Transcript of the Press Conference of the April 2019 Global Financial Stability Report

April 10, 2019


Tobias Adrian, Financial Counselor and Director, Monetary and Capital Markets Department, IMF

Fabio Natalucci, Deputy Director, Monetary and Capital Markets Department

Anna Ilyina, Division Chief, Monetary and Capital Markets Department

Peter Breuer, Deputy Division Chief, Monetary and Capital Markets Department

Randa Elnagar, Communications Officer, Communications Department


Ms. ELNAGAR: Good morning. Welcome to the Spring Meetings of the IMF and the World Bank. This is the press conference on the GFSR, the Global Financial Stability Report.

I am Randa Elnagar from the IMF's Communications Department. We have with us here Mr. Tobias Adrian, the Financial Counsellor of the IMF and the Director of the Monetary and Capital Markets Department; Mr. Fabio Natalucci, Deputy Director of the Monetary and Capital Markets Department; Anna Ilyina, she is a division chief of the Monetary and Capital Markets Department; and Peter Breuer, deputy division chief at the Monetary and Capital Markets Department.

Tobias is going to give some opening remarks, and then we will take your questions.

Mr. ADRIAN: Good morning, everybody. Welcome to the release of the Global Financial Stability Report. This year, we not only have the report; we also have a little brochure that highlights the key messages. So I welcome all of you to take one of these at the end of this press conference.

After years of economic expansion, global growth is slowing, sparking concerns about a deeper downturn. The credit cycle is maturing. Financial vulnerabilities continue to build in many countries and could amplify a slowdown.

Over the past six months, financial conditions have been on a roller coaster, tightening sharply at the end of 2018 as downside risks to global growth increased. A dovish shift to monetary policy supported the easing of financial conditions, mitigating short‑term downside risks to global growth.

Yet downside risks to growth in the medium term remain elevated. Under an adverse scenario, global growth could be negative three years from now. This means that policymakers should take careful steps to limit the buildup of financial imbalances, even as they focus on avoiding sharper economic slowdowns in the near term.

Today's report launches a new framework for the comprehensive and systematic assessment of balance-sheet vulnerabilities. The analysis presented in the report shows that vulnerabilities are particularly elevated in the sovereign, corporate, and non‑bank financial sectors in several systemically important countries. Furthermore, the report provides an in‑depth analysis of a number of specific vulnerabilities.

In advanced economies, corporate debt and financial risk-taking have increased. The creditworthiness of borrowers has deteriorated. So‑called leveraged loans to highly indebted borrowers continue to be of particular concern.

In the euro area, fiscal challenges remain in countries that have worries about the sovereign‑financial sector nexus. If sovereign yields were to rise sharply, banks with large holdings of government debts could face significant losses. Insurance companies could also face losses on their bond portfolios.

In China, authorities face a difficult trade‑off between supporting growth in the face of external shocks and containing leverage through regulatory tightening.

Weaknesses at small and medium‑sized banks — low profits and capital buffers, and large, unrecognized shadow-banking credit — are restraining new lending to private firms. Further monetary and credit support may exacerbate the existing financial vulnerabilities, as faster credit growth will make it harder for smaller banks to clean up their balance sheets.

In emerging markets, overseas investment run by managers tracking popular indices have increased dramatically over the past decade. Widening the range of investors can be a positive factor for emerging markets, yet that trend leaves these economies vulnerable to a sudden reversal of capital flows in response to global trends.

Chapter 2 of today's report considers housing at risk. Assessing the odds of a large decline in house prices is crucial for the policymakers because of their great influence on the overall economy. Downside risks to house prices have rotated since the global financial crisis. On average, countries that were more at risk in 2007 are less so today.

Macroprudential policies seem to be able to reduce downside risks more effectively than monetary policies or capital-flow management. Nonetheless, these macroprudential policies could help in certain situations when the macroprudential toolkit is not available and time is of the essence.

With vulnerabilities intensifying [and with] a maturing credit cycle, this is the time for decisive policy action. There is no room for complacency.

The intensification of trade tensions and the threat of a disorderly Brexit have dented investor confidence. Policymakers should resist inward‑looking policies, avoid policy missteps, and resolve policy uncertainties.

