Transcript of a Press Briefing on the International Monetary Fund’s Global Financial Stability Report and World Economic Outlook Updates

January 25, 2011

by José Viñals, Financial Counsellor and Director of the Monetary and Capital Markets Department,
and Olivier Blanchard, Economic Counsellor and Director of the Research Department

With Caroline Atkinson, Director of External Relations,
Sharmini Coorey, Deputy Director of the African Department,
Jorg Decressin, Assistant Director of the Research Department,
and Peter Dattels, of the Monetary and Capital Markets Department
Tuesday, January 25, 2011
Johannesburg, South Africa

MS. ATKINSON: Good morning, I’m Caroline Atkinson, the Director of the External Relations Department at the International Monetary Fund. Welcome to this press conference and the release of our quarterly update of the World Economic Outlook and Global Financial Stability Report. We are very pleased to be doing this here in Johannesburg, because South Africa is a key emerging market economy, an important member of the International Monetary Fund and of course, a member of the G20. And we have begun to take these updates outside of Washington to represent the global nature of our work.

May I introduce the others on our panel, to my right Sharmini Coorey, who is Deputy Director of the African Department in the IMF, Peter Dattels, who is of the Monetary and Capital Markets Department, José Viñals, our Financial Counsellor and Director of the Monetary and Capital Markets Department, Olivier Blanchard, our Economic Councillor and Director of the Research Department, Jorg Decressin, of the Research Department in charge of the World Economic Outlook.

I will be taking some questions from our Online Media Briefing Center, as well as from those of you in the room, but beforehand I want to turn to our Economic and Financial Eouncillors to give brief opening remarks. And first of all to Olivier Blanchard, the Economic Counsellor. Olivier.

MR. BLANCHARD: Thank you Caroline. Good morning to all of you. One way to summarize what I’m going to say is to say that the world economic recovery continues, but it remains a two-speed recovery, slow in advanced countries and much faster in emerging and developing economies. As a result, tensions and risks are emerging, which require strong policy responses. So let me develop these points briefly. For some time global activity was led by fiscal stimulus and the restocking of inventories, this process is essentially over, which means that global growth is set to slow over the coming year. Fortunately underlying private demand is improving, so we expect the slowdown in growth to be modest with global growth remaining at 4.4% for 2011, down from 5% in 2010.

Now to the two-speed part. In emerging and developing countries, growth is likely to remain strong. GDP for these group of countries should increase by 6.5% in 2011 compared to 7.1% in 2010. For sub-Saharan Africa, we expect that growth will actually increase to 5.5% this year up from 5% in 2010. Most emerging and developing economies have few scars from the crisis and some, such as South Africa, are benefiting from strong commodity prices. In many of these countries output is now back to potential and the policy challenge is to avoid overheating.

Turning to advanced countries, in those countries growth will remain subdued. Our forecasts are for 2.5% growth in 2011 compared to 3% growth in 2010. This is barely enough to dent high unemployment and this raises very serious social concerns looking forward. These countries have scars from the crisis, they still need to work out their pre-crisis excesses to fully repair their financial systems; in addition, many of them are facing fiscal challenges, particularly several in the euro area.

The fourth point is that little progress is being made in addressing global imbalances. We forecast that growth in the U.S. will be based on domestic demand, while net exports will deteriorate. One may worry that the U.S. will replicate the type of growth it had before the crisis with public dissaving taking the role that low private saving used to play at the time. Similarly, without fundamental changes in China, we expect the current account surplus there to rebound from its lower level this year to a steadily higher level in the future.

Now let me turn to the tensions and risks that we see at this point in the global economy and I’ll take four of them. The first one is rising commodity prices. The problem is not yet quite as severe as headlines would suggest, as actual prices remain below the pre-crisis peak. Moreover, food price increases have been driven mainly by one- off supply-side factors, such as the weather, and the effects should wind down over the course of 2011.

