Transcript of the Press Conference of the October 2018 Global Financial Stability Report

October 10, 2018


Tobias Adrian, Financial Counsellor and Director, Monetary and Capital Markets Department

Fabio Natalucci, Deputy Director, Monetary and Capital Markets Department

Anna Ilyina, Division Chief, Monetary and Capital Markets Department

Andreas Adriano, Senior Communications Officer, Communications Department

MR. ADRIANO: Good morning everyone. Welcome to this press conference for the fall 2018 Global Financial Stability Report. It is my pleasure today to introduce you to the panelists from the IMF's Monetary and Capital Markets Department: Director Tobias Adrian, Deputy Director Fabio Natalucci, and Anna Ilyina, the head of the Global Markets Analysis Division; which is the division that writes Chapter 1. Tobias will summarize the main findings of the report, and then we will be happy to take your questions. If you are watching us online, please send your questions so that we can take them, and you have the interpretation as needed.

MR. ADRIAN: Good morning. I would like to begin by thanking the Indonesian authorities for their thoughtfulness in hosting the Annual Meetings, and I would like to express our sincere condolences to the families of those who suffered during the recent earthquake and tsunami here in Indonesia.

Our latest Global Financial Stability Report finds that the global economic expansion remains strong, supported by still easy monetary policy. The global financial system is stronger now than it was before the global financial crisis thanks to a decade of reform and recovery. However, financial imbalances continue to build up, and the new financial system remains untested. Short-term risks to financial stability have increased, and risks in the medium term remain elevated. So, while there are reasons for optimism, this is no time for complacency.

Since our last report six months ago, the balance of risk in the economy has shifted to the downside. Global growth has plateaued. Trade tensions have escalated. Some emerging markets have experienced capital outflows and asset price pressures.

In addition, policy uncertainties have increased in a number of countries. In some advanced economies, some investors have grown overly confident and even complacent. Looking ahead, financial stability risks could rise in the near term. Several potential developments could trigger a sharp tightening in financial conditions. An intensification of concerns about emerging markets could lead to larger capital flows. A broad escalation of trade tensions could discourage investment and sour risk appetite in financial markets. An increase in policy uncertainty could undermine investor confidence, and a faster-than-anticipated normalization of monetary policy could dampen real activity and lead to real pricing in asset markets.

Any of those concerns could become trigger events that could expose the vulnerabilities that have been building during years of accommodative monetary policy. This new report outlines a range of concerns.

First, the level of debt held by governments, companies, and households is high and rising. The total debt of those sectors in the key 29 countries with large financial systems has grown to about 250 percent of the combined GDP.

Second, emerging markets and low-income economies have increased their borrowing from other countries. Countries are vulnerable to further capital flow pressures when they have large borrowings, when they do not have adequate capital buffers, or when they lack a strong domestic investor base. Our new Capital Flows at Risk analysis suggests that in the medium term, there is a tail risk, or a 5 percent probability that emerging markets could face debt portfolio outflows of around 100 billion over a period of four quarters. That would be a significant reversal of the trends seen in recent years.

Third, asset valuations are stretched in some markets. Corporate bond spreads are compressed globally. Valuations in U.S. equity markets are elevated, and some housing markets, especially in some global cities that serve as the world's financial centers, are richly valued.

Fourth, banks are stronger than they were at the time of the global financial crisis, but they still face some challenges. Banks have increased their capital and liquidity, but many banks remain vulnerable due to lending to highly indebted borrowers, holdings of illiquid and opaque assets, or reliance on foreign fragile currency funding.

Beyond our analysis of current financial conditions, Chapter 2 of our report looks at the financial regulatory agenda ten years after the global financial crisis, our findings include: there is cause for optimism, as progress has been made toward a safer global financial system. New supervisory and regulatory standards, tools, and practices have been developed and implemented. Supervisory stress testing has been broadly adopted. Many jurisdictions now have a macroprudential framework. Some shadow banking activities have been curtailed or transformed into safer market-based finance.

Looking ahead, it remains crucial to strengthen the resilience of the financial system by addressing financial vulnerabilities. Policymakers should ensure that the post-crisis regulatory reform agenda is completed and implemented. They should resist calls for rolling back reforms. Central banks should continue to normalize monetary policy gradually, and they should communicate their decisions clearly. Emerging market and low-income economies should build buffers against external risks, should pursue exchange rate flexibility, and should consider timely targeted foreign exchange interventions. Regulators should address vulnerabilities by deploying micro and macroprudential policy tools, including supervisory capital buffers where appropriate. They should also develop new tools to address vulnerabilities outside the banking sector. For example, they should tackle underwriting standards and non-bank credit intermediation and liquidity risks among asset managers.

