Transcript of a Press Conference on Recent Developments in Latin America by Anoop Singh, Director of the IMF Western Hemisphere Department

October 10, 2008

With Caroline Atkinson, Jose Fajgenbaum, David Robinson, and Gilbert Terrier
Washington, D.C. October 10, 2008
Webcast of the briefing

MS. LOTZE: Good day and welcome to this briefing on recent economic developments in the Western Hemisphere. I am Conny Lotze of Media Relations. I am joined here today by Anoop Singh, the Director of the Western Hemisphere Department who, as you may know, will take over the Asia and Pacific Department on November 1. Also here is Caroline Atkinson, Deputy Director of the Western Hemisphere Department, who will take over the External Relations Department on November 1. Then we also have here Jose Fajgenbaum and David Robinson, both Deputy Directors of the Western Hemisphere Department and Gilbert Terrier, Senior Advisor.

Mr. Singh will make some opening remarks which will be available after the briefing. Then we will go to your questions. Thank you very much. Mr. Singh.

MR. SINGH: Good morning. It is a pleasure to welcome you to our press conference. I will open with some remarks on global developments and regional trends and then turn to answering your questions. Let me inform you that our full presentation of the regional economic outlook for the Western Hemisphere will take place this year in Santiago, Chile on October 22 and again in Mexico City on October 23. David Robinson will be making that presentation.

I would like to start by discussing the global context, which is of course of particular interest at this time. I am sure you have heard the main issues described by the Managing Director and Messrs. Caruana and Blanchard during their earlier press conferences. You know already that a sizable economic downturn is projected. However, we have also seen in recent days further, massive, and increasingly coordinated corrective actions and our central scenario anticipates that these will be successful in stabilizing financial conditions. Of course, it will take time, under any rescue plan, to restore the proper functioning of credit markets. For the United States, our central projection is that recovery will begin in the second half of next year, and will be more gradual than previous recoveries, because of the exceptional nature of the asset price adjustments taking place. Overall, growth in the advanced countries as a whole will also be close to zero at least until the middle of 2009.

For Latin America and Caribbean (LAC), these developments represent a confluence of negative shocks. These shocks-the freeze in global credit market, weaker external demand, and lower commodity prices-can have strong negative feedback loops, particularly for financing conditions. Such a scenario, when we stress tested it in our last Regional Economic Outlook (in the Spring of this year) risked near-recessionary conditions for the region. We are certainly not at that point and our central scenario points to growth of around 3 percent next year, close to the average for emerging market countries. Thus, Latin America and the Caribbean are expected to deal with the current global shocks better than in previous crises. This reflects the progress many countries in the region have made in improving their macroeconomic fundamentals over the past decade.

However, there are still a number of downside risks for the region, and we know that policy makers in the region remain on very high alert to dealing with the current shocks and these additional risks. Among the latter, for example, are commodity prices-which remain elevated but could fall further in line with the experience in previous global downturns. Of course. Of course, lower food and fuel prices would bring welcome relief for some countries, in particular low-income commodity importers in Central America and many Caribbean countries,. But for the region as a whole, strong commodity prices have been a major factor in bolstering fiscal and external positions and driving growth in recent years. A further sharp fall would have considerable adverse implications for the region's fiscal and external positions.

Against this background, we see several essential priorities for the region in the period ahead. It goes without saying that the first order of business is to preserve the proper and efficient functioning of financial systems by pre-emptively addressing risks from liquidity and asset quality, and we see policy makers firmly oriented toward this end. Many countries have built up considerable foreign exchange buffers that could be used to deal with exceptional and temporary shocks. Secondly, it remains important to preserve the hard-won gains on inflation. Central banks will need to maintain an active communication with markets on policy challenges and measures, especially on the future course of inflation, so as to keep inflation expectations well anchored. This is especially important for countries where domestic demand has been growing well above trend and inflation remains well above target. Third, fiscal situations will likely come under stress at a time when there will be increased need to maintain a robust safety net for those low-income households who would be affected by the slowdown. This will require a much more targeted strategy for fiscal spending to ensure that essential needs can be met while containing any additional financing needs.

As for our own role, we are closely in touch with policy makers across the region, engaged in exchanging views on the global economic and financial situation, and stand ready to extend financial assistance were this to become necessary.

