Transcript of a Press Briefing by Simon Johnson, Economic Counsellor and Director of the IMF's Research Department, on the World Economic Outlook's Global Forecast Chapters
October 17, 2007With Charles Collyns, Deputy Director of the Research Department, and Timothy Callen, World Economic Studies Division Chief
October 17, 2007
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MR. MURRAY: Good day. I am William Murray, Chief of Media Relations at the IMF. This is the 2007 autumn World Economic Outlook global forecasts press briefing. With us today is Simon Johnson, Economic Counsellor and Director of the Research Department at the IMF. Charles Collyns, Deputy Director of Research, and Timothy Callen, the Chief of the World Economic Studies Division. Simon will have some brief opening remarks and afterwards he will take questions from you.
MR. JOHNSON: Good morning, everyone. The financial turmoil that began this summer has certainly been a test for markets, and the consequent tightening of financial conditions will have an impact on global growth in the coming quarters. Led by robust expansions in major emerging market economies, global growth was rapid through the first half of this year and should again surpass 5 percent in 2007. But we have marked down our projection for global growth in 2008 by almost half a percentage point to 4.8 percent, in the wake of this recent turmoil. This largely reflects lower growth expectations for advanced economies. Underlying fundamentals remain sound and global growth should remain strong, but I would emphasize that there are serious risks ahead.
In the United States the main story obviously continues to revolve around the weak housing market. Spillovers to other sectors appear largely contained, and a further period of growth below potential is the most likely scenario for the coming quarters. We now expect that the drag from the housing downturn will continue through 2008 and that the U.S. economy will continue to grow at a moderate pace rather than picking up speed as we had projected most recently in our July update. Thus, we have marked down our U.S. growth projection in 2008 by nearly a full percentage point to 1.9 percent. However, a still-healthy employment picture has eased fears of a sharper slowdown.
In the euro area and Japan, we have also marked down growth in 2008 to 2.1 percent and 1.7 percent respectively. In Europe, tighter credit conditions and slower export growth are the main factors likely to dampen growth. Japan has been less directly impacted by recent financial disruptions, but a weaker external picture and some softness in domestic spending, particularly consumption, are expected to slow growth.
In emerging market and developing countries, growth is expected to remain strong across all regions, albeit at a somewhat more moderate pace than the brisk growth we have seen over the past two years. This year we expect China and India will be the two largest contributors to global growth, measured in PPP terms. As noted in my foreword to the WEO, this is the first time based on the IMF's measurements that this will be the case. China is expected to grow by more than 11 percent in 2007, while India is expected to expand by 9 percent. Growth may moderate somewhat across emerging Asia in 2008, reflecting slower trade growth as well as some policy tightening in countries facing overheating pressures.
In Latin America, the pace of activity is likely to moderate from 5 percent in 2007 to 4 1/2 percent in 2008, partly reflecting spillovers from the U.S. situation, but strengthened policy fundamentals should limit the impact of market turbulence.
In emerging Europe and CIS countries, growth momentum this year remains strong, close to last year's pace, although some countries that have relied heavily on large scale bank inflows may be more affected by fallout from the recent financial troubles.
In Africa, the near-term outlook remains positive, with growth this year and next expected to be close to or above its 2006 pace, 5.6 percent. In fact, we have raised our 2008 growth projections by about a quarter of a percentage point for Africa since July, reflecting the prospects of rising petroleum production in that region.
Having said all this, the primary risks to the outlook are on the downside. The principal risk going forward is that prolonged disruptions in financial markets and a possible weakening of asset prices, including but not limited to housing prices, and confidence could have a more severe impact on economic activity than anticipated in our baseline projections. Financial market developments have raised risk spreads from unusually low levels, and this new pricing of risk is likely to persist. At this stage, we still do not know precisely how the losses from the U.S. subprime mortgage market will be distributed nor whether credit conditions will tighten further as expectations of losses affect bank behavior.
