Transcript of a Press Briefing: Western Hemisphere Department

April 12, 2014

Washington, D.C.
April 11, 2014
Webcast of the press briefing Webcast

MR. ANSPACH: Good afternoon. Buenas tardes. Boa tarde.

Welcome to this press conference on the outlook for Latin America and the Caribbean.

With us today to present the outlook on Latin America and the Caribbean are officials from the Western Hemisphere Department at the IMF.

In the middle, we have Alejandro Werner, who is Director of the Western Hemisphere Department. To his left is Miguel Savastano, Deputy Director of that same Department. To his right is Adrienne Cheasty, also Deputy Director from the Department; and to her right, Nigel Chalk, also a Deputy Director in the same Department.

We have interpretation into English, Spanish and Portuguese; we are happy for you to ask the questions in your respective language. And we will also be taking questions from on line.

With that, I think Alejandro has some introductory remarks, and then we will be happy to take your questions.

MR. WERNER: Thank you, Rafael, and thank you all for coming.

Latin America is adjusting to a changing international environment, and as you saw, we are projecting a rate of growth for the region of 2.5 percent for this year. That is the lowest rate in the last decade when one takes away the year 2009 as a reaction to the international financial crisis.

So I think the region is presented with this tough environment. I think the region is well-placed to handle an environment in which interest rates have started to go up from very low levels, and also, commodity prices started to decline but still remain at high levels.

The region has strong balance sheets. The region has relatively good fiscal positions. And going forward, it will be important to avoid building vulnerabilities during this period, and it will also be crucial to focus on a pro-growth structural reform agenda that will obviously be country-dependent, but a lot of efforts have to be made to work on the structural determinants of growth to actually be able to accelerate the rate of growth in our economies in the next decade.

Talking a little bit about the global backdrop, as you know from our World Economic Outlook, global activity has picked up since mid-2013 and is expected to strengthen further over the period ahead. We project global growth at slightly higher than 3.5 percent in 2014, led by a faster recovery in the advanced world.

In the United States, economic activity is gathering pace as fiscal headwinds diminish. In the euro area, growth will be in positive territory, supported by a smaller fiscal drag and stronger external demand.

The emerging economies in turn continue to account for the bulk of global growth, although the momentum of activity is likely to pick up only gradually in the next few months.

Since the beginning of 2014, the U.S. Federal Reserve has started to reduce or taper the scale of its bond purchases. Even with tapering, monetary policy in the United States remains highly accommodative and is projected to stay that way for some time. This is important to keep in mind when considering the likely effects from normalization of U.S. monetary policy to the rest of the world and in particular to Latin America and the Caribbean.

In our assessment, a gradual and orderly process should be manageable for most of the countries in the region, notably, if it is driven by positive output developments in the United States. Indeed, stronger U.S. growth will support activity especially in Mexico, Central America and the Caribbean.

Meanwhile, most commodity prices are projected to decline somewhat over the next two years due to rising supply and lower demand for emerging economies including China. Lower commodity prices are likely to weigh on growth among some of the commodity exporters in our vision, and we are seeing some of those effects; we already saw them in 2013.

The growth rate of Latin America and the Caribbean is expected to slow down from two, three-quarters of a percent in 2013 to 2.5 percent this year. The faster recovery in the advanced economies is expected to bolster export activity, but softer commodity prices and tighter external financing together with supply side constraints will actually be affecting regional growth.

To be concrete annual growth rates of investment across Latin America have slowed down significantly in the last three years. I think this is an important factor that we have been focusing on. Investment in Latin America in the largest six economies in Latin America was growing at double-digit rates in 2010 and now is growing at an expected rate in 2014 of 3 percent. I think that is an aspect that policymakers should focus in policies to bolster investment in the Region.

More than usual, the headline number for growth in Latin America masks divergent trends within the region. Growth in Mexico is expected to rebound on the back of stronger U.S. growth and normalization of domestic factors that were holding back economic activity.

Stronger U.S. growth will also support activity in Central America, but these inputs will be largely offset by external financing costs increasing and some country-specific factors the coffee roya disease in some of these economies.

In the Caribbean, high debt levels and longstanding competitiveness issues will continue to constrain activity, although a modest pickup in economic growth is expected in the tourism-dependent economies.

