Transcript of a Press Conference on Latin America By Anoop Singh, Director, Western Hemisphere Department, IMF
April 23, 2004Transcript of a Press Conference on Latin America
By Anoop Singh, Director, Western Hemisphere Department
International Monetary Fund
Friday, April 23, 2004
MR. BAKER: Welcome to the IMF Latin American press briefing. I am Francisco Baker, the press officer in charge of Latin America here at the Fund, and let me first introduce you to the table. At my right, Mr. Anoop Singh, Director of the Western Hemisphere Department. We also have here three deputy directors of the Department: Ms. Caroline Atkinson,and Mr. Jose Fajgenbaum are sitting next to Mr. Singh; Mr. Charles Collyns to my left, and then, we also have two senior advisers to the Department: at the far right, Mr. Markus Rodlauer, and Mr. Christopher Towe at the far left.
Mr. Singh will read an opening statement, which will be made available to you in hard copy after the session.
MR. SINGH: Thank you very much.
I am pleased to welcome you all, many of whom, of course, we have met on many previous occasions. So this is becoming a regular event at these events, so we welcome that as part of our increased transparency.
Now, as we have said before, in many ways, the regional outlook for 2004 is perhaps more favorable than at any time since the 1990s. Although important fragilities would remain in the region, and we must recognize that the situation varies from country to country, it is also the case that the Latin America and Caribbean Region is emerging from a very difficult period of global and domestic uncertainties with stronger growth and better external positions than you or we would have expected perhaps just 6 or 12 months ago.
And let me go on directly and talk about Latin America. As you must have seen in the World Economic Outlook, we expect that growth in the region as a whole this year should be close to 4 percent. Now, initially, the growth was led by external demand, as exports generally responded well to the global economic recovery and the real exchange rate depreciations.
But the important point that I want to highlight is that domestic demand has also begun to pick up. As interest rates have declined in all of the countries in the region, confidence has returned in many cases, in some cases, very strongly. And inflation remains well-contained.
I would like to point out another important statistic, which indicates the extent to which our region has adjusted. Latin America's current account that was in significant deficit just a few years ago, around 3 percent of GDP, that current account position has now moved into a surplus overall, the first time it is in overall surplus for several decades.
In addition, many countries in their capital account have taken advantage of the better investor environment in emerging markets to make significant improvements in the management of their debt. Therefore, with reduced financing needs, low interest rates, still, our sense is that the region, the countries in Latin America are much better poised, much better positioned to benefit from the ongoing global recovery than they have been in previous cycles. That is, I think, a key point I would like to make.
Now, I will talk very briefly on certain countries, and I am sure that you will have some questions on those and others. And our sense is, and this is very important, that the regional recovery is well-anchored by what we see in Chile and in Mexico. These two countries were able to resist the difficulties, much of the difficulties, that affected the other economies in recent years. And in turn, this resistance, this protection, reflected their strong macroeconomic and institutional frameworks. We believe that momentum in both countries should build as the year progresses.
Let me just say a few words on Brazil and Argentina. I am sure these countries are on your mind and maybe some others later on. So in Brazil, our sense continues to be that the Government is adhering very well to the prudent macroeconomic framework that the country has set for itself, that President Lula has made a cornerstone of his own economic and social strategy.
I would like to point out to you an important development: the authorities recently, very recently, I believe just last week or two weeks ago, they updated their medium-term budget framework, providing yet another firm indication of their commitment to fiscal discipline, and as you know, inflation is on track to meet the target that they have set for the end of this year.
They continue to make progress in key elements of their structural reforms. Meanwhile, there are key indications that growth in Brazil is gathering momentum, and the Government has made further progress in improving the structure of its public debt. Overall, the Fund-supported program remains well on track. You know, the authorities are treating this now as precautionary; they are not drawing from the Fund anymore, and the next review mission, led by Charles Collyns, will begin in May, rather shortly from now.
And then, maybe I should talk a bit on Argentina. You know that in Argentina last year, there was a strong and broad-based recovery, over 8 percent, which we frankly admit was beyond most market or other expectations. And the key point here for Argentina is that this strong and, I repeat, broad-based recovery is continuing in the first quarter of 2004, as you know, supported by the three-year arrangement that they have with the IMF. And the emphasis in Argentina's program, as I have said on previous occasions, is precisely to emphasize the kinds of structural reforms that the authorities and we agree are needed to address and end Argentina's long history of severe boom-bust cycles.
