Transcript

Transcript of the October 2022 Western Hemisphere Department Press Briefing

October 13, 2022

PARTICIPANTS:

ILAN GOLDFAJN, Director of Western Hemisphere Department, International Monetary Fund

MARIA CANDIA ROMANO, Communications Officer, International Monetary Fund

GUSTAVO ADLER, Deputy Division Chief of Research Department, International Monetary Fund

ANNA IVANOVA, Deputy Division Chief in the Regional Studies Division, Western Hemisphere Department, International monetary Fund

MS. CANDIA: Good afternoon, everybody, and thank you for joining us on this IMF Press Briefing on the Regional Economic Outlook for the Western Hemisphere. I’m very happy to see some of you here today, and a warm welcome to our viewers also online who are following us from the region. I’m Maria Candia from the Communications Department, and I’m delighted to be here today with Ilan Goldfajn. He’s the Director of the Western Hemisphere Department. Gustavo Adler. He is the Division Chief of the Western Hemisphere Department, and Anna Ivanova, Deputy Division Chief of the Western Hemisphere Department. Before I turn the floor to Ilan, let me just remind you we are in a hybrid press briefing, so we will take a few questions from the room, then we will turn online. I know some of you are joining from Webex. So, with that Ilan, the floor is yours.

MR. GOLDFAJN: Thank you, thank you, Maria and it’s really a pleasure to see you all here and also in virtual mode. As the effects of the pandemic and Russia’s invasion of Ukraine continue to reverberate through Latin America and the Caribbean, the region now faces what we’re calling the third shock, the tightening of global financial conditions.

Growth momentum for the region is currently positive. The return of service sectors, and employment to pre-pandemic levels, and favorable external conditions such as high commodity prices, strong external demand and remittances, and rebounding tourism have driven activity, until recently, surprising on the upside.

Reflecting this, we upgraded our growth projection for Latin America and the Caribbean for 2022 to 3.5 percent, from 3 percent in July, but financing is becoming scarcer and costlier. As major central banks raise interest rates to tame inflation, capital inflows to emerging markets are slowing and external borrowing costs are increasing. Higher global interest rates are slowing global activity and weakening the main external drivers of growth in Latin Americ, ommodity prices, exports, remittances, and tourism. Domestic interest rates in the region are also rising.

As these factors weigh on credit, consumption, and investment, growth in Latin America and the Caribbean is projected to decelerate more rapidly than previously anticipated, slowing to 1.7 percent in 2023 compared to 2 percent projected in July.

Commodity exporters, that is, South American countries and some Caribbean economies, are expected to see their growth rates halved next year, as lower commodity prices amplify the impact of rising interest rates.

The economies of Central America, Panama and the Dominican Republic will also slow as trade with the United States and remittances weaken, though they will benefit from lower commodity prices.

Tourism-dependent Caribbean economies will continue their recovery, though more slowly than anticipated in July, given weakening tourism prospects ahead.

Despite slowing growth, Latin America will face high inflation for some time.

Major central banks of the region acted fast and hiked the interest rates ahead of other emerging market and advanced economies, helping to keep long-term inflation expectations anchored.

This will help bring down inflation, but it will take time as monetary policy needs to tame domestic demand in order to ease price’s pressures, which have broadened recently.

In line with these developments, we raised our inflation forecasts. Price increases for Latin America and the Caribbean, excluding Venezuela, will reach around 14.5 percent by year-end and remain elevated at about 9.5 percent by end 2023 -- highest inflation rates in the last two-and-a-half decades -- and declining to around 7 percent in 2024. So, 14.5, 9.5, and then going down to 7 percent in 2024.

Although the region’s strong reserve buffers and central bank credibility will help mitigate the impact of tighter financial conditions, rising global interest rates will test the resilience of private and public balance sheets.

Compared to previous instances of global financial tightening, banking systems are generally healthy, and regulation and supervision have largely improved, but pockets of vulnerabilities may remain, as corporate debt has grown considerably over the last decade, especially outside the banking system.

Tighter financial conditions will also test public finances as public debt and financing needs remain elevated. In the near term, policies should focus on restoring price stability, first and foremost, and rebuilding policy space while protecting the vulnerable.

Monetary policy should stay the course and not ease prematurely. Having to restore price stability later, if inflation becomes entrenched, will be very costly. Countries with limited fiscal space should focus on strengthening public finances, while addressing social needs, as policies to strengthen public finances can only be effective and durable if they protect the poor.

