Summary:KEY ISSUES
Context. Growth continues to strengthen, although the recovery is not yet
broad-based. External and fiscal vulnerabilities have risen: private non-debt creating capital
flows have slowed, and could leave the reserve path increasingly driven by an accumulation of
external public debt; central government debt—although still moderate at a projected 36 percent of
GDP—has increased by about 15 percentage points since the beginning of the global financial crisis,
in the context of growing broader public sector operations.
Fiscal Policy. The newly re-established medium-term strategy is welcome, as it highlights the
government’s policy priorities and helps shape stakeholder expectations. The targets are consistent
with a gradual withdrawal of stimulus, and would produce stable baseline debt dynamics. However,
should private demand recover faster than expected, frontloading the consolidation would stave off
the emergence of imbalances and would boost policy credibility. Ensuring adequate fiscal space for
priority infrastructure remains key.
Monetary and Financial Policies. Looser monetary policy in the second half of 2013 has not resulted
in the hoped for pickup in private credit growth. Nonetheless, the strong recovery in H1 2013, high
bank liquidity, and the decline in reserves (albeit not indicative of pressures on the peg) suggest
an end to the easing cycle would be in order.
External Position. Capacity to service outstanding external debt obligations, including to the IMF,
remains adequate. Despite still weak net FDI flows, increased activity in large foreign-owned
companies is contributing to stronger exports. However, backward linkages will likely develop only
slowly. In the absence of domestic spillovers, the structural improvement in the trade deficit will
be gradual and growth could be uneven.