Fondo Latinoamericano de Reservas

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2 Finance and Development: Experiences in south-south collaboration from Africa, Asia, and Latin America United Nations Conference on Trade and Development (UNCTAD) South African Institute of International Affairs (SAIIA) Global Economic Governance Africa (GEGA) Carlos Giraldo Director of Economic Studies May 11 th, University of Witwatersrand, Johannesburg 2

3 Messages FLAR history can be divided by 2, in accordance with structural changes in Latin America and the FLAR s Executive Presidency: Until 2003, FLAR accomplished an important role as a provider of counter-cyclical assistance to its member countries, during decades of macroeconomic instability. After 2003, during years of macroeconomic stability, FLAR has evolved from a reserve pool structure to a regional financial intermediary, and also as an international organization. Today, FLAR is a regional multilateral financial institution, solidly strengthened in its membership, its equity and its institutional framework; it is regionally and globally recognized as an essential element of the safety net for the economies of its member countries, and as part of the Global Financial Safety Net (GFSN). 3

4 1. FLAR during FLAR during : The Tenure of Ana María Carrasquilla 3. Lessons learned and future challenges 4

5 1 FLAR during

6 1978 FAR ANDEAN RESERVE FUND FLAR was created in 1978 as the Andean Reserve Fund (FAR) by Bolivia, Colombia, Ecuador, Peru and Venezuela, as a short term liquidity provider to address imbalances in the external sector of these economies, that, simultaneously, could facilitate the regional integration process. FAR was conceived as a supplement to the IMF. 6

7 1989 TRANSFORMATION OF FAR INTO FLAR In 1989 FAR was transformed into FLAR, to allow full Latin American membership. This is how Costa Rica joined FLAR in In 2008, Uruguay adhered, providing a regional character to the institution, gathering countries from CAN, MERCOSUR and Central America among its members. In 2015, Paraguay s adhesion was formalized. 7

8 Objectives Since its creation, FLAR is the only stabilization fund in Latin America and one of the few in the world. Objectives Provide support to member countries balance of payments, granting loans or guaranteeing third party loans. Improve investing conditions of member countries international reserves. Contribute to the harmonization of member countries exchange, monetary and financial policies. 8

9 Governance structure Since its creation, FLAR has have a simple governance structure. Assembly of Representatives Composed by Ministers of Finance from each member country. It meets once a year and has a formal role. Board of Directors Composed by the Executive President and Governors of the Central Banks from each member country. It is FLAR s deciding body. FLAR s Executive President chairs it. It meets three to four times a year. 9

10 Historically approved credits USD Million External Debt Crisis Asian Crisis Ecuador s Oil Strike terms of trade shock Hyperinflation World Crisis Bolivia Colombia Costa Rica Ecuador Peru Venezuela Paraguay Uruguay 1/ There was not crisis in Costa Rica. For Central Bank s exterrnal debt restructuring. 10

11 Historically approved credits During the Latin American external debt crisis, FLAR offered important countercyclical financial support to its member countries, primarily to Peru (approximately USD 1.2 billion), Ecuador (roughly USD 0.8 billion) and Bolivia (roughly USD 0.8 billion). In the case of Peru, FLAR s financial assistance was crucial to pay off the delayed payments to Inter-American Development Bank (IADB), by USD 367 million, in July As a result, FLAR s decision was the starting point for the return of Peru to the international financial community. 11

12 Historically approved credits During the Asian crisis of the nineties, which had an impact on Latin America, FLAR s financial assistance was also important, primarily to Ecuador (approximately USD 0.5 billion) and Colombia (0.5 billion). In the period , FLAR contributed resources equivalent, on average, to 60% of the exceptional financing provided by the International Monetary Fund (IMF) to the Andean Community countries (Ocampo and Titelman, 2006). Most recently, FLAR has granted assistance during the global financial crisis and the terms of trade shock that affected our commodity exporting countries, primarily to Ecuador (roughly USD 0.6 billion) and Venezuela (approximately USD 0.5 billion). 12

13 Payment history FLAR has a zero-default, zero-refinancing history. Indeed, central banks have always paid their debts with FLAR on time, and even prepaid them. In situations where the public external debt service has been suspended by member countries governments, central banks have always fulfilled their obligations with FLAR timely. For example, Peru in the 80 s; and Ecuador in the 00 s. 13

14 2 FLAR during : The Tenure of Ana María Carrasquilla 14

15 Aspects identified during Ana María Carrasquilla s tenure as priorities to modernize FLAR (I) In 2004, a balance of FLAR s situation evidenced the institution s great potential as a regional stabilization fund to respond to the challenges, as well as the opportunities, to carry out the institutional modernization required to achieve the identified potential. 15

