Are BRIC countries currencies to play. a dominant role in the system? A Brazilian perception

Transcription

1 Are BRIC countries currencies to play The Policy of International Reserves a dominant role in the system? Accumulation: Lessons from the A Brazilian perception Crisis (Brazil s Perspective) Carlos Hamilton Araujo Deputy Luiz Governor Awazu Pereira for Economic da Silva Policy Deputy Governor for International Affairs Central Bank of Brazil Central Bank of Brazil Shaping XLVII the Meeting future of the of Central international Bank monetary Governors system Conference sponsored by Of the the National American Bank Continent of Poland, Warsaw 6 May 21 Buenos Aires Argentina May 13 th and 14 th 21

2 The 2-2 Global Financial Crisis & Brazil Transmission through sudden stop of external credit lines: September 2 when Lehman Bros. collapsed: sudden stop of external credit lines, to banks (2% of credit) and firms (roll-over rate of 13% down to 22%) impact on supply domestic credit & substitution effect demand for FX for repayts ER depreciation pressure on interbank mkt higher demand for liquidity Credit crunch real effects on sales impact on inventories and production confidence crisis, investment down Flight to quality + Profit repatriation more ER depreciation potential losses on exotic derivatives contracts (firms, banks) Severe financial+ real crisis (not typical EM confidence, more hydraulicmechanic ) given inter-connections & functioning of global financial mkts Brazil s financial fundamentals were solid (on top of sound macro) Reserve accumulation (over $2b) often criticized before the crisis Net creditor position of the National Treasury (FX deprec reduces debt-to-y) High level of reserve requirements for the banking system (R$26b) Strong capital base of banking sector (17-18% CAR) Good quality of credit and banks portfolio

3 US$ billion % The 2-2 Global Financial Crisis & Brazil s GDP Domestic demand GDP YoY % change Q 5 2Q 4Q 2Q 4Q 2Q 4Q 2Q 4Q Other foreign investments Accumulated in 12 months 15 Fixed income Equities FDI Total

4 US$ bi The 2-2 Global Financial Crisis & Brazil s Reserves Liquidity concept Jul Nov Jul Nov Jul Nov Jul Nov 1

5 basis points b. p. % % Capital Requirements & CAR Banking Sector Brazil regulatory minimum = 11% Basel capital adequacy = 8% Feb External Soundness Indicators 1 2 International reserves/short-term external debt Total external debt/exports Ratio Impact of a 1% FX Change on Net Debt-to-GDP , , 15 1,5 1 1, 5 Sovereign spread : EMBI + and EMBI + Brazil EMBI+ Brazil EMBI Difference 5 1

6 Reserves Allowed a Rapid Policy Reaction With the right diagnosis about the transmission of the crisis, reserves substituted external credit lines and helped re-build confidence: Sales of US$ in spot mkt and intervention in future mkt ($5b) Lines of credit to exporters, banks and firms (repayts of obligations) BCB engaged in currency swap arrangements with other central banks Liquidity intervention in local currency Significant reduction of reserve requirements in banking system (R$1b o/w R$42b for interbank mkt) Credit lines through public sector financial institutions (BNDES, BB and CEF) for trade financing, energy & infrastructure sectors; and temporary permission for them to expand their portfolio Fiscal policy counter-cyclical Sectoral incentives for Agriculture, Construction, Car industry, K goods and Infrastructure); tax holidays Reserves were key to kick-start, sustain the recovery and create confidence

7 Reserves Re-established Functional kets Monetary policy gains more traction with functional markets: Lower CB rate after re-establishment of more normal market conditions Cost-channel becomes more effective Credit re-established Once uncertainty and FX fear was removed, well-capitalized banks, sound financial sector (with public institutions) started working Capital strengthening also helped public sector banks Fiscal policy yields higher multipliers with functional markets Investment in infrastructure and energy sectors Transfers and incomes policy Reserves played their role of precautionary safety net and self-insurance

8 Lessons for EMkts Reserve accumulation reflects the preference for self-insurance mainly after Asian crises & pegged exchange rate regime crises (end-199s): Size and volatility of international financial flows, complexity of some financial derivatives, cross-border exposures, too big to fail banks, higher leverage in financial systems, etc require higher reserves Despite movement toward exchange rate flexibility (with exceptions) and despite its cost, self-insurance became first line of defense Reserves are part of sound framework to insure against pull and push factors (sudden stops) behind capital flows: We know that business cycles in advanced economies, major currencies monetary policy stances, relative yield & improved fundamentals in emerging markets all contribute to floods and sudden stops of capital flows Reserves are useful but combined with adequate macro-financial-prudential policies in emerging markets to reduce risks and instability: prudent demand (fiscal) management, strong regulatory/prudential rules to control excessive credit growth, exchange rate flexibility, sound financial system, well-functioning capital markets, etc

9 Excessive Reserve Accumulation? The Future Multilateral crisis-resolution framework trying to evolve to reduce excessive self-insurance More flexible procedures to use standard (IMF-SBA) tools of the multilateral system Precautionary IMF lending facilities, such as the flexible credit line FCL (created with strong Brazilian support), were relevant for countries with strong fundamentals, as Poland and Mexico in 2 New post 2 crisis consensus: better macro-prudential regulation is key to smooth inflows and prevent future financial crisis, hence less reserves Pro-cyclicality of some existing features of regulatory & prudential framework needs to be addressed Control of excessive credit growth (e.g., through higher capital requirements, maximum leverage ratio, etc) will be considered in conjunction with reflection on capital flows in forums like the G2, the FSB Reflection on the International Monetary System is under way

10 Data on Reserves Accumulation

11 US$ billion Reserve accumulation (ex-china) Argentina Brazil India Mexico Russia South Africa Turkey Source: Bloomberg.

12 US$ billion Reserve accumulation 1, Argentina Brazil India Mexico Russia South Africa Turkey China Source: Bloomberg.

13 US$ billion Reserve evolution (ex-china) 1,4 1,2 1, Argentina Brazil India Total FX reserves Mexico Russia South Africa Turkey Source: Bloomberg.

14 US$ billion Reserve evolution 4, 3,5 3, Argentina Brazil India Total FX reserves 2,5 2, 1,5 1, 5 Mexico Russia South Africa Turkey China Source: Bloomberg.

15 % of GDP Reserve as a percent of GDP 5 China Total FX reserves Russia 4 India Brazil Argentina South Africa Turkey Mexico Source: Bloomberg, IMF