Transcript of a IMF Western Hemisphere Department Press Briefing

April 19, 2013

April 19, 2013
Washington, DC

MODERATOR: Good afternoon. Thank you for attending this press conference on the Outlook for Latin America and the Caribbean, which is also being webcast live on Before we start, let me just mention that we have simultaneous interpretation in Spanish, Portuguese, and English. And then, finally, let me present to you or introduce to you the speakers of today.

In the middle of the table, we have Mr. Alejandro Werner, who is the Director of the Western Hemisphere Department of the IMF. To his left, we have Miguel Savastano, who is the Deputy Director of that same department. To his right, Mr. Gian Maria Miles-Ferretti, also Deputy Director of the Western Hemisphere Department. To his right, Ms. Adrienne Cheasty, also Deputy Director in the same department. And finally, to the far left of the table, we have Mr. Charles Kramer, who is Assistant Director of the Western Hemisphere Department.

With that, I would like to hand over the floor to Mr. Werner.

MR. WERNER: Okay. I will make a few remarks. First welcome, and I will make a few remarks for the third time on the outlook on policy challenges for Latin America and the Caribbean.

After that, both myself and my colleagues will be happy to take any question--

MODERATOR: Spanish? Spanish?


MODERATOR: Okay. Testing--could you check Spanish translation, please. Testing, Spanish interpretation.

Okay. Good, thank you. So, we will start for the third time.

MR. WERNER: Okay. So, we already--I mean, today, I will make first a few remarks on the outlook and policy challenges for Latin America and the Caribbean.

After that, my colleagues and I will be happy to take any questions that you have.

As you know, from the World Economic Outlook, global activity is projected to grow 3.25 percent in 2013, after slowing last year. This expansion is taking place at multiple speeds. The recovery has been slowest in Europe, where despite policy action, growth remains constrained by the necessary repair of balance sheets in that area of the world.

In the United States, despite some drag from fiscal policy, the recovery is gaining traction as improvement in labor and housing markets are helping to sustain private demand.

Meanwhile, growth in emerging markets is gradually strengthening, reflecting the impact of early policy easing and a pickup of global demand.

The need to further strengthen fiscal, financial, and household balance sheets in advanced economies suggest that monetary policy in these economies will need to remain accommodative for some time, and conventional monetary easing in the advanced world, including recently in Japan, will mean abundant external credit for Latin America's more financially integrated economies.

This is good for activity in the Region but also poses near-term policy challenges which we will also discuss in a minute.

Strong growth in emerging economies should help to keep commodity prices, particularly those of metals and oil relatively high, especially judging them from a historical perspective.

However, we don't see a further run-up in commodity prices. In fact, the central forecast of our World Economic Outlook suggests that these prices will soften slightly as supply conditions improve.

Now, turning to the outlook and risks for Latin America and the Caribbean. Against this backdrop, growth in Latin America and the Caribbean is projected to pick up from 3 percent in 2012 to 3.5 in 2013. The growth pickup will be supported by the factors I just mentioned, namely, the gradual recovery, the continuation of easing financial conditions, and high commodity prices, as well as the effects of ongoing policy easing in some countries.

In the case of Brazil, activity and investment have recently been responding to supportive monetary and fiscal policies, introduced since mid-2011, as well as measures to address supply constraints. Growth in the Region's largest economy is projected to rebound from 1 percent last year to 3 percent in 2013.

In the rest of Latin America, output growth remains generally robust, led by strong domestic demand and credit which, in turn, are widening the external current account deficits.

Some of the rationing activity is projected this year for many economies that are already operating near or above potential.

Achieving the soft landing will require some tightening of macroeconomic policies, both monetary and fiscal.

Now, although our baseline looks favorable for much of the Region, downside risks continue to dominate the outlook, particularly over the medium term.

Near-term risks have receded since our October 2012 update, but they remain tilted towards the downside.

An escalation of the crisis in the euro area, which would have negative effects on global confidence, trade, and external financing flows, cannot be ruled out, and a continuation of excessive fiscal tightening in the U.S. could hinder the pickup in economic activity that we expect to happen in 2014, with negative implications for economies with close ties to the U.S.

In addition, medium-term risks persist. Lack of decisive action in key advanced economies, to put their public finances on a sustainable path could trigger a generalized increase in sovereign and corporate premiums, with large spillovers in confidence and global activity.

