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Transcript of the Press Conference of the October 2018 Fiscal Monitor

October 10, 2018

Participants:

Vitor Gaspar, Director, Fiscal Affairs Department

Abdel Senhadji, Deputy Director, Fiscal Affairs Department

Paolo Mauro, Deputy Director, Fiscal Affairs Department

Ting Yan, Communications Officer, Communications Department

MS. YAN: Good morning, everyone. Welcome to this IMF press conference on the Fiscal Monitor. My name is Ting Yan. I am the press officer in the Communications Department of the IMF. Let me first introduce our speakers today. We have Mr. Gaspar, Director of the Fiscal Affairs Department of the IMF, and two Deputy Directors here, Mr. Abdel Senhadji and Mr. Paolo Mauro. We will start with Vitor's opening remarks to highlight some of the key messages and main findings of the Fiscal Monitor, and then we will take your questions afterwards. We will also take your online questions, so please submit your questions on the IMF Press Center.

Vitor, over to you.

MR. GASPAR: Thanks, Ting. Welcome. Good morning. We are grateful for your interest in our work on fiscal policies around the world. We continue to advise countries to use the cyclical upswing to build fiscal space for the next downturn and strengthen public sector balance sheets.

Balance sheets are the focus of the Fiscal Monitor. The world is committed to make progress towards the 2030 Sustainable Development Goals. Fiscal policy is central to realize this aspiration.

This is certainly relevant for Indonesia. I want to use this opportunity to express my condolences and solidarity to the people of Indonesia in the face of adversity; most recently, in the form of the earthquake and tsunami that devastated Sulawesi and the provincial capital of Palu, and it happened so shortly after Lombok. Indonesia, as always, is showing remarkable resilience and, as these meetings testify, outstanding hospitality. We are most grateful to Indonesia.

According to our preliminary estimates, global debt continues to rise in 2017, reaching a new record high at $182 trillion. In the 10 years between the Asian financial crisis and the global financial crisis, global debt has more than doubled. The pace of leveraging slowed down after that. Nevertheless, global debt still increased by more than 50 percent. China accounted for nearly 40 percent of the U.S. dollar value of the increase in the last 10 years. The U.S. and China together represented almost two‑thirds of the increase. However, that is only part of the picture. Assets are important. It is not only what you owe; it is also what you own.

In the Fiscal Monitor, we show that for a sample of 31 countries, covering 61 percent of global GDP, total assets are worth $101 trillion, or 219 percent of GDP. In the advanced economies, prior to the global financial crisis, private debt was rising fast while public debt was broadly stable. After the global financial crisis, we see a role reversal, with fast increases in public debt. The sharp increase in public debt was only partly due to the implementation of fiscal stimulus measures.

Another contributing factor was the massive expansion of public sector balance sheets because of government rescue actions. For example, in the United Kingdom, public large‑scale financial sector interventions resulted in a reclassification of some large banks into the public sector. As a result, public sector liabilities increased by more than 200 percent of GDP between 2007 and 2009, from 126 percent of GDP to 335 percent of GDP. Assets also increased. Public debt ratios increased because of the previously mentioned interventions but also because of reductions in output. On balance, there was a significant deterioration in public sector net worth.

Now let's move on to emerging markets and talk about emerging markets' debts and assets. In emerging market economies, private debt is growing fast while public debt is broadly stable. You will recall that that is exactly the same pattern recorded in advanced economies before the global financial crisis.

China is the main driver of private sector debt growth in emerging market economies, but bear in mind that in China, the border between public and private is blurry. In any case, according to our estimates, since 2007, China contributed almost 60 percent to the world's accumulation of nonfinancial private debt. The Chinese authorities are well aware of these trends and have taken action to rebalance the economy and slow down the debt buildup. The slowdown is already well visible in the data for 2016 and 2017. Moreover, as the right‑hand side figure shows, at more than 100 percent of GDP, net worth in China is the largest among emerging market economies. This is a significant buffer even when compared to total debts of public corporations.

Most other emerging market economies covered also post positive general government net worth. However, we should not draw a too positive picture because estimates of nonfinancial assets, such as infrastructure and natural resources, are less reliable. And for most countries, financial net worth is negative. In the case of China, financial net worth, while positive, is much smaller than total net worth. Moreover, it has been declining in recent years.