QUESTIONER: Thank you. Two questions, Mr. Singh. First I would like to get your reaction on the announcement made yesterday in Mexico, the so-called anti-crisis program announced by the government of President Calderón. Among other things, they lowered the projections for growth this year, and they announced that they are going to increase the budget also, and the other thing is related also to Mexico. For a couple of days we have been hearing a lot about how the region has been facing this crisis in a strong position, resilient is the word, but I wonder if after what happened in Mexico, which was largely due to a crisis of confidence, we are starting to see some cracks on that resilience that countries across the region have chose so far.

MR. SINGH: Well, let me say this, the region-Mexico certainly included--has buffers of foreign exchange, and countries generally have historically high reserves. The fact that they are now beginning to use them is natural, it is not a surprise. We do believe that we are facing exceptional circumstances. We do know from previous crises, in virtually every single crisis that we have experienced in the last 25 years, there is always a phase when markets overshoot, extreme rates overshoot, other pressures overshoot, and this overshooting generally continues even while strong corrective actions are being put into place because it takes time for the shift in attitudes to take place, it takes time for markets to be convinced that the corrective actions are serious.

Given the extent of actions that have been taken in the U.S. and other economies, and their increasing coordination, you can be sure that the governments concerned have now proclaimed that they will do whatever needs to be done to stabilize the situation, and that is why our scenario assumes that this will happen. The fact that it is not now happening, today, at this moment as we speak is not in itself surprising because overshooting is a phenomenon of every crisis, and we are seeing that now. Even as systemic measures are being put into place to correct the problem, countries are also intervening massively-including in Latin America--to increase liquidity and deal with the overshooting. We continue to believe that countries in Latin America have financial systems that are less directly exposed, So in the end what we are waiting for is for the overshooting phase to end. You will see then that the markets will bounce back relatively quickly in Latin America.

MR. ROBINSON: On the crisis package and the revision of projections, clearly Mexico's growth is going to be hit hard by the slowdown in the United States and the deterioration in the global situation more generally, so I think that the revisions that the authorities have made to growth are basically very sensible. In fact, their forecasts are very similar to our own. It is a sort of appropriate recognition of the risks on that side. Now, as far as the program that is being put in place, again I think this is something that we support. Clearly the additional expenditures that are envisaged are going to be on infrastructure, and public infrastructure as we all know is one of the weaknesses in Mexico, so I think it is a sensible use of resources, it is the right place to put the money, and it is a timely stimulus in the current circumstances. Obviously for this to take place, it is also the case, I think, that there will need to be an adjustment to the balanced budget law, and that will need to be considered by the Congress in the context of the oil reforms, oil sector reforms that are presently under discussion. Of course, those also are very important for Mexico, given that oil prices are falling now and oil production is falling, so it adds some urgency to achieving a good consensus solution on how to strengthen the oil sector and oil revenues and production moving forward.

QUESTIONER: This is a question related to my colleague here. In Brazil we are seeing a lot of overshooting in pressures on the exchange rate in the few days. What I would like to ask you if you think that it will be easy for Brazil to finance its current account deficit this year, credit market conditions are very tight, and we have now a current account of about 1.5 from the GDP for the first day in some years. So I would like to have your assessment on that.

MR. SINGH: Well, to answer your question, we do not see any difficulties at present. You know that over the last few years Brazil has received enormous amounts of FDI, foreign direct investment. If you go back and look what have been inflows in recent years and what may have been the outflows in the last few weeks, the balance is still extremely positive for Brazil. So what is now happening remains a fraction of the inflows that Brazil has received. Brazil remains an attractive destination. Indeed, its own elevation to investment grade rating is helping. As I said, we do see this as a period of overshooting. So we do not see that there will be any significant long-term effects in terms of financing for Brazil.

QUESTIONER: [Through interpreter] In the case of Chile, the economy has had high levels of public savings, high levels of international reserves, of foreign reserves. Still, the peso has been under strong strain. Copper might fall substantially. Do you see any risk that the Chilean economy might decelerate further than what you yourself projected a few days ago and during the next year?

MR. SINGH: Let me respond in English and maybe others can add. Clearly, Chile has been and continues to be a country with among the strongest macroeconomic frameworks in emerging markets. You know that Chile has been growing close to or above trend for some years, and its growth rate last year I believe was above 5, and for this year despite the uncertainties in the global environment, we believe it will be growing at least at about 4 1/2. Like other economies, it will be affected by the developments in copper, in commodity prices and reduced external demand. It is therefore possible that Chile growth rate could fall a bit further in 2009 to below 4.

