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Transcript of Video Teleconference by Managing Director Rodrigo de Rato with External Relations Director Thomas C. Dawson
MR. DAWSON: [---In progress--] at the IMF, and I'd like to welcome all of you to this video teleconference with the Managing Director of the IMF, Rodrigo de Rato.
The Managing Director will have a brief opening statement on his upcoming trip to Asia, and then we will be happy to take your questions. I think perhaps we'll start with two questions from Singapore, and then a question from the Washington reporters, and back and forth like that.
I would appreciate it if you would use the microphone and identify yourself and your institutional affiliation. The teleconference is embargoed until 15 minutes after the conclusion of the conference, and I will set a precise time at that point.
Mr. Managing Director.
MR. DE RATO: Good morning. Thank you very much for being here, and I understand that for those in Singapore this is a very early hour, so thank you very much.
Let me first begin by making some reference to my next trip to Asia. This will be my third trip since I became Managing Director of the IMF. And on September 3rd, next week, I will be in Singapore participating in a seminar; its main focus is regional financial integration, and that seminar was jointly organized by the government of Singapore and by us, by the International Monetary Fund.
This subject of financial integration in Asia is a very important one. In an increasingly interconnected world, Asia's economic integration is a process of global consequence. It has significant implications for the global economy and the smooth functioning of the financial system worldwide.
In this seminar, senior officials from ministries and from central banks, as well as from the IMF, will discuss opportunities and challenges of Asian financial integration and ways to enhance regional dialogue and monetary cooperation.
We certainly at the Fund support this integration, and let me just mention three very important reasons for it. The first one is that we believe that regional financial integration should help deepen financial markets, and that is a very important step to strengthen the resilience of regional economies to external shocks. This more deepened financial markets and stronger economies will create more opportunities for Asia's high savings to be invested efficiently in the region, and also to attract foreign savings to be invested in the region, and that is the second reasons. And the third reason for this seminar at this time is certainly that a stronger sector in Asia, financial markets in Asia, should promote the continued integration of Asia in international economy, and we believe that is very important for Asia, but it is also very important for the world.
By co-hosting this seminar we are really committed to collaborate with the different national authorities in all the steps, technical and policy advice, regarding financial integration.
After that seminar in September 7th, I will travel to Seoul, where I will hold bilateral meetings with the Korean authorities. I want to first of all underline that I will have the privilege of meeting President Roh and also the Minister of Finance and the Deputy Prime Minister and the Governor of the Central Bank. I will also meet with some important leaders of civil society to discuss issues regarding Korea and also of course the region.
This visit to Korea, my first one as Managing Director, comes at an important time. After several years of sluggish growth in Korea, the economy is now beginning to recover. There are very important opportunities and at the same time important policy challenges regarding structural reform and the financial sector.
After that visit to Seoul, I will then go to Jeju on September 8th to attend the APEC Finance Ministerial meeting for further discussions on important issues that will cover not only the Asian region but also the world economy.
As you all are aware, both the World Bank and the Fund are working closely with the Singaporean authorities for the next year's Annual Meetings, a year from next September, that will be held in Singapore. And I think that will be another very important opportunity to continue the dialogue with the world's more dynamic region.
Before getting to the questions let me just make some statements regarding the world economy and the Asian economies. The recent data indicate global expansion remains on track, but rising oil prices represent an increasing risk. The expansion is also becoming more and more imbalanced [among] regions and the differences between savings and investments are also increasing.
The growth in Asia has been remarkable. Last year, 2004, was a very important growth of 6-3/4 percent, and we see the continuation of a similar track in the next two years, that is, 2005 and 2006. That growth was driven by exports, and certainly the recovery in the world economy that we are envisioning in the second part of 2005 is good news for Asia.
We have many examples, but let me just put three of them or four. I just put Korea, but another one is China which continues very strong growth in the range of 9 percent; India with growth in the realm of 7 percent; and Japan is gaining momentum, and we see also clear signs that the deflationary pressures in Japan are receding. I think that all those news are good for Asia.
