Jacek Rostowski, Poland
Finance Minister of the Year, Emerging Europe There wasn’t a huge shortlist for the award for best finance minister in emerging Europe. It has been a terrible 12 months for the region, and every CEE (central and eastern Europe) economy is in recession – every country, that is, with the exception of Poland.
Poland is forecast to keep growing by around 0.7% this year, and by 1.4% next year. “Poland is doing much better than its peers in the CEE”, says Michael Ganske, head of emerging market research at Commerzbank. “It’s the only country in the region still growing, albeit at a slower rate to past years.”
If finance minister Jacek Rostowski was unfortunate in the timing of his acceptance of the ministerial position – taking the job in November 2007, just as the global economy lurched into crisis – then he has been more fortunate in the way that Poland has weathered that crisis.
Commerzbank’s Ganske says: “A lot of Poland’s success in the last 12 months is down to luck, really. Luckily, the economy is not very leveraged, and less reliant on industries like commodities than some of its peers.” It also has a large domestic consumer base and domestic investor base, which has helped shield it from the worst of the crisis.
But the government has hard decisions to make as well. Like most other governments, public finances have deteriorated sharply, with the deficit in Poland’s case likely to be 6.1% of GDP this year, rising to 7% next year, according to analysts. Crucially, this is down to poor tax revenues and spending on social benefits rather than a Keynesian-style fiscal stimulus.
“We decided very early on not to introduce a stimulus, and instead allowed automatic stabilizers to do the work,” Rostowski tells Emerging Markets in an interview.“This strategy worked well for us, and I am very proud that we are the only country in the region to have had growth this year.”
However, public debt is at 47% of GDP – not too worrying, but if it goes over 55%, it triggers a clause in the constitution that would force the government to make drastic cuts. “We certainly need to ensure this level is not breached, and of course we will take measures to reduce the deficit,” he says.
Rostowski’s plans involve trying to raise huge sums of money from privatization sales within a short period of time. The biggest deal, if the Polish unions don’t succeed in blocking it, will be the sale of the government’s 42% stake in KGHM, the copper company, which could be worth around $3 billion.
The government is also trying to sell its stake in energy company Enea, with RWE at present the sole bidder for what could be a $2.5 billion deal this year. It also plans IPOs for PGE, the energy firm, and PZU, the insurance company. It has already sold small stakes in Bank Pekao, Bank Zachodni and BPH Bank. But analysts say the strategy is over-ambitious at a time when leverage is scarce and cash-rich foreign investors are thin on the ground.
But Rostowski remains defiant “I am confident that this will be achieved, because if you look at the performance of global stock markets and general market sentiment, it is very positive.”
Nevertheless, Poland’s bondholders have the security of knowing public debt cannot, constitutionally, get out of hand in Poland, unlike in many other debt-ravaged EU countries. —Julian Evans
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Durmus Yilmaz, Turkey
Central Bank Governor of the Year, Emerging Europe
Even in conditions of global turmoil, few monetary authorities have cut policy rates as audaciously as the Central Bank of Turkey (CBOT). In slashing its overnight lending rate from 16.75% to 7.75% between October and August, the bank has put historically-rooted fears of capital flight and currency collapse to rest, while perennially high inflation has touched 40-year lows of under 6%.
Governor Durmus Yilmaz refuses to take any personal credit for the bank’s correct call. “It has been teamwork from top to bottom,” he says, adding: “We inherited a culture both in terms of central bank independence and our institutional capacity to analyze data and take the appropriate decisions.”
The governor insists that the bank has not put growth concerns before inflation. “Our first concern is price stability... By interpreting the data correctly we have been able to bring inflation down first and then interest rates. It’s not the other way round.”
Yilmaz’s three years in the post have not been easy. He began inauspiciously as a last-minute compromise candidate and was soon grappling with domestic political noise and global liquidity tightening. In the summer of 2007, the CBOT hiked policy rates by 425 basis points as the lira wobbled. A year later it was obliged to abandon its inflation target of 4% in the face of soaring commodity prices, settling instead for 7.5% in 2009, 6.5% in 2010 and 5.5% in 2011.