Policymakers should ensure that post‑crisis regulatory reform is fully implemented. They should resist calls for rolling back reforms. Policymakers should develop and deploy macroprudential tools which can mitigate vulnerabilities and make the financial system more resilient. In the eurozone and China, efforts to repair balance sheets and reduce leverage should continue.

Emerging markets facing volatile capital flows should limit their reliance on short‑term overseas debt, and they should ensure they have adequate foreign currency reserves and bank buffers. Monetary policy should be data‑dependent and well‑communicated.

To sum up: Policymakers should act decisively to renew their commitment to open trade, to discourage the buildup of debt, and to communicate clearly any shifts in monetary policy. In the maturing credit cycle, far-sighted policy actions to reduce vulnerabilities can help avoid more painful adjustments in the future.

Ms. ELNAGAR: Thank you, Tobias. We are ready to take your questions. Please.

QUESTION: Do you see some kind of risks in the Mexican financial system by the link between the banks and the oil company PEMEX?

And I have another question, please. Last year, we had in Mexico a cyber attack. I want to know if you have a diagnosis about it and if you think that we are in a better position to face another severe attack. Thank you.

Mr. ADRIAN: Let me start with the question about the cyber attack. So large financial institutions and governmental agencies around the world are under constant cyber threats. Cyber attacks occur frequently in major financial institutions, in central banks; but even at institutions like the IMF, we see cyber attacks. So, in general, we do expect more cyber attacks. The question is, are authorities taking the right steps to prevent any adverse developments after these attacks? We have started to provide technical assistance for that particular purpose, and we are helping our membership to develop a policy framework around cyber attacks.

Ms. ILYINA: So let me just elaborate a little bit on your question about market concerns on PEMEX. As you know, the credit rating of PEMEX has been put on a watch recently after a downgrade. And currently, it is only one notch above junk by both Moody's and Fitch. And this is despite government support packages for PEMEX that have disappointed the markets, given growing debt stock and mounting investment needs.

The main recommendation that was made by our country team was to come up with a comprehensive business plan for the company to avoid creating large contingent liabilities for the sovereign. But, of course, you know, sovereign is currently [in] no risk of any sort of significant spillovers to its credit rating from the situation in PEMEX.

QUESTION: (Inaudible) Had a question for PEMEX. I want to know if they are in some kind of danger because of the situation in PEMEX.

Ms. ILYINA: So currently, the level of capitalization in the Mexican banking system is adequate, and there are sufficient buffers to withstand the wide range of shocks. So the specific exposures of individual banks to individual companies is not something we usually comment on.

QUESTION: My question is that Indian--what is your view on the Indian banking system when there is this high NPA but at the same time, our Supreme Court turned down an important measure by the Reserve Bank of India that says that you have to recognize NPA because you have to recognize the default if it is not serviced within 90 days. So that is being interpreted as a setback. What is the IMF's view on this?

Mr. ADRIAN: So there continues to be a high stock of NPAs in India. And there has been some progression, but we would welcome further progress on the nonperforming assets in India.

Ms. ILYINA: As you pointed out, the level of nonperforming loans in India remains high. And the level of the capitalization of some banks, particularly government‑owned banks, should be bolstered. This is also one of the recommendations of the Financial Sector Assessment Program (FSAP) for India that took place fairly recently.

There were some steps that were taken by the authorities to boost capital buffers in banks and also to improve governance in state‑owned banks that have had some positive impact. I mean, in particular, we have seen average price to [book] ratios for Indian banks improving somewhat. And the institutional mechanisms for resolution and the recognition of NPLs are, of course, an extremely important part of the process of cleaning up the banking system of nonperforming loans. And I think the authorities should continue working along these lines.

QUESTION: The issue of the sovereign‑bank nexus and that sort of time bomb that we all remember from 2011‑2012, with the kind of fear in Spain and the rest of the eurozone periphery. I wonder if you could--

Yesterday in the WEO, there was a mention that a disorderly Brexit could trigger a flight to quality in the eurozone. And I wondered if you could comment on that and other things that you fear may trigger or could trigger another debt crisis in the eurozone. And whether you think that the European Central Bank, which for several years [would do] what it takes to kind of bring comfort to us all. Is that now less of a guarantee?

