Argentina and the IMF
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Transcript of a Press Conference on Latin America|
By Anoop Singh, Director, Western Hemisphere Department
International Monetary Fund
Friday,October 1, 2004
MR. BAKER: Welcome to the IMF Latin American press briefing. I am Francisco Baker, the IMF press officer for Latin America and it is my pleasure to introduce the head table. To my right is Mr. Anoop Singh, Director of the Western Hemisphere Department. He is accompanied this morning by the three deputy directors of the Department-Mr. Jose Fajgenbaum, Mr. Charles Collyns and Ms. Caroline Atkinson-and by a Senior Advisor, Mr. Christopher Towe.
Now, as usual, Mr. Singh will have a few introductory remarks before we start taking questions, and let me tell you that the full text of Mr. Singh's remarks will be made available after the press conference at the IMF Press Desk.
MR. SINGH: Thank you very much, Francisco.Good morning, everybody. I am glad to see you all. Let me start by saying and repeating what has been said by others this week, and that is this year, 2004, is proving to be a very important year of recovery and growth for the Region. I think you would agree that since we last met at our press conference in April developments have been even more favorable than we expected at that time. In particular, the recovery in Latin America has strengthened further and broadened from the initial upturn in exports to increasing strength in domestic demand.
As a result, growth this year should be the strongest since 1997. And despite the stronger activity and the rising commodity prices that we of course all see, inflation in the Region has generally remained well-contained, and policymakers have continued to use the favorable environment, both domestically and externally, to strengthen their economies.
Of course, challenges remain. The main challenge is how to entrench and lock in the higher growth that we are seeing into the medium term and raise living standards across the Region.
Let me just say also that the generally encouraging picture for the Region owes much to the performance of the United States, which has continued to provide considerable support for the rest of the Hemisphere.
Let me give you just one number: U.S. imports from Latin America were at least 20-percent higher in the first half of this year compared to last year. This gives you a measure of the support being provided by demand and growth in the U.S. to exports from the rest of the Hemisphere.
In Latin America itself, the pace of the recovery, as I have said, has exceeded our expectations. Growth this year in the Region as a whole is now expected to be around 4.5 percent, which is at least half-a-percentage point higher than we had anticipated just six months ago.
The key point about the higher growth rate that we now see is that domestic demand is leading growth, and is also quite broad-based; both private consumption and business investment that we see are growing briskly.
Growth in the Region should remain relatively strong next year, should be at least 3.5 percent. Of course, there are risks, both upside and downside, that we will have to weigh as we come to the coming months.
Briefly, a word on the policy framework of our countries in the Region. As I said, governments have recognized that this environment provides an important opportunity to press ahead with reforms that address the weaknesses and vulnerabilities of their economies. Certainly much has been achieved in the last couple of years.
We have seen, most importantly perhaps, a huge swing in the Region's external position. You only have to look at the turnaround in the trade and current account of both Argentina and Brazil to see how much the external positions have swung into surplus over the past year.
On the fiscal side, too, we see that the governments in the Region are using this period of recovery to strengthen their budget positions, improve the structure of their public debt, reduce the public debt levels, and try to make decisive progress with fiscal vulnerabilities.
Looking ahead, what are the areas that we believe countries need to focus on in order to put the recent achievements on a sustainable path?
First, I will underscore the importance of further bringing down the public debt through continued fiscal consolidation. Public debt remains high in many parts of the Region, and paying down the public debt through curbing nonessential spending and boosting revenues would also allow higher spending on infrastructure, both physical and social, while ensuring a sustainable fiscal position over the medium term.
Second, I would point to the need for continuing and further institutional and structural reforms. I have spoken about this frequently in the past. This agenda includes measures in the corporate sector, the financial sector, labor market, trade liberalization, and so on. These are the more fundamental structural reforms that will, of course, take time to develop, time to gain consensus on domestically, and time to implement.
But this period of recovery is the time for governments to do, as they are doing, by seeking consensus to raise their efforts in these areas.
Finally, we are seeing some threats to inflation, both in the Region and outside. These threats, as you know, come in part from higher oil prices that we have seen. Therefore, it is crucial that in the Region, inflation remain contained. The Region has already built up a track record over the past 10 years in keeping inflation low despite several shocks. And much of this has been achieved in the context of inflation-targeting regimes.
Therefore, it is important, as central banks are doing across the Region, to contain the second-round effects of the higher oil prices, contain other pressures through monetary policy adjustments that will keep inflation low as we look ahead.
