December 19, 2012 10:30 pm
A time for Christians to engage with the world
Our involvement in politics and economics should transcend every form of ideology, writes Pope Benedict XVI

Render unto Caesar what belongs to Caesar and to God what belongs to God,” was the response of Jesus when asked about paying taxes. His questioners, of course, were laying a trap for him. They wanted to force him to take sides in the highly charged political debate about Roman rule in the land of Israel. Yet there was more at stake here: if Jesus really was the long-awaited Messiah, then surely he would oppose the Roman overlords. So the question was calculated to expose him either as a threat to the regime, or as a fraud.

Jesus’s answer deftly moves the argument to a higher plane, gently cautioning against both the politicisation of religion and the deification of temporal power, along with the relentless pursuit of wealth. His audience needed to be reminded that the Messiah was not Caesar, and Caesar was not God. The kingdom that Jesus came to establish was of an altogether higher order. As he told Pontius Pilate: “My kingship is not of this world.”

The Christmas stories in the New Testament are intended to convey a similar message. Jesus was born during a “census of the whole worldordered by Caesar Augustus, the emperor renowned for bringing the Pax Romana to all the lands under Roman rule. Yet this infant, born in an obscure and far-flung corner of the empire, was to offer the world a far greater peace, truly universal in scope and transcending all limitations of space and time.

Jesus is presented to us as King David’s heir, but the liberation he brought to his people was not about holding hostile armies at bay; it was about conquering sin and death forever.

The birth of Christ challenges us to reassess our priorities, our values, our very way of life. While Christmas is undoubtedly a time of great joy, it is also an occasion for deep reflection, even an examination of conscience. At the end of a year that has meant economic hardship for many, what can we learn from the humility, the poverty, the simplicity of the crib scene?

Christmas can be the time in which we learn to read the Gospel, to get to know Jesus not only as the child in the manger, but as the one in whom we recognise that God made man. It is in the Gospel that Christians find inspiration for their daily lives and their involvement in worldly affairsbe it in the Houses of Parliament or the stock exchange. Christians should not shun the world; they should engage with it. But their involvement in politics and economics should transcend every form of ideology.

Christians fight poverty out of a recognition of the supreme dignity of every human being, created in God’s image and destined for eternal life. They work for more equitable sharing of the earth’s resources out of a belief that – as stewards of God’s creation – we have a duty to care for the weakest and most vulnerable.

Christians oppose greed and exploitation out of a conviction that generosity and selfless love, as taught and lived by Jesus of Nazareth, are the way that leads to fullness of life. The belief in the transcendent destiny of every human being gives urgency to the task of promoting peace and justice for all.

Because these goals are shared by so many, much fruitful co-operation is possible between Christians and others. Yet Christians render to Caesar only what belongs to Caesar, not what belongs to God. Christians have at times throughout history been unable to comply with demands made by Caesar.

From the emperor cult of ancient Rome to the totalitarian regimes of the past century, Caesar has tried to take the place of God. When Christians refuse to bow down before the false gods proposed today, it is not because of an antiquated worldview. Rather, it is because they are free from the constraints of ideology and inspired by such a noble vision of human destiny that they cannot collude with anything that undermines it.

In Italy, many crib scenes feature the ruins of ancient Roman buildings in the background. This shows that the birth of the child Jesus marks the end of the old order, the pagan world, in which Caesar’s claims went virtually unchallenged. Now there is a new king, who relies not on the force of arms, but on the power of love.

He brings hope to all those who, like himself, live on the margins of society. He brings hope to all who are vulnerable to the changing fortunes of a precarious world. From the manger, Christ calls us to live as citizens of his heavenly kingdom, a kingdom that all people of goodwill can help to build here on earth.

The writer is the Bishop of Rome and author of ‘Jesus of Nazareth: The Infancy Narratives’

Copyright The Financial Times Limited 2012.


