Transcript of the External Sector Report Press Conference

July 17, 2019

Gita Gopinath, Economic Counsellor and Director, Research Department

Luis Cubeddu, Division Chief, Research Department

Martin Kaufman, Assistant Director, Strategy, Policy and Review department

Gustavo Adler, Deputy Division Chief, Research Department

Raphael Anspach, Senior Communications Officer, Communications Department

Mr. Anspach: Good morning. Welcome to this press conference on the IMF’s External Sector Report. Delighted that you could be here today with us. Also, welcome to all our colleagues that are following us online. Before we start, let me just introduce you to the speakers of today's press conference. Let me start with Ms. Gita Gopinath the IMF’s economic counselor and the director of the IMF research department. To her left is Mr. Luis Cubeddu. He's the division chief in the research department. To his left Mr. Martin Kaufman. He's the assistant director in the Strategy Policy and Review Department. And finally to my left, Mr. Gustavo Adler from the Research Department a deputy division chief there. Gita will have some introductory remarks and then we'll be happy to take your questions. Gita, the floor is yours.

Ms. Gopinath: Thank you. Good morning everyone. We've just released the latest edition of the External Sector Report. The report provides a multilaterally consistent assessment of external positions of the was 30 largest economies which makes up about 90 percent of GDP. This is part of our continuous efforts to monitor systemic risks emanating from external balances imbalances and discussed policy options to address them. In this year's report we also explore in depth the role of exchange rate flexibility in aiding external adjustment an issue that has elicited significant policy debate.

Let me start by stressing that not all external imbalances are a cause for concern as there are good reasons for countries to run current account deficits or current account surpluses at certain points in time. For example, it's natural for young fast-growing economies to run current account deficits as they borrow from aging economies with weaker growth prospects. But, there are also circumstances when imbalances can be excessive and risky, as countries that borrow too much may be subject to sudden stops in capital inflows. And in addition, countries that run large current account surpluses may be saving too much and therefore be detrimental to global demand. Our job is to assess when external imbalances are excessive. We focused on the overall external position and not bilateral positions vis a vis particular countries. Since it's natural for a country to run a current account deficit with some countries and a current account surplus with other countries depending upon how they specialize in their production. So, our multilateral focus also enables us to say something about the macro and structural policies behind external imbalances. Now, let me turn to discussing the key findings of the report. Significant progress has been made since global imbalances peaked in 2007 at around 6 percent of world GDP. Now they stand at 3 percent of world GDP. Although progress since 2013 has been slow and accompanied by rotation of imbalances towards advanced economies. We assess that about 35 to 45 percent of global imbalances were excessive in 2018. Excess surpluses remain centered in the euro area as a whole. Driven by Germany and the Netherlands and in other advanced economies in Asia like Korea and Singapore. While excess deficits remain concentrated in the United Kingdom in the United States and some emerging economies like Argentina and Indonesia. A noteworthy development is the continued narrowing of China's current account surplus against a backdrop of greater exchange rate flexibility and real appreciation over the last decade. Its current account is now assessed to be line with fundamentals. Although achieving a lasting external rebalancing will require adopting further structural reforms, including to reduce subsidies to state owned enterprises and reduce entry barriers in certain sectors as current expansionary fiscal and credit policies are gradually withdrawn.

The picture of external stock imbalances is less positive as a net external wealth or debtor and creditor countries have continue to diverge, reaching historical peaks. Short term financing risks from the current configuration of external imbalances are generally contained as current account deficits and debtor positions are concentrated in reserve currency issuing countries like the United States. The main short-term risks stem from an intensification of trade tensions or a disorderly Brexit, which can have negative implications for global demand and global risk appetite. Which then in turn can affect economies that are highly dependent on foreign demand and on external finance. Over the medium term, in the absence of corrective policies, trade tensions could become entrenched and a further widening of stock imbalances could trigger disruptive adjustments in key debtor economies that could then spillover to the rest of the world.

So, what can countries do with output near potential in most systemic economies. Well calibrated macroeconomic policies are necessary to support rebalancing. Countries with excess current account deficits need to pursue growth friendly fiscal consolidation. While excess surplus economies should use fiscal policy where available to boost potential growth and achieve rebalancing. Structural policies remain central to tackle external imbalances in general. Excess surplus countries should adopt reforms that encourage investment and discourage excess saving, including by supporting innovation and lowering barriers to entry in key sectors, widening the coverage of social safety nets and addressing distortions behind rising and high corporate savings. Excess deficit countries should strengthen competitiveness in tradable sectors including by investing more in the skill base of workers. Finally, the rise of external indebtedness by sovereigns and corporates in some economies warrants careful monitoring to ensure that there are no growing mismatches in currencies or in maturities.

