Transcript of Fiscal Monitor Press Briefing

October 7, 2015

October 7, 2015
Lima, Peru

Vitor Gaspar, Director, Fiscal Affairs Department, IMF
Sanjeev Gupta, Deputy Director, Fiscal Affairs Department, IMF
Benedict Clements, Division Chief, Fiscal Affairs Department, IMF
Angela Gaviria, Deputy Division Chief, Communications Department, IMF

Webcast of the press conference Webcast

MS. GAVIRIA - Good morning to everyone in the room, plus those following us on the Internet. I'm Angela Gaviria. I work in the Communications Department of the IMF. Welcome to this press conference on the publication of the Fiscal Monitor.

Let me introduce the speakers. We have Vitor Gaspar, the Director of the Fiscal Affairs Department. To his right is Benedict Clements, who is Division Chief in the same department. And to my right is Sanjeev Gupta, the Deputy Director of the Fiscal Affairs Department.

Mr. Gaspar will have some brief points to make on this issue of the Fiscal Monitor and they will be happy to then take your questions.

MR. GASPAR - Let me start by saying what a pleasure it is to be here in Lima for the Annual Meetings of the World Bank Group and the IMF. I will make some short remarks to begin with.

The world economy is experiencing important transitions and associated uncertainties.

Commodity prices have fallen sharply with adverse consequences for exporting countries. China's rebalancing and the reaction thereto had spillover effects on other economies. This and other factors are posing important fiscal challenges especially for emerging markets.

Indeed, since our assessment in April we have seen a significant deterioration in fiscal positions measured by the primary balance for emerging markets and for commodity exporting countries.

This change in the primary balance has translated into higher levels of public debt.

It is timely, therefore, that this issue of the Fiscal Monitor focuses on the conduct of fiscal policy under uncertainty, with particular attention to the uncertainty created by commodity price fluctuations. The recent fall in commodity prices really underlines our long-standing advice to conduct fiscal policy in a prudent way, in particular in good times. The recent sharp drop in prices reminded us that these prices are volatile and highly unpredictable. History tells us that commodity price booms and busts can involve prices moving by as much as 40 to 80 percent. Moreover, these movements can also be highly persistent. What we document is the fact that fiscal policy is key to the transmission of commodity price fluctuations to the rest of the economy.

This occurs for at least two reasons.

One, in countries where governments rely heavily on commodity revenues, commodity prices tend to cause large fluctuations in fiscal revenues.

The second reason is that insulating government spending from volatile revenue has proved particularly difficult. As a result, spending in these countries have been strongly procyclical, increasing during price booms and falling during price busts. This time around is no different. The fiscal implications of the sharp decline in commodity prices are very large.

The deterioration in the 2015 primary balance in commodity exporting countries is about 5 percentage points of GDP on average, with countries like Saudi Arabia and Venezuela experiencing a particularly sharp decline. This reflects a massive reversal of the revenue windfall that commodity exporters accrued during the boom years. About half of this windfall has been reversed so far. In this slide you do have the quantification of the windfall and you can also see the partial reversal if you focus on the red dots.

Not only are revenues weaker, but external financing conditions in commodity exporting countries have tightened, making it harder and more expensive to finance spending.

Indeed, as you see in this slide, global financial markets are particularly unforgiving. Financial conditions tend to worsen significantly, precisely at times when commodity exporters need financing.

Those commodity exporters that have built buffers during the boom years or have easier access to capital markets, such as Chile, the Gulf countries, or Norway, have been in a better position to support government spending. In many other countries, however, budgets are under stress. All commodity exporters will need to adjust public spending to lower commodity revenues, while safeguarding to the extent possible essential capital and social spending. The pace of adjustment will depend on the availability of buffers and market access. The latter crucially depends on the credibility of the fiscal framework, and country-specific factors. More encouraging is that prospects in advanced economies remain broadly unchanged compared to April as the modest recovery progresses in line with earlier projections.

But, our long-standing warning about high public debt and its adverse economic impacts remains very relevant. In advanced and some emerging market countries, debt levels have reached extraordinary levels. And to make matters worse, these economies have huge future obligations from age-related spending. We estimate that health and pension spending will rise to 25 percent of GDP by the end of the century in advanced economies, and to 16 percent of GDP in less developed countries.

We will present important new evidence of the fiscal implications of demographic trends at the end of the month in Tokyo. Given the magnitude of the challenges I have just presented, the key question is how can governments manage public finances to deal with these daunting long-term challenges while also coping with the substantial near-term risks and uncertainties?

The answer to this question, and one of the main messages of the Fiscal Monitor, is that the conduct of fiscal policy under uncertainty can be improved by adopting a robust and coherent risk management framework. And we believe that this framework needs to rest on four pillars.

