Transcript

ESR/Spillover Conference Call

July 28, 2014

Participants:
Hamid Faruqee, Division Chief, Research
Steven Phillips, Division Chief, Research
Emil Stavrev, Deputy Division Chief, Research
Sweta Saxena, Senior Economist, Research
Dezhi Ma, Senior Communications Officer

MR. MA: Good afternoon and thank you very much for joining the call. This is an embargoed call on the 2014 Spillover Report and External Stability Report. Joining me today we have Steve Phillips, the main author for the External Stability Report; Hamid Faruqee, main author for the Spillover Report. Both of them work at the Research Department. Steve and Hamid will give some brief opening remarks respectively on the two reports and then we will take your questions.

The two reports have been posted under embargo, and the embargo will be lifted until Tuesday, July 29th at 12:00 p.m. Washington time which is 1600 GMT.

MR. PHILLIPS: This is Steve Phillips. I'll be speaking just a few minutes, maybe less, on the External Sector Report. This is the third edition or the annual exercise of the External Sector Report. It's our process at the IMF for assessing what we call external positions. So that's not just exchange rates, it's all current account, external balance sheets, international reserves positions. And it's an exercise or a process that we do among ourselves and with country authorities to analyze 28 key and fairly large economies, analyze them all at the same in what we call a multilaterally consistent way to make sure that the analysis at the end of the day adds up into one coherent picture.

In contrast to the Spillover Report -- I'm speaking first because I like to emphasize that one big difference of the External Sector Report is it's more of a snapshot assessment. So at a moment in time basically focusing on 2013 and early 2014 what we're providing now is an updated external assessment for 28 of the world's largest economies -- or 29, we bring in the Euro Area as a whole also. And while we do work on this year round what we show to the IMF's Board and now to you are two papers that we produce annually. Those are, one, a set of individual economy assessments. So for each country, each of the nearly 30 that are covered we're going through key aspects of their external sector and the staff's analysis of that in a common sort of matrix or format. So you'll see the same general area is covered in different degrees for different economies. That's all done. It looks like it's just a series of individual assessments with a staple through it, or in one PDF file, but the key again is that it's multilaterally consistent and that comes out more clearly in the overview paper, the second of the papers. And that paper is basically designed to bring it all together and to point out multi-country patterns, see how big economies and smaller economies fit together into a global picture, and to analyze policy issues that can be evaluated one country at a time, but also to bring out aspects where looking at more than one country at a time and looking at the multilateral perspective actually makes a difference. So for example in the report you can see subsections or topics on fiscal policy, what we call the global fiscal policy gap, or on cyclical conditions and the global output gap, and how those things matter for a global picture.

I do want to clarify that these assessments that we're doing here is not just a product of our Research Department. I was just the Chair of an interdepartmental group and aside from your interest in our bureaucracy what I'm trying to bring out is that interdepartmental group is working with the mission chiefs, the desk economists, the experts, on each of those nearly 30 economies. So we're not off by ourselves. What we're doing is working with those individual teams to help us all work together to build a coherent picture. In a way then what we do is provide a kind of a back stop or a support for the sort of Fund’s official word on each economy which is still found in the Article IV Consultation, so the Staff Reports that for most of these economies are published once a year. In this External Sector Report we're not replacing that, we're complementing it and what we're doing is bringing it all together at the same time of the year. The reason we do the External Sector Report at this time of the year is because it coincides with the Article IVs, the annual Staff Reports, for the largest economies and for many other economies, but not for all of them. So it's sort of like taking -- I was giving the analogy a few minutes ago -- a family snapshot and we're making sure that everybody's in the same picture at the same time. That's what we're doing in these papers.

Just very quickly I'd like to emphasize some of the distinguishing features of what we do with our external assessment that contrast them with what might seem similar analyses. After all there are plenty of people, especially in the markets, who have their own, say, exchange rate models and issue statements about exchange rates. That really is very far different in purpose from what we're doing. With risk of a generalization, most of what you see in the market is quite naturally oriented towards forecasting. It's comparing, it's guessing, estimating where things will be in the future so that people have a sense of how say exchanges rates are likely to move. But that's not our purpose. Our purpose is not to predict what will happen but to try to say where things should be. And what I mean by "things should be" I mean if all the world had appropriate policies, if no one had a too loose fiscal policy or any other type of policy distortion where would we expect current accounts and exchange rates to settle. That's a normative type analysis and that's something that's unique what the Fund does. And it's useful for us because we give policy advice and so naturally we're interested in looking at the effects of appropriate policies on current accounts and exchange rates.

