Transcript of a Conference Call on The Global Economic and Financial Impact of an Avian Flu Pandemic and the Role of the IMF

with David Hoelscher, Chief, Systemic Issues Division, Monetary and Financial Systems Department
Charles Blitzer, Assistant Director, International Capital Markets Department
Sandy Mackenzie, Assistant Director, Research Department
International Monetary Fund
Washington, D.C.
Monday, March 13, 2006

MR. MURRAY: Good day. I'm Bill Murray, Deputy Chief of Media Relations at the IMF in Washington, D.C. Before we begin, and I apologize for a bit of a late start, let me reiterate that the contents of this conference call, and the contents of the paper that we posted on Friday on the Media Briefing Center, are under embargo until 11 o'clock Washington time, or 1600 GMT today. So we have a few hours before we go live on this conference call and on the contents of the paper.

I'm going to just make a quick introduction around the table of the gentlemen that are with me currently, and then there will be some brief opening remarks before we take questions. Joining me here at IMF Headquarters is Charles Blitzer, Assistant Director of the IMF's International Markets Department; David Hoelscher who is the Chief of the Systemic Issues Division of the Monetary and Financial Systems Department; and Sandy Mackenzie, an Assistant Director in the IMF's Research Department. They are principal authors of the paper entitled "The Global Economic and Financial Impact of an Avian Flu Pandemic and the Role of the IMF."

I'm going to turn the table over now to David, who will have some opening remarks. Let me also underscore that when we talk about the global economic impact, we're really talking about systemic issues. On April 19th when the World Economic Outlook is published, there will be a specific section that will deal with the exact current thinking of the IMF on the macroeconomic impacts of the avian flu pandemic.

Let me now turn the table over to David Hoelscher of the Systemic Issues Division of the Monetary and Financial Systems Department. David?

MR. HOELSCHER: Thank you. In recent months, a number of international organizations, including the IMF, have focused on the possible impact of an avian flu pandemic. While other agencies are looking at health aspects and another kinds of aspects, the Fund, I think in keeping with its specialization is concerned about the implications that a pandemic could have on the global economy and on financial systems.

I think it's important to stress up front that there is a high degree of uncertainty about the virus. We don't know if it will mutate to a form that can be transmitted to human to human, we don't know how deadly this virus might be if it were to mutate, and we really can't specify with any certainty what the financial impact might be.

But I think, however, specify some of the risks. We know that in the face of a pandemic, particularly a severe pandemic, the world could face financial disruptions. Operational risk to the financial system could arise from the impact of absenteeism on a number of key financial institutions such as the payment system providers or even major clearing banks, or there could be an increase in the demand for liquidity from the public. We also know that there could be financial sector disruptions if substantial asset price volatility were to occur, or if there were a spike in risk aversion among our risk players. But again, while we can identify these risks, it is difficult to try to quantify them in any meaningful way.

So under these circumstances, the Fund is trying to contribute by helping our members prepare for these risks. We see country efforts in this area as a kind of assurance against a low-probability event, or at least an event of unknown probability but that could have a large and significant impact. So in this area our efforts really have concentrated on trying to play a coordinating role. We're trying to be a forum where countries can exchange views about the appropriate response and then share their experiences in developing and establishing robust business continuity plans.

In the paper we put on the Fund's Website, this in our view is a first step in this effort. In that paper we begin with some high-level principles for business continuity that were drafted by the Joint Forum. As many of you know, the forum is an agency which operates under the aegis of the Bank for International Settlements and has representatives from the Basel Committee, IOSCO, the International Organization of Securities Commissions, and the International Association of Insurance Supervisors.

These high-level principles provide I think a useful framework, but they are focused on broad issues of because continuity. What we've tried to do in the paper is to collect information on practices aimed specifically at the risk associated with an avian flu pandemic. This preliminary compilation is not meant to be comprehensive, and it is certainly not meant to be best practices. Rather, these are elements that are common to business continuity planning among those institutions that have considered avian flu scenarios, and they're presented really as an offer for countries to consider. I think each country is going to have to prepare their own business plan in light of their own specific financial infrastructure and the risk that they think they face.

After this we will try to increase our outreach to try to further refine these lists of practices. As well as continuing discussions with public and private institutions, the Fund is organizing a number of seminars to being together business continuity practitioners from central banks and supervisory agencies. We'll try to continue to develop our own thinking, and we'll try to present our conclusion or conclusions at international meetings or through bilateral contacts with members as the occasion arises. We will also continue to try to disseminate this information through the Fund's Website and through other publications. Thank you.

MR. MURRAY: We can turn to questions.

QUESTION: Good morning. Could you point out which countries are particularly well prepared in the report? You mentioned the countries that have been dealing with SARS, but you can name some countries or maybe some other countries that you think are prepared, and also some that have a lot to do? Thank you.