Uncertainty about the impact of financial turmoil on real activity also reflects the unexpected ways in which the problems have spread. Like a forest that has not seen a fire in many years, a benign financial environment, including low volatility and unusually narrow risk spreads, had built up a sizable underbrush of risky loans, relaxed lending standards, and high leverage in certain areas. When problems ignited in the U.S. subprime mortgage market, the fire jumped in somewhat surprising ways to other areas. In other words, at least three important fire breaks that should have limited the impact of the crisis in U.S. subprime mortgages did not hold. One was obviously the impact on other parts of the U.S. credit markets, such as jumbo mortgages which traditionally involve less risky borrowers. The second jump was to banks. Revelation of the extent of bank exposures, including among European banks, to subprime mortgages in the U.S. through off-balance sheet vehicles have shaken confidence and squeezed liquidity in interbank markets. The third, and perhaps most surprising jump, was to commercial paper markets. Asset-backed commercial paper saw issuances curtailed and a sharp rise in spreads, and there were effects also on other kinds of commercial paper. These global funding strains, as you know, led to a run on a UK bank, a mortgage lender that was apparently not at all involved in U.S. subprime.
These secondary fires are still being addressed through liquidity operations by major central banks, and their actions continue to help stabilize market conditions, but the smoke has not yet cleared. Interbank and commercial paper spreads have begun to ease, but money market conditions have definitely not yet returned to where we were before the turmoil began.
Central banks in advanced economies face a challenge in terms of restoring stability to the payments system while responding to the evolving macroeconomic risks. Central banks have been appropriately careful to distinguish between actions to restore liquidity and setting their policy stance to control inflation and support growth.
I would also like to stress that some important fire breaks did hold. There was relatively little impact on U.S. investment grade corporate bonds. More broadly, the financial problems did not spread in any serious way to emerging market and developing countries.
Thus far, emerging markets and developing countries have been less affected and generally appear well positioned to weather a period of weaker external conditions. Although there have been a few instances where interbank markets have shown strains, for example in some CIS countries, access to foreign capital has been maintained, and the prices of commodity exports have stayed buoyant. Solid domestic demand growth should continue to be a key driver, and stronger international reserve positions, public sector balance sheets, and policy frameworks provide the basis for most of these countries to withstand some weakening in external demand.
In fact, for a number of these emerging market and developing countries, inflation and overheating pressures are a rising concern. Food prices have accelerated in most corners of the globe, pushing up headline inflation, particularly in lower income countries where food is a larger part of the consumption basket. Factors behind the recent surge in food prices, which are discussed at length in the WEO, include the role of biofuels and rising demand from emerging markets such as China and India. While supply may eventually respond to the surge in demand, the catch-up period may take some time.
At the same time, oil prices are at all time highs and upward price spikes remain a concern. The oil market remains tight as demand growth continues, particularly from fast growing emerging markets as well as due to robust U.S. oil demand. On top of all of this, aggregate demand in many middle income countries is growing fast, fueled by capital inflows and rapid growth in domestic credit.
So, while some central banks are putting out fires and discussing how to fight future fires, others are preparing to deal with a flood. That is the flood of capital flowing into middle and lower income countries. In contrast to the situation in major advanced economies, where inflation risks and inflation expectations have eased, further monetary tightening in several emerging market countries may be needed to forestall overheating pressures and keep inflation expectations well anchored.
But this could complicate the already difficult task of managing capital inflows. Governments will thus need to keep a tight grip on public spending which can help to some extent mitigate pressures from capital inflows, including on the real exchange rate. In some situations, it makes sense for the governments to allow their exchange rates to appreciate.
Global imbalances remain large, although there are some encouraging signs, looking at current accounts around the world. The U.S. current account deficit is moderating to around 5 1/2 percent, benefiting from past dollar depreciation and a more balanced pattern of global demand growth. Going in the same direction, the latest U.S. trade numbers have also been encouraging. While we expect some recovery in U.S. household savings, and fiscal balances have improved, this should be helpful, although there are long-run pressures on public finances that remain a concern.
In oil exporters, current account surpluses should remain narrow as these countries ramp up spending. However, with the weakening dollar and rising oil prices in recent weeks, the reduction may be less than we projected earlier.
China's current account surplus remains on a rising trajectory. Renminbi flexibility against the U.S. dollar has increased, and domestic inflation has led to some small appreciation in real effective terms, but the burgeoning surplus is showing no signs of slowing, underscoring the need for further real effective appreciation over the medium term.
Japan's current account surplus also remains large, and we do not see any immediate prospect this will narrow significantly in the near term.