Indeed, their agenda of reforms for 2004, as set out by the authorities in their letters of intent, include crucial actions on a range of fiscal and institutional reforms as well as the important objective that they have set for themselves of reaching a comprehensive and sustainable debt restructuring with their private creditors.
You know that the second program review with Argentina was completed just, I guess, less than four weeks ago, in March, and the next review--this is held every quarter--the next review is, therefore, scheduled for June.
In other parts of the region, too, performance continues to be within programs where countries have them with the Fund. I should say we are at an advanced stage in discussions for program reviews in a number of cases. A mission has been in Colombia, and we are continuing at an advanced stage with Peru, and overall, our sense is that not only in the south but also in Central America and in the Caribbean region, there is a strong recovery taking place.
So what we see is that this year, whether it is Central America, whether it is the Caribbean region, whether it is the South, provides a crucial opportunity to take the kinds of structural reforms that are best taken when the global economy is strong and when economies are growing domestically. And so, we have almost a historic coincidence of influences this year: a strong global recovery; we have, in many countries, lessening of political uncertainties, and we have stronger growth.
And therefore, this confluence of events provides the opportunity to push ahead with the reforms, and I do believe that in their programs, each of these countries that I have mentioned and others--Uruguay, too, as I said, Colombia, Peru, they are taking, they are emphasizing just the kind of structural reforms and just the kind of institutional reforms that are needed to ensure that the upturn this year will be sustained over the medium term.
Now, clearly, there are risks ahead in the global environment, and I am sure you will be thinking of the risks that there are in the global environment. We do believe that the balance of risks in the global economy is still positive. I will not repeat what is in that balance. You would have heard Mr. Rajan speak about this a few days ago.
The point I want to make before I conclude these remarks is that yes, there are risks, but the countries in the region are much better positioned than they have been in the past to protect themselves from any shocks, and this is especially because many countries have moved to greater flexibility in their exchange rates--that helps--and because they have built up important margins in virtually every case in their current account positions and in their reserve positions, so they have the margins to absorb any shocks that may arise.
So with those kind of general introductory remarks, I guess the floor will be open to questions. If there are no questions, we could end it right now.
QUESTION: I have a question, one on Argentina and another question on Venezuela. On Argentina, President Kirchner again said that he would not raise the 3 percent primary surplus fiscal target for next year. The IMF has called for that to be raised. I was just wondering sort of how do you see a way out of this? I mean, how important--if we just go through, you know, why it is important to raise that 3 percent and if you see that as a, you know, happening.
On Venezuela, in the World Economic Outlook, there was a sentence in there that said, you know, urgent measures are required on the fiscal front. I am not quoting this exactly, but the word urgent was in there, which I would interpret to mean this year. But the Venezuelan budget is actually in pretty good shape. They have just issued a big bond; their accounts seem to be balanced for the rest of the year; obviously, oil prices are high, but the budget took a rather low figure into account.
So I was wondering if you could elaborate a little bit more on what kind of urgent measures the Venezuelan authorities should be undertaking.
MR. SINGH: Okay; thank you very much.
Well, on Argentina, obviously, there has been a lot of attention on this issue. It is important to remember what has actually happened to the primary surplus in Argentina. I think it is always instructive to start with the facts. And the facts are that compared to the 1990s and where we are now, the primary surplus in Argentina has shifted from probably minus 2 percent percent of GDP on average to its objective for this year, which is plus 3 percent of GDP.
So, in fact, Argentina has shown a capacity, despite the recession it was in a few years ago, to bring about a very significant shift in its primary surplus, and that is a fact.
The second thing I will say is that this shift is a dynamic phenomenon, and it is continuing. What I mean by that is that the authorities had a certain target last year of 2.5 percent of GDP, and they overperformed. They achieved 3. We believe this overperformance is continuing into the first quarter of 2004. And we have the representations that the authorities have made in their own letters of intent about how they see the outlook for the primary surplus. Now, the target for next year will, we have been told, be decided in Argentina when they come to decide the budgetary framework for next year, and we have to wait for that.
