Transcript of October 2021 Western Hemisphere Press Briefing

October 21, 2021




Acting Director, Western Hemisphere Department, IMF


Communications Officer, IMF

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MS. ROMANO: Good afternoon. Welcome to the IMF’s press briefing on the regional economic outlook for Latin America and the Caribbean. I’m Maria Candia with the Communications Department and I’m delighted to be here today with Nigel Chalk. He is the Acting Director of the Western Hemisphere Department of the IMF. Nigel will give some remarks and he will answer to your questions afterwards. With that, Nigel.

MR. CHALK: Thank you, Maria. I just want to start by advertising that we have just published our regional economic outlook for the western hemisphere region, and that more fully describes our views on the region. It also has some interesting analytical work that examines the impact of climate change in Latin America and the Caribbean and also looks into how to make tax systems in the region more fair and more supportive of growth.

Let me quickly offer some comments on the outlook for the region. The good news is that after taking a very heavy toll for much of 2021, the pandemic appears to be receding in many parts of Latin America and the Caribbean. However, this is not a time for complacency. Vaccination campaigns have helped mitigate the pandemic’s impact but there are still important inequities in the availability of vaccines and these need to be addressed. In this regard, I’d like to highlight the efforts by the U.S., and by others, to expand vaccine access in the region.

Turning to the economic outlook, growth after [inaudible] have actually been better than we had expected, and we’ve moved our forecast up accordingly. We now expect the region to grow by 6.3 percent in 2021 and by 3 percent in 2022. There’s clearly a lot of uncertainty associated with the outlook, both related to the pandemic and to variants, but also surrounding the speed and the timing of the return of private demand as policy support in the region is being scaled back. Given these uncertainties, countries should prepare for this recovery not to be a linear path. As the title of our regional economic outlook suggests, there is a long and winding road ahead with setbacks likely to be encountered along the way.

I also want to highlight there is important heterogeneity across the region. We should not forget, for instance, that many tourism-dependent economies in the Caribbean continue to face a very challenging environment. And even in those countries that have bounced back quickly, the recovery in employment has been very uneven. The young, the less educated, and women are bearing a heavy toll and there has been important damage to human capital during the pandemic, both from the unemployment from increasing in formality and also from prolonged school closures. These trends will likely take many years to reverse.

And finally, let me say a word on inflation which has become an important feature for most of the region. Rising commodity and food prices, global increases in goods prices, sector-specific constraints, and supply chain disruptions are all pushing consumer prices higher. Many central banks in the region have rightly reacted to these pressures by raising policy rates to underscore their commitment to their inflation goals. It is likely that these interest rate increases will continue in many countries in the coming months and, if inflation expectations become less well-anchored, policymakers may have to react even more assertively.

Managing this delicate balance, especially at a time when the economy remains below its potential, will be tricky and, inevitably, puts an important premium on clear and transparent communications by these central banks. Now with these remarks, I’d like to turn to your questions, Maria.

MS. ROMANO: Thank you, Nigel. We’re going to start with a question from Alfonso Fernandez from the Spanish News Wire, EFE. Is Latin America entering a new lost decade? Latin America is projected to be the region with the highest inflation in the world. Could a sudden tightening in advanced economies lead to stagnation in growth?

MR. CHALK: Thanks for that question. So, as I said before, inflation is definitely a concern in the region; but I would note that there is a very different institutional context for the region than in previous inflationary cycles. I think there’s been a huge investment in credibility of central banks and there’s been a big shift to inflation-targeting regimes in a lot of countries and, I think, this will really help in managing both inflation and in inflation expectations. However, as I said, previously, if there is particularly a move in inflation expectations, I think, central banks will have to react; and that will mean higher interest rates and a tightening of financial conditions.