However, if you look at energy prices, then things are quite different, in particular, for oil. The pressure on prices there comes from steadily increasing demand. In the second half of last year, unexpected consumption growth of 2% resulted in a price increase of roughly 10%. Strong world growth is therefore likely to be associated with further increases in commodity prices with important implications for emerging and developing countries.

Second, capital flows into emerging markets present risks. Here again the problem may not be quite as bad as the headlines would suggest. Inflows have definitely increased, but for most countries they remain below previous peaks and have actually been receding in the last couple of months. This recent decrease actually suggests that the Fed’s QE2 may not be having the impact that many emerging markets anticipated. Nevertheless, the flows are there, they raise difficult policy choices from the degree to which countries should allow their currencies to appreciate to the respective roles of macroeconomic policy, macro prudential tools and capital controls.

Third, risks in peripheral Europe remain elevated. In some of these countries the macroeconomic and fiscal adjustment is likely to be a long and painful one. Markets consequently worry that implementation could go off track leading to concerns about sovereign debt and in turn, to concerns about banks. They also worry that problems could travel the other way from banks to sovereigns, and I’ll come back to it.

Fourth, there are risks associated with continuing global imbalances. We have for a long time argued for external re-balancing––what will happen if such re-balancing does not take place? Absent an improvement in exports, growth is likely to remain subdued in the U.S., making it difficult to withdraw the fiscal stimulus. If the fiscal stimulus is not withdrawn, the long-term fiscal challenges will intensify. Either way there will eventually be problems down the line, not only for the U.S., but by implication for the rest of the world.

Now let me turn to policies and what needs to be done to reduce risks and strengthen the global recovery. We think that a three-pronged strategy is necessary. First, in many emerging and developing economies, macroeconomic policies need to shift and tighten so as to avoid overheating. Second, in periphery Europe, as my colleague, José Viñals will explain, for some issues, some policy decisions, time is of the essence. For example, some measures are urgently needed to clarify the exposures of banks. And with those measures there has to be clear recapitalisation schemes if and where needed. Otherwise, as we say in French, it is important to give time to time.

That is, since fiscal and structural adjustments will take time, it is important to let them happen and take panic scenarios out of the picture. To do so, current fiscal and macroeconomic commitments must be backed by deeds, adequate multi-lateral funding if and when needed, and by ECB liquidity.

Let me turn to the last leg of policy suggestions: the world needs to reduce global imbalances. What does it mean? We discussed it in the past, for China and other current account surplus countries, this involves structural reforms and currency appreciation.

For the U.S. and most other advanced countries, this involves fiscal consolidation. Many advanced countries, including the U.S., have not yet put in place a credible medium-term fiscal adjustment plan and this is urgently needed. Dealing with global imbalances is essential to achieve a sustained, lasting world recovery. Thank you very much.

MS. ATKINSON: Thank you, Olivier. And now José Viñals, Financial Counsellor at the International Monetary Fund.

MR. VIÑALS: Thank you Caroline, and good morning to all of you. It is a great pleasure to be here in Johannesburg to present to you our views on global financial stability and the main challenges it faces. It is fitting that we should present our latest assessment of the global financial conditions here in Johannesburg, because during the recent crisis, South Africa’s financial system fared relatively well and in fact better than in many other countries.

Let me turn now to the three key messages I want to give you today.

First, more than three years after the onset of the financial crisis, global financial stability is still not assured. Second, policymakers need to step up their efforts to tackle pressing policy challenges, such as sovereign risk, banking system vulnerabilities, and increased global capital flows. Time is of the essence!

Third, we need to press ahead with structural solutions to longstanding financial problems.

Before I delve into the details of our key messages, I would like to give you a brief assessment of where we stand at the moment.

In spite of recent improvements, we are observing a dichotomy between the economy and the financial system. While the global economic recovery has been continuing, financial stability is still at risk, because of a persistent lack of investor confidence in some advanced country sovereigns and their banking systems.

