Participants: Christine Lagarde, Managing Director, IMF & Gerry Rice, Director, Communications Department, IMF
MR. RICE: Good morning, everyone. And welcome to this Press Briefing here, at the International Monetary Fund. Delighted to welcome you this morning, and we looked at this as an opportunity to give you the chance to ask some questions to the Managing Director of the IMF, Madam Christine Lagarde. Good morning, Madam Lagarde.
MS. LAGARDE: Good morning, Gerry.
MR. RICE: Who with us this morning. And also it’s an opportunity for us to use the Online Media Briefing Center to reach out to our contacts and colleagues in the press all over the world. So, again, welcome. We are on the record this morning, we are going to turn to your questions online very shortly. But just before doing that, I would like to ask Madam Lagarde, perhaps, to make a few opening remarks and then we’ll turn straight to your questions. Thank you. Madam Lagarde?
MS. LAGARDE: Well, thank you very much, Gerry; and good morning to all of you. This is my first virtual press conference, which is quite unusual and I’m trying to imagine all of you behind this little screen that is facing me, but I’m going to look at Gerry and imagine that you are all like Gerry.
If I look at the global economy as it stands at the moment, and based on the real latest, at the World Economic Outlook, we have a situation where growth is a little bit tepid, I would say, the 3.3 percent in 2015, hopefully 3.8 percent in 2016, which is clearly better, so we have recovery, as we have said, but it’s fragile, it’s unbalanced, and there are some downside risks on the horizon. But being a positive person, and trying to look at the bright side of things, I would like for once to just, you know, sort of start with the low-income countries, because that’s where we are seeing the highest growth numbers in the fifth, aiming toward six, depending on the countries, with some outperformers.
And clearly countries that are heading towards better development, and that was certainly clear at the time of the Addis Ababa Conference that took place about a week ago, where major financing were considered, and where low-income countries really gathered to see how they can, together, move forward.
So, that’s a promising area, and one where, I think the IMF is going to continue being a partner, where the IMF will not make undue promises, but where we will be very keen to deliver what will actually help the low-income countries. And, you know, I’ll be happy to go back to that.
Then moving East towards Asia, we also have, particularly in the developing countries of Asia, some very remarkable performers, and we have, you know, a slowdown in growth. We are still focusing China at 6.8 percent which is certainly a bit lower than what it has delivered lately, but it’s a measured slowdown, I think very much under control. It has had its little ups and downs lately, and I’m happy to come back to that later. Japan is a very interesting country, we just concluded the Article IV a couple of days ago, and it’s clearly a country where a very determined and decisive team has focused on monetary, and that monetary policy is much more active and vibrant and it has been for a long time, and it targets, clearly, an increase in inflation, an increase in the monetary mass as well.
And a set of fiscal and — fiscal policies and structural reforms that have to accompany the process. Now, we believe that Abenomics, as it’s called, is turning out to be positive, is beginning to deliver, and we see underlying inflation in particular, inflation expectations on the upside. But it has to be continued, and they both, in terms of fiscal commitment with the consumption tax, in terms of structural reforms will focus on women. Those reforms have to be continued.
The Euro Area? I would say that despite trepidations that everybody is familiar with, particularly in Greece, the Euro Area is beginning to turn the corner, and we have more upbeat forecasts than we had in a long time, and certainly there are countries that have graduated from their programs; whether it’s Ireland, whether it’s Portugal, Spain only with respect to the banking sector that are beginning to deliver much better results. Greece, I’m sure, you’ll want to ask me a couple of questions on Greece. But it’s looking more promising and I’m sure that there will be changes in the Euro Area, which will be probably triggered by the current questions that one has about the cohesion of the monetary currency, the monetary union.
Moving West this time, we clearly have a strong performer with the United States of America, which is, you know, certainly well into its recovery process. Where we should expect probably a variation of monetary policy in the not too distant future, we are very pleased to see that it is data-dependent, and that the Chairman of the Fed is actually very, very determined to stay data-dependent, and to give very clear signals and indications as to when changes will occur.
We have a close, as you know, connection to the U.S. authorities, particularly to the Fed, and we are in great discussion. We are not always exactly on the same page, and we made our recommendations, but that’s probably to be expected.
Now looking South, in that hemisphere, the Latin America countries from the Caribbean all the way down to the South Cone, are taking a hit as a result of the commodity prices decline. And I think it’s a region that has enjoyed a very longstanding, positive ride as a result of high commodity prices, as a result of growth being driven by some large economy, such as China. And where, clearly, there is a dampening effect as a result of the decline of prices. And probably some expectations that the change in U.S. monetary policy will also induce an element of volatility in those markets, so we are seeing in 2015, certainly, a much lower growth rate overall, with completely different performers, and hopefully a little pickup in 2016. I think I’ve tried to give you a sort of global approach to where we are at the moment.