Turning to South America, activity in Brazil will remain subdued as weak business confidence continues to weigh on investment.

Argentina faces a challenging growth outlook related to balance-of-payments constraints. The authorities have recently allowed some currency depreciation, rising interest rates, and a reduction in utility subsidies. All of these measures are welcome steps and reserves losses have been stopped in the last month, and we will have to monitor the situation.

On the other financially-integrated economies, Colombia and Peru are expected to maintain fairly rapid rates of growth, and Chile is projected to continue its slowdown toward a 3.6 percent expected rate of growth in 2014.

Output in Venezuela is projected to stagnate amid persistent macroeconomic imbalances and distortionary policies. Fundamental policy adjustment will be necessary to avoid these dynamics.

The regional outlook remains clouded by downside risks. Although the effects from the gradual and orderly normalization in U.S. monetary policy should be contained for most of the Region, increased capital flow volatility remains a risk as this process of normalization of monetary policy, as has been described in our GFSR presentation, is subject to significant uncertainty. And the effects could be especially acute in those countries with large current account deficits, high inflation, and limited domestic policy space.

Another important risk is sharper-than-expected decline in commodity prices--for instance, renminbi surprises in Chinese growth. The most affected economies from this shock would be metal exporters in South America.

On the domestic side, weak fiscal positions represent an important vulnerability in some economies, especially in Central America and the Caribbean. In several of the financially integrated economies, policymakers will also need to monitor carefully a possible buildup of risks in the corporate sector linked to rising indebtedness.

Therefore, what are the policy challenges, and what does this global outlook mean for the Region?

I think the policy priorities vary across countries but generally include implementing structural reforms to raise potential GDP growth, strengthen public finance, and addressing potential financial fragilities. In those countries in which the exchange rate is floating, countries should use the floating exchange rate as the first line of defense and allow the currency to depreciate.

In sum, policies in much of Latin America and the Caribbean will need to adjust to this new reality of tighter or less lax financial conditions, less favorable terms of trade, and domestic supply constraints.

With that in mind, macroeconomic policies should not be used to boost demand in economies with an output gap that is almost closed and that are operating at full capacity. In our analytical work, bilateral surveillance, you can actually see that for most of the countries in Latin America, the unemployment rate is very close to the historically lowest level of unemployment. Therefore, the capacity to keep pushing growth through aggregate demand policies is not there.

As I said, exchange rate flexibility should continue to play an important role as a shock absorber. At the same time, and I think most critically, structural reforms will be key to raise productivity, to raise investment, and to raise growth in the medium term, especially in the areas of education, infrastructure, and improving the business environment.

With that, I will close my opening comments, and we can open it up to Q and A.

MR. ANSPACH: Thank you, Alejandro.

Just to remind you, we have the copy of the introductory remarks, so you can take them afterwards.

We will go to questions, and I will start with Sylvia. If you could just introduce yourself before asking a question.

QUESTIONER [Interpreted from Spanish]:

I posed this question in October, and you said "No," and I will repeat it now.

With the visit of Minister Kicillof, was there any modification in Argentina's situation vis-à-vis the Article 4? Was there any progress in the possibility of performing that review, or will Argentina be among the countries that does not have a periodic review by the IMF?

The second question is whether there was any progress on the role of the Fund in Argentina's negotiations with the Paris Club. Was there concrete participation, or what is the participation of the Fund in that negotiation round?

MR. WERNER [Interpreted from Spanish]: We did not take part in negotiations between Argentina and the Paris Club, so we don't have a role to play in those negotiations.

Regarding the Article 4, we met with the Minister, we spoke about the issues of data and the price index and the publication of a new price index and the review of the GDP figures. On the Article 4, our position remains the same. We are available whenever a country deems it opportune to have the Article 4 exercise. We will send a team, and we will be able to work with them in this analysis of the macroeconomic fundamentals and the financial sector in Argentina, but we did not discuss that issue.

QUESTIONER [Interpreted from Spanish]:

Argentina has devalued its currency, and it is also updating its statistics according to the request of the Fund. What do you think is lacking for a complete reinsertion of the country in international organizations?

