Transcript

Transcript of the Western Hemisphere Department Press Briefing

October 7, 2015

PARTICIPANTS:

Moderator: RAPHAEL ANSPACH

Panelists:

ALEJANDRO WERNER
NIGEL CHALK
ADRIENNE CHEASTY
CHARLES ENOCH
ROBERT RENNHACK
KRISHNA SRINIVASAN

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P R O C E E D I N G S

MR. ANSPACH: Welcome to this press conference of the International Monetary Fund on the outlook for Latin America and the Caribbean. Joining me here are experts from the Western Hemisphere Department of the International Monetary Fund: Alejandro Werner at the head table, Director of the Western Hemisphere Department. We also have with us Charles Enoch, the Deputy Director of the same Department; and Mr. Krishna Srinivasan, also Deputy Director; Ms. Adrienne Cheasty, again Deputy Director of the Western Hemisphere Department; Nigel Chalk, and others. Alejandro will speak to us briefly at the beginning of the conference, following which we will be very pleased to take your questions. Also, I wanted to say that this conference is being webcast, so if you are joining us online and would like to submit questions, feel free to do so. Alejandro has the floor. Thank you.

MR. WERNER: Thank you very much, Rafael, and thanks to all of you for being here this afternoon. Thanks to the Government of Peru for this exceptional organization of these Annual Meetings of the Bank and the Fund. It is a joy to be back in Latin America after a few years elsewhere. I think the last Annual Meetings here on this continent were in Rio de Janeiro, close to 50 years ago.

So why don't we begin by going through a number of slides that sum up our regional report and aims to highlight the main salient points of the regional outlook. As you heard yesterday at the World Economic Outlook, we have a slightly reduced the global outlook to 3.1 percent -- that is a fall of 0.2 percent below the GDP that we had estimated earlier, and that is a bit below what was projected last year. We hope the advanced economies will grow by some 2 percent this year, which was pretty close to what we estimated in July of this year for the emerging countries. The drop will be a little more significant. We would hope 4 percent growth for the emerging growth. That is a difference of 0.1 percent to what was estimated last year. The United States is staying at about 2 percent after a first quarter, which was a bit wobbly. The first quarter for some years now -- for weather related reasons and a number of other more specific reasons, the U.S. is a bit sluggish at the start of the year, but then kicks up, up to 2 to 3 percent in the remaining quarters. And we see that to be the case this time also in the U.S.

For Europe, we are estimating pretty much what we saw some months ago. The Chinese economy has certainly its ups and downs, a good bit of volatility there, but generally in line with the 6.8 percent growth, which we had anticipated in July of this year. That deceleration will likely continue with growth likely becoming less dependent on investment and more so on consumption, which in itself poses a number of challenges to the Chinese economy.

Getting to the region here in Latin America and the Caribbean, these averages really highlight what the regional average that we expect, and this year it is -0.3 percent for the region. That average for the region of course camouflages those that will have a negative growth rate, some of them rather significantly so, and is offset slightly by those that will have a positive growth rate.

So, all and all, if we look at the Pacific Rim economies -- if we look for instance at Mexico, etc., there we see a growth of between 2 and 3 percent. The average clearly is dragged down when we factor in the very complex situation that say Brazil is undergoing, and one that is indeed much more complex than we expected, not to mention Venezuela, and there of course, negatives are expected, but beyond those three economies, overall the growth in the region will be of about 2 of 3 percent, and as we show in the graph on the right, we have also revised downward the medium term outlook for Latin America rather significantly so. If we take this country by country, as I said earlier, we see that it's generally 2 to 2.5 percent, but contraction of 3 percent for Brazil; contraction for Venezuela of 10 percent; for Ecuador, 0.6 percent give or take. Then you have economies like Paraguay, Panama, and Uruguay that are growing at around 3 percent, Panama at a much higher rate, close to 6 percent, Paraguay at around 3 percent, as I said, and Bolivia hanging onto a growth rate of about 4 percent. It's interesting to note that in Central America, growth rate has leveled out at 4 percent and 2.4 percent of the Caribbean, which is a bit higher than what we had seen a few years ago. So the Caribbean is inching up and recovering from the drop in consumption in the United States, and the movement and the arrival of tourists. So there's a countercyclical movement there with of course energy weighing in the build. The rest of the trade of the region of course they're suffering from the changes in the terms of trade and the aggregates for the region are quite striking. From 2011 to the present time, you see very marked differences. And take a look at metals, which in 2011were at a peak, dropped to the levels that we see in 2015. On the other hand, oil, which had stayed pretty high until mid-2014, suddenly plummeted in the last half of last year, which triggered yet another set of exogenous shocks derived from terms of trade for the petroleum exporter countries.