Against this background, I would like to elaborate further on the key challenges that keep global financial stability at risk. First, in light of high public debt levels, market concerns about sovereign risk have persisted and have spilled over to a greater number of countries, mostly in the euro area. At the same time, we have seen an increasingly negative interaction—an adverse feedback—between banking and sovereign credit risks in some euro area countries. In other words, the fate of some banks is now increasingly intertwined with that of their sovereign—and vice versa. Second, fragilities remain in key parts of several banking systems. Markets are questioning the quality of many bank assets, reflecting concerns about banks’ exposure to countries facing sovereign pressures, and concerns about exposure to real estate loans.

Banks also face significant funding needs now and over the next two years. During that period, sovereigns will also need to refinance their debt, creating competition for limited funding resources. Many banks still need to raise their capital levels. They also need to improve the quality of their capital to reassure investors and to meet the more stringent Basel III standards. The challenges facing banks—if left unresolved—would hinder the provision of credit to companies and households and would hurt the global economic recovery. And third, there is the challenge of coping with the rapid rebound in capital inflows into emerging market economies. While capital flows are generally beneficial for recipient countries, rapid and strong inflows can fuel asset price bubbles and strain the absorptive capacity of local financial systems. Although we appear to be at the early stages of such a cycle, policymakers need to be vigilant about these risks.

So what policies should be put in place to meet these challenges?

Here we have to distinguish between advanced countries and emerging markets. In advanced countries, we need to deal with the legacy of the crisis by resolving financial fragilities—once and for all! In Europe, policymakers need to break the adverse feedback loop between sovereigns and banks. Sovereign risk should be contained through credible, medium-term fiscal consolidation strategies. In addition, the financial system should be repaired through a comprehensive plan to reduce uncertainty about banks and help restore investor confidence. This plan should include the following elements: improved bank transparency; greater firepower for the European Financial Stability Facility (EFSF); a decisive pursuit of recapitalization and restructuring of banks; and all of this should be accompanied by better economic governance for the European Union and the euro area.

In the United States, policymakers must put in place a credible strategy for medium-term fiscal consolidation to avoid a potential, sharp rise in long-term interest rates.

Increased efforts are also needed to address the effects of the still-damaged real estate markets on banks. In emerging markets, policymakers must act now to avoid future crises. It is important to maintain the appropriate mix of macroeconomic and prudential financial policies to deal with the challenges posed by capital inflows. In addition, local capital markets will need to become deeper and more resilient, for example through improved market infrastructures. There is also a need to ensure continued progress on the global financial policy agenda. Financial systems everywhere need to adapt to cope with regulatory reform. New regulations need to be adopted consistently across the world, including on systemically important financial institutions and the so-called “shadow” banking sector. Supervision and bank resolution regimes need to work more effectively within— and across—national borders to safeguard financial stability. To conclude, global financial stability is still at risk, in spite of the measures taken to support the financial system. Time is of the essence in addressing immediate policy challenges—particularly in the euro area—and finding a better balance between macroeconomic and structural financial policies. Without these timely policy responses, global financial stability and sustainable growth will remain elusive.

Thank you.

MS. ATKINSON: Thank you very much. So I’ll turn to your questions, please raise your hands, we have a mic that we will bring around. Identify yourself and your news organisation. Over here, in the middle of the right hand side? Do we have a microphone coming? Yes, just here behind you, the lady here. Thank you very much. If you hold off, because it’s recorded, so it would be good to get everything that you say. So are we switched on now? Okay thanks. I’m just waiting to see an indication from the back. That’s one going to work, okay over here please, thank you.

QUESTION: This question is South Africa related, so I don’t know if you can help. South Africa has been one of the emerging markets to receive these capital inflows into local shares and bonds, however, it is growing much faster than the other countries that are receiving these inflows. Does this make it more vulnerable to a reversal or a slowdown in global risk appetite? I just wondered what your thoughts are on this.

MS. ATKINSON: Thank you very much. We have Sharmini here, Sharmini Coorey, who is the Deputy Director of the African Department, and can speak to the question about South Africa.