On the stagnation question, I don’t think that that’s necessarily the case, but I think we are very conscious that the toll of the COVID crisis has been very heavy in Latin America. We’ve seen substantial increases in poverty across the region. I think the middle class are in an increasingly precarious situation; and I think, we’re seeing a lot of social strains across the region that are being manifested itself in demonstrations and also in broader concerns. We do, actually, see that it will take some time, perhaps not even in our five-year forecast horizon, for the region’s GDP to return back to where the pre-crisis trend was; and, I think, we are concerned that labor participation is much lower than it has been in the past and has been slow to recover, and also productivity is potentially lower.

So, I think, all of these underlying really important supply-sided reforms will be needed to be taken both to raise participation; encourage, particularly females and young workers to come back to the labor force; and also to improve productivity and increase private sector participation in the economy. So, I don’t think it’s predetermined that the economies will do poorly but, I think, it will take some policy efforts in order to reverse the damage done by COVID. Thank you.

MS. ROMANO: Thanks, Nigel. We’re going to go to two online questions from Mexico. Silvia Rodriguez from El Milenio and Yolanda Morales from El Economista. So, Silvia is asking what is the scenario for my country in the face of inflationary pressures and slowdown on growth? And Yolanda is asking the increase in the foreign exchange reserves provides more protection than the flexible credit line. And let me just add one more question. It’s very similar -- both of them asking about reform in the electricity sector -- and so they’re asking whether this limits the private investment in the sector and what is the risk for the GDP outlook?

MR. CHALK: Okay, thanks. There’s a lot in there. Let me talk first about the scenario for Mexico. We do see Mexico recovering quite fast from the pandemic from last year with growth over 6 percent this year. So, that’s very good. I think Mexico is being buoyed by a very strong rebound in the U.S. and, you know, strong demand for goods, particularly in the U.S., where Mexico is exporting. So, that’s all helping.

I think we also see some scope for additional fiscal support to the economy, both this year and over the medium term, particularly to increase investments in social areas, in health and education, to try and reverse some of the damage, I think, was done by the pandemic. Certainly, inflation has increased in Mexico. Some of that’s imported from inflation in the U.S. Some of it is more general trends on goods’ prices and, you know, the Central Bank has reacted. I think we see inflation expectations still very well anchored in Mexico; and, you know, it’s right for the Central Bank to be raising rates.

On the FCL -- so, we believe that the FCL has provided very important support for Mexico for several years and it’s provided benefits that we see in terms of financial market costs of financing and access. I think the FCL also demonstrates a very strong policy framework in Mexico, and we recently conducted the Article IV. I think, the concluding statement was published in early October. And we should regard the FCL’s part of a multi-level approach in Mexico in combination with, you know, fed swap-lines, with NAFTA swap-lines as well, and also reserves; and I would note that, you know, these are all complimentary. I don’t think they’re really substitutes, they’re complimentary approaches, and I would note that the Fund also significantly added to Mexican reserves in the SDR allocation which, I think, will help protect the economy from external shocks.

Oh, and -- oh, the question on electricity sector, sorry. So, on electricity sector, I think we engaged during the Article V to discuss the reforms. They're still being formed, so it's hard to become to a specific view on the reforms. I think more generally, we think it's very important in Mexico. We've seen relatively weak private investment for some years. And so, we think it's very important that whatever the reforms do, that they do encourage a better business environment and encourage private investment, particularly. I think they provide an opportunity for Mexico to increasingly rely on renewable sources. And I think the goals of the reforms we would totally agree with in terms of providing cheaper electricity, more reliable electricity, and also a greener electricity mix as well.

MS. ROMANO: Great. Thank you so much, Nigel. I'm going to bundle two questions from Ecuador. So, Sebastián Angulo from Expreso and Wilmer Torres from Primicias. So, Sebastián is asking, "The IMF estimates that the Ecuadorian economy will grow 3.5% in 2022. On what is this growth based, taking into account that the Ecuadorian government must make a significant adjustment next year, within the framework of the extended Fund Facility program?" And Wilmer is asking a related question on growth. "Ecuador's economic prospects are maintained taking into account that the government has not been able to approve a tax and labor reform as planned and has not been able to completely eliminate the fuel subsidy."