Yilmaz stands by both moves. The rate hikes, he argues, “turned out to be a blessing, because we have been able to contain inflation, and because it gave us room to slash interest rates as much as we have done under the current circumstances.”
Adjusting the inflation targets, he recalls, was “very painful”: “If I were to give advice to any central banker it would be ‘Don’t do it.’ Because it involves credibility... It’s a double-edged sword: if you don’t change the target and you don’t achieve it, you lose credibility. But if you change the target you also lose credibility. We took the risk, and we changed it and increased interest rates at the same time so that our determination to bring down inflation should be read correctly by the markets.”
Yilmaz is not content with the current level of inflation, but he believes that reducing it to an internationally acceptable 2–3% must be a gradual process. “It has to be sustainable. Let’s say one year you reach the acceptable target and the next year you are not able to maintain it. That’s not price stability... And secondly, going very fast has welfare costs, economic costs, output costs...”
When the world economy recovers, a rise in commodity prices will pose inflationary risks for Turkey, Yilmaz notes. Another key issue is fiscal policy: “Turkey has an opportunity to maintain single-digit interest rates, but... the government has to commit itself to a fiscal rule in which both the expenditure and the income must be clearly stated, and Turkey still needs to target some sort of primary surplus.
“This is not only true for Turkey. The question for the world is, how the fiscal measures are going to be unwound and the timing and their impact on the budget deficit. It’s not a promise to keep the interest rates very low for a very long time; it’s a conditional statement...’ —Bernard Kennedy
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Xie Xuren, China
Finance Minister of the Year, Asia
In the two years since he was appointed China’s Minister of Finance, Xie Xuren has presided over a period of extreme turbulence in the Chinese economy brought about by the impact of the global financial crisis and economic recession. During this time, China has stabilized faster than any other major economy and has resumed quite robust growth.
Xie, though not regarded as a high-profile personality, has made his voice heard on the domestic and international stage whenever the occasion has demanded a show of leadership and confidence. This was evident, for example, when he reassured the National People’s Congress in June that not one yuan of China’s huge fiscal stimulus would be wasted.
It was evident again during the September meeting of G–20 finance ministers in London, where Xie vowed that China would stay the course on fiscal stimulus until full economic recovery is attained – and yet again during the US-China strategic and economic dialogue when Xie took Washington to task over its huge fiscal deficit.
Economic policy-making is something of a team effort among China’s top political leaders, from premier Wen Jiabao downwards. But the 62-year-old Xie, an experienced public administrator, has the necessary skills at the implementation level to put these policies into practice, say those who know him.
When Xie was elevated from being director of China’s State Administration of Taxation to replace Jin Renqing as finance minister in September of 2007, the global economy was still in relatively good shape. Xie’s main task appeared to be keeping a steady hand on the fiscal tiller to steer China through a period of double-digit growth.
But as the US sub-prime mortgage crisis snowballed into a financial and economic crisis of a magnitude not seen since the Great Depression, China faced a collapse in its export-led growth. Bold policy responses were called for, and were soon forthcoming from Beijing, chiefly in the shape of a 4 trillion yuan fiscal stimulus spread over several years.
From the second half of last year, China has adopted a pro-active fight against the global crisis, which has kept the country’s GDP growth rate above an annual rate of 6% at a time when other major economies have moved into minimal or even negative growth. Fiscal stimulus has been the key, as Xie has noted.
This has required bold measures. Chinese government revenues fell by 196 billion yuan to 2.7 trillion yuan in the first five months of this year. The central government saw its share drop by 14% to 1.4 trillion yuan as trade and economic activity slumped. Overall fiscal revenue is expected to drop by 550 billion this year.
