Transcript

Transcript of the April 2023 Western Hemisphere Department Press Briefing

April 13, 2023

PARTICIPANTS:

Moderator:

MARIA CANDIA ROMANO, Communications Officer, International monetary Fund

Speaker:

NIGEL CHALK, Acting Director of Western Hemisphere Department, International monetary Fund

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MS. ROMANO: Welcome everybody to this press briefing on the IMF regional economic outlook for the western hemisphere. So nice to see some of you here in person and also connected online. I am delighted to be here with Nigel Chalk. He’s the acting director of the Western Hemisphere Department here at the IMF. Nigel will give some remarks, and then we’ll take your questions.

MR. CHALK: Thank you, Maria. So, let me start the press conference ‑‑ well, first of all thank you for coming, for everybody who’s in the room and people joining online.

So, let me start the press conference with the good news. The region, Western Hemisphere, has proven to be very resilient in the face of multiple shocks over the last few years, and growth has repeatedly surprised on the upside. After growing by 7 percent in 2021, Latin America and the Caribbean grew by a respectable 4 percent in 2022. Output and employment are now comfortably above pre-pandemic levels. Nonetheless, we expect growth to deccelerate to 1.6 percent this year, although we expect most of the region will avoid a recession.

This slowdown is not surprising given though the region’s main trading partners are also slowing. The favorable terms of trade that we saw in the aftermath of COVID its lessened somewhat, and global financial conditions are less friendly than they were a year ago.

The bad news, though, is that inflation remains high across the region. We know this high inflation disproportionately hurts lower-income households, particularly as it has been concentrated in large increases in food prices, and because wages have been unable to keep up with these higher prices. After peaking at around 10 percent in mid-2022, for the average of the region, headline inflation in the largest Latin America economies has now decelerated to around 7 percent in March. However, progress in bringing down core inflation appears to have stalled.

Core inflation in these economies averaged 8.4 percent in February, and for most countries, inflation remains well above the Central Bank’s target range. Nevertheless, we have to commend the Central Banks in the region for their quick and assertive response to inflation, which has been effective in anchoring medium-term inflation expectations and creating an environment for disinflation to eventually take hold.

Restoring price stability is paramount to a healthy economy and, particularly, to protect the most vulnerable. As such, we attach an important priority to quickly bringing inflation back to Central Banks’ target. This is key also to cement the credibility the region’s Central Banks have built over the last two decades. With most economies operating at or above potential, macroeconomic policies should now aim to bring demand back into line with potential output in order to ease price pressures.

Central Banks have already done a lot of the heavy lifting that’s needed. Given the usual lags between the interest rate increases in economic activity, we expect to see the full impact of their efforts during the course of this year. However, we still do not know how persistent inflationary pressures will be. As a result, Central Banks will need to remain resolute in this battle until inflation is unambiguously heading down towards target. This means that interest rates in the region will likely remain high for much of this year and, in some cases, even well into next year.

We also think tha fiscal policy should play a bigger role in helping Central Banks through a more countercyclical stance this year. In 2021 and 2022, the pandemic fiscal stimulus was rightly withdrawn quickly as the economy stabilized. However, this year, fiscal policy is expected to be broadly neutral in most countries at a time when we see unemployment’s very low, capacities constrained, and wage and price pressures have not yet been resolved.

A more contractionary fiscal stance this year and next would help both bring demand back into line with supply but also lower public debt which increased abruptly as a result of the pandemic. By tilting the policy mix more toward fiscal, interest rates will then be able to start to decline earlier; and this would also help lessen some of the potential financial stability risks that we’ve seen emerge in the advanced economies. Calibrating fiscal policy at this current juncture will not be easy. Policy makers need to preserve key social programs and continue spending on house, education, and public infrastructure that are the foundations for longer term growth. Also, the social situation is fragile in many countries in the region and much is being asked from the providers of public services.