On Venezuela, the first thing to tell you is that yes, as you saw in the World Economic Outlook and in the predictions, growth is rebounding this year considerably because of higher oil prices and mainly because production is back to where it was before it was interrupted last year. Now, I want to tell you that we do have, we have remained in contact with the authorities, so we have close contact. We have a mission that will go to Venezuela to continue our normal, routine contact.
I would like to tell you that our expectation is that Mr. Rodlauer will be on that mission, and it is precisely on that mission that we will discuss the authorities' plans for their economic framework and exchange views as to what the views we have.
But I do think that before we have those discussions, I should not preempt them by just telling you our sense. We need to wait and see what that mission yields, and we look forward to those discussions with the authorities in Caracas.
QUESTION: When do you expect to send that mission?
MR. SINGH: Well, I am not sure I remember the exact date, but we certainly hope that the mission will start next month.
QUESTION: In the primary surplus, fiscal primary surplus, in which number or which is the level that we are thinking that may raise the surplus in Argentina? Is it the level of Turkey at 6.5? Is it the level of Brazil? Which is the level that you are thinking of?
MR. SINGH: Well, I know many of you believe, and I hope you do not believe it any more, but many of you might still believe that we have a kind of model, and we always have a number, and we press a button, and out comes the number.
The fact is that is not the way it works. Argentina's medium-term framework depends on a number of factors, and there is no doubt that the primary surplus is a very important, indeed, a very important part of that framework. But it is not the only part of it. There are many other aspects of it.
The priority is to get Argentina back to sustained growth without the boom-bust cycles and to do it in a way that is going to further reduce poverty. We are very pleased to see that the Government's policies have already resulted in a significant decline in the poverty share. You know that. So our interest is no different from that of the Argentine authorities, and that is to develop a medium-term framework of policies that will sustain this growth rate, raise potential growth and reduce poverty.
Now, exactly how that is done is not a magic formula. The primary surplus is certainly part of it, but it is not the only part of it. And it is precisely the kinds of discussions that we are having with the authorities to develop all the factors. So I do not think it is very productive to single out one factor, give a number to it, and say that is the only factor. There are many factors, and we are jointly driven by a resolve to have a framework that will lift Argentine poverty. There is no doubt about that.
QUESTION: I have a question about Brazil. There are apparently two schools of thought in Brazil among people who support the current economic policies. One says that stay the course, keep the current position, expansionary monetary policy. It is pretty unpopular because of growing unemployment in Brazil. This group says that--basically, they say that anything--Brazil grows more than 4 percent without more further reforms that will free the energies of the country, make the country more productive, over 4 percent of growth, we overheat, and inflation is back, and we have to do the things you have to do when you have more inflation.
The other school that is interestingly--the other thought is shared by people from John Williamson to Delphi Matto [phonetic] saying that the real interest rate of equilibrium in Brazil is not 8 to 10 percent; it is probably 5 to 6. And the Central Bank should be more daring and because at that real rate of interest rates, you could have more growth; you could have more political support for further reforms, and you would have more of the virtuous cycle that everybody is looking for.
Has this been debated between you and Brazil? Is this part of your debate, and do you have an opinion on this?
MR. SINGH: Well, this is an outstanding question. It is a very thoughtful question, and obviously, in the Fund we are debating these issues a lot ourselves and with the World Bank and certainly and fundamentally with the authorities.
Clearly, from our side and from the authorities' side, we are looking for Brazil to grow more rapidly on a sustained basis, and like I said, I do believe this is going to happen this year. Your question, therefore, is what is potential growth in Brazil beyond this year, and to what extent do we have to worry about the structural problems and overheating as they hit 3 to 4, or is it that potential output, potential growth is expanding, and Brazil therefore has more leeway? So I think that is your question.
I should tell you first that Charles Collyns, and he might say some more on this, will be going there, as I said, in a few weeks, and these kinds of discussions, we are constantly having with the authorities. You know, it is very difficult to give you a firm answer, because there is no firm answer. Let me, however, tell you, refer you to one document, which I learned a lot from: when this government came into office, the Ministry of Finance produced what I call an outstanding paper called Economic Policy and Structural Reforms in Brazil.
