Transcript of the Western Hemisphere Department Briefing

April 17, 2015

Washington, D.C.
Friday, April 17, 2015
Webcast of the press briefing Webcast

MR. WERNER: Welcome to our press conference. As you know from our World Economic Outlook, global growth remained moderate and uneven in 2014, and only a slight pick-up is expected for this year. We now project global growth at 3.5 percent in 2015 and 3.8 in 2016, which reflects a downward revision of about ⅓ of a percentage point with respect to our projections back in October.

A notable global development over the last few months has been the sharp drop in oil prices has been the sharp drop in the price of oil, that as you have hard, the Economic Counselor, on balance should provide a boost to the global economy, and our view regarding the appreciation of the U.S. dollar, is also a positive to the extent that it rebalances demand to those areas of the world in which demand has been relatively subdued.

The slight pick-up in growth in 2015 compared to last year will be driven by a recovery in advance economies, growth in the United States is projected to be around 3 percent, with robust private consumptions supported by higher-rate incomes. Activity in the Euro Area is also showing signs of firming in the wake of cheaper oil, and a weaker euro, and growth in Japan is also projected to pick up significantly.

In emerging markets by contrast, growth is projected to slow in 2015, reflecting sharp downward revisions to growth of oil exporters, and the ongoing gradual slowdown in China. The distribution of risk around this global outlook has become more balanced, but remains weighted to the downside, reflecting geopolitical tensions, potential burst of volatility in financial markets and the risk of stagnation and low inflation in advanced economies.

In this environment, Latin America and the Caribbean, face a particularly challenging outlook. Economic activity expanded at 1.3 percent in 2014, the slowest pace since 2002, and we are expecting it slow further this year to below 1 percent.

However, the economic outlook defers across region, broadly along North-South lines. That way revision are concentrated in South America as a commodity, and the revision, to commodity prices, it's affecting most of the economies in South America. Also countries with specific issues, like weak private sector confidence in Brazil, or the ongoing economic crisis in Venezuela further hamper the outlook for South America.

At the same time trade links with the U.S. economy are relatively modest for South America, limiting the positive spillovers that can come from that country. Three of the largest economies in South America are expected to suffer economic contractions, Venezuela, Brazil and Argentina. While only Chile and Peru are seeing their economic growth work has been revised upward.

In contrast, most of Central America, the Caribbean, and Mexico are expected to see steady growth, or an acceleration of growth in 2015, basically led by the recovery that we are expecting in the U.S. and the decline in the price of oil -- the positive effects of the decline in the price of oil for many of these countries.

Let me now provide some detail, going into country-specific issues. Brazil experiences the most serious economic downturn since the early '90s, long-standing competitiveness problems have been compounded by weaker terms of trade and high uncertainty, including about the fallout from the Petrobras investigation and the impact of a protracted drought on electricity supply.

The authority's decision to tighter macroeconomic policies is critically needed to contain the rise in debt, and shore up confidence in the policy framework. Staying in South America, the sharp recent drop in oil prices had hit the regions, all exporters, Venezuela being the most important in Latin America, with output expected to contract by 7 percent this year.

Macroeconomic imbalances and policy distortions had already created significant challenges in that economy before the drop in the price of oil, and therefore the decline in the price of oil, is a significant negative shock that adds to an already very delicate situation with inflation, I mean, at two-digit level since a long time, reaching the range between 60 and 70 percent, and expected to creep up towards a 90 percent this year.

Growth in Bolivia, and especially Ecuador is also projected to slow, as a result of lower oil and gas prices. In both countries lack of exchange rate flexibility is hampering the adjustment to the external shock. Columbia will also be affected, but strong policy framework provides stability and the recent important depreciation of the peso, should boost non-commodity exports.

In Argentina, foreign exchange pressures have eased somewhat, but the outlook remains difficult as a result of persistent macroeconomic imbalances, adverse terms of trade developments and weak activity in Brazil.

On the up side, Chile and Peru are expected to see a rebound in growth this year, on the back of supported fiscal policies, and a monetary expansion and the movements in the exchange rate.