MR. RICE: Thank you very much for that overview. I’m sure that was great interest to the global audience. Let me turn to the questions, or some of the questions we’ve received online. I’m going to begin with some questions on China, and in particular from Xinhua, from Yujuan Jiang, we have a couple of questions, let me just read these questions: some are questioning China’s efforts to stabilize the stock market movements, and how might this affect China’s determination to further its reforms? How does the IMF evaluate China’s financial market reforms? And will this stock market event of recent times, earlier this month, will it affect the IMF’s review of the renminbi’s inclusion in the Special Drawing Right currency, the SDR?
MS. LAGARDE: Hello, Yujuan Jiang. That’s quite a question I have to say. Okay, let me backtrack a little bit. First of all I think there had been a lot of noise and a lot of coverage of significant market variations, but I think we need to keep in mind a bit of a medium-term approach. And if we look at the Chinese market, particularly the Shanghai market, we are still up — they are still up more than 80 percent relative to a year ago. So it’s a market that has gone up extraordinary, and which is through a down mechanism at the moment, which is also very rapid, but we are still more than 80 percent from last year. That’s point number one.
Point number two, we have concluded our China Article IV, and that was actually reviewed a couple of days ago and we believe that the Chinese economy is resilient and, you know, strong enough to withstand that kind of significant variation in the markets.
I think the third point is that it’s not a very, sort of, well established longstanding markets that has been around for decades and decades, as has been the case in either the United States or some of the European Union countries. It’s a relatively young market and there is an element of a learning curve, both by the market players, by those who invest, by those who raise capital and of course by the authorities as well. And no one should be surprised by the fact that they want to maintain an orderly movement, and try to avoid disorderly functioning of those markets. That’s after all, the duties of such authorities. And the fact that they want to maintain a level of liquidity as well, that is commensurate with an orderly process, is also quite good.
Now, is that going to impact significantly? I think on the economy as a whole, I’ve mentioned the point that we believe that the Chinese economy is resilient. Is that going to impact our assessment of the Special Drawing Right basket? I don’t think so. We have to be mindful, we have to be vigilant, and we always are, but equally we cognizant of the very significant reforms that the Chinese authorities are implementing. I mean, a few days ago implementing, I mean a few days ago and it went quite unnoticed. In mid-July the Chinese authorities moved forward with significant reforms of their financial markets. And we are very confident by their determination to deliver on the reforms, which will be conducive one day when the time comes once all the signals are checked positively to the renminbi included in the Special Drawing Right basket. So we are doing the work. We will continue to do the work. And I don’t think that we will be derailed by some market variations that we’ve seen recently.
MR. RICE: I should have mentioned several questions on China. Andrew Mayeda from Bloomberg had a similar set of questions. I’m going to move on to Greece where we have a large number of questions, most of them around the same sort of nexus of issues. I’m going to take the question from Jeremy Tordjman of AFP, but I should mention that there are questions also from the Washington Post, Kathimerini, Reuters, from Dagens Nyheter in Norway, Asahi Shimbun,. Let me capture the main issues via Jeremy Tordjman and actually a question from Heather Scott of Market News and The Guardian in London. So the questions on Greece, if I may, are:
The IMF has repeatedly stressed the importance for build-out countries to have ownership of the programs. How do you expect, how does the IMF expect, this ownership to materialize in Greece given that the authorities have indicated little faith in the program and have publically stated in the past that they did not want to have the IMF onboard?” So that was Jeremy Tordjman’s question. And there’s a question from Asahi Shimbun that says, “Regarding Greece’s debt; there were agreements the creditors should have restructured Greece’s debt earlier, which turned out to be true. Does the IMF stance this time reflect that lesson? And then finally, what actions or policies would be necessary to convince the IMF to participate in a future program in Greece?”
MS. LAGARDE: Good morning, Jeremy. First of all, I have received a letter from the Greek authorities and from the Finance Minister to invite the IMF to come and work with the Greek authorities on a proposed program. So that’s number one, we are being invited. Number two, I have been in politics myself, a little bit, and there are lots of things that you say and what matters at the end of the day is what you do — so deeds, no creeds. And what will be critical in my view is what the Greek authorities actually are prepared to do, not the words around it, not the political noise that is often a necessity. But to demonstrate ownership and to demonstrate determination you propose pieces of legislation, you debate them, and then you vote, the parliament votes them or not. That’s stage one. Stage two, you implement the decisions that have been made. And I think that’s what will really indicate the ownership of the authorities to make sure that the Greek economy turns around, that it starts creating jobs, and that it restores the complete financial sovereignty of the Greek economy so that at some stage it can go back to market, finance itself without any support. So that’s the nature of ownership.