You also said that the Fund does not take part in the Paris Club negotiations, but there is a meeting scheduled for May 26. Would there be a Fund representative at that meeting?

MR. WERNER [Interpreted from Spanish]: My understanding is that the Fund participates as an observer in the Paris Club and not in the active negotiations that we will hold with Argentina; we do not perform an active role there.

Now, when it comes to the measures you mentioned, in view of the fall in reserves that we saw last year in Argentina, the authorities reacted with a set of policies which I would consider adequate. The exchange rate was made more flexible. It is very difficult to judge the results regarding the extent of the measure, but exchange rate went up--the interest rates went up, exchange rates were flexiblized, and if we don't have a more complete dialogue on the policy framework, it is very difficult to make a judgment on the entire toolbox of policy measures, but I think these measures are adequate to reduce the pressure that we were seeing on the balance-of-payments.

The authorities are now focusing on containing the inflationary effects of these measures, and I think that is also very important at present.

Regarding the insertion in international organizations, as far as we are concerned, the publication of the price index at a national level and the new GDP statistics are in harmony with the agreements that Argentina had signed with us, and of course, we will be performing a technical evaluation of these figures throughout the year, but these are part of the commitments assumed there.

And on the Article 4 issue, as far as we are concerned, our commitment is to be ready whenever the country requires it.


You said that we have never seen a divergence between growth rates within the Region, and on other occasions, you have said that this has to do with the opening of the economies, structural reforms, et cetera.

I am interested in a look at the future and whether this difference is going to increase, if there is going to be a convergence there. Looking at the investment data, which are low in the low-growth countries, some time will go by before the Atlantic zone economies recover, even if they implement structural reforms today.

So, what do you think about the time it will take for Brazil to recover?

MR. WERNER [Interpreted from Spanish]: We never said that there had never been divergence. What we are saying is that it is particularly important to point out the difference between the different rates of growth of the different economies.

An important difference is the one between the economies that are more linked to the real sector of the U.S. economy and the Latin American economies which are more linked with the commodity price cycle. The economies that are more linked with the evolution of the U.S. economy through remittances and other activities are having markedly better performance; the others are being affected by the issue of stability and the drop in commodity prices.

Now, the interest rates that we will see in the region, which will be less low, will affect the countries in a differential way. Those countries that have a higher debt level, shorter-term debt and more volatile capital flows will have greater challenges than those that have lower financing needs, smaller current account deficits and better liability structures. So that will indicate how the external phenomena will affect the Region.

Of course, we also have a set of policies that is different according to the country, and that will also play into how the future will perform.

Coming back to the issue of structural reforms, which is very interesting, and the lag on economic development, I think you are completely right, but the earlier we begin, the better it will be, and sometimes, due to these lags, the political economy does not allow these changes to take place because at the end of the day, there is a political cost on the current governments, and the future governments are the ones that will benefit.

We are seeing in the Region governments that are assuming the responsibility. In Chile, we have an educational reform which will have short-term effects particularly; we think that the costs will be short term.

[Interpretation dropped.]

In Colombia 14 months ago, we saw changes in the fiscal policy and in the social security policy.

So I think the region is clearly coming through a period, especially in the Southern Cone, where there has been strong growth, and to a certain extent, this is led by the external sector because of commodity prices, et cetera. And consequently, it has been less necessary for them to incur the political cost to implement these reforms. But in several countries, we see them advancing in the right direction, and they are taking the steps to implement these reforms.

Now, there are some sector reforms that can have effects in one, two, three years, and the farther-reaching reforms will take longer to produce an effect, so you are very right there. But it is clear that it is time to implement these reforms.

QUESTIONER [Interpreted from Spanish]: I have a technical question to ask about Argentina. Yesterday, the Managing Director of the Fund said that Argentina, like the other members of the IMF, has to live by the rules. You just said that in keeping with the agreement with Argentina, they committed to reviewing the GDP.

So I would like to know what is the general agreement that says that all members of the IMF have to comply with the rules, and what is the specific agreement with Argentina?

Also, it would seem to me that Article 4 is voluntary. All IMF members do not commit themselves to an Article review on a periodic basis.