With that, I'll just point out some of the broadest messages from this year's External Sector Report. I won't go at the country level. There are very specific messages for each country so I can only just speak about the sort of common and general ones. Starting off with a sort of familiar measure of what we call global imbalances. So adding up all the world's current account surpluses and all the world's current account deficits and asking how does that look. Well, as most everyone knows that picture looks much better, much different, than it did at the pre-crisis peak of global imbalances. So imbalances are really very much reduced. But we don't think that the job is done and our point in this year's Report is to remind people that most of that progress happened -- by now is almost old news. It's not a recent thing. And if we focus on what's happened in the last few years we really don't see very fast progress on reducing amounts. We saw some in 2013 overall, but even within 2013 you see kind of a mixed picture of some imbalances narrowing but some others widening. At the end of the day we do try to have a -- we form an assessment of how big we think imbalances should be. For every economy we make an estimate, combining our models and judgment, of what would an appropriate current account surplus or deficit as the case may be for each country. And when we add all those up we find -- those are current account norms -- we find that that number is about half as big as the actual current accounts that we observe today. So in a certain sense imbalances, although they are much reduced, still too large. Roughly speaking overall, adding everybody up together they're about twice what we would expect to see. That's not necessarily a cause for alarm, but it's a cause for concern and in some individual economies' cases it might be a cause for alarm.

Just to point out a few more things on looking sort of within the composition of that overall picture, I mention there has been sort of mixed progress in the last few years. So a number of economies excess surpluses or excess deficits have narrowed, but actually on the surplus side if we look just in the last one or two years we really see that progress in reducing excess surpluses has mostly stalled. There are some exceptions; Malaysia is one exception. But mostly in the last one or two years there hasn't been that much progress on the surplus side. So the action that we've seen has been on the deficit side. There have been cases of excess deficits getting smaller but there're also been a few cases or a number of cases of deficits that might have been too large in the first place getting somewhat bigger. Now this is particularly in a number of emerging market economies. And I say emerging markets excluding China, putting China off to the side as a giant economy. I'm talking about some smaller but still significant emerging markets. And this is what we call a kind of a “rotation” on the deficit side. It's kind of a mix of good news and bad news.

Finally on policy messages I really want to emphasize that anywhere there is an imbalance there's a need to address it from both sides, for each imbalance, each economy is a function of not only its own policies and circumstances but also somewhat a reflection of a spillovers of others. The policy agenda that we recommend really varies by country and that's where there's the second document of these two papers to say for each economy what it is for their particular circumstances, situation, what it is that we think would be most appropriate for them in general and in terms for reducing any imbalance that they may have. So beyond referring you to each one of those pages I'll just say that it is -- the nature of imbalances is of course it's a joint -- it's a multilateral problem so it's best solved with action from both sides. Acting for example only on the side of reducing current account deficits and not acting enough on the side of those with surpluses would not be the best thing for global growth or global stability.

Finally I'll say that in terms of how fast of action we're looking for, we're not actually necessarily expecting radical action, we're not expecting or even saying it's necessary in most cases to have very abrupt external adjustments. So a gradual approach is most likely and it's probably the most desirable. After all we wouldn't want a number of economies that have fiscal adjustment needs, fiscal consolidation needs, to attack those completely and try to solve them overnight. That would be recessionary for them and for the global economy. But the point is sort of to keep making steady progress and let's try to break out of this pattern of the last few years where it seems that not so much progress, at least by a number of economies, has occurred.

MR. FARUQEE: Thanks. So I'll talk about the 2014 Spillover Report. Steve's given you a nice introduction on how we organize the work here and in many ways the Spillover Report is produced in a very similar manner. There's an interdepartmental task force that puts together that report and I served as the Chair of that task force.