Sharply lower growth in emerging economies, particularly Asia, could reduce global growth with large knock-on effects on commodity prices.

The recent lower-than-anticipated growth in China showed us how sensitive commodity prices are to changes in Chinese growth prospects.

What are the implications of this global outlook and risks for economic policy in the Region?

Our policy advice is not too different from one year ago. We think that policymakers in Latin America should take advantage of still relatively favorable external conditions to rebuild policy space and safeguard financial sector stability.

More specifically, amidst closed output gaps, a more prudent fiscal stance would ease pressures and appreciate and arrest the widening of current account deficits.

Stronger fiscal balances would reduce the burden on monetary policy and increase the flexibility to respond to changes in economic circumstances.

Policymakers should not use the current environment of easy external financial conditions to increase public indebtedness.

Exchange rate flexibility should continue to be used to discourage speculative capital flows, and it may have to be complemented by prudential measures to safeguard financial stability in the face of rapid credit growth.

Moreover, with an increasing share of credit allocated outside the banking system, oversight of the broader financial sector and corporate indebtedness requires strengthening.

Commodity-exporting countries with weaker policy frameworks would benefit from spending a smaller share of their commodity revenues. Challenges are particularly pressing in some countries where tighter macroeconomic policies are necessary to contain growing external imbalances and bring down inflation from high levels.

For countries in Central America, the key policy priority remains reducing public debt to around pre-Lehman levels and address growing external imbalances. Stronger efforts are needed to mobilize revenues and replace broad-based subsidies with well-targeted support schemes.

Some countries should consider increasing exchange rate flexibility to help buffer external shocks. In much of the Caribbean, high debt and weak external demand continues to constrain growth. The challenge remains the same as in the past few years, reducing public debt, strengthening competitiveness, and addressing financial sector vulnerabilities.

So, while much of Latin America continues to do relatively well, it needs to do more to take advantage of the current favorable conditions to lay the foundations for strong and sustainable growth.

In particular, we must work harder at strengthening policy buffers and strengthen financial sustainability. The current juncture also provides an opportunity to carry out growth-enhancing structural reforms that could support growth over the medium term if and when the tailwinds ease.

We will provide a more detailed account of these issues facing the Region in our launching of the Regional Economic Outlook on May 6 in Uruguay.

Thank you for your time, and now we'll take whatever questions you have.

MODERATOR: Thank you very much, Alejandro.

Before we start, let me just say that we are also taking questions from online. So, with that, I would like to start with the questions.

I will go here first with Alicia.

Please identify yourself. Thank you.

QUESTION: Alicia Alegado [phonetic] from Mexico.

Latin American countries have been confronting major fluctuations in the exchange rate and because of the LAC's policies. In what manner can these effects be contained and how much that is being taken in foreign currency by international corporations--and not only in the case of Mexico, but also Brazil, Colombia, Peru. I think those are the stronger countries.

And what's happening in Argentina? Has there been any progress in resolving that issue?

MR. WERNER: [Through interpretation] First, with regards to the real exchange rate, there are several factors to explain the fluctuations of the real exchange rate in the Region, real balance and equilibrium models control these factors and show that the models that we are seeing for the fluctuations in the Region today are within the confidence levels of what these models reflect for the real rate of exchange.

What factors can explain the real rate is close to balanced levels, even though, historically, they seem to be on the upside, but it's the high rates of exchange, low interest rates, and, in some areas in the Region, it is in drastic reasons such as very low prices for natural gas and energy, et cetera, which increase these countries' competitiveness.

The other face of the coin is what can be seen in current account deficits, which is still low in the Region. And this reflects a balance in foreign accounts. When looking at the financing of these deficits and capital flows to the Region, there is a very strong component of long-term flows. There is an important component, also, of foreign direct investment, an important component of long-term bank loans, and also portfolio flows that, to a certain extent, are also responding to the relative strength of the Region, greater relative growth compared to what is seen in other Regions of the world, fiscal policies and balances both at the corporate level and governments and solid financial systems. And obviously, there are components of these flows that respond to different interest rates and lax policies elsewhere in the world. In general terms, the situation is robust and not too vulnerable.

Now, you referred to foreign currency debt and the placement, both by sovereign and by corporations. That is true and that is the balances that countries in the policy mix need to find in order to make the best use of historically low interest rates on loans without generating vulnerabilities in so doing.

