Transcript of a Background Briefing by Senior Officials on the International Monetary Fund's Group of 20 Surveillance NoteWashington, D.C., Thursday, February 5, 2009
MODERATOR: Good day. Just a quick reminder that the contents of this conference call are embargoed, as is the text that you should have via the Media Briefing Center, until 11:30 Washington, D.C., time. I believe that's 16:30 GMT, roughly a half hour from now.
With me today are senior staff from the Research Department, Monetary and Capital Markets Department, the Fiscal Affairs Department, and the Strategy, Policy and Review Department of the IMF. Each of these departments has had a role in the preparation of this G-20 Surveillance Note. This is a background briefing, and the participants should be generically identified as senior IMF officials or IMF officials.
SENIOR IMF OFFICIAL: Let me speak very briefly about what is this report, what it has in it, what's new, and what's not new. First of all, what is this report? It's a report on the prospects of the global economy and on financial market developments prepared by Fund staff as background material and input for the meeting of G-20 deputies in London last weekend. This is a preparatory meeting in the run-up to the April 2nd head-of-state summit. Further information on the G-20 you can find on the G-20 website.
We typically prepare these surveillance notes, as we call them, in advance of G-20 meetings. We decided to publish this report on this occasion as part of our continuing efforts to increase transparency, and because we thought this report provided interesting and useful information to you that would support the messages that were included in our WEO update and our GFSR update that we released last week.
First of all, let me emphasize what's not new in this report. As you'll quickly see, the overall assessment of the outlook and the policy messages are essentially the same as in the updates last week. On the global outlook, we see very limited growth; the numbers are the same. We have a half of a percent growth in the global economy in 2009, and the advanced economies in a severe recession, followed by a gradual recovery in the course of 2010, provided that the policies are effective. In terms of what policies are needed, we're emphasizing the need for a combination of both policies to restore the financial sector to health and supporting macroeconomic policies. On the financial side, we've emphasized the need for a three-pronged approach, the continued provision of ample liquidity, dealing with the bad asset problem, and providing additional capital as needed to the financial system. And then on the macro side, we have emphasized the need for supporting monetary and fiscal policies to support aggregate demand in the global economy and to help cut the negative interaction between the real economy and the financial factor.
In terms of what is new in this report, I think there are basically two dimensions. One is this report provides a broader range of forecasts than we released last week. This covers now all the G-20 countries' growth forecasts for 2009 and 2010. I think that provides useful information. But more importantly I think it provides a more in-depth assessment of the effectiveness of policies that are being implemented. In particular, I think the information that we provided on fiscal policy is interesting. We provide information on the extent of fiscal stimulus across the G-20 countries. We're providing estimates of the growth impact of the fiscal stimulus and the extent of automatic stabilizers, and I think we're making some important points here. On the monetary policy side, we're commenting that conventional monetary policy is likely to have limited effectiveness because of the financial disruptions and because we are getting close to the zero interest rate found in a number of economies. There certainly is some scope for supporting the economy through credit easing, targeted at illiquid markets, but the extent of the impact of such easing is uncertain. For this reason, we put a lot of emphasis on the importance of fiscal policy, a broad fiscal stimulus, across a range of countries that have policy room as well as letting the automatic stabilizers work. But at the same time, countries need to be mindful, of the need to preserve confidence in medium-term fiscal sustainability. Not all countries have the same amount of fiscal room.
So those are the key messages of the report. What is coming? There will be further follow up on this issue of the impact of fiscal policy. The Fiscal Affairs Department is preparing a report on the impact of the crisis on fiscal policy, and that will be coming out within the next month or two. And we in the Research Department are continuing to do further analysis of the impact of fiscal policy on the economy. And again, we will be preparing a report that we hope to be releasing in the next month or so. This is all in the run-up to our normal work towards preparing the spring world economic outlook and global financial stability reports, which will be available toward to the end of April.
Let me close my remarks there, but we'd be very happy to respond to any comments or questions.
QUESTION: Thanks very much. And I just wondered if I could make sure that I understood this table correctly on page 18. So essentially what you're saying then is that the impact on growth in percentage points of the fiscal stimulus that we've had announced so far could be between 0.4 percent, percentage points of GDP, and 1.3 percentage points of GDP. I wonder if you could just confirm that. And also you have estimates for the very relative sizes and the fiscal stimulus in different countries. Do you think this 1.4 percent of GDP so far is adequate? And just finally, a brief summary of the economic outlook and how grave you think it is, even including this fiscal stimulus, would be handy.