Dollar depreciation has clearly picked up since the turmoil began, but it has been orderly. The dollar has depreciated noticeably against a wide range of currencies since August, but less so against the currencies of key surplus countries. So we still need to watch closely for risks associated with either a disorderly adjustment or an asymmetric adjustment or both. The first multilateral consultation involving China, Saudi Arabia, Japan, the euro area, and the United States provides a joint road map for policies to help mitigate exactly these global risks while supporting global growth, but we all need to follow through on those plans for the global economy to remain in good health.
We can now turn to your questions, but first I would like to announce that while I was talking, my blog has gone live on the IMF web page. I can see you are excited by that. If we do not have time to answer your questions now or if you want more details on anything, please feel free to post a question there. More generally, questions and comments from your readers and viewers are of course most welcome. Please tell them this is a limited time offer. We currently expect the blog to run just through the Annual Meetings and over the next few weeks as we explain our World Economic Outlook around the globe. Thank you very much.
MR MURRAY: Thanks, Simon. We can take your questions now.
QUESTIONER: Two questions. One is a general question about the reaction of central banks. To take your analogy, isn't just pumping lots of cheap money into financial markets a bit like sending an arsonist back into the forest with a box of matches, and, in a couple years time, aren't we going to be facing an even bigger forest fire?
And a rather parochial question about the UK At one point in the WEO, you say that some of the increase in house prices in the U.S. and in other markets has been justified by economic fundamentals, but some of it has not. In the U.S. you say that perhaps a third of it has not been justified by the fundamentals, and in some European countries, Britain included, it might be more than that. Can you specify a bit more how much overvalued you think the UK housing market might be?
MR. JOHNSON: Let me take the question on the metaphor first, as I am clearly responsible for that, and let me turn to Charles on the UK We have divided up the responses to various countries among the three of us.
As I tried to say in my opening remarks, I think there is a potential danger along the lines that you indicated, and central banks have to be careful while they are providing liquidity support to interbank market and to money markets more generally. They have to be careful that people do not misinterpret this in the short term as being in some way inflationary. I think they have done a very good job in those terms. I think longer term you are right that we have to worry about the general monetary stance, and also about the level of interest rates around the world. The so-called global savings glut is still an issue, and it is still something we have to look at. The flow of savings around the world is more of a medium-term issue that I would worry about. Monetary policy is very focused on the short term and I think it is doing a good job, but we have to still pay attention to where the capital is moving around the world and if there is in some sense that too much savings is pushing down interest rates and leading to excessive risk taking. I do not think we are there yet, but those are legitimate concerns for the future.
MR. COLLYNS: On the housing markets in Europe, we do not have a very detailed analysis of each housing market. What we do in the WEO is present a range of indicators that suggest that there may well be indeed some degree of overvaluation in many European housing markets, including the United Kingdom. For example, if you look at price to rent ratios or price to disposable income ratios, these have increased significantly more in the UK and some other European markets than in the United States. It is difficult to say how much of this is justified by fundamentals because in each market there are idiosyncratic factors that also affect prices, including in particular supply constraints which in countries like the UK tend to bite harder than in the U.S. One also has to take into account migration flows, the buoyancy of the UK financial sector and implications that that has for housing prices. So clearly some secular increase in UK housing prices is justified by the fundamentals, but we also are concerned that the recent increase in prices has gone beyond those fundamentals.
QUESTIONER: You mentioned that there are higher pressures on the inflation side in emerging markets and you also put in your report that in the case of Argentina you project 13 percent of inflation for next year, over the government projection or calculation, but under market expectations that are between 15 and 20 percent. Why is that?
MR. COLLYNS: On Argentina's inflation, it is difficult to make projections. There are so many different factors that are affecting price formation. It is not a completely free market, as you know. We certainly see a build-up in inflationary pressures in Argentina. Not all of those inflationary pressures are actually feeding into prices because of the various government measures. We think the underlying inflation in Argentina is certainly on the rise. There are strong pressures on the wage front, where we have seen 23 percent rise in wages over the past year, and a number of prices are controlled by the public sector. Exactly how the underlying cost pressures and demand pressures will feed into inflation is difficult to say, but clearly inflationary pressures remain a serious concern in Argentina.
