Session II: Monetary and Exchange Rate Policy Responses€¦ · Pedro Rabasa Chief Economist...

The Global Financial CrisisCentral Bank Responses in the Western Hemisphere

Session II: Monetary and Exchange Rate Policy Responses

Pedro RabasaChief EconomistCentral Bank of Argentina

Central Reserve Bank of Peru. March, 2009

22

• Latam Central Banks and the Crisis

• The Argentine Case

Latam Central Banks Policies against the Crisis

33




4

Latin American financial systems were better prepared to face the international financial crisis…

Liquidity and SolvencyLast date available

14.113.4

11.7

0

3

6

9

12

15

18

21

Braz

il

Uru

guay

Para

guay

Arg

entin

a

Mex

ico

Boliv

ia

Col

ombi

a

Chi

le

Peru

Ven

ezue

la

Em. A

sia

Em. E

urop

e

Dev

elop

ed

Latin America

%

18.3

10.3

2.0

0

5

10

15

20

25

30

35

Chi

le

Bol

ivia

Bra

zil

Mex

ico

Arg

entin

a

Col

ombi

a

Ven

ezue

la

Para

guay

Peru

Uru

guay

Em. E

urop

e

Em. A

sia

Dev

elop

ed

Latin America

%

Average: 21.2%

Average: 15%

Capital compliance - % of risk weighted assetsLiquidity / Total deposits

Source: IMF


5

…together with sound macroeconomic fundamentals


Latam. Current Account, Primary Fiscal Balance and International Reserves

-5

-4

-3

-2

-1

0

1

2

3

4

2000 2001 2002 2003 2004 2005 2006 2007 2008e

% of GDP

0

2

4

6

8

10

12

14

16% of GDP

Primary Fiscal Balance

Current Account

International Reserves (% of GDP; right axis)

Source: JP Morgan and WEO e: Estimated

6

Countries of the region have implemented several policies to mitigate the effects of the international crisis.

Argentina

Brazil

Chile

Colombia

Peru

Mexico

MexicoSocial Policy

Argentina

Brazil

Chile

Colombia

Peru MexicoFiscal Policy

Paraguay

Ecuador

Argentina

Brazil

Chile

Colombia

Peru MexicoTrade &

FX policies

Paraguay

Ecuador

Argentina

Brazil

Chile

Peru MexicoIndustrial

Policy

Argentina

Brazil

Chile

Colombia

Peru MexicoMonetary &

FinancialPolicies

Paraguay

Ecuador


7


In particular, Latam Central Banks adopted several common measures, among them:

• Reference interest rate cuts

• Liquidity provision mainly through open market operations, both in domestic and foreign currency. It was also broadened the spectrum of assets accepted as collateral of liquidity provision.

• Reserve requirement reduction / ease

• Managed depreciation of the regional currencies

Nevertheless, the impact on each country has been different, depending on its productive structure, its commercial relationships and its dependence on external financing

8

The Central Banks of the region were plenty active using different tools ...


Liquidity provision in domestic currency

Liquidity provision in foreign currency

Brazil X X XChile X X X X

Colombia X X XMexico X X X

Paraguay X X XPeru X X

Uruguay X X(*) Selected countriesSource: Economic Commission for Latin America and the Caribbean (ECLAC) and Bloomberg

Countries (*) Monetary Policy Instruments

Reference Interest Rate Cut

Reserve Requirement Reduction/ Ease

Open Market Operations

9

…allowing a managed nominal depreciation of their currencies


Latam Nominal Billateral Exchange Rates(Index 07/31/07 = 100 local currency per US dollar)

80,0

90,0

100,0

110,0

120,0

130,0

140,0

Jul-07 Nov-07 Mar-08 Jul-08 Nov-08

Source: BCRA based on Bloomberg.

Mexico Brazil Chile

Peru Colombia Argentina

1010




11


Argentina: Facing financial turmoil in better shape than in the pastArgentina: fiscal and trade balance and international reserves

0,0

-5

0

5

10

15

20

Primary fiscal balance(national)

Financial balance(national)

Current accountbalance

International reserves

% of GDP

Tequila (1994)Brazil (1999)2008

1212

The monetary framework in is based on a risk management approachand four pillars

THIS FRAMEWORK IS BASED ON THE INTERACTION OF THREE THIS FRAMEWORK IS BASED ON THE INTERACTION OF THREE

PILLARS: PILLARS:

1. ROBUST MONETARY POLICY (ENSURING THE EQUILIBRIUM

BETWEEN SUPPLY AND DEMAND IN THE MONETARY MARKET).

2. COUNTERCYCLICAL FINANCIAL POLICIES (BUILDING LIQUIDITY

BUFFERS AND CUMULATING RESERVES).

3. A MANAGED FLOATING EXCHANGE RATE REGIME.

4. PRUDENTIAL REGULATION AND SUPERVISION


BCRA designed a monetary and financial framework adapted to argentine

idiosyncrasy.

13

• Price stability Monetary program: M2

Reserve accumulation

(managed float)

• Financial stability

Objectives Intermediate targets Instruments

• Reducing external

vulnerability

Repo interest rates and

CB notes

Fx intervention

Lowering public sector

exposure & currency

mismatch


The BCRA’s objetives, intermediate targets and instruments

Stregthening prudential

supervision and regulation

14

Gradual monetary policy: change of stance

M2 (pesos) and GDP (nominal) Growth Rates

0

5

10

15

20

25

30

35

40

2003 2004 2005 2006 2007 2008 2009(program)

% annual var.