MR. HOELSCHER: I think the countries that went through SARS are fairly well known, Singapore and Hong Kong certainly did, and Canada did. I think they were given an opportunity to think through very early or earlier than others how their business continuity plans need to be adjusted in the light of possible large absenteeism. I think many countries are now taking some of those lessons and moving on.

MR. MURRAY: Thanks, David.

QUESTION: Thanks for taking the question. I see in the study that you talk about the possibility for keeping cash on hand, greater liquidity. Can you talk about that a little bit? Do you mean that banks should actually hold more cash in their coffers in anticipation? Is that something that should start now? If you could just explain exactly what you mean there. Maybe I've misinterpreted. Thanks.

MR. HOELSCHER: I think the first thing to stress is this is not a prescriptive list in any sense. We're not trying to suggest as to what countries should do or need to do. When we were talking with our membership we found that a number of countries recognize there may be a big demand or large increase in the demand for liquidity, and one of the things you might to think through is how you want to ensure that that demand can be met. So this wasn't a recommendation, it's just an issue you may want to think about.

QUESTION: Was that an issue after SARS?

MR. HOELSCHER: I know there was a large demand for cash. The demand for cash during SARS did increase, but there was no problem in distributing that liquidity to the markets. That we know of, that wasn't a problem.

QUESTION: Would you be able to talk about that as an example? How much of an increase demand was there and where did it occur?

MR. HOELSCHER: I don't know the specifics about that time.

MR. MACKENZIE: I'm not aware of any specifics. I think it's reasonable to suppose, however, that people would want to make fewer trips to banks or even 24-hour tellers because fewer trips means less of a chance of infection, and that alone could cause in the demand for cash. Then on top of that to the extent that there's simply any fear and we're not making a prediction, believe me but any fear that banks might have difficulty meeting demands for cash or functioning, that in and of itself would also increase the demand for cash.

QUESTION: Could I just ask who just spoke?

MR. MURRAY: Sandy Mackenzie. Another question?

QUESTION: The G8 this evening is proposing to intensify the work in dealing with different pandemics including adopting an action plan in fighting against the avian flu. So how do you think the IMF can support this initiative or will it will it support the initiative, or do they have any reaction about this?

MR. BLITZER: When the G8 Finance Ministers met in Russia several weeks ago, this was a topic of discussion. The communiqué which came out broadly endorsed the work of the various international agencies in their own particular areas, and in particular there was a sentence welcoming the IMF's effort to look into issues related to stability in the financial sector and to interact with our members to promote preparedness in that area. That's what we're doing and we'll be reporting to all the international forums on progress on that.

MR. MURRAY: Thanks, Charles.

QUESTION: Yes, this is NHK Japan Broadcasting in Washington. Do any of you have sense of preparedness at all on the part of American-based financial institutions or corporations? Are they taking this seriously in the sense of actually putting plans in action and perhaps even executing them at this early stage?

MR. HOELSCHER: I think a number or most of the large sophisticated financial markets recognize that this is an issue and are taking steps that are moving very rapidly to try to be fully prepared for this. So I think the U.S. along with others is doing everything it can, is moving as quickly as it can.

MR. BLITZER: There is a private-sector association made up of financial institutions and associations of financial institutions which is nationwide and has a Website which you can find, There is work underway within particular financial centers. We know that the institutions in Chicago are talking to each other, the institutions in New York are talking to each other. But we certainly have not done a comprehensive survey of all American financial institutions.

QUESTION: Can you repeat that Website?

MR. BLITZER: I think it's


MR. MURRAY: Frank, double Sam, double Charley. Another question?

QUESTION: I was wondering if you have any sort of idea what kind of impact a pandemic would have an global GDP. The second question is have we seen any sort of economic impact yet from months of outbreaks that have been going on? My third question is, how well do you think countries are prepared at the moment to deal with a possible pandemic?

MR. MACKENZIE: Three challenging questions. First of all, on the impact on global GDP, let me say that our World Economic Outlook is going to be published on April 19th and it has a fairly extended treatment of this issue. We do have some numbers in there. Frankly, I am extremely reluctant to prognosticate about the impact on global GDP or indeed GDP in any particular country.

I think what we can say is that in a country that's basically financially stable which is the vast majority of countries that a really severe pandemic would have a sharp but short-lived impact on GDP. As an illustrative example, GDP might drop very sharply in one quarter and then rebound the next. The decline is due basically to the fact, or a sharp decline, would be due to the fact that rates of absenteeism and illness between them would reduce the labor force and labor time very substantially. But because in the case of illnesses, the vast majority of people recover, people would be back on the job soon, absenteeism would come to an end and supply would rebound. Similarly, consumer demand would rebound and, indeed, there would be some sort of compensatory effect in consumer demand. It would pick up as people purchase things that they had postponed like consumer durables and the like.