Mr. ADRIAN: The sovereign-bank nexus is a particular vulnerability that can amplify any adverse shocks. So adverse shocks could realize in many different ways. Brexit is one possibility where a negative shock could realize, but there are other negative shocks that could occur. The sovereign‑bank nexus is a potential amplifier when sovereign spreads are widening sharply.

Now, what we saw last year is that Italian sovereign spreads widened sharply, but that did not have adverse repercussions on other peripheral European countries, such as Spain or Portugal. So that was a fairly reassuring event, actually. There was a lot of differentiation across those banks.

Now, in general, European banks are better capitalized. The level of nonperforming loans has declined in Europe. But in some countries, sovereign exposures have increased, and that is a particular concern that we are flagging and discussing in the report.

QUESTION: Could you talk a little bit more about the corporate debt concerns that you have got? You said 70 percent of global output is vulnerable. What do you mean by the corporate debt being elevated, the risks being elevated? And is this a risk to financial stability on a similar level to the eurozone crisis or the global financial crisis?

Mr. NATALUCCI: So the starting point of the analysis was that there has been slowing, the global economy is slowing. There have been market gyrations over the last 6 months that have affected risk assets. So that has kind of, like, raised investor's concerns about the health of the corporate sector. So you mentioned the 70 percent of systemic countries is one example that will come out from the [map] that Tobias has shown before.

Now, we look at the indicators of credit cycle. Specifically, we compared the U.S. with the euro area. It looks like the comprehensive indicator or corporate sector that takes into account corporate fundamentals, as well as financial risk taking, it is at record high in recent history for the U.S. Of course, we need to keep in mind that there are differences in the underlying market structure. So, for example, the role of market‑based finance is much higher than it was in the past. So comparing periods. It is tricky in some sense.

We know that insurance companies, pension funds play a much larger role; that foreign investors now account for 25 to 30 percent of the investors. Then we have a section in the brochure that shows the BBB, for example. So the lower‑rated segment of the investment grade is now quadruple over the last decade and accounts for 50 percent.

So there are some signs of deteriorating credit quality, deterioration in underwriting standards. So the analysis tried to look at, what happens if you have a slowdown in the economy or a tightening of financial conditions? So the assessment is, if it is a moderate slowdown in the economy and a gradual tightening of financial conditions because debt service capacity has improved, balance sheet is stronger, then they should be able to weather without major problems. But if there is a much more severe slowdown in the economy and much tighter financial conditions, so more sudden and less gradual, then it could be a problem for some firms, for a [weak tail] of these firms, particularly because the credit quality has declined, underwriting standards are weaker, and debt levels are much higher.

Mr. ADRIAN: So a particular concern in this area is that there are very few macroprudential tools for the corporate sector. In some countries, supervisors can limit the deterioration of underwriting standards to the extent that credit is provided by the banks. But, of course, one of the big trends post‑crisis is that market‑based finance has become more important for the corporates. And there are very few prudential tools. So one of our policy recommendations in the report is to develop macroprudential tools for the corporate sector.

QUESTION: We know that China is investing heavily in Africa, from Djibouti to Ethiopia, almost everywhere in sub‑Saharan Africa. What do you think is the risk of Chinese investment in Africa? Especially because some of the loans that they give are given to corrupt, unaccountable governments. Thank you.

Mr. ADRIAN: Thanks very much for the question.

So lending--capital flows, in general--and this includes capital flows from China--are, of course, important for development, on the one hand. On the other hand, what is very important in those lending arrangements are the terms of the loans. And we urge countries to make sure that, when they borrow from abroad, that the terms are favorable for the borrower. In particular, we tend to recommend that loans to countries should be conforming to Paris Club arrangements. And that is not always the case in the case of loans from China.

In terms of governance issues, the Fund is very focused on that issue. And good governance is extremely important in making sure that capital flows are channeled to productive sources. So we share your concern there.

QUESTION: Here in the United States, there is a debate over modern monetary theory. And this possibly could encourage Democrats, should they take back the White House, to spend a lot more and really load up debt for infrastructure, a green New Deal, whatever. I am just wondering what your view is on this debate and whether this will put more pressure on sovereigns, whether--if the U.S. goes this way, it will encourage other countries to do so. Thank you.