Despite this, China has pressed ahead with stimulus measures (including some tax reductions and raising export tax rebates) and, according to Xie, had by July allocated 72% of its near 1 trillion yuan of fiscal stimulus targeted for the whole of 2009.
Xie acknowledged in July that China’s economic development was in a “critical period of recovery and stabilization”, and that the basis for economic recovery was not yet solid. Whether China’s rebound is sustainable remains an open question, but the leadership is doing everything in its power to make it so. —Anthony Rowley
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Duvvuri Subbarao, India
Central Bank Governor of the Year, Asia
Just 48 hours into Duvvuri Subbarao’s new job as governor of the Reserve Bank of India (RBI), the US set off a global panic as it temporarily nationalized mortgage lenders Fannie Mae and Freddie Mac.
It was the biggest government intervention in private financial markets in history. A week later, the collapse of Lehman Brothers plunged the world into the biggest financial crisis since the 1930s depression.
Despite the health of Indian banks at the time, the seizing up of global credit markets and subsequent collapse of market confidence, triggered a temporary freezing of domestic credit.
The Reserve Bank of India’s response was immediate – it injected vast amounts of liquidity into the country’s financial system. “We decided that the impact of the evolving crisis could potentially be big enough for us to reverse the tightening mode and that we must signal that the RBI was at the forefront of combatting the crisis,” Subbarao tells Emerging Markets in an interview at RBI’s headquarters in Mumbai.
Until September last year most economists had argued that India’s relatively closed financial system, low level of private debt and low dependence on external trade would barricade the country from the financial hurricane. “However, between October and December, we realized that the crisis was spreading through the financial and confidence channels as well as the real economy channel, and that the impact on India was more than that anticipated earlier,” says Subbarao.
As a result, the governor slashed the policy rate from 9% to 3.25%, cut the cash reserve ratio, the proportion of deposits commercial banks must park in the RBI, from 9% to 5%, and made it easier for banks to buy government paper.
These moves generated some Rs5.6 trillion – about $120 billion – of liquidity to combat the crunch and boost the economy.
The governor’s monetary stimulus was one of the most aggressive in Asia. Subbarao deployed almost every conventional policy weapon in the RBI’s arsenal.
Subbarao’s reaction was all the more impressive given his lack of experience at the central bank. “I had no reference frame and was coming in with a fairly clean slate, and relatively untutored in central banking,” he says.
That said, he was well aware of the big picture, having been deputed by India as lead economist in the World Bank from 1994 to 2004. From 2005 to 2007 he was appointed to the prime ministers’ Economic Advisory Council from 2005 to 2007 after which he became India’s finance secretary.
His is still a complicated job. The RBI has been tasked with a torturous juggling act due to its full-service mandate: inflation warrior, economic growth driver, financial watchdog, and also, government debt manager.
As a result, Subbarao has been battling with the finance ministry over its Rs4.5 trillion borrowing programme this fiscal year. This spending has undermined the RBI’s mission to lower market interest rates. Nevertheless, with inflation rising, the RBI may raise rates earlier than the government expects – or wants.
Subbarao has been an effective crisis manager, but his mission to combat the fiscal deficit while ensuring price stability may have only just begun. —Sid Verma
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Sheikh Ahmed bin Mohammed Al Khalifa, Bahrain
Finance Minister of the Year, MENA
In the heyday of the global bull run, as the Gulf embraced new financial services, technology and real estate at a frenetic pace, many viewed Bahrain as a nicely diversifying economy, yet dull compared to the dazzle of Dubai.
But as the financial crisis hit GCC markets, Bahrain may have quivered, but a full-blown debt crisis erupted in the emirate.
Strong financial regulation coming into the crisis and public spending this year have helped to compensate for the collapse in private economic activity in Bahrain. The government over the past year has completed a new $137 million Sheikh Khalifa bin Salman Port – designed to rival Dubai as the premier cargo port in the Gulf – expanded the Bahrain International Airport and spent heavily on other infrastructure projects.
