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Transcript of International Monetary Fund Managing Director Christine Lagarde's Opening Press Conference, 2018 Annual Meetings, Bali, Indonesia

October 11, 2018

Participants:

Christine Lagarde, Managing Director, IMF David Lipton, First Deputy Managing Director, IMF Gerry Rice, Director, Communications Department, IMF

MR. RICE: Good morning, everyone, and welcome to this press conference on behalf of the International Monetary Fund. I am Gerry Rice of the Communications Department. I am very pleased that we have with us this morning the Managing Director of the IMF, Madame Christine Lagarde. We also have with us the First Deputy Managing Director of the IMF, Mr. David Lipton.

I think you have all received this morning the Managing Director's Global Policy Agenda, so you have that in front of you. Please, when you ask your questions, keep them short. Please identify yourself by name and affiliation. We will try to take as many questions as possible.

I would like to begin by asking Madame Lagarde to make some opening remarks, and then we will turn to your questions.

MS. LAGARDE: Selamat pagi! Good morning. Bonjour. Welcome to the 2018 Annual Meetings.

Before I go to the specific remarks that were prepared for this press conference, I would like, on behalf of the IMF and on our personal behalf, to express our sympathy, our condolences, to the people of Indonesia, and certainly to the families who have suffered losses and who are in distress at the moment.

I was myself in Lombok on Monday. My team was in Sulawesi the day before, and we could see on the ground the impact and the devastation. But we could also see the resilience, the courage, the determination of the people. And certainly, as an institution, as a community, we are trying to help in whichever way we can. And as is said in Balinese—I hope— IMF berdiri bersama anda! [the IMF stands with you!].

(Applause)

Now I know that there are some Indonesians in the room.

(Laughter)

So that spirit of solidarity and courage and resilience certainly demonstrates also how a country can grapple with difficult economic circumstances, and do that with success. Certainly, Indonesia is a clear indication of that.

You will have seen not only the Global Policy Agenda that was on your chair, but you have also heard from our team yesterday and the day before, and the World Economic Outlook, the GFSR, the Fiscal Monitor, and the forecasts that we have, as well as the risks that we see on the horizon. So what I would like to do is to identify three questions, and then you can ask any questions that you want to ask.

The first question that I want to consider is, I wonder whether the economy, as it is—and based on the documents that you have seen in the last couple of days—is the economy strong? And I think the answer to that is: Yes, the economy is stron,g at the moment. We expect growth to remain steady, at 3.7 percent this year and next. But the real question is: is the economy strong enough? To that, our answer is probably not enough, because we clearly see that growth has plateaued if, three years in a row, it is at 3.7 percent.

And we also see that that growth is more unevenly allocated around the world. Moreover, some of the risks that we have highlighted, particularly at our Spring Meetings in April, have now begun to materialize, especially from the rising trade barriers. And if these tensions were to escalate, the global economy would take a significant hit. So our strong recommendation is to de‑escalate those tensions and to work toward a global trade system that is stronger, that is fairer, and that is fit for purpose and fit for the future because if services are not sufficiently covered, if digital transformation is not covered in that trade framework, then we are missing the point, and we are probably losing out on the productivity gains that we could have.

The second question I want to ask is: is the economy, as it stands now, safe enough? And the bottom line is that 10 years after the great financial crisis, or the global financial crisis, we are safer, and measures have been taken. But we are not safe enough. With global and public debt, private and public, at an all‑time high, any slight change in the wind could provoke capital outflows and economic instability in emerging markets, as we see in some of those markets. To guard against this, our recommendation is certainly to encourage countries to have the right combination of domestic policies, using all the tools or the arrows that they have, and for global policies to also reflect those requirements of safety.

We also need to press ahead with the financial regulatory agenda and resist the risk of backsliding. There has been a lot of progress in the last decade but also an unfinished agenda, combined with the added challenges from continued financial innovation, which has its upside but also its downside.

A safer global economy also means tackling the issue of sustainability, including the existential threat of climate change. And we know from work that was done last year—in particular, at the time of the World Economic Outlook—that low‑income countries and low‑lying countries are the first victims of such development. And we know from having heard from the U.N. IPCC (Intergovernmental Panel on Climate Change) that time is of the essence and that we cannot afford to waste it.

