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Transcript of a Conference Call by Senior IMF Officials on the IMF Staff Report: “Review of the Method of the Valuation of the SDR — Initial Considerations”
August 4, 2015
August 4, 2015
MR. MA: Welcome to this embargoed Conference Call on the five-yearly review of the method of valuation of the Special Drawing Rights currency basket. I'm Dezhi Ma with Communications Department at the IMF. I have a few colleagues of mine with me today who have worked on SDR Review for a long time. They will update you on the latest developments in the review process, and then take your questions.
IMF OFFICIAL: Thanks. What I'll try and do is to give you a landscape of where this review is, and then we'll take your questions. I will start with the very basic as to: What is the SDR? For us, it's a basket of currencies that reflects the relative importance of major currencies in the world's trading and financial system.
And we see it as reserve asset, and the construction of the basket is seen as enhancing the attractiveness of the asset. For this reason, it's reviewed every five years to make sure that the basket is keeping up with ongoing financial developments in the world.
So, what does the review consist of? In the review the Board assesses the criteria for selecting the currency. These criteria are aided by the use of indicators, depending on what part of the criteria the Board is looking at. The review also assesses the number of currencies in the basket and the methodology for determining the weights of the currencies.
And finally, there is the Board assessment on the instrument comprising of the interest rate basket. So, what are the criteria? The current criteria are that the basket contains, or consists of, four currencies issued by members which have had the largest value of exports of goods and services over the five-year period, and that they’ve been determined by the Board to be freely usable.
Why do we have these two criteria? The export criterion, which we also call the gateway criterion, is used so that currencies are picked up that play a central role in the global economy. And second, the freely-usable criterion reflects the importance of financial transactions for SDR valuation, and I'll come to this in a minute.
So, freely usable is a criteria that goes to the heart of Fund operations or financial operations, defined as a currency that is widely used to make payments for international transactions, and it is widely traded in principal exchange markets.
Just to give you a sense of how it is used and our own operations, when a member in balance of payment difficulties needs to -- borrows from the Fund, they will get a freely-usable currency. They get currency X, maybe that currency is not the intervention currency. So the member would either use it directly, meaning it's widely used for making payments for either imports or service debt payments. Or, they may use indirectly by selling it on the market and getting the intervention currency.
So for this currency to be usable in IMF operations, it needs to satisfy the need of both direct and indirect use. So, in terms of the review in 2010, when the last review took place, the renminbi (RMB) was the only currency that met the export criterion, that’s the gateway criterion, and the Board judged that it was not freely usable, and therefore it was not in the SDR basket.
And you may ask, what is the change for 2015? On the export side the landscape remains unchanged. RMB is third in total value of exports of goods and services, so it obviously meets the gateway criterion.
On the financial criterion the picture is more mixed relative to 2010. In most, not in all indicators, RMB trails the four currently freely-usable currencies, which are the dollar, euro, Japanese yen and pound sterling. And relative to the others it is up and down in terms where the currency stands.
On the operational side, a considerable amount of work is being done to enable the currency to meet operational requirements, between now and later this year when the formal review takes place, on both the indicators and the operational side for the workings to be done, and on indicators to see if there are new indicators that measure RMB’s use more accurately, more widely.
And on the operational side is to ensure that if the currency was deemed to be freely-usable and brought into the SDR basket, Fund members, when they borrow from the Fund, are able to use it directly for satisfying their balance of payments needs. And if not, are able to use indirectly by selling the currency in the market and not being disadvantaged in that sale.
To allow all of this to take place in the normal manner, the staff will shortly propose to the Executive Board, that the current basket be extended to September 30, 2016. We are proposing the extension of the basket, current basket, by nine months from December 31, 2015, to September 30, 2016, and this is mainly in response to the feedback we've got from SDR users, that it is not easy for them to rebalance their holdings and their reserve holdings, on January 1, when the market is thin.
And also, that if a new currency is included in the basket, SDR users need an extended period of time to be able to balance the position. So, I'm going to stop here and then take your questions.
MR. MA: We are ready to take questions.
QUESTIONER: Hi. Thanks for taking my question. What strikes me from the report is some of the charts that you have on the different indicators that you use to decide whether the currency is widely used. I'm thinking of official reserves, I'm thinking of debt securities, and it really seems like the yuan has quite a long way to go. I mean it ranked seventh in terms of currency reserves, but if I'm not mistaken it ranked around eight in terms of debt securities. I mean, what's your assessment of how far it has to go? I mean, and why bother extending till September when it just seems like they are going to have a lot of difficulty meeting the technical criteria by then.
