Transcript of a Press Briefing by Masood Ahmed, Director, External Relations Department, International Monetary Fund

November 29, 2007

Washington D.C.
Thursday, November 29, 2007

Webcast of the press briefing

MR. AHMED: Good day. I am Masood Ahmed and this is our regular press briefing.

Let me start with a couple of travel announcements. First, I would like to tell you that the Managing Director is going to be visiting Argentina on December 10 to attend the inauguration of President-elect Cristina Fernández de Kirchner. Second, I should tell you that Mr. Kato, Deputy Managing Director, will be in Bali, Indonesia, on December 10 and 11, and then again on the 14th, for two events connected with the high-level event on climate change. In between, he will be in Sydney, Australia, where he will give a speech on the implications of financial globalization at the Australian Banking and Finance Conference.

Mr. Portugal, Deputy Managing Director, will be traveling on December 9 and 10 to Nicaragua for a bilateral visit. In all of these cases there will be opportunities for media interaction. You can get information directly from the organizers, and from our colleagues in Media Relations.

Let me also mention before taking questions that we will be publishing the next issue of our magazine Finance and Development on December 5, and advanced copies of articles will be available to the media on December 3. The main theme of this issue is global governance and there are a number of articles that examine governance issues relating to trade, health, international institutions, and financial markets. A new idea that we are trying this time on which we would like your feedback is that we have a regular column by Simon Johnson, the Chief Economist, which this time focuses on how adoption of biofuels is affecting world prices. In addition to the written column, we are making available a broadcast-quality video clip. So for those of you who are interested, please get in touch with Media Relations.

Let me now turn to questions.

QUESTIONER: I had heard that the Managing Director was going to Argentina. Is this also an opportunity to start up the Article IV Consultation? And is this also an opportunity to address the debt issue?

MR. AHMED: He is going to Argentina because he has been invited to attend the inauguration and he was happy to accept that invitation. He is going to be there between December 9 and 11. His schedule is still being firmed up, but I would expect that he would have an opportunity to meet with the administration's new economic team and also he would have the opportunity to meet with some of the regional leaders who are going to be there.

As far as the Fund's interaction with Argentina is concerned, what I can tell you now is that we expect the next Article IV Consultation to take place early next year. That is our current plan and that will be, if you like, the next step in the process of the regular interaction between Argentina and the Fund.

QUESTIONER: Has there been any sort of feedback from the Paris Club to the Fund or from Argentina or anything regarding the Paris Club debt issue?

MR. AHMED: My response on issues relating to the Paris Club and countries is that they are best addressed by the Paris Club and the country concerned.

QUESTIONER: Yes, but has the Fund heard anything?

MR. AHMED: At this date, the focus of our work is exactly what I have outlined.

QUESTIONER: How do you see Pakistan's economy in the wake of political turmoil and the poor security situation?

MR. AHMED: If you look at the economic indicators in Pakistan, they have been quite strong. The economy continued to perform well in 2006 and 2007 with growth over 7 percent. And more recently, in the face of both international financial turmoil and the domestic uncertainties, market indicators have shown quite a lot of resilience both in terms of reserves and in terms of asset markets, although I should say that the spreads have moved up recently on international markets.

QUESTIONER: Yesterday, Simon Johnson on the BBC interview spoke about a perfect storm regarding global financial turmoil. There has been concern since the Fund's last remarks regarding what is going on in the market that the financial credit issue has worsened and that we could see some more fallout going into early next year. Do you have any update for us on how the Fund is seeing this situation currently?

MR. AHMED: Our current view on this is that we do think that recent developments in both oil and financial markets have further dampened the global outlook since the release of the World Economic Outlook in October because some of the downside risks that we had identified then have materialized. Financial market conditions remain highly unsettled, money markets are still under stress, estimates of bank losses have been rising, and there are also concerns about wider spillover effects across markets. So we do think that while the strong third-quarter activity in several advanced and emerging market economies will probably mean that the outturn for global growth in 2007 will exceed our earlier estimates. At the same time, we feel that the headwinds from both financial market turbulence and the recent surge in oil prices mean that global growth in 2008 will likely be lower than we anticipated in the World Economic Outlook.

We will be doing an update of the World Economic Outlook in about the end of the year and in early January it will be made public. So that will be the moment when we will pull together from a country-by-country basis what the likely updated assessments we have for outlook for each of these regions over the next year will be.

QUESTIONER: Is the feeling that this could spill over more than expected into the emerging markets, because before emerging markets looked like they were buffered or had not been affected. The question now is if that going to be an issue going forward.