There are risks, of course, and the most important risk at this time for Asia is oil prices. We've seen that the impact of oil prices in output has been mild as to this moment, but we believe that if high oil prices persist -- and we believe that they will because of structural reasons for it -- Asian growth could be affected. At the same time, what is clear is the increase in oil import bills has been considerable and this is already putting pressure in many countries in the balance of payments numbers. In that respect, we think the authorities have to be extremely careful.
The question, against this background of growth and at the same time risks, is: What should policymakers do to sustain growth in this environment? We believe that it's important that budgetary policies continue to be tending toward reducing imbalances and reducing public debt. We see clearly that governments have to make consumers and companies aware of the true price of energy. This is not going to be just a short-lived increase in the oil prices. We see structural reasons, as I said, for it.
So the consumers, both households and business, have to accommodate to this new environment. So an energy policy that will, and that will continue passing through to the consumer, both households and businesses. The reality of the world oil prices is required, and that of course will also allow governments to reduce a lot of public expenditures that in some countries is quite considerable in subsidies.
This is posing a strain in all economies, but especially in low-income countries, and in that respect we are ready to support with our policies of poverty reduction and [INAUDIBLE] facilities the situation of low-income countries in Asia. We'll have a lot of dialogue with Asia's low-income countries. We'll have a substantial amount of programs in Asia that is supporting poverty reduction and development, and we will continue to do so especially in these circumstances of very high oil prices.
As a general rule, not only for low-income countries but for all countries, the monetary policy will have to remain extremely vigilant to limit any second-round effects on inflation produced by the hike in oil prices. We see as part of the future of sustainable growth in Asia, continued financial sector restructuring and labor and product market reforms that certainly will give a new chance to domestic demand and help to balance growth in Asia, and we believe that is an important step looking forward.
Actions on all these fronts, together with increased exchange rate flexibility, will help to address the vulnerabilities posed by global imbalances. At on this point, we welcome at the Fund the recent steps taken by China and Malaysia, and we look forward for those steps to continue in the future as to make currencies in those countries more market-driven. And of course we believe that policy measures to sustain growth and deal with the risk of global imbalances will require not only Asian policies but policies in other parts of the world, certainly the United States and in Europe.
I don't want to go farther because I suppose that you will touch a lot of these issues and others during your questions. Thank you very much, and we'll take some questions. Thank you.
MR. DAWSON : Now for the first question from Singapore. Go ahead.
QUESTIONER: Mr. de Rato, you said that you expect the effect of the oil price to be mild at this moment. So keeping that in mind, how does the expectation growth to be compared to last year's 6.7 [INAUDIBLE].
MR. DE RATO: Well, we will make the specific numbers public in the Annual Meetings. I'm sorry, but I'm not going to give the numbers right now.
But I said before, and I'm very willing to repeat again, that we see a continuation of what we saw in 2004 in this year and next year in Asia, 2005 and 2006. I'm not going to put any specific number, but we see growth continuing at a very important pace. The key question, as I said before also, is how to--what other policy advice we can give countries in this new environment, this new environment that is characterized by strong growth, and at the same time high oil prices and increasing global imbalances?
We believe both in fiscal policy, in monetary policy, in structural reform lays a lot of responses to these challenges, and we see that certainly, for instance, financial integration would make more competitive financial markets in Asia, more competitive financial system in Asia, competing among themselves but also competing with the rest of the world, and will allow also for Asia to use its own resources which are very considerable. The levels of savings in Asia are very considerable. And we see that to have a more balanced pattern of growth in the future. More strong domestic demand, domestic consumption will be needed in some countries, most of them. In some countries a pickup of investment will be welcome after the slow-down that came after the crisis of the last '90s. In other countries, to the contrary, there the level of investment is probably too high. That is the case of China.
We also see the need for making an important contribution by the part of Asia in trade liberalization worldwide. We see that there is an increasing amount of bilateral trade agreements in Asia, and they are of course an important instrument, but bilateral agreements should not limit the willingness of the Asian governments to contribute to a multilateral system. There is no doubt, I believe, certainly we don't have a doubt in the Fund, that a multilateral agreement in Hong Kong in December will be very good news for all countries of the world, but it will be very good for Asia. Asia has always been a very competitive area of the world, export-oriented area, and certainly will benefit for a new round of world trade liberalization.