Regulators and supervisors must remain attuned to new risks, including possible threats from cyber risks. They should also support fintech's potential contribution to innovation, efficiency, and inclusion, while safeguarding against risks to the financial system.

To sum up, this is a time for more proactive measures to safeguard financial stability. Confidence must not become complacency.

MR. ADRIANO: Thank you, Tobias. Just to mention that Chapter 2 that was just referred to here has been released by the IMF last week and is available on our website. We are ready for your questions. Please identify yourself, and as much as possible, keep the question short.

QUESTIONER: Could you tell us how resilient you think the financial system will be or the banking system will be to absorb the shock of Brexit. In particular, the clearing, the CCPs, the central clearing parties, how much work has been done to make sure that that is resilient, and do you think this is a real risk to the global economy?

MR. NATALUCCI: Thank you for your question. Let me step back for a second maybe and provide a framework of how we think about Brexit in terms of financial stability risk. The focus obviously in the report is primarily on financial stability risks. We take no stand in terms of what the odds of Brexit deal are or not, nor the severity that may come or what the ultimate deal may be agreed between the UK and the EU, so it is purely a financial stability assessment. The financial stability risk, of course, will be diminished the more prepared the private sector is and the closer the cooperation between the European and UK authorities.

That said, we identify broadly two sets of risks. One, short-term transitional risks as they relate to contractual risks, for example, for derivative contracts, as you indicated, including CCPs, and the recognition of CCPs and the ability to provide services cross-border if one of these should relate to derivatives contracts. Continuity of contracts, primarily is the concern here, although we note, we think that these contracts remain valid in principle. It relates also to insurance contracts. There are operational risks related to banks, insurance companies, asset managers, and so on. Those are like transitional short-term risks. There are also medium-term challenges that relate to the ultimate deal that will be reached, and so those have to do with the risk of fragmentation of liquidity, the possible duplication of trading venues, and relating efficiencies, risk management issues for financial institutions, as well as data sharing.

So, generally speaking, the policy recommendation here is that the private sector should continue to be prepared and prepare for whatever the ultimate Brexit deal is, that authorities should continue to engage with the private sector and make clear what the contingencies are in the event of a hard Brexit, as well as, of course, be ready essentially for whatever the ultimate agreement would be.

QUESTIONER: Just one quick follow-up. What about the shock effect of a cliff edge Brexit; would not that have a disruptive effect on financial markets and the whole financial system?

MR. NATALUCCI: The issue obviously is an issue of continuity of financial services, so to what extent financial services will continue to be provided and the extent to which cross-border flows, for example, may continue. That requires taking a stand on what the likelihood of Brexit deals are and what the ultimate deal is, which at this point I do not think we would speculate on that.

QUESTIONER: Mr. Adrian, you said about the trade tensions, and it is very clear that the IMF when you read the World Economic Outlook and the Global Financial Stability Report, it has a clear concern about the increase of the trade tensions. The question is this; how the trade tensions would escalate in a way that could put in danger the financial stability in the world. And the second one is about can you give after some more details about the information that you provide that there is 5 percent of risk to outflow for emerging markets in the period that you said has four quarters. Thank you very much.

MR. ADRIAN: Thanks for the question. So, the first question is about the impact of trade tensions on global financial stability, and the channel that we are highlighting in the Global Financial Stability Report is the confidence channel, so the impact of the trade negotiations or the trade tensions on investor confidence. What we have seen already in China is that financial conditions have tightened significantly this year, and the trade tensions are one of the factors that have led to this decline in investor confidence in China. Of course, the Chinese authorities have started to undertake expansionary monetary and fiscal policies in order to offset this shock to confidence.