One thing that I'd like to highlight that's different about this year's Report compared to previous years is that we've shifted the structure of the report on how we look at Spillovers. In the past, we focused on spillovers from large economies or systemic economies. This year we've looked at spillovers through a slightly different lens. In particular coming at spillovers thematically, at the report focuses on what we see as the key spillovers at this point in the global economy from more a conjunctural perspective. And when you do that you get some of the messages that we have in this year's Report. Let me just start off with some of the headlines and give you some different context than what's in the report itself. One of our key summary lines is that we see global spillovers as having entered a new phase. Let me give you a little more context for that. We began our Spillover Reports in 2011 and the 2014 Report is the first one where we haven't focused on crisis-related spillovers. That's not to say that spillovers don't matter, they still do very much matter but the sources of those key global spillovers we see as changing. In particular when I describe this new phase what we have in mind is that changing growth patterns in the global economy at this point being a leading source of key spillovers. And what the report tries to focus on is really two key trends. And this relates to our WEO update which came out just last week on an uneven global recovery. And the two key trends we have in mind, first is signs of self-sustaining recovery in some key advanced economies and with that prospects for monetary normalization which we think can carry important global spillovers. We do see global interest rates eventually moving higher from here and part of what the Report tries to highlight is some of the spillover implications from both the source country and the recipient country perspective. The second key trend that the report focuses on is the broad based slowdown in emerging markets. The Report defines this slowdown , some of its key features. And again what the Report tries to bring out is the diversity of spillover channels that we think might be in play that may transmit the effects of slower growth in emerging markets onto the rest of the world. So that's a little bit on the focus of this year's report.

In terms of relevance, in terms of why we should care about these issues, let me just emphasize that -- and this is again discussed in the report itself -- that these main spillover issues we think still lie ahead of us. Some of these key risks we see as relevant going forward. On monetary normalization, just take that as an example, we see that much will depend on how well unwinding or normalization process, removing the exceptional monetary stimulus that's out there, how well can that process be managed. And here we do see some complex challenges that face these major central banks. And what the Report tries to do is provide you with analysis on what to watch out for and who to watch out for as this normalization process proceeds. And if there are bumps in the road who may be hard hit in terms of spillovers.

On emerging markets, again to pick up on the slowdown issues, the Report goes into some depth on what has defined the slowdown. We see this is not just a China issue but a much more broad-based slowdown, a synchronized slowdown. We see it as being protracted. But of course it's hard for us to pin down the exact nature and extent of the slowdown. And so going forward that remains an uncertainly. The events are still unfolding and one of the things the Report tries to do is look at some of the risks that may emerge if the slowdown were to deepen in emerging markets.

And finally what the Report talks about is on the policy side. Here one of our main messages which is very similar to what we had last year, we think it's still the right message, is that we still need stronger policy action at the national and the global level to help mitigate some of the risks associated with these important spillovers. And what the Report tries to provide you with is an updated priority list with respect to actions at the national and multilateral level.

So with that broad overview, we are happy to take specific questions that you may have.

MR. MA: Thank you, Hamid and Steve. We are open to questions.

QUESTIONER: They are quite dense and cover a lot of stuff, but thank you for doing the call.

Can you explain the downside scenarios that you -- you seem to stack them up. They seem to be cumulative. So I'm looking at on page 21, your figure to global downside scenario. It seems as though that you mention a two percent GDP figure coming off global GDP but I'm not sure where I see that in there. It seems like they add up to a lot more than that. And then there's another graph in here which shows an emerging market impact of like eight percent of GDP. It's on the next page, the spillover effects of downside scenario. Vulnerable emerging markets could have a negative eight percent contribution to GDP. I wonder if you could explain that a little bit better.

MR. FARUQEE: To answer your question let me start off -- with the more conceptual issue, the layers that you mentioned. And that was very much intentional on our part. We saw these spillover issues as in an important ways being distinct. And so the risk associated with them could certainly overlap, intersect, and interact. So that's why we break out the different kind of shocks and put them in terms of layers. We show different sets of charts in terms of the implications that you're referring to. The figure two on page 21 shows you the impacts of the different shocks on different groups of economies. We don't show you the global aggregate in that picture but we do calculate that separately. Now this picture is measured a bit differently. This shows you the deviation in the level of GDP from its baseline. So if you like you take vulnerable emerging markets you can see that GDP is quite significantly lower as you pointed out and that's partly because here we assume a structural slowdown for these economies and that's why the level of GDP is staying lower over time as well. Now the chart with the larger numbers that you mentioned on page 22, those are cumulative numbers. So that's adding the area under the curve if you like from the previous chart. That's how you reconcile them.