MS. COOREY: Yes, thank you. Capital inflows into South Africa have been significant. However, South African growth has been recovering gradually and the risk appetite towards South Africa is really not different from any other emerging markets at the moment. The financial system in South Africa has withstood the crisis very well and remains very strong and macroeconomic policies are very well calibrated fiscal policies on a sustainable path and having been supportive during the crisis is now ... the fiscal impulse has been withdrawn gradually. Monetary policy has very appropriately ... the interest rates have been cut. So, overall the macro policy stance in South Africa is very sound. So, we don’t see any change in risk appetite that should be any different from anywhere else. Thank you.

MR. DATTELS; Might I just add this?


MR. DATTELS: In terms of South Africa’s financial markets, they are quite deep and robust. So, while South Africa is a high beta country in terms of its asset prices and sensitivity to global trends and financial markets, its vulnerabilities to that type of volatility is rather limited and that reflects very sound funding position of domestic banks and the lack of the kinds of vulnerabilities that were apparent and were exposed during the crisis, particularly in terms of cross-border debt financing.

So, that’s put South Africa in good stead. I would say the other global link for South Africa relates to the financing needs for infrastructure and so on. Clearly those needs are large in the period ahead and there is not sufficient domestic savings to finance that. So, clearly access to international markets and well functioning international banking systems to provide that type of finance is important. So, as José has mentioned, it is extremely important that the position of the banks are particularly fortified so that South Africa can have access to international markets at reasonable credit spreads, which would increase if things got out of hand.

MS. ATKINSON: Thank you very much. Here in the second row, can we bring the microphone around?

QUESTION: Mr Blanchard, you already referred to the need for rebalancing the global economy and you mentioned appreciation of the Chinese yuan. Can you tell us how does the IMF view the level of the value of the U.S. dollar compared to the euro and the yuan at the moment? How undervalued is it?

MR. BLANCHARD: I’m sorry, I missed the second half of your question.

QUESTION: How undervalued does the IMF see the U.S. dollar vis-á-vis the euro and the yen?

MR. BLANCHARD: First we think that China is moving in the right direction. It is focusing on increasing domestic demand and we think that sooner or later it will be the logical thing and the necessary thing to appreciate. We think it could be done faster. We think that the Yuan is undervalued. We don’t do bilateral comparisons of currencies, but we think the yuan is undervalued and we think it would be a good thing, both for China and for the rest of the world if there was a faster appreciation. This would allow other countries to feel freer to appreciate without losing competitiveness vis-á-vis China.

MS. ATKINSON: Thank you, here in the front row?

QUESTION: Just to pick up on the previous question, Mr. Blanchard, when you say that the RMB is undervalued, if you look at say South Africa, its currency has gone up 20% in the past two years. Brazil has gone up to 30% and you focused on the lack of rebalancing. I’m just wondering if you think that a 5% annual revaluation of the RMB, which is the pace at which it’s been moving, is adequate.

MR. BLANCHARD: No, I think clearly the pace of appreciation of different currencies has been quite different. I mean, you have to distinguish between Asia and Latin America and countries like South Africa. In the case of South Africa, as you know, we think that the Rand is actually at the strong end of its valuation range so that further appreciation is probably not desirable. We think that in a number of other countries the appreciation has been substantial, but we think that in the case of China, and by implication in the case of other emerging Asian countries, it has been insufficient. So, the advice that we found is not that all emerging market countries should appreciate, but that a number of them should.

MS. ATKINSON: Thank you. I have a question on line here for José Viñals on Spain. And just to say to those of you that are watching online as media signed up on line, please do submit questions. So, to José, what do you think of Spain’s new plan to speed up bank restructuring? Is it enough to shore up confidence? Is the government’s estimate of a 20 billion euro capital shortfall enough?

MR. VINALS: Well, I think that we welcome the plan announced by the Spanish authorities to further enhance the solidity of the Spanish banking sector and to further restructure the Spanish banking sector. These measures need to be fully studied by us before we can come up with a more definitive assessment, but these measures build on those that have been taken in the recent past on reforming the savings banks and increasing their solvency.