Peru—Concluding Statement of the 2012 Article IV Consultation Mission

December 18, 2012

Sound macroeconomic management and strong economic performance continued in 2012, and the economy is now running close to its potential. In addition, several structural reforms have been implemented. The near-term outlook remains favorable, but subject to risks. In particular, negative terms of trade shocks could reduce exports, investment and growth; while ample global liquidity and capital inflows could lead to overheating. Monetary policy should continue to be neutral if underlying inflation remains subdued and expectations well-anchored. Macro-prudential measures should be used more proactively to limit the buildup of financial vulnerabilities in the context of large capital inflows and strong credit growth. Additional exchange rate flexibility will help the Peruvian economy to absorb external shocks, and assist the private sector to better internalize foreign exchange risks. Prudent implementation of the 2013 budget is expected to continue. The fiscal framework should cement a prudent management of non-renewable resources and avoid pro-cyclicality. To address long-term challenges and improve growth prospects, Peru should tackle long-standing structural bottlenecks to enhance productivity and revamp infrastructure through a well-designed national investment strategy.

A. Context, Outlook and Risks

1. Growth performance in 2012 exceeded expectations, with inflation converging to the target band.

Real GDP growth is projected to slow to 6.3 percent in 2012 with the output gap closing by year-end. Stronger-than-envisaged domestic demand—in particular private investment—has offset weaker export performance due largely to lower export prices. Inflation declined to 2.7 percent in November 2012, falling within the inflation target range (1 to 3 percent), reflecting the reversal of food supply shocks. The current account deficit is estimated to have increased to almost 4 percent of GDP in 2012, mostly due to deteriorating terms of trade and strong import growth. However, the external current account deficit is more than financed by foreign direct investment (FDI) inflows. The financial sector remains sound, profitable, and well-capitalized, but credit dollarization remains high.

2. Macroeconomic policies were geared towards managing the surge in capital inflows and strong credit growth.

  • The fiscal stance was tighter than envisaged. The overall fiscal surplus of the non-financial public sector (NFPS) is estimated to have reached 2.1 percent of GDP in 2012, which helped sterilization efforts. As in the previous year, the stronger fiscal outcome was due to higher-than-forecasted revenues and under-executed expenditures. The structural fiscal surplus as measured by IMF staff is expected to have reached 1.6 percent of GDP.

  • Monetary conditions were tightened through reserve requirements. While the BCRP has kept the policy rate unchanged at 4¼ percent since May 2011, average reserve requirements have been hiked by a cumulative 375 basis points since early 2011 to dampen strong credit growth. The Nuevo sol has appreciated by about 4¾ percent in real effective terms this year. The BCRP has intervened in the foreign exchange market with a net purchase of US$12 billion as of end-November 2012, to avoid a sharp appreciation of the currency in the context of a dollarized economy (about of deposits and less than ½ of credits in the banking system remain in U.S. dollars) with an open capital account. Gross international reserves will reach US$64 billion in 2012 (32 percent of GDP), accompanied by increasing sterilization costs.

  • Prudential regulations were strengthened. The mission welcomes recently adopted prudential measures, including liquidity requirements in line with Basel III criteria, as well as higher provisioning and capital requirements to help financial institutions internalize foreign exchange credit risks. The mission also welcomes measures to deter FX lending in automobile and other consumer loans.

3. The near-term outlook remains favorable but risks lurk in both directions.

Real GDP growth is projected at potential, supported by buoyant domestic demand and continued elevated commodity prices, while inflation is expected to remain subdued.

  • Downside risks from the global economy could have a significant effect on Peru primarily through terms of trade shocks. The combination of a sharp relapse in global growth and a return of global risk aversion is the principal tail risk that could encumber the growth outlook. A significant fall in metal pricestriggered by a larger-than-envisaged slowdown in China, Peru’s largest trading partner—would have a significant negative effect on exports, investment and growth prospects.

