March 11, 2014
IMF's Werner: "Systemic inflationary processes affect economic growth"
By Liliana Franco, from Washington DC
The relationship between the International Monetary Fund (IMF) and the Kirchner governments has always been complex. However, a few days ago the authorities decided to establish a cooperation agreement for the creation of the new National Price Index released yesterday. It is for that reason that the organisation has intervened in the index that replaces the old IPC, in an effort to regain credibility. The index's Janaury debut cut the gap between measurements prepared by private economists and released by the opposition in the National Congress - 4.61 percent for the first month of the year.
In any case, the 3.71% announced yesterday by the government will most likely still be contested.
The Director of the Western Hemisphere in the IMF, Alejandro Werner, in an exclusive interview given to ambito.com and Ambito Financiero in his Washington office, said that "the publication of the new index was an action stipulated in the Executive Board of Directors' decision," and clarified that the issue would be "examined" in the coming months. It is important to remember that the first analysis of the IPCNU will be put before the Board in May, and an official opinion is expected within the year.
Werner occupies the Fund's highest position on the American continent. He was born in Argentina (Córdoba), but moved to Mexico in his youth. With a doctorate from the Massachusetts Institute of Technology (MIT), he was undersecretary of the Treasury and in other positions before entering the international organisation.
On referring to international prices for materials and the risks that emerging markets face, the director warned that "we are no longer in a world where agricultural prices grow continuously, and the most likely outcome is a descent," while recommending that "countries have to start adapting to that new situation."
The official estimated, however, that emerging markets would be aided by the United States' recovery and, speaking on Janet Yellen's recent speech to Congress, believes that healthy communication of the Federal Reserve's monetary policy is vital.
Asked about the way to confront inflationary processes, Werner maintained that "when inflation takes a large part of added demand growth, any programs also comes together with an element of containing the growth of demand." Put another way, in certain circumstances Werner saw as necessary the halting of demand in order to face inflation. He warned that "an inflationary process that is already rooted and accelerated leads to increased uncertainty, which affects economic growth, while putting the analysis in context; "if uncertainty is fought, the regressive impact on the added demand component will be more than compensated by the effects of credibility."
In spite of the football World Cup, the Fund does not predict an acceleration in Brazil's economic growth, which will be very similar to 2013's figures with a growth of 2.3%.
With regards to the role the IMF will play in negotiations with the Paris Club, Werner signalled that his organisation is "a passive participant."
Asked about recent articles in the US speaking of a possible economic crisis in Argentina, the official explained that there was concern among investors for what is considered the vulnerability of emerging markets, although he pointed out that "Argentina is the place that stands out most, because it is where we have seen most volatility with the growth in the exchange rate to 8 pesos per dollar, and a rise in interest rates of almost 900 basic units."
Throughout the interview he looked cautious about opining on the progress of the Argentine economy, after explaining that "no dialogue exists with governmental authorities" outside the remit of the price index. Werner, with a strong Mexican accent, added that he "will not think about returning to Argentina until Independiente go back to the Primera A".
Venezuela and Argentina are facing price problems. In those countries, governments have rejected the policy of cooling down the economy to fight inflation. Is a cooling inevitable to beat inflation or are there other possible paths?
From a theoretical point of view, there are cases where inflation is determined by factors of inertia or others that could have an answer through a program of coordinated expectations and which lead to a deceleration of inflation and a recovery of economic growth.
There are also cases where the regressive effects of anti-inflationary programs have been more than compensated by the positive effects of the reduction in uncertainty and growth in confidence, with important recoveries for investment, as in the cases of Ireland in the 80s or 90s which are always cited as a stabilisation with an expansionary effect.
Now, when inflation takes a large part of added demand growth, any programs also comes together with an element of containing the growth of demand to see to these fundamental causes of the inflationary process. While the packages are designed in a way that attends to expectations along with the contention of added demand, the regressive effects will be minimised and the final result will depend on which effects persist or become larger. An inflationary process that is already rooted and accelerated leads to increased uncertainty, which affects economic growth. If uncertainty is fought, the regressive impact on the added demand component will be more than compensated by the effects of credibility.
The Central Bank is lifting rates. Is that a path to contain inflation?
Without holding talks now with the Argentine authorities it is very difficult to give my opinion, and if we had these talks the Argentine authorities would be obliged to give their explanation. Lots of measures have been taken and one has to understand the entire consistency of the program. So, without a clear dialogue with the authorities, it is difficult... The only thing I would say is that we have seen a lot of emerging markets act on the monetary front this week, in the case of Argentina we see an important move in the shape of raising interest rates, as in Turkey, South Africa, but we saw at the root of this volatility, a big move in the actions of the central banks in the last three or four weeks.
