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She is also the chair of the Latin American Shadow Financial Regulatory Committee (CLAAF). From March 1998 to October 2000, she served as managing director and chief economist for Latin America at Deutsche Bank. Before joining Deutsche Bank, Rojas-Suarez was the principal advisor in the Office of Chief Economist at the Inter-American Development Bank. Between 1984-1994 she held various positions at the International Monetary Fund, most recently as deputy chief of the Capital Markets and Financial Studies Division of the Research Department. She has been a visiting fellow at the Institute for International Economics, a visiting advisor at the Bank for International Settlements and has also served as a professor at Anahuac University in Mexico and advisor for PEMEX, Mexico’s National Petroleum Company. Rojas-Suarez has also testified before a Joint Committee of the US Senate on the issue of dollarization in Latin America.
She has published widely in the areas of macroeconomic policy, international economics and financial markets in a large number of academic and other journals including Journal of International Economics, Journal of International Money and Finance, Journal of Development Economics, Journal of Contemporary Economic Policy, International Monetary Fund Staff Papers. She has also published or being cited in prestigious newspapers such as the Financial Times, the Wall Street Journal and the Washington Post. She is also regularly interviewed by CNN en Español.
Michael P. Dooley & Donald J. Mathieson & Liliana Rojas-Suarez, 1997. "Capital Mobility and Exchange Market Intervention in Developing Countries" NBER Working Papers 6247, National Bureau of Economic Research, Inc.
Rojas-Suarez, L & Weisbrod, S-R, 1997. "Financial Markets and the Behavior of Private Savings in Latin America" Working Papers 340, Inter-American Development Bank, Research Department.
McNelis, P.D. & Rojas-Suarez, L., 1996. "Exchange rate depreciation, Dollarization and Uncertainty: A Comparison of Bolivia and Peru" Working Papers 325, Inter-American Development Bank, Research Department.
Rojas-Suarez, L. & Weisbrod, S.R., 1996. "Banking crises in Latin America: Experience and Issues" Working Papers 321, Inter-American Development Bank, Research Department.
Rojas-Suarez, L. & Weisbrod, S.R., 1996. "Building Stability in Latin American Financial Markets" Working Papers 320, Inter-American Development Bank, Research Department.
Rojas-Suarez, L. & Weisbrod, S.R., 1996. "Managing Banking Crises in Latin America: The Di's and Don'ts of Successful Bank Restructuring Programs" Working Papers 319, Inter-American Development Bank, Research Department.
Rojas-Suarez, L. & Weisbrod, S., 1994. "Achieving Stability in Latin American Financial Markets in the Presence of Volatile Capital Flows" Working Papers 304, Inter-American Development Bank, Research Department.
Economic recovery in Latin America and the Caribbean (LAC) is gaining momentum, but more work is needed to ensure growth is both sustainable and inclusive. Looking ahead, activity is expected to gather further momentum—reflecting stronger demand at home and a supportive external environment. But there are still challenges ahead. Risks to the region’s outlook reflect internal factors as well as heightened external risks—notably, a shift towards more protectionist policies and a sudden tightening of global financial conditions. Additionally, longer-term growth prospects for Latin America and the Caribbean remain subdued.
Most countries in Latin America are currently reporting fiscal deficits and many have increased their external debt ratios. This has refocused attention on whether the region’s resilience to external shocks has deteriorated, and it has raised questions about Latin America’s ability to reignite growth and support development efforts.
Since the early 2000s, Latin America has become increasingly integrated with the global economy, liberalizing trade and opening its capital account. These initiatives were prompted by the assumption that advanced economies would not impose barriers to the cross-border movement of goods and services. But today, a rising wave of protectionism not seen since the Great Depression challenges this assumption.
With this new reality as the backdrop, the Latin American Committee on Macroeconomic and Financial Issues (CLAAF) will be meeting in Washington, DC to discuss how to tackle these emerging global economic challenges. Members of this committee include former finance ministers, former central bank governors, and other high-level economic officials and academics from across Latin America.
Often overshadowed by the regional powerhouses that border it, Paraguay’s recent sovereign bond issuance of $530 million was five times oversubscribed, revealing that the landlocked country of 7.5 million people warrants more attention. With presidential and legislative elections approaching next month, the incoming government will surely hope to continue building upon the country’s recent economic growth, averaging 4.8 percent over the last decade. This growth has helped the country make massive poverty reductions in one of the lowest income per capita countries in Latin America—in 2016, Paraguay’s poverty rate was 26 percent, down from 57.7 percent in 2002.
This success has been largely thanks to sound macroeconomic management that has helped the country weather both political and economic uncertainty in two of Paraguay’s major trade partners, Brazil and Argentina. However, as protectionist forces gain strength in the United States, interest rate hikes by the Fed are certain, and renewed market volatility raises concerns, structural shortcomings threaten to diminish the country’s capacity to withstand external shocks. The persistent vulnerability to such shocks demands attention be paid to how structural variables undermine Paraguay’s resilience and reduce the effectiveness of its macroeconomic strengths.