These are my brief opening remarks on the Region as a whole. I do have remarks on individual countries which will be in my written statement that we will have. Maybe, Francisco, we should now go on to te questions.
QUESTIONER: In the World Economic Outlook the IMF says that growth gathered strengthened in Brazil, but vulnerability still remains. Given the fact that high oil prices are putting inflationary pressures, the central bank in Brazil is already thev tightening monetary policy. Now, do you think that Brazil should keep in 2005 the recently raised 4.5 percent primary surplus target for 2004 in order to alleviate the tightening cycle?
MR. SINGH: Thank you very much. You know, this is not a straightforward answer. There are many factors involved.
Let me first say that we welcome very much the steps the Government has taken in recent weeks to further strengthen their policy mix. As you said, they have raised the primary surplus to 4.5 percent. This will allow them to pay down the public debt faster.
They have taken steps with interest rates to ensure that inflation in Brazil remains well within the target range.
As we look ahead into 2005, it will depend on a number of factors. It will depend on the state of the external economy. It will depend on the pace of the domestic demand. It is therefore too early for us to say what or whether the target for next year should be adjusted. As you know, we have full confidence in the assessment and judgment of the authorities, so we will be discussing with them later in the year what is their assessment—but I would not like to second-guess that. The government has built up a huge track record with considerable ownership, and we should respect that.
QUESTIONER: What would you say to other countries like Argentina that don't want to have a larger primary surplus in order to do more social investments instead of using that money to reduce their debt or to pay their debt, in any case?
Mr. SINGH: Your qiestion is what should other countries do to pay down their debt?
QUESTIONER: The question is what would you tell the countries like Argentina that don't want to have a larger primary surplus because they want to use the money to do more social investments.
MR. SINGH: The question on Argentina is actually very easy to answer. The facts in Argentina—and these facts have been well-elaborated by the authorities—are that the primary surplus in Argentina so far this year has been much above their own target. And our own assessment is that the primary surplus in Argentina this year, for the year as a whole, will be well above 4 percent of GDP, maybe well above 4.5 percent of GDP.
So Argentina's fiscal situation is overperforming, and I for one would draw a link between the degree of fiscal overperformance and the extent of confidence that we see in the economy and the higher growth rate.
So, from my point of view, I see that as countries—not only Argentina—overperform on the fiscal side and give markets confidence that they are dealing with the public debt, this in fact helps and does not hinder growth.
In turn, that process creates more resources and more flexibility in the budget to tackle the kind of social infrastructure needs that you have just mentioned.
QUESTIONER: Given the political transition that already seems to be underway in Mexico, could you prioritize a little bit the reform agenda there ? There are a lot of things on the table. Obviously, most observers of Mexico don't think that they are all possible in this period.
What does the Fund think is the most important priority in terms of the reform agenda, and if I could, I don't know if you guys could describe a little bit more this special Standby Credit Facility that countries like Mexico want to have for external shocks and where that is at now.
MR. SINGH: Well, thank you very much. I think, as there has been a lot of attention on what Mexico needs to do in terms of structural reforms, but we should at the same time recall that Mexico has indeed made very impressive progress in structural reforms already. And I think that it is worth recallingwhere they were just 10 years ago and where they are now. Macroeconomic policies have become much stronger, and resilient; the public debt is coming down; the fiscal balance has been reduced.
And in particular, Mexico has made huge progress in its financial sector. Institutions have been put on a strong footing. The framework for lending has been improved. And you see this in the rising availability of credit in Mexico.
So I would not underestimate the progress that Mexico has already made over the past half-decade in structural reforms, especially in the financial sector. And we are seeing this now in the availability of credit that is supporting the recovery that is currently going on in Mexico.
Now, as the authorities have themselves recognized, there remains obviously an agenda for the future. That agenda has much to do with improving further fiscal flexibility, improving the efficiency of taxation, creating more room in the budget to tackle the kinds of needs that do exist. But also, overall, the authorities have recognized, especially in certain sectors like energy, the need to increase competition and also to improve the legal framework for market activity.
So I think there is an agenda ahead of us, but we should recall that a lot has been accomplished, and the achievements so far, together with what is happening in the U.S., are driving growth in Mexico.
Caroline, do you want to add something more on the agenda, looking ahead, in Mexico?
MS. ATKINSON: I think that is absolutely right, and the authorities have laid out an important agenda. There are many areas where improved competition would lock in the chances for stronger medium-term growth—energy, obviously; telecommunications; some labor market reform—in addition to the fiscal and pension reform that the authorities have laid out.