IMF OFFICIAL: Okay. If you look at the charts or the tables you have in front of you, you will see that the currency has moved quite a bit in some cases, 20, 30, 40, 100 percent in a short period of time. So point one on the data is – the Board will have to come back to this by the end of the year and make an assessment as to what the situation is at that point later this year.
So that’s one. Second, these indicators are not self-executable -- they don’t execute themselves. By that I mean, there is no rank order. It's judgment that is involved, that involves both the gateway criteria and the freely-usable criteria. So there is no off-on switch, there is no rank order, judgment is involved, and no currency is more freely-usable than another currency, and there is no minimum threshold.
So the judgment that [a currency] will be freely usable is both in terms of the indicators that serve as input into a qualitative judgment, and in meeting the operational needs, and on both of these there is time between now and November, and the landscape will change. There is no doubt in my mind that it will change.
QUESTIONER: And just as a quick follow up, I mean, you mention in the report some other possible indicators that might be included. I mean, at this juncture what would you say is the likelihood that you would add some these indicators, and which ones are they likely to be?
IMF OFFICIAL: One of the things that you'll see in the report is that structurally, if you look at advanced countries, their weight on the financial side, is relatively higher -- relative to the real side. The weight is lower financial to real in emerging markets. And that’s a structural phenomenon, and one thing that we are trying to do in this review is also to capture the rate of change that is taking place, and to capture that rate of change, we also are looking at some of the flow indicators.
So, for example, in the paper we have international debt securities, we also have issuance of debt securities. We are looking at some other flow indicators, to see how the currency is faring. The other thing we've noticed, and this is a little bit deeper into the paper, when you get into it, you'll notice that the currency is trading quite a bit in Asia, a little less in Europe, much less in North America.
And so we've begun to look at regional markets in trying to interpret some of the freely-usable criteria. So, I think you'll probably see more work in the indicators in the paper, and if we get data sources that aid in the assessment, we'll bring them, but right now we don’t have anything spectacular to add.
QUESTIONER: The extension, does that mean that the Board could put off a final decision until into the next year on the debt -- I'm sorry -- on the SDR?
IMF OFFICIAL: As you know the Board decides when the Board decides. The staff makes a proposal and when the Board has enough information, they make decision. The reason to extend the current basket has been entirely for operational reasons. SDR users are reluctant to hold SDR deposits after December 31 this year, and to allow operations to go forward on an adequate basis, it is being extended independent of the (decision to conclude the review). The Board can decide at any point in time (on the extension). And these are not --
QUESTIONER: But what's that (inaudible)?
IMF OFFICIAL: These are not related at all.
QUESTIONER: There is no relation. So that gives us --
IMF OFFICIAL: And neither is this prejudging what the Board does. The Board can decide later in the year to stay with the same basket, or the Board can decide to extend the basket and bring the RMB in. There is no prejudging of the Board decision. It is simply to allow current operations to proceed in a normal manner.
QUESTIONER: As the previous question goes, it could take longer to meet the freely-usable criteria than the current November timetable allows, which could postpone the decision into the New Year, and the extension would then also allow the Fund to revisit it later in the New Year.
IMF OFFICIAL: So I think there you need to step back a little bit, you are seeing these indicators as self-executable, and you are assessing some rank order in these indicators, and they are not self-executable, there is judgment involved in looking at these indicators, and indicators are input into a qualitative judgment.
So I think it's important to step back and assess freely usable, both in terms of whether a member is not disadvantaged by using one currency over the other, and by that I mean, either they have sufficient number of transactions in that currency to meet their BOP needs, or they are able to sell the currency, whether in Europe or onshore to get the intervention currency.
So I would not watch these indicators and say the currencies are rising in a manner that there's a rank order. So I think I would caution against doing that.
QUESTIONER: And the concept of a quantitative decision-making, basically at some point there's so much flexibility in how one reads indicators are freely usable that besides the operational concern there is basically a political concern here?
IMF OFFICIAL: You know, there is no politics when a member is in a crisis and has to meet its balance of payments needs. So let's take -- let's take Greece, and if Greece borrowed from the IMF, and RMB was in the SDR basket, it would get RMB as part of the purchase, and the member needs to be able to use that currency for BOP purposes, and we take that fairly seriously, there is no politics in that. And our membership wouldn’t. Members want to ensure that they have a currency that meets their needs.
