 Fel fud ydynt, y pryd Después, mae'n ffrasil arddugwr macroeconolau cyfnodol, sy'n fwyaf yn cysg seldomau syniadu gyda cyrraedd macroeconolau? Ond nesaf, jillian Tett. Yn y gweithio ymgylchedd mewn ysgrifennu ysgolfa â Oedden cyfaint yn Ymericaol, ac nid i fod yn flynyddoedd ar y panel â nhw. Ydyn ni'n gweithio y dyfu ymgyll Tun. Ond hynny mae y gallwn y cwil sy'n gweld yr Ymgrifennu Cymdeithasol is to promote inclusive democratic engagement. So I think we have this today with a layout. Not only are the ministers and officials outnumbered by the audience, but you're sitting behind them ready to pounce. So I think the balance of power in the room is quite unusual. But we're discussing a really very important theme right now because those of you who read the Financial Times this morning, and I hope you all did, might have seen a story entitled, at the top of our page, a web page, emerging market capital outflows eclips financial crisis levels. Apparently there have been bigger net capital outflows over the later three quarters than during the 2008-2009 financial crisis. And that reflects a very significant shift in sentiment not just amongst investors, but also policymakers around the world. I was with Christine Lagarde and Janet Yellen yesterday in Washington. And as Christine Lagarde pointed out quite forcefully to Janet Yellen, there's been quite a rotation of risks in the world global economy away from regulated banks to non-regulated, away from the developed world to the emerging market world. That at least is the IMS view. She wasn't talking specifically about Latin America, but many Latin American countries are being looked at increasingly cynically by international investors. Not just because of concerns about what a change in federal reserve monetary policy would mean, not just because of the commodities shifts in the commodities climate, not just because of the slowdown in China, although that's certainly very important, but also because of big questions about whether the significant institutional reforms that happened a decade or two ago are slowing down. So the question is, has the remarkable renaissance we've seen run out of steam, or are you collectively going to be able to convince everyone sitting around you that actually Latin America is on track and can weather what's going to happen over the next year? So we have a terrific group of people to talk about this. On my immediate left we've got Eric Parado, who's superintendent of banks and financial institutions of Chile. Next to him, a man who needs no introduction to this crowd, Luis Vidagurai, Minister of Finance and Public Credit of Mexico. Opposite me, again, a man who doesn't need much interruption to this group is Ricardo Villela Marino, Executive Vice President of Itao Unibanco, Brazil of Brazil, the region's largest bank. Over here we have Mauricio Cardenas, who's Minister of Finance and Public Credit of Colombia, and on my immediate right is Ernesto Talvi, Academic Director Center for the Study of Economic and Social Affairs in Uruguay. So a mixture of ministers and commentators and a banker. So I'd like perhaps to start by asking Minister Vidagurai, what can you tell international investors today who are concerned about whether Mexico is in a good position to weather future capital markets turbulence? Certainly the current environment. Gillian, thank you very much for hosting this panel in this nice and new format, and welcome to all to Mexico. Certainly the international environment is challenging and it's going to challenge the resilience, the macroeconomic resilience of emerging markets all across the globe. We have sluggish growth, falling commodity prices, of course for Mexico the price of crude oil is very important, and then we have shifts almost of tectonic proportion in monetary policy, where you see the monetary policies of Europe and Japan going in one way and US monetary policy will go in a very different way. This is all creating shifts in capital allocation around the world, and this is creating already volatility and it's already testing the macroeconomic resiliency of all developing economies, all emerging markets, including Mexico. How are we dealing with this challenge in Mexico? We're basing our strategy in three concepts. First of all is liquidity, second is macroeconomic fundamentals, sound fundamentals, and third structural reforms. Why is liquidity so important? In times of stress, particularly currency markets can produce sharp movements without order and really reflecting the fundamentals of the market. So our main priority in the market for the Mexican peso is to make sure that the market works well, orderly, and with enough liquidity. We are not fixing the exchange rate. Mexico has a history of our 20 years with free-floating exchange rate. We believe it's much better than the market makes this happen, but our role as policy makers is to provide liquidity. We do that by having a substantial amount of foreign exchange reserves, over $195 billion, and then with that we have a flexible trade line with the IMF that was renewed just at the end of last year for another $70 billion. So we have substantial reserves not for fixing this change rate or protecting a particular level, but for making sure that we have enough liquidity and the markets work well. Second is fundamentals. So you're basically saying that you stand ready to intervene in the foreign exchange markets if there is a wild burst of volatility again? If the peso starts weakening dramatically? If there is a lack of liquidity. We are not stepping in to defend or to set a particular level. That is for the market to define, but we have intervened in the past. We set up a mechanism in January, in December, now back in March we did again, and we will continue to provide liquidity in order for the market to work properly. That's the first part. The second part of the three-part strategy is sound fundamentals, sound macroeconomic fundamentals, credible monetary policy, a sound banking system, and particularly a credible path for fiscal policy. Making sure that our fiscal deficit remains on track on a credible path and that we stabilize our debt-to-GDP ratio. We are, as an oil-producing country, that has a significant part of our public