Berg, A., E. Borensztein, G. Milesi-Ferreti, and C. Patillo, 1999, “Anticipating Balance of Payment Crisis: The Role of Early Warning Systems”, Occasional Paper No.186, International Monetary Fund, Washington D.C.
Brassière, M. and C. Mulder, 1999, “External Vulnerability in Emerging Market Economics: How High Liquidity Can Offset Weak Fundamentals and the Effects of Contagion”, IMF Working Paper, WP/99/88, International Monetary Fund, Washington D.C.
De Beaufort Wijnholds, J. and A. Kapteyn, 2001, “Reserve Adequacy in Emerging Market Economies”, IMF Working Paper, WP/01/143, International Monetary Fund, Washington D.C.
Edison, H., 2003, “Are Foreign Exchange Reserves in Asia too High?”, World Economic Outlook, forthcoming, International Monetary Fund, Washington D.C. (October).
Edwards, S., 1985, “On the Interest-Rate Elasticity of the Demand for International Reserves: Some Evidence from Developing Countries”, Journal of International Money and Finance, 4, 287-95.
Faal, E. and N. Thacker, 2003, “Dollarization in Latin America: Is Mexico Different?”, Mimeograph, International Monetary Fund, Washington D.C.
Greenspan, A., 1999, “Currency Reserves and Debt”, remarks before the World Bank, Conference on Trends in Reserves Management, Washington D.C.
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Tweedie, A., 2002, “The Demand for International Reserves—A Review of the Literature”, Note 2 in External Review of Quota Formulas—Annex, International Monetary Fund, Washington D.C.
Prepared by M. Vera-Martin.
First implemented in May, the authorities started with daily auctions of US$32 million for the 3-month period from May to July. The Bank of Mexico (BOM) would sell US$14 million per day during the second 3-month period the system is operational, i.e. between August and October. Initial estimates suggested that total sales in 2003 would be US$3–4 billion.
IMF (2001) recommends complementing the analysis of reserve adequacy indicators with stress testing of the balance of payments to allow for a better understanding of the interaction between reserve adequacy, vulnerability, and country-specific factors and policies. An analysis of external sustainability for Mexico with stress testing of the balance of payments was prepared during the 2002 Article IV Consultation (see Country Report No. 02/238, IMF (2002)).
The figures on reserves refer to the series “Total Reserves minus Gold”, which includes the U.S. dollar value of monetary authorities’ holdings of SDRs, reserve position in the Fund, and foreign exchange. This definition is different from the concept of “Net International Reserves”, due to the fact that the latter excludes short-term liabilities with the Federal Government, Pemex, and other creditors, and includes liabilities with the IMF.
The analysis considers 20 large emerging market economies that have generally enjoyed more or less uninterrupted access to international capital markets. The sample accounts for all emerging market regions (Asia, Eastern Europe, and Latin America). Data for the cross-country analysis is described in Table 1.
See, for example, Brassière and Mulder (1999), Rodrik and Velasco (2000), and Berg, Bozenstein, Milesi-Ferretti, and Patillo (1999).
Guidotti was apparently the first to propose such a rule at a seminar of the Group of 33 in Bonn in the spring of 1999. Greenspan (1999) also put forward such a rule, complemented by two enhancements—that average maturity of external debt should be above a certain threshold, and that countries implement a liquidity-at-risk standard.
These data on short-term external debt on a remaining maturity basis are collected from creditor sources, and may differ from the data reported in individual IMF staff reports, which are usually obtained from the authorities.
These results are in line with those reported in Edison (2003), which show that Mexico accounts for the bulk of reserve accumulation in Latin America since 1997, and has actual reserves above those warranted by fundamentals.
As the analysis here is no longer cross-country comparative, data on short-term debt on a remaining maturity basis are from the Bank of Mexico and Fund staff projections, in line with the figures reported on Table 2 of the Staff Report for the 2003 Article IV Consultation.
The authors suggest to adjust by a fraction of between 10 and 20 percent of M2 for managed float and fixed exchange rate regimes, and between 5 and 10 percent for floaters. This interval is consistent with the declining trend of the standard deviation of the reserves-to-broad money ratio, which ranges between 8 percent to 6 percent depending on the period considered.
The Economist’s country risk index was also considered, yielding similar conclusions. Benchmark intervals are reported on the basis of the CRI, as it implied a more conservative level of reserve adequacy.