One, budget revenues should be mostly derived from broad based taxation, backed by strong compliance. In the case of commodity exporters, more efficient revenue mobilization can mitigate revenue volatility. One specific aspect is the taxation of multinational enterprises. These reforms can be part of the fiscal adjustment strategies that commodity exporters will need to pursue.

Two, improving the efficiency of spending, including energy subsidy reform, continues to be a priorities and can also facilitate fiscal adjustment. That is also clearly the case in core areas for sustainable and inclusive growth such as public investment, health, and education.

Three, it is important to put in place fiscal frameworks that help countries save during good times so they can protect spending during bad times. In commodity producers, this saving has to strike the right balance between accumulating financial assets, investing in physical infrastructure, and investing in people through health and education spending. Moreover, it is essential to start now in implementing a more robust framework that can help countries deal with the uncertainty that lies ahead. That is at the roots of policy upgrades on the fiscal front.

Fourth, the quality of institutions is crucial. Fiscal rules and procedures are important but they need to be underpinned by a broader social and political commitment to adhering to these rules and laws.

These pillars are important for all countries. But they are especially crucial in resource-rich countries, where the conditions for managing public finances are much more challenging and the Fund remains committed to assisting its membership in building these pillars not just in the analysis I am presenting today, but in the context of the regular policy dialogue with countries and the extensive technical assistance we provide.

So, thanks for your attention. And now I and my colleagues are ready to answer your questions.

MS. GAVIRIA - We're ready for questions. Before asking, please identify yourself and your organization.

Do we have any questions in the room? Let's start here in the front row.

QUESTIONNER - You forecast a rising trajectory of the Brazilian gross debt until 2019. Why do you forecast this rise, and how do you feel about Brazilian fiscal accounts?

MR. GASPAR - The Brazilian fiscal situation is very demanding, and at this point in time we project the overall balance to continue to deteriorate in 2015, and to stay still reflecting very high imbalance for 2016. Given this behavior of the overall balance, we do see gross debt as a percentage of GDP increasing quite significantly during this period by almost 10 percentage points of GDP between 2014 and 2016.

As it is well known, the Brazilian economic situation is very demanding, and economic prospects have deteriorated quite significantly relative to expectations, even recently, with GDP projected to contract by 3 percent in 2015 and still continuing to contract in 2016. One of the reasons for the increase in the public debt to GDP ratio is associated precisely with the direct effects of the contraction of GDP on the public debts to GDP dynamics, and also the indirect effects of the fall in economic activity on the performance of, say, tax revenues.

That being said, in Brazil, as I believe is well recognized in the country, fiscal policy is a key pillar of macroeconomic stability, and so it is very important to have a fiscal policy that does ensure sustainability of public debt, and tackles the important challenges associated with the dynamics in public spending in the country.

If you have more specific questions, I'm happy to follow up.

QUESTIONNER - You single out three countries or three areas, Norway, the Gulf, and Chile, as having buffers. Can you elaborate a bit better? And also countries like Canada and Australia come to mind as far as being producers from advanced economies, so what is the state of their buffers?

MR. GASPAR - One has to be selective, if you allow me. I think it is hard in just one answer to cover Norway, the Gulf states, Chile, and then go to Canada. So, let me concentrate on Norway. If you want to follow up on other countries, that is absolutely fine.

But, Norway I think is a very good example. Norway does have very solid macroeconomic stability framework. Their fiscal rules and procedures, their institutions are among the best in the world. They have followed very prudent fiscal policy, in particular in the area of using up resource wealth revenue for decades. They have accumulated very high financial assets, which constitute buffers that they can use, as you have seen from the reports in the press, Norway is in a position not only of letting automatic stabilizers work, but they came out with discretionary initiatives to support economic activity during this business cycle downturn. That really illustrates that if you do build sizable buffers in good times, if over the long run you accumulate strong credibility, then you can use fiscal policy in a stabilizing role in case of an economic downturn. And we, in the Fiscal Affairs Department of the IMF, did document in the April 2015 Fiscal Monitor that indeed the stabilization role of fiscal policy, a fiscal policy that contributes to smoothen the business cycle, is a very important element in a framework delivering macroeconomic stability. But, in order for fiscal policy to play that role, it is crucial that fiscal policy leads to savings in good times, savings that can be used up if needed in case the business cycle turns less favorable.

QUESTIONNER - I believe last year you all said that the oil price fall would be a net gain to the global economy. But, here we are a year later with much lower revision in growth rates.

Secondly, beyond the direct revenue impact of oil price fall or commodity price fall, have you calculated the hidden liabilities from state-owned enterprises's balance sheets and the liabilities from having to cover the nonperforming loans in the banking industry?

And finally, do you expect, given this outlook, that the IMF will, there will be an increase in demand for IMF bailouts, or emergency loans?

