Transcript of a Press Briefing on the Regional Economic Outlook: Western Hemisphere DepartmentWashington DC, Friday, April 13, 2007
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MS. LOTZE: Good morning, everybody. Welcome to this press briefing on the release of the Regional Economic Outlook of the Western Hemisphere Department. I am Conny Lotze of the IMF's Media Relations team. As you may have seen, we have released the report in English and Spanish as well as a press release on the report in English, Spanish, and Portuguese. Let me now introduce the speakers. We have in the center Mr. Anoop Singh, Director of the Western Hemisphere Department, who will make some opening remarks. We also have Ms. Caroline Atkinson and Mr. Jose Fajgenbaum, both Deputy Directors of the Western Hemisphere Department. Let me now turn it over to Mr. Singh before I take questions. Mr. Singh.
MR. SINGH: Thank you very much. Good morning. Welcome to our usual presentation of the economic outlook for the Western Hemisphere. I will start with some trends in the region. You have seen perhaps our regional outlook, and then we will take some questions. I am pleased to see all of you here this morning.
As you all know, 2006 was a year of extraordinarily strong economic performance for the Western Hemisphere, notwithstanding somewhat slower growth in the United States in the second half of the year. In Latin America and the Caribbean, output grew at an average rate of 5½ percent, more than half a percentage point higher than we had expected in the Fall. The 2004-2006 period is now on record as the most vigorous period of growth in Latin America and the Caribbean since the 1970s, with growth averaging about 5¼ percent a year.
Regional economic indicators for 2006 were strong almost across the board. Inflation continued on a downward path, falling to a regional average of 5 percent. For the region as a whole and in many individual countries, primary fiscal balances and external current accounts were at record highs. Public debt ratios continued falling, and debt structures improved further, with greater reliance on medium- and long-term local currency debt. Finally, and perhaps most encouragingly, unemployment and poverty rates continued to fall, and recent evidence now suggests that income inequality is falling. Many of these improvements were shared by countries experiencing critical political transitions, a testimony to the new economic stability of the region.
As we all know, these improvements occurred in the context of an exceptionally favorable external environment, with high world growth, ample private financing, historically low emerging market risk premia, and rising commodity prices. This good environment no doubt gets some credit-along with much improved policies-for the region's outstanding performance. This brings me to the question of whether these favorable conditions can last, and whether we expect Latin America and the Caribbean to deliver a repeat performance of 2006 in 2007.
Regarding the external environment, as you have heard from the Managing Director and Mr. Johnson, 2007 is expected to be another good year for world growth, though it will be a bit less vigorous than 2006. In part this is due to the current slowdown in the United States, which is expected to grow at around 2.2 percent in 2007, about one percentage point lower than in 2006, though with rising growth rates during the year. We are also expecting nonfuel commodity prices to decline slightly in the course of this year and 2008. Notwithstanding the burst of financial market volatility in February and March, the external financing environment is expected to remain broadly favorable. But the overall effect of these changes will be to withdraw some external stimulus from the region.
In part for this reason, and in part because several countries have been growing at historically high rates in 2006, we expect average growth in Latin America and the Caribbean to decline moderately, to just under 5 percent in 2007 and about 4¼ percent in 2008. For 2007, staff estimate there is about a 1 in 4 chance that Latin America and Caribbean growth might be below 4 percent. Inflation will edge up a bit, particularly in some countries with high capacity utilization, but is expected to remain contained for the region as a whole. Domestic demand-both public and private-is expected to remain strong, even as external conditions become somewhat weaker and growth eases.
Against this generally favorable outlook, it is important to note that policies will need to be vigilant to ensure that the safety margins built up in the recent past do not erode over the next year. With public outlays and imports projected to continue growing at high rates, fiscal and external surpluses are expected to decline. This raises a flag, we believe, on the need to rein in the growth of government spending, especially for current outlays, which have been rising particularly rapidly in recent years. Another phenomenon that needs to be watched carefully is credit growth, particularly credit to households, which has been growing rapidly in many countries.
