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Greater downside risks likely, global recovery vulnerable: IMF

The International Monetary Fund (IMF) is not very optimistic on the global growth as it was earlier, said its Chief Economist, Maurice Obstfeld.


“We perceive greater downside risks than a few months ago,” he said, adding that “we think it is important for the government to adopt growth-creating policies both in the fiscal sphere and in the structural sphere to aid monetary policy.”


However, Jose Viñals, Director, Monetary & Capital Markets, IMF, says that as per the forecast, things are going to be better than last year. He added: “We have also signaled that the recovery is vulnerable and that it is subject to downside risks.”


There are a number of risks that could impact developed as well as developing economies, Obstfeld said.


“One salient risk is renewed financial volatility which could bring more financial tightening and that could adversely affect emerging markets,” he adds.


On China’s economy, Obstfeld said that IMF sees a safe growth range for the country, which would be more sustainable. The main question, however, is whether the government policies will last over a longer period of time, he added.

Viñals added that the growth for China will depend on how authorities will carry out economic and financial policies. “In our forecast, we [expect] a growth rate between 6-6.5 percent,” he says.


On India, Obstfeld says that while macro policies are strong, challenges, in terms of monetary and fiscal policies, still exist. High food prices, consumer price index (CPI) as well as supply factors will determine the inflation behaviour, he added.  

“Fiscal revenues could be put on a much firmer basis if the Goods and Services Tax (GST) Bill was passed,” he says.


Below is the verbatim transcript of Maurice Obstfeld & Jose Viñals’ interview with Latha Venkatesh on CNBC-TV18.

Q: Governor Rajan asked during the International Monetary Fund (IMF) meet in India whether policies which have negative spill over can be marked red and those which have positive global spillover be marked green. In your opinion, is this feasible in the near-term?

Obstfeld: I welcome his call to study the effects of these policies. I do not think we have done enough of that. I think we have a lot to learn. I do worry about the certainty with which we can reach conclusions and whether that could be a basis for classifying policies as red, yellow or green. I would also worry that policies that would be red or yellow for some countries, it might be green for other countries; countries are very diverse and to the extent that there are those differences, it might undermine the sense of fairness of any such system.

Q: But even now can the IMF object to any country’s policy, if they think it is only directed towards depreciating their currency and capturing other people’s markets?

Obstfeld: The Fund does take a position and these are in its articles of agreement that deliberate undervaluation for the purpose of obtaining advantage in exports is not consistent with its norms but on the other hand monetary policy meant that insuring price stability and employment is fully consistent with norms. Those policies may and often do have impacts on exchange rates. 

Q: What is your take on the IMF’s growth projections for 2016? Like in previous years, are you likely to see them getting revised or downgraded?

Obstfeld: We are not as optimistic as we were – I think that is fair to say. We perceive greater downside risk than a few months ago and that’s why we think it is important for government to adopt growth creating policies both in the fiscal sphere and in the structural sphere to aid monetary policy. Monetary policy will be much more effective if accompanied by other support of policies

Q: Will you be upgrading your forecast of Chinese growth after Premier Li Keqiang’s announcements at the People’s Congress last week?

Obstfeld: Our view is that not only is the quantity of growth for China important, but so is the quality of growth. We view a safe range for them, one in which growth will be more sustainable to be somewhat lower than what they have set out and having said that, I have no doubt that they have policy levels that would allow them to reach the targets.


The question is whether that set of policy levels is conducive to their longer run goals of rebalancing the economy, making it more consumption based and achieving a sustainable rate of growth. 


Q: Do you expect growth rates in the developed countries like the US and Europe to be downgraded?

Obstfeld: There are number of risks there and I could list about six or seven. One salient risk is renewed financial volatility which could bring more financial tightening and that could adversely affect emerging markets.


We also see range of geopolitical risks ranging from the refugee crisis to Brexit which could also immediately have effects on financial markets. In the Euro Zone, growth seems to have lost some momentum and European Central Bank’s actions last week showed that they are concerned about that as well. So, certainly no shortage of downside developments that could play out.


Q: The kind of bottoming out we saw in crude and metal prices over the last three-four weeks. Are you sure that will last, could there be further downsides in commodity prices if global growth is so doubtful as you put it?

Obstfeld: It is possible that commodities could retrace some of the ground they had made up. There are very strong demand effects there. In terms of oil, there are also very strong supply effects.

Q: Many IMF officials like you and Ms Lagarde, even Jose Viñals keep saying that countries with fiscal space must spend but who are these countries with fiscal space? It appears almost that most governments are reeling under huge debt?

Obstfeld: That is higher, but if you think for example of infrastructure investment, the cost of those investments, the interest cost, that is at a historical low and were these investments are productive, they can pay off very handsomely including raising the incentive for private sector to come in with its own investment. So from the standpoint of increasing national income, more infrastructure looks like a good bet and I don’t think we should take a very narrow view of fiscal space when we evaluate it.

Q: Do you see the US raising their interest rates this year at all or will the Fed raise rates only in 2017?

Obstfeld: I think their decision is very data dependent and it is hard to forecast the data. I think even the pessimist in markets think of at least some further tightening, but again they are looking at the data and to the extent that the global economy affects the US economy, which it certainly does, they will be monitoring and reacting to that.

Q: What is your comment on India? We still have over 5.5 percent inflation, are India’s macros giving you the confidence that inflation will decline and growth will be better next year?

