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Mr. Adolfo Barajas, Sergio Restrepo, Mr. Roberto Steiner, Juan Camilo Medellin, and Cesar Pabon
After building up foreign currency denominated (FC) liabilities over several years, Colombian firms might be vulnerable to a shift in external conditions. We undertake three empirical exercises to better understand these vulnerabilities. First, we identify the determinants of FC borrowing. Second, we investigate the implications for real activity, finding a balance sheet effect that transmits exchange rate fluctuations to investment and is asymmetric, much stronger for depreciations than for appreciations. Finally, we find that foreign exchange derivatives are not used solely for hedging, due in part to monetary authority intervention to smooth exchange rate volatility. However, a full explanation remains open for future research.
Ms. Maria Gonzalez
We examine corporate sector vulnerabilities in Brazil, Chile, Colombia, Mexico and Peru. First, we identify stylized facts based on corporate financial indicators. Second, we assess vulnerability of individual firms to a sudden stop in financing through a probit model, using a panel of 18 countries in 2000-11. Results suggest that higher leverage and maturity exposures raise a firm’s probability to become exposed to a funding shock, while a larger firm size and buffers reduce it. Further, greater exchange rate flexibility can help mitigate corporate vulnerability. Identification of firms at risk through the model suggests that some vulnerabilities may be building in Latin America led by leverage, currency exposures and moderating buffers. These effects are partially offset, however, by a significant reduction in maturity exposures.
Mr. Tigran Poghosyan
We analyze factors driving persistently higher financial intermediation costs in low-income countries (LICs) relative to emerging market (EMs) country comparators. Using the net interest margin as a proxy for financial intermediation costs at the bank level, we find that within LICs a substantial part of the variation in interest margins can be explained by bank-specific factors: margins tend to increase with higher riskiness of credit portfolio, lower bank capitalization, and smaller bank size. Overall, we find that concentrated market structures and lack of competition in LICs banking systems and institutional weaknesses constitute the key impediments preventing financial intermediation costs from declining. Our results provide strong evidence that policies aimed at fostering banking competition and strengthening institutional frameworks can reduce intermediation costs in LICs.
Herman Kamil
Using a unique dataset with information on the currency composition of firms' assets and liabilities in six Latin-American countries, I investigate how the choice of exchange rate regime affects firms' foreign currency borrowing decisions and the associated currency mismatches in their balance sheets. I find that after countries switch from pegged to floating exchange rate regimes, firms reduce their levels of foreign currency exposures, in two ways. First, they reduce the share of debt contracted in foreign currency. Second, firms match more systematically their foreign currency liabilities with assets denominated in foreign currency and export revenues--effectively reducing their vulnerability to exchange rate shocks. More broadly, the study provides novel evidence on the impact of exchange rate regimes on the level of un-hedged foreign currency debt in the corporate sector and thus on aggregate financial stability.
Mr. G. Terrier, Mr. Rodrigo O. Valdes, Mr. Camilo E Tovar Mora, Mr. Jorge A Chan-Lau, Carlos Fernandez Valdovinos, Ms. Mercedes Garcia-Escribano, Mr. Carlos I. Medeiros, Man-Keung Tang, Miss Mercedes Vera Martin, and W. Christopher Walker
This paper reviews policy tools that have been used and/or are available for policy makers in the region to lean against the wind and review relevant country experiences using them. The instruments examined include: (i) capital requirements, dynamic provisioning, and leverage ratios; (ii) liquidity requirements; (iii) debt-to-income ratios; (iv) loan-to-value ratios; (v) reserve requirements on bank liabilities (deposits and nondeposits); (vi) instruments to manage and limit systemic foreign exchange risk; and, finally, (vii) reserve requirements or taxes on capital inflows. Although the instruments analyzed are mainly microprudential in nature, appropriately calibrated over the financial cycle they may serve for macroprudential purposes.
International Monetary Fund
With the creation of the Flexible Credit Line (FCL) and Precautionary Credit Line (PCL), the Fund’s GRA toolkit was overhauled to address gaps in the Fund’s crisis prevention and resolution toolkit. The innovative and flexible nature of the new instruments was meant to reduce stigma from using Fund resources, underpinning confidence in its users amid stressed market conditions. Yet, there have been a limited number of members with these Using a variety of methodological tools, this review assesses experience with the instruments, arrangements. Using a variety of methodological tools, this review assesses experience with the instruments, reflects on the appropriateness of their design, and recommends refinements to enhance their effectiveness.
International Monetary Fund
In recent years, Colombia has found several innovative ways to improve the efficiency of its public enterprise sector. One option used by Colombia to reform public enterprises has been to enhance their commercial orientation and limit the fiscal risk. If a public enterprise is considered commercially run, it could be removed from the country’s fiscal indicators and targets. This paper presents the IMF staff’s evaluation of these two enterprises. It also discusses the commercial orientation and fiscal risk of Isagen and Ecopetrol, respectively.
International Monetary Fund


This accompanying document to the Guidelines for Foreign Exchange Reserve Management, which the IMF published in 2004, presents case studies prepared by reserve management entities in 20 countries. These sample case studies illustrate how a range of countries from around the world, at different stages of economic and financial development and institutional structure, have developed their capacity in reserve management in the areas covered by the Guidelines. The various strategies adopted by the countries, which are based on the country-specific policy environment, offer useful insights and suggestions to countries seeking to strengthen their policy frameworks for reserve management.

Mr. Ousmene J Mandeng
This paper aims to identify appropriate option contract specifications for effective central bank exchange market intervention. Option contract specifications determine the impact of options on the underlying asset or currency, and hence their actual effect on asset price or currency volatility and are therefore key to determining the effectiveness of option-based intervention. The paper reviews the experience of the systematic option-based foreign exchange market intervention of the Central Bank of Colombia and finds that its contract has only been moderately successful at abating exchange rate volatility, which is attributed here to sub-optimal contract specifications.
International Monetary Fund


The financial turmoil of the late 1990s prompted a broad search for tools and techniques for detecting and preventing financial crises, and more recent episodes of instability have high lighted the importance of continuous monitoring of financial systems as a tool for preventing crises. This paper looks at the development of measures of financial sector soundness and of methods to analyze them. The authors propose two sets of financial soundness indicators that are considered useful for periodic monitoring, and for compilation and dissemination efforts by national authorities. They highlight the substantial advance made in recent years in measuring and analyzing financial soundness indicators, and specify areas where more work is needed.