On the issue of debt, first of all there was a debt restructuring in 2012. It was essentially a public sector debt owed to the private sector, and there was a massive restructuring at the time. We are currently looking at a situation where we have analyzed the debt as unsustainable. I think I have repeatedly said that for Greece to succeed and for any program to fly, a significant debt restructuring should take place. So I don’t think that we have varied. And we will stick to that position because that’s really becoming a commonly accepted view that with a debt that climbs from 170-ish and might peak at 200 percent with the track record of the country, it’s inevitable that there is an element of debt restructuring, which takes me to the latter part of your questions.
I think for a program to succeed and for Greece to be able to turn around its economic and social situation and to reach the stability that is hoped for, it will take four key components. I think it will take sensible fiscal targets that are delivered upon with clear measures that will be identified early on. It will require structural measures to unleash the potential of the Greek economy, which is far too constrained by lots and lots of barriers, turfs, protections. And on the other side, it will require sufficient financing so that the program is actually credible; and the element of debt restructuring, which will allow the Greek economy to walk on not necessarily two legs as I have said, but four legs. It takes fiscal, structural reforms, financing, and debt restructuring.
MR. RICE: I think that covered a lot of ground for Greece. I’m going to turn to Ukraine, another country in the news, and this question is from Moritz Koch of Handelsblatt. And he is asking, “A deal with the private bondholders is still not reached. A default seems more and more likely. The IMF has indicated that it is prepared to continue disbursing money to Ukraine even in that case. So my question is this, how would a failure of the debt negotiations impact the timeline for Ukraine’s return to the markets, and would a further extension of the program and even more public aid be necessary in that event?”
MS. LAGARDE: Well, let me step back for a second because I think Ukraine has been in an incredibly encouraging situation. From a poor track record over the last 20 years or so where we had many aborted attempts to help the country, we have been now in partnership with Ukraine for more than a year and we have seen political determination to change the face of Ukraine notwithstanding the very difficult security and military situation on the eastern border of that country. But clearly political players who understand that if they want to turn the economy around, if they want to restore stability, they have to attack on all fronts — fiscal, structural reforms, corruption — the whole equation. And what we have seen is actual delivery. The Ukrainian authorities have actually delivered. Now is it to say that it’s fine and everything is okay? No. There are forces that are trying to destabilize, but I think that we are seeing a very strong political determination. We are due to have the first review of the second program next Friday, this Friday, to approve the first review of that program, which I hope will be very conclusive and will be supportive of the efforts.
Now, clearly the private debt is under negotiations and the Ukrainian authorities are in a dialogue with the bondholders, a difficult dialogue. We are encouraged that that negotiation is making progress, and we very much hope that it continues to make progress and that the bondholders are sensible as to what can be achieved rather than expected in the medium to long term. Having said that, if it didn’t work despite the encouraging progress recently made, then there is a possibility to go into a legislative process that institutes a debt moratorium. We hope that it’s not a required step in the process, but we have a policy at the Fund as you know that is about lending into arrears and we will apply that policy, which allows us to continue to support Ukraine despite that situation.
MR. RICE: Let me turn to a more topical issue, and I want to take a question on this topic. I think there are several, but I’m going to take this question from Barry Wood of RTHK, in Hong Kong. And Barry’s asking about the IMF quota reform and he says, “Since there’s no early prospect of U.S. approval of the 2010 quota reforms, are the IMF’s hands essentially tied in terms of boosting the voting shares of China and other major emerging market economies?”
MS. LAGARDE: First of all I don’t think we should give up on the 2010 reform. We take every day as it comes. We take every contact with Congress representatives as they come. But I very much hope that we can continue to hope for a positive resolution of this 2010 reform, which is completely in the hands of the U.S. authorities. We have nearly 80 percent support in the membership, but we need the key member. Now, the IMFC, which is one of the key governing institutions of the IMF, has decided that if by the 15th of September this matter is not resolved satisfactorily, then we have to select the interim step that we will take forward in order to make sure that there is an element of down payment on the quota increase. So I’m not suggesting that the quota increase that was decided under the 14th review, which is often referred to as the 2010 reform will be completely delivered upon. That would be wishful thinking on my part. But I know that an interim step is very much in the cards and that it will be considered as a down payment compared with what we should achieve under the 2010 reform.
