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Argentina and the IMF

Brazil and the IMF

People's Republic of China and the IMF

People's Republic of China Hong Kong Special Administrative Region and the IMF

Indonesia and the IMF

Japan and the IMF

Republic of Korea and the IMF

Malaysia and the IMF

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Transcript of a Video Conference
with Hong Kong and Singapore Journalists
by Stanley Fischer
First Deputy Managing Director
International Monetary Fund

May 3, 1999

MR. SHASTRY: Welcome to this videoconference with Mr. Stanley Fischer, First Deputy Managing Director of the International Monetary Fund. There is an embargo until 10:00 p.m. Hong Kong/Singapore time tonight. I'd like to thank all of you for taking the time to attend this briefing. Thanks also to our hosts in Hong Kong and Singapore: the Hong Kong Monetary Authority, and the IMF Singapore Regional Training Institute.

We will alternate between Singapore and Hong Kong, taking two questions at a time at each of the locations. Our moderator in Hong Kong is Mr. Thomas Chan of the HKMA, and in Singapore our moderator is Mr. Jerry La Pittus of the Singapore Institute.

Before we take your questions, Mr. Fischer will make a few opening remarks. Mr. Fischer?

MR. FISCHER: Thanks very much, and thank you very much to all of you in both Hong Kong and Singapore for showing up this late in the day.

We've just completed our spring Interim Committee meetings, and the contrast between the atmosphere this time and the atmosphere last October when we had the Annual Meetings was extraordinary. Last October, there was a feeling of impending gloom that the world economy was heading for even worse conditions than had been experienced in the last year and a half, with great concern over what was about to happen in Latin America, the European economy giving some signs of slowing down, and, of course, everybody continuing to worry, as they still do, about whether the U.S. economy could sustain its growth.

Now, in April 1999, the Brazil crisis is not quite over but has been resolved. The fear, which is certainly a fear we had, that the Brazilian devaluation would lead to widespread contagion in Latin America and other countries has fortunately not materialized, and prospects of growth in Brazil are being raised every few days as the situation stabilizes.

Latin America will still have a very difficult year, with close to zero growth, possibly, on average for Latin America, but a far cry from what had been feared.

And then in Europe, which did have a bad fourth quarter, there was a definite slowdown in growth. The European central bank acted decisively to cut interest rates by 50 basis points more than had been expected, and most observers expect a recovery of growth--there hasn't been negative growth--a recovery of growth in the second half of 1999.

Add to that the extraordinary performance of the United States, which in the fourth quarter of '98 had the highest growth rate in ten years and which came in with another 4.5 percent growth rate in the first quarter of '99, the growing belief that the Japanese economy has touched bottom and will grow during this year--we may talk later about the peculiarities of year-on-year growth versus growth within a year--and the fact that the Asian economies, those that were in the deepest crisis, as well as others that were not so badly affected, are all expected now to do better than had been hoped even a few months ago, with Korea in particular in the lead but other countries raising their growth forecasts from time to time, and the situation looks very different and much better than we had feared.

Now, of course, at a point like this, we have to be aware that the change in sentiment is only two months old. It basically started as Brazil's devaluation turned out to be far less damaging than anyone had expected, and anything like this is very fragile. If I wanted to paint disaster scenarios for you--which I do not want to do and will not do--I could. And there are risks on the horizon that we need to bear in mind, but I would say that at this moment the global economic scene is more optimistic and looks better than we had any right to expect a few months ago.

In terms of the international system and the IMF, probably the most important development at this Interim Committee meeting was the completion of the CCL, the contingent credit line facility, which has been somewhat controversial, but which I believe is, in fact, a very important development because it moves the IMF from a mode of reaction to crisis to giving it the capacity to work with countries to prevent crises by putting in place a facility before a crisis that will encourage good behavior and that will help persuade investors not only that the country is meeting high standards of economic performance, but also that it would have the financing necessary to deal with a crisis if a crisis should come.

We do not, of course, have a CCL arrangement with any country yet, but I think it's reasonable to assume that there will be interest in the CCL from countries around the globe, and that we should anticipate that there will be one possibly next--not by the Annual Meetings in September, but certainly within the next year. Inevitably, when the IMF introduces something new, it takes a while to figure out precisely how it works and to make it work in a concrete case. But I do expect that we will have applications for such a facility and that we will find ways of making it practical and making it meet its goals.