However, we do believe there is a path. We see scoped reduced inefficiencies in public spending. We also believe the population is more likely to embrace a more prudent public finance if government services are seen to be provided efficiently. We also think that taxes can be redesigned to both raise revenue and make the tax systems more progressive. The wealthy and the more fortunate should pay more of their fair share to help maintain social cohesion and also to invest into long-term growth. This is a challenging agenda, but well-designed policies can restore macroeconomic stability, can tackle inflation, and can bring down debt in a socially equitable way.

And, finally, let me say a word on the recent banking stresses in advanced economies. So far, we see these problems have had little impact on Latin America and the Caribbean. In part, this is because the direct linkages between Latin America and the troubled institutions in the U.S. and Europe are relative limited. Also, in part, this is a payoff from past investments in the region to strengthen supervision and regulation, and to hold the region’s banks to a high standard.

With these remarks, I’d like to now turn to the questions in the room and online. Thank you.

MS. ROMANO: Thank you, Nigel. Second row, EFE.

QUESTIONER: Hi. Thank you both for doing this. In the blog post, you called for more contractionary fiscal stance in order to address, you know, some of these issues that you’ve been talking about. Can you go into a bit more detail about what this contractionary stance means? Is it, you know, cuts in spending or is it more redirecting spending? Do you see your reforms, such as Columbia’s for example, as a blueprint for the region in this sense. Thank you.

MR. CHALK: So, as I mentioned in the beginning. We do see in the region, there is an imbalance between supply and demand, and this is driving both higher wage inflation but also price inflation. So, what we feel is a need to slow down demand in the region, not to contract demand but to slow down demand just to give a bit more time for supply to catch up and equilibrate the system. We feel fiscal can help with that.

What fiscal measures do we have in mind? Well, certainly, we want to protect social assistance payments. We know that’s important in the region, but those also will come down naturally just because the economies are doing beter and we’ve re-established reasonably solid growth in the reason. We want to preserve investments in education, and health, and in public infrastructure.

There is a lot of work that can be done in the region in terms of improving the efficiency of expenditure. When we look at the scale of expenditure in the region, relative to outcomes ‑‑ for example, in education or in health ‑‑ there’s quite a disproportionate gap between the region and other countries who are spending less and getting better outcomes. So, I think, there’s some improvements that can be made in efficiency. We can see better improvements can be made in public procurement to make the systems more transparent and less lower cost for the government.

We also feel tax reform is very important in the region. A number of countries in the region are looking at tax reform; and, I think, tax reform both to improve revenue collections to fund some of these needed spending, but also, I think, tax reform’s really important to build a sense the system is working equitably and it’s working in the interest of the population; and, I think, we can see clearly the system ‑‑ most countries in the region, their tax system’s just not very progressive. The rich are either able to avoid tax or just not subject to tax because of a number of exemption and avoidance mechanisms.

So, I think there’s a lot that can be done on the fiscal in a lot of different dimensions. It depends very much on the country, by country, which is the most appropriate measure; but, I think, that gives you a general picture.

MS. ROMANO: Thanks, Nigel. Second Row --

QUESTIONER: Thank you, and good afternoon. Mr. Chalk, I have two questions. Yesterday, Minister Pablo Arosemena has said that he has requested IMF financing for natural disasters. What type of credit is being negotiated? And the second question is, could impeachment process of president Lasso in Ecuador affect Ecuador’s growth in 2023?

MR. CHALK: Thank you for those questions. So, on the first question, as you know, we recently concluded a successful program with Ecuador and, you know, that went very well over the past few years; and we have a very close and solid relationship with the Ecuadorian authorities, both as a product of that but just in the continuing engagements. So, we work very closely with them. We have had discussions toward an IMF financing, but we haven’t actually received any request, formal request, from the government on financing. So, I think, it’s a little premature to discuss the modalities but we are working with the country authorities to see what works best for them and what works best for the Ecuadorian people.

