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Transcript of a Press Conference
Horst Köhler, Managing Director, International Monetary Fund
Anoop Singh, Director, Western Hemisphere Department
Thomas C. Dawson, Director, External Relations Department
Monday, March 1, 2004
Sào Paulo, Brazil

MR. DAWSON: -- I am Tom Dawson, Director of External Relations of the IMF. At my right is the Managing Director of the IMF, Horst Köhler, who will have a brief opening remark. Then he will be happy to take questions.

With us this evening also, to my far right, is Murilo Portugal, the Brazilian Executive Director at the International Monetary Fund, and to my immediate left is Anoop Singh, the Director of the Western Hemisphere Department of the IMF.

MR. KÖHLER: Ladies and gentlemen, good evening. I am pleased that you have an interest to meet with me and my colleagues. I have just come from Minas Gerais, after a very, very interesting and impressing visit to this state.

And this visit today to Minas Gerais was certainly a second highlight after I had met with President Lula yesterday in the Granja do Torto in Brasília.

Let me just sum up my impressions.

First, we had a lengthy discussion, the President, accompanied by Finance Minister Palocci, and Central Bank President Henrique Meirelles, about the global economy, the Brazilian economy, and what further has to happen to lead the obvious indicators of a pick-up in economic activity in Brazil to a sustained medium- and long-term growth path. And I was very impressed, indeed, that after I met with the then President-elect Lula in December 2002, many of his reform agenda items have been implemented, particularly tax reform, and pension reform. A bankruptcy law is also in the making, and we do think that these efforts, and the implementation of these reforms, will clearly pay off in the medium term to strengthen the fundamentals for growth.

We also discussed with the President, Latin America's situation in the global economy. It is obvious that there is rising competition, not least coming from Asia and, there, China, and that all countries in the world have to prepare themselves for this. And in this context, I indeed agreed with President Lula who made a strong point that, in order to have sustained growth and competitiveness, Brazil needs also to see more infrastructure investment. Infrastructure is the basic vehicle for a competitive economy, and I am pleased to tell you that we are already in the process in the IMF of working on the concept of how we create more flexibility in terms of financing for infrastructure investments in Latin America.

Second, the President was obviously very interested to move to a new phase of cooperation between the international financial institutions and Brazil, and in this context, together with Finance Minister Palocci, he underlined the importance to strengthen, to enhance, to intensify work on crisis prevention. This is also a point where I totally agreed with the President, and I told him that soon we will have in the Board of the IMF a discussion about how to strengthen crisis prevention. I do think that an idea we have, what we call precautionary IMF arrangements, should help in this context.

This was the substance of the discussion with the President, and today, of course, I was eager to come to Minas Gerais and look to three projects: Projeto Jaíba, the Milk for Life Program, and the Sertanejo Kitchens.

In my meeting with the President, he made crystal clear that the Zero Hunger program has his fullest dedication and that he is going to achieve what he has identified as his objective that at the end of 2006, somewhere like that, all poor households should have the benefit of this Zero Hunger program. And I was, in particular, impressed today at the Milk for Life inauguration. It was an inauguration which was also attended by the Social Development Minister and by the Archbishop there. And I was in particular impressed about the spirit of this program, because on one hand, you could say there is a will of the people to help themselves, there is a clear will; on the other hand, there is also a need to help them to help themselves. And there is a cooperation of various participants--the federal government, the state government, the international financial institutions, in this case also the Japanese Development Bank. All this comes together to a very inclusive project, and I do think coming from this project and also in particular from the Sertanejo Kitchens where I met a lot of women, I am deeply impressed that here in Brazil the people want to look forward. They want to help themselves. They have ideas. And they ask for support, and I think the international community, of course, the government here should offer them this support. And my firsthand visit also made clear to me that within the framework of the IMF mandate, we will do everything also to play our positive part in this context of the Zero hunger project.

So, ladies and gentlemen, that was my kind of overview, of introduction. I stand ready to answer your questions.

QUESTIONER: I would like you to comment on Brazil's external vulnerability to an eventual global crisis because of the low level of domestic savings. Brazil did quite well last year and is doing well this year in getting external funding but if the external scenario changes it might prove difficult.

MR. KÖHLER: Well, it is quite clear that national savings in Brazil are not as big as in Asian countries. But let me answer the question. I do think that the country is on a good way. Why? First, the demonstration of macroeconomic stability has already built up a persistent credibility for this country and its government. This means that there is, in my view, a predictability of financing also from the external side.

