Conclusions of the XV Regional Conference on Central America, Panama, and the Dominican Republic

July 27, 2018

Central bank governors, finance ministers, and banking superintendents of Central America, Panama, and the Dominican Republic, and IMF officials met in Tegucigalpa on July 26-27 to review the regional economic outlook and discuss reforms to remove obstacles and create opportunities for suitable growth. The Constitutional President of Honduras, Juan Orlando Hernandez and the Deputy Managing Director of the IMF Mitsuhiro Furusawa inaugurated the conference.

At the conclusion of the conference, the following statement was released by the Director of the Western Hemisphere Department of the IMF, Alejandro Werner; the President of the Central American Monetary Council, Olivier Castro; Representative of the President Pro Tempore of the Central American Council of Finance Ministers, Nelson Fuentes; the President of the Central American Council of Financial Sector Superintendents, José Alejandro Arévalo; and the Governor of Central Bank of Honduras and host of the conference, Wilfredo Cerrato.

“Global growth is projected to remain robust at 3.9 percent in 2018 and 2019, but risks to the outlook are mounting particularly owing to trade tensions. Conditions for global demand and finance have become somewhat more restrictive. The upturn in global demand is not as strong as expected in all countries, which has increased downside risks to the region’s external demand. At the same time, global financial conditions, while still accommodative overall, are gradually tightening. Financial market pressures have been particularly pronounced in countries with weaker domestic economic fundamentals, or because of uncertainty about politics and policy.

“In Central America, Panama and the Dominican Republic (CAPDR), robust U.S. growth and higher remittances associated with the uncertainty about future U.S. migration policies continue to underpin a strong growth performance in 2018. Fiscal deficits have declined in some cases, but debt is high and rising in several CAPDR countries. Participants agreed that financial sector buffers are sound, but risks from dollarization and de-risking persist. The region’s efforts should focus on containing excess credit growth, currency and maturity mismatches, and supporting healthy bank balance sheets. Participants also agreed that, as the US monetary policy stance normalizes, the monetary stances in CAPDR countries need to be recalibrated, unless domestic conditions require otherwise, to avoid that they become too supportive. In addition, participants agreed to continue promoting exchange rate flexibility as oil prices increase to protect external buffers. For some countries, there is a need to continue the transition towards full-fledged inflation targeting.

“Participants concurred that over the last few decades, the CAPDR region has experienced sustained economic transformation. This was supported by deeper regional integration and participation in the global economy. Growth performance, however, has been uneven, and overall insufficient to achieve sustained growth convergence with advanced economies. This performance clearly reflects in part the ability of some countries to innovate and adapt, by shifting resources into higher-value-added sectors such as electronics, medical equipment, and logistics and transportation services. At the same time, there are several structural and macroeconomic impediments facing CAPDR. Productivity, education, financial, and infrastructure gaps are a drag on growth and foreign investments.

“In this context, and drawing on the most recent research, participants acknowledged that a substantial reshaping of the regional growth policy agenda needs to be put on the table. In addition to shifting resources towards more creative exports or the export of tradable services (tourism, health, and wellness services), transforming the region into an attractive destination for talent should be at the center stage of any growth agenda. This of course will require stronger institutions, more efficient, robust and integrated infrastructure, safer living conditions, greener development, and conservation of natural and cultural capital. Participants also agreed that in order to make any growth strategy feasible, policy makers need to tackle excessive income disparities in each country through efficient social protection systems (i.e., pensions and health), and universal access to basic services.

“Participants acknowledged the role of emerging technologies (fintech) in the overall efficiency of the financial system, including in the areas of payments, financing, investments and insurance. These technologies are creating opportunities as well as challenges – for consumers, service providers, and regulators alike. The experience of Argentina, Brazil, Chile, Colombia, and Mexico – the top five fintech markets in Latin America – illustrates how developments in fintech are already helping bridge the financial gap, through low-cost digital solutions which benefit small and medium enterprises, and significant improvements to financial inclusion in the region. Participants, however, noted that some aspects of these technologies pose some risks to the stability and integrity of the financial system, especially where they operate outside of the purview of financial regulation and supervision.

“Managing the impact of climate change is a defining global challenge of this century, inseparable from another one–reducing poverty. Climate change is set to have a significant impact on many countries, including in the CAPDR region, where preparedness to deal with the consequences are under development. Participants underscored that macroeconomic policies will need to be calibrated to accommodate more frequent weather-related shocks, but, even more importantly, managing the impact of climate change is a development challenge. This means building policy space to respond to shocks, and to upgrade infrastructure to enhance economic resilience, and risk-informed land-use planning, which is made difficult by the uncertainty regarding the climate in the future.

“Participants expressed appreciation for the support provided by the IMF in the organization of the event, and stressed the importance of the policy dialogue between the region and the IMF. Participants thanked the Honduran authorities for their hospitality and support for the success of the conference.”

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