The second question dealt with have we seen any impact yet, and I think the answer is that in certain countries there is certainly a sectoral or perhaps I should say intrasectoral impact. That is, poultry farmers and so on are clearly suffering in some countries. The impact is not great enough as yet to register in GDP.

As far as preparedness is concerned, I think the short answer is that the degree of preparedness in general varies tremendously around the world, and as you might expect, it's greatest in countries where the standard of public health and public health budgets are the highest, and the problem would be the greatest in the poorest countries where resources for public health are the least.

MR. MURRAY: Is there another question?

QUESTION: You mentioned that there could be a temporary reduction in net capital flow to emerging markets. How could that affect accounts like Brazil?

MR. MURRAY: Charles?

MR. BLITZER: These things are, of course, very hard to prognosticate on, but certainly in the case of SARS we saw that foreign direct investment flow temporarily declined. Projects were not cancelled, but there were delays in implementation which affect at least that part of cross-border flows. Whether or not there would be other types of cross-border flows which changed, it's a bit hard to tell. In the report we do highlight that if there is a pandemic, there's likely to be some increase in risk aversion at least initially until it's clear what the dimensions of the problem are, and that to the extent that that occurs, there would be some shifting of portfolios away from more risky to less risky assets. Not all of that translates into cross-border flows. It could affect just prices and spreads to one degree or another in magnitudes which at this point could be difficult to speculate on. But there could be some delays in decisions regarding new investment into assets which are considered more risky. I think at this point it would be hard to go beyond these general cautions.

QUESTION: Can you say how vulnerable Latin America is at this moment for this change in flows?

MR. BLITZER: I would hesitate to say that Latin America is more vulnerable than other regions either in terms of the likelihood of decline in flows. There is no particular reason why we'd suppose that. Also, as you know, in recent years Latin America as a group has been running a fairly substantial current account surplus. It's been "exporting capital." In that sense it's less reliant on inflows of capital. And of course, a number of Latin American countries, including Brazil, have been taking steps to reduce the vulnerability of their debt stocks to external shocks through operations such as buying back Bradys and otherwise reducing dollar-denominated debt.

QUESTION: I wonder that you prepared this paper that's in some way reflects an increase or a fear among many of the countries in the world that we could have a pandemic of avian flu. My question is, at this point what is the sense that you get from countries, especially in countries in Latin America, about how well prepared they should be if something like this happened. I ask you this because right now most of the news about avian flu came from Europe and Asia and maybe some countries see that as far away from their soil and maybe they may think that there is nothing to worry. So what sense do you get from countries in the region about this issue?

MR. HOELSCHER: I think that's a very interesting question. When you look at the countries around the world, all countries have through business continuity planning, what happens if there is a natural disaster or what happens if there were a sudden loss of parts of the infrastructure for some reason. So those plans are in place.

I think what's happening now is countries are increasingly adding to their existing business continuity plans, issues that deal with the impact of high absenteeism. I think that's moving very rapidly in Asia and now in Europe as I think you pointed out. This also allows the countries in Latin America to begin right now getting prepared for were there to be a an expansion or the extension of the flu into Latin America. This allows them to take their existing plans and modify them and add to them activities and steps that would make them less vulnerable were there to be a flu.

MR. MACKENZIE: If I could just add to David's remarks, and I'd like to stress again, that we view the Fund's program really as a kind of insurance. As you know, if you drive an automobile at least in the United States and many other countries, you have to have insurance, and I have insurance and extra insurance on my car. That's not because I live in dread of an accident or I expect that I'm going to be in an accident this year, but simply because insurance is a good idea even if the probability of an accident isn't that great, and we see this business continuity planning as a form of comparatively cheap insurance.

QUESTION: I just wonder whether this would have any particular impact on the global financial centers of London, New York and Tokyo, whether there would be any particular downturn there and whether there are any particular steps that those areas ought to be taking.

MR. BLITZER: The major financial centers of course have, in addition to worrying about issues relating to cash liquidity and the stability of the payment systems, also have to worry about broader continuity issues in the financial sector related to clearing settlement trading and the like. They need to consider how do these businesses which play a key role in the international financial system, would continue without disruption in the context of potentially high albeit temporary absenteeism. Therefore, they have a special role, if you will, to play in business continuity.

As David said earlier, we haven't done complete surveys, but broadly speaking, the larger global financial institutions have been thinking about this and beginning their preparatory work for some months now. For specifics about each financial center, you can consult with the U.K.. the U.S., and Japanese authorities about their own preparation and those of their institutions.

QUESTION: Is there any indication that these centers would while not necessarily being affected by it suffer a major hit from their financial importance and the amount of financial activity going on?

MR. BLITZER: I'm not sure I followed the question.

