Maurice Obstfeld, Economic Counsellor and Director of the Research Department IMF had an interactive session with the media in Bali to further explain the October 2018 IMF World Economic Outlook released by the IMF
How about the expectations of economic growth in 2019 and 2020 in Africa, compared with developing countries? And what are your recommendations to them?
As I indicated, Africa is incredibly diverse; so, it is hard to summarise, and it is easy to oversimplify. You know, there are a number of economies that are doing quite well. There are countries like South Sudan which have quite negative growth rates, suffering civil strife. And this creates a very varied picture. Overall, we are projecting ‑‑ and Gian Maria can correct me ‑‑ that African growth is rising. It is rising in the near term to somewhere around 4 per cent. And that, unfortunately, is a rate of growth that is really not sufficient to meet Sustainable Development Goals, to fully employ a rapidly growing workforce. Just broadly speaking, while different economies face different challenges, there is a real need for very thoroughgoing and ambitious structural reforms in Africa that would: raise efficiency; bring people, particularly young people, into the labor force; in many countries where debt is high, put it on a more sustainable course; and in many countries, also to improve governance, which is a very big problem in a number of countries. I do not know if you want to add to that, Gian Maria. Maybe just to add that the aggregate growth rate for the continent is held down by the fact that the three largest economies are not performing up to their potential. Nigeria’s growth, 1.9 percent this year; 2.3 next year. South Africa, only 0.8 percent this year. Angola, contracting by 0.1 percent this year. So, the aggregate ‑‑ over 3 percent this year, close to 4 percent next year ‑‑ is despite the largest economies in the continent doing poorly. The continent could do much better once these economies are on a more solid footing, particularly South Africa and Nigeria because they are really large and affect a number of countries in their neighbourhood.
You have mentioned several risks related to the world economy, such as trade policies [and/in] the emerging markets. Could you predict how big the impact can be on the global economy and also on China’s economy? And could you give us the worst‑case scenario?
Well, we have run some scenarios in the World Economic Outlook. And, you know, I am not sure that we incorporate absolutely the worst case. We try to look at the kind of actions that have been talked about and retaliation against those actions. We also try to incorporate what we think are fairly realistic effects on policy uncertainty, which can hurt investment, and on confidence, which affect asset markets. But it is definitely possible in those scenarios to take close to a percentage point off of world GDP growth if all countries act and retaliate. Now, in terms of China, our forecast for next year, for 2019 growth, has been downgraded due to the tariffs that we have actually seen on the $200 billion of imports into the U.S. And that is an impact on China of 0.7 percent of GDP relative to our baseline forecast. We assume, however, that 0.5 percentage point of that is offset by the Chinese authorities’ stabilisation of the domestic economy, leading to a net fall of 0.2 percent. That set of actions, by the way, also reduces our forecast of U.S. growth for next year because we factor in China’s retaliation.
Mr. Obstfeld, the World Economic Outlook emphasises two points especially about Brazil. One is about the need for social reforms, especially the social security, and also, the stance of monetary policy in Brazil is supposed to be accommodative, especially because we have high unemployment and the growth is not so strong. So, what do you expect for the new administration in Brazil, no matter who is going to be the President, to achieve those two policies?
Yes, indeed. The key policy issue facing Brazil is high public debt and the high burden of pension spending, early retirement. And in order to stabilise the debt‑to‑GDP ratio, social security reform is clearly necessary, and that will have to be a policy priority of the next administration.
Brazil’s monetary policy framework is a strong one, and that has allowed a monetary policy conduct that has been countercyclical. So, easing monetary policy to help a recovery that is still very weak. But going forward, it is really essential to show policy progress on the fiscal stabilisation front also because the international environment has become more difficult. External financial conditions have become tighter. And clearly, in a situation where markets discriminate more, depending on countries’ vulnerabilities, these priorities become all the more urgent.
You seem to be suggesting in this report that, at least in the current circumstances, this is about as good as it gets; that if things continue on the same path, that we are headed for slower growth. I am wondering: If the U.S. and China are able to resolve their trade differences ‑‑ if the U.S. does not impose the car tariffs on Europe and Japan, they are able to come to some agreement there. You have seen the agreement in NAFTA, where Mexico and Canada would be spared from most of that, even if they do impose those car tariffs. If these trade tensions do go away, are we likely to see stronger growth going ahead? Or is the cycle old enough, where it is still going to be facing headwinds and we are going to see slower growth?