MR. CHALK: Okay, let me -- on the growth, it's true that Ecuador suffered a tremendous contraction last year. It was almost eight percent, and there was a terrible impact of the pandemic in Ecuador with lives loss and really tragic outcomes. But having said that, since the middle of last year, we have seen a very broad-based recovery in Ecuador. I think there are a number of forces that are behind that. One is just the adapting to COVID and reducing caseloads of COVID has really helped. And this -- we're starting to see some impact of vaccination. But also, I think Ecuador is really being buoyed by high oil prices and positive terms of trade and quite strong growth in its trading partners. So, all of these have really, really helped push the economy forward. And we do see quite a good recovery this year largely based with -- on private sector demand.

On the reforms, I think we think the reforms are very, very important that the government plans on the tax side labor and on the fuel subsidies. We've seen some progress, but I think there does need to be a broad societal debate on those reforms, including in the legislature. Are -- we believe that the tax reform as it's designed will generate revenues that will be helpful in terms of meeting social needs. And the revenue, the way it generates revenues is both progressive and equitable. And it will help build more of a non-oil tax base that will insulate Ecuador to some extent from shifts in oil prices. And similarly, the goals in the fuel subsidy program is to gradually phase that out during the course of the program and get back to cost recovery for fuel, but we're very conscious of that. It has to be done in a careful way, in a gradual way, and particularly with protections in place to support the poor during that transition.

MS. ROMANO: Thanks, Nigel. We're going to go to some questions on WebEx. I think Argentine reporters are in the room. I'm not seeing them.

QUESTIONER: Can you hear me?





MS. ROMANO: Yes. Let's go to Rafael Mathus from La Nación. I'm hearing you, Rafael, and then we'll take a couple of questions on Argentina, if we have some. Please go ahead.

QUESTIONER: Nigel, it's good to see you again. I have a question on Argentina. Inflation is on the rise in Argentina and Gita Gopinath said a few days ago that expectations are unanchored. Do you think that the, currently, that the government has the right policy mix to bring inflation down and if there is an inflationary spiral? Thanks.

MS. ROMANO: Thanks, Rafael. Let me take, Nigel, two more questions. Paula Lugones from Clarín, are you there?

QUESTIONER: I am here. How are you? Well, why was the economic growth in Argentina expected to fall sharply from 7.5 this year to 2.5 in 2022. Also Minister Guzmán was here in Washington last week. Was any advance in the negotiations with the IMF? Thank you.

MS. ROMANO: Thank you, Paula. And Liliana Franco from Ámbito. I understand she wanted to also ask a question. Liliana, are you there?

QUESTIONER: Yes. Are you -- Can you hear me?


QUESTIONER: Okay. Thank you. I was reading the new framework of debt sustainability released this year. And my question is, the IMF will incorporate the quasi-fiscal debt on the -- of the central bank in the new agreement with Argentina? Thank you.

MS. ROMANO: Thank you, Liliana. I thank you.

MR. CHALK: Okay, so thanks. Thanks. On Rafael's question, so certainly inflation's an important issue in Argentina. I think we see it as multifaceted drivers of that inflation. And we do think that the expectations have become unanchored. We do see though that responding to that inflation will take actions on a number of fronts given the different drivers of inflation on the macroeconomic side. And we also see that potentially there's a role for other policies, including incomes policies to address that inflation.

On the growth question, so we do have growth rebounding quite sharply this year, but then tailing off into next year. I think that's common in many forecasts for other countries also in the region. And it's really sort of -- it's much easier when the economy is operating well below potential that the economy can rebound quite quickly at the start, and as it gets closer to potential, and there are more constraints, and you start seeing more supply -- supply side constraints, which I think we see in a number of places in the region. And on the negotiations, we continue to have an active and cordial dialog with the Argentinians. We're working together on various different topics towards the program.