I should note at this stage that the possible reduction in growth for Chile is still less than what we see for other countries. Although Chile's headline inflation has been high, well above their target, this has largely reflected external price shocks We do believe that now the global context for inflation is changing, and that concerns of financial stability and growth are becoming more important. Therefore, as growth weakens in Chile, and other countries, it will reduce the pressures on capacity that we have seen in the last few years, and this should begin to open up macroeconomic room , especially for countries that have strong macro economic frameworks, like Chile, to support growth. We believe inflation expectations over the medium term in Chile are well anchored, and so we think that Chile is among the countries that will have substantial room for maneuver in dealing with this global situation. Does anyone want to add to that?

MR. FAJGENBAUM: If anything, Chile is now facing the problems of liquidity squeeze, credit squeeze from the centers, from banks in the U.S. and Europe, and the authorities are reacting quite well to that, creating facilities to provide the necessary credit to the private sector.

QUESTIONER: I wonder if we could speak about the region as a whole again, to talk about whether the drying up of the credit markets will impact this region in a way that they will be searching desperately for other alternatives, particularly the private industry, and might seek out such sources as China and other countries that might have reserves available to make investments. Can you comment on that and whether you think that situation is likely to develop?

MR. SINGH: Well I think you raise a more general point which I do believe is a helpful point in this environment, and that is that although we are seeing a scarcity of capital in some markets, globally there is capital available, and so what is at stake are the conditions that will allow that available capital elsewhere in the world to be used and brought to areas where there is a shortage of capital. The question then is what are the conditions that will bring it about because obviously it would be helpful if available capital were to be used in areas where there is a shortage. So I think your question goes, I would interpret it, for Latin America as going more directly into the issue of private investment, investment generally, and I think it is important to look at that issue for just a moment, although it is somewhat of a longer term issue. We should not to lose sight of the fact that the region as a whole still has what I would call an infrastructure gap that it needs to close, and as we said in previous assessments, it is more difficult to close that gap by public investment alone. This means that the region will be competing with other regions for the private capital that is available, and what we think is very crucial is that the conditions be continually created and enhanced so available capital from outside, from China or elsewhere, comes in to support infrastructure because that is where we see the gap as most significant.

MS. LOTZE: Let me take a question from the Media Briefing Center. We have a question from Peru, and it is very short. What would be the effects of the global financial crisis on Peru's growth?

MR. SINGH: Well, I think Peru, like its neighbors and other countries in South America, is facing a situation where external demand has weakened and for Peru more importantly commodity prices are weakening, and obviously external financing has become tighter. Let me just say that although it is very difficult to make these fine assessments, in some ways we have not seen in Latin America the kind of complete dislocation or shutdown of money markets that we have seen elsewhere, so we are not in a situation yet of extreme dislocation.

I do think we need to look beyond this phase of overshooting, and I think Peru has done a lot in recent years to enhance its productive potential. And so we are confident that Peru, that has been a growth leader in Latin America-its had almost the highest growth rate in the region over the last couple of years--will be able to bounce back. In the near-term, it is unavoidable that its growth rate will fall, but Peru clearly has been growing above trend, so it is not such a catastrophe if growth were to decline, particularly if it is brought closer to trend, as it will take away some of the pressures on inflation that we have seen in Peru over the last year. So I think we have to look beyond the present period of overshooting and see how supportive is the environment for investment, and I think Peru is one of the countries that has been increasing the attractiveness of the country to private investment.

QUESTIONER: In view of recent developments in the markets around the world and even assuming that we are seeing a lot of overshooting, are you still confident that the central scenario for Latin America is still the most probable or should we take a look at the stress scenario?

MR. SINGH: While I think it is difficult for anyone to speak with certainty, our central scenario in the World Economic Outlook assumes that the global financial situation begins to stabilize as a result of these corrective actions, and in that scenario we feel confident that Latin America growth for next year should be above what our model estimates suggest. But the fact that there are downside risks is a reality, and again the one I come back to time and again is that of commodity prices, especially their impact on commodity exporters. If we look at the history of previous downturns, you find that in every previous global economic downturn in the last 40 years you see significant drops in commodity prices. So I think the main risk now for Latin America, apart from the financial stresses, is whether the global slowdown sparks a greater reduction in commodity prices, and that would affect the fiscal and external situations. So I think that is why a key priority now for the region is to maintain fiscal flexibility. I think this is going to be very, very important.

