Macroeconomics and Equity, Speech by Rodrigo de Rato, Managing Director of the IMF

September 20, 2007

Speech by Rodrigo de Rato, Managing Director of the International Monetary Fund at the Welcome Dinner
for the ECLAC-IMF Conference
Lima, Peru, September 19, 2007

As Prepared for Delivery

1. I would like to thank Minister Carranza for that generous introduction, and also President García, Minister Carranza and the Government and people of Peru for hosting this conference and welcoming us to their country. Let me also thank all of you for joining us tonight, and for participating in the conference tomorrow on "Macroeconomics and Equity." We will be discussing very important issues, and I thank you for giving us your time and energy. I should also thank the staff of the Fund and of ECLAC for organizing this conference and especially José Luis Machinea for his very interesting remarks. This is the second time that the two institutions have joined forces to organize a conference on regional issues.

2. Let me begin by extending my sympathy, as I already did in a letter, as well as the sympathy of the IMF, to the Peruvian families who lost relatives and friends, homes and possessions, in the devastating earthquake of August 15. The earthquake and also the hurricanes which damaged the lives and property of people in the Caribbean and in Nicaragua, Honduras, and Mexico this summer are tragic reminders of how nature can surprise us in terrible ways. Here in Peru, President García and his government have taken strong and swift action to help the survivors, and to begin the process of recovery and rebuilding. You can count on the firm support of the IMF at a moment when, for many reasons, Peru is looking towards a better future.

3. We meet at a time of greatly increased uncertainty in the global economy. Since the beginning of August, there have been sharp fluctuations in costs in some markets, and near paralysis in others. We know that the recent events in financial markets result from a loss of confidence that is still running its course. But even if stability returns to the markets soon, the adjustment process and the effects of the crisis on economic indicators are likely to be felt for some time both in financial markets and in the real economy. I would like to talk to you tonight about how we see this affecting the global economy, and also about the likely impact on Latin American countries.

4. We know that the financial market turbulence will have effects on global growth, especially in 2008 when its full effects will appear in economic indicators. The impact is likely to be largest for the United States, but we will also see some effects in other countries. These would come partly from the reduced availability and increased cost of credit for housing in the United States, and from the reinforcing effects that this is likely to have on the downturn in the U.S. housing market that is already underway, and from the effects of private consumption. It also now seems likely that difficulties in credit markets will have spillover effects beyond the housing market, which could affect consumption and investment more broadly. In addition, we know that other advanced economies will be affected in part because their own financial institutions and markets have exposure to the problems in the U.S. subprime mortgage market, and in part because lower demand in the United States will reduce demand for their exports.

5. The monetary authorities have reacted quickly to provide more liquidity so that credit markets, especially in industrial countries, can return to their normal functioning. I believe that we all agree that these measures have been appropriate. At the same time, we are also beginning to see that monetary policies in some industrial countries are changing or being re-evaluated, as different central banks consider the effects of the crisis in credit markets on growth. In this connection, yesterday's action by the US Federal Reserve aims to forestall the adverse macroeconomic effects of tightening credit conditions.

6. We still expect growth in the global economy to continue performing relatively well. The economic fundamentals, both in the large industrial economies and in most major emerging economies, remain strong. And the largest industrial economies are not the only source of growth in the global economy. We still expect China and India to grow at above or close to double digit rates. These factors will add strength to global demand.

7. At present, we expect that the effects will be relatively modest in Latin America, and that most countries in the region will grow at rates close to those seen in recent years. The figures for growth in 2007 will not be much affected in any case: the effects would only be felt in the fourth quarter of the year. In 2008, the crisis could knock off about one half of one percent of growth in some countries in the region, although it is too early to assess specific effects on the real economy.

8. Allow me to explain why. In the past, economic downturns and financial disruptions in the global economy have affected the region through lower demand for imports, especially in the United States, and also through higher spreads on emerging market debt. We expect to see some impact from these developments this time around too. But there are some reasons to think that the effects on the region will be less than in past episodes. Why? Most emerging markets in Latin America have stronger economic fundamentals today than they had during previous financial market disruptions. More flexible exchange rate regimes and the ability to issue debt in local currency have minimized two sources of vulnerability, compared with previous episodes of financial market strains. Many countries also have stronger budget positions. Latin America's exports are also more diversified-the share of the region's exports going to the United States has fallen by about 10 percentage points since 2000. For all of these reasons, the impact of global financial market turbulence on Latin America is likely to be less than it would have been in previous crises.

9. However, the situation has changed since August. There are likely to be some testing times ahead for finance ministries, central banks, and regulators. There may be countries that can afford to run a counter-cyclical fiscal policy if this becomes necessary. But finance ministries will need to keep a careful eye on debt ratios, and to avoid sharp increases in government spending. Central banks and financial market regulators will need to make sure that they have good information about the risk profile of the major financial institutions in their countries.

10. While the current turbulence should not lead policy makers, here and in the rest of the world, to reject the development, globalization, and risk dissemination instruments of financial markets, which benefit the development of emerging economies, it should inform their decisions on how to develop and regulate these markets, now that the first test has taken place. For our part, the Fund will strengthen our role in containing risks globally and in the region through multilateral surveillance and technical assistance to its member countries. Moreover, during the next Annual Meetings, the IMF along with other multilateral institutions, such as the Bank for International Settlements (BIS) and the Financial Stability Forum (FSF), will initiate a discussion on the lessons and consequences for the future. The IMF also has as a priority in its agenda discussions on a new financial instrument to help prevent crises in a globalized world. Its aim would be to reduce the likelihood of a capital account crisis by supporting strong policies and by making automatic substantial access of resources available upfront if a crisis did occur. Recent developments show us that not only prices but also liquidity conditions in financial markets can change very quickly.

11. I have spoken tonight mostly about the effects of the recent turbulence in financial markets. Tomorrow, we will turn to another very important issue: how economic policy can promote more equity in societies. The rise of uncertainty in the world should certainly not blind us to the importance of equity, of equality, or of the need to reduce poverty. Indeed, one concern we should have is that it is often the very poor who are most severely affected by financial and economic turmoil, just as they are usually the people most affected by hurricanes and earthquakes. Protecting those least able to protect themselves is a task for national governments as well as for multilateral institutions. The immediacy of these issues should lend urgency to our consideration of them tomorrow.

12. Let me conclude by offering a special welcome to President Alan García, who will give the keynote speech tonight. Peru's economic stability is increasing and it is one of the fastest growing economies in Latin America and the policies that President Garcia's government is pursuing will support this growth. The government is reforming the tax system, reducing debt, and deepening Peru's financial sector and domestic capital markets. President Garcia and his government are also taking poverty seriously, and taking action to reduce it. I believe that we can learn a lot from his experience and from his ideas. It is therefore with great pleasure that I invite him to speak to us tonight.

13. Thank you very much.


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