So, I think it’s a step in the right direction and these policies, we hope, can contribute to a definitive restoration of market confidence on the Spanish banking system.

MS. ATKINSON: Thank you, over here in the second line.

QUESTION: I just have two questions. The first one is on the European growth outlook, the 1.5% for this year. How big a risk that the growth can underperform that and do you see the likelihood of any other European countries, particularly Portugal, perhaps needing a bail-out in order to address those risks?

Then the second question is on inflation risks, particularly in emerging markets. I wondered if you can just speak on that and whether emerging markets would need to move faster to combat those risks.

MS. ATKINSON: Thank you, Olivier?

MR. BLANCHARD: Again I’m sorry I didn’t get all the words of the first half of your question. It was about the European growth outlook. Again, I’ve given you the baseline. I suspect your question is about the risks. So far the shift from tensions in the periphery to financial tensions in the core had been limited and effects of financial tensions in the core to real activity have been even more limited.

So, so far you really have, there again, within Europe a two-speed recovery. You have some countries, the periphery countries which are struggling. They have a very difficult adjustment to make, but the core countries are not affected very much. We believe that the measures that José has sketched are taken. The spill-over from the periphery Europe to core countries will be limited so that the risk of a major slowdown in Europe as a whole is very small.

If for some reason some of these policy measures were not taken – we still expect them to be taken – then clearly there would be larger risks and you could think that if core banks were in trouble, they might tighten lending and this would have the usual effects of slowing down activity, but we don’t think this is a most likely scenario by far. José, do you want to add something?

MR. VINALS: Let me just add something, which I think is in line with what Olivier was saying, which is very important in the case of Europe. I think that you need to restore confidence in those countries, in those public debts, in those banking systems, which are now under severe market scrutiny and you have to return confidence once and for all. For that you really have to go with a plan, which is seen by markets as being sufficiently comprehensive. You have to have a plan, which is ahead of the curve, not behind the curve.

For that timing is extremely important and this is why I think that the signs that are coming out from Europe, in terms of the action taken by different national authorities to deal with their fiscal, structural, financial problems and the noises that one hears about the increasing favourable disposition of the European authorities to adopt measures that can help complement these national measures with actions taken at the centre in order to further stabilize a situation, I think that this is extremely important, but what is fundamental is that these things become concrete and visible before too long in order to bring calm to markets in a definitive manner. I think that this is what is important.

MS. ATKINSON: Thank you.

MR. BLANCHARD: If I can go back, there was a second half to your question about inflation risks and food prices. So, it is the case that food prices have increased in a number of countries and in emerging market countries we are seeing them feed into wages and prices and therefore into core inflation. So, that’s a potential issue. If you add to this the fact that many countries are close to potential, then probably it means that in a number of countries monetary policies may have to be tightened in order to contain inflation in the country.

MS. ATKINSON: Did you want to add anything to that? Okay, thank you. I had a question online and I will come back in the room, from Ghana, about whether there are any updates to the forecast, economic forecast for Ghana and also if we have any comments on the challenges facing Ghana. So, perhaps I can turn to Sharmini Coorey to take that question.

MS.COOREY: Yes, our growth projection for Ghana, we’ve revised it. Its recovery on the way is 5.5 to 6% for this year. The main challenges really in Ghana on the fiscal side are clearly there is a need to have some fiscal consolidation in 2011, bringing down ... especially it’s important to bring down expenditures as the new revenue comes in. There are concerns or we have concerns about the increasing public debt and the interest rate cast of that public debt. So, we think that the fiscal consolidation improvements in expenditure management, these are the main challenges for Ghana going forward.

It will also be important to have a transparent strategy to resolve the domestic arrears issues and on a longer term view it will also be important to manage the new world revenues that are coming in, in a transparent and longsighted way.

MS. ATKINSON: Thank you. There was another question there.

QUESTION: Thank you. The problems in the periphery Europe area have been highlighted as the main risk to both growth and financial stability. Does the IMF see any risk at all of any of these periphery countries leaving the euro area?

