XVII Annual Inflation Targeting Seminar of the Banco Central do Brasil, May 22, 2015
As prepared for delivery
Introduction
Good morning—Bom dia!
Governor Tombini—thank you for your gracious introduction.
It is such a pleasure to be back in Brazil – one of the first countries I visited as Managing Director of the IMF. It is a special pleasure to be here in Rio de Janeiro, which hosted the last IMF Annual Meetings held in Latin America – back in 1967. I am delighted to say that our Annual Meetings will return to the region this year, and I look forward to seeing many of you in Lima in October.
It is also a pleasure to take part today in such an important event on monetary policy. Inflation targeting has been a key pillar of Brazil’s solid macroeconomic framework for the past 15 years. Together with fiscal responsibility and the flexible exchange rate, inflation targeting has brought important benefits to this country—sustaining high growth while stabilizing inflation. This was achieved as public debt was reduced and international reserves built up – and even more importantly, while lifting millions of people out of poverty. This is a remarkable feat.
Yet, the global financial crisis and, more recently, the changing external landscape are challenging policymakers in many emerging market economies. It is reigniting an active debate about the role of monetary policy, including inflation targeters.
For example, how to ensure price stability if there is uncertainty about the economy’s productive capacity? How to secure financial stability if macro-prudential policies are not sufficiently effective in alleviating systemic risk? And how to make sure that monetary policy reinforces other macroeconomic policies in supporting growth and job creation?
These are important challenges not only for Brazil, but for other central banks in the region.
As Alice Rivlin – former Vice Chair of the U.S. Fed – once said: “The job of the central bank (and in turn Central Bankers) is to worry.”
So today’s conference is particularly timely in helping us address some of those “worries” on the horizon. In that spirit, I would like to share my perspective on three topics:
(i) First, changes in the global landscape and implications for Latin America and Brazil;
(ii) Second, how to build resilience to a more challenging outlook in the near term; and
(iii) Third, how to restore and sustain robust and inclusive growth.
1. Latin America—big strides so far, more challenging times ahead
Let me begin by highlighting key macroeconomic achievements of the past and challenges for the region in the future.
Over the past few decades, countries in the region have overcome formidable challenges. Think of the debt crisis and lost decade of the 1980s. Growing out of that experience, policymakers in many parts of Latin America have made impressive achievements. They have reduced public debt, strengthened their monetary frameworks, replenished their external reserves, and – for many of them – opened their borders to trade.
In a context of rising commodity prices and favorable external conditions, these policies brought about a welcome change in the macroeconomic scene. Between 1990 and 2009, the region grew by 3 percent on average annually, inflation stabilized at low levels, and tremendous progress was made in a number of areas of social development.
For example, poverty has declined throughout the region, and the middle class now comprises almost half of Latin America’s population, compared to only 20 percent a decade ago. Financial inclusion has also improved—more than half of the region’s adults had access to a bank account in 2014, compared to less than 40 percent only three years earlier.
In many ways, Brazil is emblematic of these trends. Yesterday I had the opportunity to witness first-hand some of the country’s social programs in action. Bolsa Familia and Brasil sem Miseriaare renowned and much admired programs. I was especially struck by something I knew less about until yesterday—the effort to empower women, including by offering them training so they can be successful, independent entrepreneurs in their communities.
Again, these are impressive achievements on which Brazil is to be congratulated. And yet, Brazil and much of the region now stand at a very challenging juncture, with lower global demand and continued slowdown in domestic activity.
What are the global challenges?
For a start, global growth remains modest and uneven – at 3.5 percent this year, roughly the same pace as last year. Important trading partners such as China are slowing, whereas advanced economies are recovering at different speeds—faster in the United States, slower in Europe and Japan.
At the same time, the decline in oil and commodity prices appears likely to persist, and U.S. interest rates are set to edge higher. The exact timing of interest rate lift-off and its impact on global capital flows is uncertain – despite this being the most anticipated monetary policy decision one can remember. It is no surprise that this is a key concern on the minds of central bankers in this and other regions.
Even though it is not the central forecast in our outlook, the prospective normalization of U.S. monetary policy could create market volatility, with broader implications for the global economy. Continued effective communication from the U.S. Federal Reserve will help telegraph future policy moves and temper the potential for abrupt asset price movements.
It is also our view that an increase in interest rates that reflects a robust improvement in the U.S. economy is likely to bring positive effects for the region overall. Naturally, those countries more directly linked to the United States are better positioned to benefit from such improvement. For countries such as Brazil, the spillovers from stronger U.S. growth – and therefore stronger global growth – would be positive.
More broadly, the asynchronous stance in monetary policy in advanced economies is likely to contribute to volatility in major exchange rates in the period ahead.
Putting all these factors together, our latest forecasts for Latin America and the Caribbean envisage a fifth consecutive year of slower growth than the year before—of less than one percent in 2015. For Brazil, like many other observers, we anticipate acontraction of one percent this year and a modest recovery next year.
So the near-term outlook is challenging. Yet, being the optimist that I am, with every challenge, I see an opportunity—to learn from the past and to build a better future. A key lesson of the 2013 taper episode is that resilience to external volatility is built at home, with strong policies and strong fundamentals.
This brings me to my second topic – building resilience, where Brazil is laying the foundations by strengthening macroeconomic policies.
