FOREIGN RESERVE ACCUMULATION - PowerPoint PPT Presentation

Loading...

PPT – FOREIGN RESERVE ACCUMULATION PowerPoint presentation | free to view - id: 1deb57-ZDc1Z



Loading


The Adobe Flash plugin is needed to view this content

Get the plugin now

View by Category
About This Presentation
Title:

FOREIGN RESERVE ACCUMULATION

Description:

Banco de M xico sterilizes completely the monetary effect of its foreign exchange operations. ... International Reserves and Foreign Exchange Rate ... – PowerPoint PPT presentation

Number of Views:41
Avg rating:3.0/5.0
Slides: 24
Provided by: othnmmore
Category:

less

Write a Comment
User Comments (0)
Transcript and Presenter's Notes

Title: FOREIGN RESERVE ACCUMULATION


1
FOREIGN RESERVE ACCUMULATION
THE MEXICAN EXPERIENCE
Manuel Ramos Francia
October 20, 2006
2
The Mexican Experience
  • As a result of the currency crisis on December
    1994, Banco de México was forced to abandon the
    predetermined exchange rate regime and float the
    peso, thus changing the nominal anchor of the
    economy.
  • Banco de México withdrew from actively
    intervening in the foreign exchange market and
    gradually converged towards an inflation
    targeting regime.
  • Fixed exchange rate
  • Monetary policy subordinated to the exchange rate
    regime
  • Flexible Exchange Rate
  • Inflation Targeting

3
The Mexican Experience
  • The free floating regime has simplified monetary
    policy management, since the exchange rate can
    adjust more rapidly to domestic and external
    shocks.

Overnight Interest Rate and Exchange
Rate (Percent and Pesos per Dollar)
Source Banco de México.
4
The Mexican Experience
  • Banco de Méxicos operations in the foreign
    exchange market are divided in two categories
  • Operations with the Federal Government and PEMEX.
  • Operations for international reserve management.
  • Federal Government external debt service
  • PEMEX export revenues
  • and external debt proceeds

FEDERAL GOVERNMENT AND PEMEX
FX OPERATIONS OF BANCO DE MÉXICO
FOREIGN EXCHANGE MARKET
  • Rule Based Operations
  • (1996-2001, 2003 onward)
  • Discretional Interventions
  • (last intervention in Sep. 1998)

5
The Mexican Experience
  • Operations with the Federal Government and PEMEX.
  • Both are required to undertake all their foreign
    currency operations with the Central Bank.
  • Although these operations are not carried out in
    the foreign exchange market, they are settled at
    market prices.
  • Banco de México sterilizes completely the
    monetary effect of its foreign exchange
    operations.

Flows of Net Foreign Assets Decomposition by
Source (1996-2006)1/
1/ Million dollars. Include net income
generated by investing Banco de Méxicos
international assets. As of September, 2006.
6
The Mexican Experience
  • Operations for international reserve management.
  • Since the 1994-1995 crisis, several mechanisms
    have been adopted for the management of
    international reserves
  • Initial Stage (1995-1998) Low level of
    international reserves and highly volatile
    foreign exchange market. Restore orderly market
    conditions.
  • Intermediate Stage (1996-2001) Increase the
    level of international reserves and provide
    liquidity to the foreign exchange market in face
    of shocks (high volatility episodes).
  • Current Stage (2001 to date) Promote a cleaner
    float and prevent excess accumulation of foreign
    reserves.

7
The Mexican Experience
  • The mechanisms adopted allowed for a fast buildup
    of international reserves and promoted orderly
    conditions in the foreign exchange market in face
    of different shocks. This contributed to the
    development of a deep foreign exchange market.

International Reserves and Foreign Exchange Rate
As defined in the Banco de Mexico Law of
1994. 1 Initial Stage. 2 Intermediate Stage. 3
Current Stage.
8
The Mexican Experience
  • Rule Based Operations
  • Between August 1996 and July 2001, the Foreign
    Exchange Commission (FEC) developed well defined
    mechanisms for the accumulation of international
    reserves and to limit the volatility of the
    exchange rate.
  • Monthly auction of options to sell dollars to
    Banco de México (August 1996 to June 2001).
  • Daily dollar auction to financial intermediaries
    (February 1997 to July 2001).
  • Once the FEC concluded that the benefits from
    continuing the accumulation of international
    reserves were less significant, a mechanism to
    reduce Banco de Méxicos rate of accumulation was
    put in place (since May, 2003).
  • Discretional Interventions
  • Banco de Mexicos last intervention in the
    foreign exchange market took place on September
    10th, 1998 for 278 million dollars.