There was also a lot of discussion on the international architecture, and I believe the work there is moving forward. But possibly I should stop talking now and leave some time for questions. So thanks very much.

QUESTION: You mentioned just now that the optimistic scenario was very fragile. What is the most likely disaster case that can happen for Asia right now?

MR. FISCHER: Well, I said that I wasn't--I didn't want to identify disaster scenarios, and I don't think that disaster scenarios are there. But one of the things to worry about--it wouldn't be a disaster, but it would be a reason for growth not to be as fast as it has--as it is expected to be. There are two factors one can see. One is that the structural reforms in the financial and corporate sectors getting underway in Korea and in Thailand could falter as a result of the lifting of the sense of crisis. This is the complacency concern about the crisis countries, and it is a very real concern. That could slow down the recovery. It's not the sort of thing which would turn a recovery into a collapse, but it's a worrying possibility.

The other concern is that the contrast between the feelings about Japan and, say, the performance in the fourth quarter where growth was less than expected could be resolved in the wrong direction, namely, in the pessimistic direction.

I think there are solid grounds for believing that Japan should be recovering during this year, namely, the very resolute action taken on the banking sector last year, the beginnings of successful operation of the Financial Supervisory Agency, which has ensured that audits of all the leading banks have been taken and recovery plans have been presented for these banks, that plus the strong fiscal policy and the growing expansionary nature of monetary policy. All those point in the right direction, but there is the unresolved tension between that and the fact that at least in the most recent data the growth was not there. That could be another factor.

In neither case do I anticipate that these things will happen. They're just downside risks. And, of course, hanging over everything is the question which everybody keeps raising of whether the United States economy can continue to operate so long as the engine of growth for the world economy. Without the market of the United States for many emerging-market countries, including those in Asia, the world situation would be a lot more difficult.

I think it's three years now that the United States economy has outperformed expectations, and it seems to be in the process of doing it again for 1999. But everybody has to be cautious about what is called in the stock market trade that trees don't grow to the sky; economies don't grow faster than expected forever. So one needs to be a little cautious on that, too.

QUESTION: Mr. Fischer, you almost addressed the question that I was going to ask you when you spoke about the U.S. economy. Both from the point of view of the IMF itself and as a noted economist yourself, could you tell us a bit more on what you think are the chances of the U.S. economy staying so robust?

MR. FISCHER: Thanks. So robust in terms of the growth rate is very hard to believe. The rate of growth has been above 3.5 percent for three years. During that period the unemployment rate has been declining. It's now at 4.2 percent, well below previous estimates of the natural rate of unemployment. Possibly the natural rate is lower than we had always thought. That's quite possible. But I see no basis for believing that the growth rate--that the potential growth rate of the economy has gone up as much as the actual growth rate has gone up.

Estimates of the potential growth rate are somewhere--they were 1.25, 1.5 of productivity growth. Add to that another 1 percent through labor force growth, you get to a productivity growth rate of around 2--sorry, potential growth rates around 2.25, 2.5.

Well, it takes an enormous amount to add 1 percent to that as the change in the underlying rate of growth, and it's not really credible as a basis for how--at what rate the economy could grow over the longer term given recent performance.

So I think the growth rate will slow down because the unemployment rate cannot keep on decreasing without some inflationary impact, and in that regard, I'm sort of an old-fashioned thinker, not a new-fashioned thinker. That means the U.S. economy is bound to slow its growth rate at some point.

I think what frightens people more is not a slower growth rate but a recession or something like that. Well, the laws of economic history haven't been repealed, so one should always bear in mind the possibility of a recession and the possibility that growth would not slow gradually. And, of course, the scenario in which that is positive is one in which there's a stock market correction.

But if you believe, as many do, that the discount rate that is applied to stock market earnings has declined, levels of the stock market not precisely where they are but higher, much higher than the six and a half thousand at which Chairman Greenspan was concerned about, irrational exuberance, higher levels are conceivable. So we don't have to think that the stock market is bound to decline by a third or something like that. There could be a correction; there always is down the road.