M2

Nominal GDP

M2 upper limit

M2 lower limit

Source: BCRA


15

Prudential international reserves accumulation was followed by a deep sterilization policy to guarantee money market equilibrium


Sterilization of FX Intervention(3 month moving average)

-300

-200

-100

0

100

200

300

400

500

Jun-06 Dec-06 Jun-07 Dec-07 Jun-08 Dec-08

millions of $

Expansion of the MB due to FX operations

Sterilization due to Repo+BCRA Securities+Rediscounts+Reserves Requirements+Public Sector

Source: BCRA

16

Source: Central Banks, Supervision Authorities and IMF

Improvements in the financial regulatory framework led to a reduction on the exposure to the public sector…

Public Sector ExposureAs % of total assets - Last available data

9.211.3

12.5

0

5

10

15

20

25

MEX BRA ARG COL VEN BOL URU PAR PER CHI Asia Europe

LATAM a Emerging a

%

LATAM average : 9,9%

Dev

elop

ed

Argentina. Public Sector ExposureAs % of total assets

12.5

6.3

23.1

5

10

15

20

25

30

35

Aug-06 Dec-06 Apr-07 Aug-07 Dec-07 Apr-08 Aug-08 Dec-08

%

Financial system

Public banks

Private banks


17

...and lower mismatches (de-dollarization and inflation-adjustedinstruments)

Currency MismatchingAssets - Liabilities

56.5

29.4

47.4

16.5

4.5

3.5

2.4

1.3

0

10

20

30

40

50

60

Dec-04 Dec-05 Dec-06 Dec-07 Dec-08

0

1

2

3

4

5

6

Financial system Private banks

Financial system (right axis) Private banks (right axis)

% of NW billion US$

65

128 124

92

76

0

10

20

30

40

50

60

70

Dec

-04

Dec

-05

Dec

-06

Dec

-07

Dec

-08

30

45

60

75

90

105

120

135

Assets Liabilities (Assets - Liabilities) / Net worth (right axis)

billion $%

28

151

0

4

8

12

16

20

24

28

Private Public

0

25

50

75

100

125

150

175billion $ %By Group of Bank

Dec-08

50

11

139

(Assets after Guaranteed Loans swap- Liabilities) / Net worth (right axis)

CER Mismatch


18

• Stabilizing the forex market

• Adjusting interest rates

• Providing liquidity as needed.

1. July - October 2007

2. April - July 2008

3. September - December2008

BCRA response: a sequential strategy

Three episodes in the last 18 months


Successfully testing the frameworkThe three episodes of stress and BCRA responses

19

Liquidity in AR pesos– New lines of repos (fixed and variable rates), and higher amounts– Anticipated buyback of CB bills and notes: secondary market, automatic

facility and put options– Open market operations (government bonds)– Liquidity window using non-traditional collateral (Bogar and PG)– Rediscount window: pre-assessment of collateral, enhanced access to all

funding sources (not only deposits)– Currency in banks computed as liquidity reserve– Bi-monthly positions for complying with minimum cash requirements

Liquidity in US dollars– Fx intervention– USD repos– Future market– Lower cash requiremens in USD

Managing turbulence: main measures


2020

Managed floating: forex market operations


FX Market

-600

-500

-400

-300

-200

-100

0

100

200

300

Jul-07 Nov-07 Feb-08 Apr-08 Jul-08 Sep-08 Dec-08

million u$s

3.00

3.05

3.10

3.15

3.20

3.25

3.30

3.35

3.40

3.45

3.50

3.55

$/US$

FX Central Banks' Operations

$/US$ Exchange rate (right axis)

Source: BCRA

1st Episode 2nd Episode 3rd Episode

21

In order to alleviate stress in the financial market, the Central Bank provided liquidity by several means

Liquidity Provision Mechanisms

-20

-10

0

10

20

30

25-Jul-07 6-Sep-07 19-Oct-07

Billions of $

FX OperationsTreasury bonds acquisitionsReverse RepoLEBACNet Monetary Effect -20

-10

0

10

20

30

23-Apr-08 26-Aug-08 29-Dec-08

Source: BCRA


2222

Private sector deposits follow an upward trend…


Deposits in pesos(non-financial private sector)

100

105

110

115

120

125

130

135

140

145

150

Dec-06 Mar-07 Jun-07 Sep-07 Dec-07 Mar-08 Jun-08 Sep-08 Dec-08

billion of $

Private deposits (adjusted by pension system's reform)


23

…and so does credit, showing the effectiveness of policies aimed at avoiding disruptions in credit conditions


Loans in pesos(non-financial private sector)

60

65

70

75

80

85

90

95

100

105

110

Dec-06 Mar-07 Jun-07 Sep-07 Dec-07 Mar-08 Jun-08 Sep-08 Dec-08

billions of $

Private loans


24

Concluding remarksMonetary policy and international crisis: we can weather

the storm

• International reserves: liquidity buffer • Foreign exchange rate: lowering volatility without providing implicit

insurance• Money demand: returns in AR pesos (interes rate) higher than in US

dollars (expected depreciation)• Sequential strategy: forex stability, interest rates, liquidity injection• Lender of last resort: available on a broad basis, but not freely• Systemic liquidity assured (in AR pesos and US dollars) to

anticipated external events• Financial system acts to mitigate shocks and not to propagate them


The Global Financial CrisisCentral Bank Responses in the Western Hemisphere

Session II: Monetary and Exchange Rate Policy Responses

Pedro RabasaChief EconomistCentral Bank of Argentina

Central Reserve Bank of Peru. March, 2009

Session II: Monetary and Exchange Rate Policy Responses€¦ · Pedro Rabasa Chief Economist...

Documents

Transcript of Session II: Monetary and Exchange Rate Policy Responses€¦ · Pedro Rabasa Chief Economist...