Now, let's move on to low‑income developing countries. A key challenge for this group of countries is to improve people's livelihoods by meeting the Sustainable Development Goals by 2030. Most low‑income developing countries face substantial spending needs to achieve Sustainable Development Goals. These additional spending needs for some specific sectors represent 14 percentage points of GDP in the aggregate. That corresponds to $520 billion, or about 0.5 percent of global GDP. But the challenges go well beyond financing. A key point here is that countries must own the responsibility for achieving the Sustainable Development Goals. They must articulate their own development strategy based on good governance, efficiency of spending, and strong tax and state capacity. But mobilizing financing on this scale will also require building trust and a strong partnership among all stakeholders. The international community, the private sector, donors, civil society, and philanthropists.

Let me now conclude and sum up. The current expansion will not continue forever. In fact, as you heard yesterday in the presentation of the World Economic Outlook by Maury Obstfeld, risks are looming closer and some of the risks have already materialized. It is time to build fiscal space against the next downturn. Systematic compilation of use of public sector balance sheets can lead to lower debt servicing costs and higher return on assets, better management of risks. And, overall, it may help to put public wealth to work at the service of societies' economic and social goals. Building tax capacity is crucial for enabling state capacity and for achieving the Sustainable Development Goals. Now my colleagues and I will very much welcome your questions.

MS. YAN: Thank you, Vitor. Please identify yourself and use interpretation, as needed. Let's open with an Indonesian question.

QUESTIONER: Based on the report, the Fund said that the transfer in balances is more attractive for financial markets. So, what [does] the Fund suggest or advise for countries such as Indonesia to step into transparency or to be more transparent? Secondly, what [is] the Fund's advice for Indonesia, as well as countries with income levels such as Indonesia, to strengthen infrastructure investment and efficiency, as it is said that the combination of the new infrastructure asset and future revenue will result in 6.5 percent of GDP to public wealth.

MR. GASPAR: Thanks a lot for your two questions. The first one is general and relates to the role of transparency associated with the public sector balance sheet approach and implications for markets, and the second one is more specific to the development strategy of Indonesia and, in particular, the role of infrastructure.

In the Fiscal Monitor, we show that countries with stronger balance sheets have access to market financing at lower interest rates. There is no denial that access to good information is paramount for our creditors. So, the point that you make in your question is very well taken. Nevertheless, if I were to stress the main message from our work on public sector balance sheets, I would refer to the importance of public sector assets. And one sentence that I like a lot from my introductory remarks and from the Fiscal Monitor is that it is not only what you owe, it is also what you own. And that is a lot.

In the Monitor ‑‑ let me repeat ‑‑ we document that for the countries we covered, we found public sector assets worth more than $100 trillion, and that corresponds to 219 percent of GDP. So, governments should be transparent and accountable for the use of this immense wealth, this immense public wealth. The Fiscal Monitor shows that all governments can do it. The benefit includes putting wealth at the service of society's economic and social goals.

Now, on Indonesia. Yes, you are absolutely right. The Fiscal Monitor presents one example of analysis based on the public sector balance sheet that focuses on Indonesia and, in particular, on an increase in infrastructure spending in Indonesia, financed by an increase in taxation by 1 percentage point of GDP per year over three years. It is a balanced budget operation.

We assume that efficiency of public investment is at the average level that we witness in emerging market economies like Indonesia. And under this set of assumptions, we find, as you already said, that there is an improvement in Indonesia's net worth by 6.5 percent of GDP. It is very important to underline that if the [patterns] of efficiency in public investment spending would be improved, this number ‑‑ 6.5 percent of GDP ‑‑ could go as high as 10 percent of GDP.

But if you will allow me, I would like to add two brief comments on Indonesia from a long‑run perspective:

One of the themes that is common across many Fiscal Monitors is the importance to take the long‑run view. To think about policy, fiscal policy as a tool for sustainable and inclusive growth. Indonesia has recorded impressive progress in the last 50 years. This is testified by growth in GDP per capita but also by a wide range of social indicators, including health and indicators like infant mortality, life expectancy, and much else.

Going forward, a continuation of progress requires a development strategy. In Indonesia, the emphasis is on investment, investment in human, social, and physical capital. So, the effort to improve public infrastructure, which is what we have been talking about, needs to be complemented by efforts to improve also education and health. So, investment in people. And in order for this investment in infrastructure, in health, and education to be viable, it is essential to build state and tax capacity in Indonesia.

And you will, of course, know that the tax‑to‑GDP ratio is very low in Indonesia, and it is very much below its peers. Research from the IMF has identified that 15 percent of GDP is a minimum desired ratio for the tax‑to‑GDP ratio, and Indonesia is well under that level. But all of this and much else is covered in a very good book that has just come out and has been released by the International Monetary Fund. It is called “Realizing Indonesia's Economic Potential,” and I would recommend that book to all of you.