Many companies are resorting to external financing to enhance their liabilities, in other words to pre-pay shorter-term and more expensive liabilities, and some companies are also doing it to acquire companies elsewhere in the world.

In both Mexico and Brazil we have seen such circumstances. We nonetheless have to be vigilant in order to make sure that there are no currency or term imbalances that will then result when flows come out or when there are exchange changes that may be anticipated, expiration, or what has been called a bunching of terms which could generate major problems.

And lastly, before I give the floor to my colleagues in case they have something to add, now, with regards to Argentina, you all know there has been talk about the censorship by the Board for Argentina. This came out early this year because of their statistics. And all we need to add right now is that we have been working with the authorities, talking to the authorities in Argentina who said they are going to develop a new index, and this is an ongoing dialogue, it's very constructive, the goal being, being able to tackle this problem.

MODERATOR: I think there was a question right here.

Luis, please.

QUESTION: Good afternoon, Luis Alonso from Mopay [phonetic].

I wanted to inquire about Venezuela, one of the countries with the most significant contraction as we see in the report. My question is, how severe does the IMF see the situation in Venezuela if the right diagnosis for the inflation and what recommendation has the Fund developed for economic policies, in particular for fiscal and currency deficits?

And the political uncertainty, does this truly complicate the economic adjustment? I'm referring, obviously, to the uncertainties due to the elections that took place on Sunday.

Thank you.

MS. CHEASTY: Unfortunately, the main response to this is we haven't had an Article IV with the authorities for several years. And therefore, we stand back from making formal assessments of their policies.

Obviously, after the election, some tightening is inevitable, and we wish the government every success in managing a rebalancing.

Do you want to add anything about the political side, Alejandro?

MODERATOR: Okay. Thank you very much.

There was a question right there. Yes.

QUESTION: Raul Diego [phonetic] the State of the Americas. I had a question about one of the topics that was addressed referring to the fact of FDI and portfolio flows.

The image that you painted seems to denote that there is no need or perhaps no justification for a country to adopt measures beyond intervention of the effects markets, controls, for instance. However, we have heard comments that perhaps Colombia will go along in this direction and, in the case of Colombia, we see at least the portfolio flows, just the petrol [phonetic] shares, are quite obvious.

So, I wondered if you see any case, whether it be Colombia or some other country a possibility in which a control of capital flows would be justified?

Second question, now focusing on whether you have identified particular sectors in the economy of some countries, we've heard about housing, for instance, in Brazil. There is perhaps greater level of indebtedness or perhaps even an over-leverage.

Thank you.

MR. WERNER: This is a good question to allow me to expand the original response.

The diagnostic I presented we obviously do believe is the correct one and it does not directly convey the idea that there is nothing to be done.

We believe, and in the opening remarks, we said that there is room, first of all, for the fiscal policy to be constrained or restricted in a growth environment with low interest rates, and basically this should help manage capital flows while also helping to create these buffers for times when there are not favorable external environments.

Secondly, those countries that have accumulated larger international reserves have found that these measures strengthen their external position with some potential outflows.

In addition, it was able to stem the mobility of the currency exchanges generated by these flows.

Third of all, we believe it is very important to avoid vulnerabilities in the financial system or the corporate sector and, in some cases, looking at the histories of our countries, we could also say governments, as to take short-term debt in order to use resources for long-term projects or to have debt in foreign currencies, when it's an agent that doesn't generate foreign currency, and therefore having this exchange mismatch on their balance sheets.

These have been called macro prudential policies, and basically they try to limit the generation of such imbalances. I would say that that is the healthiest recommendation.

We believe these are the key topics that will help to ensure that a lower percentage of flows will be a volatile portfolio, that the flows entering the country, whether volatile or not, not be used in a way that could generate future vulnerability; however, if all these measures are not sufficiently strong or powerful, the Fund has already said it, and said it numerous times, the transient and transparent use of some measures to control capital flows could be appropriate. That would have to be analyzed case by case and in markets where such measures have a certain possibility of success.

MODERATOR: We're going to take Roberto, and then we'll take a couple questions online.

QUESTION: Thank you, and good afternoon. I'm Roberto Gonzalez from Coronado Mexico [phonetic].

We heard, Dr. Werner, that in general terms you have set for Latin America, there is a need for reforms and to have some policies to control capital flows.