  • Upside risks could result from ample global liquidity and capital inflows in a context of anemic growth in advanced economies. Peru’s combination of long-standing macroeconomic stability and prudent policy management with positive growth prospects could further stimulate large and sustained capital inflows that could test the absorption capacity of the economy and pose significant policy challenges. Despite subdued inflation prospects, strong capital inflows could result in buoyant domestic demand dynamics, heightened overheating risks and potential credit and asset price booms.

B. The Challenges of the Near-Term Policy Mix

4. The current policy stance appears broadly adequate, but should remain flexible to react to risks associated with strong domestic demand dynamics, large capital inflows and rapid credit growth.

  • Fiscal policy. The approved 2013 budget aims at a fiscal surplus of about 1 percent of GDP, in line with the multi-year macroeconomic framework published in mid-2012. Staff estimates that the fiscal surplus could be about ½ percent of GDP higher in 2013 due to strong metal prices and normal levels of expenditure execution. The 2013 budget includes a number of measures related to strengthening tax compliance and enforcement as well as additional spending on social programs and wages for civil servants whose salaries have been frozen for several years. Despite the strong fiscal position for 2013, the budget accommodates an increase in primary spending of about 10 percent in real terms to gradually achieve the goals set by the government on social inclusion and public sector reforms to promote a better civil service. Staff estimates that there will be a structural expansion of about ½ percent of GDP, which is mildly pro-cyclical in part due to the higher-than-budgeted surplus in 2012. Prudent implementation of the 2013 budget is expected to continue.

  • Monetary policy. In view of the expected fall in inflationary pressures (as supply shocks unwind) and the tightening in monetary conditions resulting from hikes in reserve requirements, the mission supports the central bank decision to keep policy rates on hold. The proactive use of reserve requirements, in coordination with prudential measures, should help in containing risks associated with strong private credit dynamics.

  • Exchange rate policy. The exchange rate is broadly in line with fundamentals, but the current account deficit has widened recently due to strong import growth. The mission supports efforts to allow for higher exchange rate flexibility. This will help enhance the shock absorber role of the exchange rate over the medium term, help the private sector internalize exchange rate risks and reduce sterilization costs.

  • Macro-prudential measures. To reduce the buildup of external borrowing, additional macro-prudential measures may be required. To deter domestic FX lending, existing regulation may prove insufficient in light of the expected appreciation of the Nuevo sol and easy global financial conditions. Furthermore, macro-prudential measures could also penalize more heavily FX lending at long-term maturities. Finally, strengthening supervision may be required to ensure that banks adequately assess FX credit risks.

5. The authorities are relatively well-positioned to cope with negative spillovers.

Under a scenario of global financial disruption and a surge in risk aversion which leads to a reversal of capital inflows, the central bank can deploy resolute actions to maintain confidence and ensure orderly functioning of markets through higher exchange rate flexibility and the use of reserves, liquidity buffers, repo operations and dollar swap auctions. Exchange rate flexibility should play a key buffering role. Under a long-term global stagnation scenario, monetary and macro-prudential policies should be eased as the first line of defense. If a sharp deterioration in terms of trade materializes, a fiscal stimulus—in conjunction with the above—could be effective to ease the adjustment in economic activity and employment.

6. If upside risks materialize, policy coordination may prove challenging to ensure a timely and effective response to overheating risks.

In the context of large capital inflows and strong domestic demand dynamics, a multipronged and more coordinated policy response may be needed to confront the macroeconomic challenges. Under this scenario, tightening monetary conditions will need to rely on a combination of quantitative measures, including reserve requirements, hikes in policy rates and higher exchange rate flexibility. In parallel, tighter prudential measures would help prevent the buildup of financial underlying vulnerabilities in light of rapid credit growth. In coordination with warranted macroeconomic policies adjustment, additional targeted, transparent and temporary measures, including those to ease limits on investments abroad by the private pension funds or to deter external financing, may be used in response to a surge in capital inflows. If upside risk materialize, fiscal policy could also make additional efforts in moderating the pace of government spending to complement monetary policy.

C. Medium-Term Challenges to Ensure High Economic Growth

7. Peru needs to put in place an ambitious reform agenda to enhance potential growth, supported by a more socially inclusive strategy.

