DEVELOPMENTS IN LOCAL CURRENCY BANKING SYSTEM AS A RESULT OF THE IMPLEMENTATION

OF THE ITF, THE widening gap FINDINGS AND EXCHANGE OF BOLIVIA

MONTERO NUÑEZ DEL PRADO MARCELO
La Paz, October 12, 2006
DEVELOPMENTS IN LOCAL CURRENCY BANKING SYSTEM AS A RESULT OF THE IMPLEMENTATION
OF THE ITF, THE widening gap FINDINGS AND EXCHANGE OF BOLIVIA. An issue always i
n vogue among the public, government and international agencies is the high degr
ee of dollarization of the economy, weaknesses that introduces the monetary poli
cy management and vulnerability created in the financial system. The authorities
in turn implemented various measures that directly or indirectly had a major im
pact on this situation, we intend to measure them through the impact on deposits
, portfolio and operations in local currency checks as well as monetary issue, a
s explained below . In the 26 months running from the implementation of the ITF
in July 2004, which, for purposes of this analysis, concede that she set as a ta
rget for bolivianización of the economy and not simply fundraising effort led to
its implementation by the government of that time, the Central Bank of Bolivia,
from the second year of operation of such tax, start a clear incentive to use p
olicy of the national currency through the exchange widening gap that begins in
July 2005, with a widening gap between the purchase price and the sale of 4 cent
s per U.S. dollar, ending with a gap of ten cents in March 2006, stock assessmen
ts of the Bolivian reinforced since July 2005 to date, which led to an appreciat
ion of 13 cents. This article attempts to answer some questions such as "Measure
s to bolivianizar the economy have had any meaningful results? What instruments
have played a central role in the process? "Assuming that the ITF was used as an
instrument of incentive to use the national currency, was effective and what si
de effects created? Does the behavior reported to date continue in the future?.
It attempts to answer the first, third and fourth questions through an analysis
of the figures between the two extremes of the period mentioned, in what we call
global impact and the second in what I call analysis by periods of application
of the instruments. The overall impact of this set of provisions on the variable
s chosen for analysis, throughout the period of 26 months can be summarized as f
ollows:
EVOLUTION OPERATIONS JUNE 04 - SEPTEMBER 06 In Millions of $ us
MN DATE Jun-04 Part.% Sep-06 Part. VarAbs% Chg% 10% 243 701 23% 288% 458 90% DEP
OSIT ME 2.155 2.317 162 77% 108% 100% 3.018 2.398 TOTAL 100% 126% 620 69 3 MN %
383 14% 558% 314 ME PORTFOLIO 2.345 2.396 97% 86% 98% -50% TOTAL 2.464 100 2.728
100% 111% 39% 264 MN 298 323 58% 108% 25 CAMARA ME 235 459 61% 42% 51% - TOTAL
224 757 100% 558 100% 74% 199 218% 457 845
ISSUE *
388 Amount
* Issue for August 2006 Source: BCB SBEF-Figures from 2005 include Banco Los And
es includes UFV's MN = ME = Includes MNMV
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•
Deposits in national currency banking system spent the equivalent of U.S. $ 243
million in June 2004 to U.S. $ 701 million, an increase of 188% equivalent to U.
