Transcript

Washington, D.C.
Thursday, October 09, 2014

SPEAKERS:
CHRISTINE LAGARDE
Managing Director, IMF
DAVID LIPTON
First Deputy Managing Director, IMF
GERRY RICE
Director, Communications Department, IMF

Mr. Rice: Good morning everyone and thank you for coming today, and welcome to our 2014 Annual Meetings. We look forward to the questions this morning and ask you to be brief and then we can do as many as possible.

Let me introduce to you this morning our Managing Director, Christine Lagarde. We also have with us just to her right our First Deputy Managing Director, David Lipton.

Without further ado, let me turn to the Managing Director for some opening remarks, and then we will come to your questions in the room. Please identify yourself before asking the question.

The Managing Director: Good morning to all of you. I hope you are well and I would like to not only welcome you, but include you in wishing this institution a happy birthday. It is 70 years old and a brand new, energized, relevant machine, I can assure you.

I will say a few words about the current economic outlook as we see it, for those of you who have not followed previous press conferences by our terrific team, and I would like to say a few words about the institution first.

As I said, it is 70 years old, founded in 1944, and I believe that it is not only relevant but in a position to respond to the challenges that the world is facing. As a sign of that, I would just like to mention a couple of examples.

I said this morning in the presence of a lot of the members of the community looking after and trying to help the three West African countries that are hit by Ebola, I said for once, just for once, it is absolutely fine if those countries increase their fiscal deficit. This is not like the IMF. David [Lipton] was a bit concerned, actually. I'm sure that we have some colleagues who would be a bit concerned. But, it is just an indication that we are capable of mobilizing resources. They're not grants, unfortunately, and others are going to have to put grants on the table in significant numbers, but there are circumstances where we are capable of revisiting traditional standards.

We have done the same this year concerning sovereign debt restructuring. As you know this is a matter that we have studied, where we have come up with proposals, revisions of certain clauses of sovereign bond issuance terms. And we will continue to work on those issues. In the same vein, we are also helping the Financial Stability Board (FSB), following up, working, monitoring, and helping with profound changes and modified regulations applicable to the financial sector.

There are areas where we were not expected, and at the age of 70 it is not bad to actually look at the fiscal side of climate change, and what can be done about it. And we have made proposals concerning removing subsidies in a socially responsible way. We have made proposals concerning price setting and including externalities in the price of fossil energies.

It is also responsible in my view to assess the sustainability of growth in the light of strongly increasing inequalities, becoming excessive. And therefore likely to hamper growth. It is not irrelevant, either, for the IMF to look into growth and jobs and the inclusion of women in the job market. Those are areas that some might argue are not absolutely core business, and yet we contend that it is part and parcel of the mission of the IMF to look at issues that are macro critical, but touch on topics that we are facing and that in many ways can be new, or more acute.

In addition to that, we do all the normal things that we have to do. So, surveillance, bilateral, multilateral, the intersection of the two, of course. Lending, of course. And we have done more lending than maybe might have been considered. We extended a significant facility to Ukraine earlier this year. We are negotiating with a couple of African countries that are looking at support. The Arab countries in transition are also major clients of the Fund.

And the third areas where business is expanding, if I may say, is technical assistance, capacity building and training. We have opened our fifth training center this year, and technical assistance is an area where there is massive, massive demand from all corners of the membership. So, it is with that background that I wanted to wish us a happy 70th anniversary.

Moving to the more traditional comments that you might have expected from me.

For those of you who have seen the World Economic Outlook or watched the press conference of Olivier Blanchard, as you well know we have trimmed our forecast for 2014 and 2015, 3.3 percent in 2014, 3.8 percent in 2015. And what we have noted, clearly, is more and more country specificity in the analysis that we work. It is not as if a group of countries, the advanced economies or the emerging market economies, were recovering while others would be lagging behind. Within each group some countries are ahead, and others are lagging behind. In the advanced economies clearly the recovery is driven by the United States and the United Kingdom, while the euro area and Japan are lagging behind. In the emerging market economies, you have reasonably strong, although slower growth, out of China, better than what we had thought out of India, and clearly a major slowdown in countries like Brazil and Russia.