QUESTIONER: I have two questions about Coloimbia. First, there is a Standby Facility starting in January. Is the Fund going to support an extension of this Facility? The second is about the fiscal reform going to Congress in the next month. What is the Fund's position in this reform, and are you going to support more structural reform than the one that is being presented now?
MR. SINGH: Well, in the case of Colombia, as you know, the program continues to be implemented as outlined in their own Letter of Intent. So we are very satisfied with the track record of policy implementation, and we see this contributing to strengthening growth . In particular, the authorities have done very well in ensuring that the fiscal framework remains as designed that is consistent with bringing the public debt down.
In terms of our supporting the structural reforms, there is a wide structural reform agenda in the program that is being carried forward. Some of these are currently before the Congress; others are under preparation. And we are working very well with the authorities in these areas, some of which are in the fiscal areas.
As for what happens with the arrangement next year, that is an area which we will discuss further with the authorities, but we, you can be sure, are committed to doing what we can to support the country's efforts as we look ahead.
QUESTIONER: You have talked about the good growth performance in Latin America this year, and everyone agrees that sustained growth is necessary for the Region. You have pointed out that the growth level will decline next year. What do you see as the outlook for sustained growth in the Region? Are there pillars of it which are in place? Are there things that need to be done? And also, I would like to ask a question that relates to debt. I recognize that the debt problem is different acroos countries, but there is a lot of talk about debt sustainability, and I'd like to know does the Fund have some new thinking on what levels of debt are sustainable? Are you developing new criteria and so on?
MR. SINGH: Well, you have raised a number of key issues that would take us a long time to answer.
Let me just say that from our department, from the Western Hemisphere Department, we have just completed a study of the lessons from Latin America over the past decade, and the focus is exactly on the issues you raise—what can be done to entrench sustained growth in the Region. And that study will be out, I guess, in the next month or so, and we will be having several public outreach efforts to discuss it.
But in answer to your question now very briefly, let me just say two things. Firstly, there are short-term issues and there are longer-term issues. The shorter-term issues revolve around reducing the propensity of the Region to recurring financial crisis—reducing the kind of volatility that we have seen over the past 25 years. And for that, I would say giving more assurance to markets about the sustainability of the public debt is very important, as public debt remains very high in many countries in the Region.
But then there are the longer-term factors. As one compares what Latin America has done with other parts of the world, such as Asia, obviously, you have to look at the share of trade in GDP in Latin America compared to other parts of the world. You have to look at the balance or imbalance between trade and the capital account openness. You have to look at the flexibility of labor market. One study that was done in the Fund last year showed that as you look at growing global integration, in particular as you look at China and China's entry into the international arena, the benefits to countries from growing global integration accrues much more to those that can more flexibly move resources from sector to sector.
Therefore, I would say that with the integration that we see now globally, there has to be a priority on improving the flexibility within economies, and much of that flexibility has to do with labor markets. This is a longer-term issue but one that the Region has to tackle as we look ahead.
QUESTIONER: I have a couple of questions. The first one, you sort of explained the outlook for the Region in general, but I wonder if you could be more specific on different countries in the sense of which ones are more vulnerable than others. This is a big Region there are a lot of differences.
The second issue will be if you would like to comment on the discussions with Brazil for a program that will succeed the current one, what kind of program and so forth; and thirdly, the impact of oil prices in the Region specifically—oil prices.
MR. SINGH: Well, those are a lot of questions. I don't want to go on a country-by-country scenario—it will take us too long. But I can tell you in my written statement, I do make remarks by country, so you will see it.
On Brazil, the current arrangement, as I have said, remains in effect through the first quarter of next year. There are still six months to go and it is way too early to start discussing what will happen after that. We know what the government's intentions are, so if there is any change in their intention, I am sure they will inform us. But at the moment, I am not aware of any new development that affects our relations, which remain very close.
I think oil is a very important issue even though for many countries, in the South in particular, oil is less of a problem than it is for countries in Central America and the Caribbean. So the effect of the high oil price is not uniform, obviously, and many countries in the South are protected, and some will clearly benefit.
So the issues are twofold—countries that are benefitting from the oil price, what should they do to ensure that the surpluses they are now accruing are adequately saved or used in the right way. That is one kind of question. The second kind of question is what about countries that are worse off because of the higher oil price—and certainly Central America and the Caribbean are hit both on the current account and on the fiscal side quite heavily. And the third effect is as many governments are trying to do, domestic prices are being adjusted by and large in line with the international prices. This raises the question of its impact on the poorer sections of society, its impact on prices and so on.