The broad points that we wanted to get across with this downside scenario is that as I mentioned in my opening remarks we do see key risks both with respect to normalization and with respect to emerging market growth, the idea that we could have further growth disappointments going forward. And there really isn't anything that prevents, you know, those two things from happening at the same time. In fact if you look back to the events of last summer we had the taper episode in the U.S. where interest rates rose fairly sharply in May and particularly in June of last year. At the same time we had disappointing news about EM growth coming out at the same time. And so we thought that it was important possibility for these risks intersecting and that was partly what this downside scenario was meant to convey. You have these key risks out there and the possibility that some of these things could intersect and interact.

QUESTIONER: And what would you say the probability of these risks materializing? High, low, medium?

MR. FARUQEE: It's a good question. I think that with respect to normalization, the monetary shocks, I probably should emphasize that our baseline, our central scenario, envisages a relatively smooth unwinding process. But having said that, and again as I mentioned at the beginning, we do see these central banks really facing a lot of challenges. This is sort of the unwinding process; the tightening cycle this time around is more complex, more complicated than in the past. You have to deal with large balance sheets as well as low interest rates. And that unconventional starting point creates greater uncertainties for us going forward. Hard to put an exact probability number on it but maybe, Emil, if you want to add.

MR. STAVREV: Not just on that, the purpose of the Report is not to emphasize the probability, the probability of any single point, any scenario maybe zero. The question here is just to illustrate in case this scenario materializes what are the losses for various groups of countries.

MR. FARUQEE: In the case of the EM slowdown what I can tell you is that the amount that we assume in the downside scenario, the half percent slowdown in growth per year over three years, that half percent markdown is the average markdown that we've had to our projections over the past four years. So if you just look at how more pessimistic we've become in our medium term projections, we've been marking down on average by a half percent across our WEO projections and so we use that as a benchmark for another half point growth disappointment in each year over the next three years. So it's not out of line with some of the things that we've seen in the past. The interest rate, let me just mention one thing, again, it's hard to put a specific probability on that particular risk. We do assume 100 basis point increase in long term yields--a larger shock than what we saw with the taper episode. So the taper episode, we estimated to be about a surprise of about 40 to 60 basis points, so that 100 basis points would be a larger shock than the taper episode, if that gives you some sense of likelihoods. If you were to look at just the variation in long-term interest rates year to year, one standard deviation move in interest rates is about 115 basis points, as a point of reference. It's bigger than the taper shock, but I wouldn't call it necessarily a tail risk.

QUSTIONER: It's a question for Steven. You said that on the external imbalances, external sector, it could be a cause for alarm, in particular economy. I'd like to know how you see the situation of Brazil and how serious you see the external imbalances in Brazil comparing with other challenges that the economy faces. And I have one practical doubt. You said that the current account deficit here was 3.6 percent of GDP or 2.9 percent seasonally adjusted and that the interest rate tax assessment is that it should be minus one to minus 2.5 percent of GDP. Is this compared to the 3.6 percent or to the 2.9 percent of seasonally adjusted?

MR. Phillips: Okay, thank you for the question. So there were two questions. The second one I think is going to be too technical for us to get into the decimals et cetera. Maybe we can talk bilaterally in a few minutes. In the first one, I want to be clear that there's no sense of alarm in the assessment for Brazil. So I'm just looking at it right now. The overall assessment for Brazil is one of being “moderately weaker” than -- the external overall position being moderately weaker than one would hope to see, so I would put the emphasis on the “moderately” and I'm not trying to say that that means there's no issue at all, but in looking through the assessment page right now, and please keep in mind, I'm only the chair of the group, so I'm not the expert on Brazil. It would be best actually to follow up with our Brazil team that's actually responsible for the individual assessment here. But I do not see references to high vulnerability or anything like that. So I think I would leave it at that. You've seen for example, figure 10 in the external sector report. It shows the current account gap ranges that we estimate, that the staff assess for about 30 economies. And you see that Brazil's current account is assessed to have a negative gap but it's not among the largest. So I hope that puts it in perspective.