Now, globally financial conditions remain easy, and what you can see in equity markets in particular is that certain sectors that are particularly exposed to trade – so, for example, those Chinese companies that are particularly relying on exports to the U.S. or U.S. companies that are particularly relying on exports to China – those companies have underperformed relative to the broader market in the U.S. or respectively in China. But broadly in the U.S., financial conditions do remain easy, and the danger is that at some point those trade tensions are going to adversely impact investor confidence, hence global financial conditions. And we know from economic analysis that those confidence shocks can have significant adverse consequences for macroeconomic activity. So, there is really a tight macro-financial link that can give rise to downside risks, and we are quantifying those downside risks; if there is a long-lasting shock to investor confidence coming out of trade tensions, that can generate significant downside risks for the global economy. We have a box where we are quantifying that kind of mechanism.

Secondly, you are pointing to another calculation that is about our baseline assessment of what the monetary policy tightening is going to do to emerging markets in the medium-term. What we have seen over the past two years is that the Federal Reserve has tightened monetary policy, so interest rates have increased in the U.S. The 10-year rate is now over 3 percent, and it has also started to normalize its balance sheet; and, furthermore, the dollar has appreciated recently. So those are outcomes of the tightening. And in our assessment, tightening is going to continue, so that is going to put further upward pressure on interest rates, upward pressure on the dollar; and in general, financial conditions for emerging markets are expected to tighten going forward. That is going to trigger some outflows of capital that has flown very strongly from advanced economies to emerging markets in recent years, so that flow of capital is going to slow down somewhat. And in adverse scenarios, there can be an abrupt reversal of flows, and this is exactly the $100 billion number that you are citing. In an adverse scenario where global financial conditions are tightening, we do expect that such a capital flow reversal from the advanced to the emerging markets might lead to a sharp reversal of capital flows.

QUESTIONER: I would like to ask questions about Indonesia. How do you see the current financial stability in Indonesia, looking at the country's current economic conditions, such as the debt levels, rupiah depreciation, and widening current account deficit, and also the risk of capital outflows? And how do you think is the progress of Indonesian authorities and central bank so far in terms of addressing the financial stability risks, and what are your recommendations to improve it? Thank you.

MR. ADRIAN: Thanks very much for the question. The question is about the Indonesian economy. Indonesia has strong macroeconomic performance. The growth rate projection of the WEO is around 5.1 percent for this year and for next year. Now, that growth rate has been downgraded a little bit because of the increase in oil prices. Of course, Indonesia is a net importer of oil, and that is also one of the reasons why the currency has depreciated this year. Indonesia does have a current account deficit of a little bit more than 2 percent, and so the combination of higher oil prices that went from roughly from $60 to close to $85 this year, that has been associated with a depreciation of the currency. Our advice to emerging markets such as Indonesia is that this kind of flexible exchange rate adjustment to adverse shocks is actually a good thing; when a country is hit by an adverse shock such as the increase in oil prices, allowing the exchange rate to depreciate is a shock-absorbing development, and why is that so? Well, think about it from the perspective of international investors: as the currency has depreciated, investments into Indonesian securities such as government debt denominated in rupiah has now become more attractive because the currency has depreciated so much. Because there is a current account deficit, Indonesia has to fund itself externally from international investors. That is why an exchange rate depreciation can be a shock absorber, and so that is actually a good thing in our advice.

Now, of course, the Central Bank of Indonesia has also intervened in foreign exchange markets in order to make sure that liquidity conditions in the FX markets are orderly, and that is also very much consistent with the IMF advice on how to stabilize macro-financial conditions.

QUESTIONER: I was just wondering, the last crisis was really triggered by a collapse in housing prices in the United States. As you look forward to what might be strong policy for the next crisis, I am just wondering sort of where that vulnerability might be? Is it financial asset prices that have gotten frothy? Is that likely to be sort of a collapse in those prices under one of these scenarios that you have described here? Is that possibly the trigger for the next crisis, or is it just unknown?

MR. ADRIAN: In our financial stability framework, we distinguish shocks and vulnerabilities, so our financial stability assessment relies on assessing to what extent vulnerabilities have built that can lead to sharp downward dynamics if adverse shocks are realized. There are many adverse shocks that can materialize, but how bad of an impact that has on macroeconomic activity depends on the level of vulnerabilities. And we see three particular vulnerabilities that we worry about. One is the overall level of debt in the nonfinancial sector. That has increased to around 250 percent of GDP, so there has been a sharp increase of debt in the nonfinancial sector. Now, of course, the banking sector is a lot safer, there is more capital in banks, and banks now have a resolution regime, so we do not necessarily envisage a return of the 2008 crisis, but there is a lot more nonfinancial sector debt out there, so that is one particular vulnerability.