As discussed in the Spring World Economic Outlook, it is of course possible that the external environment for Latin America could deteriorate beyond what we now have in our baseline projections. In the Regional Outlook that we are publishing today, we look quite closely at what different scenarios for the world economy would mean for growth in the region. The main finding is that Latin America has built up its resilience to a variety of moderate external shocks over the past decade. This said, if there were an unexpectedly sharp downturn in world growth, combined with much tighter financing, or sharply lower commodity prices, the region's growth could decline significantly. Although the combination of events that could bring about such a major growth slowdown in 2007 or 2008 is quite unlikely, it is important, as governments recognize, to take these risks seriously, and continue to reduce vulnerabilities to such shocks. This means further lowering public debt, making budgets and exchange rates more flexible, strengthening financial systems, and diversifying exports, which continue to be based heavily on commodities in many countries.
The other part of the policy agenda which we view as quite critical relates to equity and growth. Equity is important not just as an end in itself, but because equitable economies make for more cohesive societies. And more cohesive societies are better positioned to cope with external shocks, and have traditionally been able to achieve longer-lasting economic expansions, as discussed in this Regional Economic Outlook.
Raising long-term growth is also important. Although 2006 was an excellent year for Latin America, it was no more than average compared to other developing regions. To substantially raise living standards over the next two decades, Latin America must grow faster on a sustainable basis. In the Regional Outlook, we show that raising long term growth will require significant increases in investment and-more importantly-in productivity growth over and above current rates. To assess the magnitude of this challenge, it is worth noting that the recent expansion, while impressive, has been driven predominantly by a reabsorption of unemployed resources, rather than unusually strong productivity growth or investment rates. So there is unfinished business here. In the report, we illustrate the effects of two particular policies-namely improvements in education and labor reforms-on productivity growth. Of course there are many other complementary reforms that are also important, including improvements in the business environment, more competition, and development of the financial system.
These few remarks were by way of background, and now we look forward to any questions you might have this morning. Thank you.
QUESTIONER: Good morning. You have mentioned imports, public spending, and credit as areas that the governments have to maintain a close watch. In Brazil the three areas are growing very fast. I would like to have your assessments on that.
MR. SINGH: Let me, first, take a moment-because it is related to your question-to point to the recent revisions that have been made to GDP in Brazil that confirm that Brazil's GDP has been significantly above what was previously measured. This means that Brazil's growth rate in recent years has been higher than what we have thought, especially over the last eight or ten years. Now, this is very good news because it tends to confirm the effect that reforms have on raising growth in Brazil. What it also means, and this is in response to your question, is that, as you relate public spending and credit to the new measure of GDP, you find that their stock to GDP has been somewhat less than what we thought. What is particularly significant for Brazil from the new data is that the investment ratios in Brazil have probably been less than what we have thought, which tends to reconfirm that there is room for much greater investment in Brazil, but what it does show us is that productivity growth in Brazil has been better than we have thought, and that is very good news.
You mentioned the issue of credit growth in Brazil being quite rapid. Many countries in the region, including Brazil, have credit ratios, ratios of different indicators of financial intermediation to GDP, which are very low compared to Asia, and the process of development will involve raising these ratios. Therefore, there will be a period when you will find rapid growth in credit because that is part of the process of financial innovation and development. What is critical, and I cannot emphasize this too strongly, what is critical is that when the catch-up takes place and credit begins to grow much more rapidly than it has in the past, it does so within a framework of a well managed, well regulated, well supervised banking system to ensure that that is a sustainable development and is not a temporary development that will threaten the banks. Our assessment is that Brazil's banking system is well regulated, well supervised, and therefore we do believe that what we are seeing in Brazil is more akin to a catch-up of financial intermediation.
QUESTIONER: Thank you. In the case of Mexico, which is facing the downward trend of oil prices and the impact of the U.S. economic slowdown, the IMF is recommending especially fiscal and energy reforms, but can you be more specific about what kind of elements these reforms, the fiscal and the energy reforms, should have in order for Mexico to really jump start the economy and also to change the way it is financing its public spending.
Secondly, in general, on Latin America, how do you square your recommendation to lower the public spending with the fact that you are also recommending more social programs to fight poverty?