QUESTIONER: Could you talk to me about what is happening in terms of South Africa, the U.K., and Italy, where a lot of developments have taken place subsequent to your finalization of the Fiscal Monitor and what advice do you have for our new Minister of Finance, Tito Mboweni?

MR. MAURO: Maybe we should start with South Africa. As you know, South Africa has had low growth for a number of years. And as a result, the debt ratio keeps edging up, and the challenge is to reduce that pace of growth to ‑‑ of the debt‑to‑GDP ratio and stabilize it.

One additional challenge that South Africa faces is the state‑owned enterprises. We know that it is a priority for those to improve their governance, to improve their transparency, and that is something where the government is putting a lot of emphasis right now. So, I would highlight those as the priorities.

So fiscal adjustment. Perhaps given our macroeconomic assumptions, a little bit more has to be done in order to bring the debt‑to‑GDP ratio to a stable path. And then again, focusing on keeping track of the state‑owned enterprises so that you create the space to then do social spending, at which South Africa is actually quite efficient. In the education sector, I think increasing the efficiency of spending in that sector is another priority that I would highlight.

MR. GASPAR: Going now to the U.K. and Italy, almost telegraphically. Our advice on Italy has been constant for a number of years. The main aspect on the fiscal policy is that a credible and sizable consolidation over the medium term is necessary to safeguard public finances and to put the public debt‑to‑GDP ratio on a firm downward trajectory. This is particularly important, given that it is very important for Italy to be in a position to respond effectively to downside risks in case those were to materialize. It is also something that we highlight, that the soundness of public finances in Italy is also an important cornerstone for a financial stability in the country. And we very much agree with all who think that growth has been disappointing in Italy for many years. And we see structural reforms, structural reforms in the labor market, structural reforms in the product and services market, as well as changes, for example, on insolvency procedures. And public administration reforms are key elements in these structural reforms.

For the U.K., we have many examples on the U.K. in the Fiscal Monitor. And we have worked closely together with institutions from the U.K. on this pioneering work on the balance sheet approach because the U.K. is very much at the forefront of efforts to upgrade public finance management. In that context, given the heightened uncertainty associated with the future relationships between the U.K. and the European Union, we have been emphasizing that the set of macroeconomic policies needs to retain flexibility. And that, of course, applies also and, in particular, to fiscal policy.

QUESTIONER: Two questions on China: First, on page 23, the figure showed that up until 2016, the local government financial net worth is still positive, but in '17 it turned negative. I wonder the main reasons behind this. Is it more because of a recognition of debt or a deterioration of its holdings, its assets? Second question. China has pledged to be more proactive in fiscal policies, such as tax reduction. I wonder ‑‑ I want your comments, if you can do some comments on that.

MR. GASPAR: We can pursue those issues further. And you can, of course, follow the press conference of the regional department on Friday. But let me tell you telegraphically the following: China is at this point in time undergoing a process of rebalancing the economy. As Maury Obstfeld stressed yesterday, we believe that China should be emphasizing the quality of growth more than the quantity of growth. As I said in the introductory remarks, it is very important that the pace of leveraging in China eases, which is something that has already happened in 2016 and 2017, and it is visible in any chart that you may consider.

So, the rebalancing of China from investment to consumption, from exports to domestic demand, from credit‑fueled growth to a sounder basis to growth, more compatible with financial stability. All these elements are crucial. China has been making progress in that direction, and the authorities have been emphasizing the priority of these elements.

At the same time, given the current weakening of growth and elements of uncertainty associated with trade, it is warranted that China tries to smooth the impacts of these developments in the Chinese economy. How to balance these considerations is a very difficult act of judgment that the policymakers in China will have to struggle with. At the same time, also in the area of public finances, China has been undergoing a very profound transformation, both in terms of its tax structure but also in terms of the responsibilities of the various levels of government. It is clear that the public finances are stronger in China at the central than at the subnational level, and the trend that you pointed to on page 22 of the Fiscal Monitor witnesses precisely the long‑term consequences ‑‑ the long‑term trends associated with that particular characteristic.