Now we talked about this certainly in the report, and what we see then is a combination of exogenous factors, as in the cases of the price of oil in terms of trade, and the situation that has arisen on the domestic front in a number of countries because of weaknesses particular to there. Where we see 2 and 2.5 percent growth in the rest of them, much of this is determined largely by these exogenous shocks, but also by influences that we see in Canada and New Zealand, which are also subject to terms of trade, even countries with important reverses and healthy public finances, and yet even there, there is certainly an impact, and there, no one is exempt from the results of terms of trade, buffered perhaps to a certain extent, but not exempt.

Exchange rates have a countercyclical role that is important. There are depreciations that are not triggering an important increase in inflation. We see in the graph for instance where you see green dots, a reference to the right-hand access that relates to exchange rates. In Brazil, for 12 months, 60 to 70 percent depreciation, 60 percent for Colombia, Mexico 22, 23 percent depreciation over that time. But now with regard to inflation, in almost every one of those cases, we see this within the ranking or within the range rather established by the central banks. We also see medium-term outlooks, which is that line that you see within the range, for inflation that the bank had established. That means that the inflation objectives that had been established by the respective central banks are being met, which shows again that the exchange rate policy is playing the expected countercyclical role.

Now, in some instances, the panorama is a little bit more complex. Why is that? Well, because the cushions that were generated have been pretty much used up during the international economic crisis. And what happens is that with a smaller cushion, obviously with the impact of terms of trade, there is less space to recovery. We have also got to recognize that this shock is perhaps a little bit more permanent in its nature because we do expect the current situation in terms of trade to remain alas present for some time. Therefore, the drop in revenue from the commodity sectors will continue to be a factor that public expenditure will have to factor in -- no redundancy meant.

So the question is how can the necessary adjustment be carried out as smoothly as possible and in a manner that will cushion or amortize the impact on the economy as best as possible, and in a manner that will perhaps be less blunt or difficult for the countries? At the end of the day, as our colleague, Vitor Gaspar said with regard to Brazil, the medium term outlook is being questioned by international markets and local markets, and therefore the question of the sustainability of public finance has got to be demonstrated time and again. The response has got to be quick and it’s got to be compelling. In some cases such as Mexico, Colombia, and Uruguay, there may be some questions as to what the fiscal framework may be in Colombia, for instance, and Mexico. The drop in the price of oil has pushed it to an adjustment of the prices within the fiscal laws. But in any event, there’s going to have to be great attention paid to compliance with the laws. In the case of Peru and Colombia where the indebtedness is lower and at a more comfortable fiscal position, there may be room for fiscal stimulus to last a bit longer. It will have to be wound down gradually. And as we look forward obviously, the weakness in other countries will be exacerbated perhaps because of the contamination or the greater impact of the situation in the economies of others, not to mention China obviously.

So possible volatility indeed also generated by the monetary and fiscal policy in the United States certainly, Japan and Europe, too, must be taken into account. So as the Fiscal Department has explained here at the IMF, the corporates have increased debt significantly. All of that is going to necessitate very close surveillance. But we have seen that we pretty much feel that the problems that arose in ’08 and ’09 will be averted because there have been steps taken to improve levels of indebtedness, terms of indebtedness, in a lot of cases. So there are the two sides of the coin to take into account.

And finally there are important the region has important strengths such as the structure of its debt, the level of reserves, flexibility in the terms of the exchange rate, and fiscal frameworks including fiscal responsibility laws that have been adopted in Latin America over the last few years.

And finally I would just like to do some publicity for a few chapters in our report. I would just say that there are three important analytical chapters in the report and that you may be particularly interested in reading one of them. It hones in on the international conditions that may curtail or somehow limit the range of maneuver of the central banks.