The mission concurs with the authorities’ view that economic growth will need to be increasingly driven by higher productivity. It agrees with the authorities on the need to deepen structural reforms. Key pillars include: (i) enhancing competitiveness by boosting human capital and maintaining labor market flexibility; (ii) defining a nationwide strategy to remove infrastructure bottlenecks; (iii) improving the business climate to foster investment and innovation (including enhancing formality and strengthening institutions); and (iv) further developing the local capital markets to facilitate investment and better allocate savings. These reforms, together with more effective implementation of social programs in line with the agenda of the Ministry of Social Development and Inclusion, will allow the authorities to deliver more socially inclusive economic growth.

8. Since elevated commodity prices are expected to persist, the authorities have the opportunity to put Peru on a sustainable high long-term growth path.

Adopting a firm and prudent medium-term anchor for fiscal policy would help contain demand pressures in the short run, while laying the basis for balanced economic growth and equitable spending of mining wealth across generations. Critically, the authorities need to define a comprehensive public investment strategy that upgrades infrastructure and removes bottlenecks. This will require identifying infrastructure needs and capacity constraints at the national and subnational levels, establishing priorities, and evaluating financing needs while identifying opportunities for PPPs over the medium term.

9. The authorities are working on strengthening the fiscal framework, including by adopting an adequate fiscal anchor that considers non-renewable wealth.

Building on the success of Peru’s Fiscal Responsibility and Transparency Law in reducing public debt and ensuring fiscal responsibility, a fiscal anchor should enhance the predictability of public spending growth in the medium term taking into account commodity prices and consider intergenerational equity in the use of natural resource wealth. An anchor would also need to consider fiscal risks associated with contingent liabilities and natural disasters, as well as the need to close the infrastructure and social gaps over time. Given capacity constraints, fiscal savings in the short term could be partially deployed as capacity expands to ensure high quality of investment. Over the medium-term, staff sees merit in running a small structural fiscal surplus of around 1 percent of GDP to address unexpected contingencies. A strong political commitment as well as the steady implementation of a fiscal rule is equally important.

The mission also suggests a communication strategy to gain public support for fiscal savings in Peru under the current elevated commodity price cycle. Over the medium term, the trend in current expenditure should be moderated to avoid challenges to macroeconomic management.

10. The mission welcomes the authorities’ recent efforts to strengthen tax administration, but achieving medium-term tax targets will be challenging.

Peru’s tax collections are low compared with other emerging markets in terms of revenue mobilization and tax effort (i.e., the ratio of actual revenues to potential) while investment and public social spending is lower than in other emerging economies with similar per-capita income. The strengthening of SUNAT is a step in the right direction but requires further upgrading. The mission endorses the authorities’ efforts to raise tax compliance.

The government’s goal of raising tax revenues to 18 percent of GDP by 2016 will allow the country to achieve similar tax collections as in other emerging economies and will help expand social programs. Staff encourages the authorities to take the necessary measures to ensure that the ambitious tax objective is achieved.

11. It will be important to continue enhancing financial supervision and prudential measures, to limit the buildup of systemic risks.

Further capital inflows to Peru risk fuelling credit and asset price booms. The presence of financial conglomerates, coupled with continued strong credit growth, could increase systemic vulnerabilities as financial deepening may result in uncharted credit risks. In this regard, the mission welcomes the proactive use of prudential measures and efforts to improve corporate governance and supervision of conglomerates.

Going forward, consideration should be given to strengthening the financial resolution framework for systemic stress conditions and revisiting the initiative to include cooperatives under SBS supervision. Additional coordination in managing systemic risks and designing macro-prudential policy could facilitate prompt policy response. Also, the mission recommends monitoring household and corporate sector balance sheets, including FX mismatches, in a systematic way to better assess macro-financial risks.

The mission would like to thank the authorities and senior officials at the Central Bank, Ministry of Finance, Superintendency of Banks, and other ministries and public and private agencies, for their cooperation and frank and cordial discussions.