QUESTIONER: The approach to focus on the balance sheet, on the net worth of countries is a novel one. I was just wondering what you are recommending that most countries do with their public assets. I mean, you do not seem to be recommending that they sell them to pay down the debt, but there does seem to be some recommendation to maybe use them more efficiently or manage them better. I was just wondering sort of, what is the basic recommendation for most countries, for most of the advanced countries, particularly that have a lot of assets? What they can do to I guess get more revenue out of them, you know, better limit the effect of the high debts that they already have?

MR. GASPAR: Thanks a lot. This is like the question I was hoping for. So, let me tell you a bit about the structure of the asset side of the public sector balance sheet. What we find is that financial assets represent 99 percent of GDP for the countries we covered in the Fiscal Monitor, 72 percent of GDP corresponds to infrastructure assets, and 38 percent of GDP, on average, corresponds to natural resource wealth. Natural resource wealth is much more important for countries for which natural resources are important. For example, for Indonesia, the share of natural resources in the balance sheet of Indonesia is about 60 percent of GDP. The country in our sample that has more is the Russian Federation, where natural resource wealth is more than three times GDP. So, we are really talking about large numbers when this happens to be important for countries.

What is our recommendation? Our recommendation is that countries be transparent about their public wealth, that they report that transparently to their citizens, and that they put the public wealth squarely at the service of society's economic and social goals.

One aspect that we explored specifically in the Fiscal Monitor has to do with, how much could countries get if they were to manage their public corporations and their financial assets better? And we compare across countries and just assume that countries could improve closer to best practices, which are already available around the world. And we present estimates according to which additional revenues could be as large as 3 percent of GDP. And this is an amount which is about the same order of magnitude as the revenues from corporate income taxation in advanced economies. So, it is a very large number. And we give examples about ‑‑ we give examples of how countries like New Zealand, Australia, and the United Kingdom have gone through the process of improving their management of public sector assets.

QUESTIONER: Speaking about the increase of government debt, I saw in the Fiscal Monitor a little increase in the medium term for Brazilian growth public debt. OK? For instance, in 2020, the number goes to 92 percent, and it arrives in 98.3 percent in 2023, much bigger than the 95.6 percent.

I was wondering, what are the reasons for this kind of forecast showing an increase? That has to do with a kind of mild or no adoption of social security reform in Brazil? And, by the way, what is your expectation for the adoption of fiscal reforms for the Brazilian new government, including the social security reform?

MR. GASPAR: Thank you for your question. The prospects for Brazilian public debt in this Fiscal Monitor are very, very similar to what we had already about six months ago in the spring, when we spoke about prospects for Brazil as well. The path for the public debt‑to‑GDP ratio has been revised up, but qualitatively the trend is basically the same, and it is one in which, as you say, the public debt‑to‑GDP ratio accumulates rapidly over time. And that is something which is constant over the forecast period.

The main reason why there has been a revision up has to do with macroeconomic and public finance developments in Brazil. So, it is basically about developments that have already taken place. So, it is a base revision mostly. We do assume the public [inaudible] outturn. So what we have seen as well ‑‑

Sorry. What we assume is that the public spending ceiling that has been passed will be respected. We do not know ‑‑ because the details are not available ‑‑ what will be the composition of this effort. And if you allow me, instead of conjecturing about what that might be, I will go to the second part of your question concerning the forward‑looking part.

So, any future government in Brazil will have to control the dynamics which are implicit in our forecast and will have to find a way of containing the increase in the public debt‑to‑GDP ratio and, eventually, put the public debt‑to‑GDP ratio on a downward path. That will entail quite a significant adjustment in the budget, and it is in the nature of the government budget constraint that either you do that on the spending side, on the revenue side, or both.

In the case of Brazil, it does seem that it is necessary to act on both sides. So, the issue of a pension reform will have to come back on the table, as will the issue of containing the wage bill of public servants in Brazil.

On the tax revenue side, there are possibilities for improvements in the tax system in Brazil, including tax policy and revenue administration. And, for example, in the area of VAT, there is the potential to simplify quite substantially the way the VAT system operates at the federal and at the state level.

QUESTIONER: [Microphone off]. In your forecast, the IMF is counting on the social security reform, or not? In Brazil.

MR. GASPAR: I will not say anything different from what I have just said, but I am quite happy to repeat it. Our assumption is that the spending ceiling will be respected. We are not in control of the specifics of how that is going to be done. If you think in terms of a longer time horizon, putting the public debt‑to‑GDP ratio in Brazil on a downward path does seem to imply a control over spending on pensions and, therefore, pension reform.