On the political process in Ecuador. I’m not going to comment directly on the political process, but I would say, I think there’s a lot of literature in the economics research that shows uncertainty, in general, is very bad for consumption, it’s very bad for investment. So, having increased uncertainty, whether it’s ‑‑ you know, we saw a huge increase in uncertainty during COVID, uncertainty relative to social disruptions, uncertainty relative to the politics ‑‑ I think it makes it very difficult for consumers to plan and so they tend to hold back on consuming, and it makes it very difficult for corporations to think about new investments; and, so, I think we’ve, there’s a pretty close empirical relationship between uncertainty and demand and output; and so, the sooner the uncertainties are resolved, I think the better. Thank you.

MS. ROMANO: Thanks, Nigel. Please identify yourself and where you are coming from. Let’s go to the first row.

QUESTIONER: Thank you. We have a debate about the new fiscal rules in Brazil. What do you think about the new fiscal framework? Do you believe is it enough to stabilize the Brazilian debt, and in this case, do you consider to [change] the fiscal projections considering the new rules? Thank you.

MR. CHALK: Okay, thank you. So, I think, the first thing to say is it’s good that Brazilians are thinking about a fiscal framework and an institutional structure for fiscal policy. I think we’re very supportive of that and we’re very happy to provide cross-country experiences, or international experiences, as the government feels is useful. In terms of the proposals by the government that we’ve seen so far, I think we’re favorably impressed with the fiscal adjustment that’s being proposed over the medium term, in terms of increasing the primary balance, I think that strikes a good balance. It’s ambitious but, I think, it’s also conscious of the social needs in the country, and balancing those two things, I think, is very important. And then there’s a broader effort to revisit the entire fiscal framework and the institutional framework in terms of fiscal rules and stuff. I think on that, what we can see is ideas are still evolving there. I mean we’ve seen some proposals and, you know, we’re looking at them. We have an Article IV Consultation, which will be in Brazil next month and, I think, we’ll have a more detailed discussion on those; and then I would point to the concluding statement from those discussions, I think we’ll have more to say on the institutional framework that the government’s planning. Thank you.

MR. ROMANO: Thanks.

QUESTIONER: Thanks. Nigel, about Argentina. The IMF accommodated some of the targets of the program in the last review due to the historic drought the country is suffering this year. Is there any area of the program that is set in stone? That, you know, it’s off limits to be changed or subject to discussions about potential change. There’s been some talk about some potential changes in the fiscal targets, in particular. Thanks.

MR. CHALK: Thank you for the question. As you mentioned, we ‑‑

MS. ROMANO: No, no. I was going to see if there’re any other questions because we have other reporters in the room. You want to add one? Thank you.

QUESTIONER: You said that the social situation is fragile in many countries of the region. Do you believe that there are risks of social tensions in Argentina since there are high rates of poverty and the government must continue to adjust to policies to sustain the program with the IMF? Thank you.

MS. ROMANO: Let me just mention that we also have a few questions online that are on the lines of what Rafael and Paula mentioned, whether you’ll be considering an ease of the fiscal targets.

MR. CHALK: Okay. So, as you know, we're only a couple of weeks from finishing the review that we completed in March. We went to the Board and disbursed. As you mentioned, it's very clear that the situation in Argentina has become more difficult due to the drought, largely due to the drought.

And we're here to support the Government's program, and I think we agree with the Government's point of view, that when the situation -- the environment for policymaking gets more difficult, that's when policymaking needs to strengthen. And I think the Government is thinking through the dimensions of the ways that they can strengthen policies in order to adapt to the current situation. And we're very happy to work with them. There's an ongoing and close contact with the Government on that issue.

In terms of the social situation, I think that's one of the aspects that's feeding into that discussion of like how to recalibrate, how to strengthen policies in the backdrop of this more difficult situation. I think it's a little early we'll be engaging with the Government for the next review that in the next month or so to have a discussion. So, I think it's a little early to talk about specifics as to where that's going to go. But we're very open to engage to help them with their, develop their own program and to support them as best we can.

MS. ROMANO: Thanks, Nigel. Let's go to Jeremias.