Moving North, Mexico is projected to growth at around 3 percent in 2015, supported by the recovery in the U.S., even though domestic demand has yet to pick up. In Central America growth will bolstered by higher exports and remittance flows, related to the U.S. economy along with lower oil import bills. Growth would pick up even more clearly, if it were not for the long-standing problems that the region is facing associated with weak fiscal positions, and difficult business environment.

In the Caribbean, improving tourist numbers will support the economic recovery, also lower oil prices will benefit most of the region, although the crisis in Venezuela has heightened the risk of disruptions coming from the PetroCaribe Program.

Risk around this regional outlook are still weighted to the downside. Further weaknesses in community prices perhaps link to a sharper expected slowdown in China, with heightened pressures of South America's commodities exporters. At the same time, financial risks have increased, following a long period of capital inflows, strong domestic trade and growth, and increasing issuance of corporate bonds in international markets. Sharper than expected moves in U.S. interest rates could prompt market volatility and tighten funding condition even as monetary expansion proceeds in the Euro Area and Japan.

On the upside, a stronger U.S. growth would obviously help those countries that trade with that nation, and cheaper oil might have greater than anticipated effects on the region net oil importers. Policy challenges at this point in time, defer by country but in general, and despite continued slowdown, evidence of economic slack remains limited in the region. While forecast of potential medium-term growth have come down, clearly there is a significant structural element to recurrent downturn, and therefore policy space to bolster domestic demand is not there for most of the countries.

Meanwhile, fiscal policy buffers have diminished in the last few years, this argues again, fighting the current slowdown, with excessive the policy stimulus. Instead, flexible exchange rates are playing a critical role in helping the region smooth the adjustment. So far depreciations have been sizeable in several cases, but orderly, and also they have not created significant effects on inflation, and inflation expectations for the medium term have been broadly contained and well-managed by monetary authorities.

The inflation targeting frameworks, come the floating exchange rate with important international reserve buffers have been used in the past, and will continue to be the first line of defense to weather the current shock.

Last, but not least, the key to restoring robust medium-term growth lies in the structural reforms to raise investment productivity and potential output. As we have said in the past, I mean, Latin America is a region that has relatively low investment and saving rates, low total factor productivity growth. And in this environment in which potential GDP is being revised down for emerging markets, including those in Latin America, all these mean that medium-term reaction should be one in which productivity is the focus, and behind productivity should be the structural reforms bolstering investment and a total factor productivity growth.

We have mentioned initiatives that are common to the main economies in Latin America, like education, infrastructure, et cetera, but there are also very specific sectoral policies that applies -- different policies in different countries depending -- their specific situation, and we think that the focus should be in there to restore at the earliest possible time, a dynamic growth process in the region that now is being interacted by the current adjustment.

Thanks. And with that we can proceed to your questions.

MR. ANSPACH: Thank you very much. We are still in an improvised mode, so let me depart from the usual procedure, and I'll take a question online, and I'll ask Alejandro, to take it if he doesn’t mind. We are getting the mics ready for you to be able to ask a question as well also.

Alejandro the question is “how do you think the Federal Reserve rate increase would affect the economies in Latin America?

MR. WERNER: Okay. We have to segment that question in several parts. On the one hand, even a very protracted and slow process, of normalization of monetary policy in the U.S., will imply that Latin America will continue to face, in the next two years, a significantly lax financial environment if we look at short-term and long-term rates in an environment in which, for a moment, we don’t talk about a the possibility of volatility spiking up.

So just looking at how the U.S. short-term rate should move from the current CO level, to an eventual neutral rate in a span of several years, that will imply that interest rates will remain low for a protracted period of time, still. On top of this we have a significant loosening of financial conditions in Europe, coming from the launching of QE, we are seeing them in 10-year bund rates in Germany being negative. We are seeing long-term rates being extremely low in the Euro Area, and also in the U.S., and therefore the environment will continue to be a positive with respect to financial conditions in the region.

