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Transcript of a Conference Call on the 2015 External Sector Report and Individual Economy Assessments

Washington, D.C. Tuesday, July 28, 2015

David Lipton, First Deputy Managing Director

Olga Stankova, Senior Communications Officer

MS. STANKOVA: Good morning, and good afternoon everybody, and thank you for joining us for this Conference Call on External Sector Report of 2015. The call will be held by Mr. David Lipton, First Deputy Managing Director of the IMF. The call is under embargo until 10:00 a.m. Eastern Time, Eastern Standard Time.

MR. LIPTON: Hello, everybody. Good to be with you. I'm going to begin by saying a few words about our new External Sector Report, and then I'll be happy to answer questions, and have a discussion. This is the fourth year in a row, that we've put forward our External Sector Report, it's something we started in 2012, to deepen our work on and analysis, in looking at countries’ external positions. In this work we start with individual country analyses. But we put together the multilateral picture to make sure that we are analyzing how the external positions of one country affects the external positions of another, and that there is, in essence, multilateral consistency in our analysis.

Our analysis is about exchange rates, but also about current accounts and we've deepened the work that we've done in looking at the adequacy of international reserves and looking at countries' balance sheets, external positions, what their net international asset or liability position is.

We've covered 28 of the world's largest economies plus the Euro Area, and so as they are the largest that capture the bulk of global economic activity.

What you have before you today are two papers, an overview paper that emphasizes the multilateral issues that we see facing the world, and shows how individual economic situations fit into the global picture, and explains our assessments from a multilateral perspective what kind of needs there are for policies to reduce global imbalances.

Then the second document is a set of individual country external assessments. You have those before you. I won't discuss the details of those country assessments. We've written a good, careful report, and I want to give you an incentive to read all those pages, so if you have questions about what we think about individual countries, I'll direct you to those country pages.

This is a report that we put out at this time every year, because this is also the time of year where we are finishing up our country dialogues with some of the most systemically important countries in the world, what we call our Article IV consultations. And having a broad picture of the global composition of balances and imbalances is a very important input into that process.

Let me go through what I think are four main messages of this year's report, and then I'll take some questions. The first messages is that really there's been little progress lately in reducing imbalances and that includes in the most recent period we've looked at 2014.

Imbalances are much lower than they were in the pre-crisis and immediate post-crisis period. And the ESR, this year finds that the imbalances are too large. But they are much lower than they were, but they are still too large. We have established norms for each country to try to capture what we think are the “proper” current account surpluses over the medium term.

The last few years really have not shown much progress in reducing the size of the gaps between the present imbalances and what we see as the norms.

At the individual country level there are some countries that have made some progress but setbacks in others. We've seen some rotation on the side of excess deficits, while progress on reducing surpluses in surplus countries, has stalled.

Our second message is that the problem and the solution really are multilateral; this is not just a matter of individual countries. Many of the economies that we cover have current accounts that diverge from their norms, each of these contributes to a global picture, and every country makes some contribution to that global set of imbalances, but obviously the largest contribution tend to come from the largest countries, China and the U.S., whether you measure it in the dollar size of imbalances or the percentage of global GDP to capture the scale of countries.

China and the U.S. are still the most relevant from the standpoint of the pattern of global imbalances and excess imbalances, although in both those two cases, imbalances are much lower than they were in the pre-crisis period, they still remain major contributors to the global picture because of the size of their economies. There are other countries that contribute significantly, on the surplus side, Germany and Korea have significant surpluses, and on the deficit side the U.K., Brazil and France.

For a number of other countries we, in the report, suggest that adjustment would be desirable, from the country's own standpoint, even though, because the countries are somewhat smaller, that adjustment is less systemically important. Because all the countries' current accounts relate to one another, and one country's deficit is another country's surplus, and vice versa, the challenge in addressing external imbalances really is a multilateral one.

And we want to see reductions of imbalances both positive and negative; those reductions would be self-reinforcing and be helpful for global growth and global stability.