QUESTIONER: I will limit my question to sub Saharan Africa. I see here in your report you say that there has been a steady growth since last year and we are predicting another increase again next year. I was wondering if you can comment as to why this growth in such positive investment climate in sub Saharan Africa is not being followed by foreign direct investment. Secondly, you talk about South Africa being one country that is attracting capital flows. I was wondering also if this is not a risk in the long term, that one country will attract such funds and other countries will not be able to do that. Finally, if you can just quickly comment on Zimbabwe. I see the inflation there is almost 8,000 percent. I wonder if you can think of any interventions that can change the situation in that country.
MR. COLLYNS: Certainly we are very encouraged by the strong performance in Africa in recent years, and I think it is being reflected with increasing foreign direct investment into Africa, particularly into natural resource sectors, given recent increases in commodity prices. There is clearly large potential for successful investments in southern Africa.
At the same time, there is also room for increasing flows of foreign direct investment. To attract foreign direct investment, I think it is well known, you have to have a good investment climate with a clear rule of law with an appropriate taxation system. So there is a need for reforms in a number of countries to create an investment climate that is most conducive to foreign direct investment. But the foreign direct investment is beginning to come, and certainly South Africa is a country that is well placed to receive foreign direct investment and has already received substantial amounts of foreign direct investment. We would expect that it will continue to receive substantial amounts of foreign direct investment.
I am not an expert in the situation on Zimbabwe, but our experience has clearly demonstrated that the countries that follow sound macroeconomic policies are able to control inflation, bring inflation down to low levels. So I think what is required in Zimbabwe is putting in place a prudent set of macroeconomic policies, and that will bring inflation down.
QUESTIONER: With regard to Japan, you indicate that you see a weakening of momentum. I was wondering if you can elaborate on that. Also, do you think that an increase of policy rates at this time would have a negative impact on the economy? And on a separate note, can you talk a little bit about sovereign wealth funds? Does the IMF see this as a contributor to the world economy or a risk, and to what extent do you think they should be regulated?
MR. JOHNSON:. The weaker momentum in Japan has been happening for some time. The second quarter was a little disappointing, as you know. While we do not think that the issue in Japan is particularly financial spillovers from what has been happening in the U.S. and in Europe, we do expect there to be some weakening of the external sector. That is why we are marking down growth a little bit. I think there is some upside risk in our forecast for Japan. To be honest, I do not think we see any signs of inflation in Japan. We have looked pretty hard at that, and as a result, I am not expecting that policy interest rates are going to be changing anytime soon. Obviously, and you will hear me answer other questions today the same way, it depends on what the data show us in the months going ahead at the time central banks make decisions. We are not trying to second guess anyone. Based on what we see today, it does not look like there is a strong case for tightening in our view.
In terms of sovereign wealth funds, I can refer you to my blog, in which we will deal with the subject later today, but trying to answer the question directly, I think that sovereign wealth funds are obviously an important part of the world economy, that they are growing in importance, and based on our current account projections, the reserves that countries are expected to accumulate, and what countries have said about they will do with extra reserves, we would expect them to become more important. I think the financial turmoil in the summer had nothing at all to do with sovereign wealth funds and probably they played a stabilizing role, if anything. It is hard to know. I think, though, the summer's experience really indicates the importance of transparency in all corners of the financial world, including in markets, securitized markets, hedge funds, credit rating agencies, and including for banks. Regulated banks turned out to be insufficiently transparent. I think in the broad evaluation of transparency going forward, I think it is worth discussing what sovereign wealth funds would be willing to disclose on a voluntary basis, for example with the IMF, but perhaps it is in some other way. I think transparency is very much on the agenda, and you will hear a lot of discussion about that and ways in which we can make progress in a cooperative way on transparency. You will hear discussion about that as we go through the weekend.
QUESTIONER: How do you see the situation in Germany? What are your expectations for the next year?
MR. COLLYNS: We have marked down our growth projections for Germany as we have marked down growth across most of Western Europe, in large part because of the combination of the more uncertain financial conditions and the likelihood of slower global demand growth with a particular impact also from the recent appreciation of the euro. In Germany, investment and exports have led the expansion, as you know. We expect them to continue to do well. Consumption, however, has continued to lag behind, and we are not expecting consumption to pick up pace in the period ahead. Germany has made good progress in recent years on the reform front, and we see the fruits of the progress that has been made. I think the advances in the labor markets are particularly noteworthy. What I think is important in the period ahead is to stick with those reforms, maintain the implementation momentum, and to avoid any backsliding, particularly in the labor market area.