So the bottom line on that excessively long answer is, yes, of course, one has to be worried. It is unlikely that this rate of growth can continue. Eventually there will be a recession, but there's no reason to fear one in the very near future or in the near future, and a slowdown of growth rather than negative growth is the more likely scenario.

QUESTION: Mr. Fischer, I wonder if you could talk a little bit about the recovery that you see coming to certain Asian countries this year. And what is evidence that the economies are actually going to begin growing? It does look like there is a financial sector recovery, but is there a real economy recovery in place now in Asia?

MR. FISCHER: First of all, we're beginning to see signs of growth in industrial production in several economies, not least, as usual, Korea which has clearly taken the lead in the recovery, where the year-on-year growth rate of industrial production announced for last month, or possibly March, was extremely high, and in Thailand industrial production has also turned around. Similarly, there are positive changes in Malaysia.

So I think there are signs in terms of output of what is typically the most cyclically sensitive part of output, of traded output, industrial production, in several of the leading East Asian economies, and that's a plus.

We have the very low interest rates and expansionary fiscal policies kicking in as expansionary factors, and there is a link between the financial--the recovery of financial confidence and the capital inflows that are so evident in a number of economies, including into the stock market, and the likelihood of recovery. So I certainly share the concern that underlies your question, namely, are we just seeing a recovery of financial confidence ahead of real economic performance, and might that be misleading? I understand the question.

I think there is more solid evidence of real turnaround in real activity than just the turnaround in financial confidence.

QUESTION: I'd just like to know how Malaysia is looking to you today, Mr. Fischer, and how have your views changed, if at all, on Malaysia's outlook and their policy choices since those gloomy days in October that you talked about earlier?

MR. FISCHER: I think the most important thing that has been done right in Malaysia about which there was a great deal of fear was the concern that behind capital controls, the opportunity to attack the financial sector and corporate debt weaknesses would be foregone, namely, that they would relax on the need for restructuring. They did not and, in fact, have been moving ahead well in those areas, and that is very encouraging, and that was a fear at the time they imposed capital controls. So that's the plus side.

The other plus side is that after the shock of the imposition of controls and the difficulties some of those controls put in place, the Malaysian authorities have indicated that this is a temporary measure from which they plan gradually to reverse and to reinsert themselves into the global capital markets. So I think that something that could have been interpreted as a long-term cutting-off from the global financial markets and the global economy has not turned out in that way, and that's another plus.

As to economic performance in Malaysia, I think it's been rather similar to that in other economies in the region, that is to say that the recovery of confidence has happened in all the economies in the region except possibly Indonesia, which, of course, has its own special problems. So I don't think we're going to get a lot of evidence on the role of capital controls from the stabilization of financial conditions in Malaysia because they've stabilized also in other countries that didn't have the capital controls.

QUESTION: Mr. Fischer, you have said in the past that if, indeed, Japanese growth slowed down in the third quarter when the current fiscal stimulus plan begins to wane that it may be in Japan's interest to again look at stimulus. The Prime Minister has been asked about this recently, again saying that that is not something that they're considering at this time.

Do you still--or, rather, not to put words in your mouth, do you think Japan should again consider stimulus? Do you think also that there is kind of a narrow latitude that they have here considering their rather overburdened fiscal position?

MR. FISCHER: The reason this is all very complicated, as you know, is that the Japanese budget process sort of requires these supplemental things to come onto the table quite late in the game, and putting them on early is politically problematic for the Japanese Government. So I don't want to talk directly on the need for a supplemental package, but I am pretty sure that if what it takes to get the recovery going and in place is another six months to nine months of fiscal stimulus late in the year, that maintenance of the current rate of fiscal stimulus would make a lot of sense.

Precisely at what point those decisions have to be made, whether there's any reason to talk about it now as opposed to later, those are complicated political issues that I'm sure the Japanese Government is handling about as well as they can be handled. But I could put in a plug as well for improvements in the transparency of Japanese fiscal policy, which would certainly, I think, in the longer run go a long way towards helping outsiders understand what is being thought about for fiscal policy in Japan.