This decision to prime the fiscal pump was always controversial. “When oil prices went down to $40 per barrel, there was a lot of speculation that it might go down even further,” Sheikh Ahmed bin Mohammed Al Khalifa, Bahrain’s finance minister, tells Emerging Markets. “We had the choice to cut spending or continue with spending to make investments in the economy, which we did and it worked out well for us.”
Bahrain weathered low oil prices – which traditionally make 75% of government revenues – and banking weakness, the biggest single contributor to its output, partly thanks to government spending. In addition, its reputation as a well-managed economic hub and low-cost base has averted the economic crash facing the region as foreign investors keep the faith, says Jarmo Kotilaine, chief economist at NCB Capital in Manama.
Khalifa’s dedication to reform has boosted market confidence at a crucial time. Active fiscal policy and increasingly efficient and transparent decision-making have helped to attract private investors and diversify the economy,” says Kotilaine.
But government spending this year comes at a price: the fiscal deficit is projected to rise to 8.7% this year compared with a 4.9% surplus in 2008. However, Khalifa pledges medium-term fiscal sustainability, arguing that investment-led spending can be easily adjusted, depending on the oil price. “Infrastructure spending is a variable, and we can slow this down if oil prices drop below $70 per barrel,” he says.
Thanks to Bahrain’s deep local capital markets – partly down to Khalifa’s reforms as central bank governor between 2001 and 2005 – a faithful band of domestic buyers is snapping up government debt.
In recent years, a cluster of new insurance firms, banks, Islamic finance outfits and investment houses have sprung up in Bahrain. But massive financial market turbulence globally and domestically, and large losses incurred by local banks could have caused the kingdom to buckle under the strain.
But, Bahrain’s relatively diversified economy, privatization efforts and governance reforms in recent years have helped to insulate the kingdom from the worst of the crisis. Khalifa says he will push ahead to develop new growth areas for the economy and to develop new sectors such as Islamic financial services and the telecoms industry. —Sid Verma
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Muhammad Al-Jasser, Saudi Arabia
Central Bank Governor of the Year, MENA
Few would have envied Muhammad Al-Jasser’s position, when he took the helm of Saudi Arabian Monetary Agency (SAMA) at the end of February.
Becoming governor of one of the region’s largest central banks, in the middle of a collapse in oil prices, and against a backdrop of a global credit crisis that was unsparing in its impact on the largest Gulf economies, the 54-year-old could have been excused a feeling of trepidation stepping into the long-serving Hamad al-Sayyari’s boots.
If he did entertain any doubts, he has not shown them. If anything, he has relished the challenges thrown up by the region’s financial turmoil, acting swiftly to limit the damage wrought on the kingdom’s economy.
Under Al-Jasser’s watch, SAMA has made it its mission to get banks lending again, implementing a loose monetary policy with a series of interest rate cuts this year. SAMA’s repo rate had fallen from 2% to just 0.25% by June.
Saudi banks have yet to increase their commercial lending significantly, despite the lowering of interbank rates, but Al-Jasser has ensured that the kingdom has achieved a soft landing.
“His standout achievement is the way that SAMA has managed the global crisis, employing counter-cyclical policies on the monetary policy front,” says Marios Maratheftis, regional head of research at Standard Chartered Bank. “SAMA has managed to ensure that the banks are still liquid, and that’s a significant achievement.”
Al-Jasser’s sure-footed handling of the aftermath of the financial crisis reflects his wide experience, including, for the past 13 years, serving as deputy governor at SAMA to Hamad al-Sayyari.
Educated in California, getting an MA and then a PhD in Economics from the University of California, Jasser started his career at the Ministry of Finance and National Economy in 1981, where he headed the Financial & Economic Analysis Unit at the Budget Department.
His career then took an international turn. He was executive director for Saudi Arabia at the IMF from 1990 to 1995, where he prepared a number of research papers and studies on fiscal and monetary policies.