QUESTIONER: All right. I appreciate it. Thank you for your time. I always think it's funny when IMF officials say the IMF is not a political institution. But we can digress.
QUESTIONER: I also was a little confused about what the possible extension might mean for the timing of the decision on whether to include the renminbi or not. But looking at the reasons that you've said, for why you are suggesting this extension. Is it more about avoiding any change on the first day of the year, or is more about needing more lead time to implement any decision?
IMF OFFICIAL: So, look at both of them. For years reserve managers have told us that even if you don’t intend to change the basket, you are just changing the weight of the basket, don’t do it on January 1 because the markets are thin and they find it difficult to rebalance their portfolios.
So, that’s one (reason) for extension, and the second is that since we don’t want to prejudge whether the currency is coming in or the currency is not coming in, the only fair way to do this is to give certainty to SDR users at this point, who are also taking our money, that they are able to plan how they construct a basket going into the new year.
Third, the SDR users have told us that if a new currency was added they would need a period of time to rebalance their portfolio. So, for three reasons, both in terms of the existing basket, but also in terms of the normal operations of the Fund continuing beyond December 31, and for whether there is a new currency on the current basket. I think they are both important.
QUESTIONER: Would this be just a one-off extension, or would it mean that any future changes would also take place and be implemented in September rather than of January, of the applicable year?
IMF OFFICIAL: I think the Board will need to come back and decide what is the date for implementation; so I can see -- I can still see, coming towards a decision by the end of the year, but waiting for the implementation till next year. So, here there are two issues, one making a policy decision on what they see a basket would be, and second, what is the date of implementation.
QUESTIONER: Thank you.
IMF OFFICIAL: But in this, the proposal is one-off for this review.
QUESTIONER: Okay. Thanks.
QUESTIONER: I just want to push back a little bit to clarify this extension issue. So if the Board agrees to the staff recommendation to extend to September 30th the current basket, they still would have to make the decision by the end of the year because that’s called for in the articles unless they change that rule, as well, correct? So the decision still has to -- is supposed to come by the end of the year, the Board decision.
IMF OFFICIAL: Well, I’ll let my colleague to take this.
IMF OFFICIAL: The decision -- you’re right that there’s currently a five-year deadline, but it’s not actually provided for in the Articles of Agreement. It was reached by a decision of the Executive Board, which, of course, can be changed.
QUESTIONER: Which means that they can decide at the end of the year --
IMF OFFICIAL: They can decide --
QUESTIONER: -- to decide at some future point.
IMF OFFICIAL: Well, they can decide at the end of the year to extend the current to extend the current SDR valuation basket. And when they reach the end of the extended period, they could also decide to have a different period of valuation. As said, it’s really up to them to decide. But in principle it would be possible to have a regular period starting from, you know, next October, September/October.
QUESTIONER: But to your point that part of the -- one of the three reasons for this extension is because of the request of SDR users and the need to rebalance their portfolios, especially when there’s a new currency involved. If the decision doesn’t come until, you know, September at some point, they still don’t have time to rebalance their portfolios unless they change and once again extend the current basket.
IMF OFFICIAL: Okay, so I see where the confusion is. The proposal to extend the basket, we would make that proposal in the next few days and bring clarity to the whole process till September 30th. And so that proposal will be made to the Board now to extend the basket, it allows the normal review to go forward. It allows the SDR users a period of certainty into 2016, and it does not prejudge the conclusion of the board.
QUESTIONER: So this announcement (inaudible) we would expect to come sooner than the end of the year?
IMF OFFICIAL: The announcement or the Board decision on the extension would come, hopefully, in the month of August.
QUESTIONER: Okay. All right. That does help. But still, do they have to decide on the composition of the basket by the end of the year or, as you said, they can change that and decide at any point next year? So that still leaves this gray area for the reserve managers.
IMF OFFICIAL: Right. So once the basket is extended till September 30th, there’s clarity for reserve managers up until September 30, 2016. And the Board, under its normal operations, will consider it later this year. If it has enough information it will decide later this year and the review would be completed. If at that point the Board requires more information, we would provide more information. It’s hard to prejudge the outcome later this year.
QUESTIONER: Okay, because some of this confusion I think is because the report makes it seem like that extension, among other things, allows time for China to complete some of these other things, like a hedging tool for the SDR interest rate and what not, so that if they comply with enough of the criteria, then by September 30th they could potentially be in the basket. But if they’re allowed that extra time, then you’re still, you know, making a decision at some point late in 2016 as to whether they’re included -- the RMB is included or not.