But apart from that I just would like to say that whether it’s in terms of policies, in terms of respect of the rules, in terms of composition of our team and diversity of recruiting, we are very mindful that we are a diverse institution. And when you walk the corridors of the IMF and when you see diverse the views can be, it is not a U.S. or Europe dominated institution. I certainly don’t feel it that way.
MR. RICE: Turning to another part of the world, if I may, I’m going to take a question on Ghana from George Wiafe and George is with Joy FM, which is a station that is known to us. He is asking, “What do you make of arguments that the real test of the IMF-supported program in Ghana is going to be the election year, which is next year, 2016?”
MS. LAGARDE: Well, whether it’s Ghana or any other country in the world, election years are always difficult for countries under program because they’re targets, because there are sometimes hard decisions to be made. Election years are not very conducive to those decisions, which is why for the Ghana situation a lot of the fiscal adjustment was frontloaded in 2015. So many of the hard decisions have already been taken, which should hopefully make 2016 not a neutral year, but a year when the hard decisions are at a lower level. So I’m very hopeful that Ghana continues to deliver and continues to restore the economic stability that it had and is sensible about its borrowing capacity.
MR. RICE: Thank you for that. I want to turn to Latin America. I know you touched upon that in your opening remarks. There are several questions. Let me just summarize them by asking, “Latin American commodity prices and China, the main drivers of growth in the region, continue to slow down and the forecasts are now dimmer than some months ago. Does the IMF see the region falling into a recession in 2015, especially as the fed is expected to hike the interest rates later this year?”
MS. LAGARDE: In Latin America as in other parts of the world, we are extremely vigilant and we check signals and we really try to go under the skin of each and every economy. And I think each and every economy in Latin America has its own specificities and characteristics, and they are different. Whether you look at Chile or at Jamaica, Brazil or Peru, Guatemala or Mexico, they’re all different. One thing they have in common for most of them is that they are commodity suppliers, they are raw material suppliers, and clearly they have stopped reaping the benefits of a decade of high prices, which has been fueling Latin America growth for many years.
The decline of commodity prices, probably lower demand addressed to them by countries like China and a few others, the volatility of currencies that we are seeing a little bit of at the moment and that we might see a bit more of if and when the Fed changes monetary policy and begins lifting interest rates, all of that is affecting the Latin American countries.
Do we see it in recession? No. The forecast we have for 2015 is 0.5, so it’s not high growth as we had it for many, many years, it’s much lower. We see a little uptake in 2016 — end of 2016 — and clearly the policies that are being implemented, whether you look at Brazil, at Peru, Colombia, to name a few, and starting from different bases, are really aiming at improving the situation, restoring confidence, having a solid fiscal base from which to work, reconstituting buffers in some cases. But I would say it’s a large continent and with Central America and the Caribbean as well, but each and every country has a history, has a particular situation, and we need to be mindful, vigilant, and prepared to help for each and every situation.
MR. RICE: Thank you. I should have said that that particular question came from Alfonso Fernandez of EFE. And I think he captured the gist of what many were asking. I’m turning to another issue that you mentioned at the beginning, Madame Lagarde, which was the whole issue of the low-income countries and, in particular, this year 2015 and the financing for development. This question is from the East African in Kigali, Rwanda, from Berna Namata who is asking: In relation to the financing for development agenda, the low-income countries in Africa are increasingly citing the IMF’s stringent rules on borrowing as an impediment to growth and to their potential. Specifically, the countries would like to see the IMF giving them more room to borrow and also removing restrictions on how much they can access on concessional and non-concessional terms. What is your view on this?
MS. LAGARDE: Well, I would like to challenge Berna on that. First of all, it’s a key year for low-income countries. We have 74 low-income countries in our membership, so it’s a big constituency as an economic group. And it’s a big year because we just had Addis Ababa for the financing of development, September we’ll see the Sustainable Goal Development Meeting under the leadership of the secretary-general, and then December will be the climate change COP21 in Paris. So if you combine all that, clearly it’s a big challenge for the low-income countries and they have a lot to gain from what will happen or what has happened.
Now, speaking of what has happened, and it went a bit unnoticed because Greece was on the front page during those days, but during the Financing for Development Summit I think the IMF really did not make undue promises, but I think we really delivered. And I want to thank the Board of the IMF for having really focused on trying to deliver on time, so we did deliver on time.
