Participants:
Vitor Gaspar, Director of the Fiscal Affairs Department
Abdelhak Senhadji, Deputy Director of the Fiscal Affairs Department
Catherine Pattillo, Assistant Director, Fiscal Affairs Department
Wiktor Krzyzanowski, Senior Communications Officer, Communications Department
Mr. Krzyzanowski: Good morning, everybody. Welcome to the press conference on the IMF's Fiscal Monitor. Thank you very much for joining us this morning. My name is Wiktor Krzyzanowski and I'm with the IMF Communications Department.
Let me introduce the speakers: Vitor Gaspar, Director of the Fiscal Affairs Department, Abdelhak Senhadji, Deputy Director in the Fiscal Affairs Department, and Catherine Pattillo, Assistant Director in the Fiscal Affairs Department.
You have received the Fiscal Monitor, and all supporting documents. I will now ask Mr. Gaspar to make short introductory remarks and then we will be ready to answer any questions you may have.
Mr. Gaspar: Thank you for being here and for your interest in our work. As you know from the World Economic Outlook, world growth is weak and uneven. It is a far cry from the G20 ambition of strong, sustainable, balanced and inclusive growth. This fall, the Fiscal Monitor is very timely, because it focuses on debt – one of the major headwinds against growth in the world economy. You have received a long written version of my introductory remarks, so I will not read it out. I will just mention some key take‑aways.
The Fiscal Monitor puts together a novel database covering 113 countries. It finds that global debt is at record highs and rising. Global debt is 152 trillion dollars, or 225 percent of GDP. Two thirds of this debt is private.
Why do we care? The most important reasons are that high and rapidly increasing private debt often leads to financial crisis. Financial recessions are longer and deeper than normal recessions. Weak initial financial positions make financial recessions even worse.
How is the global debt landscape characterized? The debt distribution worldwide is very uneven. It is mainly concentrated in advanced and a few systemically important emerging market economies. Debt levels are generally lower in low income countries. In some emerging markets, easy financial conditions have led to accumulation of private debt, a case in point is China. China is so large and the debt of non‑financial corporations is growing so fast that it significantly affects global debt trends. There, the challenge should be tackled urgently. The authorities are well aware of these challenges and have the means to deal with them.
Can fiscal tools help debt reduction? The answer from the Fiscal Monitor is: yes. One example is targeted fiscal interventions. They can be effective facilitating adjustment, but they should be well‑designed and pursued only if fiscal resources needed do not pose risks to fiscal sustainability or market access. Design is complex in practice. The Fiscal Monitor looks at six case studies to illustrate how it can be done, and those are Finland, Iceland, Japan, Korea, Thailand, and the United States.
Why is debt reduction in advanced economies so slow? In most advanced economies reduction of debt levels has been slow and it is often associated with monetary policies operating close to the effective lower bound. The key explanatory factor is low nominal growth. This can be illustrated by the contrasting developments in the U.S. and the euro area. It is indeed very hard to reduce debt ratios without returning to strong growth with inflation back to target.
In general, what can fiscal policy do? The key takeaway is that fiscal policy can play a more active role. But, no one size fits all. And like in 2008, we are not now calling for a broad fiscal stimulus. Countries with space can and should use it as the payoffs are large, especially given low interest rates. All countries, including the ones without fiscal space, and pursuing a consolidation path, should pursue growth friendly fiscal policies by changing the composition of their government expenditures and revenues, in order to minimize the drag on growth.
More generally, a staff discussion note is just out advocating a comprehensive, consistent, and coordinated approach that taps the synergies of different policies working within a country, over time, and across countries. Under current circumstances, the whole is clearly bigger than the sum of its parts.
To conclude, global debt is at record highs and rising, the global debt landscape is very diverse, reminding us that no one size fits all. Fiscal policy can do more, as the case may be, to restore nominal growth, facilitate adjustment, and build resilience. My colleagues and I are now ready to answer your questions.
Mr. Krzyzanowski: We are ready to answer your questions, in the room and also online on IMF.org.