If this recovery is moving in the direction sentiment says it's moving, then the impact of growth on the extent of the fiscal burden is far more important than anything else, and a little bit more fiscal stimulus to get a higher growth rate would reduce the debt-to-GDP ratio over the longer run. And so there would be room if it turned out to be necessary.

QUESTION: I have a question on your contingency credit line announced recently. As I'm sure you know, there's been a fair amount of skepticism from the private sector, firstly on the grounds that any country meeting your criteria will be very unlikely to be facing contagion, and, secondly, on the grounds that if any country were to apply and to fail to meet the criteria, then that rejection would potentially worsen the contagion being faced.

Possibly you could clarify these points, maybe with a historical example of when the CCL facility could have been useful.

MR. FISCHER: I find this a little bit surprising. I don't think at the moment--possibly the impression has been given that the conditions are impossible for anybody to meet. I don't think so. I'm not going to name the candidates, but I have a few in mind. And we're not talking about perfection. We're talking about economies that are in generally very strong positions, and there are quite a few of them.

I believe the Managing Director said that the greatest mark of success of the CCL will be if it's never used. What he meant--and I should clarify that--is not that nobody would get a CCL. It is that if the CCL was in place and it helped encourage good policies and it helped persuade the private sector not to panic, that there would never have to be drawings on the CCL. That's different than saying that it would never be used. It just means there would be no need to draw down the balances in the CCL.

Now, why do I think it could work? First of all, I think there are countries who could get it. Second, I think that the incentives it puts in place for accepting standards for strengthening financial systems, for strengthening policies generally, are good ones. And then I hope that as it evolves we'll see that the amounts of financing that could come with it would also be considerable and could help countries persuade their creditors that in the event of difficulty they will not themselves be short of reserves.

As you know, in this crisis, although it hasn't been heavily commented on, countries with very large reserves have by and large done better than countries that have had very small reserves. A precise reason for that is not obvious, but it must have something to do with the confidence it imparts both to the investors in that country and to the policymakers in that country. And this is in essence a device that not only will encourage good behavior, but also will supplement--not recorded reserves but supplement the amount of financing available when it's needed.

So I believe it could work. It's clearly in our interest, the IMF, representing the members of the IMF and the international community, to make it work. It is important that we put in place measures that will encourage good behavior and reduce the probability of contagion.

Now, you asked to name countries where a facility like this would have been helpful. I don't want to speculate, but let me give you two cases, which are not quite right but which I think meet the test of having actually happened.

The CCL is a bit like--it's better than but it's a bit like the precautionary arrangements that the IMF has had with a number of countries, among them Argentina and the Philippines. In this crisis, Argentina has continued to use its current arrangement with the IMF, its current stand-by, as a precautionary arrangement. That's an arrangement in which in essence we monitor their policies, say their policies are on track, and the world knows that if they need to draw on us they can. And the world does know that Argentina has access to financing from the IMF under its current precautionary arrangement. They also know that in the event of a crisis it is quite likely that the IMF would be willing to augment the amounts there if Argentina was following the right policies, and that's a feature of the CCL.

In the Philippine case, we had an arrangement in place. It was being treated as precautionary. When the crisis came to Asia, Philippines decided to draw and the program was augmented, and we provided more financing for Philippines. And I think the fact that Philippines was in a program was one of the factors that meant it was less badly hit. The fact that it had access to extra financing also helped it.

So those are cases where I think something like the CCL arrangement has shown that it could very well be useful.

QUESTION: Mr. Fischer, this question is about Russia, about credit to Russia. The IMF wants Russia to pass 16 laws and amendments. Do you think it's realistic to expect the Russian lower chamber of parliament to pass these bills? And if it does not, what happens next?

MR. FISCHER: I don't know whether the number is 16 or precisely what you said. There certainly are a number of measures, important measures, including in the tax area and bank restructuring area in which we will be asking the Duma to pass the necessary legislation.

We've discussed obviously with the Russian authorities who were here last week what are the chances of getting these measures through. We should note that the current government is believed to be the first--or, sorry, is the first Russian Government since 1992 which is believed to have the support of the Duma. And Mr. Primakov has the support of the Communists, who are the largest party in the Duma, and others. So the question is: Will they get support from those who have hitherto said that they support them?