16 Aspects identified during Ana María Carrasquilla s tenure as priorities to modernize FLAR (II) Membership expansion and equity strength As of Dec-2003, FLAR had six members: Bolivia, Colombia, Costa Rica, Ecuador, Peru and Venezuela. By that date, the institution s subscribed capital had been increased on five occasions, paid-in with the profits of each financial year. Credit assistance capacity Different actions were needed to secure supplemental resources that would allow to expand FLAR s credit assistance capacity as a short-term lender. Usage of credit assistance and credit lines Important modifications were made in 2003 to FLAR s credit lines, regarding the reduction of terms and access limits. These modifications aimed to consolidate the institution as a short-term lender and as a financial bridge until the country reached broader agreements with the IMF. 16

17 Aspects identified during Ana María Carrasquilla s tenure as priorities to modernize FLAR (III) Corporate governance The Financial Department concentrated the functions of risk management, operations and investment management (back, middle and front office), contrary to the prevailing best practices. Investment policy and credit rating While FLAR had governance processes and mechanisms in place for its investment policy, they needed to be adjusted to best practices. Likewise, in order to ensure the institution s access to international capital markets, a credit rating was needed. Passive operations While FLAR provided deposit, asset management and custody services, the goal was to aggressively expand the pool of entities that used said services. 17

18 Aspects identified during Ana María Carrasquilla s tenure as priorities to modernize FLAR (IV) FLAR s positioning in relation to other internationally relevant economic and financial players was quite incipient. The institution did not have a strong corporate identity nor image. 18

19 Why expand FLAR? There is very limited or inexistent coverage of the GFSN for emerging and developing economies, particularly for the countries of the Latin American region. The establishment of a true regional stabilization fund, as a complementary mechanism to the regional action of the IMF, should begin by expanding and strengthening FLAR. The large countries of the region need to be incorporated, in order to transform FLAR into a truly effective regional fund. 19

20 Major achievements 2017 FLAR LATIN AMERICAN RESERVE FUND In 2008, Uruguay adhered, providing a regional character to the institution, gathering countries from CAN, MERCOSUR and Central America among its members. In 2015, Paraguay s adhesion was completed. 20

21 Major achievements in numbers between Country members increased 33.3% Paid-in capital increased 146% Subscribed capital increased 86% Financial assistance capacity increased 147% 21

22 Major achievements Subscribed and paid-in capital FLAR s equity strengthening between 2004 and 2016 was a consequence of: New member country adhesions: Uruguay and Paraguay became FLAR members. Prepayments of subscribed capital via capital contributions: In 2011, Costa Rica and Uruguay made capital contributions to prepay their subscribed capital. In 2012, the Board of Directors approved the full prepayment of the institution s subscribed capital. Subscribed capital increase: The Board of Directors and the Assembly approved the subscribed capital increase by 40%. Individual subscribed and paid-in capital increases: In 2012, the Board of Directors and the Assembly agreed that countries could make subscribed capital prepayments at any time, maintaining the obligation to capitalize profits each financial year. 22

23 Major achievements Agreement with the IMF for accounting paid-in capital in FLAR as international reserves Since 1999, paid-in capital in FLAR was not accounted as part of the countries reserves before the IMF, thus affecting membership costs. After more than a decade of dialogue, in 2015, IMF admitted a proposal from FLAR: Part of the paid-in capital in FLAR could meet the requirement regarding the immediate and unconditional availability of the capital under this proposal. It consists of the possibility for new member countries to use part of their paid-in contributions to FLAR, at any time and as a unilateral decision of the member country in accordance with a previous agreement with FLAR. This capital has been labeled Convertible Capital. Pursuant to this proposal, new member countries may account their Convertible Capital in FLAR as a reserve asset before the IMF. 23

24 Major achievements Maximum Credit Disbursment Capacity USD Billion 5,0 4,5 4,0 3,5 3,0 2,5 2,0 1,5 1,0 0,5 2,9 3,0 3,1 3,4 0,6 0,5 0,5 0,5 1,3 1,1 1,2 1,2 1,3 1,4 1,4 1,5 3,8 3,9 3,9 0,6 0,6 0,6 1,5 1,5 1,5 1,7 1,8 1,8 4,8 4,8 4,6 0,8 0,8 0,8 1,8 1,8 1,9 2,0 2,1 2,2 + = + FLAR's Ma ximum Credit Di s bursment Capacity Funds from intermediation portfolio. Funds can be used to cover the amount of a loan to a small economy country Notes can be issued for up to 65% of paid-in c apital 75% of paid-in capital can be used to meet credi t requests 0, Funds from the Intermediation Portfolio Maximum Leverage Level Máximo capital pagado disponible para atender solicitudes de crédito FLAR's Maximum Credit Disbrustment Capacity 24

25 Major achievements Credit line modifications Modifications of credit lines were made in 2004 and 2014, to reinforce the institution s capacity to cover the shorter term needs of member countries. Work was carried out on the following main issues: The contingency credit line was modified, to make it more speedy and useful for the member countries. The prepayment fee was waived whenever the purpose for the full and early payment of an outstanding loan was to enable the central bank to submit a new balance of payments credit application, for the maximum access amount permitted. 25