Second, there is no doubt that we need to have sustained growth, and based on sustained growth, also the rising of living standards for the poor. And in the context of sustained growth and also rising living standards for the poor, savings will increase.

So it is certainly a prospect for the medium term, but I do think that because the problem is identified, we can work on this, and this includes also that we give attention to--and this is also what I want to do--how we work together further with the government, the federal government and possibly also the state governments, to create a competitive environment for the financial sector and between the financial institutions.

This all together, declining inflation, economic fundamentals for growth, a competitive financial sector, this all will help to provide the necessary financing for investment and growth.

MR. SINGH: Let me just make one more comment on that. As you look at the performance of Brazil's saving, it is important to recognize the enormous changes that are taking place. If you look at the external accounts and the fact that Brazil's external current account was in large deficit just a few years ago, of close to US$25 billion, that has now changed last year to a surplus of US$4 billion, and this enormous shift from deficit to surplus last year is an indicator of the changes under way precisely in the saving/investment balance in Brazil.

QUESTIONER: Recently several sectors within the Brazilian government have indicated that they would oppose a renewal of the present agreement with the IMF once it expires. Some analysts say that one of the reasons for your visit would be precisely to convince the Brazilian government of the importance of remaining under an IMF program. I would like to know if these discussions indeed took place and how they went.

MR. KÖHLER: I must tell you that we exchanged no single word about a new program. I just expressed my happiness that all indicators are demonstrating that Brazil is on track with what we call a precautionary program. So they are not drawing money from the IMF because they do not need it, and there was no idea of a new program.

We do think that for the moment everything indicates that this country is on a good track. And we need to consider more carefully--and this was the President himself who said it--how we could start what I would call a new chapter in the relationship between the IMF and Latin America. How, say, we graduate from crisis programs into a relationship where good performers know and can rely on the assumption that the Fund stands ready proactively to support them if and when a potential crisis comes up which is not under the control of the country itself. And I very much agree with this idea. For me it is an incentive, if you want so, to stay the course of good macroeconomic policy and growth-oriented policies. But these countries then should also know : there is a kind of safety net in case international markets get in a turbulence, without embarking then on kind of crisis program measures, I think we are on a good base.

QUESTION: You have mentioned the need to create a more competitive financial system in Brazil, and this is a very common critique here. What you think we should do?

MR. KÖHLER: Anoop?

MR. SINGH: Well, I think I would first like to point you to a paper a staff member of the IMF has written precisely on this issue, and we can make it available. [Note: "Do Brazilian Banks compete? http://www.imf.org/external/pubs/cat/longres.cfm?sk=16533.0] But essentially in this program, in the government's program for this year, there are already a number of early steps to improve the efficiency of the banking system.

Firstly, as you see it, interest rates are on the way down. They are already below where they were before the 2002 crisis.

Second, the government has announced certain measures that will increase the access of low-income consumers, borrowers, to bank credit, in particular by allowing direct deductions from salaries to service loans.

Third, a very important step has been taken by this government in revising the bankruptcy law. Not only in Brazil but in other countries, as you remove the uncertainties associated with the insolvency framework, you basically improve the efficiency of credit intermediation. And that is a very key plank of the efforts to improve the efficiency in the banking system.

Fundamentally, not only in Brazil but in other countries in South America, credit intermediation, the share of credit to GDP, is lower than in other parts of the world. It is precisely the kind of policies that are now being implemented with the objective of raising this financial intermediation.

QUESTION: You spoke about finding ways to better financing infrastructure investment. What is being discussed within the IMF in terms of Brazil's loan to allow for that? Will it change the way the primary surplus is calculated ? What specifically will be done within the IMF to allow that to happen?

MR. KÖHLER: I think it is premature today to go in details. But what is important for today is the clear recognition through the Managing Director of the IMF that the decline in infrastructure investment in many countries in Latin America is not a good factor for sustained growth. First point.

The second point, we will always have to assess the fiscal policy in a country, and in this context there, we want to work and we are already working on guidelines about how we can give more room for infrastructure financing.

The third element is that we are also looking on how we can find guidelines for making better and more use of public-private partnership models for the financing of public infrastructure.

