Today’s Information is Ammunition for Tomorrow
IMF Blog, January 21, 2011
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Bibliographic details
- Authors: Luis M Cubeddu, Camilo E Tovar
- Published: January 21, 2011
Central message
- Effective macroeconomic policy management and implementation is essential.
- High-quality, timely information is a critical ingredient for monitoring the accumulation of risks and potential overheating.
- Three underdeveloped statistical/information areas in Latin America are highlighted as priorities: credit conditions surveys, housing price indicators, and detailed data on companies’ financing structures.
1. Credit conditions surveys — findings and rationale
- Purpose: Assess whether lending changes are driven by demand (credit appetite of customers) or supply (decisions by banks), and to forecast changes in the economic cycle.
- Key questions these surveys address:
- How restrictive or lax are loan approval standards?
- What factors explain changes in bank behavior?
- What is the role of the economic environment or changes in customer portfolio risk?
- Current state in Latin America:
- Very few emerging economies produce such surveys.
- In Latin America, only Chile and Colombia prepare credit conditions surveys on a regular basis.
2. Better housing price indicators — findings and rationale
- Rationale: Excess demand and credit can produce highly overvalued house prices during booms; reversals can materially affect household wealth and bank capital.
- Regional concern: Recent expansion in mortgage loans and potential house price increases in some Latin American countries warrant closer analysis.
- Current state in Latin America:
- The absence of systematic housing price series for the majority of countries hampers risk monitoring and timely decision-making.
- Only four countries in Latin America produce data on housing prices.
- Many existing series are of short duration, with varying coverage and sometimes varying methodology.
- Guidance: Methodological and operational challenges (for example, those addressed in the European Commission’s price index manual) should not deter efforts to develop comprehensive and unified housing price measurements.
3. More details on the financial structure of companies — findings and rationale
- Information gaps: Need for more detailed data on corporate financing structure, particularly:
- Foreign currency and maturity mismatches.
- Exposures to complex financial instruments such as derivative contracts.
- Vulnerabilities described:
- Companies tend to increase debt when external financial conditions are favorable; this can exacerbate currency mismatches (foreign-currency-denominated debt with local-currency income) and maturity mismatches (predominantly short-term debt).
- Such mismatches were a key vulnerability during the Asian crisis of the late 1990s.
- Regional progress and shortcomings:
- Progress in compiling and disseminating balance sheet data, especially for the largest companies.
- Relatively little information on debt structure (currency and maturity) and financial exposure, including derivative instruments.
- Shortcomings were exposed in Brazil and Mexico in 2008, when severe losses occurred from operations in the foreign exchange derivative market.
- Examples of policy measures and reporting requirements:
- Brazil (starting in 2009): all financial institutions are required to report their exposures to derivative contracts (see the Central Bank of Brazil’s Financial Stability Report).
- Mexico (starting in 2009): all companies that issue securities, capital, or long-term debt are required to document the market, credit, and liquidity risks related to financial derivative contracts and to assess their importance for the company’s financial position (see the Bank of Mexico’s Financial System Report and amendments to the Stock Exchange Law).
Policy implications and recommended priorities
- Strengthen and expand the use of credit conditions surveys to:
- Distinguish supply-driven from demand-driven changes in lending.
- Improve forecasting of economic-cycle changes.
- Develop systematic, comparable housing price indicators across the region to:
- Monitor real estate sector excesses and potential vulnerabilities in household and bank balance sheets.
- Mandate and improve corporate reporting on:
- Currency and maturity composition of debt.
- Exposures to derivative instruments, market risk, credit risk, and liquidity risk.
- Use recent measures in Brazil and Mexico as starting models for broader regional adoption to improve transparency and risk assessment between the corporate and financial sectors.
Source: Today’s Information is Ammunition for Tomorrow — Luis M. Cubeddu and Camilo E. Tovar, January 21, 2011
Content in this bundle
- Perspectivas Económicas: Las Américas, Aprovechando el viento a favor, Mayo de 2010
- Perspectivas económicas: Las Américas - Caluroso en el Sur, Más Frío en el Norte, Octubre 2010