QUESTIONER: Thanks for doing this. I have some success in (inaudible), one is when you say that there is no problem of alarm for Brazil, what countries are you looking at where you are alarmed when you look at the external side, like the current account balance, and exchange rates, and to that related is the question; if I look back at the three years on the external sector reports and Germany and China were always in the top surplus countries, could that be some kind of new normal, because you don't see too much movement in there, if you compare that over the years. And the third question I have is, this is more related to the global report. You're talking about the need for global action, but I would say the main message of the report is the fact that the Bank of England has to be careful in changing the interest rate policies and emerging markets have to be prepared for that. So what is the global message? What is the global action you are demanding from countries?

MR. Phillips: Thanks for your question. I'll start the first two questions that were on the external sector report and then pass it over to Hamid. I believe the first question is, well, if we're not expressing alarm for Brazil, then where are we expressing alarm? Well I think you won't be surprised to say, to hear that I don't like the word alarm, and in fact, the purpose of the external sector report is not a vulnerability analysis or a crisis risk analysis. That would sort of be the area where I would expect to be telling you about the degrees of alarm. Instead what we're trying to do is a normative assessment of how far current accounts are from where we think they would be, sort of most desirable, given fundamentals, and given our idea of appropriate policies. It is possible to deviate from that staff assessed current account norm, without being in an alarming situation. One could be in an undesirable situation, and imagine a better situation, but it wouldn't necessarily be in terms of say, vulnerabilities or risks. That said, if you look through the external sector report, some of the country pages, they do mention specific vulnerabilities in certain country cases. I'd rather not, in this session, go from my memory on highlighting which of those economies there are, but again, I would say, similar to a point that Hamid and Emil o made a few minutes ago, where the Fund does point out risks, we're not necessarily quantifying them as being very precise. It's a relative thing and we're saying where more attention, or important attention, should be devoted to risks, without a punch line for where there should be alarm or not alarm.

For the next question was about whether there might be a kind of a new normal, so you pointed out that for example, for I think the countries you mentioned were China and Germany, that in now three years of external sector reports, three years in a row, the assessments have pointed to those countries' current account surpluses being, in different degrees, above what we estimate might be the best or most appropriate levels. So is that a new normal, or does it means something that there hasn't been that much change, as you put it, from year to year? Well, I'd say that we actually don't expect in most cases there to be a large degree of change year to year. This is an exercise we do year to year. Maybe in some cases we could do it every two years. But we don't know in advance when things will move or when they won't, so just as we assess economies, overall policies, framework, their macro situation, we also assess their external situation once a year. I would say that the fact that we change, we have -- I think, I'd have to look back. It sounds like you've done it more recently than I have -- the fact that we're pointing to current accounts being somewhat too strong, for China and Germany, 24 months after we did it in the first one, doesn't really speak to me as predicting the future, or saying this is a new normal, or really being unusual. I'll go to Hamid then.

MR. FARUQEE: My question was on the case with global action. No, I think your reading was fairly accurate in that we do place a lot of emphasis on national action, and in fact that comes up earlier in the report in terms or our priority list. We think there're a lot of areas where national policies can be strengthened. You mentioned the Bank of England, the Federal Reserve, having well calibrated central bank communication. We see that as certainly important objective for national policies, within national mandates. But having said that, we do see the potential for coordination problems and that's discussed in the report as well. And so it's not just a case of everybody doing things that are in their own best interests anyway and having just joint action. We do see a case for greater collaboration. And those examples come into play when certain actions in one country may create some tensions in others, and that's where the goal for collaboration can be important. So again, going back to the issue of monetary normalization, there can be circumstances, I think we saw some of that last summer, where communications were taken maybe to give a course correction to markets that may have gotten ahead of themselves. That may have imparted spillovers elsewhere and brought forward other problems in, say, vulnerable emerging markets. So that's the type of situation we have in mind where we think that there may be scopes for collaboration where a situation may arise where an individual country again, working with the national mandates, may need to take certain actions to improve things, maybe over a longer term horizon. But there may be a trade off in the short run at least, where that may exacerbate problems elsewhere. And that's the kind of coordination problem that we tried to highlight in the report, where we think that could be a scope for stronger action at the global level, through multilateral cooperation.

QUESTIONER: A follow-up, so would you propose the Fed would debate with other countries before moving up the interest rates next year? Or what does it mean concrete when you say there was global cooperation, collaboration? What does it mean in concrete?