Questioner: Mr. Gaspar, you seem remarkably calm for somebody who has just announced that the world is 152 trillion dollars in debt. I'm wondering why you chose not to be more aggressive in warning about the consequences of this build up? And secondly, in the report you talk about targeted fiscal interventions. What do you mean by that? Because, as you know, the minute you say “targeted fiscal interventions” and you cite examples like the U.S. intervention in the auto industry, people immediately think that this is a code for bailouts. What do you mean by that?
Mr. Gaspar: These two questions are absolutely central to what we want to put across from the Fiscal Monitor. 152 trillion dollars is a record high. In places around the world, we have excessive debt. In some places around the world we have debt – in particular, non‑financial corporations’ debt – growing very fast. A crucial message from the Fiscal Monitor is that when private debt is on an unsustainable path, it is important to intervene early in the process, to make sure that risks to financial stability, financial crisis, and financial recession can be prevented. That is the best strategy: a proactive early intervention tends to pay off. That is a key message from the Fiscal Monitor.
The Fiscal Monitor also documents that the global debt landscape is very diverse. One of the points that should be retained is that there is a very strong correlation between debt levels and GDP per capita. So, if you go by country groups, you will see that in general advanced economies have higher debt levels than emerging market economies, which have in turn higher debt levels than low income countries. But we also document quite a substantial dispersion within country groups. And there is considerable overlap across these groups. That is why we emphasize that although we have this global debt at record highs, when you want to work out the policy implications, you have to go through the specifics of the particular case. No one size fits all. That is a second very important key message from the Fiscal Monitor.
Now, targeted fiscal interventions in general are defined in the Fiscal Monitor as interventions that aim at facilitating the repair of private sector balance sheets. And, as you mentioned in your question, those interventions can be direct, they can target specific groups of households or firms, or indirect through interventions in the banking sector.
In the first group, direct interventions, the Fiscal Monitor gives a number of examples: in Iceland there was the introduction of tax rebates and subsidies on mortgage interest payments to support the government-sponsored household restructuring approach during the crisis. That is just one of the examples in the Fiscal Monitor. If you go through the six case studies, you will have some other, including the one you mentioned about U.S. auto industry. But interventions can also be indirect through bank recapitalization, and since the beginning of the global financial crisis, there were quite a few of those.
A key message about targeted fiscal interventions in the Fiscal Monitor is that they have to be properly designed. They must be properly targeted. They must be conditional. And they must have behavior requirements on the entities benefiting from the intervention, so that balance sheet health and economic viability are durably restored. They must be framed properly in the context of a robust regulatory and supervisory environment, and many other institutional features are important, like, for example, well‑functioning insolvency regime.
These issues are crucially important and complex, and in order to convey that complexity, we produced these six case studies in the Fiscal Monitor that give you a flavor of what this is about in practice.
Questioner: The British Chancellor has indicated post Brexit that it will reset its fiscal stance in a new way. Is that very sensible at a time when the debt‑to‑GDP ratio is quite high, and at a time when some private sector debt, particularly consumer debt, is also quite high. If you were laying down what interventions would be suitable in these circumstances, in which direction would you go?
Mr. Gaspar: It is an excellent and difficult question. As the situation that you are describing is still very much in a state of flux, my understanding is that the Chancellor has just given an important speech in which he announced that details about the fiscal strategy for the U.K. will be presented in the Autumn Statement. The Autumn Statement in turn, if my memory serves me right, will be presented on November 23rd.
Now, what the Chancellor said is that he will take into account a number of elements for his strategy, and again using my memory, he emphasized the need for pragmatism so that fiscal policy can adapt to the heightened uncertainty of developments in the U.K. economy. He indicated that increased flexibility was necessary precisely because of this heightened uncertainty. He did say that the goal of achieving budget balance in this legislature would be postponed. But, at the same time, he emphasized that the government in the U.K. will have to live within its means; that the medium‑term framework would be reinforced. And, that it is crucially important for the U.K. to be able to invest in public investment projects of high return and that a targeted effort will be made in the U.K. to improve the standards of public investment efficiency.