QUESTIONER: On Argentina, given the current situation around the world, do you think that they should pay their debt with the Paris Club in tranches instead of a whole chunk? That is a debate that is going on. More broadly, do you foresee difficulties in financing debt in Latin America? In Argentina, for example, maybe Ecuador, with the squeeze on credit worldwide? Thank you.

MR. SINGH: I have said frequently that the Paris Club issue is between Argentina and the Paris Club, and they need to decide what they need to do. Clearly, we are in favor of normalizing relations, but in the end it is a matter between Argentina and the Paris Club. More broadly, looking to the region's near term sovereign financing need, this has largely been met, so I do not see in the near term this causing significant problems for the governments. A bit different is the assessment for the private sector and corporate sector, that would likely be more affected than the sovereign in the near term. However, against that, we know that the corporate sectors in Latin America are not as dependent on external funds as corporate institutions in other parts of the world. Their reliance on internal funds is somewhat greater, and I think they do have greater flexibility maybe in putting off planned expansions in the first instance as an adjustment to these financing pressures, but let me ask my colleagues if you want to add to that. Jose, on the issue of financing pressures, am I right that in most governments the near-term financing needs are --

MR. FAJGENBAUM: You basically covered it. Some countries even have the full financing for 2009. So this should not be a problem. Some other countries are going to use part of their reserves, which have been accumulated for these kind of events.

QUESTIONER: [Through interpreter] Mr. Singh, what will be the impact you think this crisis situation will have on Central America given the close link it has with the United States because of the Free Trade Agreement? In your opinion, who will be the winners at the end of this crisis? Thank you.

MR. SINGH: Well, I am not sure who will be the winners, but in the near term countries in Central America are more exposed to the reduction in demand taking place in the U.S., and this may be a more serious channel than the financial channel. That is because countries like Honduras are less integrated in terms of their financing needs than others in Latin America. So in the first instance the vulnerability would be from the weakness in the U.S. economy and the attendant risks that this could translate into a weakness in remittances. On Honduras, in particular, I was very pleased to meet with President Zelaya in Washington just a few weeks ago. I know the President himself is very focused on protecting Honduras, and we are in active discussions with his economic team this week to give our advice and see how best we can be of help to them.

QUESTIONER: Two questions. About commodities, given the scenario that you are forecasting of extreme pressure on commodity prices affecting the region, can you talk about the differentiation among the countries themselves? Presumably some have seen more of an improvement in their terms of trade than others as a result of high commodity prices over the past few years. Perhaps you can tell us which countries would be most affected by a commodities slump.

Secondly, what has been your evaluation of the fiscal response from the governments today? We have talked a lot about monetary response and what the central banks are doing, but how would you evaluate the fiscal response of governments? You have leaders like President Lula who his first response was that this was not his crisis, this was George Bush's crisis. Would you say that there is a risk of governments becoming too complacent in the region, given the serious challenges they face?

MR. SINGH: Let me go to your second issue first. We do not see any complacency in the region, it is quite the opposite. I am actually convinced that people are taking this very seriously, and they are on high alert, there is no doubt. For Brazil you know that they recently raised the target for the primary fiscal surplus to 4.3 percent of GDP, and so their reaction has been to maintain confidence in the fiscal strength, and I think it has to be commended that in this period they have reaffirmed and increased their primary surplus target. In terms of the impact of commodities, I am not sure if my colleagues have anything to say on that more, but at one level one can be mechanistic, and you can look at the commodity concentration by countries, you can rank them and you can get a price and get a mechanistic impact. But I am not sure that would give us the best results. We also need to look at the different responses by countries in dealing with their commodity surpluses, because that has different implications for their external strength and resilience to future shocks. So, to get a really deep assessment as to how a country would be affected, less or more than another country, you have to go into its fiscal flexibility. Hopefully Mr. Robinson will add something more. Thank you.

MR. ROBINSON: I am anticipating a little the Regional Economic Outlook which as we said earlier we are going to be publishing in a couple of weeks because in fact a lot of the analysis you will find in there distinguishes between various groups of countries, according to their dependency on commodities.. But as Anoop says, obviously the policy response is the really key thing. But on a mechanistic basis, I think it is fairly clear that a number of countries like Bolivia, Ecuador, Trinidad and Tobago have had very large terms of trade increases. Then there are other countries somewhere in the middle like Mexico, Colombia, and Peru, which as a group have had positive but smaller increases. Then there are the Caribbean and Central American countries which have been hit really quite hard by the rise in oil and commodity prices. One of the things in the regional outlook is precisely how the policy responses differed across these countries and what the implications are. I am not going to share all that with you now, but just say, please, read the regional outlook when it comes out because it does look at these things quite carefully.