Obstfeld: I think the macro policies have been strong and the foreign inflation from recent highs is very encouraging. That is not to say that there are not challenges ahead for both fiscal policy and monetary policy. In the monetary area, the specific nature of the Indian consumer price index (CPI), the high rate of food prices and the supply factors in that market are going to be important to determine in terms of how inflation behaves and there are certainly supply side reforms that can make the Reserve Bank of India’s (RBI) task much easier.


On the fiscal side, fiscal revenues could be put on a much firmer basis if the goods and services tax (GST) were passed. It will allow the government to maybe pursue more in the infrastructure round. So, a lot of progress has been made but certainly there is room for more.


Q: Do you think after two El-Nino years, this year, 2016, food inflation maybe a new problem that the world and India will have to face?

Obstfeld: I am not going to hazard an answer on that. I think clearly the pattern of weather and the extent to which that has been influenced by climate change is making havoc in many parts of the world and the progress that the community of nations met in Paris is going to be very important in addressing those.


Q: We have seen the European Central Bank announce a deeper negative interest rate and announce a lot of further quantitative easing measures including a long-term refinancing obligation. Is this enough to pull Europe out of deflation you think?

Viñals: First of all, Europe is not in deflation. Europe is still with positive rates of inflation but rates, which will be low, close to 2 percent that is the objective of the European Central Bank’s monetary policy.

I think that these measures certainly go in the right direction. These measures are important. The combination of the augmented quantitative easing (QE) and the further taking interest rates in the negative territory, all of this is going to be helpful to support demand and to support price stability but it would be even better if monetary policy were not the only game in town and if fiscal policy in those countries, which have fiscal space and structural reforms, were also to compliment monetary policy.

Q: I did here you at the RBI and you did refer to a greater reliance on fiscal rather than monetary policy. I will come to that in just a bit, but we are two months into 2016. The IMF in previous times has started with 3.7 percent growth for 2015 and we ended with 3.1 percent. Now you are staring 2016 with a 3.5 percent global growth forecast – is there a downside risk to this forecast?

Viñals: The forecast that we have is that, this year and next, things are going to be better than last year. This is our central scenario.

However, of course, we have also signaled that the recovery is vulnerable and that it is subject to downside risk. So, the recent uncertainty associated with this forecast — now, this economic evolution that we are expecting that the global economy would do better – will very much depends on what kind of policies is put in place by policymakers.


So, the more policymakers can put in place policies in that consorted manner, that support confidence both in advance economies and emerging markets. It is all the more likely that these downside risks will be coming down and that the economy would do as well or perhaps even better than what we are forecasting.


So it depends, at the end, on the policies which are put in place. Central scenario is, yes, that the global economy would be better this year than it was the case last year.


Latha: What is the IMF’s sense, or even your sense, of what China will deliver at the National People’s Congress? The promise is 6.5-7 percent, but a lot of zombie firms will have to be killed or trimmed down. Do you think China can achieve both? Control the glut in steel and coal and petrochemicals and yet engender a 6.5-7 percent growth?

Viñals: Again, China’s future in terms of growth will very much depend on how the authorities carry out the economic and financial policies which are required to support this growth rate. In our forecast we think that a growth rate between 6 and 6.5 percent is perfectly possible and this is something that can happen because the authorities in China have the capacity to use fiscal policy, for example, to achieve that growth target. 

Now, it is very important also that China tackles decisively the problem of weak corporates. You have a lot of corporates in the mining sector, in the construction sector which are not doing great. In these corporates, problems need to be addressed. And this is also very important because these corporates have a lot of loans with Chinese banks and there is a potential for risk to be transferred from the corporates to the banks.


So, it is very important that China puts in place the policies to enhance discipline and to make sure that only the corporates which are viable to revive over the medium-term.

So, this is not something which can be done instantly. But China needs to pursue over the next few years policies that will achieve the leveraging of the corporate sector that will accompanied by some defaults of corporates by some exit, by the need to restructure the debt of some corporates.


But, this is very important that it is achieved and that the process is not delayed. It is very important to start the process even if the process takes place in a global manner. And if that is the case, I think that China will be able to sustain decent growth rates in the future.

Latha: We in India can understand. We have perhaps less than one fifth the amount of steel that China produces and it is already feeling like a glut. But, what is your sense about the Chinese currency? China is doing a great service to the world, by not allowing a rapid devaluation of the yuan, yet the outflow of dollars out of China is still thick and fast. Do you think China will or should resort to one time depreciation to adjust to the reality on the ground?

Viñals: At the end, the exchange rate reflects overtime the economic fundamentals. And if China really continues the process of rebalancing growth and achieving a growth rate between 6 and 6.5 percent, this is something which is consistent with the stability of the exchange rate vis-à-vis a basket.


This is the policy that the authorities have announced that they would like to maintain stability vis-à-vis the basket and if the rebalancing of the Chinese economy continues and if growth is somewhat above 6 percent, in principle, there is now reason why there should be a significant depreciation of devaluation of the renminbi. 

Now, if these things were not to happen, then the exchange rate will have to reflect the state of affairs. But if China pursues balanced policies to make this growth rate happen between 6 and 6.5 percent at the minimum, there would be no need for the exchange rate to depreciate very rapidly and that stability vis-à-vis the basket, could be maintained broadly.