This experience is reflected in the modern, cosmopolitan outlook of the governor, typical of many US-educated Saudi leaders. “He is quite happy to be spoken to by women and makes an effort to shake your hand,” says one female Saudi Arabia analyst.
But it is his sharp questioning mind that many identify as his defining characteristic; he often grills speakers at conferences for hours afterwards, relishing the discussion of the nitty-gritty of economic and monetary policy. “He is quite exceptionally knowledgable and smart as regional policy-makers go. He clearly knows his brief extremely well – SAMA is lucky to have him,” says Jarmo Kotilaine, chief economist at NCB Capital.
SAMA looks to be in safe hands as it faces another year of difficult economic circumstances. “He is a man of vision. He has the technical ability and the charisma,” says John Sfakianakis, chief economist at Banque al-Saudi al-Fransi. —James Gavin
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Tendai Biti, Zimbabwe
Finance Minister of the Year, Africa
This July, Tendai Biti received a bullet in the post. Welcome to Zimbabwe’s new age of reconciliation, where political optimism and death threats sit together.
Biti, installed as the country’s finance minister in February, is a key figure in a power-sharing agreement between two parties – the Movement for Democratic Change (MDC) and Robert Mugabe’s Zanu-PF. But it is an ugly marriage of convenience. The MDC are fighting a turf war with Mugabe’s supporters, who are in control of the central bank, army, police and judiciary.
Nevertheless, Biti is seeking to heal the policy paralysis that confronts the economic meltdown. “In many ways, he represents the hope that the country’s prospects have started to brighten,” says Matthew Pearson, head of Africa equity research at Renaissance Capital.
Mugabe’s violent seizure of white-owned farms at the turn of the century and autocratic rule have triggered a decade-long economic meltdown that has battered the population with hunger, poverty and Aids. Massive food and foreign exchange shortages and deviant policies caused inflation to soar to 500,000,000,000% last September. The Zimbabwean dollar was demolished.
In response, Biti has announced the removal of the Zimbabwean currency and introduced the US dollar and South African rand for official payments. This has brought inflation down dramatically – to a monthly rate of 0.4%, though annual figures are still not available. By axing the Reserve Bank of Zimbabwe’s control over printing money, a key source of funds to Mugabe’s supporters has been choked off.
Biti is seeking to oust Reserve Bank of Zimbabwe (RBZ) governor Gideon Gono and RBZ’s control over private companies. The latest episode in the battle took place in September. At the time, the IMF allocated around $400 million in special drawing rights (SDRs) to Zimbabwe after the fund enacted a $250 billion agreement to beef up the reserves of its members.
Biti has blocked Gono’s moves to siphon off the funds.
His orthodox economics and push for better governance have injected a dash of optimism among western donors, who have long withheld funding in protest against Mugabe’s rule and misuse of funds. But the winds of change may be blowing in the right direction, says Pearson: “Donors – as well as many foreign investors – are now coming to Zimbabwe because they like and trust [Biti].”
Biti is seeking to jumpstart the moribund commercial sector by pushing for partnerships with private companies in mining ventures and negotiating investment protection accords with South African banks to disburse the credit lines. Biti, who is also secretary-general of the MDC, is also battling against Mugabe’s indigenization laws that seek to oust foreign investors.
With capital dribbling in and some recovery in manufacturing and mining, the economy is set to grow by 3.7% this year compared with its 14.1% contraction last year.
The IMF says “a nascent economic recovery” is underway, citing that there now exists “a more liberal economic environment, price stability, a deepening in financial intermediation, and increased access to foreign credit lines”.
Biti has battled valiantly to turn round the economic calamity that has struck Zimbabwe, but its political recovery remains worryingly fragile. —Sid Verma
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Benno Ndulu, Tanzania
Central Bank Governor of the Year, Africa
In January 2008 Bank of Tanzania governor Daudi Ballali stepped down in disgrace. For months beforehand allegations of corruption had battered the credibility of the central bank and monetary policymaking in the country.