A second vulnerability is that while the banks are safer, there is a lot more credit intermediation in the market-based financial system that is undertaken, and we do see deterioration of underwriting standards to some extent there, so perhaps Fabio can elaborate on that a little bit in a moment.

Thirdly, of course, there are some countries such as China, where the run-up of debt has been particularly fast and where there is a large shadow bank system that is still operating. Of course, the Chinese authorities have realized that the high-level of debt is a financial stability risk, and they have tightened regulations, and those are steps that we are supporting very much.

So, these are sort of like the levels of vulnerabilities that have built up, so there are different vulnerabilities, as you point out, compared to the vulnerabilities that you saw ten years ago, but they are still concerning vulnerabilities. Now the trigger could be adverse shocks in different ways, for example, inflation that is higher than expected in the U.S. that will lead to a sharper-than-expected tightening of monetary policy at some point. That could be one trigger. A disorderly Brexit could be another trigger. And we list a number of other risk factors that could materialize. And, of course, the first thing that would happen is a sharp reversal of financial conditions. Global financial conditions have tightened a little bit in the past week, but they remain fairly easy than longer-term historical standards. Equity market valuations are fairly elevated. Credit spreads are fairly tight. Volatilities are fairly low, and so overall asset prices are fairly elevated, and so there could be a sharp adjustment at some point in the future. And then it is this interaction between the buildup of vulnerabilities and the decline in asset prices that can generate adverse implications for macroeconomic activity.

So, [Fabio] do you want to say a little bit more about the underwriting standards?

MR. NATALUCCI: As Tobias mentioned, essentially, we follow a number of vulnerabilities that you can think of as amplifiers. Debt leverage is one we looked at. Asset valuation is another one. Liquidity and maturity mismatches, interconnectedness. Specifically to the asset valuation, the report highlighted a few asset classes where valuation might be stretched. One is equity prices in the U.S. where we think that they are somewhat stretched based on fundamental values. Then credit, so credit spreads are very tight, tight by a number of measures in absolute terms when you account for default risk, when you account for leverage, and underwriting standards, one of the features that likely contributed to the overvaluation in the credit space.

One difference, perhaps, if you compare to the crisis ten years ago, is that some of these products were being financed on leverage, so there was a lot of financial leverage in the system that would actually contribute to the overvaluation. Now, our assessment that the banking sector is safer is that that level of financial leverage in the system is much lower, which means if there is a price adjustment such as a reassessment of valuation or credit, because there is this financial leverage in the system, the price adjustment would be less forceful than perhaps we have seen in the past.

Related to this, also parts of credit, as Tobias mentioned, is being now intermediated outside of the banking sector, so that could be one issue if you consider what kind of tools are available to intervene into what used to be called the shadow banking sector, market-based finance, whether there are tools, whether there are data, whether there is visibility. So that is one concern there.

MR. ADRIAN: Let me just add one more vulnerability. Of course, with the tighter regulations, the market-making activity has changed quite dramatically, and we do not know yet how these changes in the market-making, so the broker-dealers, broker-dealer assets used to grow very fast, and then they collapsed during the financial crisis, and they stagnated after the financial crisis. So we do not know how market-making is going to act in a sharp adjustment of asset prices.

We have a box on market liquidity in the Global Financial Stability Report where we point out that high-frequency trading activity has become much more important today compared to ten years ago, so the traditional market makers, like the major investment banks, are relatively less important, and these high-frequency trading firms are relatively more important, and we do not know yet to what extent that kind of market-making is resilient relative to very large adjustments, downward adjustments, in asset prices. It is just sort of like an unknown that is important to keep in mind.

MR. NATALUCCI: Generally speaking, a couple of words on liquidity. A general assessment is liquidity in normal days seem to be ample and available. We have seen, though, an increased frequency of these flash crashes or events where liquidity goes away briefly for a period of time. They have not had major macroeconomic impact so far, and so the assessment remains positive; but we caution that the possibility that essentially that they could be more frequent going forward, and that as rates continue to go higher because of normalization of monetary policy, as the macroeconomic environment changes, we need to continue to monitor essentially liquidity conditions.

QUESTIONER: Could you address the situation in terms of the forex intervention; what are your recommendations there? Because I come from South Africa, and the Reserve Bank does not have an intervention policy. Their policy is no intervention. And then, secondly, in terms of vulnerabilities, have you modelled what happens if Italy exits Eurozone but remains in the European Union?