The people with whom we were negotiating believed that they would get--I don't know about all, but practically all these measures through the Duma. There is another house, the upper house, which is called the Federation Council. They would also have to approve it, and then it would have to be signed by the President.

But this is not as it was last August when the Duma was opposed to the government, as difficult a task as it was then. And even then there were, in fact, ten measures, and they passed eight. In fact, we could have gone with eight if they passed the right eight, but one of the ten they didn't pass in August 1998 was an important measure redistributing the responsibility for taxes between the center and the regions. That made it difficult to go ahead. So I think there's more probability that they will do it than that they won't.

Now, you say what happens if they don't. Well, we can't really proceed in a program if the prospects of the necessary conditions--and there certainly is a need for bank restructuring--certainly is a need for tax reform if those necessary measures are not in place.

We have in other cases explored other ways of doing things, but those are not bridges that we need to cross at this stage.

QUESTION: Mr. Fischer, I want to go back to your first answer, which had to do with your concerns about the potential dangers of market exuberance in Asia.

Speaking specifically about Korea and Thailand, I have two parts. The first part is: What has been in your mind the single most significant reform that has been accomplished? And then, secondly, what is the single most important reform yet to be accomplished that might be threatened by over exuberance?

MR. FISCHER: I think the single most important reform that has been accomplished is in the financial sector and in the rapid progress they've made on restructuring the balance sheets of the commercial banking sector and the financial sector more generally, and there they have moved fast. They have also put in place, after considerable struggle, an independent supervisory agency for the financial sector, and that was not an easy task. So that is very important.

It is also believed by almost everybody who studies Korea that the corporate restructuring and corporate debt restructuring for the smaller chaebol, Numbers 6 to 64, as they are called, has been proceeding reasonably well. The concern of everybody is about the five largest chaebol. And I think if complacency were to return, you could see two possibilities: one, that reforms now taking place with the five largest companies, the precise meaning of which is a little hard to figure out at this stage what the exchanges of business is between the large chaebol means for the soundness of their balance sheets, is not something which is fully understood at the moment, and one will have to keep watching that.

I think if the exuberance were to be excessive you could see that reform process dying down, and the other concern that people have is that despite the progress that has been made in setting up an independent supervisory agency for the financial system and despite the progress in restructuring bank balance sheets, that you could imagine as confidence returns to the bureaucracy and capital inflows begin that there could be further attempts to go back to old ways of allocating credit.

Those would be the things that the end of the sense of emergency could bring about.

QUESTION: There have been concerns that economic and financial problems on the mainland may slow the leadership's commitment to reform and that pose a threat to recovery across the region. Do you see economic and financial problems on the mainland slowing the reform process and also to what extent it would pose a threat to the recovery in the region.

MR. FISCHER: Thanks very much. During last week's meeting, the Deputy Governor of the central bank was here, and we discussed these issues at some length. And, of course, during the visit of Prime Minister Zhu Rongji, the Managing Director met him briefly and continued this discussion.

I think nobody who follows the mainland closely is unaware of the difficulties that lie in the conjunction between the state-owned enterprises and the financial sector, that is, the weaknesses of the balance sheets of the state-owned enterprises and the fact that the financial sector has claims on them.

But when I say nobody is unaware of that, I mean also that the leadership is well aware of that and has announced a set of decisions on how it will proceed to operate to deal with the financial sector difficulties and with the state-owned enterprise difficulties.

I thought, as I listened to the Deputy Governor Liu of the central bank, that they had decided to be really quite resolute on strengthening the financial sector, if necessary inserting public funds to help clean up the balance sheets of the financial sector, and that they were aware that this would also imply some difficult decisions need to be made on the state-owned enterprises.

We see the speculation that the difficulties in these sectors will slow down reform, and I believe some reforms may have been put off for a month or two. But I don't see anything radical happening in the direction of reducing the commitment to dealing with these problems.

