Transcript of a Press Briefing on Latin America and the Caribbean
September 23, 2005
Washington, DC, September 23, 2005
Anoop Singh, Director, Western Hemisphere Department, with
Caroline Atkinson, Charles Collyns and Jose Fajgenbaum, Deputy Directors, Western Hemisphere Department,
Markus Rodlauer and Christopher Towe, Senior Advisors, Western Hemisphere Department
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MR. BAKER: Good morning and welcome to IMF press briefing on Latin America and the Caribbean. I am Francisco Baker, the senior press officer for Latin America. As usual, the main speaker will be Mr. Anoop Singh, Director of the Western Hemisphere Department. Also here with us at the head table are deputy directors Jose Fajgenbaum, Caroline Atkinson, and Charles Collyns, and senior advisors Markus Rodlauer and Christopher Towe.
Before we take any questions, Mr. Singh will have some opening remarks.
MR. SINGH: Thank you very much, Francisco, and good morning all of you.
We have our senior staff here also with me, so you can see all of us. We like to be very transparent in everything that we do. So this is another exercise in that transparency, almost knocked my name plate over.
Well, I will be brief this morning in my opening remarks for two reasons. You will have a copy of them after I speak. And also this year it is proposed that we will present a more detailed regional outlook in Bogotá on October the 13th. And that will be an occasion to go into the global context and how we see the challenges in the region in somewhat more detail than we will cover this morning.
But let me start first on the global context for Latin America and the Caribbean. You heard now the press conference of Mr. Rajan and you heard Mr. de Rato speak about this in the last few days.
The bottom line is that our sense is that the overall external context remains benign and favorable for our region. This is, of course, for a number of reasons.Over the last year or two we have seen the region benefit in different ways in different countries from commodity prices, from terms of trade gains, from diversifying and strong exports across South America. In Brazil you know what those numbers are. We have seen very favorable financial market conditions, low spreads.
What perhaps is not as well known is that the growth in the region is also being supported, substantially now, by domestic demand, by both consumption and investment. There were some signs of a softness earlier in the year but we see in the second quarter in many countries, again including Brazil, in the second quarter renewed strength in domestic demand. This is helping overall GDP growth.
We expect that the region will have overall growth on average this year of around 4 percent, and that it will be still close to that, about 3.75 percent, next year.
Now, these are high rates of growth for the region. Of course, we want to do better. But what we have in front of us is robust growth and it is also growth that it is well above historical averages. It may be less than last year but last year's was a record rate, strongly influenced by those countries that were recovering from crisis.
The other favorable context we have in the region is that inflation is still well contained. And this is despite the pressures we see from oil prices. And I will have more to say on that in a few moments.
I want to also emphasize that unemployment continues to trend down. Poverty indicators continue to improve. We see in Argentina that unemployment is now down to 12 percent compared with over 20 percent at the height of their crisis.
And just this morning or last night, I believe the government has released new poverty indicators that show in Argentina a further drop in the poverty rate, which is now well below where that was at the height of their crisis a couple of years ago.
So the context we have, both globally and in the region, I think, is good. Of course there are risks, and I will go into those risks very briefly. But I want to emphasize this morning a theme that Mr. Rajan picked on a few days ago. And that is we do believe that countries in the region, such as the Brazil, have built up the strength to deal much better with these risks than perhaps 10 years ago.
Among the risks, of course, are those from continuing high and volatile oil prices. We have had some shocks from Hurricane Katrina. We may have some more in the coming days. So far, the impact of these oil shocks, both on the global economy and on the region, has been surprisingly moderate.
Of course, the impact has been higher in Central America and the Caribbean, which comprise countries that are net oil importers. Those countries in particular are facing great difficulties in trying to balance the pressure on their fiscal positions and how to balance the pass-through into domestic prices of the higher oil prices worldwide.
So there are fiscal pressures that are rising and we need to watch those carefully.
There are also risks that will arise if the global financial market conditions were to tighten abruptly. I say abruptly because some tightening is inevitable and will happen as a result of the cyclical trends. What we are concerned about is if there is any abrupt change in market sentiment which could be sparked by any jump in inflation expectations following either concerns about oil prices or following concerns of about how the global imbalances could be resolved.