Our third message is about what needs to be done, and pointing to the risks from lack of action. In our report we try to address in each individual country situation what we think is needed in that country's case, and there is discussion of that in the second paper I refer to the individual economy assessments paper.

In general, obviously there's a need for policies to boost demand in excess surplus countries, and to control the growth of demand, in excess deficit case countries.

In some cases, fiscal policy may be part of that demand adjustment that’s needed, but we also are calling for structural policies, the kind of policies that would affect the savings and investment rates of the private sector, as well as of the public sector, and in that way contribute to the adjustment of the current account which is, after all, the gap between savings and investment.

Adjustment of real exchange rates is an essential part of this adjustment process although it's only a part in the other policies to adjust, demand and supply are also important.

I would say that to make reference to the G20 exercise that’s been ongoing for a couple of years. We've helped the G20 with its initiative to boost global growth; it's an effort to try to raise growth by 2 percentage points over five years. And in preparing that work we've stressed that boosting growth in the world requires some efforts to raise demand especially where there're unemployed resources, efforts to carry out structural reforms that will boost supply, but also a need to reducing balances, and in that we create a more balanced growth in the world economy.

And the work in this report this year and in past years is an emphasis on that third part of the global growth effort and we think it's a significant part. In action, will lead to an unbalanced situation and that carries risks, it can mean a lost opportunity in pursuing balanced growth, it can contribute to a new mediocre, to mediocre global outcomes, both in terms of growth and stability.

Clearly the multilateral aspect of this analysis and of this report, is meant to help countries understand that action only on one side, say, reducing deficits without action on the excess surplus side would potentially lead to a global reduction in demand. If only the deficit countries are lowering demand, and the surplus countries are not raising demand, you would end up with global reduction in demand, and that would be contractionary, coming at a time when the world as a whole needs, on balance, more demand. I think inaction here is really the enemy of progress on the growth and stability agenda.

The fourth message of the work is that there are developments over the course of the last year that signal some of the issues that we are going to face in the future. We've seen sharply lower oil prices last year, and up to the present we've seen divergent monetary policies in major economies with some countries continuing to pursue unconventional monetary policies, and the Fed ending the unconventional monetary policies and beginning to move forward a process of normalization.

We've seen major currencies move somewhat against each other, and these new developments don't entirely change the picture, but going forward we will have to analyze the effects that they have, and look at the new issues that they raise, and I think that those may well be quite significant. Obviously the change in the oil price affects exporters and importers, asymmetrically, but has direct effects on current account positions.

Those are partly offset by the related currency movements that the shift in current account positions that comes from the oil price changes tend to lead to. So that’s on oil.

As far as the movements of major currencies, we think that the movement of major currencies have been beneficial for the global economy, that they are part of the broad adjustment picture. They have been following from monetary policy, monetary policies that have been set in a way that they ease global financial conditions. And so when one takes this as a whole, we think that the monetary policy is being followed and the exchange rate movements that have come with that have been, for the most part, helpful.

But all in all, the bottom line message is that we see the current account positions and the exchange rate positions as requiring further action on the part of surplus and deficit countries in order to help create a basis for more balanced and stronger growth, and for continued global stability. Our emphasis has been on the growth side of the picture, in light of the need for global growth and on the stability side of the picture for now.

So, those are the introductory comments I wanted to make, and let me stop with those, and happy to entertain questions.

QUESTIONER: Hi, appreciate you doing this and thank you for describing very succinctly the potential damaging impacts on the global economy. That was very helpful. Have you quantified the potential drag on global growth, how much these imbalances are dragging on growth? And if I may, is the decline temporary? Could we see a pickup or an expansion of the imbalances if the global economy were to pick up again? Finally, it seems that your advice, having covered this issue for a while, appears to -- there is rhetoric issued in the G-20’s statements, there was some mutual assessment process, et cetera -- but it appears to be largely unheeded. Am I wrong?