The third question, which is for the medium to longer term as well, is: are the benefits of growth actually shared enough for our global economy to continue to grow in a sustainable fashion? And the answer to that is that, in our view, the benefits of stronger growth are not being shared enough. Excessive inequality, as our research has demonstrated in the last few years, excessive inequality—whether it is produced by technology, by trade, by integration, by policies favoring capital over labor—is magnifying economic and social tensions, especially in advanced economies. And that is why we need policies and reforms that not only boost growth but do so in a manner that is inclusive and sustainable.

So as I said in my curtain raiser speech last week, we need to steer the boat, not let it drift. And that means using the current growth momentum—because we still have it—to implement the right policy actions in the areas that I have just outlined: de‑escalate trade tensions; fix the system, do not break it; the right policy mix; and that inclusive growth, which requires both short‑ and longer‑term policies. But to achieve these goals, we need stronger international cooperation as well.

I am going to quote Balinese again, and I will promise to translate this time. Menyama braya, which means that everyone is a brother or a sister of the other. So we are joining hands. And we are in that same boat, which should be steered and not drift. So we would like to take that to heart.

With that, I am happy to take your questions. Thank you. Terima Kasih.

MR. RICE: Thank you very much, Madame Lagarde. Let us begin with our hosts and begin with a lady from Metro TV.

QUESTIONER: Thank you, Gerry. Good morning, Madame Lagarde. I have two questions:

First of all, regarding the tightening of global financial conditions and the trade war that affects many countries, including Indonesia, do you have any projection of how long this behavior will go on? What is best to respond, like a policy response, given some vulnerabilities that emerging countries like Indonesia might possess? That is the first question.

The second will be: How do you see Indonesia's resilience to deal with external shocks? How have you seen that we have evolved since 20 years ago? Thank you.

MS. LAGARDE: We could spend the morning on those ones!

On your first set of questions, it is clear that we are facing a bit of an unprecedented situation, where we have a combination of a tightening of monetary policy, which is to be expected, given the current situation, in particular in the United States and soon probably in Europe, which implies and, as a result, increases the cost of financing for many economies around the world, particularly the emerging market economies. And that takes the form of currency variations as well as capital outflows, which in some countries, some emerging or low‑income and developing countries, is now beginning to show a net outflow. Not all. Combined with a degree of uncertainty that we have not seen regarding the legal framework within which international trade operates. And it is the combination of the two that is probably showing in some of the tensions that we see in terms of indices, short‑term indicators, as well as possibly market volatility.

Now, in response to that, some countries have the right fundamentals, have worked hard on their policy mix over the last few years, and are in a strong position, which is why we believe that we are not seeing what is referred to as “contagion.” And it is clear that there is a differentiation between those countries that have the right policy mix and that continue to demonstrate that discipline and other countries that either had not done it or are just beginning to do so.

And to look at Indonesia and compare it with where it was at the time of the financial crisis, there has been significant improvement. And the scorecard of Indonesia is excellent: Whether you look at the increase in per capita GDP, which has more than doubled. If you look at poverty reduction, which is now down to 11 percent. If you look at growth. If you look at inflation, which is kept under control. If you look at the exchange rate, which, granted, has depreciated relative to the dollar, but so have other currencies, including Australia, including New Zealand, roughly by the same amount. If you look at reserves, massive improvement. If you look at the structure and the solidity of the banking sector, massively restructured. Same thing. And if you look at debt, a very respectable track record as well, with [ public and private foreign debt each] of only 17 percent to GDP. And if you look at the fiscal rules that are enforced in the country, again, a very good track record.

So I would hope that there continues to be that appreciation of good policies, good discipline, and determination to continue to steer the economy, rather than to let it drift.

MR. RICE: Thank you very much. Let me swing over here to the Financial Times, please.

QUESTIONER: Madame Lagarde, the U.S. only yesterday expressed its concerns about the competitive devaluation of the Chinese currency against the dollar. To what extent are you concerned that countries are now steering the boat, if I may borrow a phrase, towards currency wars as well as trade wars?