Thank you for that. The possibility that China and the U.S. resolve their disagreements would be a significant upside to the forecast. You know, at some level, I think it is not surprising that we are more tentative in our optimism than we were six months ago because, if you have the world’s two largest economies at odds, that is a situation in which everyone, everyone is going to suffer. So, it would be great if the talks could lead to an accommodation in which disruptions to trade were, you know, put aside. But, where we are now is kind of ‑‑ what we have characterised as a plateau. Back six months ago, we saw a very balanced expansion. We saw a lot of upgrades in a lot of countries, a lot of momentum, with risks evenly balanced upside and downside. And now growth is much more uneven. And, you know, I should stress that, even if you look across the emerging market landscape and the frontier market landscape, it is not the case that there are downgrades everywhere or that all countries are doing badly. In some cases where we have downgrades, countries are still growing at fairly healthy rates. You look at a region like Latin America. I mentioned the large economies ‑‑ Argentina, Brazil, Mexico ‑‑ which naturally attract a lot of attention, but we have upgrades in the forecast for Chile, Colombia, Peru, Bolivia. You know, if you look at Africa, there are upgrades for Kenya and Uganda although, again, South Africa is a downgrade. So, it is a very mixed picture, but when you do have this sort of uneven growth and countries are not all pulling in the same direction, you do see less momentum than we were so excited about six months ago. Where things will go from here on in, we do not know.
You have referred to a possible recession and the risks that some countries’ economies are facing. What would you say about the possibility that some of the world’s economies have not learned from the crises that have occurred in the past?
Well, we have a chapter in the World Economic Outlook that is being released today on the legacy of the global financial crisis. And I would say that there have been important lessons learned from that event. You know, in many countries, banks are better capitalised and are safer. The Basel III framework was developed and is being put into place. Countries continue to rely on policy frameworks that, in many cases, actually served them quite well in the global crisis itself.
Where our concerns are in the fact partially, as a legacy of the crisis and the financial disruption and the recession that it caused, many countries have higher public debts than they had before. Interest rates are still quite low in many countries, leaving less room to cut, should a new recession ensue. And even though there has been a lot of progress on financial stability ‑‑ and you will hear more about that tomorrow at the Global Financial Stability Report press conference ‑‑ there is still work to be done on the agenda, you know, importantly in the area of non‑banks and in other areas. So, this is why we recommend to countries to continue implementing structural reforms. This would increase growth. This would raise natural real rates of interest throughout the world to rebuild fiscal buffers so that they have the ammunition to respond if there is a crisis.
And I think one of the lessons of the last crisis was that fiscal policy can be very powerful in combatting recession. So, if you are in a situation where public debts are already too high, where markets might react adversely to a further increase in public debt, that could limit the positive effects of your fiscal actions. To summarise, countries have learned a lot, but there is certainly more work to be done to prepare for the next recession.
Now that the uncertainty in the NAFTA and the Presidential elections in Mexico have finished, you still cut your prospects for Mexico. I want to know, what is the issue that this is slowing economic growth. And if you would please tell me which is the main challenge that you see for the new Mexican government?
The growth prospects for Mexico have been marked down slightly compared to our forecast in April. We forecast 2.2 per cent growth for this year, 2.5 growth for next year. I think there are two main factors at play to explain the downward revisions: The first one is that data, particularly for the second quarter of this year, was quite weak. So that is naturally going to affect the level of growth for this year. And there is still a persistent uncertainty concerning trade, even though, clearly, the agreement that has been reached, if ratified, can help lift that uncertainty. But we also have some downward revision for next year of U.S. growth, which is, of course, very meaningful for the Mexican economy. You asked about the challenges for the new administration. I would say two things: On the more traditional economic policy front, I think building on the strength of the policy framework a strong, independent central bank and a robust fiscal policy framework can still be improved. But still is a robust fiscal policy framework important to build on the strength of these institutions. I think we have a chapter in the WEO that documents how important the strength of those institutions is for the credibility of monetary policy, for anchoring inflation expectations.