And the fourth element is that we indeed are also looking at how investments of public enterprises are counted in official statistics. Up to now, there is a little disadvantage for Latin America compared to Europe because in Europe public enterprises which are commercially run are not counted in public deficits; whereas, it is counted in the public deficit here in Latin America.

So there are four items, at least, that we are looking at and, of course, this needs to be discussed. I must underline and I want to underline, all this has to happen within a prudent framework of fiscal policy, because if we would give up fiscal prudence, at the end it could backfire if it would be understood as a new open gate to new debt. So it has to be in this framework of fiscal prudence, but it has also to be a recognition that more has to happen in this field and more can happen in this field.

QUESTIONER: It is my understanding that the exclusion of maintenance spending from the primary surplus calculation would allow substantial room for productive investment. Could you comment on that?

MR. KÖHLER: Anoop, can you answer this?

MR. SINGH: I'm not sure what you mean by maintenance spending.

QUESTIONER: I am talking about investment in infrastructure.

MR. SINGH: Okay. Well, I think that is what we were just talking about, that efforts are under way to see how we can develop a consistent statistical framework so that investments made by commercially oriented enterprises could be excluded from the competition of the public sector balance. That is one plank of our current work.

Beyond that, I think we are looking at ways in which public-private partnerships can help improve investment. So our efforts are aimed at providing more flexibility, but these efforts still need to be discussed with Ministers in this region. And so we expect by later this year there will be some concrete initiatives. But we are not at that stage at this point, although the problem is recognized.

QUESTIONER: You mentioned that you want to establish a new relationship with Latin America. I would like to know how this new relationship would function in the case of Argentina.

MR. KÖHLER: Well, Argentina is a country in Latin America and Argentina is a member of the IMF. I want to underline I have all intentions and the IMF on the whole has all intentions to work with Argentina like it works with other countries in this region.

QUESTIONER: I would like to know if the new accounting procedures for the calculation of the primary surplus would come into effect this year and I would also to know if in your opinion Brazil has met the conditions for sustainable growth beginning in 2004.

MR. KÖHLER: As for the statistics this will take a bit longer in the sense that we have to work on defining an internationally agreed standard, how to deal, how to evaluate public enterprises which are run commercially. But that does not mean--this somehow lengthy process of agreeing on international accounting standard--that more flexibility, more investment in the infrastructure have to wait until, say, two, three years later.

I cannot promise you that we will be already finished by the spring (in the northern hemisphere) this year because I have to get the IMF Executive Board involved. After the Board of the IMF discusses a kind of an orientation, I have already asked Finance Minister Palocci to join a group of Finance Ministers from Latin America to go through this item, and after this, I think during the course of the year--and my expectation is that at least at the end of the first half of this year, I am a bit more ambitious than my colleague Anoop Singh-we will have at the very least some orientation, guidelines for creating more room for infrastructure investment. That is my approach.

As for sustained growth, well, I am very impressed about the most recent indicators for exports, for investments, for exports not least in agriculture, but also consumption seems to pick up. And all this means for me and the IMF staff that we do see a good chance for a good growth outcome this year, around 3.5 percent, and, furthermore, that this growth path will lead over to 2005.

MR. DAWSON: Two more questions.

QUESTIONER: Last Friday the Presidents of Brazil and Argentina have agreed, during the course of an international summit of heads of government in Caracas, to adopt a common strategy to deal with international financial organizations. I would like to know your opinion about this initiative.

MR. KÖHLER: I think these are leaders of their countries and their people, and it is their job to think the way forward. And Argentina is a neighbor of Brazil. It seems to me quite natural that these two big, important, countries work together. And it is no surprise for me, of course, that they may also discuss their relationship with the IMF, I find this quite natural. I do not see here any hostility, and I could not detect from President Lula that he has any, say, negative tone in this.

QUESTIONER: Let me change the line of questioning from economics. I would like to know what did you think of that barbecue with Presidente Lula yesterday. Did he cook it himself?

MR. KÖHLER: I do not know that, but I can tell you, we enjoyed the meeting very much. It was relaxed. The President was in very casual clothing, with a straw hat. And our discussion was so intensive that we even came too late to the barbecue. I think the chef reminded us twice that we should come to the barbecue. And then when we went to the barbecue, it was excellent because it was tasty, I liked it. For me, it is another reason to come back to Brazil.

MR. DAWSON: Thank you very much.




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