MR. WERNER [Interpreted from Spanish]: Regarding the obligations of Fund members--and perhaps here, Miguel could say something about the legal aspect and the Articles of Agreement establishing the International Monetary Fund--but it is the obligation of member countries to assess their macro financial health on an annual basis, and it has been the common practice across all member countries.

Now, regarding the issue that you raise, it has to do with the obligation of providing statistics that are quality statistics, measuring what we are trying to reflect. And the thing is, we are engaged in a process with Argentina after the censure proposal a few months ago where the Republic of Argentina said that it was going to review the process of reporting those figures with a new price index. This also included certain methodological changes in producing the GDP figures.

Those changes were done at INDEC, and in those changes, basically, what was established was that for next year, there will be a review of that information on the part of the technical staff of the IMF, and the Board will voice its opinion early in 2015.

There are a couple of intermediate dates where information will be assessed at that point. One of those points is May 15, and the second date would be in the second half of the year. So that is the process.

Now, in terms of that commitment on the part of the Argentine authorities, the commitment was to work in close consultation with IMF staff during 2014 looking at how the figures for 2013 were put together. So, basically, we are engaged in that process, and the main benchmarks have been met--that would be the publication of the new Consumer Price Index and also those on the GDP.

MR. SAVASTANO [Interpreted from Spanish]: Yes, just to add to what Alejandro just said, the agreement establishing the International Monetary Fund--and these are conditions agreed upon by all Fund members--established certain obligations on the part of member countries.

In addition to obligations, there are customary practices. Now, to the question that was asked having to do with Article 4, it is a customary practice. It is not an obligation on the part of countries. But the emphasis here is on the word "customary" or "usual" practice, because this is an exercise done with most Fund members with some exceptions, Argentina being one, but there are very few other exceptions. But it is not an obligation.

Now, in the charter, there are certain obligations, and they have to do with providing certain information to the IMF, so that is an obligation on the part of our membership. So this information is reported; it has to be reliable, trustworthy information, and it is this obligation that gave rise to problems in the relationship with Argentina, and this goes back several years--doubts in terms of requesting more information, but there were doubts regarding the information being provided by the country.

So that is where we stand, and that has to do with the legal framework of the Fund.

QUESTIONER [INTERPRETED FROM SPANISH] Regarding Mexico, the IMF emphasizes two elements--first, that the economy is growing and that the growth potential could be enhanced with structural reform. So I would like to know what is the estimate of the potential growth for the next few years, since most of them are already in place--telecommunications, now energy, fiscal and financial reforms would be other possibilities.

Secondly, the decision that could be made by U.S. courts has meant that several countries including Mexico have presented motion in terms of reviewing that judicial ruling, but there is the feeling that all of the countries that issue debt could be affected if the pari passou is eliminated from the debt or if the quality that they currently have as sovereign issuers is affected. So how is this being viewed by the IMF as a risk--and this is especially important for Mexico, which places a lot of debt.

MR. WERNER [Interpreted from Spanish]: Yes, perhaps Adrienne could talk about the Mexican economy.

What I would say is that the estimates that we have made are still quite tentative. Here, I am referring to the potential growth of Mexico taking into account the reforms that have been made. First of all, these calculations were done as part of last year's consultation, and secondly, with the constitutional reform and the legal reform in place, we will have greater certainty, but it is also important to look at implementation, so within what the legal framework allows, what will the policy decisions be regarding the implementation of the new legal framework.

All of this will be subject to some uncertainty.

So, perhaps Adrian can tell us about the numbers, but what is important is to say that we are still waiting to get clear decisions on the application of the new policy framework given the new legal framework that is going to exist in the telecommunication sector, the energy sector--and also, a lot has to do with the competition policy.

Now, as an institution, the IMF is going to find the necessary channels to make our opinion known, but this is not the proper venue.

MS. CHEASTY: Just to give an indication of the numbers we are working with, we are working with potential growth of 3.5 to 4 percent a year for 2015 to 2018. Now, we know that that is conservative--it is lower than the government's numbers--but it is the issue of timing and uncertainty. This is a significant increase in potential growth eventually.

QUESTIONER: I would like to know how disruptive you think the situation in Venezuela is right now and if we should expect some spillovers to the countries in the Region--like Brazil has huge business and trade with Venezuela. I would like you to comment on the situation.