I would say the second set of challenges relates to the structural conditions to continuing the fight against corruption, reducing crime because those are clearly factors that are affecting confidence, that are affecting the level of investment, even though, again, the macro policy management has been very strong. And it is also very important to build on the successes in the reforms that have already been implemented because they give potential for higher growth in the future for the Mexican economy.
Stimulus plan, and Italy, what has happened in terms of the fiscal deficit, which I presume is also subsequent to that. And then also just in terms of Brexit negotiations. When was our cutoff date? Do you remember when we got the last submissions?
Well, de facto, we finalised right after the tariffs were imposed on China. So those are incorporated. It must have been the 17th, just after mid‑September. On the South African job summit and stimulus plan, I will push that to the African regional briefing at the end of the week because they are following developments more closely than we are. The issues of Italy and Brexit are, you know, of more systemic significance. Our concern about Italy is that there is a real imperative for the fiscal policy to maintain confidence, the confidence of markets. And we have seen spreads increase over the past months. This has certainly contributed to our downgrade of Italian growth and makes the economy more susceptible to shocks. So, we think it is important that the government operate within the framework of the European rules, which are also important for the stability of the eurozone, itself.
On Brexit, our baseline forecast, which underlies our forecast for the U.K. and for the eurozone, is that a deal will be reached. It will be one in which trade in goods is essentially tariff‑free, which would allow most supply chains to remain intact. It is one in which the regime for financial services would be, you know, quite favourable to the U.K. And I recognise that that is an optimistic scenario, but we tend to assume that when some set of economic arrangements is clearly in the joint interest of the negotiators, that somehow, they will manage to make this come about. Obviously, if this does not come about, if there are arrangements which are more restrictive of trade, which put up more barriers which disrupt supply chains, then this is going to be more challenging for both the U.K. and its eurozone partners. And there are some very critical areas where, you know, a technical agreement does have to be reached; for example, on how to handle clearing of derivatives over the transition from old arrangements to new arrangements. We know the negotiators have been working very hard. In fact, there has been a remarkable amount of progress on a lot of issues, and this often goes unnoted. But there are some very key elements that have not been resolved and that seem very difficult. So, until we get more information, we will keep with our assumption that reason and good policy will prevail. And hopefully we will be proven right.
We saw the People’s Bank of China ease monetary policy, I think yesterday. We seem to be seeing this divergence, where the Fed is tightening faster than other central banks. I was just wondering if you could talk about how you see that rippling through the global economy.
Thank you for those kind words, Andrew. It has been a pleasure to work with you over these several years as well. On the Fed, we have actually been seeing this story for a long time, starting perhaps with the taper tantrum but also the dollar’s strong appreciation, starting in the summer of 2014. So, it is not like news that the U.S. has been recovering from the aftermath of the global financial crisis more quickly than other advanced economies. What has been added into the mix perhaps is that the pace of the recovery in the U.S. has been boosted. I would not even call it the recovery. The U.S. has recovered. The pace of expansion has been boosted by a pro‑cyclical fiscal policy, which is arguably leading the Fed to raise interest rates more quickly than it otherwise would. We, like, you know, the Fed’s dot plots are forecasting one more hike this year in December, which will bring the total number to four for this year. And this naturally leads to some dollar strength. It leads to increases in interest burdens for indebted sovereigns and corporates. So, it does carry some risks, which is why the general strength of the policy framework is so important. Many emerging economies have been navigating this quite well for some time. It is also true over this period that there have been periodic concerns about China’s growth. You know, when I came to the Fund in September of 2015 ‑‑ this was shortly after the RMB devaluation and the switch in China’s exchange rate regime ‑‑ you know, we had a period of several months of concerns. So, this has also been a theme. So, we should not place too much weight, I think, on the short‑term developments.
China’s growth in the first half of this year was very strong. There have certainly been indicators of less robust growth more recently, but, you know, remember that in line with our advice and in line with what the Chinese authorities also have strongly endorsed, there have been attempts to tighten up the financial sector, particularly the non‑bank sector, and to reduce the pace of credit growth which, you know, everyone agrees is too high and has been a potential risk. And it was completely predictable that this would somewhat slow Chinese growth. Now, you know, on top of that, growth in China has arguably been affected by trade tensions with the United States.
