Transcript

October 20, 2007
International Monetary Fund
Washington, D.C.

P R O C E E D I N G S

MS. LOTZE: Good morning, everybody, and welcome to this press briefing to update you on the regional economic developments from our Western Hemisphere Department. I am Conny Lotze from the External Relations Department, and to brief you here are Mr. Anoop Singh, Director of the Western Hemisphere Department; Ms. Caroline Atkinson, Deputy Director; and Mr. Jose Fajgenbaum, also Deputy Director.

Mr. Singh will make some opening remarks before we take your questions. The remarks will be available after the briefing in English and Spanish. Mr. Singh, please.

MR. SINGH: Conny, thank you very much, and good morning, everybody. It is, as always, a pleasure to see you all and to welcome you to this press conference on the Western Hemisphere.

I will open as usual with some brief remarks on the key regional trends and then turn to your questions. I expect that we will be even briefer than usual today, because as I think some of you know, the full presentation of our Regional Economic Outlook will be made this year in Sao Paulo on November 9. So I do look forward to seeing some of you there if you are able to make it.

Let me start by discussing briefly the global context, which obviously has been discussed in great detail in the last few days, so I can be brief. The global economy continues to grow strongly although, as you have heard and seen, there is increased uncertainty about the near-term outlook because of the disturbances that we witnessed in global financial markets.

It is significant that emerging market countries such as China are now providing the largest contribution to global growth, while growth in the industrialized world is more subdued. As you now know, in the United States, our projections have growth slowing to about 1.9 percent, just under 2 percent, both in this year and in next year, reflecting, as you have heard, the effect of the housing correction and the recent disturbances we have seen in financial markets.

But now I shall move on to Latin America and the Caribbean, and here, the story remains a robust one. The region has weathered the financial market turbulence in global markets rather well so far. Initially, as you saw it, asset markets throughout the region did experience volatility, but since then, stock prices have recovered, exchange rates have generally recovered, and in both cases, these are now at or above their pre-turbulence levels.

As a result, we see that growth in the region will remain at a relatively strong 5 percent in 2007, this year, and the reduction in growth next year should be fairly modest. We are anticipating at this point growth of about 4.25 percent for 2008.

So, the story is that the region has come out of the initial turbulence rather well, and this is significant. And we attribute this to the strengthening fundamentals in many countries in the region. In particular, I think this bears out what I have emphasized in previous such press conferences, and that is that our sense is that in the region, there is a much deeper and wider consensus on macroeconomic stability and on keeping inflation low. And I do believe that this new sense in the region has been very important in their response to the turbulence so far.

In recent years, as we have emphasized previously, most countries have shown declining public debt; they have strengthened their fiscal and external position, financial systems are also sounder, and there is generally greater exchange rate flexibility in many countries.

Now on inflation, it remains low by historical standards. It continues to bear out what I have said—a greater commitment in the region to keeping inflation low. However, it has edged up in some countries, and this has been for a number of reasons, including some shocks from food prices, and now we do have more volatility in oil prices. And while the inflation trends bear close watching, we remain confident that the Region is committed to dealing with these shocks and avoiding second-order effects.

That is basically what I have to say on the near-term outlook for the region. There will be more details in my written statement that you will have later on and more detail in our Regional Outlook which will be coming out in a couple of weeks.

But before I end, let me just make one or two more points. First, through the recent years' experience of strengthening fundamentals and higher growth, this has been a period in which poverty has declined, and inequalities also seem to be now on a declining trend. This is enormously important for reasons I need not spell out here.

We know, for example, that in Argentina and Brazil, there have been very significant reductions in poverty. We know that Argentina has cut its poverty rate by more than half in the last few years, compared with the peak at the crisis in 2002, and we see now that Brazil's poverty rate is now down to 27 percent. While there is still a way to go, we are encouraged by these developments, and we find them to be a significant aspect of the experience of the region in the last few years.

So, as we look ahead, the challenge remains to sustain and to build on the recent developments, to ensure that the Region remains resilient to shocks that may still well occur. As you know, in the global outlook overall, risks are still on the downside, and that is because we still don't know the full extent and the full effects of the declines in the housing market in the U.S.

So the challenge for the region is in the first place to increase even further its resilience so it can withstand these shocks; and an equal challenge is to raise investment and productivity so that the region can raise its growth rates in the coming years. You will find these and other issues elaborated, as I said, in our Outlook in a couple of weeks.