This emphasis on the need for pragmatism, in particular in the short- to medium term, while at the same time emphasizing fiscal, structural policies and the importance of a medium‑term framework, seem to me as the element that we at the IMF recommend as crucial to have a sound fiscal framework.
Questioner: A short follow-up if I may. I specifically referenced the high level of public sector debt to GDP at the moment, and high levels of consumer debt. I was just wondering if you felt those fiscal expansions could be prudent in such circumstances?
Mr. Gaspar: One needs to have the concrete details in order to make the type of assessment that you asked for. What I can emphasize, and I believe it is crucially important, is that in many cases, when you need to have the room to maneuver to flexibly address short run challenges, at the same time you then anchor expectations around fiscal sustainability and a gradual decline in public‑debt‑to‑GDP ratios in the medium- to long term. That is why in this staff discussion note I already quoted, which calls for this comprehensive, consistent, and coordinated approach, we very much underline the consistent, which has to do with the conduct of policies over time. The time dimension is crucial to be able to reconcile the needs for flexibility and sound policies at the same time.
Questioner: I want to bring your attention to a paper that came out of the IMF by Jonathan Ostry and Raphael Espinoza. It pointed out that national debt rising is not actually a bad thing, if after all there is an access to finance, and the time to actually service national debt should be when there is either an economic boom or privatization receipts have increased in a country. What does this mean for sub‑Saharan Africa where the booms are actually, if anything, hardly existent and there are hardly any receipts coming in from privatization?
The second question is regarding China. A recent report shows China is gaining a lot of relevance when it comes to non‑concessional lending, at least for much of sub‑Saharan Africa, not to mention the New Development Bank, of course. On China's debt, yes, much of the emphasis is on corporate debt, but the national debt for the country is rising. What does this mean for sub‑Saharan Africa, which is actually borrowing from China? Are there any effects when it comes to spillovers?
Mr. Gaspar: On the Mr. Ostry, Ghosh, and Espinoza paper, they basically reproduce the very well‑known result in the literature that points to debt ratios following a random walk, a stationary process. Having high debt is regrettable in that setup because you have to have a higher tax‑to‑GDP ratio. But, the trade‑off is such that you don't want to actively push the debt ratio down. That is something which requires a number of assumptions. One of them you stress, which is that there must be no risk of interruption in bond market access, this is an important requirement of their analysis. But there is also another important requirement, which is risks have to be symmetric. If you take into account that fiscal risks are typically asymmetric, it is much more likely that public finances will be hurt by a positive shock, a shock that increases public debt, just think about the accumulation of contingent liabilities from the private sector during the global financial crisis as one example. Or, losses in state‑owned enterprises. So, if you take into account the empirical distribution of risks, which is skewed, you have much more of these shocks that increase public debt than those that decrease it. Then you do have a case for a gradual, slow reduction in public debt‑to‑GDP ratios.
In the context of a medium- to long run strategy, that is exactly what you would expect. But, Mr. Ostry and co‑authors are absolutely right that debt is something that occurs organically in the context of the working out of the economy and the asymmetry in the shocks is part of those general characteristics of the economy. So, one needs to be careful in interpreting those results.
Ms. Pattillo: On debt levels in sub‑Saharan Africa, and the challenges from slow growth and low commodity prices that you mentioned, these are core areas that the Fund is engaging with countries on, helping them with policies that will deal with the current near‑term challenges and build strong growth and fiscal and debt sustainability going forward.
On the debt trends right now, as Mr. Gaspar mentioned earlier, there is quite a bit of heterogeneity within all country groups, and including in low income countries in Africa. But as a general overview, private debt levels are still low, but there has been a gradual increase in the last several years, and that is mainly a good thing, because that has been due to the development of the financial sector, including increases in microfinance lending, and mobile banking. And sub‑Saharan Africa has ways to go here. Financial deepening is much lower than in other low income countries.