It was against this backdrop that Benno Ndulu, a former economics professor, took over as central bank governor.
He had an immediate remit to show the probity and transparency of the central bank. Later that year he had to deal with the global financial crisis and, in particular, the tricky problem for a country with limited financial resources, of bringing down interest rates at a time of fiscal expansion.
On both counts Ndulu has succeeded.
From May this year, Ndulu has allowed interest rates to fall by reducing the supply and frequency of 91-day Treasury bills. The yield on the benchmark government paper has fallen from 12% in early March to 4.7% – a rate not seen since the turn of the century.
“The basic approach we took was the diversification of instruments for liquidity management purposes,” says Ndulu in an interview with Emerging Markets.
Ndulu, who had worked for the Macroeconomic Division of the World Bank for Eastern Africa, sought to sterilize domestic liquidity through regular sales of foreign exchange rather than relying on net increases in liquid paper.
“We decided we should not overload the use of T-bills for the purposes of mopping up liquidity in response to the big increase in government expenditure. So we decided to increase foreign exchange sales and have a better use of repos [repurchase agreements with banks].”
These moves have reduced the high cost of liquidity management to the central bank and the government. The operation prevented Ndulu asking the government for emergency financing which, he says, “would have jeopardized our independence”.
The problem that dogs central banks in sub-Saharan Africa is the difficultly in influencing interest rates due to the structural constraints of regional economies, such as poor legal structures and an underdeveloped financial system.
However, overnight inter-bank lending rates now stand at 0.7% – a historic first. “This has increased the money being made available for private sector credit,” he says.
Another potentially epoch-making feature of Ndulu’s tenure is the stability of the exchange rate. Until quite recently the shilling has traditionally been allowed to devalue to ensure competitiveness.
However, the shilling has appreciated in trade-weighted terms since 2007. Ndulu says: “We’ve generally left the market to play its role and occasionally work with a currency band to make sure the exchange rate does not get too unstable. However, importantly I wanted to change the market view that the currency could only go in one direction: down.”
Ndulu has also cleaned up the central bank’s image. He has sought to subject the central bank’s accounts to independent oversight, improve the governance structure and regularly communicate with primary dealers, chief executives at banks and the media.
“In a hugely difficult period, Ndulu’s arrival has helped to improve Bank of Tanzania’s communication with markets and his liberal approach to the managed float has worked well,” says David Cowan, Africa economist at Citi. —Sid Verma
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Oscar Ivan Zuluaga, Colombia
Finance Minister of the Year, Latin America
<!--[if !supportEmptyParas]--> Colombia’s economy under finance minister Oscar Zuluaga, is forecast to expand between 0.5% and 1% this year – no small feat given the pressure on it from internal and external forces. Inflation is expected between 3% and 4% and foreign investment close to $9 billion.
The government had no problem placing $1 billion in bonds in April and is looking to the do the same for 2010, while state-owned companies have wowed markets with their own international bond issues. State oil company Ecopetrol’s $1.5 billion bond in July was oversubscribed near eight times.
The country’s relative economic stability comes amid political uncertainty around the 2010 presidential elections, disputes with Ecuador and Venezuela – which contribute a large share of Colombia’s export earnings – and a stalled free trade agreement (FTA) with the US.
Zuluaga takes the problems in his stride and says the country is taking advantage of the crisis to emerge stronger. “Colombia has resisted the external financial crisis, and the basic fundamentals have not deteriorated. There is still a good perception of the country. We expect investment this year to be $9 billion, which is a 12% decline from the previous year, but quite good during a crisis of this magnitude,” he tells EM.
Investment is coming primarily in hydrocarbons, mining and infrastructure. Mining is particularly attractive as the country branches out from coal – Colombia is the world’s fifth-largest exporter – to precious and base metals.
The government recognizes infrastructure as a weak point, creating its own investment fund and providing incentives through public-private associations for road, rail and port development. “There are large investment projects throughout the country; this is definitely one of the dynamic sectors,” says Zuluaga.