Even where fiscal space exists, fiscal policy should avoid undoing the work of monetary policy by supporting vulnerable groups without fueling domestic demand. Authorities should not lose sight of the region’s medium-term challenges, especially the need to boost growth and strengthen social cohesion through much-needed structural reforms.

Let me stop here and take your questions.

Maria, please?

MS. CANDIA: Thanks, Ilan. Any questions? If you can identify yourselves, I’d appreciate that.

QUESTIONER: I have a bit of a broad question about the region and then I have a couple of country-specific questions. So, first of all, you guys have been painting a pretty grim picture of what lies ahead for the world economy. What can Latin American economies do to weather the storm and advert the worst outcomes? What are some of the countries that are better positioned to lead the region in these uncertain times; and then a couple of country-specific questions.

First, on Colombia and Chile. How does the IMF view both Colombia and Chile’s tax reform proposals, specifically, Colombia’s proposal of a windfall tax on oil and coal? And then, on Brazil, what is the outlook on Brazil in the context of the upcoming election? Thank you.

MR. GOLDFAJN: Thank you for both of your questions, both the general and the specific. On the general, what we are forecasting now is quite a good momentum in terms of growth and what I explained recently is that’s dependent on external conditions. There were strong conditions, globally -- growth, commodities were up, tourism’s coming back, remittances are strong -- those generated quite a bit of growth momentum and that’s the reason why we upgraded our growth forecast for 2022.

But you’re right that for next year, we are linking the region to the global environment. We are seeing the major economies slowing down, United States, China, Europe, that may impact, on one hand, the commodity prices; on the other hand, maybe remittances, maybe the recovery of tourism will be slower than we expected before, and that will lead to growth which we downgraded to 1.7, and that is consistent with what we’re seeing in general. The region is embedded in a world economy that will decelerate.

Now, your question whether what countries can do, and they can do quite a bit. First and foremost, they should act first. They should not allow things to become entrenched. Now, here I’m talking about inflation. The most important prevention measure to avoid having deceleration which is stronger or even negative is if you act first, you make inflation go down in the horizon that Central Banks are looking and, therefore, you have higher chances of a smooth landing.

In addition to that, there are other measures you need to look for. One, you need to protect the poor, the vulnerable. That’s very important in this moment. We understand that high inflation means that the cost of living has increased, and fiscal policy has the responsibility to look for that.

But it is also true that fiscal policy needs to see what’s affordable. When you don’t have fiscal space, it’s not affordable, so you have to target to the poor and be responsible with your fiscal because if you already have inflation, fiscal policy has to be responsible. And even in the countries in the region, when there is space, fiscal policy has to complement monetary policy. They both have to work together in order to have inflation returning to the target as fast as possible, and in this case, as fast as possible, is not next year. As you know, next year we still have high inflation. It will take some time.

On the country issues you asked about the tax reform countries, and some of the reforms or part of these reforms go in the direction of providing the people the services that they need to have, and the services they need to have sometimes require more revenues. Part of the region, not all of the countries but part of them, have low revenues as a proportion of GDP, and that means that if you do want to provide more investment, health, education, and provide better public goods you need to do it in a responsible way, and the way to do it is to have tax reforms that increase revenue and offers spending.

At the same time, we have been saying that we need inclusive consolidation, fiscal policies that are inclusive; and part of these reforms go in this direction that are more progressive. They care about equity, they care about more income distribution, they care about the vulnerable. The only caveat we would like to say is that they all have to be with responsibility and fiscal. So, if you don’t have the revenues you projected, you will also [inaudible] that the spending readjusted to the revenues that ended up coming with the reforms.

And, finally, there’s a question on Brazil. Brazil was the question on growth, and I think the answer is the same as the rest. We have upgraded the growth in Brazil this year, and it’s going in the same direction next year as the rest of the economies, their deceleration. So, it’s, basically, growth is in the same direction in both 2022, as well as 2023, as the rest of the region.

MS. CANDIA: Thanks, Ilan.

QUESTIONER: Hi. Jorgelina do Rosario from Reuters. You mentioned that financing is becoming scarce, and costs are increasing. We see this globally, but specifically on the region. Considering that access to international markets are uncertain due to global conditions, could you mention specifically which countries are you monitoring closely that might need more IMF aid? And I would also like to ask if you could confirm any new requests from countries to apply for the Food Shock Window Program from the Resilience and Sustainability Trust? Thank you.