IMF OFFICIAL: Yes. Look, the review is based on the information at the time of the Board meeting. The review is not concluded on the expectations that changes would take place in the future. It has to be in place, so the extension is not being proposed to allow China to put things into place. The extension is being proposed simply to allow reserve managers to be able to function.
The Board judgment will be made on the wide use and wide trade of the currency at the time of the Board meeting, not in the expectation of where the RMB would be in the ensuing months.
QUESTIONER: And that will be at the end of the year. It’s expected to be at the end of the year unless they announce a change.
IMF OFFICIAL: Yeah, end of the year.
QUESTIONER: Okay. That clarifies it. Thank you very much.
QUESTIONER: Hi. I wonder if you can just shed a bit more light on some of these outstanding issues. I mean, on the question of, you know, the interest rate or the interest rate instrument and hedging possibilities, will you be merely assessing developments in China or is there a work program with the Chinese in the coming weeks and months to help you reach a decision?
And just sort of a follow-up to that, you know, one of the big criteria here that’s not really largely in Chinese hands is that availability of -- it’s the depth of the market in the U.S., in the -- America’s time zone. China can do a lot to improve hedging instruments and decide an interest rate incident, but they can’t increase the depth of the renminbi in the U.S. foreign exchange market. How big is that criterion?
IMF OFFICIAL: Okay, so let me take the second one first, that one of the criteria is that it has to be traded in principal exchange markets, with an S, which means it has to be traded in more than one market. It also means it does not have to be traded in every market. So the paper, -- in its assessment comes to the conclusion that principal markets are best looked at in terms of time zones. There’s Asian time zone, there’s a European time zone, there’s a North American time zone. And the judgment in that would be that two of three time zones would satisfy the criteria that we’re looking at.
On your first question, I think some of the things that need to be, you know, sorted out are, for example, being able to call a representative rate London Time for all the currencies. And the Bank of England is helping us in doing that.
The other is a simple criterion that a member not be disadvantaged by using one currency or another. And, therefore, there should be a market that’s deep enough where if the member were to sell the currency, that the exchange rate doesn’t go against them.
And if they choose to hold the currency, that they’re able to invest it in securities that don’t have adverse movements as they move into that market. And so members’ access to onshore markets in China would be important, as would a free interest rate, market determined interest rate that can be used for the SDR basket.
So for this, on July 14th, China liberalized access for Fund members and their agents to the investment market for fixed securities and derivatives. So that’s been done. I think more work is needed to have a more streamlined approach for the foreign exchange market, as well as developing a market-based interest rate.
China’s aware of what needs to be done, there’s been fairly close work with China in the past few months, as with other members. And by that I mean members that are helping us, likeBank of England and others, they’re aware of what the timetable is.
QUESTIONER: So there are no specific meetings planned with Chinese officials in the next month or two specifically related to, you know, helping you to come to a determination on any of these criteria?
IMF OFFICIAL: So in terms of the technical work that takes place, it’s taking place on several levels. Some are very technical levels, some are not. And my experience is that when we work with countries in an intensive manner, some of these conversations take place five times a day and then some others once a week, and China is no different. The dialogue is on, it’s constant, especially you’re moving forward and you’re assessing whether institutions and depths of market are available, especially for members who may use the market to satisfy their balance-of-payments needs.
QUESTIONER: I wanted to follow on from the previous questions. Specifically, what are you expecting by the end of the year? And I think you’ve given quite a bit when you say that you want increased trading in at least two of these three time zones.
And secondly, isn’t it fair to describe this as a compromise? You’re waiting for actions to be taken and then, presumably, sometime in the period ahead you’ll wave the green flag and the renminbi will be included? Thank you.
IMF OFFICIAL: Well, let me take your second question first. It’s the same as what others said, compromise means a political decision and it’s not true for any member in need -- a balance-of-payment need. They need that money in the hour that they draw from the Fund. And either they should be able to use it directly or they should be able to sell it immediately. And these criteria are important. It goes to the heart of our lending operations and this is not something that either the staff or the Board will compromise on. So that’s one.
Second, I guess you’re asking me what is the checklist, and there is no checklist. What we’re asking for is a framework, a system, an approach where the member has unimpeded, unrestricted access to both the foreign exchange markets in Asia, in onshore markets, or in Europe, or to the investment markets so that they can both convert and hedge.