SENIOR IMF OFFICIAL: Well, the estimates in the table should be seen in the context of a broader set of estimates. These are only the discretionary packages. So there are other things going on, too, as mentioned earlier, the automatic stabilizers. We've also only really looked at measures that have been introduced in response to the crisis, and as well only things that would affect the deficit here. So there are other estimates -- there are other things going on where governments are, for instance, acquiring assets through their actions. Those don't affect the deficit when the assets are acquired; they may do so later on. So just a word there on what exactly is in the table, and different countries have announced different packages. Oftentimes the focus is on headline measures, and we've tried to limit it again to measures that are directly related to the crisis, new measures, and measures that affect the deficit and don't entail an acquisition of assets.
I think whether this is enough, I think time will tell. And countries are continuing to introduce measures that as time goes on, just this week, the government in Australia introduced a second stimulus package for 2009. The authorities in Brazil and Indonesia have also introduced new measures. We've tried to be cautious on linking the stimulus to growth. We'll have to see as things unfold. You've seen the discussion in the note whether this is enough. Clearly for 2010 the figures are much lower. A lot of countries haven't introduced measures, and we've extended measures introduced in 2009 when they're not yet reversible. So I think -- I would say time will tell whether this is enough. It's certainly a good start, and we will keep monitoring things.
SENIOR IMF OFFICIAL: Maybe just let me add for a second on the global outlook. Certainly the current situation is highly uncertain. It is important that effective policies are implemented, and part of that policy support is on the fiscal side. But it's equally important that there be effective measures to deal with the financial problems as well as support of monetary policy. And we don't think that fiscal policy alone is going to be able to restore the global economy to sustained growth. But fiscal policy in conjunction with financial policies and monetary policies can be effective. And the scale of the fiscal policies in part will depend on the progress that's being made by the global economy. One of the points that we make is that there has to be a calibration of the fiscal response to the response of the global economy. And it will be important to sustain fiscal support for the global economy as long as the weakening is continuing.
QUESTION: Hi, good morning, thanks. I'm actually curious about the small paragraph at the end where you suggest that the use of a "bad bank" would be a good way of disposing of distressed assets. Can you elaborate on that and why you think that, if you think that is the best solution if you're advocating that for the United States or other economies as well?
SENIOR IMF OFFICIAL: I think our main message here is that there is an urgent need for clarification with regard to the state of affairs on troubled assets on banks' balance sheets. The "bad bank" approach has certain advantages. It's a clear-cut mechanism, more like a surgical sort of operation where you remove the assets from the balance sheet of the institution. So that speaks in favor of it. On the other hand, it has certain implications with regard to upfront fiscal costs which have to be taken into consideration. And I don't think we intend to give the message that it is entirely clear cut that a "bad bank" approach is under all circumstances the best way. It's certainly one of the methods and one that in the past, in past experiences, has proven to be very effective. So it's certainly one that should be seriously considered. But in the end it will depend also on the type of assets that we are talking about because we have some that are clearly identifiable securities that would I think be a little more easy to be removed off the balance sheet. But then on the other hand, as a result of the deteriorating economy, the more general portfolios of banks are being put under pressure as defaults rise, and those are much more embedded in the going concern type of activities of the institutions. And for those I think removing them off the balance sheet is much less of an option. And there you would have to use more guaranteed type approaches.
QUESTION: Hi. I have a few questions. One is about the table on page 19 where you suggest that infrastructure investment seems to have two or three times the impact of tax cuts. Does that mean that that's the route you think governments in general out to go there? Second, I see you've broken the rule and used the "n" word, "nationalized," on page 23 with regard to financial institutions where shareholder equity has been wiped out. Do you think any of the kind of major economies -- the U.S., the U.K., for instance, Germany, Japan, and so on -- have reached the stage where nationalization will be helpful funding the financial institutions there?
SENIOR IMF OFFICIAL: For the first question, I think issue of the tax cuts are sort of an indirect form of stimulus so that you can't be certain of what the recipient of the tax cut actually does, whether they would save the stimulus, or repay other debt, or actually do something that would generate growth. So the infrastructure investment is -- would be a more direct form of investment. I'm not so sure that we would globally say that we would advise one over another. I think we would have to look at countries' circumstances, you know, the degree of infrastructure already in the country, what the needs are, what the bottlenecks are in a particular country, on the other hand what the tax structure is. So I think we'd be a little reluctant to necessarily make a blanket prescription, with the caveat at first that the infrastructure investment does have a more direct and potentially a more immediate impact, depending on how the investment programs in a particular country are designed to work.
SENIOR IMF OFFICIAL: On the question of nationalization or not, I think here the point is that we advocate that when you tackle the problems in the banking industry -- as I just described by looking at the bad assets and trying to resolve that issue -- you have to very much look at the particular characteristics of the institution, and it has to be part of a restructuring process. So if you do, in deed, want to take measures in the field of these assets, it will require in-depth analysis of the bank's balance sheet. And the measures that then follow from the clearance of the troubled assets will depend on the financial situation in which the bank finds itself. And there may be some circumstances where it appears that the bank is in great difficulty. And then the question becomes where in the end it is a viable or not a viable institution. And you can't make general statements on that. If it is not a viable institution, then our position would be that there would have to be some kind of a resolution of the institution. And if that resolution requires some orderly transition, then a temporary nationalization could be part of that. But as I said, it's impossible to make very general statements on that.
