De las Reservas Internacionales a la estabilidad cambiaria en Bolivia

Interview on International Reserves and Currency Stability

Introduction to the Interview

• The interview features Dr. Walter Morales Carrasco, discussing international reserves and their impact on currency stability. The host expresses gratitude for Dr. Morales' time and insights.

• Dr. Morales acknowledges the importance of these discussions, highlighting the extensive evidence regarding currency crises and economic stability in international literature.

Importance of Central Bank Independence

• A key focus is on the credibility of economic policy, particularly the role of central banks in maintaining stability through independence and institutional integrity. This helps anchor expectations and manage transitions between different exchange rate regimes.

• The discussion aims to explore Bolivia's current economic situation, specifically regarding its international reserves managed by the Central Bank of Bolivia, which are currently around $3.5 billion.

Defining Balance of Payments Crisis

• Dr. Morales defines a balance of payments crisis as a significant loss of international reserves that prevents a country from maintaining its exchange rate or meeting external obligations without corrective measures like devaluation or capital controls.

• He identifies three classic indicators of such a crisis:

• Persistent decline in reserves below prudent levels (less than three months' worth of imports).

• Significant exchange rate premium between official and parallel rates (over 30% indicates external restrictions).

• Deterioration in capital flows and current account with inability to access sustainable international financing.

Current Economic Indicators for Bolivia

• Bolivia meets all three conditions indicating a balance of payments crisis: declining reserves, high exchange rate premiums, and deteriorating capital flows alongside limited access to financing options.

• The conversation shifts to optimal reserve levels relative to economic activity; benchmarks suggest at least three months’ worth of imports or coverage for short-term external debt should be maintained for stability purposes.

Evaluating Reserve Sufficiency

• Dr. Morales discusses metrics used internationally to evaluate reserve sufficiency:

• Recommended reserve levels range from three to six months' worth of imports.

• Reserves should ideally represent 15% to 20% of GDP; less than 10% is considered vulnerable.

• Guidotti-Greenspan rule suggests full coverage (100%) for short-term external debt as an indicator for financial health.

Analysis of Bolivia's International Reserves

Current State of Reserves

• The composition of Bolivia's reserves has shifted significantly, with a notable increase in gold holdings due to rising gold prices. This change impacts liquidity and the ability to cover imports without selling gold.

• While the balance sheet of the Central Bank improves with higher gold values, effective liquidity decreases as gold cannot be used immediately for external payments.

Liquidity Concerns

• A substantial portion of gross reserves may not be available for immediate interventions or public deposits, potentially reducing usable reserves by up to 40%. This raises concerns about financial stability.

• The minimum recommended level for international reserves in Bolivia is estimated between $4 billion and $5 billion (approximately 8% of GDP), which would cover at least four months of imports and short-term debt obligations. An optimal range is suggested between $6 billion and $8 billion (10-12% of GDP).

Interpretation of Reserve Composition

• The current reserve level around $3.3 billion does not ensure exchange rate stability or provide sufficient maneuverability against external shocks or capital outflows. This indicates a significant gap from safety levels.

• The nature of reserves matters; having 95% in gold complicates liquidity assessments, as it may not suffice to cover even short-term import needs despite meeting nominal reserve requirements. Understanding the structure is crucial for accurate analysis.

Portfolio Management Strategies

• Effective management requires balancing liquid assets like cash and special drawing rights (SDRs) with less liquid assets such as gold, suggesting that at least 60%-70% should be held in liquid forms for credibility and operational flexibility amidst fiscal policy challenges.

• Current figures show only $103 million in currency among total reserves, highlighting a critical liquidity issue that could hinder economic responses during crises or market interventions. Thus, maintaining an adequate mix is essential for resilience against economic fluctuations.

Recommendations for Reserve Structure

• It is advised that liquid assets constitute 60%-70% while less liquid investments like gold should make up about 25%-35%, allowing room for strategic adjustments based on market conditions every six months to ensure responsiveness and signal reliability to markets.

• Special drawing rights are considered semi-liquid assets useful primarily within multilateral frameworks like the IMF but should be managed carefully given their limited utility outside specific contexts like crisis intervention strategies seen in other countries such as Argentina.

Crisis of Low Reserves in the Country

Causes of the Crisis

• The crisis stems from both external factors and issues within government sectors, leading to a low level of reserves in the country.

• It is crucial to differentiate whether the problem is due to stock (existing reserves) or flow (net income of foreign currency).

Current Economic Situation

• Empirical evidence shows that the trade balance has deteriorated since 2014, shifting from a surplus to a deficit. Exports of hydrocarbons have dropped over 40% in the last decade.