So, very country specific, and by the same token the low income and developing countries are thriving. From a much smaller base, granted, but their growth rates are very impressive, which is why it makes the current epidemic, Ebola, even more threatening, because it might certainly jeopardize economic recovery that was underway and entail a decline of those economies that would be wasting the gains that they have earned as a result of their efforts.

So in the face of what we have called the risk of a new mediocre, where growth is low, and uneven, we certainly believe that there has to be a new momentum and that is what we will be discussing with the membership in the coming days.

I believe that you have received the Global Policy Agenda, a copy of which I have somewhere here. This is the document that encapsulates for the membership the strategic direction of the work we will be discharging over the next 12 months, and this is the document on which we seek their approval and their support.

Now, this new momentum with hopefully more growth, more jobs, better growth, better jobs, is what we would certainly call upon the membership to produce. What does it mean in practice? And I will very quickly touch on the three key topics.

The first one is monetary policy, where we would be seeing asynchronous movements probably but particularly in the eurozone and Japan, more of that accommodative monetary policy is needed going forward in order to support the economy.

While at the same time the Fed is probably going to normalize its monetary policy and where we're going to continue to caution a lot of the emerging market economies and low income countries and developing countries to just prepare themselves for a bit more volatility than we have observed over the last few months.

On the fiscal front we believe that more growth friendly fiscal policies can be put in place, and those of you who have followed the press conference of Vitor Gaspar, the new head of the Fiscal Affairs Department, will understand what I mean by pointing to the potential labor reforms and fiscal policies adjusted to support job market reforms, which we believe could make a lot of sense.

We also think that the financial policies must continue to aim at reducing excesses, make the financial system sounder, and strengthen its ability to help the recovery.

Now, there is a third package we have been referring to regularly, which is the structural reforms. We don't believe that the structural reform is the sort of third chapter, by the way. We believe that it is very important, and it has to be country specific. At the juncture of demand and supply driven measures, we have strongly held the views that infrastructure and investment in infrastructure can be a good way to support growth in the short term, by putting people to work, by launching major construction efforts or maintenance jobs, but can also impact on the supply side in the medium term by facilitating and accelerating the creation of value down the road.

So this is in a nutshell what we are forecasting, what we hope to discuss in the next few days, and I will be very happy to take questions together with David on any topic that you care to ask questions about.

Mr. Rice: Thank you, Madame Lagarde. We begin here on the right.

QUESTION: I was wondering in your global policy agenda you said your analysis of the world looks uneasily familiar, and a lot of your advice has been -- you've been saying it for the past three years or more since the crisis countries need to do these structural reforms and it looks like fiscal and monetary policy have reached some of their limits and is why we're turning to infrastructure spending. Would you agree with that analysis and do you think countries need to step up their game?

The Managing Director: We strongly agree and we hope to convince those countries that satisfy the various conditions, it is not investment in infrastructure at any rate, under any circumstances. It is clearly beneficial and we believe that it can be not only growth friendly but even debt friendly if done under the right conditions, with enough slack in the economy so that it picks up from there, with a financing situation that continues to be very accommodative and at very low cost, and with clearly a need for infrastructure. So, on that basis, we believe that it is helpful and as I said, it addresses both the demand short term and the supply side of the economy.

Structural reforms, yes, we have said that, and in a way it is the common factor to many of the countries in the various regions, but what we are seeing is that they have to be country specific. They have to be well adjusted to the political acceptability, the multiplying effect it can produce on those economies. But, it is a question of doing it, not just talking about it. We can talk, we can publish reports, we can do that, and we will continue to do so and will be as granular as we can be, although it is not necessarily our domain of competence by excellence. Other institutions can do that better. But we can certainly, No. 1, cooperate with them, and No. 2 reinforce the message, but it is a question of getting on with the job and doing it.