MR. DAWSON: Next question from Singapore.
QUESTIONER: I wondered if you could address the issue of Indonesia. The rupiah went to a 3-1/2 year low yesterday, and removing oil subsidies is obviously very tricky [INAUDIBLE]. Could you share your thoughts please on what the Indonesian government's going to do?
MR. DE RATO: Yes, certainly. First of all, I want to underline that Indonesia economic fundamentals are sound and growth remains strong, and that the efforts that the government is doing to make the Indonesian legal framework and economic framework more attractive for international investment are very important, and we sustain all those efforts.
What is needed, we believe at this moment, is to address through monetary policy and fiscal policy some of the consequences in Indonesia of the picture just described in the world. That means Indonesia has some clearly inflationary pressures and excess liquidity. We've been advising the Indonesian authorities to address those through the monetary policy, and we believe that that will help to reduce inflationary pressures, especially inflationary expectations, and sustain a clear, strong currency, strengthen currency.
At the same time we also think that the budget should address some of the consequences of the oil prices. In that respect we think the budget should be based on realistic assumptions and the budget should reduce inflationary pressures by reducing public deficit. And it's clear that a very high expenditures and subsidies is not right now in the best interest of Indonesia. And we believe that the government should start shifting that pressure on the budget by making a more transparent and realistic price of oil in the market, in the domestic market. Because as I said before, not only for Indonesia but for the rest of the world, oil prices are not at a [INAUDIBLE] level but we are going to see these prices around this level for quite a long time because the reasons for the high prices are very clear, and countries have to make their economies adapt. That of course demands measures in the size of demand and prices, but also measures in the size of supply and policy mix, and energy mix, and that is of course a very big challenge, not only for Indonesia but for many countries.
MR. DAWSON : Let's take a question here from Washington.
QUESTIONER: Can I ask first on North Korea? In East Asia, North Korea has the nuclear issue [INAUDIBLE], but [INAUDIBLE] that a couple of years ago, you, IMF, in fact invited North Korea to Annual Meeting. Actually, North Korea needs [INAUDIBLE]. What I'm asking is when are you willing to allow North Korea to enter IMF member country or steps?
MR. DE RATO: First of all, to become member of IMF, like 184 countries that are members, you have to want to apply, which is a prerequisite. And the other is of course that there has to be an acknowledgement by the rest of the membership that, a willingness to accept the country. So in the case of North Korea, like in other cases, that is necessary, that the policy--the political relationship between countries is an important issue when a country addresses the possibility of coming inside the International Monetary Fund.
It's true also that even countries that have not become members have asked and benefited from our technical assistance. There's been some cases in Eastern Europe recently. In the case of North Korea, I cannot give you any more specifics, because we don't have a lot of information about the economic situation in the country. The country's not a member of the Fund. As far as today, there is not any conversation regarding membership. Hypothetically, if there was a willingness by the part of the North Korean government to address that possible membership of the Fund, of course some policy issues regarding members of the Fund will have to be addressed. We will let that of course--we have to see in time.
MR. DAWSON : Let's go back to Singapore.
QUESTIONER: You mentioned that the IMF welcomes the recent moves by China and Malaysia to be pegged. I just wondered if you actually think that that's enough to address the global imbalances that we're seeing and just wondered what you see the risks might be.
MR. DE RATO: First of all I want to say that the movement of China and Malaysia toward a more flexible exchange rate system is a good and welcome move for the good of Malaysia and China. I mean it's in their advantage because that is going to give both countries a much more efficient anti-inflationary policy and monetary policy, and also it will allow both of them to have a more sophisticated and efficient system to absorb external shocks. And in a world of global imbalances and globalization and global markets, external shocks are a fact of life for every country. And very rigid exchange rate systems, as everybody can understand, are not flexible by definition, and that is not a good recipe to absorb external shocks in economies that are becoming more and more open and of course more subject to possible external shocks.
At the same time, especially in the case of China, the importance of the Chinese economy in the world economy makes of course that any movement to make the Chinese economy more flexible is welcome, and addresses a better functioning of the world economy. We could say that China, together with other countries like United States or Japan or the European Union are systemic economies that affect not only their own well-being but affect in a very substantial way the rest of the world.
