Special Drawing Rights: A unique opportunity for Latin America

The IMF has approved an extraordinary allocation of Special Drawing Rights (SDR), equivalent to 650,000 million dollars, which represents a great opportunity for member countries.

On August 23, the general director of the International Monetary Fund (IMF), Kristalina Georgieva, announced the entry into force of an unprecedented measure in the history of the institution she presides over. It is an extraordinary allocation of Special Drawing Rights (for its acronym and hereinafter, SDR), which transfer an amount equivalent to 650,000 million dollars to member countries.

Given what happened, in Economipedia we ask ourselves: What has motivated this decision? What impact can it have on the economy? To answer these questions, let’s look at all of this and pay special attention to the region of the world that has always had a more contentious relationship with the IMF: Latin America.

Why has the IMF made this decision?

«In an environment in which private activity is falling and health expenses are skyrocketing, it is logical that public finances will run into deficits. »

So, let’s look first at the causes that have motivated a decision of such depth.

As we all know, the world is still suffering the consequences of the pandemic and the economy is one of the most affected areas. In this sense, the most direct impact is the unprecedented drop in economic activity, which has not yet fully recovered in many countries; but we must not forget that this factor, in turn, has led to other problems, such as the governments’ fiscal imbalance.

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In an environment in which private activity falls – and therefore the ability of governments to collect taxes is reduced – and health expenditures soar, it seems clear that the only possible result is that public finances run into deficits. Even more so if we assume, as has happened in most of the world, that the political authorities refuse to make spending cuts in other areas to balance the budget.

As we have commented in previous articles, the impact of the crisis has been very strong throughout the world, but the consequences have been very different depending on the macroeconomic picture with which each country has reached the pandemic. For the Netherlands and Germany, for example, having arrived in surplus and with low levels of public debt has allowed them a wider margin to assume a few years of deficit, even more taking advantage of the international strength of the euro.

Latin America: A region in crisis

«For many economies in the region, the outbreak of the pandemic has been the worst possible event, at the worst possible time. »

However, the situation that the Latin American economies were going through in 2019 was far from ideal: the prices of raw materials were falling, international trade was suffering the effects of mutual restrictions between the United States and China, and the rise in interest rates. Interest from the Federal Reserve (FED) threatened the price of emerging currencies.

In addition, some countries had previous problems to face the payment of foreign debt (Argentina or Ecuador) or dysfunctional exchange markets with a great shortage of foreign exchange (Cuba or Venezuela). For them, the outbreak of the pandemic has been something like the worst possible event, at the worst possible time.

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The problem has ended up spreading in one way or another throughout the American continent and the fiscal imbalance has not taken long to translate into a general depreciation of emerging currencies. According to Bloomberg data, between January and August of this year, the Colombian peso devalued by 13.61%, the Argentine peso by 13.27%, the Peruvian sol by 11.30% and the Chilean peso by 8.66% . More stability is shown by the Mexican peso (depreciated by 0.89%) and the Brazilian real (appreciated by 0.06%).

But how much money is SDR equal to?

«The objective is for economies to have a wider margin to recover, without the need for tougher fiscal adjustments or without resorting to financing under unfavorable conditions.. »

In this context, the allocation of SDRs comes like an oxygen balloon for many countries.

Above all because it is a flexible solution, which allows governments to make use of them adapted to each particular situation. In this way, countries can use the SDR to strengthen the reserves of their central banks, to have liquidity in hard currencies when they trade with the rest of the world, to stabilize their currencies in the foreign exchange market or even for development projects.

The idea of ​​the IMF is that, with this special allocation, the economies have a greater margin to recover, without the need for tougher fiscal adjustments or without resorting to financing in unfavorable conditions. For this reason, this measure has been very well received by the various governments of the region.


The upper graphs can give us an idea of ​​the impact of this measure.

As we can see, there is a direct relationship between SDR allocation and size of economies. This, to the extent that countries receive more money in absolute terms the higher their GDP. However, if we analyze that same allocation in relative terms with respect to reserves, we will see that the relationship is inverse. In other words, the idea of ​​the IMF is to help proportionally more to countries whose international position may be more vulnerable.

It is no coincidence that the two countries that benefit most in relative terms are Argentina and Ecuador. Precisely the members of the group who are currently experiencing the most difficulties in paying the debts they have contracted with the multilateral organization itself.

With respect to the other countries, it is also important to point out that the two with the most reserves (Brazil and Mexico) have been precisely the ones that have had the greatest exchange rate stability, as we have commented previously. One more proof of the importance of generating confidence in international markets, and one more reason why countries with less stable currencies could benefit from these SDRs.