MR. VINALS: I think that the answer is a definite no and the reason is that as you can see in the examples of those countries which have been most significantly under pressure, like Greece and Ireland, which are now under a joint program of the European Union and the IMF that these countries don’t question at all the membership of the European Monetary Union of the Euro zone in that they are ready to do their homework in order to have the economies attesting and solving the problems that they have, but all within the European Monetary Union, within the euro area. I think that for these countries it is very important to be inside, but there are some rules that you have to obey when you are in the monetary union and what these countries are finding is that when these rules are not obeyed all the time, then you have to catch up and then you have to do further adjustments, but again let me emphasise that one proof of the resilience of the euro zone is that not only are countries not thinking of leaving, but there are some like Estonia, which has just joined.

MS. ATKINSON: Thank you very much.

QUESTION: A question for Ms. Coorey, please. Could you assess economic policies in Zimbabwe, particularly with this unity government of the last 18 months? What is the fund’s view of the use of the U.S. dollar as the currency, which obviously provided a lot of new stability that they’ve never had, new products to buy? What progress has been made, if any, in restoring Zimbabwe’s situation or relationship with the IMF?

MS. COOREY; :The dollarization has clearly ended hyper inflation. It’s a positive development from that point of view. It has certainly imposed fiscal discipline on the country, because really you have to run a balanced budget under these circumstances. That actually we think is a positive development.

Nevertheless, there are a lot of challenges and the revenue effort has been very good in Zimbabwe. The authorities have raised fiscal revenue. They receive a lot of technical assistance from the fund. The IMF has been very involved in helping the Ministry of Finance to rebuild their public expenditure management and now we are involved in that and we have been helping them with revenue administration.

The challenge really is to contain spending and particularly wages, public sector wages. This is a longstanding issue in Zimbabwe and it continues to be a challenge to get the consensus to hold back public wage increases.

Going forward, the fund is very closely involved in giving technical assistance also to the Reserve Bank of Zimbabwe to help restore a future central bank, a better functioning central bank. There is a governing board now that has been appointed. We see progress in that area. Going forward, in terms of Fund relations, we will take our progress as it comes. If the authorities can strengthen their economic policies, particularly on the wage side and if there is support among the donor community to restructure Zimbabwe’s debts, support them financially the Fund is looking forward to further relations with Zimbabwe. We’ve always stood behind them and along with the donor community we will certainly work to integrate them back into the global economy.

MS. ATKINSON: Thank you very much. While we see if there are anymore final questions here, I just wanted to make one announcement. We will be putting out a press release on this. As you know, we’ve been doing a lot of thinking and everybody in the world has been doing a lot of thinking about what lessons to draw from the financial crisis for how we think about economics and Olivier Blanchard will be chairing a conference on this topic in the IMF, really to look at thinking in the wake of the crisis.

He will be co-chairing that with two Nobel Prize winning economists, Joseph Stiglitz and Michael Spence, and we will be putting out a press release on that shortly. On March 7th or 8th will be the event and we look forward to your attendance at that as well. Are there any more ... if there are no more questions, then I would like to ... oh okay, we have one more question here.

QUESTION: I wanted to ask how long do you think until we see an employment rebound in the United States and other advanced economies and what is it going to take to get there.

MS. ATKINSON: Olivier?

MR. BLANCHARD: I think our forecast on employment is that it will be just above 9% in 2011 and 8½% a year later. So, there is a long way to go. How far it can be taken down is a question, which is very much discussed. Whether we can go back to the 5% of the pre-crisis or not, I do not know. I would guess that we can probably return to 6 percent and so what we are talking about is many years before we return there.

MS. ATKINSON: And that is one reason why we have been looking increasingly at this issue of jobs and unemployment and working also with the ILO and the International Trade Union Conference and Olivier was part of the conference we had on that in Oslo. Did you have a follow-up?

QUESTION: Those were the figures for the U.S.?

MR. BLANCHARD: These are the figures for the U.S.

MS. ATKINSON: Okay, thank you all very much. Thank you Sharmini, Olivier, José.


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