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ON THE LEFT: Mixed bag for foreign reserves

Economic CommissIon for Latin America and the Caribbean

ON THE LEFT: Mixed bag for foreign reserves

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Should the state of Barbados’ foreign currency reserves be cause for concern?

International reserves in Latin America and the Caribbean contracted in 2015 due to the deterioration of the region’s trade balance since the second half of 2014 (especially among commodity-exporting economies) and currency interventions by central banks seeking to counteract the effects of exchange rate volatility. Consequently, at year-end 2015 international reserves in Latin America and the Caribbean had fallen by five per cent compared with the previous year, reaching their lowest level since 2011.

In total, reserves declined in 19 of the region’s countries in 2015, and were depleted by more than ten per cent in 12 countries. The largest declines were in Suriname (-47.2 per cent), Ecuador (-36.8 per cent), Bolivarian Republic of Venezuela (-25.8 per cent), Argentina (-18.7 per cent) and Haiti (-16 per cent). The group of five countries with the highest levels of international reserves (Brazil, Chile, Colombia, Mexico and Peru), saw their external assets decrease by four per cent in 2015, with Mexico’s reserves significantly down by 9.2 per cent.

Thirteen economies were able to increase their reserves in 2015, with five countries (Antigua and Barbuda, Dominica, Grenada, Jamaica and Saint Lucia) posting gains of more than ten per cent. This accumulation was possible thanks to falling energy costs and consolidation programmes implemented in conjunction with multilateral institutions.

In the first five months of 2016, international reserves in Latin America and the Caribbean picked up by one per cent compared with year-end 2015, albeit remaining below 2014 levels. Reserves decreased in ten economies during this period, declining by more than ten per cent in Venezuela, Ecuador, Bolivia, Suriname and Uruguay. Conversely, 16 economies managed to consolidate their international reserves in early 2016, with six countries (Argentina, Bahamas, El Salvador, Guatemala, Panama and Paraguay) posting increases of more than ten per cent.

Notwithstanding the trend described above, the ratio of international reserves to GDP has increased in 2015 and 2016 to date, reflecting the aforementioned recovery of reserves on the one hand, and the effects of the region’s slower growth on the other. In the wake of the 2009 financial crisis, the region’s economic authorities applied a raft of amendments to their regulatory frameworks with a view to ensuring macro financial stability.

The region has continued its progress in this direction during 2015 and the first five months of 2016. Steps have been taken to reduce exchange rate volatility and bolster the international reserves position, notably the currency swaps between China and countries such as Argentina, Chile and Suriname; the renewal of the International Monetary Fund’s flexible credit line for Colombia and Mexico, and the securing of resources from multilateral agencies by Honduras and Jamaica. Argentina, the Bahamas and Venezuela have implemented regulatory changes in the process of allocating foreign currency.

Several countries maintained their efforts to de-dollarise their payment systems, as in Bolivia, Costa Rica, Haiti and Peru. Trinidad and Tobago tightened its restrictions on illegal currency transactions. Jamaica and Paraguay accorded their central banks a higher degree of autonomy, together with responsibility for safeguarding financial stability, with Jamaica also relaxing its restrictions on currency transactions by pension funds and insurance companies.

Some countries have also undertaken initiatives to prevent credit-risk situations from acquiring a systemic dimension, notably the regulatory amendments concerning financial services provision in the Bahamas, Barbados, Costa Rica, El Salvador, Guyana and Jamaica.