Transcript

WESTERN HEMISPHERE DEPARTMENT PRESS BRIEFING

October 13, 2023

PARTICIPANTS:

RANDA ELNAGAR

Senior Communications Officer

International Monetary Fund

RODRIGO VALDES

Director of Western Hemisphere Department

International Monetary Fund

NIGEL CHALK 

Deputy Director, Western Hemisphere Department

International Monetary Fund

LUIS CUBEDDU

Deputy Director, Western Hemisphere Department

International Monetary Fund

ELNAGAR: Good afternoon everyone, and welcome to you in the room and to our viewers around the world.  This is the Press Briefing on the Western Hemisphere Regional Economic Outlook.  I am Randa Elnagar of the IMF's Communications Department.  Sitting with me here is Rodrigo Valdes, Director of the Western Hemisphere Department.  Nigel Chalk, Deputy Director of the Western Hemisphere Department, and Luis Cubeddu, Deputy Director of the Western Hemisphere Department.  Rodrigo will start with some opening remarks and then we will turn to your questions.  Rodrigo, the floor is yours.  Thank you.

MR.  VALDES:  Thank you, Randa.  So, let me give you overview of the region and then we take questions.  Most Latin American countries and the Caribbean have successfully weathered recent shocks, very large shocks of the world economy.  They rebounded strongly from the Pandemic and showed continued resilience in 2023 at the beginning of this year.  But reality is that growth is slowing from 4.1 percent in 2022 to 2.3 percent this year and also in 2024.  This reflects the effect of tighter policies to contain inflation, and they are having a more visible effect and also an external environment that has been weakening this year.  Less supportive external conditions reflect lower trading partners growth, tight external financing conditions, and lower commodity prices.  I would add to this list the fact that long term growth in the region has been low for a long time and continues to be low.  So, the possibility of growing fast is also restricted by that. 

Together with the expected slowdown in activity inflation in the region and here I will exclude the cases of Argentina and Venezuela, is projected to decline from 7.8 percent in 2022 percent to 5 percent this year and to go to 3.6 percent next year.  Importantly, most inflation targeting economies in the region are expected to see inflation converge to their target ranges by late 2024.  This has been helped by an early and swift and commendable monetary policy tightening since 2021, a timely withdrawal of the Pandemic fiscal stimulus, and receding external price pressures.  All of this has helped to put inflation on a downward trajectory. 

Downside risks to the near-term growth have receded somewhat, although the balance of risks remain tilted to the downside.  Key external downside risks include lower growth of key trading partners, tighter for longer monetary policy in advanced economies, among others.  At the regional level, key downside risks include increased in social tensions and also climate related shocks.  El Nino is coming, and El Nino has effects on the region. 

But we also see potential for stronger than forecast growth from the possibility of a more benign global environment, a faster than anticipated decline in inflation in the region, which would allow a faster monetary policy easing and also a significant growth potential in green minerals and energy sectors in the region. 

How should countries calibrate their policies in this context?  Most central banks in the region are well placed to gradually ease monetary policy as price pressures continue to recede.  Prudent easing will require a fine balance between two risks here.  One is to be able to place inflation on a durable downward path, while the second risk is to have overly tight monetary policy over a longer run than needed and that will produce a longer than required period of low growth.  Key for achieving for evaluating this balance is a proper assessment of the impact of the past tightening of monetary policy on inflation.  You know that monetary policy operates with lags.  That means that what was decided in the last few months will be affecting the next few months and that this makes this not that easy.  And of course, there is considerably heterogeneity in terms of disinflation in the region and therefore the size of and how fast should you ease also depends on these conditions.  There are different cyclical positions.  The size of initial tightening are all considerations for the appropriate policy pass.