One continues to see from outside pretty resolute patterns of decision making. I think the Gitic decision and the implied way of changing behavior of the other Itics was criticized for the way the decision was announced and the fact that it was, so to speak, sprung on people without a lot of consultation. They may well be valid criticisms about the ways in which the decision was announced and made public and so forth. But the announcement to investors in China of how the government intends to proceed with these very important cases, which could have led to massive obligations for the central government had they all been accepted as central government liabilities, is, in fact, another sign of the sophistication and toughness of the underlying decision making process.

The atmospherics may not have been right, but the underlying view that the investor in China has to be aware that not every investment in China comes with a guarantee from the government and that they have to appraise risks accurately strikes me as one of the important developments of recent years, one of the developments that could reduce the probability of a future crisis.

I think if the investors have a realistic view that they're investing in particular institutions and that there are high risks there--

the government does not stand behind them necessarily unless it explicitly says so--is a very important way of moderating the way capital flows into China and reducing the risks of the type of crisis that could happen if it was believed that you put money in China and you're lending to the Chinese Government automatically.

QUESTION: You just mentioned the Gitic episode. I was wondering if you thought that as a result of this crisis that corporations in Asia as a whole are more answerable to their shareholders than they were when the crisis began. And if not, what mechanisms would you suggest to make corporations more answerable to shareholders?

MR. FISCHER: Well, I'll take the easy route and say yes, something like this will make it more likely that corporations are going to have to deal with their shareholders and with their other creditors, and they will begin to realize this. Of all the many measures that could be put in place to make this more generally applicable, the one that we are concerned about in several countries in the region is the development of a serious bankruptcy procedure, one that would be implemented. We see difficulties with bankruptcies, particularly in the Indonesian case where clear cases of background seem to be having trouble being processed through the legal system.

You don't have bankruptcies, as you know, but possibly some of your readers mightn't know, in order to close down firms as the standard outcome. You have bankruptcies as a way of reorganizing the creditors of the firm and enabling the firm to continue. And that I think is a set of procedures which both in the financial sector and in the corporate sector could help enforce the discipline that is needed in all market economies.

QUESTION: Mr. Fischer, I'd like to ask about the country where you said that so far there appears not to have been a recovery of confidence, and, of course, we are talking about Indonesia, although in the last day or two markets which may be shooting well ahead of reality, indicate that confidence is returning. But there are enormous political and other problems ahead: bank restructuring, which I know Hubert Neiss is in Jakarta today to talk about. According to the Dow Jones Wire today, it said Mr. Neiss is going to push the Indonesian Government to initiate actions for the state banks to chase the bad debts. But I thought the IMF had one agreement from Indonesia to begin that chasing by the end of April.

I would just like to ask you if you could evaluate the situation in Indonesia and how much more you can push the government to do things. And what's the Fund going to do if there's no government to push in a couple months?

MR. FISCHER: Well, thanks for the easy questions.

Basically what has happened on banking in Indonesia is that each time we've made an agreement with the government to be completed by the next review, it's taken a lot of hard work not only by the IMF but also by our colleagues in the World Bank and the Asian Development Bank and other people and institutions that are assisting in the reform of the banking sector to get those measures done.

Now, that's because these are very difficult. They are very difficult technically, and they are very difficult politically. And we are heading towards an election.

I once was talking to a Finance Minister who had done exceptionally well by doing the right thing, and he said, You know, everybody thinks that the public wants you to just be wild and to give away money and to not follow responsible policies. Well, my view of the situation is that that's just wrong. They want you to do the right thing, and they'll reward you for doing the right thing, and Finance Ministers are well advised to do the right thing. He said, Well, except in the six months before elections.

We're heading close to an election in Indonesia. The pressures are very large. Therefore, the efforts needed from the international community have to be very strong, and Mr. Neiss is there today pushing on the restructuring of state banks where we have this anomalous situation of revenues being below outlays because of non-payment on certain--on some of the loans. That's a very tough issue with which we'll be working. And I expect that in this case, as in other cases, we will get to an agreement with the authorities, possibly a few days late, as you imply, to undertake the policies that are right for this situation.

I don't know what it means not to have a government in a few months. There will be a new assembly, and then there will be a new President.