And it was decided that concessional lending from the IMF, from what we call the PRGT, Poverty Reduction and Growth Trust Fund, that is established in our institution, would increase access by 50 percent; that we would better target on the poor countries; and that we would maintain the 0 percent interest rate for all concessional lending to the fragile states. So those three components are really a pluck in helping the Financing for Development.
Now, to Bernard’s point, why isn’t the IMF a bit more, you know, complacent and flexible and relaxed about non-concessional borrowing in particular? I would say, Bernard, please look at our revised policy, which we have matured over a period of about a year and a half and which is now embedded in the rules of the institution, which allows us precisely not to categorize countries in buckets of, you know, the low-income countries, the over-indebted countries.
But we have a policy that is actually helping focus on the actual needs of the country, the projects for which special borrowing is expected, and it applies to those countries that are under program. The other ones can, you know, do what they want within reason and with the public interest of their population in mind, but they do what they want. Those countries under program with us, we actually authorize non-concessional borrowing if it is associated with a structural program and infrastructure financing, something that is going to be meaningful and will deliver expected growth for the country. So I think our policies have improved for the better.
And I was very pleased when I met with the African Union leaders or when I met with some of the finance ministers at the Spring Meetings to really explain in details what this new policy is. I think there’s a lot of misunderstanding about it and I think we have gone towards being much more country-specific, much more project-specific to actually have rules that are not as rigid as they used to be.
MR. RICE: I’m going to make this the last question. We’re turning again to the emerging markets, something you touched on earlier, but two questions have just come in, one from Jiji Press, Edward Paglia Rulo, and one from CNBC. And the question is: Are emerging markets and other countries more prepared now to handle potential spillovers and uncertainty that may result from the expected interest rate hike by the U.S. Fed?
MS. LAGARDE: I think the answer is yes. You remember the ‘Taper tantrum” that we had back in — I think it was May and June 2013, when it was hinted and then everybody thought that the interest rate was imminent and there was volatility and there was instability on the markets. I think everybody learned a lot from that. And I think the vigilance level has been raised. Many countries have actually taken measures in order to be able to resist a recurrence of the same volatility and the same instability, whether it was in the monetary policy area, whether it was in fiscal. And we saw at the time that those countries that took the right set of measures bounced back from this volatility incident very promptly.
So I think, we at the IMF studied that. We communicated with the membership. We did a lot of work on the spillover effects and the spillback effects of spillovers to actually raise the level of awareness and vigilance of all monetary authorities. And I was really pleased always to hear Chairman Yellen say that she would be mindful of potential spillover and spillbacks into the U.S. economy.
So I think the toolbox has been explored, has been made available in each and every country. We remain vigilant. The monetary authorities that will make decisions in due course, whether it’s the Fed, whether it’s the Bank of England, whoever starts first, or whether it’s later on the ECB of the Bank of Japan, will be mindful of that. And I think that tapering tantrum was painful, but it has been a good warning of how prepared we should be, and I think the level of preparedness has significantly improved.
Now, in the meantime, the downside risks and the headwind that the emerging markets are facing has increased. And the fact that commodity prices have gone down in particular is clearly going to increase the necessity to use the toolbox very appropriately when the interest rate movement comes.
MR. RICE: Thank you. I’m going to give Madame Lagarde the last word, but before I do, let me thank our colleagues for joining us online. We will make a transcript of this press conference available. And with that, Madame Lagarde, would you have a last word for colleagues online?
MS. LAGARDE: Well, first of all, it was very pleasant, but also very strange to communicate with the journalists who are listening, but I hope it’s comfortable for you and that you have your feet on the table, a cup of coffee, or that you are comfortable wherever you are. I think it shows how the IMF is actually determined to take advantage of technology in order to embrace very broadly the membership, the needs of our members, and your expectations as well. I’ll give you an example.
In addition to this virtual press conference, which I hope we can renew, as you know the IMF is delivering a lot of technical assistance, a lot of capacity-building on the ground. But we have now ventured into the MOOC space and I’m very, very pleased to see how we can actually use and leverage common technology with other major universities around the world to provide the knowledge, the know-how, the best practices that we have accumulated over time and that we are activating for the membership.
We have had many, many civil servants now graduating from those programs, whether it’s in public finance management, whether it’s in debt sustainability analysis. We’re going to expand that base of courses available, and I think that’s a fantastic way to leverage on the knowledge available in our institution and make it available for free to those who want to learn, improve, and develop their skills. So I welcome those changes very much.
MR. RICE: Okay. Well, I want to thank you, Madame Lagarde, for giving us this time this morning and perhaps we can do this again at some future point.
MS. LAGARDE: Absolutely.
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