So the important consideration will be to the extent that normalization of monetary policy in the U.S. could trigger volatility in asset prices as the one we saw, let's say, in the summer of 2013, associated with the tapering talk by the Former President of the Federal Reserve. Then those conditions can generate volatility in domestic markets in Latin America. We think that, in general, Latin American countries have the tools to weather these periods.

They have relatively well anchored inflation expectations, they have a floating exchange rate, they have significant international reserve. They had -- they have well-capitalized financial systems, they have a stronger than in the past, public finances, and in many cases a low levels of public debt, and corporate sectors that have used the current period of relatively low interest rate to refinance their liabilities at much longer maturities and lower interest rates.

So in that sense there is a lot of financial strength in the region, this is not to say that this volatility might not have some effects, that does not have the potential to create more important issues, but in general, we think that aside from seeing periods of spikes of volatility, the possibility that this volatility eventually feeds into a balance sheet side of the corporate, or the sovereigns, we think it's much lower than in the past and countries are relatively well-placed to handle this issue.

QUESTIONER: The question is on Mexico, and we notice that the wheel says that the projection is that in spite of this adjustment, on the growth in Mexico for this year, the IMF says, that they expect solid performance for the Mexican economy this year.

And I wonder, what the IMF see in Mexico, to have the confidence that the Mexican economy will have a solid performance, in spite of lower oil prices. And I mean, I would like to know your answer, but putting aside the nexus with the U.S., I mean, aside from the nexus with the U.S., what did you see in Mexico, solid in Mexico, that gives you that confidence?

MR. RENNHACK: Thanks a lot. Our forecast for 2015 is that Mexico will grow by 3 percent, that’s up from 2.1 last year. I'll mention the nexus with the U.S. anyway, because it's important. We are seeing a recovery in the U.S. as well, it was 2.4 percent growth last year, up to 3.1 percent for projection this year, so part of the boost in the Mexican economy is coming from a pick-up in growth in the United States.

And there are other domestic factors that are doing well in Mexico. We are seeing a recovery in construction. There is some steady growth in investment, and that consumption is not doing wonderfully, but it's also not doing badly, sort of growing along at 2 or 3 percent a year. I think there is sufficient domestic demand coupled with the impulse coming from the United States. So I think that, you know, the forecast of growth of 3 percent this year is fairly reasonable.

QUESTIONER: So, the question is on Argentina, and two questions really, first of all what can you tell us about how is the work going with the statistics issue? And if this is going to be the memo that was sent yesterday is going to be the end of the discussion? Or is it possible that it will be continuing on the next month? How do you see the work, if it's going to be the end? If it is progressing, what can you tell us about that?

And second, can you explain as which kind of inflation have you measured in the last WEO, because the footnote has changed? Usually you used to write that the official inflation with the mention that it was disputed in Argentina. Now it doesn’t say that. So I want to know which kind of inflation are you including in the WEO, and why did you remove the footnote about the dispute of the numbers in Argentina?

MR. CHALK: On the statistics process, as you’ve said on April 15th we issued a report to the Board, on statistics in Argentina. As the Minister, I think, mentioned yesterday, we’ll have a Board Meeting in May, and then the Board will consider that note and decide the next step, so that’s all I can say about that.

On the inflation in the WEO, we take the IPCnu, the government's inflation. It's for technical reasons, because last time we did the WEO we didn’t have a full 12-month window for that new statistics, and now we have the 12-month window, so since we have the data we can put that into the WEO. So it's the government's official numbers [in the WEO].

QUESTIONER: And it's not disputed?

MR. CHALK: Sorry?

QUESTIONER: There's no dispute on that number now in the WEO?

MR. CHALK: It's in the WEO, yes.

QUESTIONER: Right. But there's no dispute?

MR. CHALK: We've included the number in the WEO since that’s the official statistics of the government and we have availability of the data.

QUESTIONER: So, it's okay?

MR. CHALK: As I said, we've included the statistics in the WEO, because that’s the official data of the government, and that’s the data we have available now, since we have a full 12-month sample of the new statistics.