In these two areas that you refer to in general terms, I'd like to ask your opinion, in particular now focusing on Mexico.

Thank you.

MR. WERNER: Perhaps the person who could better answer this question is Adrienne, because she is in charge of Mexico. So, she could refer to Mexico.

MR. CHEASTY: I know I can't answer it better than Alejandro, but as head of the department, he has to recuse himself from commenting on Mexico.

We're very comfortable with Banhico's [phonetic] monetary policy, in response to capital flows.

Governor Carstens has emphasized that, given Mexico's growth prospects, in the context not only of the inflows, the monetary policies in advanced countries, but also in the context of Mexico's structural reforms, there's going to be a natural tendency for the peso to appreciate against other currencies.

And you know, Mexico has a strong record of strong, no surprises policy management. So, we expect the authorities to continue to manage the macroeconomic implications of capital inflows very skillfully within their current policy framework.

I believe that when you were talking about reforms, I believe you were talking about capital inflows side and not about the structural reform side.

We are also very impressed with President Pena Nieto's structural reform agenda, but I think that goes beyond your question.

MODERATOR: Thank you, Adrienne.

I'm going to take a couple of questions online before we move back to the room.

The first question is from Candida Costa [phonetic] from the Dominican Republic.

The question is, "What recommendations would you have the Dominican Republic? When will the monitoring program begin, and do you anticipate a growth of GDP closer to 4 percent this year?"

MR. SAVASTANO: Article IV of the last visit of the mission to the Dominican Republic was--made a presentation to the Board of the IMF just a few weeks ago. The summary of that discussion is available on the Web, and projects for this year have not changed with regard to what the mission projected in late last year.

There is a growth of less than 4 percent that is expected for this year--actually closer to 2 percent and not 4, and the basic recommendation for the new government was to reduce the fiscal deficit from a relatively high level that was determined in 2012 and the budget--the government's budget for this year takes that reduction into consideration. So, that's with regard to the projections.

Now, with regards to monitoring, the Article IV meeting at the Board also approved monitoring. This is Board decision and the Board did approve the oversight, and I imagine it will take place in the next few months that will also develop a report to be presented to the Board to explain the situation of the Dominican Republic.

QUESTION: Thank you. I come from Honduras.

What recommendations will the Fund make for a country that has a 6 percent fiscal deficit with a $500 million in sovereign debt with no agreement in place yet with the Fund?

The country anticipates a growth in this coming year of 3.3 percent. What risks do you see there? What recommendations would you formulate for this country and for the Central American Region in general?

Thank you.

MR. SAVASTANO: I'd like to answer your second question.

There are many Central American countries whose situation is similar. Alejandro said this in his opening remarks.

The Central American countries, with a few exceptions--Panama being one of them--perhaps Guatemala being another--have had a very similar behavior in recent years.

They were highly affected by the 2008-2009 crisis that slowed down the product and the tax collections and for this reasons the fiscal deficits increased, and public debt also increased, and that is the expected response to what was happening in the world at the time.

Starting in 2010-2011, the IMF that has a very fluid dialogue with each and every one of the countries and most of the countries in the Region implemented a program in those years, formulated basically the same recommendation, and that was that, starting in 2010-2011, it was a time to reduce fiscal deficit, take less debt and slower and regenerate the fiscal spaces that had been used and were useful in order to mitigate the global crisis of 2008, 2009. This is the case of Honduras but likewise the Dominican Republic and El Salvador. It's also the case of Costa Rica.

Given a number of factors, all of them different because the countries have different realities, in 2013, we find ourselves in a situation where the recommendation cannot be implemented. The expenditure levels remain pretty high. Income have not recovered their levels prior to 2008. Therefore, fiscal deficits are somewhat high and public debt has not dropped.

So, the recommendation to all the countries remains the same, and this is what Alejandro said.

In terms of objectives, it would be desirable or recommendable for all the countries in the Region, or the subregion, rather, that is different to other areas of the continent, because they are not commodity exporters, because that external factor is one that helps the tax revenue and the payment balances in South America, but they are of no help in Central America.

So, given the world's situation, it is recommendable, and this has been the position for the IMF in all of the countries, including Honduras, that the fiscal deficits need to be reduced, and the way to better make advantage of the abundant financing in the external world is to use the cheaper foreign debt in order to pay higher-rate loans.