MS. LAGARDE: Well, we certainly hope that we do not move in either direction of a trade war or a currency war. It would be detrimental on both accounts for all participants. And there would also be lots of innocent bystanders, if I may use a phrase that we used a lot during the financial crisis.

We are seeing more and more—China included—countries that actually let their currency fluctuate and that certainly has been the case over the last three years as far as China is concerned.

If you compare the position of the renminbi relative to the dollar, it is one particular story, which has also a lot to do with the strength of the dollar. If you compare the same currency, the renminbi, with a basket of currency, there is a bit of depreciation but certainly not as much. And, you know, we have supported the move of China towards flexibility, and we have encouraged the authorities to continue along that path going forward. We do have instruments to actually measure the external sector situation, and we hope that the recommendations that we have given to China in terms of letting the currency fluctuate, will continue to be approved and agreed and implemented by China.

MR. RICE: Thank you, Madame Lagarde. Let me swing around here, please, to the front row. China.

QUESTIONER: A follow‑up question to that, but on China more specifically. China's economy is recently under some stress, partly because of the trade war, and the policymakers stand ready to loosen up maybe again. So I wonder, Madame Lagarde, your message to them and, if you like, your messages also to the other part of the equation. Thank you.

MS. LAGARDE: I think my message in the face of trade tensions and potential additional trade tensions—which, as I said, would have a negative impact on the global economy, as was discussed a couple of days ago by Maury Obstfeld when he presented the WEO, and would have an impact on those that have been called the innocent bystanders, which are not the target of any particular discussions but happen to be part of supply chains, happen to be part of the flow of raw materials, for instance, that are needed for countries which are party to those tensions—my recommendation is very simple, and it holds in three words: de‑escalate, fix the system, and don't break it. Because all countries have had the benefit of that legal framework for many years, and it has served international trade rather well. It has not been fixed sufficiently in order to really embrace the new economy, to really enforce some of the rights that are actually covered under the WTO arrangements or that would need to be covered under the WTO arrangements. So our recommendation is: De‑escalate. Fix it, do not break it.

MR. RICE: Thank you, Madame Lagarde. Let me take The Wall Street Journal in the front row, please.

QUESTIONER: Madame Lagarde, thanks for taking questions.

The Government of Pakistan has said this week that it is going to seek a program from the IMF. One of the issues here is that the Government of Pakistan has incurred quite large debts, many of them from China as part of China's Belt and Road Initiative. A large number of countries have incurred very large debts as part of this initiative, and policymakers in the U.S. have expressed concerns about whether a program to Pakistan and other countries so indebted would be kind of a backdoor bailout of China.

I was wondering if you could address how the IMF would approach a program with Pakistan and other countries who may find themselves in this situation, given these concerns that have been raised about the Belt and Road Initiative. Thank you.

MS. LAGARDE: Well, first of all, I have seen, like you, the press statement, but I have not yet seen the Finance Minister of Pakistan. And David and I are going to see the delegation this afternoon. So I am assuming that there might be a program request on their part, but that has not been discussed. And we will explore that this afternoon.

Second point, the IMF is available to its entire membership. We have 189 members, and we have to serve the entire membership, each and every one of them.

Third point, in whatever work we do, we need to have a complete understanding and absolute transparency about the nature, size, and terms of the debt that is bearing on a particular country. And to really understand the extent and composition of that debt, both in terms of sovereign, in terms of state‑owned enterprises and the like of it, so that we can actually really appreciate and determine the debt sustainability of that country, if and when we consider a program.

A fourth point, this issue of debt transparency and an appropriate understanding of debt is not only going to apply to Pakistan. It has to apply to all countries. And it is part of a necessary disclosure exercise that we have to agree with our members for the purpose of a debt sustainability analysis, but also for the purpose of the governance and corruption project that has been approved by the Board of the IMF, and for which we are now moving into the implementation period. Again, on that point, fully understanding what the liabilities are and to whom they have been assigned is a necessity.

MR. RICE: Thank you, Madame Lagarde. Let me take this question right here in the front, please. Yes, sir.