Although much progress has been made in bringing down the public debt, there is no doubt, I believe, that Latin America and the Caribbean remain vulnerable to any abrupt tightening of financial markets.
The third risk I will point to is a risk of continuing competitive pressure from other countries in export markets and also risks from any increase in protectionist sentiment around the world.
Now here I should say three things. First, as I have just said, the export growth in the region has been impressive and so there is that background and context that helps us.
Number two, we have now falling into place the Central America Free Trade Agreement and that should help, particularly as countries are now strengthening their institutions to maximize the benefits from that trade agreement.
And third, we should all be resolved--and this is the challenge for the wider world — to press forward with the Doha round.
But now let us talk briefly about the ability of countries in our region to withstand these risks and shocks if they were to materialize.
Here I will make four quick points.
The first is that the region is stronger from a fiscal perspective. Most countries in the region have used the last two or three years of better growth to undertake structural improvements in fiscal policy. They have held tight control over spending. They avoided, by and large, the cyclical tendencies of the past. And this has resulted in positive and high primary surpluses, declining public debt ratios, and improved debt profiles. We see primary surpluses now around 5 percent for Brazil and Argentina for this year. And a number of countries have gone further and have increased their reliance on the issuance of domestic debt. This further reduces the vulnerability to exchange rate risk and it also helps deepen local currency markets.
So to summarize this point there is structural improvement on the fiscal side which has accompanied the cyclical improvement that has taken place. This will help our countries cushion and absorb shocks from the region much better than perhaps 10 years ago.
The second point I would make is that countries have, in a cautious and preemptive way, pre-financed their future needs of foreign exchange and their future debt service obligations. Many countries have already completed their financing needs for 2005. And some of them have already begun to either start or advance substantially into pre-financing their need for 2006. And some are even now beginning to look at pre-financing 2007. So this is a wise and preemptive move on the part of many countries in the region.
The third point I would make is that inflation has been well contained and this is because of improvements in the monetary policy framework. We see inflation targeting working reasonably well in many countries. We see central banks more committed, publicly committed, and institutionally committed to keeping inflation low. Clearly, we have public pressure from the population at large to ensure that inflation remains low.
And finally, I have already said that external positions have improved. We have large trade and current account surpluses across the region. You can look at almost any country and you see large surpluses, Argentina, Brazil, across the region.
We see high reserves. Reserves in Argentina now are almost at $26 billion. Net reserves in Brazil I believe are now close to or above $40 billion. This is a sea change from the external positions of our countries just two or three years ago.
And of course, many of them have adopted more flexible exchange rate regimes and clearly that needs to be maintained.
Finally, what I will talk about is one of the policy challenges over the medium term. Now I do not want to get into this topic in any detail now for two reasons. Firstly, the agenda is still complex and we should discuss that when we have more time.
The second reason is we have outlined this agenda, to some extent, in our Latin American paper that came out a few months ago. For those who have not seen it, we can certainly make it available.
And third, I will have more to say on these kinds of issues when I talk of the regional outlook in more detail next month.
The main point is that countries in our region need to raise the quantum and the efficiency of investment and savings. And this will need institutional reforms, particularly to public sectors, to improve the efficiency and the quality of public spending and of tax systems so that we can crowd in more and better private investment. This underscores the importance of having a business climate that attracts that private investment.
So finally, let me just end by saying that the region has done well over the past year. The external environment remains so far still fairly benign. The region has improved its resilience to shocks. And now the countries are building on these achievements and trying to address the challenges to ensure that growth remains high and sustained over the medium term.
So that was my brief introduction, perhaps not so brief. And now if you have any questions, I certainly will be happy to take them.
QUESTIONER: You did not mention when you assessed the risks, one risk that was pointed out by the World Economic Outlook about political uncertainties. In their knowledge, they say that this is one of the things that could curb the growth in the whole region. And specifically in Brazil, the fallout of the political uncertainties could threaten growth on the following years.
Do you agree with that assessment? I would like you to elaborate a little bit on that.
