ROUNDTABLE
In an exclusive LatinFinance roundtable, central bank governors single out global trade disruptions as among the greatest threats to their economies
BY DANIEL BASES
The give and take of the global trade war between the US and China has created a wave of uncertainty regarding investment and growth in the region. Just as worrisome is Britain’s exit from the European Union, which is hitting the crucial tourism sector hard. The IMF/World Bank sees Latin American and Caribbean economic growth rising to 1.8% in 2020 from 0.2% in 2019 and could reach 2.7% by 2024.
Joining LatinFinance for a roundtable discussion on Oct. 17 during the IMF annual meetings, six central bank governors described the threats to their economies. Participants were Verónica Artola of Ecuador, Richard Byles of Jamaica, Rodrigo Cubero of Costa Rica, Alejandro DÃaz de León of Mexico, Cleviston Haynes of Barbados and Héctor Valdez of the Dominican Republic.
These are the highlights from the discussion, edited and consolidated for space and clarity.
ON THE GREATEST THREAT TO THEIR ECONOMIES
DÃaz: The reduction of oil prices and the reduction of oil volumes has significantly changed the external accounts in Mexico. For many decades you used to have oil trade surpluses in Mexico. Now you have oil trade deficits and sizable trade deficits. And you used to have non-oil trade deficits, and now we have non-oil trade surpluses. So this recomposition in the external accounts required a real exchange rate depreciation. I think in our region we have had several countries experiencing real exchange rate depreciations.
In the case of Mexico we have had uncertainty regarding NAFTA. It has been a major obstacle for investment and an element that has weakened global demand. We have come a long way in terms of having a negotiation and a package that is still pending legislative processes in the US and Canada. And we understand that it has a time of its own, and we hope to see that work out--the sooner, the better. Also I think that the change of administration in Mexico has also introduced some idiosyncratic elements of uncertainty. Those I think are the key elements that we have around the Mexican economy, that have driven GDP a little lower. I think this is clearly close to what the world is experiencing as a consequence of the trade tensions.
“In the case of Mexico we have had clearly uncertainty regarding NAFTA. It has been a major obstacle for investment, and an element that has weakened global demandâ€
— Mexico Central Bank President Alejandro DÃaz de León
I think that probably in the case of Mexico, we saw some of these effects earlier. But I think there is a commonality of trade tensions, which introduces a lot of uncertainty. We know that uncertainty weighs heavily on investments. Also trade and manufacturing has been affected in general by these trade tensions. And to compensate for the adjustment, which is lower global growth, it also implies lower inflationary pressures and lower interest rates throughout the world. And that has, in a way, benefited the region with a trend towards lower cost of finance and lower yield curves throughout the region.
Valdez: In the case of the Dominican Republic, and this has happened throughout Latin America, there’s been a complex external panorama of global uncertainty, negative expectations, fundamentally because of disagreements with the United States and China and also the disorganized Brexit in the United Kingdom. For example, in the case of the Dominican Republic, the hotel sector, that normally benefited from European clients, visits from tourists, Spanish tourists, French tourists, English tourists, that was very significant. That has gone down significantly. This has to do with the situation in Europe, and the situation in the European Union.
[LF: A series of deaths among tourists in the Dominican Republic drew worldwide headlines in 2018 and 2019]
Artola: These past years that President Correa was in charge of the presidency in Ecuador, the main important sector in Ecuador was the public sector. Now we are trying to make the private sector the main one in Ecuador.
But we are facing some problems. Like Mexico said, international investors are not coming to Ecuador because of the risk seen in Ecuador.
[LF: In March 2019, the IMF approved a $4.2 ln financing deal for Ecuador]
With the IMF or without the IMF, I am pretty sure that we must consolidate the fiscal sector. We have a deficit around 6% of the GDP. So we must reduce it. We need around $8 billion each year to finance the fiscal sector. That’s a lot of money. The debt [structure] that we have is not as good as we want. We must change the reality of the external debt.
Cubero: What are the main threats to Costa Rican growth? I’d start with the external. We have deceleration in the world economic growth rate, but also, and more importantly, deceleration in global trade. We know global trade right now is pretty much stagnant. That is a factor that affects a very open economy like Costa Rica’s. But also we have the uncertainty. That cloud of uncertainty lingering over our countries is really affecting investments and business plans in Costa Rica.
“When you look at the history of our debt buildup, a big portion of it has to do with fixing infrastructure after these natural disastersâ€
Richard Byles, Jamaica Central Bank Governor
And the elephant in the room is the fiscal situation. We were near a fiscal crisis last year. It was fortunately staved off as a result of the passage of a fiscal reform in December 2018, which was necessary to restore sustainability in the public finances.
We have a deficit that is reaching 6% of GDP. Our debt-to-GDP ratio is around 58%, estimated for 2019. And the debt will continue to grow and the deficit will probably continue to grow, despite the reform for the next two or three years.