QUESTION: Whether there would be a more serious impact in terms of anything further than just--I'm sorry, this is not a very clearly phrased question. There is a lot of financial activity in these centers and whether that would have a disproportionate impact on these centers was simply the question, but it sounds to me like it would be roughly in proportion to the amount of financial activity in those centers.

MR. BLITZER: I would think that that would be a good working assumption.

MR. MURRAY: Thanks, Charles.

QUESTION: HSBC was quoted in a Financial Times article as projecting that up to half of the employees might stay away. I wondered if you could respond to that and also what bank regulators could do to gauge the preparedness of particular banks. For example, should they inquire into this in connection with mergers as they did with year 2000 issues or some money-laundering issues?

MR. HOELSCHER: There are a number of estimates out there for what levels of absenteeism could result from pandemic. They go from 2 percent to 50 percent numbers. As I was saying at the very beginning, we really have no idea, and I think you want to be careful about trying to make predictions, worst-case predictions or any kind of predictions, without knowing yet what the virus might look like.

What that leads us to think about is that financial institutions probably should have a range of options, have thought through what are they going to do it absenteeism is 2 percent, what will they do if it's 20 percent, and what might they do under the conditions that it raises to 50 percent. Each one of those will have some kind of investment requirement around them and they make the decisions based on where they think they get the largest return for any investment right now, but it is very hard to say.

I do think that regulators may well find it useful to just sit and discuss with the institutions they regulate, sit down and ask what are their preparedness plans, are they testing those plans. There may be an interest in ensuring that especially the larger financial institutions, the payment systems providers, have robust plans, and that would come through a discussion or a conversation between the regulators and the institutions themselves.

QUESTION: In terms of banks being transparent to the public as to their preparedness, do you have any thoughts on that?

MR. HOELSCHER: I'm sorry?

QUESTION: In terms of banks being transparent to the public, not behind the scenes to the regulators, do you have any thoughts of whether the upside or I guess also the sort of giving fear downside of banks being relatively public about both their projections and their preparedness?

MR. HOELSCHER: I think many of the large global institutions are quite public about what they're doing, and there is a benefit to that. Some of the information that's put on their web sites. The issue is to be sure that their clients understand that they are prepared, and I think that they're already doing that.

One other issue. When you talk about the role of the regulators, it goes back to what the testing of the business continuity plans are. Individual institutions can do quite well in trying to test their own systems, but it gets more complicated when you're trying to do a system wide test. That's another role for the regulators to not only ensure that the business continuity plan of each institution are well thought through, but also help think through how you test across the system.

QUESTION: Have you looked at in terms of contingency planning the impact a pandemic might have on manufacturing, and consequently, the downstream effects of that? For example, all the critical pieces that are made by almost single sources in, for example, China, or even in medical, the very limited production of vaccines, and if there's any short of shutdown of imports and exports how that might have an impact on economies around the world.

MR. MACKENZIE: One key issue would again be the issue of absenteeism. I'm not sure whether it would be a greater problem for manufacturing or a lesser problem than it would be for other areas. I think it would depend, obviously, in the way the factory was organized and the number of interactions people had. But I think you're absolutely right, there's a potential for disruption when the production chain stretches over several continents or several countries. Beyond that, I'm not quite sure what one can say. Obviously, to some extent one can prepare for this by stocking up in advance, but on the other hand, that's not the practice and it's not as easy as it used to be.

MR. MURRAY: Thanks, Sandy. Are there any further questions?

QUESTION: If I understood well, if there is a severe pandemic there will be a decrease of one-quarter of GDP and a very rapid rebound of [inaudible] the economic. Do you have any idea of how long this economic impact will last after the health crisis is solved?

MR. MACKENZIE: In principle, the effects in most economies should not be long lasting. There is obviously a permanent effect as you know because there's a permanent effect on the labor force that I don't need to go into. What causes or we think would cause the sharp decline in output, which is only temporary is absenteeism and once that's reversed, then that effect is gone.

Even some of the permanent decline in labor force numbers would probably be offset as other household members increase their participation in the labor force. So, again, in a well-run economy, there's no reason really to see a permanent or significant long-run effect.

MR. MURRAY: Thanks, Sandy. Any further questions?

Let me just wrap this up then and repeat that at 1600 GMT today, that's 11:00 a.m. Washington time, the embargo comes off so, therefore, the contents of this telephone conference call are then live as is the paper. Let me thank everybody for joining us.

Let me also note again for planning purposes, on April 11th we will be releasing the Global Financial Stability Report, which of course will touch in some fashion on the avian flu issue, and then WEO Chapter 1 on April 19th. So we will revisit this again on April 11th and April 19th.

As for today, if you have follow-up questions, drop me an email and I will follow-up with the authors who have joined me today. My email address is Thanks again for joining us.


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