There is the question also of the volatility of the financial markets. There is also a chapter on regional integration, which given the information we have just received with regard to the Trans-Pacific Partnership, becomes even more relevant. We believe that in the region a little less push from the commodity center may take other countries to perhaps concentrate more on financial markets, on integration, on other areas that are not the commodity sector. So that is good if it happens.

There’s also an important part of the report I believe where analysis is made of the impact of oil prices as determinants of the socioeconomic conditions in the Caribbean.

Well, there you have it, ladies and gentlemen, this whirlwind overview and we are here to answer your questions.

MR. ANSPACH: Thank you very much, Alejandro. We’ll now go into our Q&A. We have our friends handing the mics. We’ll start with the gentleman over there. Could you please state your name and affiliation?

QUESTIONER: I’ve got two questions. What are the chances of the recession continuing in Latin America over the next year, especially if the fed decides to increase its rates in a few months?
And the second question: Regarding Brazil as Augusto la Torre, the head of the World Bank said that the situation in Brazil was a little mysterious and that the macroeconomic data did not justify the toughness of the recession and he pointed to political uncertainties. Do you agree with that view?

MR. WERNER: Let me respond and afterwards I think it would be good for Krishna to complement my answer. We anticipate positive recovery next year in the region. We think many economies in the region are already showing signs of a recovery, slight, but we see that clearly. We see that in Peru as well. In Chile there have been some indications, of course. Economic recovery sometimes stops and goes again. We see signs to the effect that in some economies the correction of external accounts has already taken place and in others not, but growth in many of them seems to have touched a bottom level and is now picking up again. The same thing goes for the Mexican economy and then smaller economies are benefitting from a positive shock in the terms of trade. We think that little by little that will start to see better signs of faster growth.

At the end of the day the question is also naturally combined with your second question, and I think that’s where Krishna could help us. It’s also part of the growth when you see the average. It will depend on the less deep contraction that is expected for the Brazilian economy next year. In the case of Brazil our central scenario is that at the end of the day the political system does reach certain agreements in order to put back in place fiscal targets to send signals of fiscal consolidation looking forward. And that will eventually foster the beginning of recovery towards the second half of next year. I think in that background it is anticipated that the monetary conditions will (inaudible) in the second half of next year.

And in the case of Venezuela I think forecasting what may happen in 2016 is a very complex exercise for us based on very infrequent information and with a very critical economic situation. We are talking about an economy contracting at 10 percent this year with inflation that we estimate at 190 percent. And the imbalances are of such magnitude that obviously the assumption of the teams is that there has to be a correction. But since we have no dialogue with the policymakers, it’s very hard for us to predict the nature of that correction.

MR. SRINIVASAN: Economic prospects in Brazil depend critically on the revival of confidence. Now, the revival of confidence itself depends on the pursuit of a credible fiscal adjustment program. The frequent revision of fiscal targets doesn’t supply that confidence. So to get back on track, what you need is political will and cohesion in the pursuit of such an adjustment program. And when that happens, confidence comes back and hopefully the economy will rebound.

QUESTIONER:
I’ve got two questions. In the case of Argentina, you anticipate a fall in GDP. I wanted to ask you, under what domestic conditions you think recovery could take place in the country? And linked to this I think you anticipate inflation of 25 percent. Why do you think the country’s inflation will jump from 16 to 25 percent next year?
MR. WERNER: Perhaps my colleague, Nigel Chalk, who’s responsible for Argentina could answer that. By way of introduction let me say that we do see unsustainable trends currently in the Argentine economy, and hence these assumptions for next year pointing to a certain correction in those trends. That’s basically what we are now seeing, but I think my colleague can give more detail on that.

MR. CHALK: So as Alejandro just said, I think what we see in Argentina now is a set of policies that we don’t feel are sustainable. We’ve seen growth in fiscal spending. We were at 35 percent year on year. The fiscal deficit has deteriorated in the first 8 months of this year to around 4.25 percent of GDP. That’s more than double what it was in the same period last year.

So there’s a lot of impetus being given to the economy from fiscal and monetary policy, which is helping growth this year, but next year we anticipate that that will have to be unwound. It won’t be able to continue it at such a pace.

And so that’s why we see deceleration happening as we come out of this next year and a contraction through next year. And I think we’re seeing signs of that unsustainability in various different places in the fiscal numbers, in the pace of growth of the monetary aggregates growing 35 plus percent. The trade surplus has diminished. It’s around a third of what it was this time last year. So I think those tensions are what’s going to feed into next year and start dragging down growth.