QUESTIONER: Good morning.

MS. LAGARDE: Good morning.

QUESTIONER: Nigeria has a new Finance Minister, Madame Lagarde. And in about five months' time, we will be going into a general election. If you are to meet with the new Finance Minister today, what advice will you be telling her? What recommendations will you be making for her?

Also, on the issue of trade tensions, I do not know if you have done any work on the estimated impact on Nigeria because, as you are aware, the U.S. and China, are major trade partners with Nigeria. So what is your estimation? Is there going to be a likely spillover effect? Thank you.

MS. LAGARDE: Thank you very much. First, a point of observation. I am delighted that Nigeria has appointed, yet again, a female Finance Minister, and I welcome the meeting that I will have with her. But if she was to ask me, what is our policy recommendation? I would certainly start with a tight monetary policy, higher non‑oil revenue mobilization. I remind you—you know that probably inside‑out—that domestic revenue mobilization is 5 percent of GDP in Nigeria, and that is just way too low, relative to where Nigeria should be in order to address the issues of health, education, proper social spending on the people, and particularly the young people of Nigeria. That would certainly be a very strong recommendation that I would give her. And structural reforms that would probably include really making sure that the refineries and the oil equipment that is available in Nigeria works well and works for the benefit of Nigeria. That would be my recommendation.

In terms of spillovers, this is work that is constantly underway. It is to be found, if you will, in the Article IV that we produce under our bilateral surveillance. It is a tricky question because you have spillovers that are produced in very circumvoluted ways and not just a direct spillover. But we are doing this exercise on a country‑by‑country basis, very often taking scenarios and hypotheticals that either are proven true and hopefully will be proven wrong.

MR. RICE: Thank you, Madame Lagarde. Let me take a question from the BBC.

QUESTIONER: Good morning, Madame Lagarde.

MS. LAGARDE: Good morning.

QUESTIONER: Could you give us your judgment, given the tensions that you have spoken about, on the present market volatility that we are seeing in the bond market and the equities market. Are you concerned that that volatility may grow, given the tensions you have outlined?

The second issue is on interest rate policy by central banks. How concerned are you about the divergence between where America is going and where the rest of the world is going in terms of interest rates and the effect on capital flows that that appears already to be having? Thank you.

MS. LAGARDE: On the most recent volatility, I am not going to comment. We cannot comment on a daily basis what happens on the stock markets of the world. There are ups and downs, and I think it is fair to observe—and all of you are observing that the U.S. equity market and stock markets, in general, have been extremely high. But I will stop at that.

On the interest rate, as I said in my opening remarks, it is clearly a necessary development for those economies that are now showing much improved growth, inflation that is picking up and falling into the range or reaching the thresholds, unemployment that is extremely low. It is inevitable that central banks make the decisions that they make. And clearly, as a result of those, it is very likely that we are—we have seen, we see, and we will continue to see capital flow movements. Now, the fact that large central banks of advanced economies are not exactly all moving at the same pace is also probably accelerating that phenomenon.

MR. RICE: Thank you, Madame Lagarde. I am going to swing around here to Brazil.

QUESTIONER: Good morning.

MS. LAGARDE: Good morning.

QUESTIONER: As far as Brazil, what is your expectation, Ms. Lagarde, about the new President there that is going to be elected in about less than three weeks, especially because the IMF suggests—especially in the World Economic Outlook—that the fiscal reforms proposed to advance, above all the social security reform, and that the monetary policy should continue to be accommodative to improve the growth of the economy, decrease the unemployment rate. Thank you very much.

MS. LAGARDE: Well, thank you so much. In terms of economic policies going forward, what we would certainly recommend is to restore fiscal sustainability and, as a result, to probably reform in‑depth the social security system of Brazil and to contain the wage bill going forward.

We would also encourage structural reforms that would be aimed at improving credit intermediation, the quality of infrastructure, and trade liberalization as an imperative.

As you mentioned, we also believe that monetary policy should continue to be accommodative, and that, you know, the exchange rate continued to be a shock‑absorber going forward, given the fiscal policy that we are recommending. But we will see in a short while, actually.