QUESTIONER: I have two questions to ask. There is no doubt that China's economy has encountered some problems such as the asset price inflation. You know housing prices are going up, and the stock market has reached a high level in the past six years. What is your opinion?
The second question is on China's currency exports and policy. Do you think China has been hearing more pressure about the revaluation of the renminbi?
MR. JOHNSON: I will take the second part of the question and turn to Tim on the first part. I think you are asking whether China's exchange rate policy is going to come under more pressure to change. As I said, we regard the renminbi as being undervalued. I think that view is shared quite widely. In the Multilateral Consultation, China agreed to have more flexibility in its exchange rate, and we do think all exchange rates can move up and can move down as they become more flexible. Over the medium term, we would expect the renminbi to appreciate in real effective terms by a considerable amount, and I think that China's increase in current account surplus makes this a likely topic of discussions in the months ahead. I do not think that we should single out the exchange rate in China as the only issue worth considering, or even the thing to focus on necessarily. The Multilateral Consultation emphasizes and the Chinese government agrees, in fact it was the Chinese government proposal, the need for a broader rebalancing of the Chinese economy, a shift away from exports and away from investment-led economy to more of a domestic consumption led economy. I think the appreciation of the renminbi would be likely to take place in that context, and that would be a positive way for it to happen, that would be a way we think would be quite consistent with sustained global growth and not at all disruptive. I think it is correct to think that in the light of what has happened in the past few months and the depreciation of the dollar that we have seen in the last couple months in effective terms, there is going to be more discussion, more thought about how to ensure this adjustment process continues to be orderly with regard to all currencies and all major economies.
MR. CALLEN: I think it is clearly very difficult to say whether the Chinese equity market or indeed any equity market is overvalued. Clearly we have seen very rapid price increases, and as you say equities, also some segments of the housing market as well. It is certainly something that we need to keep an eye on, but I think more fundamentally the question we have raised in this WEO, and other WEOs, is that we are concerned about the very rapid pace of credit and investment growth in China, and we do think that more needs to be done to begin to rein that in. So interest rates do need to be raised, and within that it is going to require that the exchange rate appreciates more quickly so that monetary policy has room to operate.
QUESTIONER: I want to know if there is something to do in Mexico to face the slowdown impact next year or we just have to wait for the shock. And I have another question: Mexico has been growing for more than five years lower than the population needs. What can the economic authorities do to accelerate growth?
MR. COLLYNS: Certainly Mexico's economy is very closely tied to the United States economy and is affected by the developments in the U.S. We are expecting the U.S. economy to continue to grow at a moderate pace. We are not expecting a major shock in the U.S. economy and a slowdown from the current rate of growth. Consistent with that, our projection for Mexico is for continued steady growth of around 3 percent, both this year and next year. So we do not see a major shock coming to Mexico, but clearly the authorities have to be ready and monitor the situation carefully, and if some of the downside risks we have highlighted in the report do seem to be coming, they will need to respond to that. But I think the major item for the Mexican authorities is to continue to push forward the reform program. We are very encouraged by the passage of the tax reform, we think this is a very important reform that has been on people's minds for a number of years. It is very encouraging that political consensus has now been reached to push forward a major reform of this sort. We think it will underscore the soundness of Mexico's finances for a number of years, that will help to replace the revenues that will be lost as the revenues in the oil sector diminish, but it will also provide additional funds for public investment, which will help to build up the basis for faster growth in Mexico. There is still of course a long reform agenda in Mexico, and I think the government will sensibly focus on issues step by step. Two areas that I would mention are the hydrocarbons sector and how to increase investments in that sector, and in the telecommunications sector, how to increase competition in telecommunications.
QUESTIONER: How should emerging markets in Latin America, especially Colombia, address the currency appreciation when the IMF questions the traditional measures in inflation targeting countries, but these countries are experiencing short-term portfolio investments that are becoming almost long-term investments and also high levels of FDI?