On your question on inflation, it’s a little bit of a similar story. The lagged effect of the monetization of the fiscal deficit from this year will feed into inflation next year. We anticipate the continued depreciation of the currency will add to inflation pressures. And implicitly because of the need to correct some of the fiscal imbalances, we are have assumed in our forecast that there will be some realignment of regulated prices, which will again feed into higher inflation next year.

So it’s a combination of a number of factors, but I think the symptoms of the forecast are really one of an unsustainable trajectory that will be corrected.

QUESTIONER: Good afternoon. During your presentation a while ago, you talked about the fact that small economies -- Central America, Costa Rica, and others -- are benefiting from the fall in the prices of commodities. I would like to see how you view the risks for those economies, perhaps considering the stabilization of monetary policy in the U.S. That’s one of the risks you’re considering, I assume. And what others? Thank you.

MR. WERNER: Just very briefly, I think Krishna, again, can provide much more in-depth views on the Costa Rican case, but like other economies in Latin America, there are benefits due to the changes in the international scenario, the fall in the prices of oil, and the sustained growth we are now getting to see in consumption in the U.S., which also boosts tourism and remittances in the region. But clearly, in the case of Costa Rica, there’s the concern regarding the reestablishment of fiscal sustainability and that has been a very important consideration, talks with the authorities. And I think that is an important matter that must be corrected as soon as possible.

MR. SRINIVASAN: In Costa Rica, the growth forecast for this year is 3 percent, to pick up 4 percent next year. As Alejandro mentioned, as growth -- as recovery gains traction in the U.S., that’s beneficial for Costa Rica.

The big issue in Costa Rica is a fiscal adjustment program there and to make sure you are in a sustainable debt path. And there the recent reforms which have been submitted to Parliament are along the lines of Fund recommendations in last year’s Article IV, both in terms of (inaudible) and income tax reforms. The question is the adoption of these reforms will help put debt parterns on a sustainable basis and that should help the economy going forward.

QUESTIONER: You mentioned Venezuela. There’s an election coming up at the end of the year. If there should be a government change that would also be accompanied by a policy change, what are the prospects for Venezuela to overcome the situation? How strong is the economy of Venezuela and is it really in such a dramatic situation that even a policy change in 2016 would not allow a desirable recovery to be seen?

MR. WERNER: Let me give the floor to Robert Rennhack, who is responsible for Venezuela, but let me just say, at the end of the day, economies eventually do recover from these processes and this we have seen very often in Latin America. So with the right policies, in some years we may be looking at an economy that rebuilds order in its public finances and macroeconomic order as well as a system of signals that makes it possible to put economic resources in the areas with greater social impact and, hopefully, one should be able to see a sustained and rapid growth process for some time, recovering from the earlier falls.

Obviously, it is very difficult to say whether that recovery will take place immediately or not. This will depend on the policies. We don’t know what the policies would be since we haven’t been in touch with the authorities of that country for quite a long time. It’s also hard to figure out what political support such policies would enjoy and how that will be perceived in terms of the sustainability of such a package of policies once introduced.

MR. RENNHACK: We’re assuming no change in the current policy framework. It’s hard to foresee what will happen after the elections. No one is sure of the outcome, so we’re assuming a continuation of the same fiscal policies, the same restrictive price controls, foreign exchange controls. And so that to us is a package of policies that will lead to persistent slow growth in the economy, higher tendency for inflation, things like that.

QUESTIONER: We’re taking this back to the Caribbean now. I have a few questions.

Firstly, the International Monetary Fund would have signed on to letters of intent by some of our economies, our governments for the implementation of our structural adjustments programs. And I know you know there are many of our islands with these programs in place. But what we’re seeing is that as a result of that letter of intent they were asked to cut their public expenditure, and most of them have resorted to cutting the wage bill.

But on the other hand, we’re finding that our governments are creating a parallel public service. They’re using that same monies and paying it out in other programs to employ other people. How is the IMF treating that situation?

Then we have citizenship by investment programs in a number of our economies down in the Caribbean. And the target here is for them to bring in revenue for government to meet a number of their expenditures, but what if, because we’re not seeing the successes as yet, what if it fails to realize the monies that you’re anticipating? What do you think will be some of our consequences?

