William Maloney: “Latin American Central Banks and Treasurys Have Been Professional in Recent Decades” | Economy

The World Bank’s chief economist for Latin America and the Caribbean, William Maloney (Massachusetts, US, 63), has just visited Spain with an optimistic message for the region. The pandemic and inflation have also affected the economies of Latin America. However, this pest was no larger than in other latitudes. The director of the multilateral organization understands that central bankers and treasury officials have…

The World Bank’s chief economist for Latin America and the Caribbean, William Maloney (Massachusetts, US, 63), has just visited Spain with an optimistic message for the region. The pandemic and inflation have also affected the economies of Latin America. However, this pest was no larger than in other latitudes. The director of the multilateral organization is aware that central bankers and treasury officials are more professional, although he asks their governments to be careful in the face of the uncertainty they can generate.

ask. Economists take it for granted that the Fed’s actions will push the US into recession. Do you think this will drag Latin America down?

Answer. Nobody knows what will happen. The US is trying a soft landing to end inflation without causing a recession. In any case, it is true that the performance of the G7 economies is an important factor affecting the economies of Latin America, along with the economy of China, the development of interest rates and raw material prices. This explains a lot of what we see now, which is not very positive. We expect growth of 1.4% for this year, while we expect growth of 2.4% for the next two years. We see how, since 2010, we’ve made progress at a rate of 2.2%, while the world is doing it at a rate of 3.1%, and that means that very important structural issues in the region have to be addressed.

s. and he?

R was found. For starters, education. It is even more important after the pandemic, when children, in general, have lost a year and a half of schooling. This translates to a 10% decrease in revenue over the life cycle. We also have an infrastructure shortage: an average of 3.5% of GDP continues to be spent in the region, when Asia or Africa devotes 7%. There is also the problem of competitiveness, whether to attract companies or to enter foreign markets. Obviously, uncertainty complicates matters.

s. The data of a 10% drop in income due to losing a year and a half of school is pretty staggering. Can it be recovered?

R was found. Requires intensive lesson systems. So far we haven’t seen these programs on a large scale in the region, so it seems lost to me.

s. After the resources allocated to the epidemic and inflation, do the governments of the region have the capacity to deal with these problems?

R was found. Most countries in the region have strengthened the safety net for families during the pandemic. This has caused an increase in public spending and debt, which means that there is now very little fiscal space.

s. Where do you get the necessary money then?

R was found. There are two ways. First, you can search for new resources. We at the World Bank are doing some studies on what kind of tax can collect more resources without hurting the economy. And second, we have produced reports showing that an average of 4.4% of GDP could be saved by making governments more efficient.

s. Forecasts indicate that inflation will continue to rise in Latin America…

R was found. With the exception of Argentina and Venezuela, the countries of Latin America have a lower average inflation rate than Eastern Europe and somewhat higher than Asia. The authorities in the region did a very good job of managing inflation: they took action early on. For example, Brazil started raising interest rates a year before the Fed, and Mexico and Chile did so nine months earlier. In recent months, the average inflation rate has fallen and expectations have not risen. Next year we expect the inflation rate to be 5% and in 2024 the targets of the central banks will be achieved.

s. In other words, isn’t there a risk of a debt crisis as we saw after the inflationary crises of the 1980s?

R was found. It’s another good news. Things are changing. We’ve been through two crises in which things were no worse than in the rest of the world. The management of economies took place as in any other part of the planet, which means that there was maturity and professionalism of macro policies. Markets see central bank reserves as much larger than they were 30 years ago. The composition of the debt is also very different, there is a higher percentage in the local currency. Rising debt is not without a problem, but there is some confidence in the markets that officials are handling a difficult situation decently.

s. In other words, there has been institutional progress.

R was found. definitely. There has been a good professionalization of central banks and ministries of finance in recent decades.

s. The Federal Reserve and the European Central Bank have so far continued to raise interest rates. Are they detecting capital flight?

R was found. Obviously, what happens to interest rates in developed countries affects capital flows and central banks have to react to them as well. It’s happening, but we haven’t seen anything dramatic yet.

s. Does rising prices put businesses at risk?

R was found. Part of the professionalization that we saw in Latin America also happened in the Banking Supervisory Authority. Yes, we’ve seen an increase in delinquency, but the banks also had enough provisions to deal with. The US has seen some bank failures, but relations with Latin American entities are almost non-existent, so we don’t expect contamination. However, we must be careful and monitor the situation.

s. Some Latin American presidents lament that their economies are too dollarized. Can you or should you get out of this fence?

R was found. Most of the countries that depend on the dollar, such as Panama and Ecuador, have the lowest inflation rates in the region. Panama has grown well. The problems are deeper.

s. Is it a good proposal to create a common currency like the one proposed by Brazil and Argentina?

R was found. Hello everyone at the party. But it is not easy to create a currency that everyone will accept. The dollar and the euro are among the most important currencies in terms of defining contracts, trading and carrying out financial transactions because they are stable currencies, have a proven track record, and have fairly deep financial markets. It’s not that easy. That takes decades. The yuan’s weight is gradually increasing, but it is still very small.

s. Specifically, we’ve seen Argentina accept purchases in yuan or Brazil suggest in China that there should be alternatives to dollars. How do you see the growing presence of China in Latin America?

R was found. This is how free trade works. Good as a source of capital. And if it’s a technology source, that’s okay too.

s. There are countries like El Salvador that have experimented with Bitcoin by making it legal tender. How dangerous is that?

R was found. We support El Salvador. But in this there is a lack of transparency and environmental problems. We don’t want to be involved or have too much say in this.

s. Regardless of the currency, would greater integration of Latin American economies be desirable?

R was found. Latin America can benefit from the volume of trade. The problem is the geography of the area and the lack of infrastructure makes it difficult. But there is also technology transfer, which is essential. This is more complicated when the exchanges take place with countries with similar characteristics. Granted, more trade with the region, but the United States has 330 million people and is the most dynamic generator of technology. You have to make an effort there.

s. The agreement between the EU and Mercosur has been signed but not ratified. Should they speed it up?

R was found. Any such treaty with the European Union would be fine.

s. The frequency is also in the EU …

R was found. With these treaties there are always winners and losers. You have to manage it.

s. The world is already witnessing another digital revolution, the artificial intelligence revolution. Is Latin America losing ground?

R was found. In terms of the physical network, the coverage is not too bad. There are more cost issues that stop a lot of people from getting into this system. We are just getting started in e-commerce and digital banking.

s. Studies show that Latin America is one of the regions hardest hit by climate change. The United States and the European Union have published plans to combat this phenomenon. How can it be funded?

R was found. As a region, it emits 7% of its emissions and has the greenest electricity matrix in the world with 50% coming from renewables. We have many opportunities. But yeah, we have more hurricanes and storms in the Caribbean, more droughts in Argentina or Uruguay, and new insects attacking coffee crops in Colombia. We expected a stronger recovery and drought prevented that. There is a big challenge to answer that requires capital. On the plus side, the region is firmly committed to reducing emissions. Where do you get the money? It’s a big question, but it’s a global problem. The numbers being dealt with are enormous.

s. Europe decided to do it on debt.

R was found. Exactly, but it’s a complicated situation. We must think about how to mobilize the private sector.

s. The five largest economies in Latin America have left-wing governments, sometimes with hostile rhetoric with foreign companies, such as the Spanish. Does this affect their economies or business climate?

R was found. Leaders have formulated a critique of the previous model, which means they are looking for new ways to organize their economies. There can be good things in those experiences and good things cannot come out. But it is clear that with more uncertainty investing becomes more difficult.

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