IMF: Brazil Is Reaping Fruits of Past Policies

This year, 2004, is proving to be a very important year of recovery and growth for the Latin America. Developments have been even more favorable than we expected. In particular, the recovery in Latin America has strengthened further and broadened from the initial upturn in exports to increasing strength in domestic demand.

As a result, growth this year should be the strongest since 1997. And despite the stronger activity and the rising commodity prices that we of course all see, inflation in the Region has generally remained well-contained, and policymakers have continued to use the favorable environment, both domestically and externally, to strengthen their economies.

Of course, challenges remain. The main challenge is how to entrench and lock in the higher growth that we are seeing into the medium term and raise living standards across the Region.

Let me just say also that the generally encouraging picture for the Region owes much to the performance of the United States, which has continued to provide considerable support for the rest of the Hemisphere.

Let me give you just one number: U.S. imports from Latin America were at least 20-percent higher in the first half of this year compared to last year. This gives you a measure of the support being provided by demand and growth in the U.S. to exports from the rest of the Hemisphere.

In Latin America itself, the pace of the recovery, as I have said, has exceeded our expectations. Growth this year in the Region as a whole is now expected to be around 4.5 percent, which is at least half-a-percentage point higher than we had anticipated just six months ago.

The key point about the higher growth rate that we now see is that domestic demand is leading growth, and is also quite broad-based; both private consumption and business investment that we see are growing briskly.

Growth in the Region should remain relatively strong next year, should be at least 3.5 percent. Of course, there are risks, both upside and downside, that we will have to weigh as we come to the coming months.

Briefly, a word on the policy framework of our countries in the Region. As I said, governments have recognized that this environment provides an important opportunity to press ahead with reforms that address the weaknesses and vulnerabilities of their economies. Certainly much has been achieved in the last couple of years.

We have seen, most importantly perhaps, a huge swing in the Region’s external position. You only have to look at the turnaround in the trade and current account of both Argentina and Brazil to see how much the external positions have swung into surplus over the past year.

On the fiscal side, too, we see that the governments in the Region are using this period of recovery to strengthen their budget positions, improve the structure of their public debt, reduce the public debt levels, and try to make decisive progress with fiscal vulnerabilities.

Looking ahead, what are the areas that we believe countries need to focus on in order to put the recent achievements on a sustainable path?

First, I will underscore the importance of further bringing down the public debt through continued fiscal consolidation. Public debt remains high in many parts of the Region, and paying down the public debt through curbing nonessential spending and boosting revenues would also allow higher spending on infrastructure, both physical and social, while ensuring a sustainable fiscal position over the medium term.

Second, I would point to the need for continuing and further institutional and structural reforms. I have spoken about this frequently in the past. This agenda includes measures in the corporate sector, the financial sector, labor market, trade liberalization, and so on. These are the more fundamental structural reforms that will, of course, take time to develop, time to gain consensus on domestically, and time to implement.

But this period of recovery is the time for governments to do, as they are doing, by seeking consensus to raise their efforts in these areas.

Finally, we are seeing some threats to inflation, both in the Region and outside. These threats, as you know, come in part from higher oil prices that we have seen. Therefore, it is crucial that in the Region, inflation remain contained.

The Region has already built up a track record over the past 10 years in keeping inflation low despite several shocks. And much of this has been achieved in the context of inflation-targeting regimes.

Therefore, it is important, as central banks are doing across the Region, to contain the second-round effects of the higher oil prices, contain other pressures through monetary policy adjustments that will keep inflation low as we look ahead.

QUESTION: In the World Economic Outlook the IMF says that growth gathered strengthened in Brazil, but vulnerability still remains. Given the fact that high oil prices are putting inflationary pressures, the central bank in Brazil is already thev tightening monetary policy. Now, do you think that Brazil should keep in 2005 the recently raised 4.5 percent primary surplus target for 2004 in order to alleviate the tightening cycle?