Despite the fact that in general, we saw in the region a very timely withdrawal of the Pandemic fiscal support; unfortunately, public debt in most countries of the region remains too high.  And on average is projected to remain high in the next few years above their peers.  In this context, fiscal policy should focus on rebuilding the policy space that was used in the past and boost resilience against future shocks and of course, always protecting the spending needs for social policies.  This will require these fiscal efforts will require significant discipline going forward.  Even complying with the rules and announcements requires quite a bit of efforts.  Putting public finances on a stronger footing and at the same time, attending social spending will also require additional growth friendly revenue mobilization in the region.  We have in many, many countries, not all relatively low intakes of taxes, and that has to be improved. 

Despite the regional resilience into recent shocks, medium term growth remains low, and as I mentioned at the beginning, this is an important restriction to have better outcomes.  Other emerging markets and developing economies are projected to grow about four and a half percent per year on average.  In the next several years, Latin America and the Caribbean is expected to expand only about two and a half percent, similar to basically the pre-Pandemic average that we had.  With this growth, very low growth, per capita income in the region will virtually have no convergence with the income levels of richer economies like the U.S.  This highlights the urgency of implementing reforms to boost potential growth, and this of course includes addressing long standing structural changes in the region, lackluster productivity, low investment, informality. 

In this regard, let me mention a special chapter that we have in our Regional Economic Outlook that looks at fostering international trade in the region both with the rest of the world but also within the region.  This has an enormous potential for higher income, and basically the chapter shows that we trade much less than we could than other emerging markets and that infrastructure needs an upgrade and customs logistics needs to be improved to take advantage of this possibility. 

Finally, let me emphasize that despite welcome progress that we have had in the region, over aspects like poverty and inequality both remain too high in the region.  In this context, enhancing social cohesion should be a centerpiece of any policy plan going forward.  This will require, among other things, tackling insecurity and strengthening social protection mechanisms.  And this brings me to the second chapter in our Regional Economic Outlook, that is more analytical, that is entitled Income Volatility and Social Insurance in Latin America.  This chapter stresses the importance of strengthening the social protection mechanism and to make it more attuned to the needs of people.  Let me stop here and take your questions.

MS.  ELNAGAR:  Thank you, Rodrigo.  We're going to start by taking some questions in the room, then we're going to turn to Webex on online.  So, let me start by here in the room.  Please before you make sure you raise your hand, identify your organization and your name.  The lady in the middle, please. Mike.

BECERRA: Hello, I'm Laura Becerra from Cambio Magazine from Colombia.  Latin America faces a lot of challenges in terms of growth.  Which strategies do you think policymakers can implement to boost productivity in the region?  Thank you.

VALDES: Thank you.  Laura, as I mentioned, this is perhaps one of the biggest challenges that we have in the region and boosting productivity, to put it in a more closer to people notion is to grow faster, is to have better incomes on time.  And this has a list of very old reforms that we have not been able to tackle properly and fully in the region and new things that are appearing. 

The old list is long, but let me just mention that first, a precondition is to have macroeconomic stability.  Countries with macroeconomic instability barely have time to discuss other things.  So, first, macro in order.  Clearly, we need better education and better health systems in the region.  There's need of a better alignment between skills of workers and what companies need.  So, how we retool our labor force is not great.  We need better access to financing.  And again, the list can be long, but let me give you three specifics that are in this Regional Economic Outlook. 

One is the one in trade.  Trade, I already mentioned, is an immense opportunity, especially within the region.  Second, the energy transition that we have to go through is another big opportunity.  We need better investment frameworks to really take advantage of this.  But the amount of green metals or mining that is around and other aspects on this is something very important.  And a final point that we're stressing in this report is the role of security and crime.  Everywhere, this is this problem, but in the region, this is even more pressing. 

And we're not experts on security and crime; of course, IMF cannot do everything, but we can show the criticality of this for the macroeconomy, and the report mentions this and shows some studies in terms of basically showing that growth is lower, investment is lower because of this problem.  Thank you.

ELNAGAR: Thank you.  I'll take the lady in the second row.