MR. SINGH: Well, those are very good questions. For Mexico, you know that the new government has made a number of pronouncements on the need to carry forward the reform agenda and raise growth in Mexico. You saw in the budget that the new government sent to the Congress just after it came to power last year, late last year, it gave its sense of the fiscal reforms that are needed. It has now carried out step one, it has reached agreement and announced, I would say, a very well developed and a sound reform of pensions. The government has also laid out a strategy for dealing with the other fiscal reforms, especially tax reform in the coming months. So we think the government has a very well developed program to tackle the fiscal reforms which are essentially aimed at entrenching what we have seen in recent years, a downward trend in the debt ratio, and diversifying the revenue base away from dependence on oil, whose price, as you say, has been falling.
Now, the other elements of the reform agenda in Mexico are also well known. These have been discussed in the Mexican press, in academia, and in public policy for many years, and that agenda involves changes to competition policy, increasing competition in many parts of the economy, and bringing in new investments, especially in the oil sector. I think this is an agenda that the new government intends to carry forward, and we have to see how they proceed. They are certainly off to a very good start in terms of the sequencing of their reforms. We are not trying to second-guess their timing and sequencing..
Now, going on to your second question, which is very important, there is a delicate balance. Many countries need to continue bringing down the public debt while, at the same time, raising public investment and raising resources for poverty reduction. In our view, this balance is achievable. It is achievable because, frankly, in many countries in the region, we find inefficient budget structures. We find revenues that are tied and earmarked, we find spending that is mandated to satisfy certain historical norms and priorities. So, by loosening up budget structures, by reducing the extent of earmarking, you will be able to better pursue the new priorities that governments in the region are embracing. Indeed, as many Ministers in the region have emphasized, there is a lot of room to shift resources to more productive uses. In many countries, because of historical factors or for other reasons, significant resources currently finance subsidies which do not benefit the poor, and there is a lot of room to shift resources toward more effective poverty reduction. In this context, we are seeing in the region successful conditional cash transfer programs such as the Bolsa Familia in Brazil. This recent phenomenon is very important because these conditional cash transfers appear to be effective in reaching the poor, and what is more important, they do so at very little budgetary cost. So I will say I am very optimistic that with some reforms, governments in the region will be able to do both things. Certainly we see this also in Mexico, we see these conditional cash transfers in many parts of the region now, we see them expanding in Peru. So I think this is a phenomenon the growth of which needs to be watched to make sure it remains effective, but so far our sense is that it has been very cost-effective.
QUESTIONER: Thanks. I have two questions. I was wondering if you can develop this concept here in the report where you talk about popular impatience about social outcomes in the region. And then, on Nicaragua, I would like to know: in February you said there were going to be negotiations with Nicaragua for a new program. I would like to know what happened with those negotiations and if the negotiations were somehow affected by the positions of the new Sandinista government.
MR. SINGH: On your first question:, although we are economists and not political scientists-Ana doubts that from time to time, but it is a fact-we nevertheless study carefully the results of elections, and it is clear to us that there is a certain popular impatience with social outcomes, and we see this in the results of elections in many countries. It tends to underscore the basic economic point which we stress in the regional outlook, that improving equity and bringing down poverty is part of the process of raising growth itself. It is not simply that growth will bring down poverty. It is also the case that bringing down poverty will increase growth through a number of channels, and therefore we do believe that there is a need from both directions to increase the targeting of government spending in order to affect social outcomes.
Now, on Nicaragua, I was in Managua in late December shortly before President Ortega took office, and we had a good meeting. The main message of that meeting was twofold. First, that Nicaragua will maintain macroeconomic stability because it is fundamentally in Nicaragua's interest to do so. Second, that Nicaragua would like to strengthen its medium-term program so as to give even more emphasis on infrastructure, investment, and poverty reduction, which we agree with. Since then, we have had several discussions with the new government. The discussions have gone well. I met with the authorities, the Governor, and the Minister just recently in Guatemala just a couple of weeks ago. We do believe another mission will go to Nicaragua at the end of April. The basic point is that Nicaragua's economic situation is currently quite strong in terms of the macroeconomic indicators, in terms of growth. We are not in a rush. We would like to give the new government as much time as they want to develop their program. We want this program to be their program. Nonetheless, there is a timetable, a systematic timetable, and we certainly hope in the next few months there will be a program. This is our expectation. I believe this is the expectation of the new government, and we are very pleased to have a very good dialogue with them.
MS. LOTZE: Okay, before I take another question from the floor, let me take a question from the media briefing center here: What is your opinion of the nationalization of telecommunications and electricity firms in Venezuela and the announcement that cement companies may be next?