And the second question would be--you said that some governments in the region are taking responsibility in addressing reforms. Is the Brazilian Government one of these countries, and how do you assess the policymaking in Brazil in this field?

MR. WERNER: Regarding Venezuela, direct economic channels of contagion to Brazil should be relatively small. We did an analysis of spillovers, and obviously, you have other economies in Latin America having stronger links, given the size of their economies, to Venezuela. But I think from the traditional channels, there is not that degree of spillovers to the region.

I think the major spillover from Venezuela can come through the financing agreements that Venezuela has through its oil-exporting agreements with many countries in the region, and this is a source of vulnerability that we are monitoring, and we are watching carefully and talking with member countries about it to work on contingency plans in case these schemes are revised.

I think each government is working at its own pace in terms of reacting to the slowdowns in their economies, and their slowdowns are also advancing at different speeds.

In the case of Brazil, I think we have seen challenges on the inflationary front that have been addressed forcefully by the central bank. We have seen the government advance, I would say, at the right speed on the growth agenda, on the part of its infrastructure program. I think they have made significant changes to the way their concession mechanisms work so that they can actually launch a more aggressive infrastructure agenda, and that would be an important part of relaunching growth in the future.

However, there are many challenges in terms of the growth agenda. One of them is low private sector investment as well. Another one is low productivity which is pervasive in the region as well. And there, I think measures will have to be implemented in the future.

But I would highlight the important measures that were taken on the inflationary front and on the infrastructure side, and I think it is an important--a very important--bottleneck for the Brazilian economy.

QUESTIONER: Your presentation simply mentions "the Caribbean." I don't understand what that means. I don't understand what the state of play is in the Caribbean, because it really says nothing.

And following up on the question asked about Venezuela, Venezuela's supposed assistance to the Region has greatly increased the national debt of the country. Let's take PetroCaribe for example. Even though it is seen as a loan that is extended, the truth is the increase in the national debt is significant, and the biggest problem in the Region is that area of national debt and deficit budgets.

How could I when I leave here say that I understand what the true position of the Caribbean is particularly with respect to the financial institutions?

MR. WERNER: You are right. It is very hard for us to convey all the problems of different subregions in a very brief press conference, and I and our teams will be available to you to go over any details and more disaggregated data, because that is exactly what we do here. Thirty percent of our Department is focused on working on the Caribbean. So we put a lot of focus on that, and we work very closely with country authorities to try to find avenues for solutions to the very important problems that you mentioned.

I think one very important problem is high debt, actually affecting several countries. Another one is some weakness in some financial institutions in the Region, and we are supporting the ECCB in their efforts to deal with those institutions.

I think, the issue of growth--actually, it is much simpler to address some of these fiscal challenges with very high fiscal deficits that have widened after the 2008 and 2009 crises in a very low-growth environment. That has been extremely tough for the region. We are trying to--and we are moving in our bilateral surveillance--to increase the focus that we put on growth-enhancing measures. Also, we have created groups within the Fund that cut across departments to understand the workings of these small states, because in many cases, the challenges that your Region faces are very different, and one of the characteristics that makes them extremely different is the small nature of the states. So the weight of the public sector in these small states is huge, driving this accumulation of debt, etcetera.

So I think you are totally right in saying that sometimes, we are bunching everything and just giving a brief assessment, but we are working closely with the region. We are open to broadening this dialogue with you and getting into the specifics of different countries. And you are right in highlighting the challenges of fiscal stance and debt accumulation, the challenges of the financial system--I will add the challenge of growth and the vulnerability from PetroCaribe. You are right in highlighting that, and maybe Adrienne can expand a little bit more on the region.

MS. CHEASTY: Okay. This is a vast discussion, so we can do it bilaterally.

One thing I should point out which is probably clear from the WEO is that there are two Caribbeans. There is the tourist-dependent Caribbean and there is the commodity-exporting Caribbean. And we do distinguish between those. However, I would say that the theme is the same in both of them this year--that growth, even though it is higher in the commodity export is still disappointing. So it is up, but it is disappointing in both. It is a unified message.