MR. ADRIAN: Let me start with South Africa. So South Africa is an economy where foreign exchange hedging instruments are well-developed, so corporates can hedge their FX exposure. When a corporate issues debt in U.S. dollars or in euros, it can readily hedge the foreign exchange risk in OTC markets, in derivatives, in FX swaps, and futures, or other forms of derivatives. In those circumstances, as I pointed out earlier, the exchange rate is a useful buffer for adverse shocks. Of course, South Africa was hit by adverse shocks. It had two consecutive quarters of negative growth. So, the depreciation of the rand makes investments into South Africa that much more attractive, and so it allows corporates, banks, and the sovereign to continue to borrow.

The recommendation of the Fund is to use exchange rate flexibility when these domestic markets are well developed. In other countries where that is the case, for example, Australia or Canada, where large fluctuations in exchange rates are used as a shock absorber and that works very well. Now, of course, there are other countries where derivatives markets are not developed all that well, and there some form of FX intervention to make sure that FX markets are orderly can be useful.

On Italy, as you know, there was a preliminary budget that was proposed, and the budget deficit was somewhat higher than had been expected by markets. As a result, Italian sovereign spreads have widened quite a bit, and yesterday in the trading session they continued to widen; so we really have to look at the political process, what is going to happen, whether they will get to some sort of compromise that markets will judge as sustainable. We are, of course, discussing the Italian situation, but we do not provide particular numbers for the kind of concerns that you raised.

QUESTIONER: You talked about the need for regulators in emerging markets to develop new tools to tackle financial system risk. Specifically for Nigeria, we have seen some [inaudible] outflows. What are you recommending to the monetary policy authorities who see tight monetary policy? Are you advising that they continue on that path? And for the fiscal authorities, what form of response would you advise them to adopt? Thank you.

MS. ILYINA: Thank you for the question. Nigeria, like many other emerging market countries, has come under market pressure since mid-April. It was a combination of factors that basically affected emerging and frontier markets. It started with the sharp appreciation of the U.S. dollar in the context of rising U.S. interest rates and, of course, emerging markets and frontier markets being active borrowers, and hard currencies are very sensitive to changes in external financing conditions, so that affected sort of the broad market asset class. But what we can see very clearly is that those countries that had stronger economic fundamentals and policy frameworks and less external financing needs and external imbalances have been clearly less affected. Also, some of the outsized currency moves that we have seen, like in the case of Argentina and Turkey, have been driven largely by country-specific factors that are not necessarily related to the global environment.

In the case of Nigeria, there is one other important driver that always affects its external borrowing costs and economic conditions more broadly, and that is oil, so Nigeria being an oil exporter is obviously very sensitive to changes in oil prices.

In terms of policy responses, of course, flexible exchange rate is the first line of defense. Allowing the exchange rate to act as a shock absorber is helping the economy adjust to the new external environment. In terms of FX interventions, of course, FX interventions might make sense in certain circumstances, but then one has to consider how exchange rate is valued relative to fundamentals, what is the level of reserves, whether there may be other policy tools that might be more appropriate in country-specific circumstances, and so on so forth.

Another thing that I wanted to mention is that given that we are still sort of in the relatively early stage of monetary policy normalization in advanced economies, one can expect global financial conditions and external financial conditions for emerging markets to remain challenging going forward. So this is likely to be a sort of relatively protracted period of volatile capital flows and pressures in the markets, and therefore in this situation, one should use foreign exchange reserves judiciously while thinking about future, maybe more extreme periods and bouts of volatility.

QUESTIONER: [through interpreter] - I am from Colombia. Since 2013 I have been attending these meetings, and I was pleased when in 2015, they introduced Indonesia as the venue, so I thought it would be great to be able to make that trip. When you looked at debt, as you see this as a problem of governments, but you look at 21 countries. What about all the other countries, and also what about other types of debt, debt in families, for instance, and also corporate debt?