And this paper, produced by the Ministry of Finance in April of 2003, and I would say all those who have not seen the paper from outside Brazil should see it. It is an outstanding assessment of Brazil's strengths and weaknesses and what Brazil needs to do precisely to address the question you have raised, to raise potential growth in Brazil.
I do believe that the kind of policies that they are following now of not just reducing the public debt but also improving the structure of the public debt, and improving financial intermediation, is precisely opening the door for real interest rates to decline to levels that would be exceptional in terms of Brazil's recent history.
And if you look at just one number, if you look at the exchange rate dependence of Brazil's public debt, that, I believe, has already been halved in the last 18 months. And so, to answer your question, I think the kinds of reforms that are underway generally are opening the door for interest rates in real terms to fall below where they have been in historical terms.
Precisely how far we can go in bringing them down, how far they can go in coming down is something that has to be tested. And I think we all have great confidence that the Central Bank and the National Monetary Council is trying to grapple with these issues in the same way.
But, Charles, do you want to say something more on this?
MR. COLLYNS: I am not sure there is much more to say. I think you have laid it out well there. I will sort of underline the fact that real interest rates in Brazil have now been reduced to levels that are at their lowest for many years, and this, by itself, should already be providing significant impetus to the economy, and the economy is responding well, and we are seeing a good recovery this year which we hope will continue to accelerate next year.
But as Anoop says, how much further real interest rates go will need to be established by the Central Bank, and it has a flexible inflation targeting framework which provides a good framework within which to make these assessments, and clearly, it is of paramount importance that inflation remain under control and continue to be brought down. And if any Central Bank were to act prematurely to lower interest rates below what would be an equilibrium rate, then, that would lead to a rapid requirement to reverse themselves, and that would not be good for the economy at all, and that as we have seen is not at all the intent of the authorities.
So I think it is appropriate for the Central Bank to move cautiously and prudently, as they have been over the past couple of years, to gradually lower interest rates while continuing to bring down inflation, and hopefully over time, as Anoop says, they will find that they do have room to lower real interest rates even further below where they are now as the structure of debt improves, as confidence continues to build, and as the structural reform program of the Government continues to advance.
QUESTION: I have two questions. The first one is after reviewing the WEO on Latin America, at least I have the impression that Mexico and Brazil seem to be the engine of the economic growth in Latin America for this year, and I say this because the review made in both countries, you know, are very optimistic when you compare the review of those countries with the rest of the area.
So my first question is is this impression of Mexico and Brazil being the driver of the economic growth in Latin America this year accurate?
And the second is on Mexico: the WEO projects economic growth of 3.3 percent this year, and I think that next year, it is going to be a little bit less. I wonder have you considered the chance that the growth for next year in Mexico could be a little bit higher, taking into consideration that economic growth in the U.S. seems to be going in the right direction.
MR. SINGH: Well, I think, as you look at Mexico, you have to be impressed how the economy has come back since 1995. The comments that I have made and others have made in the WEO relate to the fundamental fact that over the last few years, Mexico's economy has been relatively shielded from the kinds of pressures that other economies have had.
And this is testimony to their own policy framework and structural reforms. You should know that as you look back over the 1990s, even taking into account the midnineties, you see that Mexico was able to average a rate of growth over the whole period that was close to about 3.5 percent, about the highest for the region. And growth, as you said, will this year be in that range, 3.3 or so.
Now, we would like to believe that there are up-side risks possible, that growth could even be higher. A lot will depend upon the global environment. A lot will depend upon what happens here in the U.S., but I do think that as the year progresses, you will see a firming growth in Mexico.
Charles, do you want to say something more on that?
MR. COLLYNS: I think those are the main points, and our forecast for this year is fairly cautious, and indeed, it could well be higher than we have placed, and if the global environment remains positive next year, then again, we would expect growth to be strong and to accelerate.
But we are also focusing on the medium-term and the issues that the Mexican Government will be addressing in order to assure sustained growth. I think that is what is really important for the future of Mexico is not what happens over one year or the next year but rather over the medium-term.
MR. SINGH: Let me just say one more time. I believe the budget projection of growth for Mexico this year was for 3.1 percent, so they are already performing ahead of that projection.