revenues depending on oil. We have cut our budgets earlier this year in January. We announced a 0.7% cut in the budget and we are working already on the budget for next year that will also reflect the needs of having tighter expenditures. Third is structural reforms. In a world where capital is going somewhere else, we need to present a case that we continue to be an interesting investment spot. There is no other way. There is no substitute for structural reforms. I think Mexico has a very strong case about structural reforms happening and becoming a reality. I'm going to come back and talk about structural reforms in a bit together with questions about the rule of law and the level of credibility of the judicial system later on. I want to ask Minister Cardenas. When you look at the macroeconomic climate today in the markets, we've had people from the IMF warning about not just another taper-tentrum but possibly a super taper-tentrum coming. What are you doing to prepare for any taper-tentrum and how concerned are you? Well, thanks, Julian. It's a pleasure to be here. I'm happy to see Minister Villegarai who has been a long friend and to be in your country and to all the members of the panel. Five years ago in 2010, there were a number of articles in the press talking about the decade of Latin America and we were half through that decade. I think during the first half, all of us were pretty much on the same wave of high commodity prices and low interest rates. Now the wave is fading, so it's now about swimming. Who knows to swim best? We're not longer on that wave. To swim well, you have to be fit for that. There are a number of things that are necessary to be a good swimmer. One of them is to be lean and to be prepared and to have a good sense of direction where you're going. Once the wave has passed, not everyone is going to get to the coast at the same pace. I think it's going to depend a lot on your abilities. Let me put your question in that context. How well prepared are we to do that? I think not everyone is equally prepared. Colombia, for example, is a country that has managed to reduce its fiscal deficit significantly. Its public debt to GDP ratio has a very strong financial sector. It has an economy that is not very dollarised on the country and has an economy that at the same time has run low inflation. With that, you are well equipped to deal with this because you can depreciate the currency without worrying for other effects on inflation on the balance sheet of banks or the corporate sector. That helps a lot. That's what we've done. The currency has depreciated and that's an automatic stabilizer. Are we concerned about increases in interest rates in the United States and super... Super tapered tendrum? No, we're not. The reason is that I think markets are discriminating. Markets understand what the fundamentals are. Markets are going to be looking at the sources of growth of the different economies. One key aspect here is domestic demand. In Colombia, we understood that high commodity prices and low interest rates were temporary. We always considered that as a temporary force. We began preparing for the times like now when those forces were going to be receding, encouraging more domestic investment in infrastructure, in housing, expanding the size of the middle class. I thought those are the engines that are going to allow us to keep our cruising speed. The other version of the image of the wave that you used is a wonderful phrase that when the tide goes out, you can see who's been swimming without any trunks. I don't know how you translate that in Spanish. That's another version of what you're saying. Basically, when the wave of high commodity prices and cheap money and Chinese demand, the three Cs, I like to say, cheap money, Chinese demand and high commodity prices, as that wave recedes, you can indeed see where different countries are structurally. I mean, one of the countries which is considered to be looking quite naked, if I dare say it, as the tide goes out right now, is Brazil. There is a lot of concern about what the state of Brazil is in terms of the institutional reforms. You've had significant political protests. You have questions around the current government and, of course, corruption scandals. What can you say to investors who are looking at Brazil today, either your bank or the country more generally, to reassure them? Actually, as you described, it's a pretty challenging scenario and situation that we're facing right now in Brazil. But if I can say something, one phrase is, don't bet again Brazil. But we should see that in a different perspective and in the context what's going on in the region and globally as well. And this new global environment in the horizon, we see the US, it's about to start the monetary tightening cycle at a time by the end of this year. And commodity prices, as mentioned, are set to remain at low levels that we are forecasting. And for the Latin American countries, there will be very challenging and a risky environment ahead overall. Because as the US interest rate rises, we're going to see bond prices becoming less attractive, liquidity more expensive. I won't see this cheap credit who won't exist anymore. And Latin American countries will face tighter external financial conditions. And at the same time, commodity prices are low with no recovery in the horizon and no longer tailwinds for growth in the Latin American region, we're going to see also the region facing a less favorable terms of trade. But given that the global environment is riskier and the question is for the panel and for ourselves, are Latin American countries prepared for a sudden capital outflows that you mentioned in the beginning of the conversation, or to lower prices and higher volatility in commodities? And I dare to say that indeed, more than in the past and why, because many countries and not all, it's not homogeneous Latin America, in the region have made most of the good times to build buffers. And just to mention three important lines that were being worked out with responsible policy makers, some of them around the table, is that first, external positions have become more resilient. Second, the public debt has been reduced over time and its composition