When we talk about global imbalances we are talking about some different imbalances. We have strong imbalances of growth. We have strong economies growing right now, mainly--a lot of them, but the two most important ones the United States and China.
If you look at the pattern of growth in both you see that that pattern of growth has to change to be more sustainable. In the case of United States, the pattern of growth has to increase its savings and reduce its current account deficit to become sustainable. In the case of China, the pattern of growth has to reduce investment and be more based in domestic consumption. Although that change in both cases will help global imbalances.
But global imbalances are not only related to growth in China and United States and the difference of savings and investment in both countries, but are also related to lack of growth in other parts of the world. That's the case of Europe, that's the case of Japan. If there's going to be less growth in the United States because it's going to be increasing savings and that might reduce consumption in the United States, there has to be other parts of the world that take the lead or take part of the lead.
Clearly, that cannot be the case of China because it's growing already at 9 percent, and we all think that this is maybe too much to be sustainable over time. So the other two big economies in the world, that is Japan and Europe, have to take part of the growth.
The news that comes from Japan are good, as I said before, and we see the Japanese economy recovering levels of growth that are becoming more and more important, and what is more important is a more balanced growth, and we see not only export-led growth, but we see domestic both consumption and investment, and although still the numbers are not as impressive as you can find in Korea or in China or in India, but we are seeing already strong signs in Japan.
Europe is a different question. Europe is not showing enough dynamism, and from the point of view of the International Monetary Fund, the reason is clearly lack of potential. Europe is not growing at a level that is very far away from its potential, so if we want to see a stronger economic Europe that will contribute to reduce global imbalances, we need to see structural changes in Europe, in labor markets, in financial markets, in product markets that make the European economy much more dynamic. We see signs of changes, for instance, in Germany. We see changes that have occurred in Ireland, in UK, in the northern countries, in Spain, but we still need to see much more growth in Europe.
Sorry to be a little long but the question was not a short one.
MR. DAWSON : The next question from Singapore, please.
QUESTIONER: This is again on Indonesia. I wanted to know whether you would advocate any kind of capital controls right now, or would any form of regional currency cooperation [INAUDIBLE]?
MR. DE RATO: No, we don't. We think that--first of all, once again I want to stress that we see Indonesia in a strong footing and with strong growth. So we see the country moving forward. We see the country has to address very clear, specific problems. One is inflationary pressures, and if there is a clear anti-inflationary policy, both in monetary terms and in budgetary terms, that will reinforce the credibility of the country. So the question is not to try to address inflationary pressures with mechanisms that don't have any influence on inflationary questions. The question is to address inflationary pressures with policy that are credible, and monetary policy is essential for inflationary pressure.
So we really advise, we have been advising the government. The government has been taking steps, but we think the steps have to be more clearly applied, that monetary policy is key in this moment.
Also part of that inflationary pressure has to do with excess liquidity, but also needs to be accompanied by a budget that is credible, credible in its hypothesis of growth and revenues, and credible also in its policy of reducing inflationary pressures and reducing the contribution to inflation through the budget.
At the same time, to manage the budget, there are certain areas of expenditure that are clearly--that need clear changes, and one of them is to show that the reality of world oil prices is part of the functioning of the internal economy in Indonesia. Levels of subsidies of more than 3 percent of GDP are very heavy, a very heavy burden for the budget, and in that respect we also advise the government to liberate those resources, and also at the same time use those resources in social policy and in investment policy.
So overall, we see the Indonesian economy on a strong footing, but the problems are what I identified, and what is important now is the policymakers react to those problems in a way that is credible. We believe that the speech of the President in the middle of August regarding these issues goes in the direction, and we expect that the government and the monetary authorities will implement those lines that were presented by the President in his speech in the middle of August, and certainly the Fund is ready to provide advice and support--technical support I'm referring of course--to the Indonesian authorities.
MR. DAWSON : We'll have a question here.
QUESTIONER: Yes. I would like to ask about the APEC meeting. Would you expect finance ministers to discuss the Chinese currency problems at that meeting?