QUESTION: I wonder if you can comment on the interest rate increase that the IMF expects, you know, to be coming and looming; just which countries you think are more vulnerable to suffer from this interest rate hike in terms of the load of debt and the structural debt in Latin America?
MR. SINGH: Yes; well, you know, there is been so much attention, I was looking at the transcripts of the interviews that were held earlier this week, and I can see that this is an issue for many of you.
Now, Chris Towe on our side knows more than I what the prospects are as we see them at this stage for global interest rates. My sense is that we are looking at the prospect, yes, of firming interest rates, but as you look at market pricing and futures over the next few years, you see that markets are pricing in a fairly gradual increase in U.S. interest rates, fairly gradual. That is the first point I would make.
Nobody is out there saying this is going to be either abrupt or very steep. What markets are pricing in is quite well-known, and if you wish, Mr. Towe will give you that background, and the slope that the markets see are also very gradual. That is on one hand.
On the other hand, as I said in my opening remarks, virtually all Latin American countries have built up margins both in terms of policy flexibility, that is, exchange rate flexibility, but fundamentally also in terms of current account positions and reserves. So I would say given that the prospect of firming is one of a gradual phenomenon, I think there is a lot of time to prepare and adjust for that prospect, and there is a lot of scope to absorb it, either through policy flexibility or through current account and reserve positions.
Chris, do you want to add something on this on the gradual risks that markets are pricing in?
MR. TOWE: I am not sure there is too much more I would add, but I think one point that one could append to Anoop's remarks is the current level of spreads for Latin American instruments, and I think that is an additional concern in addition to the possibility that interest rates could rise more rapidly than markets are pricing in for, say, U.S. Treasuries; then, at the same time, spreads could widen as well since they are at historically narrow levels.
QUESTION: I would like your assessment about the actual monetary policy of Argentina to sustain the dollar at around 3 and make it kind of inflation targeting with low inflation.
The second, it would be a more specific picture about the financial system and the challenge: what are, if are the compensation critical or crucial or not within the next negotiations.
And the third would be what about your assessment about the energy crisis and if you see a transitory or structural problem?
MR. SINGH: Okay; that is three questions in one! Maybe that is a good time to end this after that.
MR. SINGH: Well, I think on inflation in Argentina or the absence of it and inflation targeting and the Central Bank, I think we should all be pleased by what we see. I think against many expectations, the Argentine Central Bank has been able to build up a good track record of developing the structure of inflation targeting. They have managed their monetary policy very well.
Argentina did not have the kind of inflation some had predicted, did not have the kind of inflation that in the past has occurred in the wake of these severe crises, and credit goes to the Central Bank for having managed it, for having instituted an inflation targeting framework.
Credit also fundamentally goes to the Government and the Ministry of the Economy, because it was their firm fiscal discipline and restraint over spending that also created the environment which allowed the Central Bank to operate as it did. So from both sides, I think we have a lot to be pleased about. I should also saw that when I was in Lima a short while ago, Governor Alfonso Prat Gay [phonetic] gave me a copy of the latest quarterly inflation report for Argentina, and for those of you who have not seen that, I commend you to see it.
It is precisely that kind of document which is comprehensive and transparent that lies at the root of the credibility they are trying to build with their inflation targeting. On the banking system, I am not sure I have much to add. The strategy for Argentina's banking system is well laid out in their letters of intent.
What I would say is that over the last year, there has been an important shift, and we see that in aggregate, at least, Argentina's banking system has moved into small profitability. So there has been a big shift in its fundamentals. Clearly, there is a lot of restructuring; there is a reform agenda ahead which is laid out in the letters of intent.
And as regards your question on compensation, the Government's intentions are clearly laid out in their letters of intent that yes, they do intend to complete compensation, I think, by the end of June. So that is their stated policy on their part.
On the energy shortages, of course, we are looking very closely as we can to assess if these are temporary or not. I do not want to rush to a premature view, because we do not have all the facts yet, and the Government is, as we speak, taking policies that they have announced to address that. So we need to assess that with the authorities. We need the views of the World Bank, but clearly, everybody is working to make that as short and as temporary a problem as possible. There is no doubt about that.
QUESTION: And the dollar--the exchange rate?