Indicator of economic resilience to external shocks
The importance of structural variables is revealed in my latest CGD working paper, which constructs an indicator of economic resilience consisting of two dimensions: (i) the economy’s capacity to withstand the impact of the shock, and (ii) the authorities’ capacity to rapidly implement policies to counteract the effects of the shock on economic and financial stability. Each dimension consists of both macro and structural variables. While macro variables can fluctuate rapidly in the short run, structural variables take more time to change. Inadequate performance of the latter can limit the effectiveness of the former, downgrading resilience against shocks.
The figures below illustrate the dimensions of resilience with macro variables in black and structural variables marked in red.
Figure 1. First dimension of resilience: the capacity to withstand the impact of the shock
In the event of an external shock, non-domestic sources of finance can become scarce and costly. Thus, the first dimension of Paraguay’s resilience depends on the strength of its external position and the availability of domestic sources of finance. The former is a testament to the country’s prudent macroeconomic management. In 2017, Paraguay boasted a current account surplus (as a percentage of GDP) and a total debt ratio of only 25 percent of GDP. Strong performances in these macro variables supported demand for Paraguay’s recent bond issuance, reflecting their importance as a safeguard against external shocks.
At the same time, Paraguay’s structural variables moderate such strengths and undermine its capacity to withstand shocks. First, trade shocks represent an important risk to Paraguay where soy and derivatives, cereal and beef account for about 75 percent of exports. In the event of a sharp decline in prices for these products, the lack of export diversity can expose Paraguay’s external position to current account balance deterioration and a weaker fiscal stance. Second, the national savings rate and indicator of financial depth are woefully low. Paraguay’s savings ratio is less than 20 percent. This helps explain Paraguay’s low level of financial depth that is hampered by a stubbornly low pension funds ratio. Together, these deficiencies signal a lack of domestic sources of finance needed to counteract a sudden scarcity and/or higher costs of external sources of finance.
Figure 2. Second dimension of resilience: the capacity of authorities to rapidly implement policies to counter the effects of the external shock
With respect to the second dimension of economic resilience, the story is quite similar. Efforts to improve the country’s macroeconomic stance since 2003 have paid off and will continue to do so if a new adverse external shock hits the economy. During the global financial crisis, the authorities had the fiscal and monetary space to implement countercyclical policies, minimizing the overall effect of the shock. An analysis of Paraguay’s macro variables presented in my paper reveals that their relative strength has persisted, and in some cases, such as the behavior of inflation under an inflation targeting scheme, has even improved.
Again, the strength of these macro variables needs to be qualified by Paraguay’s structural deficiencies! Tax collection in the country is one of the lowest in Latin America. Despite a low fiscal deficit and debt, weak tax revenues can potentially undermine Paraguay’s ability to fund existing investment projects in the event of a shock that reduces or reverses external sources of funding. Additionally, Paraguay’s rate of financial dollarization, measured as financial institutions’ holding of assets and liabilities denominated in foreign currency, is nearly at 50 percent. The latter is contained because a significant part of borrowings in dollars corresponds to the agribusiness industry, whose revenues are denominated in dollars and, therefore, have a natural hedge. Notwithstanding, a high degree of dollarization remains a risk to financial sector stability and a constraint on the efficacy of the central bank to respond countercyclically to an adverse external shock.
Ranking Paraguay: the significance of structural variables in Paraguay’s performance relative to other emerging markets
To evaluate Paraguay’s economic resilience and highlight the importance of structural variables, I put together two valuable exercises. First, similar to the exercise in my 2015 paper and using a similar methodology, I consider the macro variables discussed in this blog post to create a macroeconomic resilience indicator that is defined as the simple average of the seven variables in consideration. The two graphs below compare how this ranking has changed in the last decade, presenting the indicator’s values in 2007, pre-global financial crisis, and 2017. Countries are organized according to the value of the indicator. The larger the value, the greater the country’s macroeconomic resilience relative to the countries in the sample.
Figure 3. How the macroeconomic resilience indicator value affects country ranking, 2007 and 2017
Paraguay only moves from second to fourth place in the ranking between 2007 and 2017, confirming the macroeconomic strengths discussed in this blog post. Yet, a second exercise that accounts for all variables considered in this blog post (macro and structural) paints a different picture.
Here we employ an indicator of economic resilience to external shocks that accounts for all the variables considered in this blog post (macro and structural).[i]
Figure 4. How the economic resilience to external shocks indicator value affects ranking, 2007 and 2017 (all variables, macro and structural)
In this exercise, the effect of structural variables is clear. Paraguay’s position is not only lower than in the first exercise, but its position deteriorates considerably from position 11 to 19 out of the 22-country sample.[ii]
In Paraguay, the winners of next month’s elections will face the challenge of building upon Paraguay’s pragmatic macroeconomic management by bolstering its economic resilience through structural reforms. Considering that a more uncertain external environment looks increasingly likely, it truly is an opportunity that Paraguay can’t afford to waste.