MR. ADRIAN: Thanks so much for the question. We focus in the report, of course, on the one hand, on debt in the financial system, but then also on debt in the household sector, the sovereign sector, and the corporate sector. And one of the key considerations from a policy point of view is not only the level of debt, but also who has access to finance, so what is the level of financial inclusion in an economy, are households and corporations able to borrow in financial markets or from banks? What we have seen in recent years is that new technologies, what we label fintech, have really changed and improved access to finance for households in a number of countries, including low-income countries and emerging markets. So, for example, in Kenya and in some other Sub-Saharan Africa countries, fintech through mobile phones has vastly increased access to finance and has really spurred a new form of entrepreneurship, new businesses, and new forms of income.

We have also seen that in China, where fintech is very large, this is driven by the large tech companies in China that have started to act as lenders as well and to provide payment services as well. So, these kind of fintech developments and new technologies really can increase financial inclusion and can foster growth. Of course, at the same time as they foster inclusion and foster growth, they too come with new risks, so one risk is the cyber risk. They all rely very much on technologies such as mobile internet, and they are subject to cyber risks.

Secondly, they start to be large in some countries, so some countries now have a majority of their financial intermediation via phone operators or via mobile banking, and that brings with it a new set of financial stability risks that have to be considered carefully.

Tomorrow there will be an event on the Bali Fintech Agenda that broadly outlines our thinking, the thinking of the IMF, the International Monetary Fund, and the World Bank, on fintech related issues, and I would recommend all of you to attend that session. That will be very interesting and pointing to future opportunities and risks.

QUESTIONER: You mentioned to us that the house prices in these global cities are richly priced. I just wondered what the risk is about highly priced houses in capital cities such as London, and what is the financial stability risk, how bad is this risk, and what policy should be taken? Should speculative capital inflows into these property assets be curbed or constrained in some manner?

MR. ADRIAN: Thank you for that question. Of course, financial crises are often associated with sharp adjustments in housing prices. That has been the case for many, many decades and many countries across the world. So, when we see an increase in housing prices, we worry because housing finance is often associated with mortgage debt, right? From a household perspective, mortgage is often the main vehicle through which households can take on leverage. That exposes them to house price risks. And the banking sectors are exposed to the households because in many countries around the world, mortgages are one of the major assets on bank balance sheets.

What we worry about is when we see economies where housing prices are rising, and household debt is rising at the same time, and there is also potential for underwriting standards to deteriorate. Our recommendation for many jurisdictions where we see such developments is to deploy prudential tools actively. And many jurisdictions have done that. That includes for example, cities such as Hong Kong, but also jurisdictions such as Canada and Australia where authorities have deployed macroprudential tools actively in order to make sure that underwriting standards are conservative, are safe, so they have put limits on DTI ratios, debt-to-income ratios, loan-to-value ratios. They have triggered countercyclical capital buffers in some jurisdictions, and they have used a number of tools. This is something we generally support at the IMF.

MR. NATALUCCI: I would just add one quick thought. So there is a section on policy recommendation in the report that looks at macroprudential tools that Tobias mentioned, and there is a table that looks at the availability of these tools across different sectors, and so housing is one, in fact, where there are some tools available, and in fact they have been used in some jurisdictions, so that offers the possibility of actually studying what the impacts are and thinks about possible cross-border effect, too.

QUESTIONER: Are London house prices too high, and should these tools be being used then?

MR. ADRIAN: In this report we do not look at valuations of specific cities, but we are working at the moment on a chapter that is looking at valuations across countries and in different cities, including in London, and that chapter is going to be published in April in the next GFSR, so we will give an answer to your question at that point.

QUESTIONER: My question is about the Chinese government, so the Chinese government has slowed the pace of deleveraging and encouraging the local government to speed up the sales of bonds where it is going to continue the impact of the trade tensions with the U.S. What do you think of this move, and to what level do you think China can continue to build up the debt to support growth without triggering a crisis? Thank you.

MR. ADRIAN: Thanks for the question. The Chinese authorities are undertaking a careful balancing act. Last year, senior policymakers did formulate the objective of moving from high growth to high-quality growth, and that means containing financial stability risks. Of course, as the regulatory tightening has been phased in, these trade tensions have also occurred, and so both monetary and fiscal policies have been eased to some extent in order to balance financial stability goals and growth goals.

MR. NATALUCCI: I think essentially the assessment is that the Chinese authorities are well aware of the financial stability risks. Some of the policy recommendations that the Chinese have set, in fact, they have followed through. They have eased monetary policy now and softened the implementation of some financial regulatory measures in part to cushion the slowing of the economy, in part deriving also from trade tensions. The balancing act here essentially is to consider what the appropriate measures are to sustain growth in the short term without contributing to a further buildup of vulnerabilities that could have financial stability implications in the medium-term. That is the balancing act that they are trying to walk now.