MR. SINGH: Well, I think Argentina has a flexible exchange rate, so I think there is no fixed rate. It depends on so many factors, but it has a flexible exchange rate system.
QUESTION: I have one followup on his question and another one.
Is the IMF worried about the erosion of political support to prudent fiscal policies? Although we see that constantly, the IMF saying that the prudent fiscal policy is something that will lead to higher growth later, we have high rates of unemployment in the country and not only the opposition parties, but there is a growing eroding of political support within the Government party. So I would like to know if the IMF is evaluating that and if it is worried, if the organization is worried about that.
And also, I would like to know the opinion of the Western Hemisphere Department about the proposal for excluding investments in infrastructure from the deficit. We have seen some harsh criticism of this in the recent press briefings.
MR. SINGH: Okay; well, you know, it is very difficult for us to speak about the politics, so I would not like to do that.
My sense is that there is a lot of support for the kind of policy framework we have in Brazil. You only have to look at the progress the authorities have made in the short period of time in the structure of the public debt. I do think that is very important, because of in terms of its dependence on exchange rates and interest rates, that dependence is coming down quite rapidly.
And there is universal, in my view, consensus that that is a good thing, because it is precisely that kind of improvement in structure that will protect Brazil from any shocks that may occur in the international environment. To the extent that debt structures are less sensitive to interest rates and exchange rates, obviously, you are protected from any risks from the external environment. So I would really believe that there is a lot of support in Brazil for this, and as growth materializes this year, I think you will find even more support for it.
The fact that the Government recently announced confirmation of its fiscal framework for the next three years is another indicator of their resolve, which we clearly share and applaud. On public investment, you know, we are not ourselves the experts. You know very well that in the Brazil program already, there is some exclusion for commercial orientation. There is also some special treatment for sanitation projects.
So I think in a pragmatic way, we are adapting. Now, if you ask what is going to be done Region-wide or Fund-wide, we have to wait and see, because a lot of work is underway to define commercial orientation. A lot of work is underway to set kinds of standards for transparency for these PPPs. There have been outreach activities. There was a seminar a few weeks ago. There has been a Board paper.
So I think number one, there is a lot of recognition that infrastructure matters; number two, there is a universal consensus that any initiative should not sacrifice debt sustainability, and so, within that, we are all trying to work with the authorities in Latin America to see what can be done to improve the emphasis not only on infrastructure but also on well-targeted social support programs.
QUESTION: There is been a lot of talk about getting ready before bad times come along; battening down the hatches; now is a good time to prepare. Yet, when you look around the region, you see everyone talking about spending more, easing of rules, accounting rules to find more investment.
Do you really see people getting ready for the bad times that may well come as interest rates rise? And secondly, you said that the chance of interest rates going up quickly in a way that would be difficult to respond to is unlikely. What about commodity prices falling at the same time interest rates rise? People seem to be taking high commodity prices for granted. Do you think they will stay high? And how do countries have to prepare in case they fall?
MR. SINGH: Okay; well, let me just say this, that if you look at the facts as to what countries in the region are doing in terms of building margins, it is quite apparent that they are doing their best to use, as you say, the good times to build up either savings or margins.
Given the numbers on the current account, that is an important reflection of how they are building up a margin. You see everywhere, reserves have gone up. But fundamentally, if you look at the primary fiscal balance across the region, you see that this is firming further. So across the region, you will see a higher primary surplus in 2004 than we have had for the last few years. And you will also see debt stocks coming down.
Now, you could of course always argue that they have to do more than they are doing, but the trend is clear. The trend is to try and build up these margins. And so, that effort is underway. As I said, you may have a view, we may have a view if more can or should be done, but the direction of the change is clear.
The second question was on what? Oh, commodity prices. Well, you know, I would just frankly say that commodity prices are clearly helping Latin America a lot, but I am not the expert on how they will evolve. Clearly, there are shocks that may or may not come, and countries need to do what they can, as they are doing, to diversify and improve the flexibility and structure of the economies to precisely prepare.
But as to how these prices will develop, we have got the forecast in the WEO, and I could not really add to that projection at this point.
MR. BAKER: Thank you very much; I am sorry we could not take more questions.
[Whereupon, at 12:23 p.m., the press conference was concluded.]
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