QUESTIONER: Thank you. [inaudible] about the reform Fiscal that imposed by the president of Honduras Xiomara Castro and about the conversation [of] a new program with the country, thank you.

MR. CHALK: Thank you for that question. So, as you know, we have a long track record of support for Honduras. We had a program with them until relatively recently. And we've been consistently providing a lot of capacity development support and technical assistance to Honduras over the past few years.

In terms of the program -- on public finances, I think we very much agree with the Government that there's a real need to prioritize supporting the vulnerable in the country, but also at the same time there's a need to strengthen the public finances. And so, we're, I think, striking the right balance on that is really important and we're engaging to discuss those questions with the Government.

And we also want to make sure that there's a consistent approach on the fiscal policy that's going to allow for a reduction in inflation in the country, which also is harming the poor and we think needs to be addressed.

In terms of program discussions, we're continuing to have engagement with the Government discussing a program. I don't think we have any new developments. They're here right now and we're going to be meeting with during the course of these meetings. Thank you.

MS. ROMANO: Thanks. Let's move to the side of this room.

QUESTIONER: Thank you. My question is on Panama. I'd like to know how do you assess the recovery after the pandemic just in 2020 to the country reached the level pre-pandemic levels in terms of GDP, but not in terms of employment, for instance, some sectors, and I would like to know also about which is the expectation you have for this year and coming years. Which sectors are going to drive growth? Thank you.

MR. CHALK: Yeah. So, as you said, Panama roared back from the pandemic. What happens in the global economy very much happens in Panama. It's very connected both through trade and financial links to the global economy. And so, I think you saw that they took full advantage of the recovery in the global economy, and particularly the recovery in trade, which was very strong because, you know, European and U.S. consumers were consuming a lot of goods relative to services. And so that really boosted trade and I think helped Panama.

This year, we expect Panama to be one of the fastest growing economies again in the region. I think we're starting to see a change somewhat in the business model in Panama is that for the past many years, it's been very much an investment driven economy with investments, really large investments both in the canal and then investments in mining. And then we've started to see a lot of public sponsored investments in infrastructure. And that's been really instrumental in driving the economy.

I think now, those fundamentals are very strong and in place, and I think the shift is ongoing towards more of a service-oriented economy where, where Panama will be able to capitalize on its comparative advantages in things like logistics, in finance and legal services, and in trade-related services. So, I think we do see like this less reliance on investment going forward and more reliance on domestic services as a driver of growth. But the performance has been pretty spectacular. Thank you.

MS. ROMANO: Thanks, Nigel. Let's go there. Second row and then I promise we'll come to you.

QUESTIONER: Good afternoon, could you give us any update on Suriname? We have seen, of course, that the program has gone through the Board. It has a review, but it's been a while since we have an update on the country and the program situation. And also, what's your input on bilateral creditors such as China on thede debt talks? Thank you so much.

MR. CHALK: Yeah, thank you. So, on Suriname, as you mentioned, so we have a program in place with Surinam. The program was going reasonably well, and then around the middle of last year, essentially, we got into a position where we were unable to complete reviews. Some part of that was there was some change in personnel in the Government and some part of that was policy related. We've been having a very close dialogue with Suriname over the past year or so. We've been working quite hard with them to try and bring the program back on track in order to continue with the investments and macro stability that the Government has been making. The authorities are here right now, and we're having discussions with them. We hope that we'd be able to fill the mission soon in order to try and deepen those discussions and come to a conclusion where we can progress--proceed with program reviews.

In terms of the issue on the bilateral creditors, this has been a tricky issue for Suriname. As you probably know, they have a large share of their official sector of public debt to China. And in the program previously, we had basically moved forward on the program on the basis that they were essentially not paying the debt to China and would be eventually restructured.

So, I think we are looking for some progress in terms of that restructuring of the Chinese debt. The Surinamese already reached agreement with its Paris Club creditors and it's close to reaching an agreement with India, which is the other big creditor. And so, I think having some more progress on the debt restructuring talks with China would really help, both help both with the program and help the country.

