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IMF Notes High Rates of Growth for the Region

Region expected to have overall growth on average this year of around 4 percent, and about 3.75 percent next year

Posted: September 24, 2005

Statement by main speaker Anoop Singh, Director of the International Monetary Fund (IMF) Western Hemisphere Department, during Press Briefing on Latin America and the Caribbean held in Washington, DC, September 23, 2005.

MR. SINGH: Good morning all of you.

We have our senior staff here also with me, so you can see all of us. We like to be very transparent in everything that we do. So this is another exercise in that transparency, almost knocked my name plate over.

Well, I will be brief this morning in my opening remarks for two reasons. You will have a copy of them after I speak. And also this year it is proposed that we will present a more detailed regional outlook in Bogotá on October the 13th. And that will be an occasion to go into the global context and how we see the challenges in the region in somewhat more detail than we will cover this morning.

But let me start first on the global context for Latin America and the Caribbean. You heard now the press conference of Mr. Rajan and you heard Mr. de Rato speak about this in the last few days.

The bottom line is that our sense is that the overall external context remains benign and favorable for our region. This is, of course, for a number of reasons. Over the last year or two we have seen the region benefit in different ways in different countries from commodity prices, from terms of trade gains, from diversifying and strong exports across South America. In Brazil you know what those numbers are. We have seen very favorable financial market conditions, low spreads.

What perhaps is not as well known is that the growth in the region is also being supported, substantially now, by domestic demand, by both consumption and investment. There were some signs of a softness earlier in the year but we see in the second quarter in many countries, again including Brazil, in the second quarter renewed strength in domestic demand. This is helping overall GDP growth.

We expect that the region will have overall growth on average this year of around 4 percent, and that it will be still close to that, about 3.75 percent, next year.

Now, these are high rates of growth for the region. Of course, we want to do better. But what we have in front of us is robust growth and it is also growth that it is well above historical averages. It may be less than last year but last year's was a record rate, strongly influenced by those countries that were recovering from crisis.

The other favorable context we have in the region is that inflation is still well contained. And this is despite the pressures we see from oil prices. And I will have more to say on that in a few moments.

I want to also emphasize that unemployment continues to trend down. Poverty indicators continue to improve. We see in Argentina that unemployment is now down to 12 percent compared with over 20 percent at the height of their crisis.

And just this morning or last night, I believe the government has released new poverty indicators that show in Argentina a further drop in the poverty rate, which is now well below where that was at the height of their crisis a couple of years ago.

So the context we have, both globally and in the region, I think, is good. Of course there are risks, and I will go into those risks very briefly. But I want to emphasize this morning a theme that Mr. Rajan picked on a few days ago. And that is we do believe that countries in the region, such as the Brazil, have built up the strength to deal much better with these risks than perhaps 10 years ago.

Among the risks, of course, are those from continuing high and volatile oil prices. We have had some shocks from Hurricane Katrina. We may have some more in the coming days. So far, the impact of these oil shocks, both on the global economy and on the region, has been surprisingly moderate.

Of course, the impact has been higher in Central America and the Caribbean, which comprise countries that are net oil importers. Those countries in particular are facing great difficulties in trying to balance the pressure on their fiscal positions and how to balance the pass-through into domestic prices of the higher oil prices worldwide.

So there are fiscal pressures that are rising and we need to watch those carefully.

There are also risks that will arise if the global financial market conditions were to tighten abruptly. I say abruptly because some tightening is inevitable and will happen as a result of the cyclical trends. What we are concerned about is if there is any abrupt change in market sentiment which could be sparked by any jump in inflation expectations following either concerns about oil prices or following concerns of about how the global imbalances could be resolved.

Although much progress has been made in bringing down the public debt, there is no doubt, I believe, that Latin America and the Caribbean remain vulnerable to any abrupt tightening of financial markets.

The third risk I will point to is a risk of continuing competitive pressure from other countries in export markets and also risks from any increase in protectionist sentiment around the world.

Now here I should say three things. First, as I have just said, the export growth in the region has been impressive and so there is that background and context that helps us.

Number two, we have now falling into place the Central America Free Trade Agreement and that should help, particularly as countries are now strengthening their institutions to maximize the benefits from that trade agreement.

And third, we should all be resolved--and this is the challenge for the wider world — to press forward with the Doha round.

But now let us talk briefly about the ability of countries in our region to withstand these risks and shocks if they were to materialize.

Here I will make four quick points.

The first is that the region is stronger from a fiscal perspective. Most countries in the region have used the last two or three years of better growth to undertake structural improvements in fiscal policy. They have held tight control over spending. They avoided, by and large, the cyclical tendencies of the past. And this has resulted in positive and high primary surpluses, declining public debt ratios, and improved debt profiles. We see primary surpluses now around 5 percent for Brazil and Argentina for this year. And a number of countries have gone further and have increased their reliance on the issuance of domestic debt. This further reduces the vulnerability to exchange rate risk and it also helps deepen local currency markets.