What we have recommended, what our mantra has been for a while is that the Chinese authorities should de‑emphasise the quantity of growth and think more about the quality of growth, i.e. the sustainability of growth longer term and its resilience to financial instability events. And our advice to China is to sort of stay the course. And they are naturally taking some steps on the monetary front like the action you mentioned to shore up the economy. But they do have to balance those actions against the need to achieve a more stable financial sector to achieve more deleveraging than they have to exert better control over local government, government financing. And it is definitely going to be a balancing act for them going forward. But, again, you know, markets often tend to put tremendous weight on the most recent developments and perhaps exaggerate them. And much of what we are seeing now, we have seen at various times, in various forms over the last couple of years. So, it is not totally new.
I am wondering ‑‑ because this is Indonesia, and we are hosting the meetings here. I think it is important for us to also understand what the World Bank or the IMF thinks about the Indonesian economy. You already mentioned about Indonesia as one of the emerging economies today. However, we see that there is a lot of heated discussion on how the dollar has increased against the Indonesian rupiah. Also, emphasising on ‑‑ Indonesia will face the general election, a major election next year. So how do you think that Indonesian policy should do in order to stabilise their economy? And also, what do you think about how Indonesia’s economy could strive today, in today’s economy because there are a lot of recessions going on also.
Well, I think it is important to realise, No. 1, that the gradual tightening of monetary policy in the U.S., the approach of more tightening in the euro area, and the general tightening of financial conditions facing emerging markets throughout the world is a common factor that a number of countries are contending with. You know, it is easy from the perspective of one’s own country to talk about the weakness of the currency; but if you take a broader view of the world, you might talk more naturally about the strength of the dollar. And I think that is what we are seeing.
One way to gauge this is to note that, even though the rupiah this year has depreciated against the dollar by something like 10 percent, its depreciation on a weighted effective basis against its trade partners is only 4 percent, so one does not want to exaggerate the extent of the issue. So that is important to keep in mind.
The Indonesian growth story has been a real success story. And even though we have downgraded our growth forecasts for the next couple of years due to a number of factors ‑‑ tighter global financial conditions, oil prices, the effect of U.S.‑China trade tensions ‑‑ and how those might affect Indonesia, growth is still expected to be fairly strong. And this provides an opportunity for the government to, you know, bring up the level of what it does for the Indonesian people to something more consistent with the growing incomes that the population enjoys.
For countries of Indonesia’s income level, we would think that there might be a higher level of tax revenue, which would allow investments in the educational system, in infrastructure, in the social safety net, all of which would be very beneficial I think to the people. So, our sort of advice really to all countries of Indonesia’s income status is to look at those issues, to try to raise the agility of the workforce, to raise the human capital of the workforce, to fight further against inequality, which has come down in Indonesia in recent years.
Pakistan’s government has announced that this week, it will seek an emergency bailout from the Fund. Can you talk about the challenges facing its economy and its ability to finance itself?
As far as I know, we have read the news stories too. We have not been formally approached yet. As with any member in good standing, they are certainly entitled to request financial support from the Fund. So, we will be listening very, very attentively when and if they come to us. Pakistan is suffering from a number of imbalances: A very large fiscal imbalance. A large current account imbalance. They also have a low level of reserves and a currency that is too rigid and overvalued. As a result, they are having financing gaps. I assume that is what they will want to talk to us about.
Their government has expressed a desire to enact deep structural reforms that might break the cycle of Pakistan needing financial support from the Fund. Frequently, they have had programs in the past several times. And, you know, that is a very good sign going forward. So, again, when Mr. Azour gives the briefing for his region toward the end of the week, he may have more for you on that, but that is all I have now.