Now, as far as we are concerned, regarding the third effect, I think it is very important that budgets retain the flexibility and the room to adjust social safety nets, even temporarily, so that the effect on the poor can be addressed. Beyond that, there is a greater task for monetary policy to contain the second-round effects of inflation.
So I think this is an important part of our policy discussion in the Region—how to adjust to an oil price that probably has some degree of permanence, and how should the Region adjust is a very important issue. So this is among the risks that we see ahead. You see risks from interest rates, you see risks from the oil price, you see risks from non-oil commodity prices. But you also see benefits from higher growth in industrialized countries.
As you weigh the impact on countries of the different effects, much depends on the openness of the country concerned, its trade share; much depends on the extent of interest payments that have to be borne by the current account. So the effect on each country varies depending upon the structure of its external openness and the structure of its fiscal accounts. But clearly, this is an impact that we need to be concerned about and discuss with our authorities, and that's what we are doing.
QUESTIONER: I thought I couldn't let you off the hook completely without asking a question on Argentina. When are the next talks scheduled with Argentina on the program going forward? We know about the debt restructuring happening now, and that things would start moving, but have you actually decided when you are going to move forward? And can you clarify exactly how you would move forward with this program—do you need another agreement? Would that have to be renewed? Could you just make it a little bit more clear to us?
MR. SINGH: Well, I was getting lulled into complacency by the lack of questions on Argentina, but okay. You know, there is some kind of misconception out there that we are not talking to Argentina, and things have been suspended. That is not the case. We are in constant contact with the authorities on all issues under the program. Those contacts and discussions are constructive; they are held in a very cordial atmosphere. We have a resident office in Argentina, obviously, and we meet with the authorities in Washington frequently.
So the basic point is that our relations and our contacts with the country remain continuous, remain constructive, and remain highly cordial, and I think mutually beneficial. That is very important to realize. The more formal issue that you ask is when will discussions resume for the program or for the review. There is no change in the status of that issue.
Both the authorities and the Fund have pointed out that the authorities have told us that they wish to focus their efforts in the coming months on the debt. And clearly, resolving the debt situation, achieving a comprehensive and sustainable debt restructuring, has to be among the most important issues to complete Argentina's normalization. Therefore, it is right that they are focusing on that issue, and the authorities have told us that they will resume discussions on the rest of the program after their debt exchange has been carried forward.
This does not mean that we are not discussing those other parts of the program continuously—we are—but in a formal sense, discussions for the review, for the program, will begin after they have taken their debt process forward. That is exactly where we currently stand.
QUESTIONER: I have two questions—one, on the emergency credit line that the Brazilian Government is proposing. What is your opinion on that? Do you suggest precautionary credits that would be some kind of thing that wouldn't be necessary in the program, only a kind of reviving of CCL (Contingent Credit Line: see Press Releases No. 03/207 and No. 99/14), but with different conditions. The second one is about the sustainability of growth in Brazil. We seem to be in a trap—every year that we have higher growth, inflation seems to come back, so either we have to raise the surplus or the interest rates, and this hinders the growth ahead. So I would like to know what Brazil needs to do to be able to grow for a longer number of years, without inflation.
MR. SINGH: Let me just make a few points, and then maybe Charles can comment further.
On the first issue, the issue of any changes in Fund instruments has to be discussed by the Executive Board. And I know there is a discussion at the Board currently about these issues, but this is not an area where I have any further information than you do. So we will have to wait and see how matters progress at the Board in the coming months.
Now, about Brazil, I would not be so pessimistic as you have expressed your question. I remember six months ago when I was in Brazil, and we said that we can be reasonably confident that by the middle of the year 2004, Brazil should be growing strongly. And I was greeted in São Paulo by a lot of skepticism. And I said, no, we can be reasonably confident of that because we see this in the leading indicators.
And sure enough, we have in the second quarter of this year growth at an annualized rate of close to 6 percent-quarter over quarter-and in the first half of the year, it is over 4 percent over the period last year.
Now, about the sustainability of this, let me just say that we need to look at the structural reforms that Brazil has carried out over the years, and there have been a number of important structural reforms including in the fiscal area, including in education spending, across the spectrum. And many of these reforms take time to effect growth.
I do think that we are now coming into a period where the dividends from past policies are taking root. So I think we can be much more confident now about the sustainability of Brazil's growth than perhaps we may have been five or six years ago.
But Charles, do you want to add a bit more on what are the structural reforms?