A very diverse region, a different solution for each country

«The SDRs can be a lifeline for the Argentine government, since they could help guarantee the payment of the foreign debt in the coming months.«

In Mexico, the entry of some 12,178 million dollars into Banxico’s reserves can open up many possibilities for the country. One of them is to reduce the burden of long-term public debt, not by repaying debt directly with that money, but with debt operations. rollover that we explained in previous posts. In other words, if the inflow of money generates confidence in investors, the Mexican government could exchange old debt for new, taking advantage of the fact that the markets would be willing to finance the country at lower interest rates.

Nor can a similar scenario be ruled out in Brazil, whose international reserves are among the strongest in the region, since the arrival of the SDR could help cushion possible losses derived from operations of swap of foreign exchange that the Central Bank of Brazil has made in recent months. In addition, it could be a significant injection of liquidity for a government that has already expressed its willingness to maintain social subsidy programs for the duration of the pandemic.

The situation in Peru is perhaps more uncertain, especially due to the arrival of a new government that openly defends economic policies that move between Keynesianism and classical Marxism. In this scenario, a transfer of resources of this magnitude (about USD 1.8 billion) could help finance part of the expansion of public spending and contain the depreciation of the currency, at least for a time.

We can say something similar about Colombia, where the use of the SDR will largely depend on the outcome of the presidential elections in 2022. In this sense, if Colombians opt for an economic policy similar to that of Pedro Castillo in Peru, we could find that IMF resources go to a similar destination.

Uncertainty also seems to be the dominant trend in Chile, a country that hopes to elect a new president in November. In this case, the direction taken by economic policy could be affected by an additional factor, the constituent process that began in 2019 and which, in the coming months, aims to provide the country with a new Constitution.

Finally, the situation in Argentina is one of the most complex in the region, due to the debt that the Government already has with the IMF, and not only that, but also that both authorities are in the process of renegotiation of said debt.

In this sense, the SDR can be a lifesaver for the Argentine Government, since, with the Argentine Central Bank’s reserves in low hours, debt maturities in the coming months and a useless currency to face those commitments, the possibility of accessing At about $ 4.3 billion of immediate liquidity it can guarantee solvency for a few months.

Let us remember that the immediate objective of the executive, made up of politicians after all, is none other than to reach the legislative elections in November and, at the same time, achieve a new agreement with the IMF that does not involve measures that are too unpopular. Therefore, for this, it is essential to avoid default (default) in the short term.

SDRs: A Solution to Regional Problems?

«The risk, perhaps, is not in an inflationary effect that would be very small, but in sending the message to the world that the liquidity problems of governments can be solved by creating money. »

However, there are also critical voices with the IMF’s decision.

On the one hand, the detractors of the extraordinary allocation of SDR point out that such an injection of liquidity can suppose a strong support to political projects such as that of Argentina, Peru or Venezuela. In addition, these same warn that a false appearance of sustainability could be given to economic policies that, analyzed, would be destined to fail.

On the other hand, it is also argued that if many countries, at the same time, decide to convert a large volume of SDRs into liquidity, central banks could be forced to create money to enforce these rights. All this, with the risk that we already know in relation to the stability of the currencies, and especially, to inflation.

The problem with this argument is that it does not take into account the magnitudes, since if the aggregate M1 in dollars was about 19,402 trillion in July, the SDR allocation is 650,000 million. This means that, even if all countries demand the conversion of their rights into dollars at the same time and there is no other recourse than to go to the Fed, the money supply would hardly increase by 0.036%. An impact, as we can see, very small on the dollar, but which, in return, can benefit many governments in the world.

The risk, therefore, may not be in the inflationary impact that this measure may have, but in the message that is being sent to the markets. As we have seen, it is difficult that this SDR allocation could devalue the dollar, but it could help to consolidate the idea that the liquidity problems of governments can be solved by creating money. In some ways, this is a message that supports the expansionary monetary policies of many central banks, which are being carried out on a larger scale and which do have a direct impact on prices, as we have seen in many empirical studies on inflation as a phenomenon. monetary.

In any case, it is clear that for the Latin American economies, the SDRs arrive like a real oxygen balloon, although we must not forget that it is an extraordinary decision and that it will hardly be repeated in the short term. Now it falls to each government the decision, and the responsibility, to decide how to use that “gift” from the IMF. A tough test of responsibility in a region whose political class has stood out, so many times in history, for not being up to the task.

Will it be this time? We will see.

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