QUESTIONER: So why are you waiting for the [board] discussion, because you are already using it?

MR. CHALK: I think I answered that. So the statistics process was such that we issue a report to the Board, on April 15th, we've done that. There will be a Board discussion in May, on that issue, and then they’ll be deciding next steps on that matter.

QUESTIONER: Good afternoon. I heard PetroCaribe mentioned in the speech. Our economists are of the concern that with the PetroCaribe, the Venezuela Agreement, the sharp decline means a sharp decline in our benefits from that agreement.

Some are saying that the Caribbean countries now need to find alternative arrangement, and to the PetroCaribe, what do you say on that? Secondly, our economies, we lack the resources, we don’t have the oil, we don’t have to generate the revenue, so what we’re seeing is they are moving in one general direction, that is tourism, and most of them are now depending on the citizenship by investment program. Are these adequate enough pillars for long time prosperity?

Again, the structural adjustment program has been increased, what, a little under one year now, and our trade unions are basically complaining that while IMF supports the program and you are monitoring it, your monitoring mechanism is a bit feeble because we are seeing recurring. Explain to me your method of monitoring that program, and if I may say, penalties if there is any defaulting.

MR. RENNHACK: Sure. I’ll answer the question on Grenada. On Grenada, the program is working quite well, and we have very close monitoring of the program. We have teams that visit Grenada every three months or four months. We work very closely with the government, and we do a careful check on the data. When we are there, we talk to many people inside and outside of the government.

We get a pretty good fix on the data provided, and the data so far showed the government is performing quite well under the program. The fiscal adjustment is better than what we expected. The economy actually grew much more rapidly in 2014 than we had projected.

A lot of things are going quite well in Grenada, but the program is working. One thing I like about the Grenada program is very active engagement with civil society. When I have been there, I have talked to the labor unions, I’ve talked to the NGOs. They are very focused on the program. They have a lot of information about the program. There is a very close dialogue with the government, which is very healthy.

I think that is one key compliment of the success of the program today, the ownership that the whole society has.

I think we have careful monitoring of it, but so do the Grenadians themselves have very careful monitoring. The program is working very well right now.

MS. CHEASTY: You may have to repeat the questions because I thought they were going to him. Let me start with PetroCaribe. I think you asked how will countries in the Caribbean be affected by PetroCaribe in 2015.

QUESTIONER: Is there a need for us to start finding alternative arrangements?

MS. CHEASTY: On the latter, certainly, the outlook for Venezuela looks more difficult than in the past. We have been advising countries to make sure they build buffers while still continuing to benefit from the concessional financing associated with PetroCaribe. It happens that in 2015 with the decline in oil prices, countries, particularly in the Caribbean that are very oil dependent, are much better off anyway. The value of PetroCaribe to these countries and the gains of the countries from the falling of oil prices leaves them better off than in the past. It is a particularly good year to use the opportunity of the improvement in their external accounts to reduce their dependence on PetroCaribe.

I think your second question was on citizenship by investment?


MS. CHEASTY: Certainly, it’s hard to imagine the Caribbean without tourism as a long term pillar. Citizenship by investment programs are different. It has been a really valuable windfall to some countries in the area, but we emphasize it should be treated as a windfall. We don’t know how long these earnings can continue. It is very important that the programs be managed very impeccably with careful governance and attention to what the countries to which citizens from these countries travel to, what they say about the management of the citizenship by investment programs.

For example, if Canada or the European Union felt the programs were not being managed well, they could disappear. We have cautioned countries to treat the earnings from citizenship by investment programs as windfalls to use them to pay down debt, because they might be there forever.

QUESTIONER: Good afternoon. You mentioned that Latin America in general is in a better position to deal with any volatility in asset prices that might arise from things like a repeat of the taper talk from the other year. On the other hand, there are some countries in the region that don’t have these sorts of buffers that you mentioned or the extent to which, or that might not be, for example, investment grade, or the less developed markets. Could you talk about where in the region there are the most risks for an impact from return of volatility in asset prices?

