Fund dismisses economy skeptics
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Emerging Markets

Fund dismisses economy skeptics

Deputy managing director Murilo Portugal rules out Latin fallout from possible global slowdown

IMF deputy managing director Murilo Portugal has ruled out in an interview with Emerging Markets any major trauma in the global economy that would impact Latin American countries.

He also acknowledged the urgency of the Fund’s review of both its lending and funding instruments.

“Our assessment is that the world economy is well positioned for a soft landing,” Portugal said. “We expect 2007 will be another year of solid growth and this will be the fifth consecutive year of strong growth, producing the highest average growth rate since the 1960s.

Portugal ’s optimism strikes a contrast with those analysts who warn that slowdowns in the US and China could pull the world economy back, with serious repercussions for Latin America and other emerging markets.

“It’s true that growth is slowing down somewhat in the US , but in the euro area, the expansion is now very solid. Similarly in Japan , the expansion is very solid,” Portugal said.

“In the fourth quarter of last year, the euro area was growing at 3.6% and the economy of Japan also rebounded with a growth rate of 4.8% annualized, not to mention emerging markets, led by China and India.

“There are certain countries in Latin America that are more sensitive to the US slowdown, but others have more diversified links, so it’s not exactly the same picture everywhere. The region as a whole has improved substantially and has considerably reduced vulnerabilities.

“There is a greater resilience now to face external deceleration ... In many countries, the public finances are stronger, levels of debt have been reduced, international reserves have been substantially increased and that, of course, provides a cushion to face not so good times.”

Portugal insisted that the IMF assessment is that there will not be a substantial growth deceleration this year. “There is some rebalancing of global growth,” he said.

After large countries such as Brazil and Argentina decided to pay back their IMF loans, the Fund will consider a new income model to prop up its own finances, Portugal said.

“It’s true that this has reduced our income, which is generated from lending fees. ... The new model intends to diversify the IMF’s sources of income, which are now very much concentrated on income generated by lending,” he said.

Meanwhile, the IMF is considering setting up a new lending instrument to substitute the contingency credit line (CCL). “The idea is to create a reserve augmentation line (RAL) that would be available to countries which have good economic policies and have already made policy adjustments, but still have to deal with large stocks of debt,” the IMF official said.

 “The idea of this credit line is to make substantial funds available for this kind of countries in a precautionary way, so that they do not need to accumulate so much foreign reserves themselves,” Portugal added. The plan has yet to be submitted to the Fund’s executive board.

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