Central America’s Central Bank Swerve

With the Dominican Republic just reissuing a global bond before the President eyes re-election and Costa Rica’s new team debating fiscal and monetary policy changes the IMF in a research paper expressed reservations about regional central bank finances “negative in cash flow terms” as they try to support inflation and economic stability goals. Further balance sheet reinforcement is needed under benign conditions and shocks could pose operating and solvency risks in view of the historical record, the analysis comments. The five countries including Guatemala, Honduras and Nicaragua regularly intervened in commercial banks in past decades causing losses and since have moved to exchange rate-dependent inflation-targeting. Legal reforms conferred autonomy through the early 2000s but now are “stalled” in relation to appointments and terms and other standard practices adopted long ago by bigger Latin American economies, despite upgrades in oversight, lender of last-resort and payment functions. Recapitalization instruments typically carry below-market interest rates at maturities up to 50 years far beyond normal yield curves. Where legislation mandates budget transfers, implementation has been spotty with proceeds diverted for “more pressing” purposes, according to the document. Income positions have improved in recent years but no central bank is in the black, and foreign assets are up on reduced external debt especially after Nicaragua’s official cancellation. Securities outstanding are 7 percent of GDP and 80 percent are in local currency. Public sector claims are down the last decade to 10 percent of output, but aggravate negative capital value if international accounting norms were applied. Unremunerated reserve requirements help offset this weakness but reinforce financial system distortions. Over the longer-term lower inflation at home and higher returns on foreign reserves would contribute to health, but natural disasters and other setbacks could foster a “prolonged period” of inadequate resources, the Fund concludes. It finds across-the-board lags in qualitative and quantitative measures versus smaller hemispheric peers like Colombia and Peru, but omits reference to the Eastern Caribbean common central bank experience as a possible alternative. Latin America’s broader group has able technocrats in charge who have taken aggressive steps outside the wishes of nominal political masters, as in Colombia’s April interest rate hike amid national elections. They are also net creditors without need for sovereign borrowing abroad from private or bilateral-multilateral sources, with Panama the only isthmus example tied to the Federal Reserve with dollar use.

A Caribbean comparison could be more apt among the larger islands where predicaments could be relatively worse with near-defaults in Jamaica and Barbados. The former has won praise for finally sticking with its IMF program after a voluntary local bond restructuring to meet fiscal benchmarks, as growth turned positive reflected in MSCI stock market gains. With debt-GDP at 95 percent, Barbados’ government shed thousands of employees in a last-ditch move to avoid its own Fund resort, as dollar-denominated paper outperformed the EMBI through April in a bittersweet punch.