MR. SINGH: Even better, come to Santiago so you can hear and see the presentation.

MS. LOTZE: One more question from the Media Briefing Center, then we will wrap it up. This is a question from Brazil. How do you evaluate the recent measures taken by central banks in Latin America? The Brazilian central bank, for example, reduced the level of money required to be kept on depository reserve balances.

MR. SINGH: Well, as I said before, countries and central banks in the region are on high alert, especially for any threats to payment stability, and they are reacting by adjusting liquidity instruments as needed to maintain stability. It is in that context I see that measure by Brazil and there are other measures by other countries, too, and this is an indication that countries are on very high alert, and they are doing what they can to smoothen these shocks.

MR. FAJGENBAUM: Just to add on the specific measures that Brazil has taken, basically they are measures to provide liquidity to stretch the banking system, especially to be able to avoid the credit crunch and the liquidity problems that we see as well. These were very well received measures, were very well designed. First it was a very general step, reducing reserve requirements, but then the central bank became more selective in reducing the reserves so that the banks that have enough liquidity are induced to purchase portfolios of banks that are more tight.

QUESTIONER: [Through translator] Mr. Singh, you spoke a few minutes ago about the fact that you have daily discussions with the governments of Latin America to analyze the evolution of the crisis and that you have offered financial assistance and you even said that it is technical and financial assistance you have offered if they needed. Have you spoken lately with the government of Argentina and do you believe that Argentina could be eligible to receive financial assistance given the situation and given that Argentina has been resisting itself to undergo Article IV reviews?

MR. SINGH: Let me be clear, we are not ringing up country-by-country and saying can we give you a program, that is not what I mean by being in daily contact. What I mean is the Fund, the Managing Director has assured policymakers and our members that we have the resources and we are prepared, and we will act in financing situations that arise, and I think this message is well known now globally, it does not mean I have to ring up every Governor and say do you want a program? We are in daily touch with all our governments, including Argentina. Dialogue in every country is different, but I can tell you that we are in daily touch with all our governments, and they are taking this very seriously and very responsibly without exception.

QUESTIONER: I have two questions for Mr. Singh if I may. The first question is related to the inflation in Venezuela and Argentina. What is going on in Venezuela in the field of inflation and how does the IMF view the figures of inflation in Argentina?

The second question relates to you, Mr. Singh, in the field of your person itself, and because this is going to be your last briefing on Latin America because you are moving to another assignment in the IMF, so I would like to know how would you remember your experience with dialoguing with Latin American countries, especially with Argentina?

MR. SINGH: Well, I think I should be careful that my last answer in my last press conference on Latin America does not become so memorable as to wipe out the memory of all the previous ones. But actually I can answer both your questions in one way, your question as what is my enduring memory and your question about Venezuela and Argentina's inflation. I can answer them both in the same way.

When I started working on this region some years ago, there was a deep crisis at the time. It was just after Argentina's crisis of 2001, I started work on the region in 2002, when other countries in the region were also facing crisis conditions. At that stage, the stark history of Latin America was a region that had periodic crises and where every crisis was generally characterized by inflation, high inflation and financial instability. This was the record over I would say the last 50 years. What I have been really impressed by in this period is how much the region today is actually determined to wipe out this history of high inflation and remove its vulnerability to periodic crisis. So I do believe that in my time I have seen every government become firmly resistant to high inflation, I see a greater consensus for low inflation, I see many countries having built up institutions for keeping inflation low. You mentioned Venezuela, you mentioned Argentina, even there those governments do not like high inflation, indeed those governments want to bring inflation down. So I would say there is no difference across the region whether you are in Chile, Venezuela, or Brazil or elsewhere; there is a clear commitment to bringing inflation down. Some countries have got it down more than others, but no one likes it, and I think that is a great success for the region, and that is my enduring memory.

I do believe that the region has crossed into a phase where it is determined to keep inflation down and it is not simply an objective of economic policymakers. I do think that the desire for low inflation and macro stability is deeply rooted in the wider community.

MS. LOTZE: That was a wonderful final wrap. I want to thank you all and we conclude the press conference here. Those in the Media Briefing Center, I want to thank you for sending in the questions. We will try to answer some of them bilaterally later. Thank you very much.


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