QUESTION: Madame Lagarde, according to data released this week by the IMF China will overtake the U.S. as the world's largest economic borrower, at least in terms of PPP. How challenging is it for the IMF since China holds less than 4 percent of voting rights at the Board? Do you think that the legitimacy of the institution is at risk and do you think the IMF will have to go beyond 2010 quota reform that is currently stuck.

The Managing Director: The 2010 quota and governance reform is an absolute must, it has to be implemented, and everybody knows that it is currently stuck before the U.S. Congress. We very much hope that the different branches of the U.S. authorities, executive and legislative, and members of the legislative amongst themselves, will understand the relevance of having an IMF that is representative of the global economy and includes the people that should sit at the table.

Now, this has not happened. It was due in 2012. It is overdue in 2014. And I strongly hope that under President Obama's leadership and with the right understanding of the parties, the role of the IMF warrants that ratification.

Who was first on the job concerning Ukraine?

The IMF.

Who managed to disburse very, very quickly and put cash in the banks of Guinea, Sierra Leone, and Liberia?

The IMF.

Not to say others are not doing their job, but we are capable of dealing with crisis situations of that nature like no institution.

Now, I'm not finished. I also want to say that notwithstanding the fact that the reform has not been ratified, we as management include a representative of China, one of the Deputy Managing Directors is Zhu Min and plays a full part of the management and we are delighted that he is sitting at the table with us. Within the teams we have a lot of the underrepresented staff members, and heads of departments. The Secretary's Department head is a Chinese national. You were talking about China in particular, but I would like to enlarge the topic by saying those underrepresented in the quota are not underrepresented necessarily in the management circle or in staff, and at the highest level of the Fund. We certainly pay as much attention as we should to all, and not just to the big players.

QUESTION: We have seen a lot of countries speaking with the IMF, African countries in particular, even working with the IMF with regard to technical assistance, some with the intention to issue a bond, some have already issued bonds and tapping into international bond markets.

To what extent do you think African countries are capable of taking that money and pumping it into the right projects, infrastructure projects, as the IMF has been alluding to, and not making the same mistakes of the past given the debt history of the continent?

The Managing Director: You are right in that quite a few African countries have lately issued sovereign bonds and have been very successful which is a sign there is progress, there is more stability, they are more reliable borrowers, probably, as seen by the financial markets. I think it should be done with measure, like everything. No excess, no abuse. I would like to point out to you that we are currently working within the Fiscal Affairs Department on specific research work to actually focus on how public finance, how civil service in each country, can actually well serve the discharge of major infrastructure projects and we will make that expertise available to the Australian presidency of the G-20 and to all our members, of course, to make sure that they appreciate how good management of public finance, how good governance of public finance, and how focused project management can be in order to serve the efficiency of infrastructure. Because, this is what we have advocated. It will work if it is efficient. It will be efficient if it is well handled by those in charge. And there is a way to do that.

QUESTION: My question is about Greece, of course, Madame Lagarde. The feeling in our country is that after four-and-a-half-years of a program, there is enough austerity and enough pain. The prime minister of Greece said today, and I quote, that he is absolutely convinced that Greece can meet its financing needs in the coming years without needing the money from EU and the IMF. As I understand, he sent a team to Washington to talk with you, and in my opinion the question is simple. Can Greece make it without the help, without the loans of the IMF and the European Union?

The Managing Director: First of all, it is obviously for each country, and Greece is clearly a point in case, to decide what it wants, and how it wants to handle its financial situation. We are very pleased to see that agrees has significantly improved its position from a fiscal point of view, on the financial markets. There has been significant improvements. But we also believe that going forward and in order to deliver a continuous satisfactory outcome, the country would be in our view in a better position if it had precautionary support. So we're talking about evolution in the relationship, but we believe that the relationship can still be extremely helpful for the country to move on and ultimately on its own. So we are ready to help and we believe that it could be effective.