QUESTIONER: Thank you. Mr. Singh, yesterday, Minister Carstens said that Mexico does not agree with the projections of the IMF for growth this year for Mexico. He said that the government still thinks that growth will be around 3 percent this year and maybe 3.7 for the next year. That is in contrast with the IMF projection of 2.9 percent for this year and 3 percent for next year.

I don't try to imply that the IMF and Mexico should be in the same line of analysis, but I wanted to ask you what is it that the IMF sees that gives lower projections for growth in Mexico?

MR. SINGH: Thank you. Well, it goes without saying that in Latin America, Mexico obviously is the most closely aligned with developments in the U.S. economy. So as we see the U.S. economy slowing to around 2 percent or just under 2, it is natural to expect that Mexico will be affected.

Now, it helps that Mexico has just come off very strong growth last year—I believe that in 2006, Mexico's growth was close to 5 percent, 4.8. So, what we see as our central scenario now is that Mexico's growth will remain close to around 3 percent in the coming year.

Let me make two more qualifying statements to that. The first is that Mexico's growth, as we look at linkages with the U.S., remains more closely sensitive to developments in the industrial sector in the U.S. rather than the construction sector, and it is our sense so far that in the U.S. economy, the industrial sector is being less affected than construction, so that helps Mexico.

The second and I would say more important factor to bear in mind is Mexico's growth over the medium term. I would put much more importance in that than just looking at the next three to six months, where Mexico is being affected by an external shock. And what we see with the new government in Mexico is that they are systematically developing reforms that are designed to raise Mexico's growth over the medium term. I think that is the real story. The next three to six months is a reaction to an external shock.

The real story in Mexico is that they have already made significant changes in fiscal policy, which we have seen, in pensions, in taxes; the new government has announced an initiative, a kind of long-term framework, that shows Mexico's per capita income rising very rapidly over the next 20 years. And through various pronouncements, the new government has indicated the areas where it intends its reforms to touch. So, I do think that Mexico is creating a new basis for higher long-term growth in Mexico, and that's the real story.

QUESTIONER: Thank you. Yesterday, the Brazilian Minister of Finance said that he sees as less than precise the reading of the IMF the figures of growth of the institution. The figures of growth of the IMF for Brazil are 4.4 percent for the economy in 2007 and 4.0 percent in 2008. The Brazilian Minister of Finance said that it will be 4.8 percent in 2007 and close to 5.0 percent in FY08.

Besides that, he said that the IMF seems to believe that Brazil should let the dollar lose its value against the real until the markets find a point of balance, and he believes in a more active action of the Brazilian government in dampening this lowering of the dollar.

So yesterday, he made very clear that he very much disagrees with the way the IMF sees the best strategies for conducting the Brazilian economy. I would like to have your comments on that and also to ask you—you seem to see the economies in Latin America as kind of sheltered from shocks from the developing countries. Yesterday the markets fell in the United States and much more rapidly after that in Brazil. It didn't seem to be so sheltered, the situation yesterday.

MR. SINGH: All right. Thank you. We got three questions. First, I wasn't there for what Minister Mantega said, so I really cannot comment on what you say, but the way we see Brazil's growth is in a very positive way. We know that, I believe, in the second quarter of this year, Brazil's growth touched on an annual basis or 12-month basis 5 percent—is that correct—it reached 5 percent. That is an historically high number for Brazil, and the reason is very clear. The reason is that over time, Brazil has been laying the foundation for raising its growth rate significantly, which it needs to do and which, as we have seen as I have just said in the context of other policies, is helping to bring down Brazil's poverty rate and, we believe, also beginning to impact on inequalities.

Now, if you ask me what is our projection for Brazil in the coming six to nine months, we have some formal productions which are in the Outlook, and you will see that. We think that overall, there will be some moderation of growth from recent highs generally across the region. This is because, as you said in your third question, there are external shocks coming from the external environment.

But the fact is that Brazil's growth has touched 5 percent. It shows that Brazil can grow at 5 percent, and this is a good development. And I am confident that with the reforms that continue to take place over time in Brazil, Brazil is laying the basis to grow more rapidly, and this is good news for Brazil, it is good news for the region, and it is very good news for the global economy. So that's what I have to say on growth.

Now, about the other issues on exchange rate, I would just say this. I would say that Brazil, its central bank, has established a well-tested inflation-targeting framework, and this framework has delivered very good outcomes for Brazil. It has brought interest rates down to historic lows. It has brought inflation down to around 4 percent, well within or even below the central bank's target. Indeed, this macro stability that we are seeing in Brazil is one reason why we have higher growth and more investment.

My sense is that any intervention that is done that affects the exchange rate in Brazil is done within the context and the framework of this inflation-targeting regime.