MR. SINGH: Well, we are not emphasizing ownership. We are not emphasizing that one form of ownership, public or private, is the magic bullet for development, especially not in the oil sector or energy sector or utilities because you do have models in different countries of both public and private ownership and hybrid forms of ownership. So there are those models. What we are emphasizing, instead, are three basic points. The first, that investment is needed in the public infrastructure, investment is needed in telecommunications, investment is needed in oil and energy, including in Venezuela. So investment is needed.
Second, that it needs to be as efficient investment as possible because that is the lesson we have drawn from other countries. Third-whether in Venezuela or any other country-it is generally unlikely that the public sector can be the sole supplier of the investment that the country needs. This is, because public finances are often constrained; and there is also the question of state of the art technology which usually requires private involvement in some way. So, if private investment is needed in these economies, this then takes us to the issue of the stability of the regulatory structure because ensuring private investment on a sustainable basis requires the stability of contracts. So we are emphasizing three things. Investment is needed, it needs to be efficient, and there needs to be stability and predictability in the contractual environment. Now, those conditions can, in principle, be met by different forms of ownership. That we have to look at country by country.
QUESTIONER: I have a question on inflation, especially in Argentina and Venezuela, which are the countries that have-where you foresee double digit inflation, especially Venezuela. The numbers are really high. I wonder if you could give your rationale behind those numbers and your counsel to those countries to bring down those rates. Thank you.
MR. SINGH: Well, we are living in a globalized world where low inflation is a fact. It is a reality, and it is also a constraint on countries. Fortunately in Latin America we are also in a new reality, and I said this last time. In Latin America there is not a single country or government that I know that wants high inflation. This is a new political reality in the region. Low inflation is what is needed, low inflation is what is wanted. I am actually convinced from my discussions with the authorities of Argentina that they want low inflation. In Venezuela, too, you look at the government's projection in Venezuela for inflation, and that projection for this year and next year is for much lower inflation than there is now, so these governments want to have lower inflation. That is tremendous.
Now, the next issue is, what is the policy stance that will bring that about? In Argentina to me it is very clear. Argentina is a sophisticated economy, and it has many tools of economic macroeconomic management ; thus, our advice has consistently been that Argentina is able to and should use all the available instruments of macroeconomic policy to bring inflation down.
In the case of Venezuela, we have to look at the situation more carefully. I do not want to just give out a recommendation, but we are looking forward to having discussions sometime this year with the authorities, and given their interest in bringing inflation down, I think we will surely have a very good discussion. But let me ask, Jose, if you want to add something on inflation in Venezuela.
MR. FAJGENBAUM: Just a comment, one of the main sources of inflation in Venezuela is well known. It is the very large public expenditure, and that is in part spending the oil export earnings that the government has. The issue is how the government can manage to sterilize the effect of this large spending and therefore reduce inflation.
QUESTIONER: Thank you. So far there has not been a lot of progress in the U.S. Congress on approving free trade deals with Panama, Colombia, and Peru. I wanted to get your thoughts on what potential you think those agreements have to boost growth in those countries and then if you could just more broadly talk about the potential for greater trade liberalization in South America in particular.
MR. SINGH: Well, obviously, those are very important issues. Let me preface my comments with the remark that the reality is we are looking at a region where the ratio of trade to GDP is quite low compared to other parts of the world. To tie this to my comment on investment a few minutes ago, it matters whether investment is taking place in a region which is relatively closed or relatively open, and it is generally the case that when investment takes place in an economy or a region that is relatively open in terms of high trade shares to GDP, that investment tends to be more efficient. So I will say that raising the trade share to GDP in the region over the next short and medium term should be a basic priority. I think there can be no doubt about that.
The second point is that it remains our view, and we are not the experts on this in the Fund, but it remains our view that broad multilateral opening in the context of the Doha Round is the only true recipe for broad-based benefits to the region from trade opening. There can be little doubt on that. Now, having said that, we have done studies and governments in the concerned countries have done studies on what would be the impact on employment,growth and exports of these bilateral FTAs, and those studies are quite positive on the beneficial effects on employment, growth, and trade of the concerned countries. Certainly, we see in Central America that the CAFTA-DR is already having an important effect on expectations, and indicators of new investment. So these deals are important. I should, however, underscore that the basic objective is broad multilateral opening. Caroline, do you want to add to that?