QUESTION: Yes, hi, good morning. I have a question about page 20, the effects of automatic stabilizer data. I'm not sure I'm understanding correctly, and of course I look at the Italian example -- Italy 2008 the effect of the automatic stabilizer, and please correct me, would be -0.6, and 2009 1.4. So it's not clear to me also because in 2008 the automatic stabilizer didn't kick in in Italy. Could you explain?
SENIOR IMF OFFICIAL: Well, what we're trying to show in this table is to look at the effect basically of the slowdown and how it affects the fiscal balance. In the primary impact, as we measure it here, is through revenues, through lower revenues. So we have a deterioration that begins in 2008 and then accelerates in 2009. Of course, there will be in some countries some spending programs that will also be affected. Typically, that would involve unemployment insurance or some other social transfers. Here what we -- we took a little bit more simple approach and looked at the widening of the output gap, or the slowing of growth, and how that applies basically through the revenue channels. So we see some deterioration already starting in 2008 in most of the countries because of the growth slowdown, including in Italy.
QUESTION: Are these related to the automatic stabilizers?
SENIOR IMF OFFICIAL: That's correct.
QUESTION: Okay, so the kicking in of the automatic stabilizer is a depressive effect?
SENIOR IMF OFFICIAL: Well, in fact, it simply widens the measurement of the fiscal deficit here, and that's related to the slowdown in growth. It doesn't involve any discretionary actions taken on the part of the national authorities.
But it does help to support demise -- it does help to support countries with large automatic stabilizers have a stronger support from a fiscal sector from that side. It's positive for the outlook, having a high automatic stabilizer.
QUESTION: Thank you. Same page basically, you say that in 2010 the growth effect would be minimal, which is an interesting admission, unless additional measures are taken. How does that correspond to what's happening here, for instance, in the U.S.? And also, since I come from Russia, if you could give me a brief outline of how you view Russia's efforts as against the other G-20 countries. How do Russia's prospects look in that?
SENIOR IMF OFFICIAL: Thank you very much. I think the reference -- it's rather specific in paragraph 27 -- and what it means to do is to basically -- if you look back at the table on page 18, it's to say that at this stage, on the basis of current information or announced packages, the growth effect would be minimal. That's basically because the packages that are introduced thus far for 2010 are rather small in most countries, the carryover of things that were announced for 2009 with a couple of notable exceptions, the U.S. being one, Saudi Arabia being another. As we said in the first answer, I think as we -- going forward, should the crisis persist, countries will introduce new packages and we'll see a stronger growth effect then next year.
SENIOR IMF OFFICIAL: Then on Russia's situation, clearly Russia like other G-20 countries is being severely affected by this crisis, both from the impact from falling commodity prices, in particular oil prices, and also tightening of financing constraints and difficulties in maintaining the capital inflows. In these circumstances, we think it is appropriate that the Russian government is introducing quite substantial fiscal stimulus, approaching 2 percent of GDP as we estimated for 2009. The Russian fiscal position is generally strong. Russia has accumulated substantial reserves in an oil stabilization fund, and the circumstances in which that fiscal room should be used. So we do support Russia's actions to support their economy with fiscal policy.
QUESTION: Is there anything else that you would expect or would advise them to do?
SENIOR IMF OFFICIAL: Well, clearly they need to deal with the strains in the financial system, which have been quite severe, but the Russian government has been active in addressing the strains. The key will be a combination of steps to support domestic demand, but also dealing with the financial strains.
QUESTION: Thank you.
MODERATOR: I think this is going to have to be our last question, so if someone's got a burning question, get it in. And if there's any follow up, send me an e-mail firstname.lastname@example.org and I'll follow up with the relevant department.
QUESTION: I just wanted to follow up about the measure taken in Italy, or on the verge of being taken. In view of our (unintelligible) measure to be taken in Italy, considering what you said about the multi (unintelligible) impact?
MODERATOR: I'm sorry. Repeat the question, please.
QUESTION: I just wanted to know that the direct command measure in Italy on infrastructure development -- you have said that they have multiple impacts on growth?
SENIOR IMF OFFICIAL: I would leave that question for the Italy Article IV. I think it's going to be completed shortly and that there will be an opportunity to discuss with the Italy team that particular question.
MODERATOR: Okay. I think we're going to have to wrap that up again. I know it's very brief, but if you do have some burning, follow-up questions, just drop me an e-mail, email@example.com, and I'll try to get you a quick answer. Thank you for joining us today, and stay in touch. Thanks.
IMF EXTERNAL RELATIONS DEPARTMENT
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