MR. DE RATO: Well, finance ministers will discuss whatever they feel suited. I think that the fact that China and Malaysia moved to a more flexible system--I said before and I repeat it again--is a welcome step. It shows that the authorities of both countries understand that it is an event in their own advantage to have a more flexible system. What is now required is that the system is applied. Of course, we've only been about a month since the decisions were taken, so I think that any analysis now is too early and too soon, but now what is expected and I'm sure is the desire of the authorities is that that flexibility will start working and will produce over time, in a gradual way, but over time a clear relationship between market forces and the currency.
We understand perfectly that these movements have to be measured, have to be gradual, but they have to be credible, and we think that the first movement has been credible because it changed the system. Now we have to continue. And in both cases, certainly the Fund has a very close dialogue with the authorities and we will continue having technical assistance and policy advice regarding these issues and others that are challenges both for Malaysia and for China.
MR.DAWSON : Can we go back to Singapore for a question?
QUESTIONER: You said that the oil prices are continuing to--will continue to stay high [INAUDIBLE]. Why do you feel that the oil prices will stay at the current level or at high levels over a sustainable period of time?
MR. DE RATO: Well, I think there are demand reasons and supply reasons. Demand reasons are very important. We are not in a hike of oil prices that is not explained by demand forces. So contrary to other situations in the past that were very much related to reduction of supply, the main reason for the actual oil prices, not the specific ones of this week but the ones we've seen in the last two years, are certainly demand forces. We've seen a very important increase in the consumption of oil in the world related to many reasons, to the development of new countries, new economies, very strong economies like the case of China, India and others, but also developed economies like United States are increasing their oil consumption. So there is a substantial explanation of the increasing prices that is related to demand.
There's been an important effort to supply the markets by OPEC essentially, especially, and the Gulf countries, and that has to be recognized too. But there are also some supply constraints, and there are varied reasons. You have supply constraints in some oil-producing countries because of inefficiencies in their production systems. I don't want to put examples right now, but there are many countries with state-owned companies that are not making the necessary new investments that will guarantee their efficiency in the future, but there is also important concerns of supply in consuming countries, and refinery bottlenecks are very important right now and they're playing a very important role.
You see, for instance, the difference of prices between [INAUDIBLE] has almost disappeared, and that shows clearly that some of the supply constraints are not related to the policy of producing countries but related to the policies of consuming countries.
All that together, you have to add one more ingredient, is that the market is not--the oil market is not as transparent as it should be. You have an area, a part of the market, that is OPEC that is more transparent and there is that of it, but then you have other parts of the market that are not at all transparent. And there is a high degree of speculations at the moment.
So even if you believe that a market will become more transparent in a very short period of time, and that speculation will be reduced to a minimum, the demand drive forces and the supply constraints really indicate that a high price, if you want to call it a high price, certainly above the US$25 we saw three years ago, but even the US$40 we believed a year and a half ago, and maybe even higher than that is what we are going to be seeing in the medium term.
MR.DAWSON : Can we have the next Singapore question?
QUESTIONER: You spoke of the imbalance in the balance of payment and how governments need to correct that. Indonesia, as a case in point, [INAUDIBLE] are on the watch list where you would like [INAUDIBLE].
MR. DE RATO: Excuse me?
MR. DAWSON: What other governments in Asia, besides Indonesia, which you indicated, might need a change in monetary or fiscal policy?
MR. DE RATO: Well, we can talk about every economy if you want to, but I think that there's many cases in Asia in which monetary policy is appropriate, but it is a fact that Asia is an area in which the impact of oil prices is especially important because many of the Asian countries are net importer or [INAUDIBLE] producers of oil.
In that respect, the balance of payments problems or tensions--you don't want to call it problems--would appear, are appearing in most of them, but not in all of them you have inflationary pressures. And you can manage things in a much different way if you don't have inflationary pressures. But in a moment in which you combine domestic inflationary pressures with a substantial increase in the price of oil, well, you have a specific problem. Certainly, the Philippines is a clear example in which some of those issues have to be addressed too.
MR. DAWSON : We now go to a question here, back in Washington.
QUESTIONER: Do you expect recent oil price hike to continue for a while, and if so, until when does it continue?