S. $ 458 million. Foreign currency deposits, on the other hand, continue to grow
at a slower pace than 8%, thus determining the importance of local currency dep
osits in total pass 10% to 23%. • The national currency portfolio of the bank, h
aving captured the national currency resources, also recorded a significant incr
ease of U.S. $ 314 million, equivalent to a growth of 455%, rising from U.S. $ 6
9 million in June 2004 to $ us 383 million in September 2006. The foreign curren
cy bank during this period experienced a contraction of 2%. The behavior of the
portfolio determined that the local currency bank pass a share on the total port
folio in June 2004 from 3% to 14% in September 2006. • financial disintermediati
on, as measured by the operations of Cheques Clearing House during the first yea
r amounted to 36% due to lower trading volumes in U.S. $ 272 million, of which U
.S. $ 82 million corresponded to a disintermediation national currency. During t
he remainder of the period, there is a gradual and modest recovery of operations
, reducing the disintermediation to 26%, mainly due to further deterioration of
foreign exchange transactions reaching a 15% growth compared to transactions in
national currency reached 52%.ۥ The monetary issue, it could not be otherwise,
with increased use of the national currency, is increasing the equivalent of U.S
. $ 457 million, ie 118%, from U.S. $ 388 million in June 2004 U.S. $ 845 millio
n in September 2006, growth similar to that recorded by deposits in local curren
cy in the banking system. The behavior of the analyzed variables allows some con
clusions that are detailed below, within the limits considered exclusively respo
nsible for introducing this process only the measures taken by the Government, t
he Central Bank of Bolivia and the ongoing action of the Bank through interest r
ates more attractive and profitable for deposits in national currency for foreig
n currency. • The ITF, the enlargements of the exchange rate gap and the appreci
ation of Bolivia, has led to a growing process bolivianización the operations of
the financial system and hence the economy. Progress has been made, but much re
mains to be done and this depends largely on the margins of stability and econom
ic growth, social stability and legal certainty, without which they always prior
itize safety over the return on savings. Given that the conditions which determi
ned the behavior described, they remain in greater magnitude, because the exchan
ge rate gap is 10 cents, the ITF only applies to foreign currency and would not
be surprising some additional findings Boliviano, as a result of the behavior fo
reign trade and virtually no demand for dollars in the Bolsín, you can expect th
is process to continue more rapidly. As a result of growth in local currency ope
rations, foreign exchange risk in the banking system has declined, reducing thei
r vulnerability, yet she remains at the low significance of the process yet. The
ITF despite being an adjunct to bolivianización element of the economy had a pe
rnicious effect on the degree of financial intermediation, since despite some
•
• •
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•
•
recovery in financial intermediation, at the time of House operations and the us
e of the financial system are at levels below those registered before the enactm
ent of the measure. Continued bolivianización process with a consequent increase
of the monetary issue involved, not only will continue to provide more effectiv
e monetary policy, but will give the Central Bank of Bolivia increasing responsi
bilities in controlling inflation and, hence the economic stability. Undoubtedly
the combination of these measures are removing a habit acquired in the country
as a result of dollarization and hyperinflation experienced in the past, they di
d prioritize the security rather than profitability and that meant that income i
n Bolivianos, the dollar deposit and withdraw partial sums in Bolivia to meet ho
usehold expenses as the cost of this exchange was minimal gymnastics.
To try to answer the question concerning the greater or lesser effectiveness of
the tools used to encourage the use of the national currency, saving the fact th
at the measures can not be judged independently in their effects because they re
inforce each other and heighten the effects, analysis of the figures are done in
 three periods, the first year of the ITF in which there is no other measure, th
e second between June and March 2006, characterized by enlargement of the gap fo
ur and five assessments exchange currency national and, finally, the third betwe
en April and September 2006, characterized by only two findings of the national
currency.
EVOLUTION OPERATIONS JUNE 04 - SEPTEMBER 06 In Millions of $ us
MEASURE DATE MN DEPOSITS Jun-July 4 Jun-05 ITF implementation Jul-05 Aug-05 Sep-
5 October to 5 February-06 Mar-06 Apr-06 Aug-06
Findings of the Bolivian 3-point-wide the gap is 4 points (8.05-8.09) Bolivian A
preciaciión the two points, the gap widens to 6 points (8.03-8.09) Bolivian Find
ings of a point (8.02-8.08) Findings the Bolivian two points - by widening the g
ap to 8 points (8.00-8.08) Bolivian Findings of a point (7.99-8.07) Findings of
the Bolivian-2 points the gap widens to 10 points (7.97-8.07) Findings of Bolivi
an 1 point (7.96-8.06) Bolivian Findings of a point (7.95-8.05)
PORTFOLIO ME MN 69 144 2.396 2.412
CAMARA ME MN 298 213 459 272
Amount 388 501 ISSUE
2.328 2.155 ME
243 348
376 406 425 484 522 545 558 680 701
2.346 2.414 2.416 2.443 2.348 2.344 2.337 2.280 2.317
149 154 179 190 234 235 245 359 383
2.419 2.412 2.401 2.405 2.346 2.356 2.377 2.348 2.345
217 259 246 235 203 253 222 311 323
223 267 256 251 192 273 244 221 235
517 544 571 596 709 690 728 845 845
Sep-06 *
Figures from 2005 include Banco Los Andes Includes UFV's MN = ME = Includes MNMV
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DEVELOPMENTS IN OPERATIONS MN
900 800 700 600 500 400 300 200 100 0
Jun-4 June to 5 July-05 Aug-05 Sep-5 October to 5 February-06 Mar-06 Apr-06 Aug-
06 Sep-06
Deposits MN
Portfolio MN
NM House Operations
Monetary Issue
* Issue for August 2006 Source: SBEF-BCB
•
First year of the ITF (July 2004 - June 2005). or public deposits in national cu
rrency increased by 43%, reaching U.S. $ 348 million representing 13% of total d
eposits, compared with 10% representing June 2004. o The national currency portf
olio increased by 110% to U.S. $ 144 million, or 6% of the total portfolio, comp
ared to 3% in June 2004 depicting. or direct financial disintermediation as the
amount of operations in Check Clearing for both currencies, shows a reduction of
such operations was 36%, falling from U.S. $ U.S. $ 757 million to 485 million,
corresponding to 28% ($ U.S. 85 million) in local currency and 41% (U.S. $ 187
million) in foreign currency. Consistent with this behavior or the money supply
grows by 29% from U.S. $ 388 million to U.S. $ 501 million. Second period of enl
argement of the breach by 10 cents and appreciation of the Boliviano at 11 cents
(July 2005 - March 2006). During this period the exchange rate goes from 8.08 B
s buying and selling Bs 8.10 Bs 7.97 Bs 8.05 buying and selling the U.S. dollar.
