International Reserves Accumulation
in Emerging Countries with Flexible Exchange Rates
Patricia Rodríguez and Omar Ruiz

For emerging countries, one result of the international crisis has been the capturing of global excess liquidity, given the differentiation of real interest rates between such countries and developed nations: “in developing countries, due to the weakness in their balances of payments, real investment decisions are not only taken with an eye on the projects’ profitability and the interest rate in their local currency, but in comparison to the anticipated performances of assets denominated in foreign currency” (Mantey, 2010: 175). This is reflected in the constant increase in monetary reserves to maintain high economic expectations with price stability. Therefore, in 1990, developed countries held international reserves that were the equivalent of 3% of their GDP, whereas in 2009 this ratio was just 6%; on the other hand, the reserves of developing or emerging countries represented 8% of their GDP in 1990, but in 2009 this ratio was 36% of their GDP, in IR, Figure 3.

Figure 3. International reserves as a percentage of GDP by groups of countries
Source: Compiled by authors using data from UNCTADstat (2010).

Currently the policy of IR accumulation being implemented by the central banks of emerging Latin American countries is clearly as a precautionary measure; in other words, their central aim is to protect themselves from banking and financial crises similar to those of the 1990s which triggered a collapse in the exchange-rate fixing, contributing to a change in the monetary paradigm that led to these countries using floating exchange rates determined by market forces,4 within the framework of a monetary policy of inflation targeting. This type of inflationary control, even when a floating exchange rate is repeatedly announced, actually involves the monetary authorities’ active intervention, and therefore it must be accepted that the exchange rate is subordinate to the policy of price stability and a type of actively controlled or managed floating exchange rate specified . See Figure 4.

Figure 4. International reserves and exchange rate for Argentina, Brazil, Chile and Mexico. 1995-2009
($US billion and local currency per dollar)
Source: Compiled by authors using data from each country's central banks

4 Switching to a flexible exchange rate is theoretically a protection against external shocks, defining real interest rates, as well as the mechanisms for managing external capital. But Latin American economies in turn joined in global trade, therefore the growth of complete economic sectors competes with international prices, hence their currency reserves become another means of managing inflation control expectancies.