And so, we've -- Minister Guzmán was here during the annual meetings and met with the managing director, met with the team, and there's also been a lot of technical discussions among the team and IMF staff. And then the question on debt sustainability and the incorporation of quasi-fiscal debt and central bank debt, I think this is somewhat technical question. I think these are one of the issues that is being worked through during these discussions with the Argentines. So, I don't want to preempt those discussions, but it's certainly something that we're looking at. Thank you.

MS. ROMANO: Thanks Nigel. I'm going to go to an online question from Michael Stott from The Financial Times. It is a regional question. He's saying, "As the US and Europe tighten monetary policy, how big are the risks to Latin America's economies from a tightening of credit conditions?"

MR. CHALK: So, I think it would be right for the regions prepare, and you know, looking forward that there will be a withdrawal of monetary support in some of the large, advanced economies, particularly the United States, which is very important for them. I think we're already seeing the US Federal Reserve flagging that it will start soon tapering its asset purchases and potentially raising rates. Our forecasts assume rates will start rising towards the end of next year. We think it's going to be a very gradual process. I think what we believe is that it's very important that that process is very well telegraphed in advanced and is well-communicated, which I think the Federal Reserve has been doing.

Nonetheless, as those financial conditions tighten, we will see potentially lower capital inflows into the region. We potentially will see higher cost of capital for the region. And I think, you know, that will provide some headwind to growth. At the same time, you should expect that the period where rates are rising in the US because the US economy is doing very well. And so, for many countries, I think typically those with strong trade links to the US like Mexico and Canada, you're actually going to see a net positive effect that, while interest rates will be raising and financial conditions may tighten, the demand effects from very strong US growth will overwhelm those.

MS. ROMANO: Thanks, Nigel. I think that Eric Martin is also on WebEx and wanted to come in.

QUESTIONER: Yes. Good afternoon. Can you hear me?

MR. CHALK: Yes, yes.


QUESTIONER: Very good. Thank you, Nigel, for taking the time. I have a few questions for you. One is following on the questions of my colleagues from Argentina about whether the IMF is planning any kind of a visit to -- staff visits to Buenos Aires for the remainder of this year. Another is El Salvador and the Article IV, about whether that will be published in November as the country is saying, and when will the EFF program talks begin? Thirdly, does the IMF believe that Bitcoin poses only upside risks for El Salvador as the central bank chief in El Salvador says?

And finally, a question about Bloomberg's reporting from earlier this month on the Article 4 of Brazil earlier this year. We understand that Managing Director Kristalina Georgieva intervened or took part in the process after being contacted by the executive director of Brazil and asked to delete some lines of text from that Article IV. I was wondering if you could elaborate on how the executive director of Brazil knew those particular lines would be included and whether that was, you know, something from the draft report that was shared either in print or read to the ED, and whether your team generally has faced that kind of pressure from EDs from the board, particularly regarding climate change and the macro-critical nature or macro-critical analysis of climate change. Thank you.

MR. CHALK: Thank you, Eric. So, on a staff visit to Buenos Aires, as I said, the Argentine team had actually been in Washington during the annual meetings, and we had good meetings with them at various different levels of staff and management. I don't think there's any reason why that the team would not go to Buenos Aires, but I think we're just going to play it as it comes to see whether that's necessary and if it's useful for the negotiations and discussions, and I'm sure the team will go. On El Salvador, yes, the Article 4 is underway, or it will soon be underway. The exact timeline will be likely towards the end of the year the board will consider that Article IV. And I should say also that we are having continued discussions with the authorities on that, on a range of issues linked to a potential program. But that's sort of ongoing.

In terms of the Bitcoin question, I think we do see important issues related to Bitcoin being a national currency and legal tender. Those range from financial stability questions, I think there's a bunch of fiscal questions associated with that adoption of Bitcoin as a legal tender.