QUESTIONER: In your report here, you state based on a concern about government debt, and in Sub-Saharan Africa yesterday, your report, there was a warning that the governments will have to be careful about borrowing, and my mind tells me that somehow you are referring to Nigeria. So I want to know, at that level now and the challenge of revenue to match the debt, and the government's hand is still on the trigger to borrow more, what do you think is the implication in terms of horizon, application tool for the private companies, private institutions there, and the rest of the economy maybe?

MR. ADRIAN: Thanks for the question. So, the question is about debt in Sub-Saharan Africa. What we have seen in recent years is an increase in countries that issue debt in international capital markets, Sub-Saharan countries that issue debt in international capital markets. That is a good thing for development, right? It is good for development to be able to participate in international capital markets to fund things like infrastructure projects and to sustain investment in countries. Of course, international borrowing has to be balanced with stability objectives, and so countries have to make sure that the level of borrowing is sustainable in the long run so that the country can pay back the debt and the interest rates on the debt even if times get worse at some point, and so that is always the big question: Is debt sustainable even if economic activity slows for some reason?

Of course, in the case of Nigeria, at the moment, as Anna has pointed out earlier, at the moment the rise in oil prices is sustaining economic activity because Nigeria is an oil exporter, but oil prices could decline at some point, and so it is important to have some constraint on how much debt is issued.

As a matter of fact, when you look at debt issuance of Sub-Saharan African countries, we do see a sharp slowdown in issuance in recent months. As financial conditions for emerging markets have tightened, financial conditions also have tightened for Sub-Saharan African countries, and there is some slowdown in the debt, and so it might be that we see less issuance going forward.

Of course, there is going to be quite a bit of need for rollover of debt in 2020 through 2022 in particular. There is quite a bit of debt that is going to come due, so there will be rollover, and hopefully international capital markets will allow that rollover in a smooth fashion.

QUESTIONER: I would like to know your opinion, how did you evaluate the risk, the cybersecurity risk? Are the financial institutions prepared, organized, the structures ready? We are seeing growth on financial services, fintech, but our institutions do not seem to be ready to respond in the risk side. Is it a risk in the stability for the system?

MR. ADRIAN: Thank you for the question. So, when you look at surveys of risk managers in the financial industry, the number one risk that they typically flag is cybersecurity. We have seen the level of cybersecurity attacks rise sharply in recent years, and major financial institutions as well as smaller banks and even central banks are under constant attacks, constant cyber attacks. Some of those attacks do lead to losses for financial institutions. There are many examples that one could cite. There are countries in South America that have been under attack where some banks have been out of business for a couple of days. There are central banks that have been under attack, and it is a risk. It is a major risk. When we look across countries and across financial institutions, we see a wide variety of practices, both from a supervisory point of view and from a bank risk management point of view. So some countries have supervisory frameworks and regulatory approaches to cyber risks, but some countries do not, and we have a technical assistance program underway where we help countries develop a regulatory framework around cyber risks.

We also see that when we look at financial institutions, some institutions have very sophisticated cyber stress tests. They have backup plans. They have second locations. Some even have third locations where if their systems get attacked, they can transfer the activities to a backup location, and some of them have a second backup location; so some institutions are well prepared, but some institutions are not prepared at all.

One of the key challenges in cybersecurity is that it is not a purely technological challenge. It is also the human element that is very important. Cyber criminals often use human weaknesses as an entry point into computer systems, and so they use e-mails and viruses in order to gain access to systems, and it is often the human element that is the weakest element that opens the door to the cyber attacks. So it is a complex issue, and we estimate that potential losses could become macrocritical in some countries, so it is a risk that we are taking very seriously and that we have from a regulatory and from a financial stability perspective.

MR. ADRIANO: Thank you very much, Tobias. We have to finish, but on this note let me again reinforce the invitation for the Bali Fintech Agenda seminar tomorrow with the participation of the IMF Managing Director, World Bank President, Governor of Bank of England, and the special participation from the President of Indonesia, where we will be discussing the Bali Fintech Agenda, which is a joint paper of the IMF and World Bank, which, importantly for you, will be distributed this morning, so you will have the paper 24 hours in advance of the seminar. Thank you very much!

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