MR. RICE: Thank you, Madame Lagarde. Let me take Reuters in the second row here.

QUESTIONER: Thank you, Madame Lagarde. I just wanted to come back to trade and back to China. You have been defending the global trading system for a couple of years now. One of the things that we have noticed is that the language has sort of changed. It has evolved from “stay the course” to “fix the system, fix the rules.” And we are starting to see you advocating for changing the rules surrounding some of the things that the Trump administration is complaining about China over, such as state subsidies, protection of intellectual property. I am just wondering if you sort of feel that in order for these trade tensions to go away, will China have to take some major steps to change its policies?

MS. LAGARDE: You know, I have been an advocate of global trade for longer than the last couple of years. I was Secretary of Trade for my country back in 2005. So I have seen close by the benefits of trade and how it has an impact on countries that participate in a legal framework that organizes trade. I have seen close by as well the downside of it and how the unanimity rule and the rigidity that that implies, how that actually is an obstacle to many improvements that need to take place. And I am a strong advocate of plurilateral agreements when the multilateral rigidity is an obstacle to actually making progress and embracing the new economy as we see it.

You know, there are, in the WTO, as it stands at the moment, provisions and chapters that actually address these issues of subsidies, that require the appropriate definition and understanding of subsidies, and what a state‑owned enterprise is. And those issues need to be clarified, need to be understood, and need to be agreed, which is why we certainly advocate the de‑escalation, sitting around the table, and actually improve the system as it is so that it works better for all and so that it is fairer in many ways. I think the issue of excessive dominant position, however they are fueled, is not either particularly compatible with free and fair trade. So I hope that in competition law as well, there is progress.

MR. RICE: Thank you, Madame Lagarde. I think we can take maybe just two more. I am looking for another lady, actually, if there is a question.

QUESTIONER: Madame Lagarde, bonjour. I would like to ask you, how concerned are you about the Italian situation and if you see any potential risk of contagion? And how do you assess or evaluate the new budget proposal in light of the recent market turbulence. Thank you.

MS. LAGARDE: You know, our position concerning Italy is quite well known. We certainly advocate continued fiscal consolidation, which has to be growth‑friendly in order to support the growth of that country. And we certainly consider that being a member of the European Union and the EU members should respect the rules that they are committed to by virtue of their membership. That is our position.

MR. RICE: Thank you. I am going to take the last question.

QUESTIONER: Thank you. I am from Investment and Marketing in Pakistan. I want to touch on the subject of corruption and governance that you mentioned. I want to bring to your attention two facts about Pakistan. It is sort of a sensitive subject, and I do not expect you to comment on that.

I want to mention that there has been a change in government in Pakistan. There is a new government that was elected. And the former Finance Minister is absent from Pakistan and has refused to appear in court. There are court proceedings. The Prime Minister returned to Pakistan and was imprisoned, and there are court proceedings.

MR. RICE: The question?

QUESTIONER: The question is: It seems to be also in the private sector … I want to ask you, what is the educational capacity of the IMF and the World Bank to educate the private sector and the government about anticorruption and about anti‑money laundering, for example? What is the capacity of the IMF in that respect? Thank you.

MS. LAGARDE: Actually, thank you for asking the question. I am not sure that I can specifically comment on the private sector; but certainly, the approval of the Board to not only include the recipient countries, if you will, but also the source countries—because corruption is a two‑way street. Somebody is receiving money, but somebody is paying money. And whether it is—I am referring to money at large, but it is favors. It can be anything. But somebody gives, somebody takes. And the Board has certainly approved that the institution looks at both sides of corruption. And some countries, including the G‑7 countries, the Czech Republic, and Austria, have actually agreed to volunteer as potential source countries to be part of that exercise. So we will do so. And we do provide massive technical assistance in that respect, which was centered around anti‑money laundering and combatting the financing of terrorism, which is probably the technical assistance program that is most in demand from our membership. And we will continue to develop it and to make it available to as many members as is possible. Thank you.

MR. RICE: Thank you, Madame Lagarde. Thank you, David. Thanks to all of you for coming today. We will be seeing you over the coming days.

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