is also healthier. And third, the inflation targeting, as was mentioned here before, the regime has been successfully implemented. But in the case of Brazil in this context, I will say that given the overall better economic macrofundamentals, there is room to face the challenging environment with counter-seq policies, especially through countries such as Chile, Colombia, Mexico, Peru. Coincidentally, the countries in the group of the Pacific Alliance, I think in the case of Brazil is not so accurate. And we are in urgent need for economic adjustment and to prevent policy makers for using both the fiscal and monetary policy as counter-seclical tools. And unlike other Latin American countries, we see Brazil that didn't invest enough while we had a favorable commodities price cycle in our side. We failed to recognize at that time the end of the cycle in time, which led to several imbalances that need to be tackled to restore confidence and to allow a rebound of growth. And in Brazil, we are, as we speak right now, at the peak of the adjustment season. That's the good news. We have Minister Levy, who is working hard technically and politically to approve a lot of the adjustments that are necessary. And quickly five, the fiscal one, the quasi-fiscal, the regulated prices, a balance of payments and inflation targeting. On the fiscal, as you know, it compromises the fiscal primary surplus that we need to reach the target and move from minus 0.6% to the target of 1.2%. We won't believe our economies will reach this 1.2%, but it will be closer to 0.8%, which is homework done. We have to improve the dynamics of the country also and do this as a main adjustment in order to regain credibility and to enable economic recovery. The second one, the quasi-fiscal, reserves to public sector credit as well as expenditures of budget. The third one is the prices. As we know, governments have prices in gas, electricity. They are repressed in the recent past and are lagging vis-à-vis the other prices. So we see a high increase in tariffs, 45% in electricity. And the third one is the balance of payment. It's an effort to reduce the current account deficit for the current more than 4% to a level lower than 2.5% of GDP. And we see that the central bank perspective, the end of the daily intervention programme and also the strong exchange rate depreciation that we've seen in Brazil are part of their adjustment. Finally, on the fifth point, inflation targets, we must renew the efforts to reach the inflation target of 4.5%. Nowadays, this year's forecast, we're going to end with inflation over 8%. So we're very challenging all the adjustments, but necessary and little by little we're gaining confidence to go through the deep levels of the cycle because at the end of the day, we cannot lower the guard otherwise we're going to be caught naked when the tide goes down. Well, it's certainly a radically different position to the situation five years ago when the Brazilian Finance Minister was talking about currency wars. But I mean, one of the questions that is particularly concerning people in Washington, many investors, is institutional reform or institutional change and whether that's run out of steam or not. I'm looking at Eric Parado to ask really, in terms of the banking sector, I mean Chile in many ways was widely admired for the reforms you did introduce in previous years in the financial sector. Do you think that the pace of institutional reform is slowing down, not just in Chile but elsewhere? No, I don't think so. But let's try to put this in context given that we are in Playa del Carmen, I would say that the sunny days are over in Latin America in some way. And some countries did the homework and some countries didn't. That meaning that the sunny days includes all the aspects related to high commodity prices, cheap money, huge liquidity and some countries took advantage of that. Some countries bought hats, coats, umbrellas and some countries didn't. And that's the main difference between Pacific Alliance countries and other type of countries. And on the financial system, I would say that Chile made a lot of reforms previously, at least on the banking side. But now this year we're in the middle of changing the banking law. Because we said it has worked but we have to make changes to diminish the gap between international standards and our own standards. When the global crisis hit us, the economy in Chile was really well prepared. I would say, without trying to compete with all our countries, we were the most resilient country in Latin America. Why? I would say because of our economic policy framework with counter-seqial fiscal policy, we saved a lot in the sunny days to spend a lot in the rainy days. We have a very counter-seqial monetary policy too. During the global crisis, the Central Bank of Chile reduced 800 basis points in one shot, in one year, with a flexible exchange rate which acts as a buffer. Third, high international reserves and fourth, a very well and strong regulated financial system. So a combination of these four legs have implied financial stability. But having said that, we have to continue doing all the economic reforms that countries made. Last year we passed a huge tax reform. It was over almost 3% of GDP to finance a huge educational reform. But at the same time, we are in the process of changing some laws to have institutional change in the law to improve transparency in political activities, for instance. It has become an issue in Chile, so it's not only talking about economic laws and reforms, but also about institutional reforms that all countries made. And at the end of the day, we want to attract investors. We are doing these reforms. Right. So you are one of the few people out of this group who doesn't have any direct responsibility for running anything. You're commenting at the moment. How credible do you find these arguments? So I hold the key for credibility. Exactly. You're allowed to speak relatively freely at the moment. What marks would you give to each of them? Give you an answer in one word. Given the countries that are represented in this table, I would say that I find what they are saying very credible. So on your two opening questions, is Latin America prepared for a super