While the world focuses on the US and China, Britain’s exit from the European Union, G3 monetary policy and Europe’s doldrums, little attention is being paid to economic and financial developments in Latin America. Yet, change is afoot. The International Monetary Fund is stepping up activities in the region.
Argentina is the Fund’s largest engagement, with around half of a $57bn programme already disbursed. The country is undergoing, by necessity, a tough fiscal austerity drive. President Mauricio Macri’s administration, in hindsight, far too gradually restrained borrowing in its early days, only to see Argentina hit by adverse shifts in global market conditions, jeopardising market access. Recession ensued, but the economy is beginning to show signs of growth. Inflation, however, remains persistent, and the central bank just raised interest rates amid a renewed decline in the peso. Argentina is keeping its programme on track.
On 11 March the IMF board approved a $4.2bn extended programme for Ecuador. The previous Rafael Correa-led government spent excessively amid oil price declines and a rising dollar, undermining competitiveness and putting pressure on the dollarised economy. It borrowed excessively to fill the gap. The new government had little alternative but to pursue a more orthodox stabilisation policy course. The new programme will seek to cut back on borrowing and deficits by boosting fiscal sustainability and competitiveness, thus strengthening Ecuador’s dollarisation. As is the Fund’s welcome standard operating practice under Managing Director Christine Lagarde, it also includes measures to protect the poor and fight corruption.
Venezuela’s economic collapse looms large over Latin America. With Nicolás Maduro still holding the reins, the IMF is engaged from afar in contingency planning with other institutions, such as the World Bank and Inter-American Development Bank, preparing for the day when Venezuela may have a legitimate government and counterparts on the ground for the Fund to deal with. The IMF hasn’t been able to set foot in Caracas for more than a decade. Its knowledge about the Venezuelan economy is highly limited and the quality of what little data it receives from the country is suspect.
If there is a proper transition, massive humanitarian assistance will be the initial order of the day. The IMF will first wish to inject emergency assistance – presumably through its rapid financing instrument, though the permissible sums under Fund rules are not great. Critically, the Fund will also need to begin gathering data on the ground, meet the economic team, and develop a medium-term economic and financial plan. That will need to encompass policy reforms, import rehabilitation needs including in the oil sector, and requisite financing, such as official multilateral and bilateral inflows and debt relief. A plan will take time to develop and would probably be supported through an IMF extended arrangement. Venezuela’s debt restructuring may make Argentina’s look easy by comparison.
Mexico has a $75bn contingent flexible credit line arrangement with the IMF, extending through the end of November. The new government under President Andrés Manuel López Obrador is committed to maintaining macroeconomic stability, including a primary surplus, and seems comfortable with central bank independence and the Banco de México’s first-rate team. However, other López Obrador statements and actions are bruising investor confidence. Recent credit downgrades of Pemex, Mexico’s state-owned oil company, highlight that the country faces potential future fiscal pressures and contingent liabilities.
Only ‘platinum’ performers qualify for the flexible credit lines. As Mexico’s FCLs of the past decade testify, the country has consistently been such a performer. The new government will need to decide if it still wants the FCL after November. For its part, the Fund will need to develop relations with the new Mexican team and assess their commitment to upholding ‘platinum’ policies. Given the Pemex downgrades and market ruminations about possible sovereign downgrades, Mexico may well want a further FCL extension to avoid a global investor selloff.
Colombia also has long had a FCL, and the current line totals nearly $11bn and extends through May 2020. Colombia’s record of macroeconomic management in past years has been exemplary. But it is on the front lines of the Venezuelan crisis, and Colombia’s noble humanitarian support for refugees is adding significantly to the country’s fiscal burdens. As recently concluded by the Fund, Colombia faces the hurdle of being mindful of future fiscal and external competitiveness challenges, while tackling structural rigidities.
Ironically, while these Latin developments are afoot, a new Brazilian government is working on tough pension and budget reforms, many of which the Fund has long called for and all analysts agree are essential for restoring fiscal sustainability. But the IMF seemingly has few relationships with Brazil’s new economic team. In addition, the team’s policy orientation seems decidedly to the right of the IMF’s in terms of maintaining effective social protections.
IMF activity in Latin America is percolating. The Fund has a much better reputation with the region’s leadership than in the past. While it may not be on the radar screen of a world mesmerised by Donald Trump, Xi Jinping, Theresa May and the like, Latin America warrants a watchful eye.
Mark Sobel is US Chairman of OMFIF.