MR. WERNER: It is hard to single out countries. If we observe what has happened in the past, I would say following your comment, obviously there are countries, for example, that do not have the exchange rate as an instrument to adjust to a foreign shock.

I know using the exchange rate has been playing an important role, if one looks at the recovery of the economy, I would say the fiscal inputs and the exchange rate movement are playing an important role in some countries, that having important external financing needs, they don’t have an exchange rate adjustment escape, and if they are not investment grade, they might have a tougher time in those countries that have different circumstances.

On the other hand, in terms of short term asset price volatility, even countries that have sound fundamentals but have a large presence of foreign investors in their economies, have shown significant volatility in previous episodes.

When one looks at the taper talk episode, basically one sees a very general contamination in the first few months and then these generalities start to taper off and those countries with weaker fundamentals, let’s say, higher inflation, wider current account deficits, weaker fiscal positions, are the ones that ended up having a long lasting impact from the change in international capital markets.

I would say secondly, obviously countries that are slowing down much faster and which may mean the corporate sector has gone into an important borrowing spree, some of the leverage ratios look a little bit weaker today because the income generation capacity of those corporates that maybe were thought to be much higher when these economies were growing at four and five percent and now they are growing at three or two is going to be affected.

Therefore, some probability of some events might develop. In the aftermath of a normalization, I think it’s a possibility. By looking at these characteristics, we might think or we might identify which are the economies that will be the most affected in the short run but more important than that is those economies that have weaker fundamentals and have larger external financing needs, I think, are exposed to a larger risk, and that be compounded by not having one adjustment mechanism in the exchange rate in some economies in the region.

QUESTIONER: If we look at IMF forecasts for Brazil, one percent next year, and if you look in the following years, it is something just above two percent. Do you think the Brazilian potential growth is around two or 2.5 percent, and why would it be so low if you compare to what we had in 2004 to 2008?

MR. SRINIVASAN: Good question. We have lowered the potential for Brazil to about 2.5, and this is partly because we have looked at factors contributing to productive capacity, and if you look at Brazil, there are many factors which are long-standing problems in productivity, a confident business environment, and so on. If you take all these factors into account, it is reasonable to expect productive capacity or productive potential of the economy has been lowered. That is how we revised our numbers from previous years to now.

QUESTIONER: (Inaudible) Around three percent?

MR. SRINIVASAN: Slightly more than three percent before.

QUESTIONER: So, now 2.5?


MR. ANSPACH: I’m going to take a question online here, and then we will return to the room. The question is what is the current state of the Saint Kitts and Nevis economy? Is the country meeting the IMF projections and targets, and are we on course on these targets?

MS. CHEASTY: That is really a follow up question to the citizenship by investment program question. Saint Kitts is doing very well. It grew at seven percent in 2014, and it is expected to grow again strongly in 2015. This is largely because of the strong inflows from citizenship by investment receipts. Also, because of the effects to the rest of the economy, investment is strong.

Saint Kitts does not have an IMF program any more. It is in the post-program monitoring stage. In some sense, there are no targets other than informal benchmarks. It is meeting all these targets very well. Our recommendation to Saint Kitts is to continue its efforts to consolidate all these gains that it has made under the program. It has remaining structural reforms to do. In a bland economy like this, reforms to maintain competitiveness become very important, and obviously also to preserve fiscal and debt sustainability, because citizenship by investment flows may not be there forever.

QUESTIONER: I want to go back on the statistics issue in Argentina. You mentioned that you sent the report to the Board, and there will be a decision in May. Since you used the official numbers, would you say you are confident this problem will be solved in May and the program to [improve] Argentina’s statistics will finish in May?

And regarding statistics for Venezuela, I understand the Central Bank hasn’t published the numbers on inflation since December. I wonder if Venezuela could enter a similar program which Argentina entered years ago regarding their statistics. Could there be some sort of reprimand from the IMF towards Venezuela because of the lack of transparency on the statistics?

MR. CHALK: [On Argentina] no, I wouldn’t say what you just said. As I said, the Board will make a decision in May on next steps.