Mr. ADRIAN: Well, in our view, there is no free lunch. We have seen again and again around the world and over time that unsustainable fiscal policies are problematic. They can incur--they can trigger crisis. And countries are becoming more vulnerable when debt is very high. As a matter of fact, in the report, we are flagging the rise of sovereign debt as one of the risk factors going forward. Of course, with the lower interest rates globally, there is a tendency for countries to take on more debt, but it is risky.

QUESTION: In the second chapter of the report, you said that house prices are high recently all over the world. And I want to talk about the Arab world and Egypt specifically, that a [price house] spiked and hiked at a very, very increased rates. So I need to know your opinion or comment regarding the effects of these prices, if it continues, on the GDP. And what are the IMF's efforts in handling these issues? Thank you.

Mr. ADRIAN: Thanks for the question.

So this Analytical Chapter on house prices is particularly interesting. What we show is that downside risks to housing prices are really determined by four factors. Devaluation ratios, like price to rent ratios are important. And I think this is what you are referring to. Overall financial conditions are important. Overall credit to GDP. And then GDP growth. Those are four factors that determine how much downside risk there is to housing prices.

And what we find is that, in close to 30 percent of both advanced and emerging markets, house prices are at risk at a similar magnitude as what we saw in 2007 prior to the financial crisis in the U.S. So there is an increased level of housing at risk in many countries. And I would invite you to take a look at our Article IVs that are flagging risks in particular countries. In this report, we do not publish individual country results, but in the Article IVs, we do discuss those risks.

Ms. ELNAGAR: We will take a couple of questions online and then get back to the room.

There is one from Nepal: Could you please explain the possible financial shocks that low‑income countries could face in the aftermath of natural disasters and climate change? What should they do to minimize the risks?

Mr. ADRIAN: That is an excellent question. And it is a difficult question.

We all know that climate risks are on the rise. Our report on global financial stability is primarily focused on risks two to three years into the future. And some low‑income countries are facing climate‑related challenges at that horizon. Many other countries are facing climate‑related risks at a more medium‑term horizon. We urge all of our membership to take precautionary steps in order to address those risks. And, of course, the IMF is ready to provide help to countries that are hit by adverse climate shocks or climate‑related adverse shocks.

Ms. ELNAGAR: I will take one more online.

What would you tell monetary policymakers that face a trade‑off between growth and financial stability? Example: Economies face expected slower growth this year but also face elevated financial stability risks that are being elevated further to accommodate financial conditions.

This is from Central Banking Publications.

Mr. ADRIAN: Yes. So interest rates are low around the world. And when we look at yield curves, we can expect interest rates to remain low around the world in many countries. That can fuel higher valuation levels because future cash flows are discounted at a much lower rate. And that is giving rise to financial stability concerns.

Our first order advice to authorities is to use prudential tools, both micro and macroprudential tools, such as higher capital in the banking system and more conservative underwriting standards in the mortgage market but also in other sectors, such as the corporate sector. That is the first order consideration and, in principle, if sufficient tools are available that can mitigate those financial stability risks.

Of course, when we look at countries around the world, many countries do not have all of the tools that are necessary to make sure that the system is financially stable. And, as a result, financial stability concerns can feed into monetary policy decisions. So we do urge monetary policymakers to also look at risks to financial stability both in the short term and in the medium term.

Ms. ELNAGAR: The gentleman in the first row.

QUESTION: We have seen some trends taking place around the world that I think start to question the ability of the IMF or any institution to carefully monitor what is happening--an increasing privatization of assets, including debt instruments and a derivatives market which continues to grow; a continuing offshoring of an awful lot of capital. Are you concerned that the IMF and everyone is losing the ability to carefully track the flow of capital and funds across the world?

Mr. ADRIAN: It is certainly challenging to track all flows around the world. And there are data gaps. We urge authorities to do whatever they can to collect the data that is necessary to gauge flows.