Public debt is in general low following the progress with debt relief with the heavily indebted poor countries initiative. But, again, in recent years, it has been on an upward trend since around 2010, in some cases by nontrivial amounts. Just one number, if you look at debt levels by quartile, in the top quartile of low income African countries the average increase since 2010 has exceeded 30 percent of GDP.
Frontier markets, of course, are one group that has seen an increase in debt levels, as they used more non‑concessional enhancing, bond financing, as well as financing from China, while they were embarking on very ambitious public investment plans.
The important question for countries is, as they are borrowing, and increasing their debt levels, is this translating into actual increases in infrastructure and public capital stocks that are going to then allow for the future growth and revenues and repayment capacity that will keep debt sustainable? As we document in the Fiscal Monitor, it has not always been the case that these increases in public debt are being used to finance public infrastructure. So the challenge, with the current financing conditions, the larger share of non‑concessional debt that raises, and some rollover risks related to changing financial conditions, is to continue to have a good balance in countries between trying to meet these large infrastructure needs and maintaining very hard‑fought debt sustainability.
On China's spillovers and the spillovers related to their lending, in the World Economic Outlook there is discussion of China spillovers in general, and also looking at a range of different regions, including Africa. There are trade channels, the decline in commodity demand, and an impact through lower potential financing. The impacts are not the largest in sub‑Saharan Africa. For Chinese lending, which has been really important in the continent, there have been some signs of potential slowdown in the past year, but I think that is still something that is evolving and we'll see how the numbers look this year.
Questioner: The huge run‑up in debt, of course, has coincided with a period of record low interest rates, which is likely to continue for some time. To what extent do these two things balance each other in terms of debt service costs? Perhaps more importantly, as the markets absorb your message about the shared high levels of debt, is that not likely to create even more fear of what happens when the Fed begins to normalize interest rates?
And just very quickly, the Bank of Japan has recently introduced a policy of yield curve control to try to help the situation of banks and the financial institutions. Is this something which has applicability elsewhere, do you think?
Mr. Gaspar: I will be very brief on your last question on monetary policy in Japan, because we're fiscal! We reluctantly comment on monetary policy, apart from the fact that we emphasize very much the importance of the interaction between monetary and fiscal policies in the context of a comprehensive approach, where fiscal must support monetary when there is need for expansionary policies, and monetary policy is constrained by proximity with the effective lower bound, which is definitely the case in Japan. But I will not comment on the operational aspects of monetary policy because that is not in line with my job description.
Now, have markets absorbed our message? That is a very important question. One of the roles that we play is to provide good quality information which is relevant for markets, for governments, and for citizens. Allow me to say that I'm very proud of this Fiscal Monitor because we put together a new data set that covers 113 countries. It has much more coverage of emerging market economies, and low income countries than what was available before. So, it allows us to have a much better picture of the global debt landscape. And, to repeat, that is very important information for citizens, for governments, and for markets. I believe that they will be reassured by the fact that now they have better information.
You of course understand that there was a little bit of a tension between the various questions you asked. Are interest rates a mitigating circumstance? Are interest rates triggering this accumulation of debt? What happens when monetary policy will normalize? Clearly, that is exactly the right sequencing of questions. And, what you see is that indeed global low interest rates had a role in the accumulation of debt in some emerging market economies. It is also very important that one has a policy strategy that allows debt levels to be sustainable when eventually monetary policy will normalize. That is a further reason why we emphasize the dimension of conduct of policies over time: one needs policies which are appropriate for now, and will deliver stability, sustainable and inclusive growth, from a long‑term perspective.
Questioner: Is Mexico on time to fix the problem of the public debt? Because the authorities had launched a proposal to reach primary surplus next year, so I want to know if it could be enough to reduce the problem in the debt? Also, some rating agencies have warned about the small fiscal flexibility that the authorities have in Mexico to help to manage the problems in debt. I want to know if you agree with this analysis.
Mr. Gaspar: We don't comment on analysis from credit rating agencies. Something that we emphasize in the case of Mexico, and one dimension where progress has been made in the recent past, has to do with the fiscal framework. We do see, and that is the recommendation that we have in our bilateral surveillance, that Mexico could benefit from the creation of an independent fiscal council. It could have a closer link between deficit targets and debt objectives. And it could invest further in its fiscal rules framework in order to make sure that the necessary flexibility in the short run would come together with a well‑anchored public debt path from a longer term perspective.