I am happy that the question which was put just before me referred to Pakistan. My question was actually a part of the question that he had raised. First of all, I am 82 years old, maybe, possibly the oldest person in the gathering today. I have been attending the IMF’s World Economic Outlook gathering for the last many years, and I have met all the past, previous MDs of the IMF. I have two questions to ask: First of all, there has been a lot of transition, changes in the entire financial world all over the globe. The IMF’s policy, as it stands today, which was a few years before, do you think with the change in the financial situation all over the world, the IMF will go through some change in its policy in the near future? That is one question. The second question is: Pakistan today has a new government. And, as you said, we are facing a lot of challenges. Of all the challenges, if I take as, No. 1, Pakistan is at the moment in the grey list, and there is a fear that it might return to black, but there is a lot of effort that we get out of this problem. How do you view the optimism that comes from Pakistan to get out from the grave and take back their regional position? You spoke about China. China and Pakistan are two very close friends. I would like your opinion on the China‑Pakistan economic corridor. There has been a lot of work going on in terms of the progress of Pakistan’s [western] areas, roads, and other things. How does the IMF view the relationship and the development progress that is coming from China to Pakistan?
Thank you for those questions. And may you attend many more Annual Meetings. I will not be here, but hopefully you will. On the financial system, finance is very dynamic and has evolved and continues to evolve. One of the important evolutions of the IMF over the years has been its much greater attention to the details of financial markets. Back in 1980 or so, there was no Financial Stability Report. And, in fact, the Fund began a Capital Markets Report within the confines of my department, the Research Department. And that proved so influential that it ultimately became the flagship of our current MCM, Monetary and Capital Markets Department, which did not exist back in 1980. It just was not thought of as being part of the main sort of macro framework that the Fund worried about. If you come to the briefing that my colleague, Mr. Adrian, will give tomorrow with his staff, you will see the results of that in its full glory.
I think one of the lessons we have learned ‑‑ and this goes to the lessons of the crisis ‑‑ is, you know, you have to watch financial markets very carefully because they change. They evolve. Particularly when you put constraints on them, regulatory constraints, they evolve in such a way as to evade them. A lot of the work we do through our Financial Sector Assessments, through our analysis, is to try to track this and not to be always in a situation where we are fighting the last war. So that is a real challenge going forward that we take very seriously.
On Pakistan, this is obviously a country with immense potential. Again, our job at the Fund ‑‑ through our surveillance, through our capacity development ‑‑ is to help our members try to attain their potential. If we enter into discussions later this week on a possible program, that will be another opportunity to try to make progress. And, again, as I said, the government seems to have the idea, which is a good idea, of making durable progress. So, if that can happen, that would be terrific for Pakistan and its people. On cooperation with China, this has definite potential benefits but also risks. Pakistan needs more infrastructure, as you said, and this is a source of infrastructure and connectivity, but it is also important that the design of projects, the governance of projects be sound and that excessive debts which cannot be repaid are avoided because that just leads to financial instability and to lower growth.
You said that some countries, especially the emerging countries, are responding in different ways towards the economic situation. In the case of Indonesia, with the uncertainty we are still trying to boost our ‑‑ and to maintain our infrastructure development. And we are looking for a new financing scheme. What do you think about this strategy to respond to the situation of the economy?
Well, Indonesia definitely needs more and better infrastructure along a number of dimensions, so the efforts that the government has made are very welcome.
We also think that Indonesia could benefit even more from a further opening to foreign direct investment, which could supply a greater degree of its infrastructure needs.
Indonesia is a rapidly growing economy. It is a huge market. Foreign direct investors will find it very attractive in a setting where they are facing fewer regulations or fewer restrictions. I think, for Indonesia, this is possibly a very attractive way forward. I am going to return Andrew’s compliment now. One of the most satisfying and, I think, important functions of the job of the Economic Counselor of the IMF is to give these press conferences and to interact with the press. This is obviously important to you. It is your job. But also, I think it is important to the effectiveness of the Fund. We put a lot of effort, a tremendous amount of effort into preparing for these press conferences and to thinking about how we can best respond to your questions. You, in the press, and we are actually partners in educating people about the economic issues that are very central to their lives. Your demand for clear communication from us helps us to bring our message closer to those who we seek to help, which are the populations of our 189 member countries. Your questions, particularly when they are hard questions, also help to raise our credibility in the long run, no matter how uncomfortable they might make us in the short run, because they keep us accountable. And the public sees that we are accountable. I want to say thank you to you for all that you do. You help us to present an alternative vision to those who deride experts and expertise, and that is very important in today’s world.