In our Financial Sector Assessment Programs--we have done over 100 over the past 20 years. It is the 20‑year anniversary this year of the Financial Sector Assessment Program. This is where we take very, very detailed looks at countries, including at flows of capital across borders. And we work with authorities, including with supervisory data, to gauge the risks from any such flows. But we do acknowledge that there are data limitations.

In our analysis of the Global Financial Stability Report, we primarily rely on publicly available data, and we do complement that by talking to investors as well as authorities. And we find that the combination of using the publicly available data with market intelligence is very revealing. But, yes, we do share your concern.

Ms. ELNAGAR: The lady with the white jacket in the second row from the back.

QUESTION: In terms of China's monetary policy, I am wondering, is there still any need for further easing monetary policy? Also, is there still room to cut interest rate and reserve requirement ratios? Thank you.

Mr. ADRIAN: China has cut reserve requirement ratios four times last year. And short‑term interest rates have declined quite dramatically, from around 4.5 to 3 percent. So there has been monetary easing. And that monetary easing has helped China to sustain its growth momentum in the face of headwinds from trade conflict and also from the efforts of regulators to tighten regulations.

What we saw in China for many years is that leverage increased in the banking sector, the shadow banking sector, the corporate sector and, more generally, in the economy. And so about two years ago, China started to restrain the buildup of leverage in order to make sure that the system is safe.

For the moment, we view these monetary policy actions as appropriate.

QUESTION: I would like to know, how do you see the Moroccan banking sector? And what are the main risks faced by the Moroccan banks? Thank you.

Mr. ADRIAN: Thanks very much for the question. We do not specifically focus on Morocco in this report, so we do not have anything specific to say at this point. But we would point you to the regional press briefing that is going to occur later this week, where you can ask very country‑specific questions.

Ms. ELNAGAR: The gentleman in the front.

QUESTION: I am from Daily Trust Nigeria. We have seen debt levels increase in the country almost [nearly to the levels we were] before the debt forgiveness the last time. And largely, they consist of the Eurobonds, which you have advised the emerging countries to cut down on short‑term funds. How do you think this would impact stability in Nigeria with regards to debt to GDP? Thank you.

Mr. ADRIAN: So Nigeria has been borrowing [on] international markets. But we worry--

On the one hand, that is very good because it allows Nigeria to invest more; but on the other hand, we do worry about rollover risks going forward. At the moment, funding conditions in economies such as Nigeria and other sub‑Saharan African countries are very favorable, but that might change at some point. And there is a risk of rollovers, and there is a risk of whether these needs for refinancing can be met in the future.

Ms. ELNAGAR: The gentleman in the third row.

QUESTION: Especially I would like to raise a question on South Asian economy.

The South Asian economy is especially growing very fast, and there is a broad sense that it will grow by 7 percent in 2019 and also in 2020.

So in the case of Nepal, if we say that there is a huge demand of credit from the banks and financial institutions. And the IMF, it has suggested Nepal [Rastra] and the Central Bank of Nepal to cap their optimum threshold of credit expansion. That is 80 percent of the deposit per square capita. And there are [diverse] that we should further cap the [optimal] lending level. So what would you suggest? We should maintain CCD or not?

Mr. ADRIAN: So, again, we do not give advice on the policies of specific countries here. We do the Financial Sector Assessment Programs for that. And, again, there will be a regional press briefing, where you can ask questions about specific countries.

In general, our framework is that we gauge downside risks. So we have a financial stability metric that is the downside risk as a function of financial conditions and financial vulnerabilities. So the credit to GDP, for example, and other metrics of leverage of financial are financial vulnerabilities, while financial conditions are more related to prices. And we do advise countries, where those downside risks are increasing, to take more steps in order to make sure that vulnerabilities are not rising too much.

I am going to turn to my colleague Peter who is going to say a little bit more about our systematic assessment of financial vulnerabilities.

Mr. BREUER: Thanks, Tobias.

So in this GFSR, it is really an innovation of what we call the indicator‑based framework, which helps to identify and monitor financial vulnerabilities across sectors and countries.

Vulnerabilities increase financial risk by magnifying and propagating the effects of adverse shocks. So tracking them, these vulnerabilities on a systematic basis, helps to prioritize and sharpen policy recommendations. We essentially do this by collecting indicators by vulnerability type--like leverage, currency, maturity mismatches--across a number of sectors--banks, non‑banks, households, and so forth. In total, we collect more than 50 indicators for 29 countries. And the online annex really has more detail on exactly how we go about doing that.