In terms of your first question, the IMF very much emphasizes the authorities' commitment to a gradual reduction in the fiscal deficit, and we link that with the importance for Mexico to interrupt the increases in the public‑debt‑to‑GDP ratio, and move into a deficit position that will deliver a reduction in the public debt ratio, as we anticipate under the baseline.
Questioner: You have seen a lot of talk about what exactly is meant by fiscal space. When you talk about fiscal space, given the debt burdens, are we talking about countries maintaining balanced budgets, or is it a little bit more flexible than that, in any country that can stay, for instance, within the Maastricht criteria where there is room for a slight budget deficit, is that acceptable to you?
In the Eurozone, there has been a lot of talk about using fiscal space, but there are mixed views on whether or not countries that do have the room to spend could actually have some sort of regional benefit on growth. So, what is your point of view on the cross‑border impact of using this fiscal space? Are the benefits largely confined to individual countries, or could you see a bigger impact on global growth?
Mr. Gaspar: On the fiscal space, we have a definition at the IMF. We say that a country has fiscal space when the country is able to increase expenditure or reduce revenues without undermining fiscal sustainability or bond market access. Now, when you're applying the definition, debt sustainability and market access depend on a very broad range of circumstances, and so the judgment on fiscal space is a very complex judgment to make. For example, under circumstances like today's, when monetary policy is close to the effective lower bound, the staff discussion note that I quoted shows that spillovers across countries, the point you were making about policies in one country having effects in others, are particularly strong. So, the case to be prepared for coordination, if necessary, is very strong. And that is something which is important so that the world community of policymakers is ready in case of a significant downside shock.
But you also asked whether it would be in the best interest of individual countries to do as we recommend, to use fiscal space in case they have it, to support monetary policy, to support growth, to focus on the medium term and support structural reforms. For that, let me give you the example of Germany. Germany does have fiscal space. The IMF quantifies that as at about 2 percentage points of GDP over the next three years. That would be enough for Germany to engage in a significant increase in public investment. Germany is already moving in that direction. But, if you look at Germany, there are other areas where it would make sense to concentrate public resources. Just think about the importance for Germany of dealing with the demographic transition, where the increase in female labor force participation would be very important: if there would be public investment in child care, kindergarten, that could have a measurable impact. And of course in Germany the issue of managing migrants and making sure that they integrate in the best possible way into society and the labor market is also a very important priority, which could benefit from public resources. All of this is already happening, is a matter of degree, and we would urge the German authorities to go even further than what is now envisaged.
Questioner: You project lower primary surpluses than the government of Greece for this year and next year, significantly lower than the ESM program, from 2018 and onwards. Do you think that the Europeans will accept to lower these targets, and if not, how can Greece achieve and maintain 3.5 for the years to come?
Mr. Gaspar: What I can say about your question is reaffirming the position that I believe is very well known. The IMF very much supports the need for policy adjustment efforts in Greece in terms of fiscal adjustment and structural reforms. They have to be realistic, and in our view a realistic policy path on the Greek side must be complemented by improved efforts at debt relief on the side of Europe in order to restore debt sustainability in Greece.
Questioner: Listening to you yesterday and today, I had the impression that you work in a circus, because you are always talking about balance. My question is, with this high level of indebtedness in the business sector, will investment have to be suspended, so there is more sustainability in the future?
Mr. Gaspar: You point to a paradox. Many years ago, Keynes emphasized the paradox: when people try all to increase their savings ratio at the same time, the contraction in economic activity would defeat their purpose. And, that would be counterproductive for society as a whole. You can in a sense point to a similar paradox when it comes to debt, if everybody tries to repay debt at the same time. This is why it is so important to envisage reductions in debt ratios in the context where you have robust nominal growth, which is one of the aspects that is more emphasized in the Fiscal Monitor.