MR. COLLYNS: Yes, perhaps two points. First, I agree with Anoop that we shouldn't be too pessimistic about the short-term outlook. It is true that inflation has increased in recent months, but that is largely because of supply-side shocks, and in fact the expectation now is that inflation will start to come down in line with the central bank's objectives. The central bank has begun to tighten monetary policy, but the tightening cycle is expected to be gradual, very different from in the past.
I would also point to the very strong external performance in Brazil as being extremely positive from the perspective of the sustainability of the current growth cycle. Export growth performance has been truly spectacular—a 50-percent increase over the past three years. We have a current account surplus in Brazil implying considerable strengthening of the external position, which is being recognized by the recent upgrades by the credit rating agencies.
As Anoop says, the Brazilians have done a lot in the past to improve the structure of the economy. Of course, as the Brazilian officials themselves are the first to recognize, more needs to be done, and they are proceeding along those lines. This year, they have made rather substantial progress in a key area which is to improve the conditions for financial intermediation in Brazil. One of the issues in Brazil has been the lack of credit for growth, the relatively low levels of investment. But the Brazilian authorities have begun to tackle this issue with determination, including taking a number of steps to improve credit provision in the economy. Most important, progress is now being made to pass a new bankruptcy law, which hopefully will be passed by the end of the year.
Another initiative which the Brazilian Government is following which is important is to look at public investment and find ways to increase public investment, to create more room within the fiscal accounts. As you know, we are now doing a joint study with the Brazilian Government looking at the scope for increasing public investment in the year ahead.
MR. SINGH: Let me just say one more point on Brazil and changes in the structure. I think if you look closely at the export performance of Brazil in the past one to two years, you will find a kind of sea change. You see a structure of exports that is much more diversified, both in terms of composition and in terms of overseas destination.
There is much greater dynamism and strength in Brazil's exports. This is a new phenomenon, and I do believe we are seeing the beginning of it. But it is a sea change, and the changes in the export structure are a leading indicator of the changes in the structure of the economy as a whole. And that is what gives me much more optimism that we are perhaps at the beginning of a broad-based trend of higher trade shares, openness and growth in Brazil.
QUESTIONER: I have a few questions on Argentina. The first is on the challenge of the new central bank president and finance sectors in relation to get credit in particular. The second is about an IMF a staff paper that circulated a few days ago and that suggested that Argentina could use reserves to reduce its exposure with the Fund. I would like you to explain if Argentina is in a condition to use reserves to pay its debt—I don't know if next year or when—or lower its exposure. And the third will be about if you can make an assessment of the new law of the utility sector that is in Congress now. It seems like the role of government is more active in that law, and I would like to know your opinion and how it affects investment.
MR. SINGH: Well, Francisco, we should have reached the end of this conference with the previous question... Okay. So your questions was about Brazil, was it?
MR. SINGH: All right. Well, I think, as regards the central bank, I am looking forward to meeting the new Governor, Mr. Redradoon Sunday morning. I have been told, he has already declared continuity with the monetary policies of the BCRA (Banco Central de la Republica Argentina). I think the central bank in Argentina has done very well to build up a track record of bringing inflation down quickly and keeping it low and developing a framework for addressing the issues in the banking system. These are the kinds of issues we will discuss with the Governor when we see him, but he has already declared continuity, and we have the greatest confidence in his leadership, looking ahead, of the BCRA.
Now, you referred to a staff paper commenting on reserves. We have looked at the issue of debt sustainability in Argentina from a number of points of view, and one of those contexts is where Argentina currently stands in relation to where it was just a year or two ago. And the context of our assessment is that Argentina has indeed done very well over the past year to build up a fiscal track record, to build up fiscal overperformance, as I have said, this year, and to restore reserves to a comfortable range. This, therefore, gives Argentina room for maneuver looking ahead. It is in that context that our assessment was on reserves.
Now, on the draft law on-I guess you meant utilities, was that your question ?-well, this draft law was sent to Congress a few weeks ago. As you know, it is the World Bank that is in the lead in this area. Our own contribution has been to ensure or try to make the point that this is an area of the economy that certainly will need fresh investment looking ahead, and that any law that goes ahead in Argentina should establish a framework and an environment that will attract new investment. And from my discussions with the authorities, I am convinced that this is also their objective—namely, to build a framework that will attract investment into that sector. Now, we have to see how this draft moves ahead, see how it finally turns out, but I think there can be no doubt that both sides—ourselves, the World Bank and the authorities—would like to see a framework that will attract new investment into the sector.
Thank you very much.
[Whereupon, the press conference was concluded.]
IMF EXTERNAL RELATIONS DEPARTMENT