QUESTIONER: Well, Nigeria has actually tried its hand in so many areas to expand the tax net, just as the IMF and the World Bank have advised, but it seems that we have not been getting the revenue or the revenue returns to the level that is able to help us overcome the debt‑to‑revenue ratio right, like you have measured ‑‑ you have always pointed out. What exactly are we not getting right in that place? In tax administration, what are we not getting right? Because the much we have done, we are still falling short of the revenue. So, what have we not done right? What would you recommend? What is it all about the tax, expanding the tax system that we cannot get right? We just want to get exactly your view.

MR. MAURO: I hope I heard the question correctly, but if I heard it, it is basically, there is an issue of how to increase the revenue base for Nigeria. And, indeed, we do see this as a crucial priority for the country, increasing non‑oil revenues. If one looks at the ratio of interest payments‑to‑revenues for Nigeria, that is quite high. And certainly, increasing revenues is the way in which one creates the space to do social spending, infrastructure, and other types of spending that benefit economic growth. So, clearly, that is a priority.

How does one go about it? We have been discussing over the years with the government, and we see the priorities in tax administration, but there are also aspects of tax policy that would help. So, certainly, in the tax administration, to increase the compliance rate, something that could be done is to increase tax audits, to use e‑filing to a greater extent. There are data matching exercises that can be conducted. So generally trying to reduce tax evasion, possibly corruption as well, those would be priorities on the tax administration side.

On the tax policy side, usually what has been recommended in previous discussions is to increase excise taxes on tobacco and alcohol. Stamp duties is something that can be looked at again. And, more generally, I think it is not just the revenue side; it is also the spending side. Clearly, improving the choices that one makes on which infrastructure projects, how does one go about selecting the ones that are really going to boost growth. So, I think, definitely, it is a priority to increase revenues, but also to be careful about, What are the ways in which we can make spending more efficient?

ONLINE QUESTIONER: Do you think that Latin American countries have been transparent in their fiscal area? An active difference between assets and liabilities in all Latin American countries is something to worry about, taking into account that the world average has this difference in positive numbers.

MR. SENHADJI: I think we have in the Fiscal Monitor 31 countries for which we have full‑fledged balance sheets for the whole public sector. Five of those are from Latin America. And Colombia, actually, is one of them. So, obviously, some Latin American countries have made significant efforts in terms of revealing the balance sheet to the public.

There is, more broadly, significant progress toward transparency, as revealed by our Fiscal Transparency Evaluation that we have conducted in quite a few countries now in Latin America and not just in terms of fiscal evaluation regarding transparency but the fiscal frameworks, in general, have improved quite a bit for many countries. Many countries have moved, for instance, to medium‑term fiscal frameworks, with fiscal targets that anchor fiscal policy over the medium term. Countries like Colombia, for instance, that are commodity exporters have actually adopted fiscal rules that shelter the budget from the fluctuations, frequent fluctuations and important fluctuations in oil prices, while actually maintaining fiscal sustainability over the medium term.

So, overall, we see quite a bit of progress in the overall macroeconomic framework and fiscal framework, in particular; transparency being part of it. But, of course, like in many regions and in many countries, there is more to be done. And there is still an issue of governance, an issue of corruption. And the authorities are aware of ‑‑ many authorities are aware of that and are working toward actually making progress in that area as well.

QUESTIONER: There is a U.K. section in the Fiscal Monitor. And when you talk about how a government could improve the compensation that it gets for bearing risk, and I just wondered if you could elaborate on this. Are you, for example, talking about possibly taxing banks more as compensation for the implicit taxpayer guarantee that is provided to banks? Is that the kind of thing? Or could you just provide other ideas?

MR. GASPAR: So, no. The reference in the Fiscal Monitor is for actual guarantees and the pricing of guarantees that the public sector offers in diverse ways to the private sector. So, the idea is that risk should be quantified in an actuarially rigorous way, and the taxpayer should get a fair return for that insurance‑like activity.

That is separate from the general issue about how to regulate the financial sector, in general, and the banking sector, in particular, and how to control for the various effects that regulation may have on the behavior of the regulated entities. That is a separate issue which is much more within the purview of the Monetary and Capital Markets Department and Tobias Adrian, rather than the Fiscal Affairs Department. I can provide specific examples bilaterally to you. I think that that is too detailed for here.

MS. YAN: Thank you very much. I think we need to conclude here. Thank you very much for your attendance. And have a nice day.

IMF Communications Department
MEDIA RELATIONS

PRESS OFFICER: Ting Yan

Phone: +1 202 623-7100Email: MEDIA@IMF.org

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