9
The Mexican Experience
Net International Reserves (Billion Dollars)
Red lines represent dates when Moodys improved
Mexicos credit ratings. Source Banco de México.
10
The Mexican Experience
International Reserve Accumulation through
Automatic Mechanisms (Billion Dollars)
Source Banco de México.
11
The Mexican Experience
Daily Dollar Auctions (Million Dollars)
Exchange Market Volume (Million Dollars Monthly
Average)
Includes operations in the spot, swap and
forward markets. Source Banco de México.
Source Banco de México.
12
The Mexican Experience
  • Sterilization of International Reserves.
  • International reserves have grown more than the
    monetary base.

Reserve Accumulation and Monetary Base
Growth (Cumulative Flows, Billion Dollars)
Monetary Base (Percent of GDP)
Source Banco de México.
Source Banco de México.
13
The Mexican Experience
Monetary Regulation Bonds (BREMS) and Compulsory
Deposits (Amounts Outstanding Billions of
Mexican Pesos)
Since August 17th, Banco de México uses BONDES
D for monetary purposes instead of
BREMS. Source Banco de México.
14
The Mexican Experience
Sources and Uses of Financial Resources (Effective
Flows as Percent of GDP)
1/ Refers to non-sectorized assets, capital and
results accounts, technical reserves accounts,
capital reserves, physical assets of financial
intermediaries, preemptive reserves, investment
in stocks, commercial banks external resources,
financing to non-residents, INFONAVIT liabilities
other than those submitted by workers, financial
intermediaries liabilities other than bank
credits, net position of trusts (fideicomisos)
with the banking sector, the difference between
development banking domestic financing to the
private sector and to financial intermediation,
and non-monetary liabilities of IPAB, among
others. 2/ Corresponds to dollar sales according
to the mechanism for reducing the rate of foreign
reserve accumulation (see Foreign Exchange
Commission press release of March 20,
2003). Source Banco de México.
15
The Mexican Experience
  • Benefits and costs of holding reserves in Mexico.
  • Benefits
  • The economy is insured against sudden stops the
    exposure to external shocks is much lower.
  • The countrys credit worthiness improves the
    country has Investment Grade since March 2000 and
    has already developed a market for long-term
    instruments in domestic currency.
  • Costs
  • Carry cost of reserves.

At the margin, increasing reserves holdings is
progressively yielding lower net benefits.
16
The Mexican Experience
  • Optimal Reserves in Mexico Methodology of
    Ben-Bassat and Gottlieb.
  • The Central Bank chooses the level of reserves to
    minimize expected costs of holding them

17
The Mexican Experience
  • FOC
  • Logistic function for ?
  • Specification for f

18
The Mexican Experience
Optimal Reserves to Actual Reserves
Ratio (Different Levels for Cost of Crises as
Percentage of GDP)
The opportunity cost of reserves (r) was
assumed at 5.
19
The Mexican Experience
  • Challenges Ahead
  • Capitalization and adequate management of the
    oil-stabilization fund.
  • Reduce the cost of holding reserves.
  • Increase asset returns.
  • Riskier assets market risk (higher duration) vs.
    credit risk (alternative asset types).
  • Improve risk management capabilities internal
    vs. outsourcing.
  • Limit the growth of reserves.

20
The Mexican Experience
Local Interest Rates and Selected Yields (Percent)
Cost of Holding Reserves
The average duration of the AAA-rated U.S.
Treasuries and Agencies Portfolio is 2 years. The
average duration of the A-rated Corporate
Portfolio is 5.7 years.
Source Banco de México.
21
The Mexican Experience
  • The Government will prepay more than 12.4 billion
    dollars of foreign exchange denominated debt
    (IADB and World Bank mostly). To finance this
    transaction, the Government purchased 12.4
    billion dollars from the Central Banks reserves
    with funds obtained from the issuance of domestic
    debt.

22
The Mexican Experience Final Remarks
  • The criteria to measure the optimal level of
    reserves has changed over time, reflecting both
    the changes in the global economy and the
    particular features of each country. Capital
    account considerations and external vulnerability
    issues seem more relevant in light of recent
    international experience.
  • After the financial crisis of 1994-95, Mexico
    started to build up international reserves in
    order to improve investor confidence, strengthen
    the access to external capital markets, and
    reduce the countrys external vulnerability.
  • During the last years, the increase in
    international reserves is explained by the higher
    oil revenues.

23
The Mexican Experience Final Remarks
  • Several factors explain the reduced need for
    accumulating international reserves in Mexico.
    Macroeconomic stability, the development of
    domestic financial markets, and the substitution
    of external debt for domestic debt have made the
    economy less vulnerable to financial shocks. The
    floating exchange rate regime implies that there
    is no need to hold reserves to manage the
    exchange rate.
  • The net benefits of continuing to accumulate
    international reserves at a rapid pace are
    considered to be limited. In order to reduce the
    cost of holding large international reserves,
    Mexico decided to reduce their growth rate.
About PowerShow.com