Let me now say a few words about our analysis on exchange rates an external adjustment which is featured in Chapter 2. There has been a lively debate in recent years over the role of exchange rates in facilitating external adjustment and in particular on how the currency in which trade is invoiced and the role of global supply chains may affect the adjustment process. To inform this discussion we undertook a very thorough analysis of these particular aspects of international trade. In general, we find that the effects of exchange rates on trade flows are relatively muted in the short term. And in economies where trade is largely invoiced in the US dollar, export volumes tend to respond little to exchange rate movements in the short run. This means that the benefits of exchange rate flexibility in terms of external rebalancing or buffering the economy to real shocks may be limited in the near-term. This points to the need of complementing exchange rate flexibility with other cyclical policy instruments. Structural policies may also be useful to strengthen the export response, for example through improvements in the access to credit and better transportation infrastructure. Our analysis also shows that these features of international trade become somewhat less relevant in the medium term and exports and imports respond more meaningfully to exchange rate changes. This means that exchange rate flexibility remains key to facilitate durable medium-term external adjustment.

So, let me finish with some broader remarks. It is imperative that all countries avoid policies that distort trade. Recent bilateral trade actions have had no discernible impact on the global imbalances, as external imbalances reflect macro policies that affect aggregate saving and investment. Instead higher tariffs have been associated with increased prices for consumers and a weighing on global trade investment and growth, including by eroding confidence and disrupting global supply chains. So, while external positions are not grossly misaligned and don't present an imminent danger to global stability, actions of the right type are needed to avoid further widening of stock positions or a re-emergence of more strongly divergent floor positions. Both deficit and surplus countries should focus on tackling the underlying macro and structural sources of imbalances. Instead of resorting to distortive trade actions, countries should work jointly towards reviving liberalization efforts and strengthening the rule based multilateral trade system that has served the global economy well over the past 75 years. Thank you.

Mr. Anspach: Thank you. We'll try to get to as many questions as possible both here in the room as well as online. So, who wants to go first.

Questioner: There's been a lot of discussion, a lot of it emanating from the US President about the strong dollar. I wonder in this report you're again seeing an overvaluation of the dollar although it's a little bit less than it was last year and the year before. Can you just say a word or two about the impact of the strong dollar and what measures from your perspective should be undertaken to sort of bring that more in line with the fundamentals?

Ms. Gopinath Our assessment is that the imbalances that are excessive right now are a reflection more of macro policies and structural policies in the different countries. So, the larger fiscal deficits in the U.S. and the larger fiscal surpluses in some euro-area countries. So, to address the imbalances the right thing would be to address those macro issues. We should also recognize that we see much less of countries accumulating reserves and you know an impact of exchange rates through that. So that's not what we observe and what we see at this point. So again, the right approach would be to focus on adjustments on macro policies and on the structural side.

Questioner: In the report and just now you've said that it's imperative that all countries avoid policies that distort trade. But can you go a little further on that and what you see? Is that a message that's getting through to policy makers and political sphere? And do you see that improving or deteriorating?

Ms. Gopinath: It is our role to continue to put that message out there. We welcome the trade truce between the US and China that came towards the end of June at the G 20 meetings and we would hope that the world would continue to work cooperatively to not only not trigger these trade tensions but also to address the issues with the multilateral trading system. We've always talked about the need to modernize it further to incorporate services trade, to deal with industrial subsidies, and to deal with intellectual property rights. We need to continue to strengthen that system.

Mr. Anspach: I'll move to a question online. This is a question on the surplus countries and more specifically on Germany. The question is how much should Germany ease its fiscal position? And what would be the effect on growth in Germany and the rest of the world of such a change in policy.

Mr. Cubeddu: I'd be very happy to take that question. I'd like to first point out that the Germany Article Four consultation just took place and that the Germany report is currently available online and in a thorough discussion on our views with regards to Germany could be can be found there. In the case of Germany what we find is that their surplus is excessive. Roughly, four to five percent larger than warranted. We also are mentioning that there's a need to ease fiscal policy in Germany. There is fiscal space to do that. But given that output gaps are fairly close and, in some ways, positive fiscal policies should be centered on boosting potential growth. And that's why we're also recommending that the spending takes place in the form of infrastructure that would facilitate again growth potential. We also emphasized quite a bit the area of tackling structural issues and in particular better understand the rise in corporate saving in the case of Germany. So, structural policies have a role to play. And the report did do some good work trying to link the rise in corporate saving, the rise in the current account to issues related to wealth inequality and an income distribution at the very top. And I encourage you to look at this issue.