I have been impressed by the fact that in the last eight or nine months, possibly ten months, since President Habibie became President, that the program has month after month been pretty close to being on track. The macro policies have been implemented--it is a situation where, broadly speaking, they have implemented the agreed program, and I think that will continue. But you know and we know that if the security situation deteriorates further, if the government that eventually takes office is very weak, it could be that the policies that are now being put in place would be abandoned. It would be a terrible mistake because these are about the only policies that could work.

We made the decision that it was very important to help keep the economy together and to keep it, if anything, improving before the election so that we did not face after the election a far worse situation, something like, say, the situation of last April or May, than we face now with the rupiah moving back once more to the low 8,000s or the high 7,000s. That's much better than anything we had when the rupiah was around 15, 16, and we will stay with that, and we will continue operating with the government after the election, and I expect that at that stage the World Bank and the ADB will also be willing to do more.

But the situation is, as you say, uncertain and we all have to work very hard to try to keep it on track and improving.

A final word. I do sense, as you do, that there is some growth, some increase in confidence by the private sector, and there would be a reason for that. They have kept the program on track. I understand that the arrangement reached with the banks in Frankfurt a little over a month ago is regarded more favorably by the banks than the arrangement reached in the previous year, and the financial sector restructuring is proceeding. So there are grounds for some hope.

QUESTION: I would like, if I may, to go back to China. There are people who argue that Chinese devaluation would, in fact, be helpful to China because it would enable--it would help the sort of export-oriented dynamic private sector of the economy and would enable people, the workforce, part of the laid-off workers, for example, to shift from state-owned enterprises to the private sector, and that this would, in fact, be good not only for China but also for the region.

Now, is the IMF very clear that there is no case whatsoever for China to devaluate its currency at any time in the near future? Or are you of the view that there could be a plausible case for this and that it might even be helpful?

MR. FISCHER: First of all, the Chinese authorities have said they expect to hold the exchange rate through the end of 1999, and we see no reason why they should change that.

You know, growth rates in the range of 6.6, which is our estimate, 7 percent, which is the latest estimate of the Chinese Finance Minister, are really not rates of the type that suggest you need to do something drastic to shake up the economy. And so the underlying case for a devaluation would be, well, possibly you could do it and possibly it would help the export industries. But there seems to be no pressing need for it at the moment.

What the Chinese authorities have not done is to make the mistake that has been made in other economies of saying this is our exchange rate and this will be our exchange rate forth next hundred years. They have proceeded year by year just trying to make that decision so that everybody knows it's not necessarily there forever, and circumstances could arise where the Chinese would be advised to devalue somewhere down the road. But there is not a strong case for that at the moment as far as we can see, nor do the authorities see a strong case for doing that right now.

QUESTION: Mr. Fischer, good morning. As you know, the Hong Kong Government intervened in our stock market last year and this damaged the credibility of the stock market. So, Mr. Fischer, do you think it is wise for Hong Kong Government to dispose orders right now because there is some upside in the stock market right now?

MR. FISCHER: I think the authorities have said that they plan to hold a significant part of their shares, but to dispose of them gradually. One of the things that is best known to academics, of which I used to be one, is that getting stock market timing right is extremely difficult and there's no great record of doing it. So I wouldn't want to advise the Hong Kong authorities on what is the precise moment at which to start selling some of their shares. But I believe they may want to do some of that, presumably in a way that doesn't weaken the market significantly, and that would have to be their decision, not one for the IMF, which doesn't on a day-to-day basis have the touch and feel of the Hong Kong stock market.

QUESTION: Mr. Fischer, what happened with the debate about rising deflation or deflation? Is there deflation still in the world economy, and is that at all a concern right now?

MR. FISCHER: I think with the prospects for recovery having improved, the deflation debate is being deflated. There hasn't been a lot of discussion of that. What negative inflation there was--and there was some in some countries--related a lot to declining commodity prices. With the oil pricing having turned around, you see a little less commodity price deflation. With the U.S. economy perking along as well as it is and with the improved prospects for Europe and Japan, I think the fears of deflation have gone. But in terms--or at least have been diminished.