MS. ATKINSON: I would just add that the importance of trade for growth in the region is certainly very high, and in that sense we have also seen a welcome shift in the region towards more interest in that area, which is part of the positive developments that we have seen more generally, I think, to focus on a stable environment that can provide for better growth.
QUESTIONER: It is a follow-up on his question about inflation. As I understand yesterday Miceli and de Rato had a nice discussion and a good exchange of views. One of the subjects, according to my sources, was interest rates. As you know, the government does not want to move them, and apparently, as I am told, you recommended to move them. So my first question is why? Why do you think this is so important if more or less things are going according to what are expected?
The second question is more generally, the ethanol initiative between Brazil and the United States, which could be the impact in prices in grains like corn and in food, and if this is not going to hurt?
MR. SINGH: I knew you would ask me very tough questions. I am happy to talk to you about interest rates in Argentina but, of course, I cannot tell you what Mr. de Rato and Minister Miceli discussed.
As you know, the central bank has been trying very hard to sterilize the capital inflows. But in the end our sense is, and you will see this in the Article IV consultation we had last year, our sense is that in Argentina or in any similarly placed country, we cannot expect inflation to be controlled by one instrument. As I said just now, Argentina has many tools, and our advice has been, and our discussions are based, on the view that Argentina is able to use all its macroeconomic instruments-monetary policy, fiscal policy, exchange rate policy, all macroeconomic policies-to reduce inflation. This is more complex than simply saying, increase real interest rates. I do not want to focus only on interest rates. It is a fact that real interest rates are negative in Argentina, though we have seen that the central bank has been trying to firm interest rates over the past year. But our basic point is that the government needs to-and will, I am sure-progressively use all instruments available.
Now, regarding the trade between Brazil and the United States in ethanol, I am not really an expert on that issue. I know that trade liberalization will obviously help, but Jose can add to that.
MR. FAJGENBAUM: Mainly it is an initiative from the U.S. and Brazil to promote the use of ethanol and the technology. It is not so much the trade between the two countries at this stage. It is a natural development given the very high oil prices that exist in the market at this stage. Substitutes began to emerge, and biofuels is one of them. We see the impact that the price of corn has had in the case of Mexico, but that is also one of the consequences of substituting one product for another.
QUESTIONER: I was wondering if you could be more specific in your assessment about the growth in public spending in Brazil, specifically current outlays?
MR. SINGH: Well, on public spending in Brazil, I think there are two issues here. The first issue is the need to raise public investment. Public investment in Brazil has been quite low for a long time, and therefore we agree with the government on the importance of raising public investment in a sustainable way. You know that in the last few years the government, when it has been announcing its target for the primary surplus, has also announced adjusters to their target to take account of certain efficient investments, and those adjustors have been in the range of 0.5 percent of GDP. So I think we agree that there is a need to raise public investment, we agree that there is room to raise public investment.
Now, we believe also that if the government is able to reduce rigidities in the budget structure over time-the earmarking and the mandating of certain spending-that will also yield more resources that could be used towards public investment without affecting its primary surplus target. So there are two issues. One is raising public investment, the second is making the budget structure more liberal so that it creates room. The point is that this can be done in Brazil without raising significantly its revenue to GDP ratio, which is already quite high.
QUESTIONER: Good morning. There is an idea which is gaining support in Latin America and it is the creation of Banco del Sur, what is your opinion about this idea launched by President Chavez?
MR. SINGH: We get this question quite a lot, and I answered this question a couple of days ago, too. I do not really know what to say. I mean, on the one hand, this is an exercise in regional integration, and we do believe from our experience in Asia and Europe that initiatives of regional integration can help greatly. They are important parts of the process of regional development. So to the extent that it involves deepening regional integration, we think it is fine.
Now, in terms of what precisely it entails, we do not know because we do not know the details of it, and we look forward to finding out and working with this bank, but we do think that it is more in the area of investments rather than in the area of monetary cooperation. But we do not know precisely what the details are, and therefore we are quite anxious to find out and give our assistance if we can. Thank you.
MS. LOTZE: Thank you very much everybody for participating.
[End of press briefing.]
IMF EXTERNAL RELATIONS DEPARTMENT
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