26 Major achievements Financial assistance increased 146% During the period of rising commodity prices and low financing costs, most of FLAR s member countries did not need to turn to the institution seeking financial assistance. However, since 2016, Ecuador and Venezuela have benefitted from the credit assistance capacity and the favorable interest rates offered by FLAR to its member countries. 26

27 Major achievements Strategic positioning FLAR priority over the past decade has been pursuing FLAR s regional and international recognition as a sound, technical, independent, speedy and flexible regional financial institution, capable of adjusting to the changing needs of its member countries and the regional financial architecture. In this context, to improve FLAR s positioning, efforts were focused on the following key aspects of its development: Strengthening alliances with internationally relevant economic and financial players. Promoting technical assistance exchanges. Updating corporate image and values. 27

28 Major achievements Promoting technical assistance exchanges Economic Studies Conference: It has been called one of the benchmark events for regional policy makers. Financial Department Seminar. Risk Department Seminar. Seminar for Attorneys of Latin American Central Banks and Multilateral Entities. Workshop on International Financial Reporting Standards (IFRS). Since 2006, we have provided different courses and trainings for staff members of the region s central banks and other official institutions of the following countries: Argentina, Aruba, Bolivia, Colombia, Costa Rica, Ecuador, El Salvador, Guatemala, Honduras, Mexico, Nicaragua, Paraguay, Peru, Dominican Republic, Uruguay and Venezuela. 28

29 Major achievements Updating corporate image and values Edition of the book entitled Building a Latin American Reserve Fund. Production of the institutional video on the 35 years of FLAR. Corporate image renewal. Website update. 29

30 Major achievements Modernization of the institution In 2004, we invited the World Bank, via its RAMP subdivision, to conduct an evaluation of FLAR, aimed at updating the institution to best international practices in regards to its investment process, transparency and, particularly, the operation of the Financial Department. There was segregation of the investment management functions. As a result, there were also additional actions taken to adhere to best practices: Creation and implementation of institutional policies. Staff training. FLAR s quality management certification. Technological modernization. Accounting methodology transition. 30

31 Major achievements Modernization of FLAR s investment and third-party assets Optimization of the investment of its own assets. FLAR as depositary and external fund manager. The growth of the deposits held by FLAR during the past twelve years is exceptional, featuring a growth rate of 891% in the volume of the deposits since January 1 st, 2004 to date, and increasing its client base by 329%. Today, we are authorized counterparts of 14 central banks, 8 sovereign institutions, and 1 multilateral. FLAR is considered as a safe haven for our clients. 31

32 Major achievements Credit Rating FLAR has the highest credit rating among any country or multilateral lending institution in Latin America. FLAR has a AA and Aa2 rating by Standard and Poor s and Moody s, respectively. These ratings were granted, and are ratified year after year, taking into account, among others: FLAR s role as a countercyclical lender, which contributes to strengthen its relationship with its borrowing members. The strong support of its members; Its de-facto preferential creditor status; and Its strong capital and liquidity profile, even in extreme scenarios like the 2008 global financial crisis; 32

33 3 Lessons learned and future challenges 33

34 Lessons learned and future challenges An expanded FLAR Develop a strategic plan to attract the large countries of the region. Execute the strategic incorporation of medium and small-sized economy countries, with sound macroeconomic foundations and low correlations with the current member countries. 34

35 Lessons learned and future challenges Equity increases Reach a consensus within the Board of Directors in relation to FLAR s optimal size, incorporation types for new member countries -large and small-, and governance structure of an expanded FLAR. Determine specific forms of cooperation and coordination with the IMF and the other RFAs. Consolidate FLAR as a provider of temporary financial assistance (short and medium term) for its member countries in times of crises, until they ensure a more ambitious program with the IMF. Optimize the current credit lines and increase credit assistance amounts, by diversifying sources: IMF, swaps between member central banks, Federal Reserve, China, Etc. 35

36 Lessons learned and future challenges Strategic positioning Consolidate the positioning accomplishments. Continue strengthening its relevance in the GFSN. Continue positioning FLAR as an indispensable player -as a regional stabilization fund- in Latin America and globally, by an ongoing and persistent tightening of bonds with the main players in those spheres. Strengthen technical ties on macroeconomic topics with central banks, finance ministries, supranational financial institutions, IMF, RFAs, academics, think tanks and other relevant players. 36

37 Lessons learned and future challenges Modernization of the institution Consolidate and secure FLAR s current human capital, to protect the institution s technical and political independence and excellence. Continue implementing all policies aimed at strengthening the institutional framework and consolidating FLAR as a best practice reference in the fields of sovereign investments and in the management of operational, legal, accounting and financial risks. 37

38 Final Remark Finally, we would like to emphasize that for FLAR Small is NOT beautiful 38

39 Thank you 39

40 Avenida 82 Nº Piso 7 P.O. Box: Bogotá D.C., Colombia Teléfonos: Fax: