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Opening Remarks by Mr. Agustín Carstens, Deputy Managing Director, IMF, given at the Third Regional Conference on Central America, San Pedro Sula
July 8, 2004
It is a great pleasure for me to be here in San Pedro Sula today, and to welcome you to our third regional conference on Central America. This is my first visit to Honduras—indeed, to the Central American region—as deputy managing director of the IMF. Of course, I visited several times while I had the privilege of representing this region in the Executive Board of the Fund a few years ago, and I have followed developments closely since then.
Let me begin by thanking Maria Elena Modragon, president of the Central Bank of Honduras, for hosting this event and for giving us such a warm welcome here. I am also very grateful to the Central American Monetary Council for co-sponsoring our conference again this year and for supporting our efforts to strengthen the Fund's dialogue with Central America. And finally, a special thanks to the distinguished speakers who will be participating in our conference and sharing their thoughts with us on growth, bank resolution, and other relevant issues.
This kind of dialogue at the regional level is becoming ever more important to the Fund's work, and our annual conferences have become an anchor in this effort in Central America. Meeting with all of you, the key economic policy makers in the region, is a great opportunity to discuss the challenges and policy options that you are facing and to share experiences. All this information becomes key in forging our understanding of the region, hopefully allowing the Fund to complement better your efforts in designing and applying the appropriate macroeconomic policies and structural reforms. Last, but not least, this type of event is conducive to meeting old friends, making new ones, and thereby renewing the common bond of friendship and trust which is the bedrock of our collaboration.
In many ways, the outlook for the global economy and for the region is more favorable now than at any time since the 1990s. Although the situation varies from country to country, Central America is emerging from a difficult period of global and domestic uncertainties. Growth is stronger and imbalances have been reduced by more than we had reason to expect a year or so ago. External conditions are improving and should continue to provide near-term support to the regional recovery. In the United States, which has traditionally greatly influenced events in Central America, most signs point to continued robust growth—GDP is expected to grow by more than 4½ percent this year and to remain around 4 percent next year.
Of course, there are risks. The region is still relatively dependent on commodity exports that are subject to considerable price variation. Although many commodity prices have improved in recent months, some—especially coffee prices—are still low relative to historic levels. Additional uncertaintly is created by the recent rise in oil prices and the outlook for monetary policy in the United States. But oil prices are still well below previous peaks, in real terms, and the likelihood of a gradual withdrawal of monetary stimulus in the U.S. has been well anticipated. Overall, I believe that the risks are manageable and Central America is well placed to deal with them. The structural reforms that have been implemented over the past few years, including in the financial sector, have made the region's economies more resilient to shocks.
Yet important policy challenges remain. In most countries, poverty rates remain high and many social indicators are still below the average for Latin America. Progress is vulnerable to policy reversals and external shocks—notably natural disasters. One of the region's most pressing issues, therefore, is how to raise growth on a lasting basis. With the exception of Costa Rica, growth in the region has slowed from the late-1990s, and in some countries, it barely keeps pace with increases in population. Clearly, more rapid and sustained growth is needed to improve the wellbeing of your citizens—especially the most vulnerable ones.
Another set of policy challenges arises from the need to strengthen financial sectors. Robust financial sectors are critical for underpinning sustained growth and for avoiding crises, which can undo the gains from years of prudent macroeconomic management. While the emphasis should be on crisis prevention, improvements in bank resolution frameworks would ensure that economic costs and disruptions would be kept to a minimum in the eventuality of a bank failure.
Achieving high and sustainable growth and reducing the region's vulnerability to shocks are thus two key, interrelated issues common to most countries in Central America, and this conference will focus on both of them. Today's session will address growth issues, and tomorrow we will discuss the experience with bank resolutions in Latin America and the lessons that can be drawn from this experience for reducing financial sector vulnerabilities.
Before we get started, I would like to add some thoughts on how the desire for deeper economic and financial integration among the countries of Central America might shape the approach to these challenges. The ultimate goal of deeper integration is, of course, improved standards of living for the region's population. From experiences in other parts of the world, we know that these benefits can be realized, but only if the focus of integration is on strengthening the ties of the region with the rest of the world, rather than erecting barriers around the region against the rest of the world.
I believe that you understand this distinction well in Central America. The integration process was begun here more than four decades ago, and it has gained momentum in the last decade or so as democracy and peace have been restored throughout the region. Important groundwork has been laid and the institutional structures put in place. For example, both the Central American Monetary Council and the Council of Financial Superintendents have become anchors for increased regional collaboration on issues related to the financial sector. Trade integration will be deepened through the Central American Customs Union and the Central American Free Trade Agreement (CAFTA). More generally, there is greater regional dialogue and coordination on a widening range of issues—from law enforcement to financial supervision.
Through these efforts, you have sought to construct a common platform from which Central America can compete more effectively for jobs and capital in the global economy. You are working to foster greater economic and social cohesion that will reduce disparities in development and living standards across the region—not through intra-regional transfer mechanisms, but by harmonizing and coordinating laws and incentive systems, and by cooperating to improve the region's infrastructure. You are also mindful that making the region more attractive implies that individual countries must be strong, and you are working to entrench a common spirit of prudent macroeconomic policies, institutional reforms, and good governance.
I believe that this is indeed the right way forward, and the IMF supports your efforts. We seek to improve our regional dialogue with Central America, but without sacrificing attention to individual country issues. This is a delicate balance, and Rodrigo de Rato will speak at greater length tomorrow on how the Fund is working to be a partner in this effort. Today, I would like to highlight one area, in particular, where I think there is scope for a strengthened regional focus and where the IMF can help—and that is in the area of financial sector policy.
Deeper integration of financial markets can improve capital flows and support higher investment spending. But we have also seen how it can expose weakness in countries' financial systems and make them more vulnerable to external shocks. The objective of the Financial Sector Assessment Program—the so-called "FSAP"—is to help countries assess the strengths and weaknesses of their financial systems and to identify the most critical reforms. All of the countries in Central America have been part of the FSAP process, and the Fund has been helping you to address identified weaknesses through technical assistance.
Yet we have found a number of issues that are common to the region, and we see benefit to considering them jointly across countries. Some of these issues are being addressed by the Central American Monetary Council and the Council of Financial Superintendents. We have proposed to complement their efforts by studying fairly specific topics relevant to the consolidated supervision of financial institutions—including their cross-border, cross-sector, and offshore operations. Other areas which might benefit from a more regional perspective are the payments and security settlements systems, as well as the insurance sector. I very much look forward to your participation in this project in the coming months, which would take the form of a Financial Sector Regional Assessment—an evolution of FSAPs into a regional dimension, with Central America the first region in which this approach is applied. Here, the IMF is innovating together with Central America.
In the meantime—during the next two days—we will discuss the issues of raising growth and strengthening financial sectors more broadly. I believe this is an excellent opportunity to advance the policy agenda for Central America, and I am confident that we can look forward to a very productive and successful conference.
Thank you.
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