In both Caribbeans, we are worried about debt. In both Caribbeans, they are exposed to PetroCaribe. However, the small tourist-dependent countries in a funny way are better-off because they came late to PetroCaribe, so they are less vulnerable than some of the other countries to any potential withdrawal by Venezuela of PetroCaribe financing.

So we can talk more later on if you'd like.

MR. ANSPACH: Thank you very much.

I will take one question on line and then go back to the room, and I think we will have to wrap up..

The question I have on line is from Uruguay: "What do you think about Uruguay's economy facing the challenge of a higher dollar and less capital inflows?"

MR. WERNER: I think Uruguay has been in a very good position in the last few years. I think that during these years of high growth, they have taken advantage of high commodity prices to handle a situation in which high energy prices were also affecting Uruguay as an importer of these inputs, but I think they applied the right policy so they took advantage of the whole agricultural boom in South America. They were able to manage the competitiveness challenge of high energy prices for an energy-importing country, and they have built a significant amount of FX reserves to have a buffer to weather a change in the environment.

Going forward, I think the country is managing relatively well the slowdown in their economy, and I think there are many interesting projects in the pipeline in terms of infrastructure, in terms of crop-producing factories, et cetera, and some interesting mining projects and port projects that can actually help the country minimize the effects from the slowdown in the region and the effects from the stability and decline of some agricultural commodity prices for the following years.

I think we feel comfortable that the policy mix is adequate to handle a slightly less advantageous external environment.


You mentioned the lower investment growth that is likely coming. Do you mean that FDI or portfolio investment will particularly end? Are there any countries likely to have a balance-of-payments problem as a result of that?

MR. WERNER: I was not referring, let's say, to the interpretation coming from the capital account and the financing of the current account deficit. I was focusing on reinvestment in the economy. And when we look at Latin America, Latin America has been a region that invests relatively little. As a percentage of GDP, you see countries investing around 15 percent of GDP all the way up to 27 percent of GDP. This is as an average significantly lower increase in its capital stock than, for example, Asian economies have.

During the current boom, some Latin American economies really had a significant increase in their investment rates, so that allowed them to increase their capital stock and therefore, they were able to produce more and, therefore, to kick off a process of rapid growth in GDP.

What we have seen in the last couple of years is that the rate of growth of investment has been slowing down, partly because the commodity sector has been reducing its investment budget and partly because the rest of the economy, as the economy is slowing down, is finding less profitable investments, and therefore, we are seeing a rate of growth of investment that is lower.

And this is a big challenge for these economies, because at the end of the day, you can grow in either of three ways--adding more labor to your production process, adding more capital--more machines, more roads, more ports, et cetera--or being more productive with the factors of production that you have, producing more things than you were producing before.

The region will find it hard in the next few years to expand production relatively fast by adding more workers, because unemployment is a a very low level.

Traditionally, the region has been a region in which productivity--this means how efficient your machines and your workers are to produce different things--the Region has not been extremely good at increasing its level of productivity through time. That is actually associated with your level of education, the quality of your judicial system. Those are things that you can only change gradually, and some countries are doing that.

The other venue that you have is eventually generating a process in which you generate productive opportunities for the private and the public sectors so they can invest and actually help this growth process by generating, let's say, a more capital-intensive economy. And in that sense, to generate this environment, what you need to do is to generate a business environment that is more conducive for the private sector to invest; you have to have a public sector that is more efficient in putting, let's say, infrastructure and other investment projects out there. And I think that is one of the challenges that the Region will face in the future.

MR. ANSPACH: We do have one last question on line, and this is on St. Kitts and Nevis. The question "The latest IMF report on St. Kitts and Nevis painted a good picture of the economy. However, in the look at unemployment, did the IMF take into consideration that some of the measures taken by the government to address the unemployment challenge were short-term and unsustainable?”

MS. CHEASTY: I don't think the measures taken by the government were short-term and unsustainable. I believe he is talking about training programs, and these are permanent investments even if they finish, because you strengthen the labor force.

Now, maybe he is talking about something beyond that, but if so, I can answer that bilaterally as well.

In general, the turnaround in St. Kitts has been impressive, and the improvement in the finances and in growth is a strong supporter for reducing unemployment.

MR. ANSPACH: Thank you very much.

With that, we will conclude this press conference. Thank you for attending.


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