paper tantrum and lower commodity prices and less than supersonic growth rates in China? The answer is it depends. We don't have one, but three Latin Americas. So we have... The first one is Chile, Colombia, Mexico, Peru. The outward looking, faster growing and with very sound financial indicators. I mean these countries have huge levels of liquidity in relation to short-term depths coming due, which is what we would... Minister, the day that I was referring to, when he said we are liquid, so if the market suddenly closed, we can always have our own resources. I mean, all these countries are in good terms with the international community, so they will be able to tap on international land-of-large resort facilities with the IMF. Brazil, let's say, Argentina and Venezuela, we all know. They are already in crisis mode, so nothing to elaborate there. Since they are not represented and they don't have a voice unless anyone in the audience wishes to comment. Brazil, I think, what people underestimate, Brazil has not been so far as outward looking as the other countries. It has some real limitations in infrastructure and other limitations that we know of. But the liquidity position of Brazil and the soundness of the financial system, we actually performed in a broken status report last October some stress test for all these countries for the banking system, and it is amazing how large non-performing loans have to go up in order for these banks to start having problems. We are extremely resilient in terms of the capital and the provisions that they have already made for non-performing loans. So I think that the narrative of the people who are sitting in this table looks good to me now. We don't have the international community sitting at this table and it is as important as these countries if we are going to have anything even remotely similar to a super tapered tantrum. I mean, the IMF has to be ready to perform the functions of international of less resort. It has to have the ability to act rapidly, decisively, unconditionally with sizable amounts to deal with the problems, to avoid fundamentally sound countries from having any problems. That's the IMF and at the level of the World Bank and this is a message I would like to share with my Latin American colleagues that we need to be careful this time around not to react instinctively as we did in the past. We need to look good vis-à-vis financial markets so we have a slow down fiscal balance start to look not as good as they looked before so we start immediately taking austerity measures. I think we have to go to a mode of what I like to call intelligent austerity. This is a world of super low interest rates. If we can take advantage of those very low rates to invest in infrastructure, to invest in human capital, to invest as my friend Ricardo Hausmann likes to say in a rekindling axis of informal workers into the complex networks that will allow them to increase their productivity, we can do that. Those are socially profitable investments but if we are borrowing at zero or close to zero then that should not be counted as debt. In present value terms it is not. So we should be careful in not overdoing it with austerity because the world we live in is not the same as the one we had in the 80s or the 90s. But Minister and Cardenas, are you convinced that if you engage in intelligent austerity the markets will give you the benefit of the doubt? In the case of Mexico if I may, Mauricio, in the case of Mexico we are... You are facing what? Is it 42% of your budget has vanished from the oil price falling? Over all it is 30% but that is upset. It is 30% but that is upset because we also import gasoline. So we have the net impact is much lower but still it is significant and we need to react. Why we are about our budget cuts and I say two things in reacting to Ernesto's comment. First, we are sticking to our budget deficit target. So we are cutting our budget because we have less money and in order to not to have a larger deficit but we are not reducing our target. We are sticking to our target and that means we have to reduce expenditure. But it is also important how we do it and we have a lot of room to cut in things for instance payroll expenditure in the first quarter was reduced 2% from previous year. So if we focus not in reducing things that actually create economic development such as infrastructure spending or social programs that are truly effective but we focus on those things that governments can do and should cut because it is not working then I think it is a good message for the investment community. I just want to say something about the lowering of the waves and losing your trunks. In the case of Mexico it is also important where we are in the world and that creates as Monizio was saying once you are not riding the wave but you are actually swimming it is important where you are and Mexico is in a very strong place. We are part of North America and 85% of our exports are manufacturing most of our exports go to the US and that is clearly a different position for modern emerging markets. I strongly believe North America particularly with the energy reforms happening and the low cost of energy makes Latin America North America can be the fastest growing region for the next 10 years. So you believe that North America is going to be the fastest growing region over the next 10 years I think that's a bad bet. Right. Well that certainly will go down well in Washington. What do you think about trying to engage in intelligent austerity? I've never yet heard the World Bank champion intelligent austerity but what do you think about that? Well I think it's an interesting concept. I tell my daughters I say to them one thing is to be intelligent another thing is to feel intelligent but yet another more important thing is what your grades say. So who is grading us and who is basically looking at what we do in terms of austerity. Colombia has a fiscal rule and the fiscal rule we have established that for this year for example our fiscal deficit structural has to be 2.2% of GDP or less. So someone thought that was intelligent. The fiscal rule by the way is well designed so that in a year like this when you have low commodity prices and we are in a