not only in products but in partners). Other lessons break with longstanding myths about the region, such as its inability to undertake counter-cyclical policies—at least on the monetary side. Yet other lessons reflect new developments in the current growth paradigm, such as a renewed assessment of (1) the relative roles of foreign and domestic banks in shielding the financial system against external shocks and (2) the potential costs of adopting blanket international financial regulations that do not account for a country's degree of development. Taken together, the lessons in this paper bring a new sense of optimism for growth in Latin America.
Topic:
Economics, International Trade and Finance, and Financial Crisis
Political Geography:
Latin America

6. The Provision of Banking Services in Latin America: Obstacles and Recommendations

Author:
Liliana Rojas-Suarez
Publication Date:
06-2007
Content Type:
Working Paper
Institution:
Center for Global Development
Abstract:
The depth of and access to financial services provided by banks throughout Latin America are extremely low in spite of its recognized importance for economic activity, employment and poverty alleviation. Low financial depth and access hurts the poor the most and is due to a variety of obstacles that are presented in this paper in four categories, along with recommendations to overcome them. The first category groups socio-economic obstacles that undercut the demand for financial services of large segments of the population. The second category identifies problems in the operations of the banking sector that impedes the adequate provision of financial services to households and firms. The third category captures institutional deficiencies, with emphasis on the quality of the legal framework and the governability of the countries in the region. The fourth category identifies regulations that tend to distort the provision of banking services. Recommendations to confront these obstacles include innovative proposals that take into consideration the political constraints facing individual countries. Some of the policy recommendations include: public-private partnerships to improve financial literacy, the creation of juries specialized in commercial activities to support the rights of borrowers and creditors, and the approval of regulation to allow widespread usage of technological innovations to permit low-income families and small firms to gain access to financial services.
Topic:
Development, Economics, International Trade and Finance, and Poverty
Political Geography:
Latin America

7. Toward A Sustainable FTAA: Does Latin America Meet The Necessary Financial Preconditions?

Author:
Liliana Rojas-Suarez
Publication Date:
07-2002
Content Type:
Working Paper
Institution:
Peterson Institute for International Economics
Abstract:
This paper focuses on identifying preconditions that will ensure the sustainability of a Free Trade Area of the Americas (FTAA). It argues that the macro, micro, and political conditions advanced in the literature to measure a country's ability to compete internationally, while necessary, are not sufficient to ensure the success and permanence of a free trade agreement. Instead, two additional financial conditions are needed. The first is that each partner in the free trade area needs to have sustainable public debts as determined by the achievement of credible and sustainable structural fiscal balances. The second is that exchange rate regimes across trading partners should be compatible in the sense that adverse shocks in one country do not generate a policy dilemma in other partners between abandoning their exchange rate system or the free trade area.
Topic:
Economics and International Trade and Finance
Political Geography:
South America, Latin America, Central America, and Caribbean

8. Can International Capital Standards Strengthen Banks in Emerging Markets?

Author:
Liliana Rojas-Suarez
Publication Date:
11-2001
Content Type:
Working Paper
Institution:
Peterson Institute for International Economics
Abstract:
Who should determine banks' capital standards: authorities or markets? What is the right definition of core capital: equity only or equity plus subordinated debt? Can the assessment of banks' individual credit risks by external rating agencies be of equal or better quality than the assessments derived from banks' own internal rating systems? These are some of the key financial regulatory issues currently being discussed by analysts in industrial countries, especially in the context of the proposed modification to the Basel Capital Adequacy Accord: Basel II is expected to replace the original 1988 Accord.
Topic:
Economics, International Trade and Finance, and Political Economy

9. Rating Banks in Emerging Markets: What Credit Rating Agencies Should Learn From Financial Indicators

Author:
Liliana Rojas-Suarez
Publication Date:
05-2001
Content Type:
Working Paper
Institution:
Peterson Institute for International Economics
Abstract:
The rating agencies' and bank supervisors' records of prompt identification of banking problems in emerging markets has not been satisfactory. This paper suggests that such deficiencies could be explained by the use of financial indicators that, while appropriate for industrial countries, do not work in emerging markets. Among the conclusions, this paper shows that the most commonly used indicator of banking problems in industrial countries, the capital-to-asset ratio, has performed poorly as an indicator of banking problems in Latin America and East Asia. This is because of (a) severe deficiencies in the accounting and regulatory framework and (b) lack of liquid markets for bank shares, subordinated debt and other bank liabilities and assets needed to validate the “real” worth of a bank as opposed to its accounting value.
Topic:
Economics, International Trade and Finance, and Political Economy
Political Geography:
East Asia and Latin America