We don’t' really see it bad for countries to assume new debt, because they have to take advantage of the prices, but it is the use of the debt. If the use of the debt is simply to maintain expenditure levels that are excessively high because of the growth of those economies, that means that those countries will be postponing an adjustment and extending the risks and, later, when the world conditions change, then perhaps a more sudden adjustment is going to need to be called for.

MODERATOR: Thank you very much.

Sylvia, please.

QUESTION: Good afternoon. I'm Sylvia Pisiani [phonetic] from La Nacion, a newspaper in Buenos Aires, and talking about expanding initial results.

What I wanted to ask you is, well, we've heard a lot in Argentina there is an openness for dialogue.

Let me ask you that, along these channels of dialogue any work is taking place. The Fund often speaks about the fact that there is no progress with Argentina.

Let me ask you, can you tell us, has there been some progress, has there been some advance? Has something happened thanks to that offer to open dialogue?

The Government in Argentina is saying that next year a new CPI could be in place. I would like to know if you feel that that might be sufficient, if next year there is a new CPI.

Moving on to another topic and focusing now on the economic report, in the report you indicate that the Argentine economy, or investments in Argentina and its economy had been affected by two matters, the exchange rate policy and the import policy. Could you perhaps expand on that and tell us whether you have recommendations to formulate in this regard.

Thank you very much.

MR. WERNER: Thanks to the dialogue, some work is taking place. These have been different phases. I would say, right now, that they are in the early steps, so I cannot really give you a very specific answer, but there is work taking place and there is dialogue. In the months prior to my arrival, a lot of work had been carried out, progress had been made. Nonetheless, there are a number of issues still on the table, they haven't been addressed, and that is why there has been a censorship, and now we're in a new working phase.

We understand the timeline for the development of the new index. We need to understand it better, however, and really see what implications this will have on the censorship that was adopted by the IMF Board. That is the current situation.

With regards to implications on economic growth, as the report points out, growth in Argentina is affected by the restrictions and by the uncertainty they generate and the difficulties in the production chain.

And 2013, we also think the favorable effects of the recovery in Brazil thanks to a good crop--and these are part of the factors that are able to develop our forecast for that economy, on the one hand, the favorable terms of the crops; and secondly, the impact from Brazil. And on the other hand, a growing effect this is having on the economy.

I don't know if Miguel would like to add something.

MR. SAVASTANO: Just one thing I would like to add or perhaps underscore an answer given to a similar question on other occasions.

We know obviously the plans of the Argentine Government to create a new CPI, we know about the timeline that they have developed in order of the implementation and the rollout of that CPI. The question is often whether the simple creation of such an index will eliminate or perhaps neutralize the declaration of censure, and the answer to that is no. The mere creation of the CPI does not address the problem, does not solve the censure. [Instead, what is important is for the new CPI to be aligned with international statistical understandings and guidelines that ensure accurate measurement.]

But the creation of the new CPI gives us an indication in the dialogue [with the authorities] to find answers to some of the methodological questions that arise with the current index.

We will have to see how these will be carried over to the new index, but the dialogue has to go along these lines.

MODERATOR: Thank you very much, Miguel.

Let me move over to this side of the room.

QUESTION: Yes, good afternoon, Rumi Salarios [phonetic] from La Republica newspaper in Lima, Peru.

The IMF has estimated growth in Peru of 6.3 percent this year, 6.1 percent next year, and we are told that we are a good economy, the country is growing, that it's the star of the Region, that we're really on the right path.

Nonetheless, what are the weaknesses, the risks that the International Monetary Fund identifies for my country?

MR. WERNER: Maybe rapidly--and Adrienne could perhaps then flesh this answer out a bit more, but we see a very good performance in the economy of Peru, and looking at things that are in good condition, we have to say it.

We have seen growth in recent years in the context of stability, of important progress in social indicators, and we see that this process will continue in coming years.

The economic policy in order to guarantee this process continues need to focus, at least in the medium term--is to take advantage of these years to develop basis for development that complement the development that is being brought about by sector development such as those associated with commodities. All of that is very important, as I have already pointed out. Infrastructure, in order to underpin the growth and to bring down the transactional costs in the economy and help the development of other sectors is important.

And here again, with the medium-term perspective, education, which, let me say, is general for the entire Region in order to develop the right approach for the medium-term development of the Region.

Adrienne, would you like to add something?

