Friday, January 28

Luis Carranza: “The Latin American economy will return to the pre-crisis level in 2023” | Economy

Luis Carranza, in 2018, in Mexico City.
Luis Carranza, in 2018, in Mexico City.Gladys serrano

The president of CAF-Banco de Desarrollo de América Latina, Luis Carranza (Lima, 1966), attends EL PAÍS in the last stages of a particularly tough year, in which the financing needs of Latin American countries have skyrocketed as a consequence direct from a pandemic that has dragged the region into its largest economic slump in 120 years. The agency closed 2020 with a historical record of approvals (more than 14,000 million dollars, 2,000 more than expected at the beginning of 2020) and of disbursements (10,000 million). But it is not enough: it already has a roadmap to gain financial muscle through an express recapitalization, “voluntary and selective”, aware that many shareholder countries do not have now – still in the middle of the health crisis – the capacity to put a penny more.

Question. At what stage is the region’s economy after the worst year in more than a century? Does 2020 weigh more hope for vaccines or injuries?

Reply. The fundamental thing is to have control of the health situation. The beginning of the vaccination process is something very, very positive, and we hope that the logistical deployment and access will be as fast as possible.

P. Are you afraid that vaccination is lagging behind the rest of the world and, particularly, with respect to the rest of emerging countries?

R. That is the risk we have now. And there is also a great dispersion among the different countries of the region regarding the progress they have in the process of purchasing vaccines and the deployment they may have.

P. It is the worst hit bloc in the developing world, and ECLAC has long been speaking openly of a new lost decade. Do you share that vision?

R. The risk exists. We are seeing a drop in GDP of around 8%, better than we had in the middle of the year, when we saw more than 9%. Some countries will likely drop nothing, like Paraguay, and others will drop to double digits, like Peru. On average, we expect the region to recover the pre-crisis level in 2023. But GDP per capita corrected for purchasing power will not return to the level of 2015 until, at the earliest, 2025. There it is a lost decade.

P. There is a tendency to speak of the region as if it were monolithic. Nothing could be further from the truth. Are we heading towards a high speed recovery?

R. Effectively. We have, for example, the countries that export raw materials, which have seen how these products have recovered, in general, the price levels that they had at the beginning of the year with exceptions such as oil, which continues to be the most affected. And there are also different fiscal conditions in the countries, with financing needs around 10 points of GDP per year and significant increases in debt. There, liquidity in international markets is helping us a lot.

P. The response has been very asymmetrical: even the IMF urges countries that have fiscal space to use it. Among the big ones, Mexico has opted for a fairly conservative fiscal approach.

R. If a country has fiscal space, it has to use it. This is the moment in which one has to use all the reserves that he has accumulated over time. But part of the asymmetry in the fiscal and monetary response depends on the pre-crisis conditions. Unlike in 2008 and 2009, when the region in general was in a very solid situation, this recession has caught us with great differences: Paraguay, Chile or Peru have relatively low debt levels, but others have very complicated situations.

P. The voices calling for more action from development banks have grown. Do you agree?

R. In the midst of the crisis, our plan was to reach approvals this year close to $ 16 billion. Why have we finally stayed at 14,000? Because our own countries did not demand from us the resources that they initially considered, thanks to the fact that the conditions in the markets began to relax relatively early, especially for those countries with investment grade. This meant that they did not need the support of the development banks that they had originally intended. And, later, some Congresses have not approved the credits that we had negotiated due to the level of internal political tension. Now, I believe that development banks have a very important process to play in the recovery process: we are a very important financial lever, not only because of the resources but also because of the orientation we give them, which is basically productive and social infrastructure. We want to remain relevant to countries in the next two to three years. This is going to be a slow recovery process that will require financial support to achieve a smooth convergence in its fiscal consolidation.

P. Is a recapitalization of CAF necessary?

R. It is a process that we have already begun: In December we proposed to our board a voluntary and selective capitalization process, and the first thing we are going to do in January and February is to collect the demands of all the countries for the next three years. And in March we will bring a specific proposal, with numbers, of what each of them would need.

P. Why voluntary and selective?

R. Because the conditions of access to financial markets are not the same [en cada país] and a traditional capitalization would be very complex to carry out: some have spreads [el diferencial entre su coste de financiación y el de EE UU] above 100 basis points and others around 1,000. These differences have widened significantly in the last decade, and the crisis has only accentuated them.

P. In silver: that some countries give the go-ahead, but do not contribute money.

R. Indeed, such cases could occur. The good thing about it being a voluntary and selective process is that some countries can approve the measure without entering the capitalization process.

P. The other large regional development bank, the IDB, is undergoing a particularly convulsive process, with the controversial election of Mauricio Claver-Carone, a Trump man who is not exactly seen with good eyes in many Latin American capitals. Can CAF take advantage of this situation?

R. There is no competition here: there is collaboration and joint work to support countries in search of prosperity and development. We have a long tradition of collaboration with the IDB. I personally have a very good relationship [el presidente saliente] Luis Alberto Moreno and we have established contact with the new president and we are ready to work. The worst that can happen to the region is that the main actor in development banking, which is the IDB, does not rise to the occasion. There is a political issue that we hope will be resolved soon and that it will have the full support of the countries so that the new president can work.

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