Mr. Anspach: I'm going to take another question online. This is more on trade and continuing trade tensions. What are the IMF projections about the impact of a continuing trade war between the U.S. and China? And how would that affect Mexico?

Ms. Gopinath: So, yes we've looked into this and we estimated that if you take into account the tariffs that were put in place in 2018 between the U.S. and China and then include the tariffs that were threatened in May between again the U.S. and China then that would reduce the level of global GDP in 2020 by 0.5 percent. So that's what we'd estimate. So this is a significant cost to the global economy and at a time when global trade is already very weak and investment is weak in the world. In terms of implications for countries including Mexico. I think one important factor to keep in mind is that with prolonged trade uncertainty it's weighing on business sentiment everywhere in the world which then has implications for global demand, which then impacts countries like Mexico too. So, this is an important factor that we flag all the time and we'll be doing so again when we release the world economic outlook next week.

Questioner: So, China just released its GDP data for the first half the year at 6.3 percent. Any new policy recommendations going forward for the policymakers in Beijing to maintain growth.

Ms. Gopinath: I think this question would be even more appropriate when we put out the World Economic Outlook update because that's when we will we'll have the updated numbers too. We think it's important for us for China to continue its pivot towards more domestic demand driven growth to ensure that there's less reliance on a credit boom driven growth. And to work on encouraging the private sector, reducing subsidies to state owned enterprises. So, these are the kinds of policies that we would we expect will continue to benefit China's growth.

Questioner: I know that we're talking here in a very structured sort of institutional language, but can I ask you how you assess that the possibility of these sort economies that is now very interconnected pulling apart as a result of all these trade measures. Do you see a sort of a general slowdown in globalization and or is it just shifting to different centers? We see companies moving out of China moving to Vietnam, other places. Is it just a shift or is there actually something sort of fundamental happening now, as a sort of change in globalization?

Ms. Gopinath: We are seeing global trade growth slow, which tells you that this is not just about shifting of trade to different parts of the world but an actual overall reduction in in trade. So, this is having a fundamental impact on global trade. There is certainly are more more being said about companies moving out of China. Now given that as China has grown and has if wages have risen in China, there were companies already looking for other countries to produce in that would be more competitive on the wage front. This particular set of trade tensions certainly accelerates that process. And so that also is playing out. But again, it is a loss in terms of the sum which is that there has been a decline in in world trade growth. And the concerns are not just on the trade side but also on the technology side because technology tensions have also risen. And that also has the possible impact of fracturing global supply chains, global technology chains and that can have implications for the diffusion of technology around the world at a time when productivity growth is already weak.

Questioner: Can I just ask you to elaborate on what you meant by the technology piece? Can you just say a sentence more about that?

Ms. Gopinath: So this is about the recent actions taken by the US to put Huawei on the entity list, citing cybersecurity concerns. Of course, cybersecurity concerns are important and countries need to deal with that. But it's also important to flag that there is a risk to how technology diffuses around the world and that have kind of implications for investment and productivity.

Questioner: It's connected to high tech. I'm sure you followed them last debate around Libra. Do you have any views on that? You think it's indeed a big concern and we have to monitor the way it could be effective? You saw probably the comment in France from Bruno LeMaire but also Steven Mnuchin yesterday. So, what is your view on the Libra?

Ms. Gopinath: Our view is, firstly that it's important for greater financial inclusion, and to the extent that digital currencies can help in that process they certainly have an important role to play. At the same time, we also flag the risks and concerns associated with it. There are questions about consumer protection. There are concerns about how the data will be used. There are important questions to be asked about how this would affect monetary policy transmission. And if you look at particularly countries that are not reserve currency countries would this lead to you know backdoor dollarization. So, all of these questions in terms of whether there will be enough checks and balances in place to prevent money laundering these kinds of aspects all are very important, which means that it's it is very important for regulatory agencies in the world to pay close attention to these developments and to make sure that they're not too late in undertaking the right steps.

Mr. Anspach: With that we will conclude this press conference. I would like to thank you for attending and also thanks to colleagues online for submitting their questions. And again, a reminder that next week on Tuesday we'll be releasing the words economic outlook update from Santiago in Chile. Thank you very much.

IMF Communications Department

PRESS OFFICER: Raphael Anspach

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