MR. GASPAR - Apologies. I was taking note of your questions since there are quite a few of them, and since they're really different, I think it is very important that I don't pick and choose and that I answer your three questions.

Oil prices and the impact on the world economy, if you remember, in the first slide I projected you actually see that the effects on the primary balance, the revisions in the primary balance that we portray are concentrated in emerging markets and in particular in commodity exporters. So, clearly, those effects are large and they're easy to see.

Now, it turns out that many countries that are not commodity exporters, many of those countries have benefited quite substantially from terms-of-trade gains, and those terms-of-trade gains have had a positive impact on the economy, and in some cases they have supported the trend in real disposable income and they have supported consumption.

However, those benefits are much more widespread. They're much more dispersed. They are in general smaller. So they are more difficult to pin down. It is easier to document the larger impacts on commodity exporters. And, so, that is the reason the emphasis is different at two different moments in time.

Your second question, if I may repeat it, is how do we go about calculating hidden liabilities of the general government. And, we do approach that issue in the context of our efforts in the area of fiscal transparency, and we push forth much better information at the country level. We conduct systematically fiscal transparency evaluations. We have published already quite a few. And the fiscal transparency evaluations are a tool that going forward is going to be very important, helping countries and observers, to document the contingent liabilities associated with the budget, risk management and reporting on risks and quantification of risks, is an intrinsic part of fiscal transparency evaluation.

We have that documented. We have fiscal transparency evaluations based on four pillars, and I only mentioned that because the fourth pillar is precisely on natural resource management. And, it turns out that our host country, Peru, has been a pioneer in applying the fourth pillar of the fiscal transparency evaluation, and during the course of this month , the Peruvian fiscal transparency evaluation will be released, will be made public, and the comments of the Peruvian authorities on the reports will be also in the public domain. So this is a very good example of how the work of the Fund contributes to fiscal transparency in general, and to the quantification of the fiscal risks and to the management of fiscal policy under uncertainty.

Now, you asked whether we foresee an increase in demand of bailouts or credit lines on the part of countries, so whether we expect more activity for the IMF. Now, we don't do that. We really do not do that. We don't do statistics associated with our membership. We don't sum up aggregate demand for our services. We look at each country individually on a case-by-case basis, and we engage constructively with the authorities of that country, trying to help the countries to find a viable adjustment path. And, clearly, the various forms of credit lines are there to be used, but we do not do the type of exercise of aggregate across that you are calling for, where we very much go on a country-by-country basis.

QUESTIONNER - Just a question about emerging markets and the impact of the lowering prices of commodities. How could a Latin American country or a country like an oil exporter, save at the moment when the income coming from this is low and what kind of consolidation, fiscal consolidation could coordinated with monetary policy to have a robust macroeconomic framework to respond to this crisis and to begin to save?

MR. GASPAR - Very good question. If you allow me, I believe you have two different questions inside your question.

One aspect is what kind of framework should a resource-rich country have in place so that it does accumulate sufficiently savings in order to be able to cope with a downswing? There, the crucial aspect is what you do in good times. It is in good times you accumulate assets. It is in good times that you accumulate savings. It is in good times that you accumulate buffers. And you accumulate those buffers in good times so that you can smooth shocks, adverse shocks that clearly you are going to face some time in the future.

The more you want to use fiscal policy as a shock absorber, the bigger the margins that you have to build in your framework. That is an interesting design issue that depends on how countries want to manage their macro economy. And clearly different countries will have different preferences and they will come out with different solutions.

A fiscal framework that ensures the ability of fiscal policy to contribute to macroeconomic stability complements in a very harmonious way a monetary policy aiming at price stability. And, you still have as part of the overall economic policy framework policies to preserve financial stability, and structural policies to underpin competitiveness and growth. And all of that is very important in an overall framework.

That answers, I believe, the first of your two questions.

Your second question is about the current situation, and what countries should do now that they're suffering from lower commodity prices, from lower oil prices. And there at this point in time, what we do say is that all countries will have to adjust. All commodity exporters will have to adjust. And why is that so? Well, because the fall in commodity prices, the fall in oil prices is very large, and so, adjustment is unavoidable. But, countries that have strong buffers, we have seen here the example of Norway, can adjust at their own pace, and can even decide to support their economy in the short run.

As you know, it is also the case that here in Peru there is also some support to economic developments.

Now, countries that have not this credibility, countries that have not accumulated such substantial buffers, these countries have to adjust more urgently. They have to adjust in some cases under pressure. And, if you go around the list of commodity exporters, you see many different cases along this gradation of large buffers, strong credibility, and down to less favorable conditions.

I hope I answered your two questions.

MS. GAVIRIA - Let me just move briefly to a question we received online, from a different part of the world. This is coming from Ghana.

