Unleashing excess foreign exchange reserves to boost growth in Latin America
In 2021, Latin American countries could be holding « excess » FX reserves of around 8.8% of GDP, with an opportunity cost to economic activity as high as 0.7% of GDP. We define excess FX reserves as covering more than 100% of a country’s external financing needs. In the past, reserves were used as a hedge against volatility and speculative attacks, and have been Latin America’s way of shielding itself from the drawbacks of financial liberalization. As a result, the region as a whole has become less vulnerable to the types of financial crises it lived through from the 1970s to the 1990s (with the exception of Venezuela, Argentina and Ecuador).
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