transition it allows for additional expenditures temporary adjustment so say 0.6% of GDP on top of that is that sufficiently intelligent or should we take advantage of the fact that there is money out there in the world available at a very low cost and maybe we should run 3-4% of GDP deficit I go back to what I say to my daughters it depends on who is grading us and the rating agencies are giving us very good ratings essentially because we are sticking to our fiscal rule should we relax that I wouldn't want to test that I wouldn't like to do that because I think credibility is a very important part of this game and sticking to your rule I think is the best option we have I wouldn't do it because it could be intelligent from your own point of view I mean you could do more things you could offset some of the declining commodity prices you could stimulate the economy further but at the end of the day it's about who grades you I can see you're dying to protest I'm not going to protest to my friend Mauricio I fully understand the position a minister is in and I would be saying exactly the same if I were in Mauricio's place that you don't want to test the limits of credibility but the way you are graded is not ingrained in stone our role from the public policy research community is to try to change the way people think about how they grade us that is why I think the international financial organizations maybe will have a renewed role to play just as they played in the 50s and the 60s when they were the only game in town in terms of capital flows we didn't have private but official flows or multilateral flows so they can be part of the recycling of these resources into socially productive investments that are being audited in a sense by and guaranteed by these multilateral organizations and maybe if they are not counted as actual deficits and this is accepted by the community then your deficit would not change and you would be allowed to do productive growth promoting productivity enhancing investments well certainly infrastructure has become the new favorite magic word if not would be magic wand of the IMF and World Bank at the moment I mean everyone loves to talk about infrastructure but Eric what do you think about no let me kick in the discussion regarding austerity because I think austerity I'm not sure if we can use well that concept I prefer to use the concept of fiscal responsibility fiscal rules and so on in the case of Chile we have a very strict fiscal rule that focus on the long term price of copper so independently of the current price we only focus to get our expenditures on the long term price of copper so if the long term price of copper is under this long term of copper we have to supplement those expenditures and I think that's important because all countries that did the homework and save money during the boom during the super cycle boom of the commodities now they have some sort of security some sort of savings to spend it in the rainy days and I think the investors discriminate that and they look at the country say you know what those countries save a lot of money so if they are running a deficit a fiscal deficit that probably we will have of course we can get all the money that we can without being shy and spending a lot we did that during the global crisis and we spend more than $9 billion which is huge for our economy trying to support the heat from the foreign shocks so that's quite important and I think if we take the transition more or less it's a similar thing right take one comment on the austerity before we move to the subject the sound yes hello can you hear me can somebody fix the sound hello yes my comment is that austerity stand alone doesn't matter how intelligent it might be it won't bring prosperity austerity is necessary but it's not sufficient we need to find other sources of growth for our countries to innovate to be more productive and so on take the case of Brazil where we have fiscal imbalances going on and the Brazilian economy urgently needs adjustments to recover sustainable growth down there and the main adjustment as I was talking before is the fiscal one because the primary surplus has been deteriorated over the years because we haven't been doing the austerity homework correctly just to give you some numbers the primary surplus was 2.9% of GDP in 2011 came down to 2.2% of GDP in 2012 down to 1.8% of 2013 and minus 0.6% last year so that came from an impact of economic slowdown on tax collection especially doesn't grow and so on and more expansionary fiscal stance given the lack of austerity expenses were growing at a rate of 5.2% so flat revenues growing expenditure not a very good equation and the reduction on the primary surplus and increase on the government financing costs put a lot of pressure on the public debt just to give an example that net debt Brazil has a percentage of GDP increased from 2.6% in 2014 to 34% and gross debt increased from 5.6% to 59% so given our calculations our economists at the bank I'm surrounded by PHD and economics in Brazil we learn to become a PHD by force, by crisis hyperinflation, debt crisis and so we all PHDs in Brazil the primary surplus necessary in order to stabilize public debt long term is around 2.5% of GDP which is much higher than the current one just to show that we need a lot of homework in the austerity front but it's not sufficient to get the so-called prosperity well I'm going to turn to the audience for questions in just a minute because we have a lot of people in the room we have a packed room a lot of people with a lot of experience I should say by the way that if any of you are too shy and don't want to ask a question in public you can email me a question too to futurefinance at w-e-f dot c-h so if any of you are too shy to put your hand up you can email me in secret too you can too if you'd like can I say a word? please do yes because at an instance point is right there is cheap capital available and that's something very exceptional about these times so you could think well why don't you spend more at the level of the government and do it in a coordinated way with the rating agencies, the multilaterals etc I think there is another way of doing the same thing but more effective which is have the