But without the reform, the sustainability of the public finances was not there. The debt was on an explosive path and would have reached probably over 100% in a matter of 10 to 12 years. So now, the beauty of this fiscal reform is that it really tackles the roots of the fiscal crisis. So next year the key threats for Costa Rica will be the external ones. I think the domestic ones are becoming less important.
We’re a little bit, like Keynes used to say, pushing on a string. The uncertainty is actually preventing better financial conditions from materializing into more consumption and investment. And the take up of credit is not materializing precisely because of that uncertainty.
Haynes: So since last year, from mid-June, with the new administration, there has been a change in the overall policy framework. We have reached out to the IMF for support under an IMF four-year program. A major aspect of this program has been a debt restructuring, both domestic and foreign. We completed the domestic component because a substantial portion of our debt was actually domestic, rather than external. We are in the process of bringing closure to the external debt restructuring.
[LF: the day after this discussion, Barbados announced an agreement with international creditors to restructure its foreign debt.]
Like everyone else, we are concerned about external developments. As a tourism-based economy. What happens in the UK is of particular interest to us, because a substantial share of our tourism comes from the UK market, and the other substantial share actually comes from the US market. So what happens in the global economy has the potential to impact our economy, if not immediately, several months down the road because some of these things tend to lag.
The other issue we face on a small island economy is our vulnerability to climatic shocks. One of the difficulties of a small economy is that, when you get these shocks, it impacts the whole economy, as distinct from some small segment, as it may in Mexico or the US.
With a small island economy, these storms cover the whole island. That really is the major concern that we have, and something which we are focused on, because all the work that we’re doing to improve the fiscal, and you get one of these shocks, you’re back to square one.
Byles: The challenges that we face to growth today, in terms of trade with commodities, have both a beneficial and a negative effect for us. We still have large bauxite deposits, so aluminum prices are very sensitive to those, and those have gone down, resulting in the closure of some of our bauxite and aluminum producing plants. And that’s been a very big negative for us. On the other hand, oil prices being where they are, compared to where they were a couple of years ago, is a big benefit to us. And commodity prices, generally wheat, soy, which we import quite a bit of, those are pretty low and pretty stable and have been a benefit for us.
We have another six years to go before we can get to 60% debt to GDP, so we have to stay very focused on that issue. But because of that, therein lies a big threat to our growth. The act of being very tough on the fiscal side and paying down the debt is a drag on growth, in the sense that the government doesn’t have the ability to make the capital investments that we need to lay the foundation for growth.
Like Barbados, I would say that a very big threat to us is natural disasters. When you look at the history of our debt buildup, a big portion of it has to do with fixing infrastructure after these natural disasters. So we are exploring avenues of de-risking in respect to natural disasters, talking to the IDB about it and creating a special fund internally to reduce contingencies.
ON PAYMENT TECHNOLOGY AND THE CASHLESS SOCIETY
DÃaz: In emerging markets I think we can get an additional huge benefit, which is financial inclusion. In the case of Mexico we have a payment system, an RTGS system, Real Time Gross Settlement system, that allows for immediate execution of payment. and that is provided by the central bank.
We have more than 30 million Mexicans that have a smartphone, and they don’t have a deposit account. The fact that we can make the smartphone a payment device will push them towards opening a bank account and that will allow for a very significant financial inclusion.
I think central banks’ role in the payment system and developing networks is critical. So this service is going to be zero cost, zero charge, to make it at as close as a substitute to cash as possible, so neither the buyer nor the seller are going to pay any fees. And this has a strong support from the banking sector community, because they understand that they have more than 30 million Mexicans to serve financially and this is the way to open the door for them. But it has created tension, obviously, but I think there is a conviction that it’s a very important step to promote financial inclusion.
Cubero: The issue of cryptocurrency is a little bit of a red herring, but certainly there is a little bit of a threat of currency substitution coming from all these crypto assets, whether crypto or not, digital currencies. And some central banks are thinking of issuing central bank digital currencies. I think that is actually only a partial solution to a deeper problem. The deeper problem is: do you have a good, reliable, efficient, low cost real-time payment system at the digital level?
And if you provide that, and if you manage to provide that highway, then the legal tender should actually circulate through that highway without a threat from other currencies, because to the extent that there is already a system that works, everyone wants to use that system.
“We need around $8 billion each year to finance the fiscal sector. That’s a lot of money. The debt (structure) that we have is not as good as we want. We must change the reality of the external debtâ€
— Veronica Artola, Ecuador Central Bank manager
Artola: A couple of years ago at the central bank we were managing the mobile payments, but then private banks were telling us that was a reason, for example, to de-dollarize the economy. So there was really big propaganda against the central bank managing the mobile payments. There was a decision to take the central bank out of mobile payments and only the private banks now are doing that.
I think that the Mexico experience is really important for us because the central bank is the institution that must do that, not the private banks. Private banks only want to charge, they are not trying to get some financial inclusion, they only want to get some money.