• Foreign direct investment (FDI) has fallen below 1% of GDP, compared to previous averages between 5% and 10%. Access to external financing remains limited due to high risk perceptions.

Structural Issues and Solutions

• The primary issue is not merely about increasing reserves but addressing structural problems that affect cash flow, necessitating long-term policies aimed at restoring net foreign currency income. This includes reactivating exports and attracting FDI.

• A sustainable solution requires normalizing exchange markets and focusing on mechanisms for generating foreign currency rather than just managing scarcity.

Future Directions

• Addressing these challenges will be complex as they have developed over two decades, largely due to an oversized state model that has caused institutional distortions and credibility issues. Solutions must be deep-rooted and multifaceted.

• Economic policy should focus on parallel development strategies while stabilizing immediate concerns like exchange rates and fiscal deficits through prudent measures by future governments.

Hydrocarbons Sector Challenges

• The significant decline in hydrocarbon revenues poses critical challenges; for instance, export values plummeted from around $6,500 million before 2014 to approximately $2,200-$2,500 million recently—a loss exceeding $4 billion. Despite falling revenues, public spending remained unchanged.

• There is a pressing need for diversification away from natural resources towards more sustainable economic alternatives as part of long-term recovery strategies for this sector.

Hydrocarbon Revenue Decline and Management Challenges

Overview of Hydrocarbon Revenue Trends

• The share of hydrocarbon revenues in GDP has drastically decreased from 12.8% in 2013 to below 3% currently, indicating a significant decline in resource management and exploration effectiveness.

Issues with Exploration Management

• Poor management practices over the last two decades have led to ineffective hydrocarbon exploration efforts, failing to replenish depleting reserves. This is attributed to inadequate public sector capabilities, particularly in countries like Bolivia.

Need for Private Sector Involvement

• Emphasizing the necessity for private companies, especially multinational corporations with expertise, to take charge of hydrocarbon exploration due to the inefficacy of public sector initiatives.

Balancing Resource Management with Economic Diversification

• Countries like Norway and Chile successfully integrate natural resource management with other economic sectors; thus, a dual approach is essential for sustainable development. This complexity requires enhanced state coordination and capacity building.

Central Bank Independence and Economic Stability

Importance of Central Bank Independence

• The independence of the central bank is crucial for macroeconomic stability; it allows for effective price stability and confidence in currency without political interference. This independence is structured around four key dimensions: political, economic, financial independence, and goal-setting autonomy.

Strategies for Stabilizing Currency Exchange Rates

• To stabilize exchange rates effectively, realistic options must be evaluated that include monetary autonomy and market deepening strategies such as intervention mechanisms and real-time data regulation. A comprehensive approach involving detailed implementation plans is necessary to avoid reverting to past issues or exacerbating current problems.

Detailed Mechanisms for Exchange Rate Management

• Suggested measures include establishing volatility bands, auction mechanisms, market maker regulations, reserve management protocols, transparent recalibration rules based on inflation differentials, and gradual desindexation strategies aimed at achieving nominal targets while ensuring credibility in policy implementation.

Lessons from Other Countries' Central Banks

Case Study: Peru's Central Bank Stability

• Despite political instability in Peru, its central bank has maintained strong leadership continuity (20–25 years), resulting in a robust currency (the Peruvian sol). This highlights how institutional stability can positively influence economic outcomes even amidst broader national challenges.

Discussion on Economic Stability and International Reserves

Importance of Institutional Continuity

• The evidence suggests that continuity and stability in authority lead to favorable outcomes, particularly in the context of Bolivia and Chile.

• Legal frameworks establish coordinated appointments between executive and legislative branches, contributing to institutional stability over time.

• The presence of "veto players" within civil society helps protect institutions from threats, fostering economic stability and long-term well-being.

Analysis of International Reserves

• The discussion centers around international reserves and currency stability in Bolivia, highlighting critical indicators such as insufficient foreign exchange for imports.

• Current liquid reserves do not cover short-term debt obligations; the parallel market exchange rate exceeds the official rate by over 30%.

• Economists label this situation a balance of payments crisis, with optimal reserve levels suggested between $6 billion to $8 billion.

Recommendations for Reserve Management

• A liquidity cushion is necessary; reserves should consist of 60%-70% liquid assets, with the remainder in gold or secure investments.

• Emphasizes the need for an independent central bank to execute monetary policies effectively without government interference.

Transitioning Currency Regimes

• Transitioning from a fixed exchange rate regime to a banded system (Crawling Peg) will be challenging but essential for economic recovery.

• This transition requires significant foreign currency injections and reconfiguration of the foreign exchange market structure.

Conclusion and Future Discussions

• The program invites viewers to continue exploring these topics every Saturday at 8 PM on Canal 11 Televisión Universitaria.