MR. LIPTON: Well, let me go through it. You’ve asked several questions. First, we don’t have a single number for the drag on global growth that comes not from the imbalances, but from the gaps between the present positions and what we consider to be the norms. But we do think that this is significant and significant enough to warrant policy action on the part of individual countries. Yes, we are concerned about whether imbalances may reemerge. We sort of take into account cyclical matters in the way we do our analysis, but certainly good policies supportive of balanced and sustained growth are necessary in order to keep imbalances from reemerging.

We certainly will be watching for that and considering the affected countries’ policies on their external positions as we have our dialogue with countries in the course of the year.

Whether the advice goes unheeded, well, all I can say is I think imbalances reduced very substantially from the pre-crisis levels, but there really has been more limited progress in the last couple of years, over the course of the last two reports that we’ve written. So we do think that there’s more that countries could be doing. And when we have these discussions at the G-20 about growth, it is true that much of the discussion is about boosting demand in countries that have idle resources and about structural reform, and there’s much less discussion about policies aimed as a general matter across the whole G20, policies aimed at limiting external imbalances. And so we are the ones who are continuing to put emphasis on this subject.

Now there are particular countries where we feel countries are engaged in discussion with us in trying to create more balanced growth, so I don’t want to create the impression that my general comment is universal. But I do think that as a broad matter, we would like to see more attention to the reduction of imbalances across the major countries.

QUESTIONER: Okay, thank you. I have more questions, but I’ll let my colleagues go.

QUESTIONER: Hi. Thanks for doing the call. You mentioned the G-20. I’m wondering what more could be done to spur countries to take action. I mean it just seems like a lot of these imbalances are deeply entrenched from an economic perspective and also from a policy perspective. So is there anything that could be done on the G-20 front, like does there need to be more of a push to have stronger language in the communiques? I’m just wondering.

MR. LIPTON: We have a process underway in the G-20 that has a direct bearing on this. This G-20 process started during the Australian Presidency and it’s carried forward into this Turkish Presidency. The first step was countries identifying reforms that they were going to take that would be boosting growth. And, of course, they put forward literally hundreds and hundreds of policies that would have a bearing on growth. We then, working with the 20 countries, have identified in each country some 5 to 10 most pertinent and most important policies that would have a bearing on growth. Those were identified so that we together with the OECD, and the countries, could identify the effects of policies and monitor how the work was going. Now, any effort to boost growth is going to have some effect on the imbalances as well that depends on whether it’s the demand side or a supply side policy and how it affects savings and investment. So we’ll be looking at both the growth impacts and the effects on external balances.

So in the course of this year, the Turkish Presidency, there is that effort. Could the efforts be stronger? Yes, and that’s where we feel our role is both to monitor what’s being done, gauge the contributions that those policy changes will make to moderating imbalances, and then urge countries to do more where that’s necessary.

QUESTIONER: Hi. Andrew and I must be the only ones fascinated by this. Is there a place you can point me to where the list of those 5 to 10 new reform proposals has been collated?

MR. LIPTON: I don’t know whether there’s literally a list, but the description is in the Brisbane Action Plan, which was the concluding document from the Australian Presidency. We’ll be also doing this year, we’re in the process of doing, sustainability updates that look at key countries’ situations. I suppose those are published at the end of the Turkish Presidency once the Leader Summit has happened, so that’s not for a bit. But those will be not only assessing policies that affect growth, but assessing the imbalance situation and the contributions that policies will be making to that. It’s a sustainability update, so it’s meant to look at sustainability of both growth and imbalances. So there’ll be some information in the course of the year.

QUESTIONER: So if we look at the largest -- you have a graph here that shows the systemic importance of the current account imbalances. If we think about China and the U.S., China appears to be acknowledging an effort to boost domestic consumption as a greater percentage of GDP and move away from its export reliance. And there’s some sort of discussion, some might say dysfunctional, but still discussion about dealing with some of the liabilities, the longer term liabilities, on the fiscal side.