MR. FARUQEE: Right. So you're asking, what does it mean in concrete terms, right? I don't think it's about debating whether the Fed should be raising its policy rate. Again, that's part of its national mandate. But you could envisage whether the level of engagement between the Fed and other Central Banks is where it should be, whether there's enough confidential information sharing. You could also think about, in terms of whether we have the right insurance mechanisms on a multilateral basis. Again, we go into this in the report, that when those eventualities where certain risks do materialize, whether we have all the mechanisms that we need in place. So it's partly a question about, do we have the level of cooperation to mitigate the risks, as much as we can. And I think what the report tries to allude to is, we're not there yet.

QUESTIONER: And what would be, when would you be satisfied to say that we are there now? I just try to understand what it means in concrete. I mean, Central Bankers are meeting every month in Basel. I mean, they are debating monetary policy. You say, is there enough cooperation, is there enough information. I'm just wondering, what does it mean concrete -- should they meet every, twice a week, or twice a month in Basel? Or what does it mean?

MR. FARUQEE: Well, I don't think frequency is necessarily the issue. I mean, you know, if you look at the open debates that take place at the BIS, occur at one particular level, I think that you could think about other types of information sharing. I think you can talk about other types of multilateral arrangements in terms of insurance mechanisms, in terms of liquidity lines. Those are things that we think aren't as developed as they could be and certainly something that we should be taking a hard look at it.

QUESTIONER: I think some of my questions have been answered, but just a really quick basic question I wanted to clarify. Under the scenario where, in the spillover report where emerging market risks or slowdown could combine with normalization in the U.S., growth could fall two percent -- that would be two percentage points? Or two percent relative overall, so I guess, it looks like, for the forecast for next year, and the WEO's, four percent, does that mean it would go down to two? I mean I know it's a different timeline, but just make sure I understand that. And then I was wondering if you could speak a bit more about the financial reform risks. You mentioned some of them. So I'm just curious what the implications from that are, whether you think financial sector reforms need to be different or if it's just, they need to be modified a bit to reduce some of these repercussions, or if you have any kind of policy prescriptions from that.

MR. FARUQEE: On the global output losses from the downside scenario, so here we have a level loss. So GDP being lower, that is, the level of output being lower by two percent, it's over a certain horizon I believe. It's over, yes, a four to five year period, at the global level. So if you look at figure two, for example, you have advanced economies with output losses, in level terms, deviation from baseline, that are less than two percent, and emerging markets that are more than two percent, and on average, at the global level, you get about two percent when you do the weighted average.

On financial sector reforms, there's really preliminary work at this stage. What we try to do in the box there, I think you're referring to the box 2?

In the report, yes, we tried to flag there was a global regulatory reform agenda that is out there. We do very much believe it's needed after the financial crisis that we had, and certainly the intent of that regulatory reform is to build a safer financial system and that's very much welcome. But when you get to the issue of implementation, in terms of speed, in terms of degree of enforcement, etc there's lots of country variation and what we try to do, at least at this stage, is try to identify some of the issues with what we see as sort of an uneven transition period. So even if we can agree on the end point, that we need to have the regulatory reform and a safer financial system going forward, getting from point A to point B in that transition, you have, the U.S. moving fairly quickly, some other countries lagging behind, the degree of implementation is also not always the same. And these are kinds of things that can impart spillovers or unintended consequences as well, so I think that's partly what we try to identify at this stage. It's hard for us to come up with a firm policy advice or policy implications. At this stage, what we try to do is identify some of the issues that we are doing further work on and we will expect some of that work to appear in the next few GFSRs', our Global Financial Stability Reports.

QUESTIONER: Thank you for taking my question. It's more of a kind of clarification on the spillover report. I'd like to know, when you mentioned vulnerable emerging markets, are they the ones that are mentioned on the footnotes of page 83? It's Argentina, Brazil, India, Indonesia, Russia, South Africa and Turkey. This is the first one. If they, when you mentioned it, and the whole report, you were referring to this set of countries? And the other one is about the map that you have in page 84. You have -- it's an accumulative affect right? In the first, you have a synchronous monetary normalization, then growth will go down and then in emerging markets and then financial turmoil in emerging markets. They are cumulative effect, if I understood correctly. And the last point is, just to know if I understand it correctly, when you say the consumer price inflation, it will be the CPI that will be reduced in, for example, the case of the 1.875, it will be 1.875 less than the, if there was no crisis. And the current accounts would improve in, for example, in the case of Brazil; it blew it to be 5 to 1.5. Thank you very much.