And that is what will be tested as we go forward and that’s precisely the reason why it’s difficult to give a checklist and it is difficult to say what needs to be done other than the fact that we need some depth of markets and we need to ensure that the member is not disadvantaged.
QUESTIONER: Hi. Thank you for taking questions. I have a question regarding the weighting formula. In the report you estimate the renminbi’s share can be about 14 percent to 16 percent, depending on whether it’s added to the basket or replaced one of the currencies, although from the report you suggest that adding renminbi as the fifth currency. I still wonder is there any possibility that another currency will be replaced and the 14 percent to 16 percent is a reliable number right now?
IMF OFFICIAL: The Board has been quite clear as to not to prejudge the number of currencies. And so if you look at the paper, somewhere in the paper there is this export table, I forget where it is. But if you look at that table, the pound sterling and the Japanese yet are quite close to each other. From what I remember they’re pretty close, .2 or .3 apart.
And so in terms of -- I think the sense is the staff sees a case for enlargement. That’s the staff’s view in the paper, that it is good for the system. It is good in terms of IMF operations to enlarge it to 5.
Right now the weighting criteria is a criteria that’s derived by adding exports to reserve holdings, so that’s a stock and flow that’s added. And experts who look at this tell us that there are better ways to do the -- to have a weighting methodology, so we would want to hear from them.
So you see a number in the paper, but the main number is on the basis of four currencies. The staff recommendation is to move to five and have a more analytically correct weighting formula.
QUESTIONER: And then in the report it says a significant work outstanding regarding these inclusions. So can you tell us what’s the next (inaudible) your work with the Chinese government in terms of gathering information or other work in the future?
IMF OFFICIAL: Yes, so significant work is both not just in China, it’s for us, also. When you look at the indicators they’re talking about removing double-counting from these indicators, having a more accurate assessment of transactions between China as a member and the rest of the world. So some of these indicators have some of the territories in them, some indicators don’t. We need to come to a clean, clear footing that is similar across the board-- we are using SWIFT data in some places, we’re using trade finance. And so we need to verify the data. In some cases it’s 2013, and for a currency that moves 40, 60, 140 percent a year, 2013 is an old base and needs to be updated.
And finally, on the operational side, China needs to do enough to ensure that the members are not disadvantaged, and so they have access to both the foreign exchange and RMB market. Finally, there needs to be a three-month market interest rate.
QUESTIONER: Yes, sorry if this has been covered before and I just missed it, but can you tell me when will the Board decide whether China can be included in the SDR starting next September? When is that decision going to be made or over what span could it be made?
IMF OFFICIAL: Like any review in the Fund, it takes place at several levels. First are just technical briefings of the Board. As you can see from this paper, since this review is done so infrequently there are a whole lot of issues that need to be addressed and also need to be brought to the attention of Board members. Several of them are new Board members, so they may not have taken part in the earlier review. So technical briefings have taken place.
An informal discussion took place last week. We expect that there will be more conversations with the board, collectively or individually, on data issues as they get sorted out. And the formal Board meeting is later this year, in November. And the Board will, at that point, decide whether it has sufficient information to make a decision or not. The staff, of course, tries to provide the Board as much information as it can.
So that’s the Board timetable. Quite separately, we had talked about extending the present basket to September 2016. That decision would be put to the Board and hopefully concluded in August 2015, meaning this year.
QUESTIONER: So in August they will decide whether to go along with the recommendation to extend until next September, and in November they will --
IMF OFFICIAL: Have the formal discussions.
QUESTIONER: Whether to add the renminbi next September or could they ask for more information? I’m just trying to get a better --
IMF OFFICIAL: Well, they could either add it or not add it or ask for more information if they’re unsure about -- so they have three possibilities: either they don’t add it or they add it or they say they don’t have enough information and ask for more information.
QUESTIONER: Right. How close could they get to the September 30th date before making a final decision if they kept needing more information or market conditions required, you know, updated information? How far could this go before a decision is made?
IMF OFFICIAL: I don’t think the Board would be forced by a date that it has set for itself. It could extend that date. On the other hand, if there is no new information forthcoming it would -- I would expect it to make a decision on the basis of what it has. I think we need to give reserve managers approximately six months’ time on average if there is any change.
QUESTIONER: Okay. Thank you.
MR. MA: Thank you very much for participating in the call.
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