The results are summarized in Figure 1.4 of the report, where the top panel really shows the proportion of systemically important countries with elevated vulnerabilities and the corporate vulnerabilities we already mentioned. And then there is a second panel that shows the distribution across regions and sectors.

Ms. ELNAGAR: Thank you. Further questions? The gentleman in the second row from the back.

QUESTION: We have seen over the past few years increasing polarization within politics in particular countries and, at the same time, a rise of more autocratic leaders, which I think has clearly led to policy mistakes. Particularly, you could highlight Turkey, the United States. Argentina has an election coming up, where one of the candidates I think would certainly cause a lot of financial market panic.

I am wondering how this impacts the Financial Stability Report, how you all assess the growing threats and all that. How much does politics play a role in your reporting so far? And how much do you anticipate it playing a role in future reports?

Mr. ADRIAN: When we look around the world and, in particular, when we look at countries where we help via programs, we do see that policy uncertainty and, you know, in many cases bad decisions are a root cause for financial distress.

What we have seen in the past two years is that policy uncertainty has been at historically elevated levels. And that kind of policy uncertainty in many countries around the world is a risk factor for financial stability. So we have started to take that more systematically into account. And it is certainly--

You know, recent work at the Fund has shown that this kind of elevated policy uncertainty forecasts downside risks to growth over and above the information that is in market‑based measures.

So, yes, it is a potential stability risk, and we are looking at it closely.

Ms. ELNAGAR: Further questions? The gentleman in the second row.

QUESTION: You mentioned in the case of India, NPL also growing. The same scenario in Bangladesh. The NPL is growing day by day, despite taking some measures by the central bank, [as--raised the] comment. And IMF also, for Article IV mission, recommended to these investors [that a stake of the] state‑owned bank to the private sector. But our government and policy (inaudible) do not take any initiatives. What is the next? Please explain it.

Mr. ADRIAN: So, again, we do not generally comment on specific countries in the financial sector policies.

Now, in general, addressing nonperforming loans is a first order importance for financial stability. Many countries have tackled that by developing a secondary market for nonperforming loans and by being aggressive in terms of writing off [nonperforming] loans and provisioning for nonperforming loans. There has been an important change in the accounting standards, the international accounting standards in terms of how nonperforming loans are provisioned for. And we expect that that is going to improve the situation over time. But that is only slowly being phased in around the world. This is called IFRS9.

Ms. ELNAGAR: We will take one more question and then wrap up. The gentleman was raising his hand.

QUESTION: Could you comment a little bit on the rollover risks faced by some of the developing nations, like such as Sri Lanka?

Ms. ILYINA: Looking across low‑income and developing countries, we can see that public debt levels have increased significantly in recent years in many of those countries. In fact, the median level of debt is now close to 50 percent of GDP. And the number of countries that are now either at high risk of debt distress or are already in debt distress is high. It is over 40 percent. And that is a significant increase, compared to only five years ago, when it was only 20 percent. So these issues are very much on the minds of policymakers in those countries.

The issue, of course, is that, with relatively favorable external borrowing conditions, many of the countries have increased their reliance on market financing. And with that, of course, comes the downside; that their debt service costs may increase when interest rates go up. Also, in some cases, that involved a shortening of maturities. And all of those things lead to a higher sensitivity to interest rate and rollover risks.

So this is a general problem in a number of countries that needs to be tackled through a comprehensive set of measures, which includes a careful monitoring of debt vulnerabilities, improved [debt] data transparency, and increased debt management capacity.

Mr. ADRIAN: Let me just reiterate that in many frontier markets, we see that the share of debt that is not conforming to the Paris Club standards is on the rise. And that means that if there is any debt restructuring down the road one day, that can be very unfavorable to those countries. So the borrowing terms, the covenants, are extremely important. And we do see a deterioration in that dimension.

Ms. ELNAGAR: OK. Thank you very much for coming to our press conference. We have the Fiscal Monitor press conference after this, so we invite you to come. Thank you.

IMF Communications Department

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