MR. ROMANO: Gentleman here in the first row.

QUESTIONER: Hi. Regarding Chile, two questions actually. The first is you improved the view about Chile this year, but still we are the only economy in the region who had a fall in the GDP. What is that and why did you improve the view for 2023? This is the first question.

The second is about why you say about the taxes and the tax reform. Since the last review of Chile in January, the Government tax reform was lost in Congress in Chile. What do you think about that and how'd that change the view about the country in the short-term and in the long-term?

MR. CHALK: Great, thank you. Those good questions. Yes. So, Chile is the only country we have contracting this year in the region. As I said, most of the region is slowing, but we don't see recession for most of the region. In Chile, it's contracting. I think you have to take that a little bit in context. Chile grew 14 percent over the last two years, so we're expecting it's going to be a little bit of a pullback and it's going to contract 1 percent this year, but Chile's still in a pretty strong shape coming out of the pandemic very quickly and still quite a bit above even the pre-pandemic trend on output. So, I think there is some moderate adjustment, but I think when you come out of a shock that big, when both supply and demand are shifting in very large amounts due to the pandemic, I think it's not surprising that there'll be some bumps and we see a very short-lived slowdown and then Chile will get back to very strong growth.

On the tax reform, I should say that first of all, Chile has like really strong institutional framework both for fiscal and monetary policy. And I think that's reflected if you talk to foreign investors, if you look at the spreads on Government debt, I think there's a lot of a lot of confidence in the economic management system in Chile. We do think a tax reform is needed. We do think there are a lot of spending priorities there in the economy, including social spending that would be important to fund and for that they, they will need more revenue. We also see there's a lot of good ideas out there, and I think the trick now is for the Government to come together, try and work with the Congress and try and find some common ground in order to move that tax reform forward. The sooner that happens, the better.

As I mentioned before, uncertainty is not great for investment and for consumption, and I think having more certainty about what the tax reform will be good will be good. Thank you.

MS. ROMANO: Thanks. Let's go to the third row.

QUESTIONER: Hi, good afternoon. A couple of questions. One, what advice would you give to tourism dependent countries in the Caribbean region in light of the challenges rising interest rates and all of that, especially in the developed markets, United States and the U.K., which are major source markets for tourism for these countries in the Caribbean.

My second question has to do with the citizenship by investment programs in the region. With the mixed outlook that we've been hearing this week, Economic Outlook, what would you say to those countries, especially, St. Kits, Antigua and those that are still funding social programs even though the pandemic is technically in the rearview mirror at this point.

MR. CHALK: Great, thank you. And it's very nice to see a journalist from St. Kits here. It's not often we see you. So, welcome. So, first of all, let me start with the, the CBI programs, the Citizenship by Investment Programs. So, these have been a very important feature of the region, the Caribbean and particularly for St. Kitts and we're generally very supportive of those. They've generated an important amount of revenues for the country, and those revenues offer the potential to be deployed in a range of areas. And there's lots of needs including as you mentioned, to some extent social spending, but also the region is very prone to hurricanes. There's a lot of need to make the infrastructure more resilient to adapt to climate change and also to decarbonize the economy because the countries are very exposed to big shifts in global fuel prices.

So, I think on the whole, the CBI program has been important in these countries. I would point to two things. Thinking about how describe them. First of all, this revenue is very volatile, so I think you have to be very careful about spending that revenue in a lumpy way. So, we prefer a system where the CBI revenue is basically saved, and some spending is derived from that revenue basically through the stream of income that those savings creates. That's a more stable system rather than having kind of stop go spending linked to depending on how much CBI revenue you get in a year.

And I think it's really important to maintain the integrity and actually to improve the integrity of these schemes given their reliance on, sort of, recognition by some of the larger economies. And then that the ECCU is moving ahead actually. I think recently they had a press release that they're moving ahead to improve the integrity of these schemes in conjunction with some of the larger economies.