MS. CHEASTY: No, I think we have the same analysis.

It is important to continue to manage macro policy so skillfully, to build up policy buffers to offset the vulnerability in the face of such large natural resource dependence.

And I think in your interviews in Peru last week, you emphasized the value of developing aspects of institutions, and you've mentioned those already, infrastructure and formality. So, same diagnosis.

MODERATOR: Thank you, I'm going to take two more questions online and then I'm going back to the room.

The first question is with regards to Guatemala. The question is from Byron Dodon of La Prenza [phonetic]:

"In your opinion, what is the reason for countries such as Guatemala to grow at average rates of 3 percent when they have so many positive things such as practically total trade, commercial openness and enviable position and telecommunications.

And the next question is in English, "How will the change of government affect the economy of Paraguay, and which actions are necessary in the fiscal system?" This is from Marta Garcia from La Nacion.

MR. MILES-FERRETTI: [Through interpretation] Concerning Guatemala, we have growth rate forecasts of about 3.5 percent, and this is a relatively high rate in the context of the Region. However, the countries that have reached growth rates much higher than that of Guatemala with similar development levels. It is because they have a greater investment in physical capital and also savings in order to finance a lot of this physical capital, and they are much higher than those of Guatemala.

So, in order to increase the levels of production, it's necessary to have a capital base which, at present, Guatemala does not have to the same extent as other countries.

Likewise, it is very important for growth rates and to increase productivity to look at the level of human capital and education. This is another area where those countries that have made good progress in their development have actually developed very highly this sector, the education sector.

And these investments, in particular human capital, have long-term results. It is not something that will result in high growth rate in just a few years. It's a long-term type of activity.

Obviously, more physical capital, more human capital, infrastructure levels, once the physical and human capital have increased, then there is greater need for public infrastructure that are favorable to achieve sustainable growth rates.

So, I would say those are the chief issues. There are a number of others, obviously, such as the strength of the institutional framework, but what we are seeing is a macroeconomic management in Guatemala that is prudent, it is responsible, but other factors are also needed to generate those high growth rates.

MR. KRAMER: On Paraguay, I think it is fair to say that recent economic developments have been significantly shaped by the after effects of the agricultural shocks that we saw last year which led to a significant contraction in economic activity during that year, and now we're seeing a recovery from those effects, first due to natural waning of those effects and the normalization of the agricultural cycle but also due to the appropriate adoption of accommodative monetary and fiscal policies in Paraguay which have helped to support the recovery and domestic demand.

So, if you look at our just-published forecast for Paraguay that just came out in April world Economic Outlook, you can see that we are forecasting a significant recovery in demand and output this year.

So, looking forward, in terms of the macroeconomic policy requirements, we think it would be important to normalize the stance of monetary and fiscal policies so as to contain any undue effects on inflation and maintain inflation at moderate levels.

So, for example, for this year, we're forecasting inflation of about 3.5 percent. So, we see those as the important macroeconomic policy priorities in Paraguay right now.

MODERATOR: Thank you.

We have time for two more questions. I see Andres and then Flavia [phonetic.]

QUESTION: Good afternoon, Andres Huey from WinFM 98.9 in St. Kitts and Nevis in the Caribbean.

Just two countries I want to focus on, but before I ask those questions, what is the growth prospect for the Caribbean Region, specifically? How are we looking, growth-wise, in projection?

Regarding Jamaica--Jamaica, at this point in time, the Jamaican dollar is being devalued. There are a lot of concerns in Jamaica that this will have effects on the economy.

What is the IMF's take on the devaluation of the Jamaican dollar? Is this going to hurt the economy? Some policies suggest that devaluation will probably help in some ways. What's your view on that?

And for St. Kitts and Nevis, where I am currently based, it is a small country--it's the smallest country in the Western Hemisphere, a small policy, a very high debt. What's the current debt-to-GDP ratio? I know there are some debt restructuring exercise in St. Kitts and Nevis. What's the state of that now? Where are we in terms of our debt-to-GDP?

And there is a concern also that our current political situation in St. Kitts and Nevis, a motion of no confidence filed in the government since December has not been addressed yet in the Parliament, and there are some concerns in the business community that this will affect business climate.

How does the IMF see this? Will this indeed affect investment climate in St. Kitts and Nevis.