private sector have the private sector use that cheap capital create the incentives for the private sector to really take advantage of that opportunity that's exactly what we're doing in Colombia with the PPPs on transport infrastructure road concessions which is essentially a program where the private sector goes out there to the financial markets to borrow long term low cost build infrastructure get some support from the colombian budget again long term but we're going to maximise investment in the short term and that's an alternative that allows you to stick to your fiscal rule show that your fiscal performance is bright but at the same time you take advantage of market conditions in the financial markets today and I think that's perhaps an even more intelligent austerity Are you convinced? I'd like to put a word on the austerity debate I was reading a piece by Paul Krugman he was my professor at MIT on the context of the UK election about austerity which is a big topic of debate and certainly perhaps the developed world has overdone austerity a bit and I think Krugman's point goes right through because the orthodox response to an output gap is not austerity but to have a more relaxed fiscal and monetary policy but after I read this long piece an intelligent piece by Paul Krugman I thought well there's a difference between a fundamental difference between a country like the UK or an emerging market what means being an emerging market is that you have to earn the trust of the markets everyday you have to earn in a world that you have the constant risk and particularly days of capital not flowing anymore you have to earn it and the only way to earn it at the end of the day is confidence building confidence and building trust in that your monetary policy your fiscal policy will remain on track and that goes not to the austerity debate but much more as I was saying on the fiscal responsibility debate and I think many of the Latin America countries certainly the Pacific Lions Brazil is doing it as well we are on track of preserving confidence in our fiscal trajectory I mean the other problem of course is that when you do get other difference between many emerging market countries and some of the developed countries is that when you do impose austerity you don't just get protest at the ballot box you can get protest out on the streets and of course we're talking about a region with plenty of political volatility how concerned are you about the current political fragmentations and tensions in Brazil we're following very closely what's going on socially and politically in the countries it's trend that it's not specifically from Brazil it's a trend that you see in other countries in the world where citizens, the civil society is not happy with the prices and service quality of the public goods that they're receiving from government and that's very natural for a mature democracy such as Brazil when we have very solid institutions they guarantee also going forward of the country and we're being witnessing in many capitals of Brazil millions of young people liberal professionals, mid class different races diversity going into the streets to fight for this better quality of goods and services and plus the end of corruption in our country so that's a claim and the government I think it's processing this information because at the end of the day they are the voters, they are the clients and they need to be satisfied so what kind of reforms that we're going to see going forward to approve, to have a better education security, health plan make sure that every tax dollar will go back in some way to benefit society at large I have a question of corruption and the credibility of the judiciary it's obviously pretty critical right now in terms of investor competence but I'm going to turn to the audience of questions apparently you're supposed to send questions if you do want to send them by social media rather than speak them via Twitter you have to use the hashtag future finance that's how you send a question by Twitter if you would like to but let me start by asking whether there's anybody who would like to ask a question in person I'm sure there'll be plenty it would be courteous but not compulsory to identify yourself and under no circumstances and this is compulsory no long speeches I'm going to cut you off after 30 seconds because we have five people and a lot of people in the room thank you, I'm going to move here because it's for Minister Rydegarai I'm Mauricio Garcia from Mexico and I love that liquidity comment but what about local liquidity liquidity in Mexico, I'm amazed about the only theme that goes around from entrepreneurs to big companies in this forum is the lack of for example VAT return for companies and that is getting a lot of liquidity outside of enterprises hence so what about local liquidity and how can we solve that big problem that enterprises and I guess the whole country is facing right now, thank you thank you for your comment certainly one of the challenges when you're not writing the external wave anymore is to have a more robust domestic demand just as Mauricio was saying at the beginning and if you look at the figures for the first quarter either you look at consumption the sales of cars in the domestic market supermarket sales these are certainly trending up and that is a good sign that families and companies have more money in their pockets inflation is trending down job creation is even stronger than the rate of economic growth and that is creating a foundation for consumption growth on a specific topic you're saying when we started the administration VAT collection was growing at a 4% rate VAT returns were growing at over 20% that meant that there was something that was not right in the system what we did was we took special steps in order to double check every return of VAT but we were very much that process is very much behind us if you look at manufacturing if you look at the food industries which are the bulk of VAT returns certainly the problem is very much very much corrected but we are in the process of stabilizing and just look at numbers in the first quarter a public finance report look at the figure for VAT collection that shows negative growth why is that