MR. SINGH: This issue of the political context, the political uncertainty, has been raised by many of you in different ways. Certainly, to look at this issue more broadly, many elections will take place between now and the next 18 months.
I will point to one major difference at this juncture compared to perhaps where the region was 10 years and 20 years ago. And that is across the region you have broad macroeconomic stability
And I think it is one thing for elections and political uncertainties to take place or to arise during periods of macroeconomic instability. It is something quite different when elections and political uncertainties arise during periods of macroeconomic stability.
And, therefore, what we have in the region, broadly, is macroeconomic stability and we have economic teams in every country committed to preserving that continuity of macroeconomic stability.
I think if you go back into history and look at elections in other countries, you see that elections that were held during conditions of macroeconomic stability are not events that we should be afraid of. In fact, they are events that will allow governments to secure broader and strengthened mandates to undertake the kind of reforms that are needed.
And I can tell you, from my own personal contacts, discussions, the conference we had at ECLAC/CEPAL a few months ago. I am convinced that there is a much broader consensus on the kind of reforms that are needed over the medium term.
Fortunately, the region has more room for maneuver in deciding how to phase them in and more room for maneuver in deciding and ensuring that populations are convinced of the need for this.
So I would say whether it is Brazil or other countries, we have macroeconomic stability. We have teams pledged to maintain it. And this is a very important improved environment for elections to take place.
QUESTIONER: In the World Economic Outlook, two important points about Colombia are mentioned. One is the sustainability and the second one is strict fiscal reform.
About the sustainability, Colombia has done two important things in the last year. One is very good [inaudible] and local currency [inaudible] and now is buying reserves from the Central Bank.
So how do you see these operations? And how do you see the prospect of this debt sustainability in the country?
And there is a component about fiscal reform that the last five years the IMF has said the country needs these stricter reforms and very little has been done. So are we going to keep hearing the contradictions to reforms and nothing really is done?
How do you see this part?
MR. SINGH: Our team has just come back from Colombia a few weeks ago. I think that was the first review of our current arrangement. That program remains well on track.
You know that Colombia has been growing strongly in recent years. We think that Colombia's growth rate should remain around 4 percent for this year and next year.
In fact, we think that growth in the second half of this year in Colombia should be above what we had possibly in the first half.
In terms of Colombia's public debt that you asked for, I think the strategic target for Colombia is to bring the public debt ratio below 40 percent of GDP over the coming years. And what the authorities are wisely doing is they are accelerating the fiscal consolidation that they have embarked on. I think we will find that they will over perform with respect to their own targets, which means that they could achieve a public debt ratio below 40 percent of GDP even faster than had been programmed.
Now this is happening not just because of macro economic reforms in Colombia. This is happening because structural reforms are also taking place particularly in the fiscal area. A lot has been done in terms of improving the efficiency of spending and a lot is planned to be done, even in the coming months, to make the budget process in Colombia more flexible.
So we think that Colombia is doing well. We think that its policy of advancing fiscal consolidation in line with the improved external environment, in line with the improved terms of trade, is the right one. We see Colombia advancing more rapidly to bring its public debt ratio below 40 percent.
And there is a strong pipeline of structural reforms that have taken place, that are taking place. You are aware, of course, of the progress made in Colombia already in the difficult area of pension reform.
So I would not agree that this is only macroeconomic. I would say in Colombia and other countries a lot of structural change has taken place over the last few years.
QUESTIONER: Successive World Economic Outlooks have expressed in the last few years that Argentina must face structural reforms of different types while the Argentine government postpones those decisions and the economy continue expanding.
Do you think that the current macroeconomic frame in Argentina is sustainable? And I am trying to frame this question, is there any kind of [inaudible] or problems coming Argentina in the following year? For instance, if the Argentine government decides to postpone the negotiations with the IMF until the middle term of 2006?
MR. SINGH: I had hoped for a moment we would not have any questions on Argentina, so you spoiled that.(Laughter)
Argentina has been growing strongly. I think it is fair to say that the speed and the extent of Argentina's recovery has surprised most people. And that, of course, is very good news.