MR. WERNER: Let me first go quickly through the growth question that you have and then my colleagues will go into specific country questions that you are asking us.

As we said at the beginning of this conference, basically, the Caribbean is subject to two important drags on growth: First, high debt, and as Miguel mentioned for Central America, I think the run-up in debt from already high levels that took place after 2008 and 2009, has to be reverted extremely quickly, and this is both a severe drag on growth and generating significant uncertainty in the Region.

Secondly, I think in terms of growth, after the crisis, the effect that the crisis had on remittances, on tourism, and in some of the other major economic activities of the area obviously are having a drag on almost all of the Region.

And that is why, basically, for most of the countries, except the commodity exporters that are basically Belize, Guyana, Suriname, and Trinidad and Tobago, for the rest, we are expecting an average growth rate of 1.2 percent. The commodity exporters are growing about 3 percent, but he rest that are subject to this really bad combination of factors, we are expecting growth to pick up slightly from what we saw last year and to touch 1.2 during 2013.

Now, my colleagues can go into the detailed questions of St. Kitts, Jamaica, et cetera.

MR. MILES-FERRETTI: So, you had a very specific question on the impact of the exchange rate change in recent months. I'd like to step back just a bit to put what has happened in context.

So, if you look at the past three years, you had a very, very strong appreciation of the Jamaican dollar, not in nominal terms--so, you don't see the exchange rate moving vis-à-vis the dollar, but what you see is a much higher inflation rate in Jamaica than you see in the U.S. and other trading partners.

So, for a number of years, Jamaica had become more expensive relative to its trading partners.

What has happened in the past few months is some reversal, some depreciation of the exchange rate that has reversed some of that--you can call it loss in competitiveness that Jamaica had experienced during the past few years.

Now, of course, whenever an exchange rate depreciates in a country that has relatively high level of imports, undoubtedly, people notice it because import prices go up. At the same time, again, this is a little bit of a payback for a period during which the high inflation rate in Jamaica would--and its import prices in dollars, had helped in the other direction.

However, it is very important for the Jamaican economy to increase domestic production and exports. If you look at what has happened in Jamaica last year, you see very little growth and yet a very large current account deficit, and we think that this depreciation of the exchange rate is going to help stimulate exports. Tourists look at their costs when deciding where to go, and would at the same time would encourage a shift towards domestic production and away from imports and, through those channels, help both the growth rate of Jamaica, you get more domestic production, as well as a narrowing of the current account.

MS. CHEASTY: On St. Kitts, you asked about debt to GDP ratio, I don't have the exact numbers with me, although I can give them to you afterwards. And as you know, it's not a simple number, because we are awaiting the outcome for the debt-for-land exchange.

And so, what I can say is that the government has made important strides in bringing down debt, and this is very welcome and very creative, and we hope that it is concluded very productively.

We don't comment on the political situation, but what I can say is that we see government operations continuing, and that's a good thing, but it would be nice to have a resolution.

MODERATOR: Thank you.

The last question from Flavia, and then we'll have to stop.

QUESTION: Hi, good afternoon. I'm Flavia Babasa [phonetic], Global Newspaper, Brazil.

In the reports this week, the Fund mentioned several medium-term risks and constraints to the Brazilian economy such as increasing housing prices, non-performing loans, corporate debt, and the concern with the high inflation--a lot of concerns, constraints.

So, I would like to know if we can expect growth in Brazil to resume the golden moment of 2010 and et cetera of that 5 percent or more threshold. And if you can please comment a little bit on the general overview for the country.

And I would like you to address fiscal policy. The Fund did not mention it in the reports, but it is a domestic concern, you know, that Brazil has been using some creative accountability to achieve its fiscal goals. So, I would like you to comment on that, too.

MR. WERNER: Okay. Let's say, regarding the first part of your question of all of our concerns, and I think that gives us also space to talk a little bit about housing prices across the Region.

I think we have looked at this issue in the past. We will update our assessment in the Regional Economic Outlook.

It is hard to claim that prices are, in general terms, in these economies, completely out of line with fundamentals. We think that increases can be explained through the important growth that we have seen in the Region.

However, this does not mean that we are not seeing in some parts, in some cities, et cetera, some prices that have been out of relationship with the fundamental drivers. And in that sense, I mean, there are some pockets of concern in the asset market, not only in housing but overall we see a financial system generally in the Region and in Brazil that it is healthy, but some problems have to be addressed.