is because we are returning a lot of the over 2 VAT from last year so the aggregate figures already show it and particularly talking to manufacturers you perceive that we have a question for me Thank you I wanted to go back to the issue of structural reforms it seems like when times are good you don't need them and when times are bad you can't afford them and what I wanted to say is particularly with regard to tax reform and labor reform there are very few countries that are really addressing those two seriously and frankly the ones that are like in the case of Chile seem to be going in the wrong direction honest what are countries doing in that regard and how important is it in the agenda of the countries represented here those two that I think are very important for business tax reform and labor reform Who would like to address that? Let me tell you what we've done and what we plan to do what we've done is that three years ago in 2012 we decided to cut payroll taxes because we thought payroll taxes were really constraining formal employment so we decided to do that and the results have been very positive we cut payroll taxes that in Colombia were very high 30% to half of that and since then we've seen 7% to 8% annual growth on formal employment which is very important on taxes I think this is a common question and a theme that it's all over in Latin America and here's the tension most of our countries have relatively low tax collections tax to GDP ratios but yet the corporate sector has high income tax rates and that's the world that it's a little bit it's contrasting the way to solve that and the way we're thinking in the future to deal with this issue is by reducing tax evasion by widening the tax base by reducing informality but making sure that you can spread taxes over a larger set of taxpayers I think that's the strategy we're following in the middle of a debate with the tax experts with the tax commission looking at our tax code to deal with that situation Ernesto, are there any countries out of here which impress you in terms of their tax policies? I don't share the idea that structural reform that there's time for structural reform is never right I agree that when the external environment is very favourable and you are doing well anyhow so why get into the political cost of doing very costly structural reforms if you are doing well anyway when we are in crisis mode we are basically devoting all our time and resources to repair balance sheets so we are not in the mode of doing structural reforms but this excluding something exploding somewhere here we are running into mediocre times where people lost the sense of a bright future that they had just a few years ago and that's the reason why we are seeing that malaise among the electorate being expressed through spontaneous social protests I really do think it is these times just to paraphrase a very famous economist when the politically impossible becomes politically inevitable these are the times in which we can really tackle structural reforms and that's why I think it is so important I mean to try to take advantage of in the way Mauricio suggested or otherwise of these very very very low interest rates and abundance of resources let us have some historical perspective here before we are too too harsh on us I mean 35 years ago 1980 most of the continent had military dictatorships everywhere not a single country in the continent not a single country had single digit inflation we were jumping from crisis to crisis from coup d'etat that was our reality today most of the continent as imperfect as it might be understands that elections are the only way to choose our leaders most of the countries in the continent except two that I won't mention have single digit inflation 35 years ago that would have been unimaginable so why not forward fast 35 years from now and think that maybe these times destroying times that we are going to confront other times in which Latin America will do what it takes to get into definitely the path of inclusive growth sounds like you should be employing to do your public speaking for you that's a very strong insight but very shortly the question do you do structural reforms at what time in the business cycle that's the wrong question you should do reforms at the beginning of the political cycle if you learn anything in Mexico do it immediately after the election and don't think about the business cycle the reforms are not aggregate demand short term tools these are structural reforms the effects will be 5 years, 10 years, 20 years so forget a little bit about business cycle act on the political cycle on structural reforms we have a question over there yes I think we have a microphone do we yes I think that a question that I would like to hear the panel or give their opinion about is what do they think about the law and the relevance of the rule of law in our countries and then the second thing that is I think just one because we're almost out of time rule of law and we've got another question behind you let's take a couple of questions because we are I'm interested in hearing the panel talk about poverty we've made enormous advances over the past 25, 35 years we still have a 5% poverty rate throughout the region more or less and I want to see how intelligent austerity, fiscal responsibility tie in with solving that enduring problem we have a very engaged democracy here lots of people trying to ask questions I'm going to take one more over here and then I think we'll probably have to treat that sadly as the final I would like to ask you a question to Mr Talby there's no representation here from Venezuela or Argentina in the panel and they say that only barbers learn on other people's heads but what are the lessons about the do's and don'ts of economic policy that the region should learn from Argentina and Venezuela maybe on multiple exchange rates maybe on using price controls as a way of bringing inflation down and so on right well we have exactly five minutes which by my math gives you each about just under a minute to talk so Ernesto do you want to start there in one minute rather than getting into the technicalities of the lessons regardless I think that the big lesson from Argentina and Venezuela is that