MR. FARUQEE: Yes, so on your last question, I think you're reading the charts correctly. They are cumulative effects so you add them up. So again, coming back to what we talked about earlier, we were adding these as layers on top of each other. In terms of the units, Emil, if you want to -- I think he has the units correct.

MR. STAVREV: Yes, it's a percentage point full inflation and then it should be a percentage, a percent of current -- a percent of GDP for the current account.

MR. FARUQEE: On your question about vulnerable emerging markets, there are actually two sets of vulnerable emerging markets that we use in the report. We have two modeling frameworks. The ones that generated the map that we just discussed on page 84. We had a second framework that's basically figure 2 in the overview chapter, but you essentially have it right in terms of, for those heat maps, the vulnerable -- I use vulnerable here based on past episodes and sensitivities to past periods of market stress. Those are the countries that we identify that showed that sensitivity in the past, not necessarily a perfect prediction going forward but certainly how we've characterized vulnerable economies.

For figure 2 on page 21, we have a smaller set of countries, so we had a smaller set of vulnerable emerging markets that were used.

QUESTIONER: It's not a same set.

MR. FARUQEE: It's a subset. There are fewer countries in our FSGM model.

QUESTIONER: Okay.

MR. FARUQEE: So the more vulnerable ones in figure two would be Brazil, India, Indonesia, South Africa, Russia and Turkey. And that I think largely coincides with the heat maps that we have --

QUESTIONER: You wouldn't have Argentina in this set.

MR. FARUQEE: We don't have Argentina in that set. Argentina's the only one. Argentina's not in the other model.

QUESTIONER: Okay, but when you mention in the report, you were mentioning to this group, that includes Argentina, right?

MR. FARUQEE: In the heat maps, Argentina is included, that's right. In the maps that you see on page 84 or the one on page 23.

QUESTIONER: Okay, and one last point, when you said Brazil would have an impact of, it would be less than 3.75 percent in output, do you have a precise figure or it's not possible to have it?

MR. FARUQEE: We do have them. We have them in qualitative form in the heat map and aggregated form in the time series chart, but we have the disaggregated results. Perhaps we could chat offline if you want to on that.

QUESTIONER: I would like to have it, the precise figure. Now I would also like to have the number that Claudia asked for the current account, if it's cyclically adjusted, or to the normal figure. Thank you very much.

QUESTIONER: Thanks for taking part in this call. Two questions if I may. I'm looking at the spillovers through the banking channel, and I want to make sure I'm looking at the map on pages 69, 70, and it's based on an extreme slowdown in EM growth. I just want to make sure I know what is that two percent decline, or what exactly is the presumption. And I guess how up to date is that, you know, Russia's the one red country with a more than five percent loss in NPL's. Does that -- is this up to date with the current status of geopolitical events? More generally, how do those potential banking spillovers compare with say the Asian crisis? I don't know if you can put that in historical context that way?

MR. FARUQEE: Okay. Thanks for your question. On the first part of your question on the degree of slowdown, we do make that assumption consistent with the downside scenario that we've been discussing. So this idea of a persistent slowdown, a 0.5 percent slower growth over a couple of years, Now, it's going to more than just that domestic factor. The reason that the amount of slowdown is actually more than that is again through spillovers.

So the bottom line numbers that you are seeing, for example, in terms of the slower growth in, say, page 21, I believe, it's an additional effect. So when it's not just an individual slowdown to the 0.5 percent per year over the three years, but the fact that your partner countries are also slowing while you are slowing, that’s an additional impact.

And that’s why the loss numbers, the output loss numbers are larger in Figure 2, on page 21, but (inaudible) with that same assumption, and then map that into the banking sector model which is talked about in Figures 9 and 10 (inaudible) we are referring to.

So those bank capital losses for the precipitant year and slowdown in Figure 9, are consistent with the growth assumptions that come out of those downside scenarios. I don't know that Sweta, our Chapter Leader is here, and I don't if you want to add on that, or on the issue of the Russian exposure numbers.