[i] Four sub-indicators are considered represented in the two dimensions of resilience (external position, availability of external financing, fiscal position and monetary position). Each sub-category is formed by the corresponding variables discussed previously. These sub-categories are obtained by calculating the simple average of the standardized values of the variables that they’re comprised of. Finally, the indicator of economic resilience to external shocks is the simple average of the four sub-indicators.
[ii] This exercise considers tax revenue—an index without this variable is presented in the working paper where Paraguay falls from position 9 to 12 in the ranking.
A rise in protectionism and increased external uncertainty may compound already existing domestic weaknesses. Latin America cannot run the risk of being unprepared for the significant potential direct and indirect effects of such a menace to its exports, capital inflows and growth.
As recently as 2011, only 42 percent of adult Kenyans had a financial account of any kind; by 2014, according to the Global Findex, database that number had risen to 75 percent. In sub-Saharan Africa, the share of adults with financial accounts rose by nearly half over the same period. Many other developing countries have also recorded gains in access to basic financial services. Much of this progress is being facilitated by the digital revolution of recent decades, which has led to the emergence of new financial services and new delivery channels.
A slowdown in China’s growth is a serious concern for Latin America, especially for those countries that have benefited from a record-setting boom in commodity prices since 2003. Much of the slowdown is due to structural reforms in China, partly prompted by the tepid and uncertain recovery of its large trade partners, namely, the US and EU.
Lurking in the background, however, is growing concern about possible macroeconomic instability due to China’s domestic credit boom, which has been accompanied by the emergence of unregulated and fast growing “shadow banks.” A disruption of the banking system cannot be ruled out and could result in a major growth contraction in China.
How big is this risk? And what are the implications for Latin America? What are the advantages of China’s financial expansion in the region, and how can policymakers make the most of these, while minimizing the risks?
The upcoming meeting of the Latin America Shadow Financial Regulatory Committee, CLAAF, will explore these questions by addressing the following topics:
• Should Latin American policymakers be delighted or concerned about the increasing presence of Chinese banks in the region?
• What are the financial channels of contagion from China to Latin America? If there is a Chinese credit crunch, will the US—Latin America’s other major market—become entangled?
• Are there lessons for China from Latin America regarding the sequencing of financial liberalization and the resolution of financial troubles?
What will you remember about 2017? The growing crisis of displacement? The US pulling out of the Paris agreement and reinstating the global gag rule on family planning? Or that other countries reaffirmed their commitment to the Paris agreement, that Canada launched a feminist international assistance policy, that Saudi Arabia finally let women drive?
CGD experts have offered analysis and ideas all year, but now it's time to look forward.
What's going to happen in the world of development in 2018? Will we finally understand how to deal equitably with refugees and migrants? Or how technological progress can work for developing countries? Or what the impact of year two of the Trump Administration will be?
Today’s podcast, our final episode of 2017, raises these questions and many more as a multitude of CGD scholars share their insights and hopes for the year ahead. You can preview their responses in the video below.
Thanks for listening. Join us again next year for more episodes of the CGD Podcast.
This paper constructs an index of regulatory quality for improving financial inclusion for the purpose of assessing and comparing the quality of rules and regulations in a sample of eight Latin American countries.
This paper addresses four misconceptions (or ‘myths’) that have likely played a role in the limited utilization of the IMF’s two precautionary credit lines, the Flexible Credit Line (FCL) and the Precautionary and Liquidity Line (PLL). These myths are 1) too stringent qualification criteria that limit country eligibility; 2) insufficient IMF resources; 3) high costs of precautionary borrowing; and 4) the economic stigma associated with IMF assistance. We show, in fact, that the pool of eligible member states is likely to be seven to eight times larger than the number of current users; that with the 2016 quota reform IMF resources are more than adequate to support a larger precautionary portfolio; that the two IMF credit lines are among the least costly and most advantageous instruments for liquidity support countries have; and that there is no evidence of negative market developments for countries now participating in the precautionary lines.
In spite of recent progress in the usage of alternative financial services by adult populations, Latin America’s financial inclusion gaps have not reduced, relatively to comparable countries, and, in some cases, have even increased during the period 2011-2014. Institutional weaknesses play the most salient role through direct and indirect effects. Lack of enforcement of the rule of law directly reduces depositors’ incentives to entrust their funds to formal financial institutions. Indirectly, low institutional quality reinforces the adverse effects of insufficient bank competition on financial inclusion.
This paper investigates the shifts in Latin American banks’ funding patterns in the post-global financial crisis period. To this end, we introduce a new measure of exposure of local banking systems to international debt markets that we term: International Debt Issuances by Locally Supervised Institutions. In contrast to well-known BIS measures, our new metric includes all entities that fall under the supervisory purview of the local authority.
A number of Andean countries stand out in their successful use of macroprudential financial regulations. This paper focuses on three: countercyclical capital requirements, countercyclical loan-loss provisioning requirements, and liquidity requirements.