state capitalism you can afford it when you have very high commodity prices redistributed clientelistic policies can be afforded only when you have very high commodity prices and very cheap capital it runs out of steam so I'm not sure what's going to happen in Venezuela but I'm sure because Venezuela has a larger institutional problem not only an economic problem Argentina still has functioning although imperfectly institutions and it's going to have an election so Cristina Gerson can afford essentially maintaining her position because she has a few months to go but the next government won't be able to afford state capitalism and redistribution and we are going to see whoever wins very substantial change so you have to look as Mauricio said you have to have very clear word to go and state capitalism doesn't work I'd like to ask a question about rule of law to Luis Minister Vizalai because there is concern about the impartiality of the judiciary in Mexico can you convince people that the rule of law does actually operate in Mexico today? Well certainly we have a large extent of a functioning rule of law and that's one of the reasons why we are able to attract substantial investment both foring and domestic investment the auto sector General Motors announced late last year a 5 billion investment in Mexico for the next four years and we are constantly attracting capital from around the world not only to financial markets but direct investment and that is because people who invest in Mexico feel that there is contractual protection to their investments of course we have a challenge and the way we have chosen this path is to make better institutions the president just signed and published this week a new transparency law the congress has approved a constitutional amendment for anti-corruption a new system for anti-corruption so yes we need to work everyday and that has to be the highest priority to make a more robust rule of law state and that's the path we've chosen through institutional change Corruption or poverty Can I take a question on poverty? Rather than corruption It's a great question and I think it's a question that matters to all of us here government, academia, business because and I'll go back to my analogy of the wave you know waves tend to get bigger and bigger at some stage and that's exactly what happened with the expansion of the middle class the reduction in poverty so everything was working in the same direction high commodity prices, low interest rates and the middle class was growing and that was part of these spectacular say last decade in the region the expansion of the middle class or the reduction in poverty to a large extent was supported by the government behind that conditional cash transfers all kinds of programs that really helped the poor and I think that was general in the region with the less fiscal revenues because of the reduction in commodity prices as there is less exuberance in terms of government expenditures there is always that risk and there is always that challenge what do we need to do now to make sure that we continue reducing poverty and expanding the middle class based on jobs this is really about jobs that's really what could sustain the expansion of middle class in the long run and that goes back to Heimann's question about structural reforms what can we do really to stimulate job creation in the formal sector taking people out of poverty it's going to depend less on the government it has to depend more on the market Eric and Ricardo last quick word let me say something on poverty I would add income distribution in some way because micro resilience by itself is not the most important thing it's not enough to have financial stability or economic stability in your country if you don't share the wealth with everybody and that's an important point because when you think about the structural reforms I think country should have at least in Latin America three priorities education and that's I think is the most important thing and when you think about the structural reform every country should have a big structural reform on education but given that you have and you are responsible physically also a tax reform then given the criticism we can talk about the details about that but if you want to increase expenditures you need to increase the resources and that's why it's important to match in some way or another with these two structural reforms two quick comments first on the rule of law I think Brazil has the biggest number of laws among ourselves in the continent but just of having the rule of law it's a matter of enforcement the rule of law and we've seen that enforcement in Brazil lately especially after the corruption investigations all spheres of the country supreme justice federal police and so on and it's a good sign that mature institutions are evolving that way on the poverty the government we see in the inclusion of middle class and reduction of the pyramid with the growth and inclusion that Brazil and the region had given the positive tailwind effect we've seen the gene index also improving but we need to grow out of poverty that's why those measures and those investments are so important because I agree with Eric you must grow the pie in order to divide and not only distribute what you have there and we need to create the jobs and also to give opportunity to people to be included in society actually it's not enough to give social subsidies to the poor having aspiration for them to raise up in the pyramid or packages that they don't simply work we must create incentives for people to find work to get skills to become entrepreneurs to innovate to raise them from poverty and that's critical to persevere and at that moment in order to regain confidence and trust we should have no tolerance or complacency right well that's in the positive note on which to end thank you for a stimulating discussion I won't try and summarize there's very diverse different themes other than to say that clearly the tide the current has changed whatever analogy you want to use swimming is going to be a lot harder over the next year but best of luck in trying to find a good course on whatever policy clothes you're wearing so thank you all very much indeed thank you