Your final question is, perhaps, if I were to interpret it—you are saying are we being too optimistic. Well, you know, this is rather good, because sometimes we are accused of being too pessimistic, which I think was your first question, and then we are accused of being too optimistic. I would really implore you not to look at every day's events and write a story from it.

The story in Latin America to my mind is very clear. Latin America has strengthened its fundamentals in the last five years. Latin America has demonstrated a much greater political commitment to macro stability and low inflation in every country. And this is good news for future growth in Latin America. That is the real story.

QUESTIONER: Good morning. Thank you. I would like to you know what you see in the Colombia outlook. The decline or the slower growth for 2008 is much, much below the 6.6 percent that you are forecasting for 2007. What are the risks that you see? Are you considering no operation of the FTC with Colombia?

MR. SINGH: Well, I think Colombia has been doing very well. It has been experiencing very strong inflows of FDI. We know that capital flows have been very strong. We know that exports have been growing very strongly, and we know that Colombia is coming off a period where growth has been above 6 percent.

Now, we see Colombia's growth rate remaining strong over the medium term. We are not seeing any reduction in potential. We are seeing—and we are optimistic on Colombia over the medium term. Any diminution in the growth rate that we project—I think we do project it coming down to closer to 5 percent next year or just under 5 percent—is simply a reflection of the very rapid growth that has taken place and the shocks from the global economy. There is no other story beyond that—unless, Caroline, you want to add something about Colombia.

MS. ATKINSON: That's absolutely right. Colombia has been growing extremely rapidly, and as Anoop says, we expect its medium-term growth rate to be around 5 percent, which is much better than in the past; so it is the same story for the region.

But there is likely to be some cooling off in coming months, partly reflecting the rapid growth that we have just had and the external shocks. But this is still a very strong growth rate that we expect next year.

QUESTIONER: I would like to go back to Brazil. I would like to have your assessment on the fact that the pace of structural reforms in Brazil are not very rapid. We have been living in political turmoil for almost six months there, and the main problem to grow above 5 percent seems to be the infrastructure problems, and investments from the government are very low now, almost one or two percent of GDP. I would like to have your assessment on that.

MR. SINGH: Well, you know, it is very easy for people to be impatient about reforms. We are not impatient. We recognize that reforms in countries need high ownership and need to move ahead at a speed that is tailored to domestic circumstances.

I do believe that Brazil has done a very good job over the last few years in moving ahead its reform agenda. We could pick any country, and we would have a difference of view as to whether those reforms are going ahead as rapidly as we would want or you would want, but the fact is that Brazil's growth has reached historic highs.

If you ask me, looking ahead, I agree that Brazil would need to grow at a relatively high rate over the medium term, and it certainly has the potential to do so—but what it needs in my view is higher investment. And this is recognized by the government. Early this year, the government announced its new Growth Acceleration Program that it puts the emphasis clearly on that kind of public infrastructure investment that is needed to meet the bottlenecks.

So you have a much greater emphasis by the government on public investment, and we see private investment in Brazil, capital inflows and private investment, moving ahead also rapidly. So we see that in both public and private investment, the emphasis is high, the government attempts to move in public investment, and private investment is also moving ahead. This does mean that we can be confident that Brazil is increasing its potential to grow even faster in the coming years. So I would not be pessimistic about the pace of growth.

QUESTIONER: I thought it was curious that you omitted from your very comprehensive analysis any reference to oil prices. I understand, of course, that oil prices paid in dollars have to some extent been discounted by the depreciation of the dollar, but a failure to mention the oil price increase when the price is moving toward $100 does seem to be quite extraordinary. Can you explain this omission, please?

MR. SINGH: Well, I haven't mentioned oil because no one has asked me about the oil price until just now. But obviously, oil is a big factor in the predictions. It has obviously mixed effects on the region. For my part, I would put the most important effect on what oil prices harbor for the global economy, because I think that remains the big influence and the big channel for Latin America. And we have a projection in the World Economic Outlook, and our projections that we have developed for the region are based on the baseline of oil and the global economy in that World Economic Outlook.

Now, I would venture the view that it is too early to say that those numbers are out-of-date. I think we have seen events in the last few days—we have seen the oil price going up beyond where it was just a week ago—and certainly, if that is sustained, there will be implications for our forecast. But I would not rush to that judgment as yet.

In the region, obviously, the effects are differentiated. South America is an energy-rich region, and as you go country to country, you will find countries that will be doing better because of the higher oil prices.