MR. GOLDFAJN: So, you’re asking what are we looking closely, I can tell you that both in our surveillance and as well as in the program, we end up looking at all the countries very carefully, because this is the moment where you need to be close to our member countries. Either they are countries that have programs, FCLs, other programs, or they are surveillance. We need to look at the countries and how they are doing in this moment. So, my answer to you is that we need to be even-handed and look at all of them with very, very intense care, especially in the moments where we have shock over shock over shock, and the financial tightening is coming. So, we need to be very careful in terms of that.

In terms of the Food Shock Window, I mean you’ve seen the announcement that it is becoming operational. And we are going to look at the countries. There’s no -- it’s too soon in the process yet to tell you any country about it. But, of course, it shows that not only the IMF, but also the region is looking for the countries and seeing where are the most vulnerable parts of the population, where we actually need to intervene. And you need to have a shock, which is a food shock. You need to have the need for these resources. And you need of course to be -- to have a situation where you will be able to receive this money in a sustainable way. So, those are basically what we are looking in terms of the food shock.

I think there is a question about the RST. I don’t know if any my colleagues want to comment on that?

MR. ADLER: Yes, Ilan. Maybe I can add. As you know, the RST has become operationalized actually [yesterday]. You may have seen the press statement by our Managing Director on that. So, we will be moving forward with some of the request.

Yeah, actually, Barbados would be the first country that has reach already the staff-level agreement on using the Resilience and Sustainability Trust. Of course, that is still subject to approval. And there are ongoing discussions with Costa Rica as well.

MS. IVANOVA: I think Costa Rica has reached staff-level agreement as well.

MR. GOLDFAJN: So, we are reaching agreements fast. So, we have now two, not only Barbados but also Costa Rica. So, in the region, we already have two countries that requested and that have reached staff-level agreement that RSTs embedded in them. So, the region is quite advanced in the RST.

MS. CANDIA: Thanks, Ilan. Let’s move to here. Paula?

QUESTIONER: Thank you. Managing Director, Kristalina Georgieva, said today there is pressure from the Argentinian public to increase spending, and this is not affordable when it fuels the inflation. People will be suffering from the elimination of subsidies from the increase in tariffs. Do you or the IMF take into account or fear that these pressures from the people can generate a turbulent social climate in the future? And how can the government cope with these pressures, especially in an election year? Thank you.

MS. CANDIA: Let me stay in Argentina, if somebody else has a question. Rafael?

QUESTIONER: Thanks. Good to see you in person, Ilan.

MR. GOLDFAJN: Yeah. Nice to see you.

QUESTIONER: The IMF has said repeatedly that Argentina faces political constraints to enact like a deep stabilization plan. Can you tell us what else is there -- what else do you see in the toolkit, the economic policy toolkit, that the government has at hand that could make inflation go down faster than it is expected? And another question, if I may, when would Argentina be -- would have the chance to access the new RST Fund? I think it’s they have to wait a little bit of time within the current program to access the new funds. Can you give us details on that? Thanks.

MS. CANDIA: Let me just ask any other colleagues about Argentina. Is there any last question? Sorry. Excuse me? Could we hand the mic to Mara?

QUESTIONER: Hi. My name is Mara Laudonia for Télam News Agency. I wonder if you can comment us on how it’s going the numbers for Argentina for the Third Revision of the program? And how are going the policies who lower the inflation in the next month?

MS. CANDIA: Thanks.

MR. GOLDFAJN: Okay. So, thank you about the questions on Argentina. Let me start with the question on the impact of inflation on the population. And I can tell you that the program takes it into account. There is clearly a directive in the program to help the vulnerable to allocate resources to the ones that need more, to have the spending more targeted, both in terms of social or even subsidies. So, the need to have a responsible fiscal policy, an affordable fiscal policy, a fiscal policy that can be financed is consistent and compatible with a fiscal policy that defends the most vulnerable and is there for the part of the population that is suffering the living conditions of higher inflation.

There is a question about whether we are looking at other measures or there’s anything. There I think what we are looking now is implementation of the program with political support. We believe that the program well-implemented in a sustained way will gradually generate objectives and will steer Argentina in the right direction. So, what we want to see is no other measures. What we want to see is implementation of what is there, fiscal policy, monetary policy, accumulation of reserves, monetary financing, structural measures, protection of the vulnerable. They’re all there implemented over time with political support will get there gradually in Argentina.