In terms of on the general advice on tourism dependent economies, you will seen in our global forecast. We think the U.S. economy's going to slow, but it's still growing pretty strongly. And one of the aspects that's going on in the U.S. economy right now is there's a shift from goods consumption to services consumption. So, even though the whole economy is slowing, that shift from good to services is actually good for the Caribbean, it's good for tourism dependent economies because Americans are traveling more. They're investing more in leisure activities and so forth. And so that's proven, I think we've seen across the region, the Caribbean, that's proven quite a big boost to the economies.

We don't see a recession, so we feel that that potential flow of tourisms is going to be maintained, but I think it would be prudent for the countries in the region to think about what would they do if it were to slow, if the U.S. were to slow down, if interest rates in the U.S. had to go higher in order to bring down inflation. Not as a baseline scenario, but more as contingency planning in case the U.S. were to slow down. And the same is true for Europe as well, because they're very reliant on Europe. Thanks.

MS. ROMANO: Thanks, Nigel. Let me just mention one question that came online on El Salvador and then we'll end up here in the room. This one is from El Economista and she's asking, is the IMF officially in talks with the Government of El Salvador for an EFF arrangement? If so, what stage is it in?

MR. CHALK: Okay, so again, yes, we're engaging with the country authorities in El Salvador. We've actually been talking to them for some time. We've recently just finished the Article IV discussions. And I think that those documents are either published or about to be published. So, there is a potential for a program there. I don't think, again, we've had a request for a program. We're just in preliminary discussions, so we don't have a particular timetable. But we're willing to help. We're listening to the authorities and trying to find something that best fits their needs.

MS. ROMANO: Yes, please. We’ll finish.

QUESTIONER: Thank you very much. The Brazilian newspaper, Folha de San Paulo. So, Brazil’s president Lula said today in his trip to China that the BRICS countries should use their own currencies in global trade to replace the dollar. And we also discussed that some months ago with Argentina a common currency for foreign trade. So how do you see this idea of de-dollarization in the region and also, if I may, Lula criticized the IMF today in the same speech saying the IMF is choking the economy of Argentina. I’d like to hear your opinion on that.

MR. CHALK: So, on the first point, so I think we see the kind of constellation you currently have in terms of the degree to which the dollar is used as in trade and finance, as reserve holdings. We basically view that as a market-determined outcome. I don’t think there’s any sort of great plan behind it but it’s more as a market-determined outcome. I think it reflects a number of things.

In order for a currency to be usable both in trade and in finance, there needs to be a lot of underpinnings, institutional underpinnings, that would support that. So, for example, you need to have relatively deep and liquid financial markets. You need to have the availability of dollar funding in order to provide, you know, resources for trade. Both exporters and importers would like to denominate their currency in the dollar. All of those things I think are happening sort of organically. I don’t think that that’s being somehow designed.

But once you have that in place it’s very different, very difficult to move away from that ecosystem because you have to create a lot of supporting structures in order to move away. So, I think, you know, we saw some, to some extent that happened with the Chinese internationalization of the Renminbi, that there was sort of an increase of offshore Renminbi financial instruments, offshore Renminbi lending, clearing facilities, markets and institutions, so it’s not impossible to do. I think it’s a feasible thing to do, but I think it takes a lot of investment and it’s not just an investment in the trade side, but you also have to map that with an investment and also, you know, the usability of the currency, the reserve status of the currency and financial markets and infrastructure that go along with it.

On Argentina, as I mentioned before, we’re here to support the authorities’ program in Argentina. So, I think the authorities have calibrated their program in a way that they think is the best way to do it for their own domestic circumstances that balances the need to stabilize the economy, bring down inflation, but also with the social needs in the economy, and the Fund is always here to support the authorities in that effort.

MS. ROMANO: Thanks, Nigel. I think that we are, we are going to conclude right now with the press briefing but we’ll follow bilaterally if there are any questions that were left. Thank you so much for those who are joining online and hope you have a good day. Thank you.

MR. CHALK: Thank you.

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