or public deposits in national currency in each of the extensions of the breach
, reinforced by findings from Bolivia, are increased by 81% from the equivalent
of U.S. $ 438 million to U.S. $ 545 million. In the same period foreign currency
deposits only grow at USD 16 million, translating this into the national curren
cy deposits go to represent 19% of total deposits, compared to 13% which represe
nted the end of first year ITF. o The national currency portfolio increases by t
he equivalent of U.S. $ 91 million, reaching U.S. $ 235 million, while the portf
olio in foreign currency decreases in U.S. $ 56 million. This behavior determine
s the portfolio in domestic currency pass for a share of the total portfolio of
6% recorded at the end of the first year of the ITF to 9%.
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In this period the financial disintermediation is reversed slightly surpassing H
ouse operations to those recorded at the end of the first year of the ITF at USD
42 million, mainly due to growth in local currency operations by 19% and the ma
intenance of standards of foreign exchange transactions. Despite this slight rec
overy of the Clearing House operations were 30% below those registered before th
e enactment of the ITF. Unsurprisingly or monetary issue continues to grow and d
o these nine months at USD 189 million. or • In the third selected period (April
-September 2006), characterized by only two findings of Bolivia in April and Aug
ust, the exchange rate stands at 7.95 Bs 8.05 Bs buying and selling the U.S. dol
lar. o The national currency deposits increased by the equivalent of U.S. $ 156
million, representing an increase of 29%, while foreign currency deposits grow a
t USD 129 million, equivalent to 4%. The behavior described determines that depo
sits in domestic currency deposits in this period to move from a share of the to
tal deposits from 19% to 23%. o The bank national currency increased by U.S. $ 1
48 million, ie 63% growth compared to growth of the portfolio in foreign currenc
y of U.S. $ 137 million, equivalent to 5%. This situation determines that began
corresponding national currency represents 14% of the total portfolio, compared
with 9% which represented the beginning of this period. o In this period there i
s a revival of financial intermediation, measured by the increase in House opera
tions in national currency in U.S. $ 70 million, while foreign currency transact
ions fall at USD 38 million, remaining operations Chamber is 26% below what they
were before the implementation of the ITF.
The three periods analyzed, with the limitation of assuming that just bolivianiz
ación due to stimuli given through the ITF, the widening gap and exchange rate a
ppreciation of Bolivian€can be concluded: • • • • • In the economic bolivianizac
ión played a greater role expanding the exchange gap and the appreciation of the
ITF Boliviano. The appreciation of the Boliviano, keeping the gap change repres
ented a greater impact on the ITF bolivianización. The greatest impetus to the u
se of the national currency occurred when combined gap measures and the apprecia
tion of exchange Boliviano. Undoubtedly the various measures under consideration
 were an effect of empowerment over time, increasing the impact generated by the
successive enlargements of the gap and exchange rate appreciation of the Bolivi
ano. The fact that the new grave ITF only foreign currency operations, which int
roduces a bias against the use of foreign currency is expected to strengthen bol
ivianización trend that has been registered.
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While the analysis, it is far from complete, but allows for an assessment of the
impact of measures taken by the government in more than two years since the imp
lementation of the ITF, making it possible to quantify their impact and the degr
ee of utility of the instruments used. Marcelo Montero Nuñez del Prado La Paz, O
ctober 12, 2006
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