The question is, what is the basis of the 72 percent public-debt-to-GDP ratio for Ghana by end of this year? Are you satisfied with the government of Ghana's plan to reduce the public debt?

MR. GUPTA - First, let me start by congratulating the Ghanaian authorities for completing the first review of the ECF. The projections that we have for debt-to-GDP ratio of 72 percent is based on the projected deficit this year, plus the growth. So it is a projection, not the actual for 2015.

The main objective of the authorities in Ghana has to be to stabilize debt-to-GDP ratio, and to take steps to bring it down over time, so as to restore macro stability going forward. So in this regard, it is very important that the authorities control the wage bill and minimize the risk of fiscal overruns from next year's elections. And so, this is absolutely crucial as far as the fiscal stability is concerned going forward.

And the authorities have taken some positive measures of liberalizing fuel prices in the summer of this year.

QUESTIONNER - I want to know, you have some Latin American countries with economies slowing down, and also at the same time they are facing inflationary pressures. What does the fiscal policy have to do in that situation, there is a trade-off between supporting growth or tackling the inflationary pressures?

MR. CLEMENTS - I think when we look at a longer term perspective, fiscal policy in many cases, the priority is to stabilize the fiscal situation, bring debt to sustainable levels, taking a long run view. Monetary policy often then is focused on achieving inflation target price stability, but fiscal policy in many cases should be focused for countries that do not have fiscal space on helping bring public debt ratios down to more sustainable levels.

And, of course, the appropriate role for fiscal policy will depend on the amounts of fiscal space the countries have. Countries with high levels of public debt may not be able to allow their deficits to rise when they are hit by adverse shocks.But countries that have fiscal space can accommodate a bit when negative shocks that may reduce their tax revenues may put additional pressure on spending. As Mr. Gaspar mentioned, countries that had accumulated large buffers or have low levels of public debt, those countries have space to allow fiscal policy to adjust temporarily in lights of negative economic shocks. The appropriate response really has to be country-specific, looking at what are the levels of debt, what are the levels of fiscal pressure on the country, in terms of the size of the budget deficit; these considerations need to be taken into account when coming up with appropriate policy for a specific country.

MS. GAVIRIA - On Latin American, there is another question on line. In Spanish.

(Interpreted) To what extent do oil measures adopted by Mexico protect its fiscal reserves in 2016?

(In English) To what extent are Mexico's finances protected in 2016 given previous measures taken?

MR. GASPAR - In terms of the situation in Mexico, it has a very sophisticated fiscal framework to manage its oil revenues, and Mexico is the only country in the world that systematically uses derivative markets to hedge its positions. In terms of the overall fiscal position, Mexico has an overall balance which is at this point in time around 4 percent of GDP deficit, and that is predicted to come down next year. Moreover, for 2015 and 2016, the revision in our prospects is actually a downward revision in the deficit, which is particularly remarkable given the status of Mexico as an oil exporter.

The gross debt of Mexico is broadly stable at around 50 percent of GDP, and what is in the pipeline is a future further adjustment as growth strengthens in Mexico. Mexico at this point in time is benefiting from its close relation with the economy of the United States and the fact that the economy of the United States is itself recovering.

So it is very important that Mexico benefits from this relatively favorable macroeconomic environment, and does the best of it, given some very important structural reforms that Mexico has carried out in particular in the oil sector are now bearing its fruit despite the very unfavorable situation in the oil markets.

QUESTIONNER - I wonder what is the IMF opinion on the fact that the Italian government has decided to remove forever, at least they say so, the tax on the first house people own? Do you agree with that measure, the European authorities don't. Your take on that?

MR. GASPAR - I don't have a specific take on the measure that you do refer to. I think that if you want to discuss specific issues having to do with detailed measures in Italy, the best place for you to get an answer is in the press briefing of the European Department, which takes place on Friday, and where those issues can be tackled in detail. What we always emphasize concerning Italy, if you allow me, is that Italy does have a very large public-debt-to-GDP ratio. So, it is very important that sustainability of public debt continues to be a very important consideration for the Italian authorities, as it has been for many years already. If you look at the situation of public finances in Italy, you actually see that in the last year, fiscal policy has been conducted in a prudent way in Italy. Italy faces a number of important macroeconomic challenges that have to do with the fact that, in the last 15 years, perhaps more, growth in Italy has been weak. Hence, clearly Italy does need to have a comprehensive strategy that includes fiscal structural measures, including having to do with the efficiency of public expenditures, but also measures on the taxation side, and need structural reforms that underpin potential growth. But, that is precisely the type of agenda that has been pursued and needs to be continued in Italy so as to guarantee at the same time a sound public finance position, and good growth prospects and competitiveness of the Italian economy.

MS. GAVIRIA - Thank you. We end this press conference here. Thank you all for participating.


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