But the other major player here, Germany and the deficit side of that in Europe, there’s a discussion in Italy about structural reforms. There have been major movements in Portugal, Spain, and elsewhere about fiscal consolidation and structural reforms. But there still is an argument put forward by Berlin that look, our current account surplus is a sign of our health. We don’t really need to change anything. Is that really -- would it be fair to say that Germany is really the thorn in the side of the global economy at this point?

MR. LIPTON: We have just finished our consultation with Germany as well as our discussion of the whole Eurozone situation, and so there are papers out with all of the details of both what we’ve recommended and what the authorities’ positions are. I think the bottom line in Germany is that we consider the current account surplus in Germany to be above the norm.

We’ve had a discussion with them about that. We’ve recommended some policies that we think would go in the direction of addressing that imbalance. In that report you can read the authorities’ views. I don’t want to characterize it beyond that. But to say that you’re right in reading the charts that -- and as I said in my introductory comment -- some of the larger countries because of their size and the size of their imbalances are major contributors to global imbalances from a quantitative standpoint. So it is hard really to imagine too much progress on the front of reduction of external imbalances without seeing some significant changes or movements towards the norms in those cases.

QUESTIONER: All right. Thank you very much. If I may, if there’s not any other follow up, I have one more question.

MR. LIPTON: Shoot.

QUESTIONER: So as your charts show, over the past decade there’s been a huge increase in FX reserves for a number of different reasons. There’s been a case made by Raghu Rajan and others that the IMF should provide a short-term liquidity facility much as the fed provided during the crisis to help reduce the need for excessive FX reserves. I think that your study here seems to underscore that argument. Where is that discussion, and is that a fair point?

MR. LIPTON: Well, I think it is a concern and a concern that we have had that the accumulation of reserves not contribute to a global slowdown by encouraging imbalances that are too large. You don’t want countries running surpluses to accumulate reserves beyond their need for reserves or a time when that accumulation could potentially be harmful to global growth. So we do have resources available that countries can draw upon if they have difficulty, so they can count on that. We also have as you know precautionary facilities for countries -- and I should say the first category is conditional lending. We have our flexible credit line and precautionary line where countries can arrange ahead of time to have access to funding if they face risks and avoid accumulating reserves to provide themselves with insurance against all of the risks that they face. We think that that is a contributing factor.

But I think the conceptual question that is hard to deal with is that Fund lending really has to be conditional. We are not just providers of liquidity. And so unless a country is in the category that some of our flexible credit line borrowers are where their policies are judged to be at a level where they can draw on these lines, we really can only lend in conjunction with conditions of policy adjustment. So

I think there are limits under the present way we operate. There are limits to the extent to which we can be a provider of reserves along the lines of what you were suggesting. But it certainly is an international issue and one that gets discussed from time to time.

QUESTIONER: Hi, thank you for doing this. To the extent you are worried about Brazil’s external position, in the 2013 report it described it as moderate, weaker than the level consistent with medium-term fundamentals and desirable policy settings. And now it’s described as weaker than the level. Are you worried about the growing in 2014 and do you expect gradual improvement this year? How do you feel?

MR. LIPTON: Well, let me say first as I said at the top, I am not going to recharacterize what we said in our report about any particular country because it’s carefully worded. It speaks for itself. I mean I can read it to you if you’d like, but you can look at the country I think you have in front of you, and it looks like you have been looking at the country page. More generally we are concerned about the economic situation in Brazil and the dilemma that they faced of slowing growth, but still the need to be adjusting budget and monetary policies, a budget deficit that’s too large and a monetary policy in the face of inflation that’s too high. We are hopeful that action on those two fronts will be suitably supportive of growth and content in the country that it can be helpful. But let me leave the question of the external aspect to what we’ve written in the paper, which I think speaks for itself.

QUESTIONER: Okay, thank you very much.

OPERATOR: We have no further questions.

MR. LIPTON: Well, thank you all. Thanks very much for participating. It’s been good to be with you.