We see the strength of the economy also in the second quarter of this year. We see industrial production coming in strongly in August. And we see now that Argentina's economy has reached an important threshold, that it has now reached a stage which is probably above, maybe significantly above, its pre-crisis level. And here I go back to 1998. So I think they have reached a level above that. So that, of course, is very good news.
I would say that a crucial contributor to this performance has been Argentina's growing fiscal strength, its restraint on government spending by and large over the last few years. We see buoyancy in tax revenues. And we see a primary surplus that is overperforming the target. I think this is all to the good.
Now what is exactly on everyone's mind, on my mind, the mind of the authorities, is to keep growth strong and sustained over the medium term.
Now towards that end, we have discussed with the authorities a range of structural reforms that are needed to sustain growth over the medium term. I do not believe, myself, that there is any fundamental difference of view between ourselves and the economic team on the kind of reforms, the broad direction of reforms, that are needed over the medium term.
I think what is at stake is for the government, for the authorities, to decide on the timing and the phasing in of those reforms. And it is only the government, not the IMF, that can decide those issues. And I think this is what they will turn to next, to decide when, how much, and to what extent. And we will wait for the government to make those important decisions, as I am sure they will.
And if that takes place today, tomorrow or a few months earlier or later, I do not think we should be overly concerned. We should wait for the government to develop the reform agenda, as they have been doing and as I'm confident they will do, in the coming months.
QUESTIONER: One of the things that caught my attention in your remarks, is that the environment for the region is very benign at this point.
In the case of Mexico, the Fund has been insisting on the necessity that the government should accelerate the process of reform, especially in the energy and telecommunications sectors.
The other thing that caught my attention is when the IMF present the window, there seems to be little worries about the effect that Katrina could have in the country or some countries in the region, especially those who have a very close commercial relationship with the U.S., which is the case with Mexico.
The World Economic Outlook points that the economy of Mexico should rebound next year to 3.5 percent from 3.3 percent this year. So the question is basically if at this point you foresee any risk that that assessment for Mexico could have changed due to the impact of Katrina?
MR. SINGH: Maybe I can ask Caroline Atkinson to answer some of these questions.
I will just make one point. I think nobody could have been more articulate and more forceful on the need for reforms than the economic team in Mexico. I think they have made the case for reforms. And I think that has led to a growing recognition, at least it is my sense, it had led to a growing recognition in Mexico that these reforms are needed. So I do not think there is anything that we have said that is not fully shared, fully led by the economic team.
Now it is true, going on to next point, that Mexico is tied more closely to the U.S., especially in terms of its industrial exports. And therefore, it is more vulnerable, perhaps, than other countries.
But maybe I can ask Caroline to give some more background on the predictions.
MS. ATKINSON: Thank you.
As Anoop said, certainly the Mexican government has been very articulate itself about the need for reforms in order to have a stronger basis for sustained growth and higher growth going forward. At the same time, they have done a lot to entrench the macroeconomic stability that is also needed for sustained growth.
We have seen that Mexico's output does move a lot with that in the U.S. That has a good side because the U.S. economy has been, after all, one of the strongest in the world.
And we do expect that our central scenario is that the growth in the Mexican economy will recover in the second part of this year and next year. And of course, it decelerated a little bit earlier this year. So we continue to have that central scenario of somewhat higher growth. You mentioned the 3.5 percent next year.
And of course, as you know, the Central Bank of Mexico has begun to allow an easing of monetary policy in recent months as inflation is moving down towards its target level. And this, and continued growth in the U.S., will help to support Mexico.
QUESTIONER: During his press conference, Mr. Rajan said that countries should pass through to consumers the rise in oil prices, especially the recent spike. In Brazil, many analysts say that there is a huge gap, that a gas price hike is way overdue.
How do you see this strategy in Brazil? And do you fear, as we are ahead of an election process, that the government or state-owned companies may take a more populist approach to the economy?
MR. SINGH: I might ask Charles to speak a bit on this, but led me address the point about the risk of a more populist approach. If you look at where Brazil's economic policy is and you look at where market confidence in Brazil's economic policy is, it is extremely sound. We have got very strong indicators from financial markets. The spreads for Brazil are back, I believe, well below 400. We have got growth remaining robust, recovering in the second quarter of this year.