MR. COLLYNS: We had a chapter in our World Economic Outlook report on managing capital inflows, and, as you mentioned, we find that one of the most effective ways of responding to capital inflows is through fiscal restraint, avoiding a party in spending which has sometimes happened in the past. I think Latin America's performance has continued to be very good in recent years. Certainly there has been upward pressures on exchange rates in countries like Colombia, Brazil, Chile, and elsewhere, but this has not undermined the strong export performance of these countries, and in part that is because of the increasing underlying competitiveness in Latin America. Some of that reflects the strong commodity prices, which provides opportunities for profitable exports, but also continuing efforts to improve the business climate in these countries to reduce costs, to improve infrastructure. I think those efforts have to continue. Latin America continues to lag behind other regions of the world in terms of overall growth rates, although its own performance has improved relative to its past, comparing Latin America to emerging Asia or to emerging Europe, we still see plenty of room to do better. But the way to do better is to welcome the increasing flows of investment and make sure that those investments are used in a profitable way and provide an environment in which these economies can grow faster.
QUESTIONER: According to your data, Italy growth for 2008 looks like the lowest in Europe. Do you have any explanation for that?
MR. COLLYNS: You are right, we are expecting growth in Italy to come down to only 1.3 percent in 2008, which is broadly in line with the consensus, so I do not think there is anything very surprising in that forecast. We have marked down our forecast relative to forecast back in July. It basically reflects similar factors that I mentioned before that are affecting other countries in Europe**--**slower growth of world demand, the stronger euro, higher oil prices, and the dampening effect of the financial market. In Italy, I think it will be important to maintain progress in the structural area. I think in the past few years the progress has been somewhat disappointing. The Italian government has quite an ambitious reform agenda, but it has not been that easy to put that agenda into place. I think that does have an impact on longer term growth prospects. So what we would hope is there will be more success in translating the policy plans on the reform front into effect that will provide a stronger basis for faster growth in Italy.
MR. MURRAY: We have a question from the Online Media Briefing Center:. What is the impact of the devaluation of the dollar on the world economy?
MR. JOHNSON: That is a very broad question. The dollar depreciation that we have seen since 2002 is around 20 percent in real effective terms, and obviously there has been a sharp depreciation in the last couple of months. This is something that we have been expecting for some time, that has been in our forecast. We think it is part of the natural healthy process of global rebalancing. As long as it is accompanied by adjustments in other countries, along the lines we have talked about that is in the multilateral consultation agreement, for example, we think it will be pretty healthy. There are, of course, some risks anytime an important exchange rate moves as the dollar has moved, but we think it has been orderly so far. Some small industrial countries have experienced more appreciation, and they are a little bit concerned to see that other countries will adjust. I think in any adjustment process you can expect some pieces to move before other pieces. So we are pretty positive that we will see progress, particularly across the countries that have large current account surpluses going forward if they follow through on their multilateral consultation plans.
QUESTIONER: You talked about the serious pressures for inflation next year in Argentina. I would like you to elaborate on what the Fund thinks that governments should do about that and also on your projections for next year in GDP, why they think it will lower from 7.5 to 5.5. I think that is not an overheating, it is more like a freezing in the economy for an economy that has been growing at 8 percent for eight years, I think it will be something to comment.
MR. COLLYNS: I think 5 1/2 percent growth is a pretty strong rate of growth, certainly by Latin American standards. Argentina has had a period of very rapid growth, as you mentioned, but this has been a period of recovery from the deep slump in 2001-2002, which opened up a very substantial output gap. The recent strong growth has pretty much closed that output gap. We are seeing supply constraints becoming increasingly relevant in Argentina, in particular in the energy sector, as you know there were a number of energy shortages this winter, so we think it will be inevitable that the Argentine economy will have to slow down after a period of very rapid growth to something more in line with Argentina's growth potential consistent with the underlying rate of growth of population, and the underlying rate of growth of investment and productivity.
In terms of how to deal with inflation, we think that it will be important to use all the macroeconomic tools to address inflation. There has been some tightening of monetary policy over the past year or so, with interest rates going up, but nevertheless interest rates remain negative in real terms. We think there is room for further monetary tightening. Just as important, I think it is going to be important to maintain fiscal discipline. We have seen rather rapid growth of public spending over the past year. There has been a decline in the primary surplus in Argentina, and this is boosting aggregate demand growth in Argentina, so I think there will be a need for tighter reins on the growth of government spending. I think in this context, it will also be necessary to look again at exchange rate policy. The exchange rate has varied very little against the U.S. dollar over the past year. With a limited flexibility in the exchange rate, it becomes difficult to tighten monetary policy because higher interest rates will tend to bring in capital inflows, which would tend to generate domestic credit growth. So we need to look at a more flexible exchange rate policy as well.