QUESTION: Good morning. Madame Lagarde, where does the IMF stand on the economies in the Arab world, where some still are coping with the aftermath of the Arab Spring and some are undertaking some really painful reforms? And on geopolitical risks, and falling oil prices, how can the IMF price in those factors and the impact on the oil exporting countries that is considered a main driver and economic power in the region?

The Managing Director: First of all, we are very engaged and involved in the Arab world in general. I'm using the Arab world in general because we used to talk about the Arab countries in transition, the ACT as we had labeled them. I think it goes far beyond the ACT, because there are countries that did not go through the transition or that transition phase, which are struggling at the moment with very complicated issues that have to do with significant military problems, disruption of the entire infrastructure, abundance of migration, people who are being displaced, about 11 million of them in that whole area. So we're trying to help in all these directions, and not only the Arab countries in transition. We go beyond that at the moment.

We have quite a few programs in place. The latest one that was approved was Yemen. A lot of has been achieved. Let's face it. When I look at the program to remove subsidies and to use public finance to better use as safety net for the poor, as support for health and education, a lot has been done. But, there is still a lot more that needs to be done, and we appreciate how difficult it is under the circumstances faced by those countries. And, it is to their credit to have done what they have done, but they have to continue.

I'm particularly pleased to see that there is a good and strong delegation coming from Egypt on the occasion of the Annual Meetings and we will be continuing the discussions with Egypt. I very much hope that we will be able to do an Article IV with our Egyptian friends. Bottom line, we are focused, we are going to continue to be engaged, but this is a part of the world that needs the attention, the support, and the financial support, as well, of the international community.

QUESTION: Thank you, Madame Lagarde, and happy anniversary to the IMF. You normally are asked about risks and problems, and I do want to ask you about the fact that as you mention the euro area is lagging behind, and whether that in your mind is connected to the current sanctions and counter sanctions. But mostly I wanted to ask you, when you look at our part of the world, where do you see grounds for optimism?

The Managing Director: The developments in Ukraine, as a triggering and very unfortunate triggering factor of the sanctions and counter sanctions is one of the geopolitical risks that we identify as a cloud of the horizon of the global economy. So, the very modest growth of the euro area and modest forecast for next year, because we have revised down to .8 [for 2014] and 1.1 [correct: 1.3 for 2015] is partly, but only partly, attributable to the geopolitical risks that we see in that part of the world.

What hope from that area? I would hope if I see a resolve to conduct both reforms on the one hand, and investment on the other hand. I think it goes hand in hand, to give and take, and both surplus and deficit countries have to rally around better growth in that part of the world.

QUESTION: My question is regarding Federal Reserve monetary policy and its effects. As the IMF has indicated that the global recovery is still relying on the advanced economies accommodative monetary policy, will also see the Federal Reserve has a growing concern over the global growth? I wonder, to what extent do you think the Federal Reserve will be able to raise the interest rate later than expected? And also, what is the IMF's latest assessment of its spillover and spill-back effects?

The Managing Director: I do not live in Delphi -- I cannot predict what the Fed will do. I also believe Chairman Yellen has given very clear, very understandable explanation and guidance about the monetary policy of the Fed. We can all read the same thing, we can all understand what is meant by what she says. And, we have also seen delivery of what she has messaged some six months ago, nine months ago.

So that is on the Fed question you had for me.

The other question you had for me dealt with spillovers and spill back. It is an area where we do quite a lot of work, a lot of analysis to actually identify what the outcome of what we call the tapering tantrum. You remember back in May, June, 2013 when there was the perception that there would be a change in the monetary policy of the Fed, there was immediate waves, and outflow of capital, and variations in the currency and exchange rates of quite a few countries, quite a few markets in the emerging world. So we have studied that in detail. We have also studied the response by those countries, to actually draw lessons from that, and are trying to make sure that the countries that will be exposed to yet more volatility when the time countries, have built the defense and have the tools in the toolkit to respond to necessary added volatility.