On the other hand, in Central America and in the Caribbean, but also in terms of domestic pricing policies in South America, the higher world price of oil is a problem, and this is another factor which is affecting inflation in the region. I said just a little while ago that inflation in the region is being affected by food prices; it will also begin to be affected more by domestic petroleum prices if this situation holds up in the global oil market.

So, far from underestimating its importance, we are just not trying to read too much into the recent days' trends but sticking by the baseline forecasts that we have in the World Economic Outlook.

QUESTIONER: Going back to the issue of exchange rate policy, it seems—correct me if I am wrong—like the IMF is advising some countries, like Argentina, Colombia and Brazil, to let currencies appreciate; but those countries are not taking your advice. They are taking all kinds of measures to prevent that appreciation. Argentina and Colombia have capital controls, for example, and Brazil is accumulating reserves. Why are they wrong? Why do you think they should let their currencies appreciate? Thank you.

MR. SINGH: Well, you are trying to imply that we have just a standard policy that we apply to all countries, and that is not the case.

The fact is—well, there are two important facts to bear in mind. Many countries in the region now have successful inflation-targeting frameworks, and under those frameworks, exchange rates are governed by their framework, and that framework is obviously different from country to country. So we are focusing in many countries on conditions that will make those inflation-targeting frameworks work well, and I think that by and large, all countries that have those inflation-targeting frameworks are doing rather well. That's the first thing.

The second thing is as you look over the last one or two years, as opposed the last one or two months, you find that over time, there has been considerable flexibility in the exchange rates in Latin America, perhaps more than in other parts of the world. And looking at flexibility, we have to look at both nominal and real, and in both cases, there has been flexibility in Latin America.

A most recent instance was when we had this turbulence, which at its peak was I guess in August, a couple of months ago, and virtually all countries allowed the exchange rates, which had come under pressure temporarily, to depreciate. And since then, many of those currencies have now recovered.

So I would say that each country's experience is different. Generally, it is governed by the inflation-targeting frameworks, and generally, exchange rates have shown flexibility in nominal and real terms over the last few years.

QUESTIONER: My question is this. Recently, Gustavo Coronel, the Venezuelan opposition leader, in a series of articles spelled out the diminishing free market and growing nationalization in his country along with the loss of civil liberties. President Evo Morales of Bolivia's nationalization is well-known. It is rumored to come in several other countries that have elected like-minded leaders. Is the nationalization of private industry, particularly in Venezuela and Bolivia, of concern to you?

MR. SINGH: You know, we have encountered that question, as you can imagine, a number of times over the past year. It is a question which is on many people's minds, and the answer I give is the following—and I am not going to change that answer this morning. My answer is that we are not ideological in our approach to investment, because clearly, we have seen different models work in different parts of the world.

What we are clear on—and we have said this in the last few years very vocally—is that the region needs higher investment, and it is a fact that energy sectors being capital-intensive need higher investment, especially to retain and sustain the market share that Latin America has in the energy sector.

So what the region needs is more investment, including or especially in energy, and the region needs more productive investment, and the reason is very clear—as you look back the last 20, 30 years, you find that productivity of investment in Latin America has not been very high.

Now, as to where that investment will come from, public or private, we are not ideological. It goes country by country. But whatever the system in place, it needs to meet two tests. It needs to deliver more investment, and it needs to deliver more productive investment. That's the story.

QUESTIONER: Could you comment more on the poverty reduction in Brazil and what is the forecast for the next years? Thank you.

MR. FAJGENBAUM: Well, poverty reduction in Brazil has been quite successful, especially based on the Bolsa Familia Program, a program that covers now something like 11 million families. And it has been quite successful not only in reducing poverty and inequality but also to instill new or renewed activity in the northeast region, especially where the poorest live, where the resources that have been channeled through this program have encouraged activities of many types, wide-ranging. And it is the region that is growing the fastest in Brazil, so one can expect that the progress in reducing poverty will continue.

MR. SINGH: If I could just add one thing as my final comment on why these are such important events for the region. We have done a lot of research in the last couple of years on aspects of macro-policies and poverty and inequalities, and not surprisingly, we have two interesting conclusions. One is that more equal societies tend to grow faster and longer, and this breaks down in the following way.

Declining poverty is itself a key factor for sustaining high growth. That's the first result. The second result is that as inequalities begin to come down—and there is some evidence that that is happening in Latin America—as inequalities begin to come down, growth tends to have more of an effect on poverty reduction.

So we hope that we could be on the verge of a virtuous cycle in the region of declining inequalities, declining poverty, and rising growth, and if that is the case, it's a pretty historic development.

MS. LOTZE: Thank you very much for coming. We will have to conclude the press conference at this point. Thank you.