The third question was about whether we have
-- what about the third review. What I can tell you is that the teams will engage shortly, in a few weeks, just looking at the Third Review. We just approved the second review. And I know there is also questions about the Third. But let’s work, let’s see the numbers on the third review. But I can assure you that the Argentine team and the authorities are engaged and will continue to be engaged very closely in the next weeks and months.

MS. CANDIA: Thanks, Ilan. Let me just address one of the questions online that we received, briefly, and then I’ll come back to the room for those who want to ask more questions.

So, a general question, and then more related to Mexico and the U.S. from Yolanda Morales, El Economista. She’s asking central banks in Latin America continue to raise rates, this week with Chile and Mexico, quoted for November. Do you see that these rate increases are really affecting inflation? And then we have another question on the U.S. How do you see the Fed dealing with inflation? And how would a U.S. recession affect Mexico?

MR. GOLDFAJN: So, I’m going to answer the question on monetary policy and the impact that we’re seeing already impact. And then I’m going to pass to Anna to answer on Mexico.

Yes, I think monetary policy’s already showing the results. When you see that the region has been less affected by the dollar cycle, the depreciation of the currencies -- we still see depreciation in some countries, and some specific countries -- but when you look at the average, we see that the region has been quite resilient to the tightening of financial conditions, the appreciation of the dollar, and that we actually have countries that have appreciated this year relative to the dollar, including Mexico and other countries.

And why is that? And the reason is that the central banks in the region have learned over the past that inflation is an important issue. The region had quite a bit of inflation in the past. And the roots of inflation from the indexation and inertia are still there. So, we know that this is a shock that will take some time to inflation to go back. And it is a risky business to allow inflation to go over time, because it could be the case that if you allow inflation to be entrenched that it will take much more effort and cost to do it.

So, when we see the central banks in the region raising interest rates, and have success in terms of credibility, in terms of anchoring expectations, and in terms of the currency support from monetary policy, this immediately reflects in the less pass through (phonetic), which means if you don’t have the depreciation, you have less inflation too. And that’s already had an impact on inflation in the region.

It is still too soon to indicate. That’s the reason why my initial remarks, we said central banks and countries should stay the course and not ease prematurely. And the reason is because we do need to make sure that the inflation that is eating the cost of living of the population, and especially the most vulnerable, are being treated, and we don’t get this inflation even higher.

Please, Anna.

MS. IVANOVA: Just to add on Mexico, I would like to make three points on this. First is that the central bank of Mexico started raising rates already in the middle of 2021. It was one of the first central banks. They acted gradually first and accelerated the increases over time. But they have reached the restrictive territory only recently, according to our assessment. So, they have now entered the -- recently entered the restrictive range of the monetary policy.

The second point to make is that of course there was increase in inflation in 2021, but unfortunately there was an additional shock associated with the war in Ukraine in the beginning of 2022. And that of course is a shock on top of a shock, which added to inflationary pressure. So, again, the time to see inflation going down and the monetary policy act is now longer.

And the third point is that there is a lag in the impact of monetary policy on inflation. And I want to take this opportunity to advertise a chapter that will be published in the beginning of November on inflation as part of our regional economic outlook, where we talk about these issues. And what we find is that the maximum impact of increase in monetary policy rate is somewhere between 18 and 24 months. So, it is
-- as Ilan said -- it is too early to see all of the fruits of this monetary policy tightening that has happened in Mexico. But we do see from our estimation that monetary policy has an impact on inflation. It helps reduce in inflation.

And in terms of the impact of U.S. slowdown on Mexico, of course Mexico is very tightly connected to the U.S. through many channels, including trade, remittances, and tourism. So, if there were to be a sharp slowdown in the U.S., it will definitely be shown in the slowdown in Mexican economy.

MR. GOLDFAJN: Thank you, Anna.

MS. CANDIA: Thanks, Anna. We’ll go to the room. The gentleman on the second row.

QUESTIONER: Andre from St. Kitts and Nevis. The Caribbean, as you pointed out in your opening statement, towards independent economies have faired well. Their recovery has been going well towards related economies. But considering the global economic outlook, what advice would you have for -- towards independent -- especially toward independent Caribbean countries and what financial or fiscal policies do you think these countries need to put in place to ensure that inflation is controlled, and the impact of the global economic outlook does not affect them greatly.

In the same breath, also, if you could specifically to St. Kitts and Nevis, a small country who looks toward independent economy as well.