This Thursday January's inflation of 3.71% was announced, far from private measures. Do you consider that the new index appropriately reflects price levels in Argentina?
We have taken note of the launch of the new IPC. One must remember that the publication of the new index was an action stipulated in the Executive Board of Directors' decision in December 2013 with respect to the provision of data in Argentina to the IMF. The next step of this process will be that the Board looks over this year following the calendar that was decided in December 2013.
Are you satisfied with what the Argentine authorities have done up to now with regards to the National Price Index?
Much work was done last year. There was a lot of interaction between our technical teams, particularly with INDEC, there were a lot of methodological discussions. This was the base of the report that was taken to the board in December and with that base, the board agreed to wait until March at the latest for the publication of the new index. Then there are other dates to report to the board and continue monitoring the publication of this indicators so that eventually next year there will be a final meeting of the board to evaluate the situation. To resume, the work we have brought before the board in December was a document that allowed us to say that Argentina had worked on the new index and, as the board decided, it was correct to wait and see the publication of the index in order to restart the discussion.
What are the functions that the Fund as an observer has in relation to negotiations between Argentina and the Paris Club?
I believe the Paris Club should explain clearly how the role of an observer works. In the case of something countries where an Article 4 is being carried out (annual revision of principal macroeconomic data), and the Paris Club has asked for an analysis the Fund has prepared, it is self-explanatory, that analysis is contributed. But really, it is the role of a passive participant in the Paris Club meetings.
In the event that the Paris Club asked the Fund for an evaluation of the proposal made by Argentina, would the Fund lean on article 4 or would they prepare a special report?
It would have to look over how the cases are, we would have to see how other cases in which something has been requested of the Fund have been, but we would have to look over the procedure. Since we have not dealt with any of these types of cases recently, we do not have that information to hand.
I do not have to explain to you that since 2006 Argentina has not had article four. On that topic, judging on coversations, do you see an article four being carried out in the current year?
As always, it will depend on the Argentine government. We are, as with any member country, willing and ready to carry out an article four as we do with the rest. We have people who have the knowledge, even if we do not go there, of the Argentine economy's numbers, and whenever Argentina needs it, we will be ready to go.
But there has been no talks on the subject?
No. We have maintained a very constructive and fluid conversation about data, but that has been the centre of our talks.
Have you had any conversations with the economy minister, Axel Kicillof?
In recent times, the US press has published several articles warning that Argentina is heading towards economic crisis. How much truth do you believe is in these opinions?
Due to the problems that have emerged simultaneously in emerging markets, we have seen clearly a series of media articles talking about the possibility of problems in those markets. As we mentioned before, in the case of nations with slightly higher inflation, current account deficits and low reserves they are seen as more vulnerable. I think that in this discussion, the fall of reserves in Argentina over 2013 and associated volatility has obviously led to this type of article, but it is in a context of weakness in emerging markets.
But let us agree that it is not every day that articles are published about Argentina in US newspapers...
In the last four weeks there has been a clear increase in the volume of new about emerging markets and Argentina is the place that stands out most, because it is where we have seen most volatility with the growth in the exchange rate to 8 pesos per dollar, and a rise in interest rates of almost 900 basic units.
How will the measures taken by Argentina affect countries like Uruguay or Paraguay?
Trade links are important, but less so than in the past and the Paraguayan and Uruguayan economies are in a less vulnerable situation. They have higher reserves, the financial ties with Argentina are smaller than in the past, therefore the chance of the situation spreading is reduced. On the one hand, the fact that Argentina is affected by the impact of exchange movements on products imported from border nations is obviously going to have an effect, as well as in tourism and eventually on foreign investment that has been moving on those two countries. But we believes that the level of contagiousness is less than in the past, because if one looks at the financial and trade links there are fewer than 10 years ago.
Soy and Football
What would you highlight from Janet Yellen's speech to Congress? Do you think that her concern for employment implies that the Central Bank will be very cautious about removing stimulus and therefore will favour market progress, tending to preserve financial stability?
The best scenario for the world is that a solid recovery in the US economy occurs. In that scenario a state of normalisation in the United States' monetary policy, which started with the announcement of "tapering", consisting basically in the reduction of the stimulus from 85 billion dollars to 75 billion, then 65 billion and so on until disappearing, will come. But continuing with an interest rate basically of zero. What the markets hope is that eventually in the middle of next year, short-term interest rates will start to rise.