As your question pointed out, getting the balance right is not easy and that is why having this time dimension, figuring out exactly how policies over time will look like, how can you serve your policy objectives with the policy instruments that you can deploy, and then you have, of course, to deploy them together. You have to use monetary, fiscal, financial, and structural in tandem, though that is the three‑pronged approach that the Fund has been calling for, for many months now.
Mr. Senhadji: The contradiction between having high debt and asking fiscal policy to do more is only apparent. The point that we make in the Fiscal Monitor is that high debt hampers growth. But, in order for debt to go down, you need higher nominal growth. How do you resolve this apparent contradiction? In order to bring debt down, you need essentially to boost nominal growth, which may require in the short term some fiscal expansion. However, if that fiscal expansion goes into boosting potential growth and bringing inflation back to target, over the medium term, not only growth will be higher and inflation will be back to target, but also debt ratios and fiscal sustainability will be restored. So, the trick here is that in order to break this vicious cycle, you may need essentially fiscal expansion in the short term, complemented with other policies. Structural reform, the right monetary policy support, and so on. But, it should be targeted on pushing nominal growth up, and that is essentially the trick here.
Questioner: Talking about spillovers: Nigeria is currently going through some economic recession. From your perspective, what do you think Nigeria has to do to overcome those challenges and whether there are some likely spillover effects, considering the weight of Nigeria in the region?
My second question has to do with Ghana. Ghana is also going through a three‑year program with the IMF currently and it has helped to result in a reduction in the fiscal deficit from 12 percent in 2012 to about 6 percent currently. Do you think that Ghana is on the road to economic recovery, or are there still some risks that Ghana has to watch for?
Ms. Pattillo: On Nigeria, as you noted, the situation is very challenging right now, with the economy being in recession, and the fiscal situation deteriorating last year on the back of the slump in oil prices, while expenditure levels were kept steady. For 2016, there is a similar expectation with the slump in oil production and slow growth, creating challenges also with the debt profile. One statistics that is quite striking is how the debt profile is weakening: now interest payments account for more than 45 percent of federal government revenue. So, there are big challenges. The priorities overall are the need for an internally consistent and comprehensive package of sustained reforms that are going to be important both for addressing the near term, but also the medium term. On the fiscal side, the priorities are to safeguard fiscal sustainability, which means importantly increasing non‑oil revenues. And, implementing an independent price setting mechanism, to minimize fuel subsidies, while also improving public service delivery so that citizens see the benefits of good government services financed by the government.
As you mentioned, Nigeria is a very important economy in the region, and its success has positive spillovers for the region, particularly in West Africa, but its challenges create difficulties for its neighbors.
On Ghana, the Fund is supporting Ghana with a program. The view from our Africa Department is that the implementation of that program is broadly satisfactory, but the outlook is quite difficult. And there are big fiscal pressures.
The challenge for Ghana, facing the commodity price slowdown, is fiscal consolidation. The priority will be to meet the fiscal targets, and that will require maintaining strict control of spending, especially wage spending, in the run‑up to the elections, and avoiding any elections-related spending overruns that have happened in the past. This is all important for market confidence, which has improved, but there is still a range of financing constraints.
Mr. Gaspar: There are two messages that I believe should be highlighted, because they are of general relevance. Message No. 1 is that if you look at the global debt and deficit landscape, you see that the countries that have the highest public sector deficits are oil exporters. Nigeria is in that group that was very much hit by low oil prices. That is a general message because it applies to oil exporters in general and there are many other examples. The group of oil exporters shares some important characteristics. But the most important point of general relevance is that in order for most of countries in sub‑Saharan Africa to deliver on sustainable development goals, a key challenge is the building up of revenue mobilization capacity, through tax capacity building. That is a key priority.
In response to an earlier question, we were saying that these countries must improve their ability to raise revenues. Why is that so? Because their needs in terms of public infrastructure, in terms of education, in terms of health, for this group of countries, public finance, fiscal policy, is part of the overall development strategy and in that tax capacity is a fundamental cornerstone.