MR. GOLDFAIN: So, we are forecasting a decline in growth, and we are not yet certain that this will affect tourism, but we do know that over, generally, in the cycles that’s the tendency. And our accommodation is to have -- to be aware of this possibility and the way to be aware and to be mindful of this cycle -- the global cycle -- is to realize that whatever buffers are there, they need to last for some time.

This cycle, this shock, will not end next month. It will take some time. And if you are a country that has reserves, has fiscal resources, do not spend everything now. While we do understand that there is a major shock and there’s a need to support the people but given that there is going to be more a persistent shock, it is advisable to be mindful that if you spend all your resources now in a non-targeted way, you may be having a policy which will not be affordable over time.

The first advice is be mindful of the time, target your support, and be fiscally responsible because several of the countries also in the Caribbean are constrained, have issues with fiscal. And we were talking today that there is no contradiction between having an inclusive policy and a responsible one. You can have both fiscal responsibility and social responsibility. I think this is valid for the Caribbean.

We talked about a few of our instruments, the food window which exactly to help the countries that have this type of shock. We talked about the RST which is also for the Caribbean where all these natural disasters and hurricanes and there’s some measures to deal with them. So, there are instruments from the Fund to help the Caribbean. Let me see if Gustavo wants to compliment.

MR. ADLER: Yes, I can add something. I mean you ask us specifically about St. Kitts and Nevis. We see dynamic in the country similar to the rest of the Caribbean where the economy has recovered quite a bit this year. If I were to project growth at 9.8 for 2022, helped by the recovery in tourism. Now, going forward because of the global slowdown that we are projecting, including in the U.S. and Europe, we see tourism weakening as well for next year, so growth we are projecting at the moment 4.8 for 2023.

MS. CANDIA: Thanks, Gustavo. So, we running out of time. Is there any other questions here in the room? Yes?

QUESTIONER: Good afternoon. German Abel, Open Interactive Caribbean. I just want to piggyback quickly on my colleague’s questions. When we look at the OECS specifically, there are a lot of territories dependent on the Citizenship by Investment Programs. And a lot of that buffered these countries during the pandemic, but a lot of that buffer was spent. What sort of recommendation, how do you guys view this as the world is about to slow down our economies, especially these territories being tourism dependent, especially countries like St. Kitts and Nevis, Antigua, and Domenica.

And, as well as, I want to jump down to South American in terms of Guyana’s perspective. Can you speak to, because at this point in time, that’s one of the countries in Latin America/Caribbean that’s going to see exponential growth owing to the oil revenues. But a lot of it is being spent. Is IMF concerned with the way that the country is currently spending and what are the projections that you guys are looking for as we head into 2023.

MR. GOLDFAIN: So, first on the issue on spending some of these buffers that you mentioned, I will say two things. One is short term. You shouldn’t spend all of your buffers. Of course, if you have done it, you will need to somehow in a difficult environment, to rebuilt these buffers. But if you haven’t, this is the moment to get the revenues, hold them there, and wait because there is -- we’re still navigating this more tougher and tougher times.

The second thing I’m going to say is that the most diversified the revenues for the countries, the better. And this is more medium-term objective. And I always say that we are always going from one crisis to the other, and we are thinking about how to sustain or how to react to the crisis.

Could be the pandemia, and then we had the Russian invasion of Ukraine which for the Caribbean means food increases and energy more expensive. And then now, we’re probably going to have tightening of financial conditions which means slowing down is the risks of having tourism and going down.

So, in this regard, where are we going to spend our time to think about diversifying the economy. But we do need to have it because we do need to think about what to do and what are the reforms, how do we get from reacting to shocks, to be more resilient the next time. And I don’t know if my colleagues want to compliment.

MR. ADLER: Maybe I can add something. I mean clearly in countries that don’t have independent monetary policy like many countries in the Caribbean, fighting inflation is difficult. But one way to do that is through accelerating structural reforms that can ease bottlenecks, that will ease these price pressures, and it would also improve prospects for growth along the lines of what Ilan was suggesting.

And there are specific areas where the Caribbean can work on. For example, expanding domestic agriculture production. Expanding electricity generation from renewable resources, reducing the use of fossil fuel, which in the short run will help because of the high cost of fossil fuel at the moment. But it will also help going forward in terms of moving towards greener energies. So, there is something that can be done here in the countries that don’t have independent monetary policy to work with, to fight against inflation.

MS. CANDIA: Thank you, Gustavo. Unfortunately, we’re running out of time. I know that many of your colleagues have sent questions online, but we will get back to you bilaterally. Thanks again for joining this press briefing and have a good day.