One more thing. I dealt with your spillover, but spill back is one as well, because when large emerging market economies are in difficulty, or at the risk of instability, it can spill back to the originating country. We are also studying that, and we are very pleased to see that, including in her communication, Chairman Yellen has mentioned the fact that she was paying attention to both.

QUESTION: Looking at the eurozone, it has a very, very slow growth rate, an aging population, doesn't seem to have recovered really from the downturn of 2008/09. We have been here before, haven't we? How close to you think the eurozone is to becoming the new Japan?

The Managing Director: It has been commented upon by Olivier Blanchard. We have alerted about a year ago to the risk of persistent, low inflation, which is one of the attributes of what you have described as the new Japan, or something like that. So low inflation was a risk. We identified that. Measures have been taken by the ECB to try and resist and reverse that risk. More we hope will be done.

We have also now alerted to the potential risk of recession in the eurozone, and I think that risk has been identified as a probability of about 35-plus percent, anywhere between 35 and 40 percent, which is not insignificant. We're not suggesting that zone is heading toward recession, but we're saying there is a serious risk that happens, if nothing is done. But we are saying also that if the right policies are decided, if both surplus and deficit countries do what they have to do, it is avoidable.

QUESTION: A follow-up question on PPP. Madame Lagarde, how seriously do you think we should look at this data, because if we look at more commonly used data, China's economy is still way behind the United States.

To what extent do you think the purchasing power parity could reflect the real status of economies?

The Managing Director: I will not enter into the debate of what is the best measurement, because there are lots of ideas on the table at the moment, GDP, PPP, the measurements inspired by the Joe Stieglitz commission from four, five years ago, but it is one indicator amongst many others. If you look at GDP per capita, China is way behind, of course, but you have to take all the factors into account to actually assess the stability and the future of an economy. I wouldn't neglect demographics, by the way. So it is a sign that China is growing. It is a fact.

QUESTION: [from translator]: Good morning, Madame Lagarde. I'm representing my Peruvian colleagues, and would like to say we are very pleased that will be hosting the IMF and World Bank meetings in October, 2015.

I want to know what are your expectations for that meeting in Peru, and also I would like to say that the fall in prices of commodities, in particular in metal, has had an impact, negative impact on the economies of a country such Peru. I want to know what other sources of growth the countries could turn to given that the metal prices are falling? So, what other sources of growth could they tap into to offset, that they can move, continue to grow? And, what measures could be taken to address this slowdown in some of our partner countries?

The Managing Director: For those who didn't get the translation, or did you all get it? No. Okay.

It was a very comprehensive question from your Peruvian colleague who, No. 1, was happy to say that Peru will be hosting the next Annual Meetings of the IMF and World Bank next October. So he hopes that you all are coming.

And, then, he asked questions about the current economic situation of Peru, which is an economy clearly marked by extractive industries and the export of commodities, which have suffered from the recent decline in the price of commodities.

First of all, on behalf of our entire institution, I would like to express gratitude to the Peruvian authorities because I know there is work under way, major construction being completed, hopefully by July, 2015, so that we can all be together under one roof on the occasion of the Annual Meetings in Lima.

We are all looking forward to it, I can assure you.

Concerning the Peruvian economy, it is one which has grown very fast, one of the fastest in Latin America over the last decade, and which has taken a hit in the early months of 2014 as a result of a combination of the lower price of commodities, which Peru is a great producer of and great exporter of. And second, as a result also of bottlenecks in the countries given that it has grown so fast and that the infrastructure has not necessarily followed as it should have. For the combination of these two reasons, the growth rate of Peru has gone seriously down in the first few months of 2014, and we're forecasting a significantly slower growth for the country compared with what it has produced in the last decade.

But we believe that the policy measures that have been decided, both from a fiscal standpoint and from a monetary standpoint should be conducive to restoring the situation. We believe that it is not necessarily easy from a political point of view, and we understand that there is a coalition government, but we hope that all members in the coalition will be focused on delivering the right supply and monetary policy mix in order to redress the situation.

Mr. Rice: Thank you all for coming and we'll see you over the coming days.