Transcript of a Press Briefing by the Western Hemisphere Department

IMF News, October 8, 2016

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Latin America and the Caribbean: contraction in 2016 of .6 percent (average for the region).
Regional recovery expected in 2017 at 1.6 percent.
Assessment: recent disappointing results indicate lower potential growth on the midterm and reinforce the need for structural reforms to increase investment, productivity, and competitiveness.
External environment:
- Stabilization and slight recovery in some commodity prices; more significant recovery in oil.
- Loosening of financial conditions for emerging markets since summer 2016.
- Weaker-than-expected recovery in the United States noted as a potential negative factor.

Brazil:
- Forecasted growth in 2017 of .5 percent, implying a change of almost four percentage points from minus 3.3 percent in 2016.
- Forecast assumptions for 2017 include approval of a proposed spending cap by Congress and some kind of pension reform to make the spending cap viable.
- If those reforms pass, expected further momentum in confidence, foreign investment, and growth.
Argentina:
- Forecasted GDP change from a drop of 1.8 percent in 2016 to growth of 2.7 percent in 2017 (change in growth of 3.5 percent).
- Inflation outlook published with two numbers:
- 23 percent (average for the year as a whole).
- 20.5 percent (presented alongside the 23 percent in reporting).
- Around 20 percent referenced as the year-end number; IMF clarifies Central Bank targets of 12 to 17 percent for the year and the December-to-December measure is typically used by central banks.
- Observations: recent devaluation earlier in the year followed by relatively stable exchange rate; strong wage and price increases have led to a real appreciation in dollar terms and a higher cost of living in dollar terms.

Venezuela:
- Described as experiencing the largest negative growth and a continued contraction for a second/third consecutive year with the highest inflation in the world.
- Humanitarian concerns emphasized; outlook for 2017 unclear due to lack of Article IV consultation and unclear policy changes.
Colombia:
- Fiscal reform aimed at replacing revenues lost from the fall in oil prices (about 3/3.5 points of GDP) to maintain fiscal sustainability and comply with the fiscal rule, thereby avoiding deeper spending cuts.

Structural reforms (energy, telecommunications, electricity, natural gas pipelines) are proceeding but take many years to fully materialize in investment and output.
Observed outcomes:
- Fall in electricity prices and increased investment in telecommunications.
- Energy auctions are taking place; pace may be slower due to lower world oil prices.
Peso performance:
- Peso has not rallied like other emerging market currencies since August 2016; linked to prospects of increased protectionism and U.S. election-related factors.
Fiscal policy:
- Public debt referenced at 56 percent of the gross public debt (question cited).
- IMF recommendation: consider establishing an independent Fiscal Council to enhance transparency and public debate; government had indicated differing views on this proposal.
- Government target: reduce public sector borrowing requirement to 2.5 percent of GDP by 2018; current deficit around 3 percent of GDP.

Public debt projected by the Ministry of Finance to reach 25.6 percent of GDP in 2017 (highest since 1993).
IMF view: not concerned given Chile’s fiscal framework, low debt level relative to region, commitment to gradually lower the primary deficit and stabilize the debt-to-GDP ratio; recommend gradual consolidation using available fiscal space.

Caribbean:
- Slight rebound in economies oriented toward international tourism; difficulties persist for commodity-tied economies.
- Recommendations to diversify and adapt tourism offerings; invest in infrastructure, logistics, renewable energy, and non-traditional services (e.g., medical education, retirement communities).
- Fiscal and financial sector challenges remain; some countries undertaking banking sector restructuring.
- Case highlight: Jamaica’s IMF program implemented over almost four years seen as strengthening financial stability, gradual growth recovery, and attracting investor interest.
Central America:
- Recommendation to open fiscal space by eliminating exemptions/waivers that distort resource allocation; reallocate to lower rates and a more level playing field to foster productivity-driven investment and employment.
- Advice: when times are good, build fiscal buffers; different countries face different fiscal pressures (e.g., Costa Rica, Nicaragua).
- On proposed U.S. legislation to restrict Nicaragua’s access to IDB/World Bank/IMF funding: IMF is monitoring closely and considers implications speculative until outcome is known.

IMF adjusted growth projections rank Paraguay among the more dynamic economies (third-most dynamic in the region referenced).
Strengths: consolidated macroeconomic conditions, access to international financial markets, strengthened banking system, and infrastructure investment supporting countercyclical forces.
Recommended priorities: continued infrastructure and energy investment (critical for a land-locked economy) and a social inclusion agenda emphasizing education to foster inclusive growth.

Fiscal policy:
- Many economies exhibit a countercyclical fiscal position with primary deficits higher than midterm expectations.
- Guidance: use fiscal space where available for gradual adjustment, protect social expenditure, and return to sustainable long-term fiscal positions; countries with higher debt and costs should pursue faster fiscal consolidation.
Monetary policy and exchange rate flexibility:
- Flexible exchange rates have helped mitigate external shocks and act as countercyclical buffers.
- In many countries, a contractive monetary stance is no longer required as inflation moves back toward targets (examples cited: Chile and Colombia).
- Central banks generally reference December-to-December inflation measures as the annual metric.

Investment trends:
- Argentina had one of the lowest investment-to-GDP ratios last year; significant capital stock rebuilding needed.
- Market interest in investing in Argentina noted, but conversion into real capital formation remains uncertain; agricultural sector among early sectors attracting investment.
Role of policy reforms:
- Structural reforms are long-term processes; persistence and full implementation are essential to realize benefits.
- For Brazil and Argentina, policy changes are expected to generate positive impulses beginning late 2016 and into 2017, contributing to regional improvement in growth and confidence.

Transcript of a Press Briefing by the Western Hemisphere Department, October 7, 2016, IMF Communications Department