But in terms of sort of the possibility that this problem could occur at some time, I am sure that in the graduate economics courses taught at MIT or elsewhere, deflation, which never used to appear on the syllabus or on the reading list, will now have an entry as an interesting possibility with questions about how one should operate in that environment. But it doesn't look at the moment that recovery is beginning that that is the concern that we thought it was just a few months ago.

QUESTION: Mr. Fischer, my question is related to Thailand. The latest indicators from Thailand show that the economic contraction may be ending. What's your view on this? And also what's your view on the current euphoria in the Thai stock market?

MR. FISCHER: Yes, we believe that the recession is ending in Thailand and that the economy is turning around and could show positive growth this year.

Once you say euphoria, of course, we have to be against it because we like balanced, sober views. I thought for some time that stock markets in Asia were significantly undervalued given the prospects for growth in the continent and even in the affected economies, and there was no doubt several months ago that they were way too low. But just as it's difficult to predict timing in stock markets, I don't want to comment on whether the level of the market is right. That it should have gone up in the last six months significantly there's absolutely no question.

QUESTION: Mr. Fischer, a question on the intermediation business in Asia and the role of banks here. A good number of countries now believe that the way to go forward is to consolidate the banking industry to have fewer banks, consolidate the assets in fewer institutions, and the problem there would be that many of these institutions are actually weak, inherently unstable, and don't have the legal, you know, infrastructure to sort of support them.

What is your thinking on the whole intermediation business in Asia right now? And how do--I'm not asking for an answer on financial architecture or anything like that, but something a little less than that. On the institutional side of the banking industry, what do you think Asia needs in order to go forward?

MR. FISCHER: I can't really answer, I think, in the level of detail that you would like, Mr. Emmanuel. It is clear that at least in the countries where I do study the financial system closely, in some of them there was vast overbanking or vast excess number of banks. Obviously Indonesia is the one that comes most strongly to mind, and then if you look at the number of investment houses or financial or merchant banks, depending on which country you're looking at, in various aspects of the financial system there was an excessive expansion of the number of institutions.

So some forms of consolidation are clearly necessary, and we see at the highest levels that happening all over the world.

If we look to the might of the Asian financial system, you're really looking at the Japanese banking system. And in Japan itself, major measures are underway to not necessarily consolidate, although there's been some of that, but just to clean up the balance sheets of those banks.

That is surely the first priority. It will take time, but Japan made a good start at that last year and I hope will continue the effort.

In other countries where there were so many banks to begin with, they will have to consolidate. They will have to clean up. And how you change the management culture in an institution is typically by changing managers. Many countries are thinking of allowing foreign investment, possibly partial ownership, or possibly larger, by foreign banks.

In this sector, as in other sectors, allowing in competition is a good way of strengthening performance. So I suspect that we will see considerable consolidation. I hope we'll see increased foreign participation as a way of helping strengthen the technology in these sectors. We certainly are looking to improved supervision in several countries, and better supervisory agencies are being put in place. And although I think you don't want me to say this, I believe that the emphasis on the financial sector in the international architecture, the setting up of the Financial Stability Forum, the push on adhering to banking standards internationally will also help in that regard.

MR. SHASTRY: We have come to an end of this briefing. Thank you very much for attending.

MR. FISCHER: I'd like to add one thing.

I had expected to be asked something about highly leveraged institutions and the attitude of the international system to them. It may not have been noticed, but the Financial Stability Forum, which had its first meeting in Washington three weeks ago, which brings together the supervisors from the main supervisory agencies for insurance, accounting, securities markets, as well as banking with the international institutions and G-7 officials, is setting up three study groups, one of which is on the highly leveraged institutions, and they will be bringing in a report in a couple of months.

You also see in the United States the presidential commission on highly leveraged institutions reported last week, and that there is a growing realization that these institutions--and the phrase HLIs has replaced hedge funds because there are many non-hedge funds who use the same methods--that there is a growing realization that some forms of supervision and insurance provision and information provision are needed for these institutions. And I expect that as we go ahead we will see action being taken in those regards.

So let me conclude by thanking you all very much for this opportunity, and if they are useful, I hope you will let Vasuki and our External Relations people know, and we can do it again. This is the second one. I don't know whether we have the frequency right, but we should continue to experiment if this is useful.

[Edited transcript]


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