Then I’m going to ask a third question.

MR. ANSPACH: Let’s keep it to two if we can, or just one last one. We just don’t have that much time!

QUESTIONER:
Okay, so a number of our state owned enterprises are being privatized and that came at a recommendation from the International Monetary Fund. But what you see happening is most of these enterprises were profit making entities and they were used by the government as cesspools to create jobs, in fluxing these entities. Why is the IMF into taking issue with that kind of behavior?

MR. WERNER: Maybe with some general comments and my colleagues, Adrienne and Rob in the specific case of Grenada and any other of my colleagues can get into the details. I would say that in terms of the recent programs that we have been involved there is no blanketed recommendation to privatize anything. I think there is obviously a recommendation of trying to undertake a fiscal adjustment that would allow fiscal sustainability to be achieved in the medium term and, therefore, to contribute to financial stability. And through these to social welfare. What is important is that state owned enterprises are either well managed, are made profitable, are efficient, and they don’t contribute neither to generating a financial liability for the government, neither to generate inefficiencies in the economy that hurt other sectors. And in these dialogues in the countries we look at the alternatives and we look at the countries’ choices and we accommodate our financial programming in terms of our programs to the choices that the countries make. And we have been on both sides of these discussions sometimes thinking that it is better to wait and not sell a company and the country being on the other side. And we have also been on the other side of the discussion, but at the end of the day it’s a sovereign decision and we are looking much more at the implications of these decisions for a sustainable financial environment, fiscal environment and also to generate growth in the economy looking at the distortion’s that are badly run. Private sector company can generate in other sectors. If we’re talking about energy, we’re talking about telecoms, et cetera.

As we might be looking at a country that has a badly regulated private sector company in the same sector generating the same distortions of growth so we address these issues in the same way. I think in the citizen by investment program we have a very similar advise to what you’re saying and Adrienne can go a little bit deeper into that and Bob. If there is anything regarding these off balance sheet operations in which employment is being created and also it’s creating a fiscal contingency.

MS. CHEASTY: Let me pick up on citizenship by investment programs. You asked what happened if the money doesn’t come in. The IMF’s advice on citizenship by investment programs is very clear and direct. These are windfalls. They are opportunities but they’re very risky. They could disappear at any moment. And so we’ve always advised governments to use these windfalls either for saving or to pay down debt, but not to build them into the budget, assuming that they’ll stay on a regular basis.

So if Grenada is considering earning money from citizenship by investment programs I’m pretty sure they are in dialogue with the Fund to say don’t rely on them for the long term.

MR. RENNHACK: The country has undertaken a very important fiscal adjustment. Growth has done very well and the debt exchange was just announced with the creditors so I think things are going quite well there.

It’s important to manage the Public Wage Bill carefully because it’s such a large share of public spending and the program has specific targets on that. And the new fiscal responsibility law helps strengthen that, so it’s really important. But in the Fund program we monitor public spending extremely carefully and there are no sort of hidden off budget expenditures going on. I mean what they’re spending is recorded; we monitor it very carefully. And there is quite a lot of oversight by civil society in Grenada so people are watching the government very carefully.

On the CBI in the program we have agreed with the government that they need to publish the data, so there is a lot of transparency in Grenada. They’ve received a little bit of money so far but not much. But the agreement in our department is to publish it. And we also have set certain guidelines on how they should spend the money so that we’re certainly preparing the fiscal program for the case that these may not be sustainable revenues and they need to be very careful about ramping up spending on that.

QUESTIONER: Mr. Werner, did I hear you saying that there are some countries in the region who have experienced sharp depreciations, but have not had consequent impact on inflation? The real question is what is your general advice for currencies in the Caribbean with regard to the point about depreciation and competitiveness and so on?

MR. WERNER: We don’t have a general advice. We can divide your questions in terms of choosing an exchange rate regime. That would be the first part of the question. The second part of the question is when you’ve chosen an exchange regime how do you operate under that exchange rate regime?