MR. WERNER: If you look at the table on the data for prices in Argentina they are there for the whole period in which this process has been going on. As Nigel said, only last year, in which we didn’t have comparable data, the numbers are not there. The publication of official data and the data process are two different issues.

MR. RENNHACK: On Venezuela, there is an issue that data gets published with a lag, sometimes a long lag. Like last year, a lot of data was published later in the year and then came out.

There are two dimensions to this process on data and the Fund. One is whether we believe the data are accurate. I don’t think that is an issue on Venezuela. There is also an issue that they need to provide a sufficient amount of information to the Fund so we can at least do some monitoring.

We don’t go to the country so we can’t really monitor things very much, but they provide the data on a sufficiently reasonable basis that there isn’t an issue there under the Article VIII.

QUESTIONER: [is there a limit on the lag]?

MR. RENNHACK: There is no firm rule. The reality is last year they published a lot of information later in the year so you could get a sense of what was going on in the economy, so if the experience of last year is repeated this year, eventually they will come out with inflation data. It’s just a matter of time. There is not an issue under Article VIII for us right now.

QUESTIONER: Thank you. My question is about how the IMF sees the Uruguay economy, and also which measures do you recommend for Uruguay authorities in this scenario you have described?

MR. WERNER: I think as we have said, we have seen a pretty health development of the economy in Uruguay, a very long process of relatively high growth, an economy that has been stable for a long period of time after the successful implementation of the stabilization program in the early 2000s, and a restructuring of its debt. I think there are many structural issues that have been addressed in the Uruguay economy. There has been a significant increase in productivity in the Uruguay agricultural sector, important initiatives in infrastructure.

I think they have been pretty repetitive in terms of the need for a last push to consolidate public finances and also to consolidate low inflation. We think going forward, in an environment in which your neighbors are going through tough times, it would be important to make efforts, and also in an environment in which commodity prices on the one hand, let’s say, on the export side, of the terms of trade, you won’t be having the positive news you have had in the past, truth be told, you will be benefitting from the decline in the price of oil, so that might offset a little bit a less dynamic agricultural sector.

Overall, I would say and as you have seen in the last 12 months, a slowdown in the rate of growth, and in a more difficult international and regional environment, I think it calls for -- we think the necessity to redouble the efforts to consolidate everything that has been done in Uruguay on the fiscal and monetary front in the next few years.

QUESTIONER: I want to know if you could explain what happened with the domestic economy in Mexico? Why is it so slow? What happened with all the investments that were supposed to be in Mexico with the structural reforms? We can’t understand what happened with all the potential that we had.

MR. RENNHACK: First of all, let me just give where Mexico is coming from. We can remember that in 2013, the economy grew by -- that was a very bad out turn. Now we are projecting it to grow by three percent, so we are seeing a pretty robust recovery over the past two years. It is important to bear that in mind that the economy is recovering. There are signs of better growth, the construction sector, as mentioned before, was doing very badly in 2013. There are a lot of signs that is beginning to recover. The trend is up for Mexico. I think when you do the process of structural reforms, it does create some expectations that growth will pick up. That is the point of the reforms. These are very long acting reforms. They were approved in 2013. A lot of the regulations were put in place in 2014, but that doesn’t mean that right away growth will jump up rapidly. It’s going to be a long process.

Certainly, we have seen some positive effects so far. Telecommunications prices have come down very nicely. I think a lot of that is attributable to the reforms. On the energy reform, the interest in round one is pretty good, 39 firms signed up for access to the database on the oil fields. A good share have entered into the second phase of that process, and then by July 15, we will know the actual outcome.

I think that is a pretty positive response. It just takes time. I think a lot of the measures are the right ones, and the pay off in growth will be there. Once again, as the U.S. continues to recover and as the reforms take hold, I think the outlook for Mexico is quite good on the growth side.

MR. ANSPACH: I would like to thank you again and apologize for the technical difficulties we have had with the audio today. Thanks to our speakers. We will have the transcript shortly in the Press Room. Thank you.

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