Based on Ben Bernanke's announcements last year, the markets have started to push forward on long-term interest rates in monetary policy and there is not a certain volatility. In our vision, the most important thing is that the US economy recovers in a solid fashion and that monetary policy is driven in a clear manner and with strong communication so that markets understand the goals and can forecast clearly when certain movements will occur.
In the last few days devaluation in Argentina, the rise in interest rates in Turkey and in general, investors' concerns for those countries that, like India, have problems in their overseas accounts have created worries for the futures of emerging markets. Have risks for emerging nations grown?
We have seen a situation in which markets have responded, on some occasions, generally before the start of tapering, but later we have seen that, little by little, the markets have discriminated more between economies with more or less solid foundations. And the economies that have suffered most are those that have large current account deficits, inflation problems and small international reserves.
So obviously, countries have to strengthen those most vulnerable areas. There is a space to have better talks between authorities of different countries so that in terms of information, there is fluid communication. We are seeing medium-term movement towards a more regular situation in terms of the United States' interest rates. That is why for those countries who have had large debt increases and who were being financed with savings from overseas, it is going to be more costly and it is probably going to create volatility, while some investors will want to take away their funds from those markets.
It is not Argentina's case, because they had practically no capital investment, but Brazil's...
Yes, it is the case in Brazil, Mexico, Peru, Colombia, Chile to certain degress. The movement that has occurred in these weeks has happened in the context of a discussion on tapering, and on the Chinese economy...
What risk is there precisely that the Chinese economy sees a strong deceleration in its growth?
We are seeing a central scenario in which the Chinese economy grows at 7.5% which is very good (last year it grew at similar rates, although this includes a large deceleration with respect to the two-digit levels) but we believe that this scenario is very probable.
Now, what many analysts have pointed out as a factor for concern, is that in the last five years following the international financial crisis China has seen a large investment boom - the investment rate in China has growned almost six GDP points and is close to 50%. There was also a high growth in financial intermediation, much of it outside the traditional banking system, of almost 60% of GDP.
The Chinese authorities, in recently announced financial plans, show clearly their intention for investment to be reduced in the Chinese economy and for an increase in consumption, which they call a rebalancing of growth sources in favour of added demand, and they have also announced their intention to limit credit. So, lots of investors are concerned about how smooth this rebalancing will be and how, in the transition to this new balance, we will not have any surprises: for investment to contract first, before consumption recovers, with its implications in economic growth. Every time there are poor industrial production statistics in China and when there is data showing problems in liquidity, the financial markets worry about possible economic deceleration.
But you cannot see a sharp deceleration happening?
We are hoping for this central scenario of 7.5% growth to take place, and to see some indications of this rebalancing. It is a medium-term plan. The risk that this plan presents a problem in terms of economic growth this year will be monitored and followed by us, but we do not believe it will be too serious.
In Latin America some countries, particularly Argentina, are dependent on the exportation of Soya for the entry of foreign currency. What are the price predictions for this prime material?
What we predict over the next three years is that the price of agricultural products will see a slight descrease in the medium term. Even in the correction scenario of China, what commodities analysts are saying is that metal prices will suffer more than foodstuffs. And in the rebalancing process, with the growth in consumption, foodstuff will have to be defended more than products that are used in investment processes. However, we are no longer in a world where agricultural prices grow continuously and the most likely case is that they decrease. Countries will have to start adapting to that new situation.
And what will happen with petroleum?
Again, looking in the medium term, we will see a drop in petrol prices. Maybe this year it will hold up ok, due to supply issues, but we are predicting a fall of around 15%.
The progress of Brazil is very important to Argentina. Growth in that country has been disappointing. Do you see any chance of a significant improvement in the short term?
We will see a growth in Brazil's economy that is very similar to that of 2013, 2.3%. Investment is low with regards to the product, growth in total productivity is low and now unemployment is also at a very low level, which means it is not so easy to keep growing pushing the limits of the economy. Every analysis points to the fact that the Brazilian economy is close to its potential limit, so it is not the case that it has space to grow closing a gap because it has idle resources. To start to grow more, we will have to see a big recovery in the investment rate. The government is making efforts in the area of infrastructure, but it is an effort that will take time to make an impact on such a big economy. If Brazil is investing 19% of their GDP, when other countries have rates of 25 or 27%, a big challenge for Brazil is seeing how to encourage a process of investment.
Will the football World Cup not help in this sense?
The contribution will be marginal for such a large economy. Besides, it has two sides, on the one hand the added demand that could see some growth, but with regards to added supply there will also be lots of days without work, also due to issues of logistics, etc it has been decided that there will be lots of non-working days in June and July, so we predict a slightly positive effect, but very small, from a statistical point of view non-existent.