We're also conscious of potential risks to AML/CFT regimes that we're looking at. So, we are actively engaged with the El Salvadorian government to try and help them think through some of these risks and downsides and to address them. So, that's ongoing work as well and I'm sure there will be a feature also in the Article IV.

And then the question on Brazil, I would say [IMF spokesman Gerry Rice] has already spoken to this quite extensively. I think [he's] described that there's a normal process between staff and management consulting on every Article IV consultation. And I would say that just on your specific question that not only the draft staff report for Brazil was not shared with the Brazilians, but I can say as a policy matter, the Fund staff do not share draft reports until they're issued to the board.

MS. ROMANO: Thank you, Nigel. We're going to go to Benjamin from Diario Financiero on Webex. He wants to ask a question as well.

QUESTIONER: Hi. Do you hear me?


QUESTIONER: Fine. So, it's a question about pension withdraws from Chile. In the event of a possible short run of withdrawals do you think that the Chilean central bank will have enough available tools to protect financial stability? What could be the consequences of such development if approved as it was done in previous withdrawals. Do you think it can be mitigated by legislation in some way?

MR. CHALK: Okay thank you, Benjamin. So, on the pension withdrawals in Chile, I think we were supportive last year in the midst of the pandemic as there was certainly important hardships for the Chilean people. But this was a mechanism but which fairly quickly liquidity support could be provided by allowing for withdrawals from people's pension accounts. And so, I think we were supportive of that as an emergency measure.

I think now we're getting into a time where those emergency measures in many countries have expired. And, you know, those extraordinary efforts that were made during the pandemic are no longer necessary. And indeed, there's more time to think through more structural approaches to addressing these questions.

I think our primary concern on the pension withdrawal question is that it does leave retirees potentially without sufficient pension for when they retire. And then there is a real question with that then how will you deal with that? Will the government have to step in in order to provide support for those retirees or some other mechanism will have to be designed in order to encourage. So, replenishment of those pension resources.

So, we don't see so much as a financial stability question but more sort of this longer-term intergenerational question of how retirees are going to ensure that they can be, you know, have reasonable living standards in retirement and without having to rely on the state and more relying on their own pension funds. Thank you.

MS. ROMANO: Thanks, Nigel. We're going to go to some online questions. One of them is on Panama. Roberto Jimenez is asking from La Prensa, what are your latest forecasts for the Panamanian economy in 2021 and 2022. And what will be the main factors that will determine the future of the economy. And what could be the impact on the economy, the fact that the country continues on these such as the financial action taskforce, the OECD and European Union?

MR. CHALK: Thanks, Roberto. So, our forecast of growth in Panama is the economy is coming roaring back. In fact, I think it's going to be one of the fastest growing economies this year in the region. But having said that, it really had a very sharp decline last year and so really what we're seeing is a bounce back from those very low levels last year that were quite extraordinary.

What's driving it I think as in much of the rest of the region is similar forces. I think we're seeing COVID vaccination rates and declining case numbers is helping. A rebound in demand for in person services is also helping. There are some idiosyncratic things like new subway lines being built and the construction has recommenced on that which is boosting the economy. Copper mining is growing quite fast.

And then generally, we've seen a pretty strong resurgence in global trade as large economies particularly U.S. and Europe have shifted towards a lot more goods consumption and less services consumption. That benefits Panama because of the canal activity. They're greatly helped by global trade.

On your question on the tax information sharing, the OECD question and the AML/CFT from the FATF. I think, you know, we think it's very important that these issues are addressed. You know, the AML/CFT regime needs to be strengthened. There's important shortcomings there that have been identified by the FATF. But we're confident the authorities are very committed to addressing those issues.

We have a PLL with Panama where a core part of the PLL is to deal with some of those AML/CFT issues. And we also have an open dialogue and we're providing capacity development as well to help Panama with those. And I think there's a very similar issue on tax information sharing where, you know, we're working through our fiscal affairs department and trying to help the authorities to address those questions.