2. Reinforcing policy frameworks to build resilience
Like other countries in the region, Brazil appropriately responded to the global financial crisis by implementing countercyclical policies. And like many other countries in the region, it maintained the stimulus as it saw a hesitant recovery in growth.
Of course, with hindsight, a decline in Brazil’s potential growth—not so evident back in 2011—was playing a role, an issue on which you will hear more from the Fund staff today .
Boosting growth is imperative – but this is more about supply than demand. Strengthening macroeconomic policies is the preferred approach to secure stability and enhance resilience to external shocks.
Encouragingly, the Brazilian government is pursuing such a strategy. It has announced primary surplus fiscal targets of 1.2 percent of GDP this year and 2 percent of GDP in 2016–17, with a number of measures adopted to achieve these targets. Such a gradual yet significant increase in the primary surplus is necessary to bolster credibility in domestic policymaking.
At the same time, key administered prices are being updated, in an effort to ensure the efficient use of scarce resources in the economy. Important as it is, a side effect of this step has been rising inflationary pressures. To prevent these relative price changes from affecting medium-term market expectations, monetary policy appropriately went into a tightening mode since late last year.
Indications are that this policy is working. Even though inflation in 2015 will be on the high side as a result of the relative price changes, the expectation is that it will revert within the band in 2016, and continue to converge toward the central target thereafter.
Overall, therefore, the recent strengthening of fiscal and monetary policies – together with a strong international reserves position and a flexible exchange rate system – is critical in bolstering the credibility and resilience of Brazil’s economic policy frameworks.
So Brazil is clearly on the right track.
This is also the case for other countries in the region, where we see a significant strengthening of macroeconomic policies.
Of course, in the context of declining growth, this stance has critics. Yet, our analysis suggests that the merits of further stimulus could put at risk the hard-won credibility of past policy efforts. That credibility is especially important in restoring and sustaining prospects of strong, balanced, and inclusive growth.
Which leads me to my third and final topic—the structural reforms needed to boost productivity and ensure durable gains in potential growth.
3. Reigniting robust and inclusive growth—tapping the promise of structural reforms
The distinguished 19th century Brazilian author, Jose de Alencar, once said: “Success is born from the will in reaching a goal. Even without reaching the target, he who seeks and overcomes hurdles will, at a minimum, achieve amazing things.”
Clearly, in the current environment, restoring solid growth and maintaining hard-won macroeconomic and financial stability in the region will prove challenging. However, the current difficulties may also open up opportunities for addressing long-standing weaknesses and implementing reforms to launch a new phase of prosperity and social progress. By overcoming “hurdles”, amazing things can be accomplished.
Let me underscore that steps are needed in many areas. I will highlight three – and again, use Brazil to illustrate some of the challenges common to the region.
First on my list is plugging infrastructure gaps. Inadequate infrastructure is a key hurdle for productivity in many Latin American economies, including Brazil. For example, according to the World Economic Forum Surveys, there are issues with the quality of roads, ports, and air transport in the country.
In that context, the Infrastructure Concession Program is an important and timely step in the right direction. Of critical importance is that it calls for the private sector to play a key role.
As Minister Levy recently remarked in a seminar in Washington, Brazil has a long history of successful private participation in the development and management of infrastructure. The Rio-Niteroi bridge, which is easy to see from most vantage points in Rio and whose concession was auctioned recently, is a good example
Second on my list is reducing the cost of doing business. For example, Brazil’s tax system is characterized by a complex set of indirect taxes, including at the national and sub-national levels. These generate high tax compliance costs.
Simplifying the State level Taxes on the Circulation of Goods and Services (ICMS) and the federal sales taxes could significantly improve the business environment. At the same time, addressing budgetary rigidities can help increase the efficiency of public spending.
Third on my list of priorities to help boost growth isrejuvenating trade integration. Latin America, and notably, Brazil can still reap large benefits from deeper integration into global value chains and greater transfer of technology from trade partners.
Asia provides a useful example of the benefits of integration in regional and global value chains. Across major emerging markets, Brazil has one of the smallest volumes of trade in goods and services relative to GDP. So even modest efforts aimed at greater trade integration could significantly bolster growth prospects.
Brazil has ongoing initiatives in all these areas, some better known or more advanced than others. The key now is vigorous and ambitious implementation if they are to give the boost in growth and prosperity we all hope to see.
Conclusion
Let me conclude.
Over the past few years, we have seen some important shifts in fortunes in this region, mostly along North-South lines. Back in 2010, it was the North cooling down and the South heating up. Today, we see a Northern spring and Southern chills.
Yet from where I stand, I can see immense opportunity for the whole region—renewed growth and prosperity blossoming in the North and South alike. And I see Brazil as a prime candidate to lead by example. True, the external environment has become less friendly and domestic constraints are non-trivial. Yet with perseverance and the right policy choices, that brighter outlook is within reach.
I cannot leave Brazil without making reference to one of its most important icons in an area where it has always excelled. It was the great Pele who said: “Success is no accident. It is hard work, perseverance, learning, studying, sacrifice and most of all, love of what you are doing or learning to do.”
As we approach our Annual Meetings in Lima, Peru, I am confident that policymakers will find the perseverance, inspiration, and yes, courage, to make the right choices and deliver a new era for the region. And just like in football, each and every country must do its part for the whole region to win.
Obrigada—thank you.