And, most importantly, we have inflation now back in the target range. Expectations are that inflation, by the end of the year, will be almost exactly close to 5.1 percent, which is the target. And we have got public spending under control, and the primary balance overperforming.
So rather than populist pressures, I think we are seeing instead responsible policy. We are seeing dividends from that policy. And we're seeing high market confidence in that policy.
MR. COLLYNS: Petrobras' approach to prices is somewhat different from other countries. Essentially, it tries to smooth variations in international prices, as you know. In times when international prices are rising fast. that means that prices in Brazil may not move up quite as quickly as in some other countries.
Nevertheless Petrobras does adjust prices in due course, when it sees that the higher international prices are being sustained. Indeed, PetroBras has, over the past couple of years, moved its prices upwards, including a recent set of increases of 10 to 12 percent.
I am confident that Petrobras will continue to adjust prices as needed. But I think it is helpful to follow this approach of smoothing the prices to avoid the more rapid fluctuations that could otherwise occur.
QUESTIONER: Mr. Singh, I hate to bring you back to the topic of Argentina, but...
With Argentina's failure to raise cash through last weeks' debt issue, investors on Wall Street are increasingly talking about the fact that the country will have to turn back to the IMF for money. What sort of engagement do you envision between the Fund and Argentina over the coming year? And how much money would the IMF be willing to put up to help the country?
If you could also give me your inflation forecast for Argentina, that would be great, as well.
MR. SINGH: So you managed to get three questions into that.
Well, the first thing is that, as I said earlier, Argentina's primary surplus has been overperforming, and certainly for this year. And so they have financing flexibility in terms of how much they need to raise from markets. So I would not worry too much about the event you cite. They have flexibility from the fact that their primary surplus is overperforming.
In terms of the Fund's engagement with Argentina, as the Managing Director said I think yesterday, this is an issue for the government. This is an issue for them. This is their decision, not ours.
In terms of inflation, I think inflation has come in, the last month we have is close to 10 percent. And clearly all efforts are directed at keeping inflation in the single digit range. This is the target.
QUESTIONER: I would like to ask about the exchange rate because in our countries there is a big discussion about what is the right level for currencies against the dollar. In Uruguay, the private sector is increasing pressure to have a higher exchange rate and they are saying that it is going to affect our competitiveness in the short-term. Exports have has been one of the engines of growth in Uruguay last year and even in this year.
How do you see this problem? And how is it going to be fixed?
MR. SINGH: Well, it is quite normal for exporters to complain about the exchange rate when the exchange rate is currently appreciating. The facts are, in a sense, the opposite.
The fact is that in many countries in the region, including Uruguay, there was a very large depreciation some years ago. And what we have observed in other crises is that this is a kind of pattern. Exchange rates typically overshoot at the start of a crisis. And then, as a recovery builds and confidence comes back, as it has come back for Uruguay, it is normal that the overshooting is then somewhat reversed.
The important thing is, firstly, not to mistake the appreciation that takes place for a loss of competitiveness because overall in most countries, and in Uruguay, the exchange rate is still much more depreciated than it was three years ago. So competitiveness has improved not decreased over the last two or three years.
The second point is not to fall into the trap of trying to fix the exchange rate again because that is the legacy that many countries in the region have had in the '90s of fixed exchange rates. Many countries now have moved away from fixed exchange rates precisely because exchange rates do need to move. So again, I will say that flexibility has served Uruguay well.
Markus, do you want to add to that?
MR. RODLAUER: Just to say for Uruguay, you look at the macroeconomic picture today, which is high growth, very low inflation, and a very strong balance of payments. I think monetary policy, in that context, is being conducted with the right kind of balance and caution.
As you know, just recently there was some moderate easing of the monetary policy that was implemented. Uruguay does not have an inflation problem at this point. At the same time, the authorities are mindful of the need to further strengthen the reserve cushion of international reserves.
So to find the right balance between making sure that inflation stays on track, which it is, and taking opportunities to further strengthen the reserve cushion, we think is exactly the right approach going forward.