MS. ROMANO: Thank you, Nigel. We have a question from Jeremias Bustillo from La Tribuna in Honduras. There's a couple of questions related to the economic outlook in 2022 with a new government and emerging from the pandemic. What will be the supports for the economic growth projections, what reforms are needed to underpin the inclusive economy? And he has one more question on the impact of ZEDES project through which autonomous territories are delimited where they will not pay tax to the treasury.

MR. CHALK: Okay. So, on the outlook, the outlook is improving. We have a program with Honduras, and we have a very active engagement with the country. Again, I think there's very similar forces. I discussed earlier, COVID recovery and reducing case rates is helping.

I think you're seeing very strong support from external sources, particularly remittance flows to Honduras that is really helping the economy. And we're seeing like a pickup in vaccination rates which is also we expect going into 2022 to be a strong force to allow demand to rebound.

On the longer-term questions, I think we see very important longer-term needs in things like public investment and infrastructure. We think there's an important need to further expand the safety net, including in areas like health and education. I discussed in the beginning a little bit about the damage that's been caused by COVID as kids have had to drop out of school and they've lost education time. And I think also we see a lot of areas on climate adaptation and resilience are very important given some of the weather forces that affect Central America.

On the ZEDES question and more generally on tax exemptions, I think the government is trying to address and make some headway on delimiting those exemptions. And there was a decree in June which made efforts in that direction, we're very supportive of that. I think I would highlight, also, one important area on these tax exemptions. This is the overall governance and transparency around them.

I think particularly reporting on the cost of the exemptions is important because they are an expenditure of government resources. And so, making people aware of how much these cost the government and what the tradeoffs are with potentially with other spending some of the areas, like public investment and safety net spending, I described earlier.

MS. ROMANO: Thanks, Nigel. Let us end with two questions on the Caribbean from Shawn Cumberbatch, the Nation Barbados. He is asking what should Barbados and the Caribbeans main priorities be now as they seek economic recovery from COVID-19. And he has a specific question about Barbados. He's asking, inflation pressures are growing on countries -- I'm sorry, what should Barbados and other countries do -- I already read it, as they seek economic recovery from COVID-19? I'm sorry.

MR. CHALK: Okay thanks. So, I think, you know, we have seen particularly the tourism dependent economies in the Caribbean really got hammered very hard by COVID and I think they're continuing to face significant decline in the number of tourism resources that are coming into the country. Which, you know, is a huge external shock that is really affecting the whole region.

In Barbados, we have a very good relationship. The program is going very well. The government has been very committed to implementing all of the policies under the program and it's progressing well. And I think we saw even during this difficult situation, you know, the program and assistance and financial support from the Fund really helped to some extent mitigate the damage that was done by COVID in Barbados.

I think in general across the region, I think the priority has to be investing in public health, expanding vaccinations and getting access to vaccinations. I discussed a bit at the beginning the unequal access to vaccinations is important for the region. And also, it will be very key in the coming months just to see how tourism will develop through the winter months and how the economy comes out of this winter, to the extent that tourism does bounce back.

And we are seeing some encouraging early signs on that that tourism is improving quite strongly. I would say though that the pandemic left the region with much higher debt than it had before and a very difficult social situation. I think now we're seeing inflation, particularly food inflation is adding to those social strains. That's very incident on the poor.

And I think the fiscal space is limited but I think there are options domestically to provide additional support for the poor in some countries. And potentially, you know, the Fund has provided significant resources through the SDR allocation to the region and stands ready if the countries in the region need assistance. Either for capacity development reasons or financial assistance, the Fund is standing ready. And indeed, we're thinking very much about a new resilience and sustainability trust that I think would be very well suited for the Caribbean to help provide longer term financing to support them.

MS. ROMANO: Thank you, Nigel. With this, we conclude the press conference. Thank you everybody for joining and stay safe and stay well. Thanks.

MR. CHALK: Thank you.

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