Colombia is on track to cover its $3.75 billion in foreign debt in 2010, with $2.5 billion from the World Bank, IMF, IDB and Andean Development Corporation, as a well another bond issue.
Zuluaga forecasts growth at 2.5% in 2010 and expects trade and investment flows to return.
Zuluaga says Colombia has traditionally kept politics and the economy separate, but this has become harder under Uribe, who governs from a more personal than party perspective.
More daunting are threats from Ecuador and Venezuela to wean themselves off Colombian goods. More than one-fifth of Colombia’s exports in 2008 went to Venezuela ($6.1 billion) and Ecuador ($1.5 billion). The combined import total from the two countries was around $1 billion.
The Uribe government has worked to diversify export markets, but this takes time. The process could be easier if the US Congress would move on a free trade agreement that has been stalled for nearly two years. However, Colombia implemented an FTA with Canada in August and aims to conclude a deal with the European Union this year.
Zuluaga says the general nature of trade with its neighbours will prevail over rhetoric. “Any political or diplomatic action on exports would affect our economy, but it is important to remember that Colombia exports to Venezuela basic goods that are not produced in Venezuela, and these are not easy to substitute,” he says. —Lucien Chauvin
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Jose de Gregorio, Chile
Central Bank Governor of the Year, Latin America
<!--[if !supportEmptyParas]--> Jose de Gregorio, the governor of Chile’s central bank since December 2007, is a marathon runner – when he has time. Over the past year, however, his time and stamina have gone into a different sort of race – that of protecting his country’s small economy from the effects of the international recession.
But, for 50-year-old de Gregorio – selected by Emerging Markets as Latin America’s Central Bank Governor of 2009 – that award is not his only prize. Given Chile’s openness to international trade, dependence on foreign investment and the comparative depth of its financial markets, it was, on paper, one of the Latin American economies most vulnerable to the crisis, yet according to consensus local forecasts, GDP will slip by only 1.5% this year before recovering to growth of 3.6% in 2010.
In Latin America and, indeed, in emerging markets in general – excluding some special cases in eastern Europe, the crisis has had much less impact than in industrialized countries, notes de Gregorio. “Normally when there was a crisis in a developed country we did worse, whereas today we’ve done relatively better.”
“Look at the debt crisis, which had a similar origin in that it was totally external... Latin America collapsed,” he points out. By comparison, the current crisis is “a success for the economic policies applied in Latin America”, he maintains.
In Chile’s case, those policies include the inflation-targeting and flexible exchange-rate policies implemented by the autonomous central bank in the 1990s and a counter-cyclical fiscal rule introduced in the early 2000s by the government of president Ricardo Lagos, under whom de Gregorio served as minister for economy, mining and energy before joining the board of the central bank in June 2001.
Chile’s central bank has, however, been particularly aggressive in cutting its benchmark interest rate, reducing it from 8.25% at the end of last year to 0.50% by July – a level that the central bank described as “minimum”. These cuts had to do with the need to counteract weak domestic demand but, above all, with guarding against too large a drop in inflation, says de Gregorio.
“Never before has the rate been so low in Chile,” he notes. But this does not mean that Chile has exhausted its arsenal of monetary tools, he insists.
It can still, if necessary, extend the term of a lending facility, introduced in July, under which commercial banks have guaranteed access to financing at the current monetary-policy interest rate for six months and, beyond that, there’s the possibility of quantitative easing, points out de Gregorio.
Looking ahead, de Gregorio anticipates that the main risk facing Latin America is the performance of the international economy. “The key question is whether recovery will be vigorous or whether it will encounter additional shocks, and there we have many doubts.”
In Chile, de Gregorio doesn’t see any major domestic barriers to sustained recovery. However, as he recognizes, that doesn’t exempt Chile’s central bank from the challenge facing monetary authorities around the world – that of knowing when to take the foot off the monetary accelerator. —Ruth Bradley