You're right. I mean, Brazil has significantly slowed down in the last few years. This slowdown has been addressed by investment, and we are seeing some signals that investment is picking up. Investment, as we said in the introduction, has been responding to stimulus, and some important programs that have been put in place to unlock infrastructure projects that I think is a very important element, not only in the short run, but also in the long run to really increase capacity in Brazil and to reduce bottlenecks.

Secondly, even with investment recuperating, the investment-to-GDP levels in Brazil historically have been low, and I think the key question now in Brazil is where is potential GDP growth?

I mean, we think for the Region as a whole, and Brazil might be the country which we are seeing this phenomenon first will be showing some slowdown from the--as you call them, the golden years, in which basically the run-up of the increases in commodities and the important increases in investment that were associated with this important resource-led development that took place in these countries is basically being incorporated in higher levels of GDP per capita, but no longer generating more and more growth into the future.

And I think the policy mix in the countries in Latin America should be adapting towards economies that will be growing less than what we saw in this decade. This was one of the best decades in history for Latin America with respect to commodity prices, and in that sense, looking into the future, as I said again in the introductory remarks, commodities are expected to remain high, but obviously not to repeat a run-up as the one we saw in the previous decade, and obviously, with some downside risk in the next few years as we saw this fear that was triggered by the Chinese data at the beginning of this week.

And maybe Miguel can go into more details associated with the specifics of Brazil.

MR. SAVASTANO: Just to add on the point that Alejandro is making, but not only relevant for Brazil, but for all the economies, actually, and not just for this Region but for all economies.

For policymakers, for authorities, for the Ministry of Finance, and for having the dialogue, it is very important to have this distinction between what you hear us talk about the potential growth and the output gap.

Essentially, there are different names that you can give to this object, but is central to policymaking, and it is different in every economy. What is the rate of growth for that economy that, given its characteristics, is consistent with equilibrium, where no inflation--non-accelerating inflation, stable current account, and so on. That is what is potential growth.

Now, that's also a number that, one, changes across economies and, (b), changes over time, but what we do know also is that it doesn't change year by year, because then you have the cycle.

So, what is important of the case of Brazil? Brazil grew by more than 7 percent in 2010. Yes, but it also fell by significant amounts in 2009. So, that's a cycle, right?

The growth of Brazil in the previous ten years, if you take away all the fluctuations, was around 3.5 percent. Now, that's just a very simple number that takes you an average over ten years. So, there's no cycle. You could say, is that the potential growth or not? Perhaps not, but it would not be too different from that.

So, an economy that has grown over ten years at an average rate of 3.5 percent, unless something fundamental has changed in that economy, you cannot expect that economy will grow by 5 percent over the next five years, unless something fundamental has changed.

In the case of Brazil, nothing fundamental changed in 2010, or 2011, or 2012. The constraints or the structural features that influence the behavior of Brazil in the previous ten years are still there, and the government is trying to tackle them through structural policies and through measures that can increase productivity which is what, in the end, lifts the economic rate of growth. So, that's one point on Brazil.

Another point to reinforce the point that Alejandro made as to what to expect for the future, I call your attention to the case of Chile.

Chile who, in the mind of everybody, is and has been one of the most strong performers over the last 30 years in economic terms in Latin America has had a substantial decline in its growth rate. Chile in the '90s and up to the early parts of the 2000s grew at 7 percent per year on average over ten years. So, the potential growth in that decade was around 6-7 percent, similar to the rate of growth for Peru now. But in the last ten years, you do the same average, and that number is much smaller. It is closer to 5 or to 4. It took a while for the Chilean authorities to shift their mindset from, "We're an economy that grows, our potential is 7 percent year," to where it is now, which, okay, is perhaps 4.5 and 5, and by doing so, they have set policies, the budget, the target of inflation and so on with that target in mind.

So, that was so important to have that reference point which, as I said, changes in every economy, changes over time, but is an important anchor for setting macroeconomic policies.

MODERATOR: Thank you very much.

Thank you to the speakers--

QUESTION: Fiscal policy.

MODERATOR: I think we ran out of time today.

QUESTION: They didn't address it. I asked it before.

MODERATOR: I will be happy to take your question bilaterally.

So, I would like to thank you all, the speakers today. Thank you for those here in the room and those online that have followed the press conference.

Thank you very much.


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