QUESTIONER:  Thank you for having me.  Aline Bronzat from Agencia Estado.  IMF improved Brazil's outlook, but the Foreign Scenario evolves challenges and now we have another war in the Middle East.  How this scenario might impact Brazil in terms of growth and monetary policy, what are your recommendations?  And my second question is about fiscal.  IMF projections are better too, but do not indicate that the government will be able to achieve zero fiscal primary.  Considering that in the new fiscal framework, how do you see Brazil's fiscal situation?  Thank you.

VALDES: Well, let me start by saying that Brazil has surprised us with its strength in terms of growth.  There are several reasons for this.  One is agriculture has been booming, this accumulation of reforms on time and also better prospects on macro-management. 

What is going on in Israel and Gaza, as the Managing Director said, adds a dark cloud to the future of the world economy.  But I think it's too early to have very important conclusions because things are in a very fluid state.  So, I would say for now we need to analyze what is going on.  But we have to recognize that the region in general is very dependent on commodities.  A few benefit with higher energy prices and oil prices.  The majority actually suffers with this and has been also always a problem.  But again, it's a bit too early.

On policies in Brazil, I can say that we strongly support the commitment of the government with fiscal prudence.  Differences on forecast depends a bit on how fast one reform happens, the macro and other things.  But the commitment to improve the fiscal is mostly welcome.  As in the rest of the region, the fiscal will be with us for a long time.  This is the first step.  We have to deliver on the promises, plans and rules, but even that will leave debt levels too high in the future.  So, also, as you saw in the Article IV for Brazil, we mentioned that down the road we will need even further efforts.  In terms of monetary policy for Brazil, we support fully the current stance and the gradual and very pragmatic and easing cycle where they are today.  Thank you.

ELNAGAR: We have a lot of online questions, so I'm going to go online and then come back to the room.  So, give me one second.  We'll start with Mexico, it's Leticia Hernandez from El Financiero.

HERNANDEZ: The IMF recommended that Mexico addresses structural problems to take advantage of the potential of nearshoring.  What are these problems?  Do you have any considerations for specific policies?  Thank you.

VALDES: We just finished the visit to Mexico in the cycle of the Article IV.  It will be analyzed by the board of the IMF in a few weeks.  But we put out a concluding statement in that mission and identified precisely this issue of how to take advantage of near shoring and the opportunities to be so close to the U.S.  that is growing faster.  Here, of course, there are all, as I mentioned before, topics like health and education.  But there are other specifics that we mentioned in that report that is low labor participation, especially low female labor participation; corruption, crime, rule of law always can be improved to facilitate more investment, to take advantage of near shoring. Low access to finance, our financial markets in general not as deep as what we need.  We have some infrastructure gaps in transport, in water and energy.  And finally, there are some costs of labor market formalization that could be tackled.  Anyway, those are the answers I can give you, perhaps, I don't know.  Nigel, if you would like to add something, Nigel is the Deputy Director that looks at Mexico more importantly to the U.S.  too.

CHALK: So, I would think that Mexico has benefited a lot from increased integration with the U.S.  and it's just taking over from China as the largest import partner for the U.S.  So, there's definitely a lot of opportunities there, I think as Rodrigo said, we're starting to see with that expansion of exports from Mexico to the U.S., the capacity constraints are starting to bind.  We're seeing in ports and roads, so, infrastructure is very important.  And then the other thing I think is very important is human capital in Mexico.  So, increased investments and better investments in health and education would really help maintain skills, be able to provide the labor force needed for this expand -- what we expect to be an expansion in the manufacturing and production base in Mexico. 

And then finally, I think there's a big challenge in Mexico to shift the energy mix towards renewables.  Energy is quite expensive in Mexico is often one of the complaints that corporates have highlighted.  And so, I think doing work to improve the operations of Pemex shift towards a renewable electricity sector.  Having more foreign investment in electricity sector would also be very beneficial.

ELNAGAR: Thank you.  Thank you, Nigel.  We're going to go to Webex now.  So, whoever's going to ask on Webex, please raise your hand and keep your camera on.  I don't see the Webex on the screen, James?  Okay, we'll start with Liliana.  Thank you.