Markets Insight

December 18, 2012 4:35 pm
A new recipe for currency friction
Central banks outline intentions for looser monetary policy

Growth now firmly trumps inflation in the central banking lexicon. What was already pretty clear is beyond dispute following the Federal Reserve’s new commitment to keep interest rates close to zero until US unemployment falls below 6.5 per cent.

The readiness of Mark Carney, currently governor of the Bank of Canada, to consider targeting nominal gross domestic product when he takes over from Sir Mervyn King at the Bank of England next year further underlines the point. And where central bankers are failing to rise adequately to the growth challenge politicians now threaten to move in on their actwitness the determination of Shinzo Abe, Japanese prime minister-to-be, to impose a higher inflation target on the supposedly independent Bank of Japan.

Of this trio of growth promoters, Mr Abe has much the toughest job because expectations of deflation in Japan are so entrenched. In the US, by contrast, there is scope for a virtuous circle. Fed chairman Ben Bernanke’s announcement of an explicit unemployment target coincides with a promising turn in the negotiations over the so-called fiscal cliff. If Barack Obama can strike a budgetary deal and secure its passage through Congress the turnround in the US housing market will solidify and US business will put surplus cash to work in new domestic investment.

The US thus looks set to provide a firm base for global growth in 2013. Yet it is important to recognise that this growthmanship takes unprecedented monetary experimentation to a new and higher level. That means the law of unintended consequences will cast a shadow. A commitment to keep the cost of borrowing low for a prolonged period is a wonderful incentive for increased risk taking in the markets, which could lead to bubbles. Admittedly the Volcker rule and other regulatory restraints will curb the banks’ urge to speculate. But there are plenty of non-banks ready and able to seize the opportunity. My suspicion is that the impact will be felt chiefly outside the US.

For a start, extremely loose monetary policy is a recipe for prolonged currency weakness. With the eurozone crisis under better control since the European Central Bank revealed its potential outright monetary purchases programme, the dollar has less of a role as a haven, while managers of official reserves remain anxious to diversify away from the US currency. The dollar thus looks the perfect funding vehicle for carry trades, whereby investors borrow in low interest rate, weak currency countries in the developed world to invest in currencies and commodities in higher growth countries.

This monetary spillover is a recipe for renewed currency friction since it will put powerful upward pressure on emerging market currencies. That takes us straight back to Guido Mantega, finance minister of Brazil, who has repeatedly complained of currency wars. And it seems inevitable that more emerging markets will resort to rigorous capital controls to mitigate the damage of volatile inflows.

What adds piquancy to this mix is that the International Monetary Fund has just gone through a not quite Damascene conversion on this issue. After a long internal debate it has developed a newinstitutional view” which recognises that liberalisation before developing countries have reached a certain level of financial and institutional development is highly risky. So the IMF accepts that there is a case in certain circumstances for regulating cross-border capital flows to address the problem of volatile inflows and outflows. An important plank of what used to be called the Washington Consensus has thus been subjected to symbolic revisionism. Capital flow management measures, a new, sanitised IMF phrase for capital controls, are seen as acceptable even if only as a complement to other economic measures and a last resort.

This is a healthy if belated step in a sensible direction. The theoretical case for the liberalisation of capital controls has always looked weaker than that for free trade. By contrast, the pragmatic case for managing capital flows has looked compelling in the light of recent financial crises. China, with a heavily controlled capital account, saw little financial backwash from the crisis in 2008-9, while the resort to capital controls by Malaysia in the 1997-8 Asian crisis proved largely beneficial.

None of this should be taken to imply that ultra-loose monetary policy will have no unintended consequences in the developed world. As central banks engage in further bond buying and commercial banks are encouraged to stock up on more bonds, their balance sheets become increasingly vulnerable to a spike in bond market yields, with potential systemic consequences. Ending the great monetary experiment will be no picnic.

Copyright The Financial Times Limited 2012