QUESTIONER: What do you think, or does your team think, about Mexico's 2006 budgetary proposal? And why the Fund is always saying that Mexico must reduce its level of public debt? Because the government always say that it has become one of the most lowest level. Even in the developed countries, it is more or less 40 percent in the total, including PSBR.
MR. SINGH: Thank you. I am going to ask Caroline to speak on the issue of the budget for next year. On the issue of the public debt, I think what is happening is not unique to Mexico. I think the experience of the last 10 years, including in industrialized countries, including in Europe, is that what economists thought some years ago was a safe range for the public debt, there has now been a revision of that view. And therefore, all governments in the region are trying to get their debt ratios even lower.
I think this is a change that has taken place in the appreciation of the links between the public debt and growth.
MS. ATKINSON: On the 2006 budget, especially in light of Anoop's comments on indebtedness, we strongly support the government's intention and proposal for a small surplus on the traditional measure of the budget deficit. This continues the pattern that we have seen of a gradual steady improvement and consolidation of the public finances, which we think is commendable.
As far as taxes go, as the Mexican authorities have said, there have been proposals for tax reform in Mexico that would broaden the base of non oil tax revenues. Turning to the 2006 budget, the overall focus on moving further towards consolidation of the public finances is certainly the correct one and one that we support.
QUESTIONER: I would like to have your assessment of the situation in Venezuela right now. And I would like to know if you think that the current growth is sustainable if they continue with their fiscal expansion? I mean, even if the oil prices keep going up?
MR. SINGH: Well, Venezuela's growth rate has been high. This has been a recovery from the difficult economic situation experienced some years ago. You know that we are projecting growth in Venezuela to be between 7.5 and 8 percent for 2005. And at these levels of oil prices, we think that Venezuela should have no difficulty sustaining growth next year of around — I would say in the region of 4.5 percent or so.
It is not just Venezuela but other countries, too, that are having these windfall gains from oil. This goes back to what Mr. de Rato said, I believe, yesterday. This is a very important moment for countries that are oil exporters to be able to use these windfall gains either to reduce their public debt or to increase high quality and efficient investments and to save.
I think it is how countries will strike this balance between saving, investing, and reducing the public debt that will determine that country's medium term growth rate. And each country will strike its own balance.
But this is a huge opportunity to strike a balance in a way that will support high medium-term growth.
QUESTIONER: I have a question on Ecuador and Bolivia. As you know, those countries are really now in a very serious political crisis. What is the IMF approach on those new governments? Is the IMF demanding some kind of policies both for Ecuador and Bolivia? Or is the IMF waiting for new governments to take place in those countries?
MR. SINGH: It is certainly true that Bolivia and Ecuador have had very difficult environments in the last year. The most important thing I will point to is that in both of those countries, despite the difficulties, you have macroeconomic stability. And I cannot tell you how important this is for a country, as I said earlier, facing political uncertainty or difficulty, how important it is for the country to have macroeconomic stability.
Bolivia continues to grow, this year close to 4 percent. Ecuador is also growing in 2005. So growth is positive, substantially positive. The financial sector is calm. These are huge assets. So I think that is the first and most important point.
It is true that these countries need to get a strong consensus, to take the kind of reforms that would maximize their own rich natural resources. Bolivia and Ecuador are rich countries in terms of natural resources. The challenge is to use the natural resources in a way that benefits the entire population.
I am convinced that those in positions of power in these two countries are trying to do just that. We have just seen Ecuador put forward a budget for the next year that is a strong budget, a budget that preserves a primary surplus close to 5 percent of GDP. So they are trying very hard to deal with the pressures they have.
Bolivia will have a very important election very soon. It matters that that election will take place during a period of macroeconomic stability.
That is the environment, the calm environment, that will allow a strong consensus to develop for the future. But it is very important that that is going to happen in a stable macroeconomic environment.
And our efforts, our engagement with these countries, has been first and foremost to ensure that macroeconomic stability remains. That is the first step.
The second step is to use that stability, to use the electoral process, to get a stronger mandate. These reforms have to be owned. It does not matter what I think or you think. It matters what the people think. And what they think in an environment of macroeconomic stability is quite different from how they would react in an environment of macroeconomic instability. It is very important for the region.
MR. BAKER: Thank you.