MR. SINGH: You know, this is not a straightforward answer. There are many factors involved.

Let me first say that we welcome very much the steps the Government has taken in recent weeks to further strengthen their policy mix. As you said, they have raised the primary surplus to 4.5 percent. This will allow them to pay down the public debt faster.

They have taken steps with interest rates to ensure that inflation in Brazil remains well within the target range.

As we look ahead into 2005, it will depend on a number of factors. It will depend on the state of the external economy. It will depend on the pace of the domestic demand. It is therefore too early for us to say what or whether the target for next year should be adjusted.

As you know, we have full confidence in the assessment and judgment of the authorities, so we will be discussing with them later in the year what is their assessment””but I would not like to second-guess that. The government has built up a huge track record with considerable ownership, and we should respect that.

QUESTION: Would like to comment on the discussions with Brazil for a program that will succeed the current one?

MR. SINGH: On Brazil, the current arrangement, remains in effect through the first quarter of next year. There are still six months to go and it is way too early to start discussing what will happen after that.

We know what the government’s intentions are, so if there is any change in their intention, I am sure they will inform us. But at the moment, I am not aware of any new development that affects our relations, which remain very close.

I think oil is a very important issue even though for many countries, in the South in particular, oil is less of a problem than it is for countries in Central America and the Caribbean. So the effect of the high oil price is not uniform, obviously, and many countries in the South are protected, and some will clearly benefit.

QUESTIONER: I have two questions””one, on the emergency credit line that the Brazilian Government is proposing. What is your opinion on that? Do you suggest precautionary credits that would be some kind of thing that wouldn’t be necessary in the program, only a kind of reviving of CCL (Contingent Credit Line: see Press Releases No. 03/207 and No. 99/14), but with different conditions.

The second one is about the sustainability of growth in Brazil. We seem to be in a trap””every year that we have higher growth, inflation seems to come back, so either we have to raise the surplus or the interest rates, and this hinders the growth ahead. So I would like to know what Brazil needs to do to be able to grow for a longer number of years, without inflation.

MR. SINGH: On the first issue, the issue of any changes in Fund instruments has to be discussed by the Executive Board. And I know there is a discussion at the Board currently about these issues, but this is not an area where I have any further information than you do. So we will have to wait and see how matters progress at the Board in the coming months.

Now, about Brazil, I would not be so pessimistic as you have expressed your question. I remember six months ago when I was in Brazil, and we said that we can be reasonably confident that by the middle of the year 2004, Brazil should be growing strongly. And I was greeted in São Paulo by a lot of skepticism. And I said, no, we can be reasonably confident of that because we see this in the leading indicators.

And sure enough, we have in the second quarter of this year growth at an annualized rate of close to 6 percent-quarter over quarter-and in the first half of the year, it is over 4 percent over the period last year.

Now, about the sustainability of this, let me just say that we need to look at the structural reforms that Brazil has carried out over the years, and there have been a number of important structural reforms including in the fiscal area, including in education spending, across the spectrum. And many of these reforms take time to effect growth.

I do think that we are now coming into a period where the dividends from past policies are taking root. So I think we can be much more confident now about the sustainability of Brazil’s growth than perhaps we may have been five or six years ago.

Let me just say one more point on Brazil and changes in the structure. I think if you look closely at the export performance of Brazil in the past one to two years, you will find a kind of sea change. You see a structure of exports that is much more diversified, both in terms of composition and in terms of overseas destination.

There is much greater dynamism and strength in Brazil’s exports. This is a new phenomenon, and I do believe we are seeing the beginning of it. But it is a sea change, and the changes in the export structure are a leading indicator of the changes in the structure of the economy as a whole. And that is what gives me much more optimism that we are perhaps at the beginning of a broad-based trend of higher trade shares, openness and growth in Brazil.

Excerpts from the Press Conference on Latin American at the International Monetary Fund on October 1, 2004.

Anoop Singh is the Director of the IMF’s Western Hemisphere Department


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