MR. AHMED: Emerging markets have been the engine of growth for the last year and so far they have remained broadly unaffected by the turmoil in financial markets. But this could change. Tighter global credit conditions would present challenges particularly for some emerging-market countries where rapid credit growth has been financed by large-scale foreign bank loans. And in other countries with emerging markets the effect would be there if there was a substantial slowdown in their export markets. So through the trade channel there would be an impact, and how big an impact that would be would obviously depend in the first instance on how much of a slowdown and how prolonged a slowdown we see in both the U.S. and some of their major trading partners. That is the process that we will be pulling together to try to get a consolidated and coherent view on by the end of the year.

QUESTIONER: Talking about interest rates, there are new indications that the Fed could cut rates because of all this turmoil and the growing voices of a possible recession actually in the U.S., while the European Central Bank has not given any indication of touching their rates in any sense. Has the IMF any comment or any position on the interest rate issue both in the U.S. and in Europe?

MR. AHMED: On interest rates, what I can say is that in view of the financial market strains, the downside macroeconomic risks to growth, and the moderate core inflation readings in the past month, the Fed's cumulative 75 basis point easing so far has been well timed and we think should support growth while maintaining now inflation.

The other point that you asked about on recession, as I said earlier, we do see now the downside risks as being greater to the baseline scenario that we had, and we will be likely shaving down that baseline scenario at the end of the year. But we also want to keep in sight the good fundamentals of the U.S. economy including low unemployment, high profits, and strong balance sheets, as well as the action that the Fed has taken so far and may take in the future. So our view now is that we still see a period of below-potential growth as the most-likely scenario for the U.S. economy.

In terms of the Euro area, I am not sure that I have anything specific to add to what I said last time, except that we do think that the economy is still doing well in the Euro Area but real GDP growth is projected to moderate down a shade for 2008 on account of the financial market turmoil, and the risks to this outlook remain on the downside. Over the short-run, financial market volatility is likely to have some negative impact, and over the medium-term, it is external downside risks which are more dominant which include global imbalances and uncertainty in oil markets.

QUESTIONER: Just to make sure I completely understand, this opinion that you are giving now, obviously the IMF formulated that within the last few weeks.

MR. AHMED: That is our opinion as of today, and, like others, we are continuing to watch it evolve. But as I said to you, we have this sort of process whereby periodically we pull together and come up with a fully kind of consistent set of forecasts country by country. So on this date what I am saying to you is that we expect to bring it down. What I cannot say to you at this point is what is our expectation of exactly how much and what the sort of spillover effects might be across economies. That is the process that we will be doing in December, and which we will be making public in January.

QUESTIONER: Is your reading currently of the situation that it is still being driven by the subprime mortgage market? You mentioned that there is a downside including oil. But is the feeling that it is still mainly because of uncertainties in the subprime mortgage market?

MR. AHMED: At this stage it is a question of the financial market turbulence, which started out in the subprime market, but of course has since then jumped across into a number of other areas, which now need to be worked out. There is also the likely impact of continued high oil prices. In terms of oil prices, what it does mean of course is that it has a direct impact on the consumer in terms of purchasing power, but it also has an impact in terms of the effect on inflation. For example, in the U.S. the direct effect of recent oil price increases on headline inflation is estimated to be around a half a percentage point by the end of this year. The combination of rising fuel and food costs is exerting pressures on household budgets and external imbalances. And it also means that central banks may find less room for maneuver in responding to weakening demand caused by the financial turbulence, given concerns that the higher fuel costs could have second-round effects on inflation. So it is a combination of those two that I am talking about.

QUESTIONER: Let's talk about the quota issue. The G-20 meeting was going to address the issue of quotas and nothing much seemed to come out of that. The question now is how you see that moving forward. Is it up to Mr. Strauss-Kahn to kind of cast the first stone to move that process forward, or is it that you continue working on the current proposals? I am just trying to get a sense of where it is going from now.

MR. AHMED: What we are working toward is that by the time of the Spring Meetings we hope to have substantially advanced the discussions on this issue, both in the Executive Board discussions that we will be having between now and then, and also through the interactions that the Managing Director and the management are having with shareholders, including in the context of the discussions, the bilateral conversations, and the discussions that took place at the G-20. And the combination of all of those should enable us to come forward at the time of the Spring Meetings with a proposal around which we can then build consensus. Our timetable for delivering on the quota reform package remains unchanged. It is the same timetable that we had in Singapore, which is to say that by the Annual Meetings of next year we hope to have completed the work required to then bring about a change in the relative quotas of countries that will better reflect their weight today in the world economy, and to do so while protecting and enhancing the voices of the poorest countries. That remains our timeframe.

QUESTIONER: For the U.S., if I understood correctly, you see the downside risk bigger compared to the last outlook, and for the Euro Area you see the GDP projection to moderate next year. Is that correct?

MR. AHMED: Yes, and also we see risks as being on the downside there as well. Again, we will be pulling this together in terms of the exercise that I mentioned earlier on the update for the World Economic Outlook.

Thank you all very much. Our next press briefing will be at the same time on Thursday, December 13.
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