I think the first question goes into analyzing the structural characteristics of each economy. How flexible it is? How mobile, for example, its labor force can be to other regions with the country? How exposed it is to external shocks? Within these characteristics there’s a whole literature that has develop, let’s say, recommendations for fixed versus floating. In a floating exchange rate you have to have a little bit more managed currency, et cetera. In these cases, I think there’s actually a quote by Stan Fisher, like saying this is like a marriage. You chose it for the long run, and obviously there will be some people which is better and some people it’s all you have problems, but you don’t change it every week that you don’t feel things are going well.

In that sense, it’s a long term decision. You mostly stick with it to the extent that the structural characteristics of the country have not changed, and then you manage your policies within that. In that choice there’s a technical aspect and there’s also a political and social dimension, et cetera. Therefore, during this discussion if a country wants to undertake that discussion our teams have been fully engaged with the countries doing the technical analysis, et cetera, et cetera. At the end, it’s a sovereign decision. When that decision has been taken our role is to say, “What are the policies that have to be implemented under that regime?”

Believe me, that’s what I was referring, especially in South America in the case of Mexico countries that have chosen in the last 20 years to live with an inflation targeting framework and a floating exchange rate regime. Now they’re seeing, given that they’re being subject, many of them, to a negative terms of trade shock, to an appreciation of the U.S. dollar within which that is a reference currency. Their currencies are depreciating and this is not generating inflation because they have been able, after 10, 15, 20 years of hard work, to really anchor the expectations. That means that every agent in the economy knows that the exchange rate can move, but the Central Bank will do its job so that inflation in one year, in two years, in three years will average 3% or whatever is the target.

Therefore, it doesn’t generate these negative feedback loops from exchange rate to inflation, to exchange rate, et cetera. They have accomplished that exactly the way an economy like Canada has accomplished that. For countries that have adopted a fixed exchange rate, and they think that’s the best exchange rate regime that they can sustain for long periods of times when they suffer a negative shock I think they have to work twice or three times as much in flexibilizing their economies to achieve the movement and resources that they need from the sectors that are being subject or the subject of the negative terms of trade shock to other sectors. How do you do that? By having more flexible regulation in some sectors. By having a more nimble and agile financial sector that can restructure debts and financial situations in firms in the sectors that are shrinking, and start lending in those sectors that need to grow.

Those are the things you have to work on. In the dialogue we have with the countries, at the end of the day, I mean, this is a type of dialogue that we have. You’re right, the region is going through a very large terms of trade shock, and therefore our dialogue, let’s say with the floating currencies, is how to really maintain that anchoring of inflation expectations. What other risks might be generated by the movement on the exchange rate, et cetera, et cetera? On the countries that have adopted more fixed exchange rates and are being subject to negative shocks we, and other multilateral institutions, work with these countries to look at what are the areas in which more flexibility will have a bigger impact in the reshuffling of resources in their economy that can generate the most rapid return to growth possible.

QUESTIONER: Good afternoon. I would like to ask a question regarding the 25% estimate that is being offered for copper which is our main commodity. Given the important weight of that commodity in our growth domestic product and how this would weigh in the poverty estimates as well?

MS. CHEASTY: What is the 25% estimate on copper? Can you give me more information on that?

QUESTIONER: It has been estimated that a growth from 2014 to 2018 is going to be increasing in terms of production. Do you think that will be a reason for growth in our GDP and a reduction in poverty which is what we have been trying to do over these last years?

MS. CHEASTY: Oh no, absolutely. In our growth estimates which show a recovery next year and beyond the role of copper is very important. We show mining coming back on stream and that’s a key input to explaining the recovery of growth to long term potential.

QUESTIONER: I have a short question about Paraguay. It’s a relatively small economy. It’s been submitted to some shocks from Brazil. It’s also a soft commodity exporter, and yet it is in the group of countries that have a growth of 3% or a bit more. Then I would also like to know how vulnerable the region that America is to a liquidity crunch in the coming months or next year, please? Thank you very much.

MR. WERNER: I think Paraguay has been able to benefit from a now several years of implementation of pretty good macroeconomic policies both on the monetary side and the fiscal side. I mean, last year they also -- it has been many years in which they had a Central Bank that has been operating in a very modern way, giving a little bit more flexibility to their exchange rate, implementing their inflation targeting framework, maintaining inflation at low levels, developing their capital markets, and continuing the growth of their banking system.