FRANCO: Hi.  Good morning.  I'm Liliana Franco from Argentina, Ambito Financiero.  I would like to ask about do you evaluate that there is a risk of hyperinflation?  And another question.  Have you recently spoke with Javier Milei about dollarization?  Thank you.

ELNAGAR: Any other questions on Argentina from the room or on Webex?  Sir, have another question?

OGIER: Thanks.  Mr.  Valdez.  Pleasure.  I'm Thierry Ogier from Latin Finance.  My question is about Argentina, which also seems to be absent all over at this meeting.  And my question is to find out if the IMF acknowledges a failure of successive programs for Argentina.  Thank you.

ELNAGAR: Thank you.  Further questions I think we have Paula?  Yeah.

LUGONES: Hi, I'm Paula Lugones from Clarin.  There will be elections in Argentina in a few days.  What do you expect from the next government and what urgent measures should they take as soon as they take office?  And also, do you think they have to reformulate the current program with the IMF?  Thank you. 

VALDES: Anybody else in Argentina?  Okay, so let me first say that Argentina faces very important challenges today, including very high and rising inflation and low reserve coverage in the context of a delicate social situation.  Addressing these challenges and safeguarding stability requires first a strong and credible macroeconomic plan and ideally, politically backed by a strong majority.  This plan has to be anchored also on decisively strengthening public finances, while protecting the most vulnerable in the country. 

Regarding the dollarization question, the Fund is very respectful of the sovereign choice of every country to decide on what is the most appropriate monetary and foreign exchange arrangement to run their own country.  But we worry and we work so that we can ensure that the policy conditions for a transition to a new regime and the conditions for an appropriate result when this new regime is working, they have to be in place.  In the case of dollarization, there are very important preconditions and policy steps that are needed for this to be successful.  At the end of the day, and this is a very important message, dollarization is not a substitute to sound macroeconomic policies. 

And finally, regarding our engagement with the different candidates yeah, we have engaged with the economic teams of the candidates, and we are ready to intensify this engagement going forward to better understand their policy plans.  At this stage, when we engage is for basically hear their views.  It's not that we are discussing anything at this stage of the election cycle.  Thank you.

ELNAGAR: We're going to move now to the room again, please, the gentleman. I'm sorry? This is the answer we have now, sir.  Please the gentleman.

QUESITONER: Okay.  Good afternoon. My name is Kenton Chance of the Caribbean Media Corporation.  The Caribbean Development Bank has proposed recovery duration adjuster, which it says better reflects the economic, social and environmental conditions of small island developing states, sorry, as a metric to determine access to concessional finance.  What is the view of the IMF on this proposal?

ELNAGAR: We'll continue on, actually. Yeah, let's take Kenton's and then.

VALDES: So, this idea of the Caribbean Development Bank is a appealing and therefore merits analysis. We don't have yet enough details to have a view on this. At the same time, we have to be careful in terms of the resources for concessional access, no? this competes with other needs at the same time.  But overall, the view that only incomes level define vulnerability, I think is a very appealing concept in general. We'll see whether it can be operationalized in a conducive way.

ELNAGAR: We have a question online on the Caribbean also from Barbados, Shawn Cumberbatch, The Nation. With the IMF saying that the world economy is resilient but still not going forward very fast, the growth, what should be the main priorities for the Caribbean economies heading into 2024?

VALDES: It's very strange to have a policy line for Latin America in general that is common for almost all countries. Usually we have for a few, some for a few others. But in this time around, the Caribbean, South America, Central America, all have basically two main challenges for the short run macro.  One that is critical is to work in the fiscal. We used our buffers, we have to replenish those buffers, in an environment that could be more challenging with higher interest rates, with growth that is not that high.

 And the second part is to work in structural reforms that can lift medium-term growth.  Again, that is super important for the long run, requires a lot of patience, but we won't grow more if we don't really tackle those.  Nigel may want to add something on climate and the region, no?