MS. SAXENA: The only thing I want to add is that the data on loss given default to calculate capital losses is from 2013, so unless the data for loss given default changes substantially for 2014,the numbers on losses would not change.

QUESTIONER: Okay. And are these loss estimates, are those cumulative over three years, is that the same basis? with the output loss with the NPL estimates.

MS. SAXENA: Actually they are -- it's a one-period model, so output losses over the next five years are assumed to materialize in one year.

MR. FARUQEE: It's a one-period model If you like, we collapse it all to one period but consistently with the cumulative output losses that we would see with that kind of slowdown.

In Figure 11, we give you some more information on the NPLs and the loss given default assumptions that we have in the report, and as Sweta mentioned these were based on 2012, 2013 numbers, that was latest available that we had at the time that we wrote it.

QUESTIONER: Can you give a more general assessment there? We had several years of that building up capital. You’ve the whole Basel Accord; you’ve got the European exercise taking place now. What kind of a setback would that represent to the strengthening of balance sheet that has taken place over the last four or five years?

MR. FARUQEE: You're talking about for the EM slowdown itself?

QUESTIONER: The EM slowdown, the effect on NPLs, what kind of a knock would that be to the banking system?

Ms. Saxena: On the capital losses, if you have a structural slowdown, a more persistent one, we estimate that capital loss would be 1 percent of GDP, on average. However, it would differ across countries, so for some of the Nordic countries they would be a little bit larger losses.

If you can see on page 31, we have shown losses across countries.

MR. FARUQEE: So you have Sweden and the Netherlands and Spain, being more affected than the average -- but the average effect being about 1 percent.

Which is noticeable, but I think it reflects the fact that although cross-border claims have risen a lot in terms of exposure to emerging market borrowers, it has risen from a low base. So it's a still modest share in terms of the overall bank exposures and bank balance sheets.

QUESTIONER: So no 2008 all over again but -- an unwelcome hit.

Ms. Saxena: Yes. But to put some numbers in perspective, I mean, like, in 2008 the U.S. had a capital loss of 6 percent of GDP, that was as high as it was, and it was 20 percent for the UK, so even with emerging market countries slowing down, these losses are much lower than compared with the global financial crisis.

QUESTIONER: In fact I have logistical question. I wasn’t sure who had answered Ian's very first question, and I just want to double check that this is on the record, about embargoed until noon tomorrow, this conversation? Or whether this conversation is actually on that ground? Thanks.

MR. MA: The conversation is under embargo until 12:00 noon tomorrow.

QUESTIONER: But it's on the record, right?

MR. MA: On the record.

QUESTIONER: On the record, okay. And who answered the very first question?

MR. MA: It would be Hamid Faruqee.

QUESTIONER: I have a question on the Spillover Report on the box on -- about Russia and Ukraine. So my question is, since this is about the possible implications of tougher sanctions, and the report is actually dated from June 25th, I want to know whether -- what is your stance to what has already happened or not; and when it comes to banks and the risk for Austrian banks and other banks you cite, on page 19.

So what sort of exposure are you most worried about? Is it the one -- is it loans to companies? I understand it's not sovereign bonds, so what are we talking about? Thanks.

MR. FARUQEE: You mentioned, obviously there's dating issue there, as you know, we had the information at the time on sanctions and counter sanctions. But on some of the things that are identified in the box, I think they still remain relevant when you think about exposures through the lines on natural gas, and on trade and tourism, I think those things are still fairly good pointers.

On Austrian banks, I don't have a specific answer. Do you have information on that?

MR. Saxena: No.

MR. FARUQEE: We would probably need to get back to you. We could ask our colleagues in our momentary capital markets to see if they could give you a more detailed breakout of that.

QUESTIONER: It was because -- it's just -- it's just not bank, but also what you say, lower down on the non-sovereign Russian bonds, and so I'm just trying to see what you think is the most at risk there.

MR. FARUQEE: Right. And obviously what we tried to highlight in the box what the relative exposure to Austria versus other banks in the region, but we don't have that detailed breakdown here, but we would have to check to see if we could provide you that information.

QUESTIONER: Thank you.

MR. MA: Thank you very much. And let me remind you again that the conference call is embargoed until Tuesday, July 29th, at 12:00 p.m. We will post the transcript of the conference call online in a few days. Thank you very much, again, for joining the call.