So to summarize this point there is structural improvement on the fiscal side which has accompanied the cyclical improvement that has taken place. This will help our countries cushion and absorb shocks from the region much better than perhaps 10 years ago.

The second point I would make is that countries have, in a cautious and preemptive way, pre-financed their future needs of foreign exchange and their future debt service obligations. Many countries have already completed their financing needs for 2005. And some of them have already begun to either start or advance substantially into pre-financing their need for 2006. And some are even now beginning to look at pre-financing 2007. So this is a wise and preemptive move on the part of many countries in the region.

The third point I would make is that inflation has been well contained and this is because of improvements in the monetary policy framework. We see inflation targeting working reasonably well in many countries. We see central banks more committed, publicly committed, and institutionally committed to keeping inflation low. Clearly, we have public pressure from the population at large to ensure that inflation remains low.

And finally, I have already said that external positions have improved. We have large trade and current account surpluses across the region. You can look at almost any country and you see large surpluses, Argentina, Brazil, across the region.

We see high reserves. Reserves in Argentina now are almost at $26 billion. Net reserves in Brazil I believe are now close to or above $40 billion. This is a sea change from the external positions of our countries just two or three years ago.

And of course, many of them have adopted more flexible exchange rate regimes and clearly that needs to be maintained.

Finally, what I will talk about is one of the policy challenges over the medium term. Now I do not want to get into this topic in any detail now for two reasons. Firstly, the agenda is still complex and we should discuss that when we have more time.

The second reason is we have outlined this agenda, to some extent, in our Latin American paper that came out a few months ago. For those who have not seen it, we can certainly make it available.

And third, I will have more to say on these kinds of issues when I talk of the regional outlook in more detail next month.

The main point is that countries in our region need to raise the quantum and the efficiency of investment and savings. And this will need institutional reforms, particularly to public sectors, to improve the efficiency and the quality of public spending and of tax systems so that we can crowd in more and better private investment. This underscores the importance of having a business climate that attracts that private investment.

So finally, let me just end by saying that the region has done well over the past year. The external environment remains so far still fairly benign. The region has improved its resilience to shocks. And now the countries are building on these achievements and trying to address the challenges to ensure that growth remains high and sustained over the medium term.

So that was my brief introduction, perhaps not so brief. And now if you have any questions, I certainly will be happy to take them.

QUESTION ON URUGUAY
taken by Anoop Singh and Markus Rodlauer Senior Advisor, Western Hemisphere Department:

QUESTIONER: I would like to ask about the exchange rate because in our countries there is a big discussion about what is the right level for currencies against the dollar. In Uruguay, the private sector is increasing pressure to have a higher exchange rate and they are saying that it is going to affect our competitiveness in the short-term. Exports have has been one of the engines of growth in Uruguay last year and even in this year.

How do you see this problem? And how is it going to be fixed?

MR. SINGH: Well, it is quite normal for exporters to complain about the exchange rate when the exchange rate is currently appreciating. The facts are, in a sense, the opposite.

The fact is that in many countries in the region, including Uruguay, there was a very large depreciation some years ago. And what we have observed in other crises is that this is a kind of pattern. Exchange rates typically overshoot at the start of a crisis. And then, as a recovery builds and confidence comes back, as it has come back for Uruguay, it is normal that the overshooting is then somewhat reversed.

The important thing is, firstly, not to mistake the appreciation that takes place for a loss of competitiveness because overall in most countries, and in Uruguay, the exchange rate is still much more depreciated than it was three years ago. So competitiveness has improved not decreased over the last two or three years.

The second point is not to fall into the trap of trying to fix the exchange rate again because that is the legacy that many countries in the region have had in the '90s of fixed exchange rates. Many countries now have moved away from fixed exchange rates precisely because exchange rates do need to move. So again, I will say that flexibility has served Uruguay well.

Markus, do you want to add to that?

MR. RODLAUER: Just to say for Uruguay, you look at the macroeconomic picture today, which is high growth, very low inflation, and a very strong balance of payments. I think monetary policy, in that context, is being conducted with the right kind of balance and caution.

As you know, just recently there was some moderate easing of the monetary policy that was implemented. Uruguay does not have an inflation problem at this point. At the same time, the authorities are mindful of the need to further strengthen the reserve cushion of international reserves.

So to find the right balance between making sure that inflation stays on track, which it is, and taking opportunities to further strengthen the reserve cushion, we think is exactly the right approach going forward.

A complete transcript of the Press Briefing is available on the IMF's website.


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