I think fiscal policy has been run in a relatively prudent way. Last year also they complemented that with an important improvement in the institutional framework for fiscal policy with the approval of the fiscal responsibility law. I think also in terms of pushing towards making Paraguay an economy in which they ease of doing business is very good. They have been able to attract investment in this very complicated external environment. So on the one hand, as you were mentioning, their agricultural sector may have been very productive, but not been maybe as productive as other parts of South America. They have complemented this with a set up that has been very friendly to investment. So the whole package has been very conducive to an important increase in investment, and to an important increase in production and productivity, and the agricultural sector.

I think now they’re trying to complement these with trying to leverage and trying to gain the most advantage possible from another source of converting the advantage in Paraguay that is cheap energy and really abandon energy. Therefore, the combination also of these market friendly setup with relative cheap and abandoned energy to also leverage their light manufacturing industry, and also with their policy space trying to reshuffle resources in their budget from current expenditure towards infrastructure.

It’s very hard at this point in time living in a neighborhood in which Brazil is going through very tough times. Nigel was saying Argentina, I mean, let’s say growing a little bit this year, expected to have a small negative growth next year. But I think they have managed to minimize these impacts by implementing both these macro reforms and good policies, but also important micro economic policies to attract investment to the country.

The other one was?

QUESTIONER: Liquidity crunch.

MR. WERNER: I think we discussed a little bit of that. We think that, hopefully, to the extent that let’s say the first step in terms of the normalization process of monetary policy in the U.S. it’s also perceived as a signal that recovering in the U.S. is well-established, et cetera. It has positives and negatives.

Secondly, the Fed has been very clear in saying that this is going to be a very gradual process, so monetary conditions and financial conditions will continue to be favorable to the region. So in that sense the central scenarios, one in which we have a gradual increase in interest rates that countries will be able to accommodate. Obviously, there’s a risk and that’s a little bit of what we go into in our chapters in the WEO. There’s a risk that I think countries have to monitor very quickly, very thoroughly of some financial vulnerability being triggered by this, some portfolio recomposition moving away from emerging markets toward advanced economy. That can generate some important volatility in markets in the region.

I think countries have been improving their policy package to accommodate to this from what they had during the taper tantrum. They did relatively well managing that shock. So within that this time around with the level of resources that they have the policy flexibility they have in the exchange rate and the low levels of interest in the Fed that we’re seeing in the region. That, first of all, the base land case is one of a smooth adjustment, and under the re-scenario they have instruments to cope with this scenario.

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QUESTIONER: You spoke of the sustainability of public finances in the countries of the region, and you mention that there’s some question about the Mexican, Columbian, and Paraguayan fiscal framework. Could you say a little bit more?

MR. WERNER: Well, it isn’t that there are questions or doubts with regard to the fiscal framework. I said Mexico, Colombia, and Uruguay. Mexico, Colombia, and Uruguay, they have very clear fiscal frameworks, very clear laws on the subject.

What we have seen in the last few years, and that’s what I meant to say, is that there has been a deterioration in the primary balance of the last number of years and the public debt as a result of the contra-cyclical measures that were introduced at the time of the ’08/’09 crisis. And so the legacy of that now, in a context that is a little less forgiving than in the past, when we look at the medium-term outlook of emerging markets, what we, of course, see is that it’s going to be very important to act in compliance with the policies that have been set forth. In Uruguay, a five-year plan was announced by the new government. Mexico’s new budget was approved by the Congress on September 8th that speaks, also, of certain targets in the medium term. And the same goes for the third country where there is an adjustment to be distributed over four years in order to meet the four-year targets.

What I say is that what’s important, especially in the current juncture, is that these targets really be met or that every effort be undertaken to meet them because the fiscal space is tight as we see in Chile and Peru. And so that’s what was meant, that the plans that have been set forth, which are coherent, be implemented.

In the case of Mexico and Colombia, I would merely add that the fiscal situation, of course, is ever more under scrutiny because of the drop in the price of oil, and that’s the financial markets taking a hard look at what’s going on there. So the adjustment necessary in those two cases will have to be a little more prompt, a little bit more rigorous.

Thank you very much.

MR. ANSPACH: Good. That brings this press conference to a close. We’re over the time allocated. If you have other questions, do feel free to get in touch with me and I will be pleased to take those questions on board.

Thank you.

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