QUESTIONER: I just want to follow up on the question about the U.S. dollar depreciation. Since oil is denominated in dollars, what is the implication for oil-producing countries and will the IMF put out advice that the oil-producing countries price their commodity in euros or any other currency since the dollar is in a free fall?
MR. JOHNSON: As I said several times, I think the dollar depreciation has been orderly. I think the extent of the depreciation which we have seen so far has not caused major disruptions. You are right that because oil is denominated in dollars, as the dollar depreciates there is some tendency for the price to rise in dollars, not necessarily rise in euros, for example, or in other currencies. I think this is something we are looking at, and we are discussing with people ways to best think about oil prices. I do not think we are going to recommend that anybody changes the way key commodities are priced. Pricing them in dollars is a very well established practice, regardless it is quite transparent. But you are right, as the dollar depreciates, we are going to have to look carefully at how that affects oil prices, how oil prices change in other currencies, make sure people are reading that correctly and thinking about how to handle that in their monetary frameworks and emerging markets, for example exchange.
QUESTIONER:. You lump together emerging markets in your analysis, and you mentioned that inflation and overheating economies remain a concern. In the case of the Philippines, inflation is low and at the same time economic growth is robust. Do you not find it interesting and do you think this will be sustainable? That will be my first question. My second question is: You also recommended that the government should exercise fiscal restraint to cushion the economy in case the financial turmoil persists. In the case of the Philippines, the government has been spending, well, they are pump-priming the economy recently. What do you think of this move? At the same time, they are trying to temper the appreciation of the peso.
MR. CALLEN: Clearly the background is that growth in the Philippines has been very favorable. After a period of higher inflation, the inflation has come down and the central bank has been able to ease policy. I think the baseline scenario we have is that that will continue. Clearly, there are some risks to the downside in terms of the global environment. Exports were somewhat affected in August as electronic exports declined, so I think at the moment what we see is policies broadly appropriate in the Philippines. Clearly with foreign exchange inflows coming in, one of the messages that Charles has already mentioned of one of the analytic chapters, Chapter 3 of this WEO, is that holding the line on fiscal policy is certainly the policy that we see having worked across countries in the past. Therefore, we would certainly encourage the government to keep a sound solid fiscal policy as it seeks to deal with these inflows, and then again flexibility in the exchange rate is another message that comes through very clearly in the results of Chapter 3.
MR. MURRAY: I also want to remind everybody that over the course of the week you will have briefings by our Asia Pacific Department, Western Hemisphere Department, and the African Department on the specifics of the regional development, regional economic development, so if you have country-specific questions, you can also follow-up there.
QUESTIONER: I gather from what has been said so far that we are going to see more and more government intervention. We see central banks intervening. Is the IMF saying that we are going to see more government intervention?
MR. JOHNSON: Let me speak to it generally and turn to Tim on the specifics of Canada. I think you are asking about the money market situation, is that right, liquidity? Well, I think it is quite hard to say how much intervention we will see going forward. I think the major central banks, in industrialized countries where this is an issue, have indicated very strongly that they are going to take whatever measures are necessary to ensure there is sufficient liquidity in their own interbank markets. That is something we think is very sensible. We also think it has been done and can be done without causing problems for inflation or damaging monetary policy frameworks. So I think in those terms the central banks will play it as they see it, and I think they have done a good job so far in terms of managing that. So your question sounded a little bit worried. I do not think we should be worried about this. The liquidity strains are abnormal, they are being addressed. Hopefully they will come completely under control, but I cannot tell you when.
MR. CALLEN: Let me make a couple of broad comments on Canada. Clearly with the slowdown, the fact that we have reduced the U.S. growth forecast relative to July means we also have reduced the Canada growth forecast given the strong trade and financial links between the two countries, and I think given that we see downside risks in the U.S., the same would apply to Canada. In terms of the financial market turmoil, clearly there was an impact in the asset-backed commercial paper market in Canada, which I believe is still yet to be fully resolved, but clearly the impact on the overall economy for Canada is less than it is going to be in the U.S. So I think what we see as the main downside risk is what is likely to happen in the U.S. rather than the financial market turmoil itself, although that is there as a downside risk also.
MR. MURRAY: Thank you very much, Tim. Thank you, Simon, Charles, and thank you all for joining us today.