CHALK: Yeah, I think the other thing that's important for the region to look at is building its resilience to climate change, and that's multifaceted. I think it's part of its shifting towards renewable energy sources. Part of it is strengthening its infrastructure to be much more resilient to the increased frequency and intensity of storms and hurricanes the region's facing.  I just mentioned that we have already in place resilience and sustainability Fund programs, with both Barbados and Jamaica, where we're pursuing a lot of these reforms. We're providing capacity development to the region on many of these areas, including areas such as green taxation, commercial green financing from the private sector.  And so, I think there's quite a large investment from the Fund in the Caribbean to try and help them make this transition towards a lower carbon and a more resilient economic system.  Thanks.

ELNAGAR: Thank you, Nigel. We're going to go back to Webex now. We have a hand raised.  Please identify yourself and your question.  Thank you.  We can't hear you.

QUESTIONER: Good morning.  My name is Evelyn Tapia, from Ecuador.  From Primicias.  I would like to know what is the factor that weight the most in your reduction of road projection for Ecuador in this year and in 2024?  And also, I have a question because this weekend we also have presidential elections.  So, both candidates have said that they are planning to take international reserves for public spending.  So, what do you think about this plan?  What could be the effects the effects of taking the national reserves for Ecuadorian dollarization?     

VALDES: Okay, let me start from the growth part. Growth was marked down from 2.9 for this year to 1.4, and from 2.8 for next year to 1.8. So, it's an important markdown.  And basically --this with respect to what we're expecting six months ago now in April, and this reflects three things for this year and another one for next year.  Oil production has been lower than expected.  Second issue is security and political uncertainty that have weighed on activity.  Which one is more important?  It's impossible to say at this stage, but those two are weighing, importantly.  And also, the first part of the year was weaker than expected.  So that also produces lower growth for the entire year. 

And for next year, in addition to this, we have to add El Nino.  El Nino is a phenomenon that affects positively a few countries and negatively a bunch of countries in Central America, but also in South America in particular, Ecuador and Peru, for example, are particularly exposed to that.  There are some estimations in the report if you want to see those.  In terms of the idea of using reserves for fiscal spending. We have to be very careful that dollarized economies are an arrangement whereby you need reserves in the Central Bank for people to be confident that their deposits in dollars in banks can be cashable if needed. 

And therefore, as a first pass, the idea doesn't look very good.  Of course, if a country had immense reserves, could calibrate how much reserve coverage you have.  But in the region, the dollarized countries, none of them have excess reserves in terms of coverage.

ELNAGAR: Thank you. We have many online questions we have from Irma Cantizzano, El Economista Central America. She's asking about El Salvador.  Could you confirm if you are in negotiations for an EFF agreement with El Salvador, could it be achieved before the elections?

VALDES: I can confirm that we had a mission that went on negotiations, but it was clear for the authorities and us, we're working very well together, that it wasn't a mission to finalize. It was a mission to start the discussion and the conversation on how to put a plan together. I will ask Luis Cubeddu, who is the Deputy Director that looks into El Salvador, to give some more color on this.  You may know him because he also deals with Argentina.

CUBEDDU: Thank you, Rodrigo. Just maybe to emphasize that an IMF team was there in early October and the idea was to initiate discussions on a new Fund program. I think important progress was made, further work is necessary and additional engagement is expected in the weeks and months ahead.  I think it's too early to speculate regarding the timing of a possible agreement.  Maybe just to emphasize that our engagement continues and it is constructive.  Thanks.

ELNAGAR: Thank you, Luis. Again, we have online questions on Chile. Rodrigo Cardenas from La Tercera and he is asking about Chile.  Chile is, along with Argentina and Haiti, the countries that will register falls in GDP this year.  In the case of Chile, it is lower than what was anticipated in April.  What improved during the year and how worrying is that the Chilean economy registers a decline in a context in which much of the region is growing?  And furthermore, considering that outlook for 2024 is also very limited.  He has another question about how do you see the scenario of the reforms in Chile with the pension and tax reforms particularly frozen?  There is a follow up question from Paula in Valor Futuro about the Central Bank monetary policy, and she wanted to also check about the growth forecast for Chile.  So thank you.