MR. DE RATO: I think that it's not a question of expectations. We already know some things that show that the oil price will not recede to levels of a couple of years ago, not only in the short term, but in the medium term. Don't ask me about specific prices because there is a lot of experts that are making those predictions, and all of them are revising them every week. So the question is that we see that the price is not going to go back to levels that we were seeing in maybe the beginning of 2004.
Why? Because the reasons for the market to behave as it's behaving are very clear, many of them are clear. You have very strong demand, and you don't see that demand receding. Even the prices are not making demand receding up to the moment. And you have some supply constraints are important. Some of them in oil-producing countries but some very important of them in oil-consuming countries, like refinery bottlenecks.
All that combined with an important degree of lack of transparency makes the actual situation and looking into the future in the medium term, well, that we're going to be living with high oil prices for a while, and that is something that both policymakers, consumers and producers have to take into account, and that demands different policies in different places -- certainly in Asia demands monetary policy to be vigilant. In some countries like Indonesia or Philippines, maybe more vigilant than in others, but in all countries to be vigilant. That demands also that budgetary policy should not rely too much or try to soften a fact, an economic fact that will last in a structural manner. And in that respect, the use of heavy subsidized prices will become more and more unsustainable both in macroeconomic terms and in energy terms because it will slow the awareness of the economy to a reality that it's there.
And at the same time countries will have to really develop, both from the demand point of view and the supply point of view, energy policies that will take into account that we live in a--you want to call it--expensive oil price.
MR. DAWSON: Can we go back to Singapore for one last question?
QUESTIONER: I just want to get a bit more detail on the Indonesian [INAUDIBLE]. It is my understanding that you are recommending to the government that the central bank needs to raise interest rates to support the currency, that it needs to base its budget on a more realistic oil price instead of US$40 a barrel, [INAUDIBLE], and to scrap the oil subsidy? If that's correct, don't you think you have a recipe for a repeat of 1998 with riots on the streets?
MR. DE RATO: No. No, no. I don't think that that is necessarily so. First of all, because the circumstances are not at all similar to 1998 both in the world and in Indonesia. I want to say again that the Indonesian economy is on a strong footing and there is strong growth.
But there is an inflationary problem, and that inflationary problem has to be tackled. It is not the question to raise interest rates to support the currency. The question is to raise interest rates to reduce liquidity and to reduce inflationary expectations. That will have good consequences on the currency, but it will have better consequences on the economy.
What will be unsustainable is to keep ignoring from the monetary point of view inflationary pressures. It's not the authorities are ignoring it. There's been already hikes in the interest rate, so I don't want to be quoted saying that they don't--they ignore it. They have not ignored it, but it's clear that those inflationary pressures have to be addressed in a very clear and credible manner, and that will reduce inflationary expectations and that will be very important for the behavior of the consumers and the market forces in Indonesia, and the credibility of the economy.
Second, the budget has to reflect the realistic assumptions if it wants to be credible. And the budget also has to address that to keep spending public money. Trying to masquerade a reality of oil prices is not a sustainable policy. That doesn't mean that you don't use public money through social policy to support the areas of the country, the low-income areas of the country that have bigger problems, but you have to have resources for that.
So the question is to reshape the budget in a way in which it becomes more efficient energy wise and becomes more efficient social wise. Not only in Indonesia, but everywhere, subsidies are not an efficient social policy. I know that they are politically very popular, but they're not efficient. And if you look who are the beneficial of subsidies, everywhere, you will discover they are not usually the more poor people in the country but are usually other parts of the country, and a lot of middlemen who make a lot of money with subsidies. That is not an Indonesian problem. That is a problem with everywhere that you have subsidies.
Subsidies are not easy to take out in a brutal way, but, well, policy is something in which you have to have a degree of flexibility, but you have to have a clear direction. We certainly advise, and we've been advising the Indonesian authorities to keep reducing subsidies so that they have new resources to use more efficient social policy, and at the same time they become more efficient energy wise because consumers everywhere react clearly to prices.
MR. DAWSON : Thank you very much. , and we will lift the embargo at 25 minutes of 9:00 in the morning Singapore time, 25 minutes of 9:00 in the evening Washington time. Thank you.
IMF EXTERNAL RELATIONS DEPARTMENT