VALDES: Thank you for the questions. I will give you a very broad answer because we need to be careful not to enter into the discussions of policies of the country of our own. I'm Chilean, that's why I'm saying this.  So, I will ask everybody to follow up on the specifics with Patricia Alonso Gamo, who is the Deputy Director that follows Chile and many other countries, who is sitting here but not here, and bilaterally, that's not a problem.  But let me just say the following about Chile.  Chile was probably one of the countries in the world that did the biggest expansion of policies during COVID. That produced an imbalance in the economy that was relatively large.  Just to have a number, the current account deficit moved to being very small, to ten, above ten.  And when countries have that type of development, they require an adjustment afterwards.  That adjustment can happen faster, less, faster, with more pain, less pain.  And what we have been seeing in Chile in the last few quarters is precisely that adjustment.  We believe that made a lot of progress.  So, it has been a very careful reaction by the authorities.  But again, I would prefer to go into the small details and especially the reforms with the reviewer of the country.  Thank you.

ELNAGAR: Thank you, Rodrigo. We have more questions, one of them on Dominican Republic, and it's from Candida Costa, Listindiario. What are the new projections of the GDP, inflation and public debt for the Dominican Republic?  What are your recommendations for greater growth?  With more employment for the country, in this context of the global uncertainty, what would be the priorities to achieve better salaries and what is missing to encourage foreign investments in order to have more industries?

VALDES: I don't know by heart all the projections of all countries. So, I have to read the table, apologize for that. So Dominican Republic would go from a growth of, if I'm correctly, 4.9 percent to 3 percent this year and 5.2 percent next year.  I would like to mention that Dominican Republic is a very fast growing country.  There was a blog in our webpage from several people who work on Dominican Republic, which is very impressive what they have achieved.  I mentioned before this long-term growth challenge that the region at large grows at 2.5.  Well, we estimate that the Dominican Republic grows around 5 percent in the medium run and that's very impressive for the level of income that already Dominican Republic has achieved.  As in all other countries, these are good times to continue working on the fiscal and continue our staff working on more structural reforms. Let me stop there.

ELNAGAR: Any further questions? Yes, the lady. Thank you.

QUESTIONER: Hi, my name is Laura Palomino, I am from Caracol radio from Colombia, and I have a question about the precautionary instrument reform is correct.  La reforma instrumentos precautorio. How can this reform benefit a country like Colombia? Thank you so much.

VALDES: For background for everybody. The Fund has different facilities, different lines to engage with countries. The typical one are these when there's a balance of payment crisis and a standby agreement has to be agreed.  But there are others, for example, an extended facility that gives them more time and looks more to structural issues.  Some time ago the Fund moved to have precautionary lines, that is a very different structure, basically ex-ante with the countries agree that there is a line there that could be used in case of need.  Some of those precautionary facilities have conditionality, so if they draw some others and the FCL is the case in point, has no conditionality.  But to be able to have an FCL you have to go through a scrutiny from the IMF that is rather important and demanding.

 And therefore, the FCL is not only an insurance for bad times eventually, but also a sign that policies are evaluated very positively.  So, they have a signal effect that is relevant.  The reform that we just had changes, a few procedures, but basically, I would say makes more clear or more objective those characteristics that you have to have to be able to access to the FCL.

 And the second thing that is a big change in doctrine, I would say in the Fund, is that you could theoretically have an FCL of a size that is not that large, like the FCLs that we have seen in the region, but without an exit strategy developed.  Right now, you have an FCL in a country, some countries have FCLs of 1000 percent of quota.  Very large.  But the idea is always there is that this will end at some point and there has to be a strategy to exit, the reform produced for the same time.  The possibility to have a precautionary line without this idea that you will have to leave it at some point.  So, it could be an insurance that is forever with you.

MS. ELNAGAR: Thank you Rodrigo.  We come to the end of our press briefing.  Thank you to all our speakers here, Rodrigo, Nigel, and Luis.  Thank you for attending here and online.  Please check our reports online and gracias.