GFSR Press Briefing 2022 Annual Meetings

GFSR Press Briefing 2022 Annual Meetings

October 11, 2022

Speakers:

Tobias Adrian, Financial Counselor and Director of the Monetary and
Capital Markets Department

Fabio Natalucci, Deputy Director of the Monetary and Capital Markets
Department

Antonio Garcia Pascual, Deputy Division Chief of the Monetary and
Capital Markets Department

Randa Elnagar, Communications Officer

Ms. Elnagar: Good morning everyone, and welcome to the Annual Meetings and
the Global Financial Stability Report press conference. It is so great to
see you here again in person. I am Randa Elnagar of the IMF Communications
Department. By now you should have received the Global Financial Stability
Report online, and we are going to be looking forward to having your
questions.

Before we start, let me introduce our speakers here today: Tobias Adrian,
Financial Counsellor and Directorate of the Monetary Capital Markets
department, Fabio Natalucci, Deputy Director of the Monetary and Capital
Markets Department, and Antonio Garcia Pascal, who is Deputy Division Chief
in the Monetary and Capital Markets Department.

Before we start, I am going to kick-start the conversation with Tobias and
ask him a couple of questions to get this conversation going. Tobias, how
do you assess global financial stability currently with very high and
persist inflation and asset price volatility?

Mr. Adrian: It is great to see you all in person. Global financial
stability risks have increased with a balance of risk that is skewed to the
downside. Amid the highest inflation in decades and extraordinary
uncertainty, markets have been extremely volatile. Risk assets such as
equities and corporate bonds have declined sharply. A deterioration in
market liquidity has amplified price moves, and financial conditions have
tightened globally. In many advanced economies, financial conditions are
now tight by historical standards. In some emerging markets, they have
reached levels last seen during the height of the COVID-19 crisis. With
conditions worsening in recent weeks, key gauges of systemic risk such as
higher dollar funding costs and counterparty spreads high have risen. There
is a risk of disorderly tightening in financial conditions that may
interact with preexisting vulnerabilities. Investors may further reassess
the outlook if inflationary pressures do not abate as quickly as currently
anticipated or if the economic slowdown intensifies.

Ms. Elnagar: Tobias, thank you. What is the most important development that
you are thinking about right now and watching?

Mr. Adrian: In emerging markets, rising rates, worsening fundamentals, and
large outflows of capital have pushed up borrowing costs notably. The
impact has been especially severe for more vulnerable economies where 20
countries are either in default or trading at distress levels. Unless
market conditions improve, there is a risk of further sovereign defaults in
frontier markets. Our global stress tests for banks show that under a
severe downturn scenario, 29 percent of emerging market banks could breach
minimum capital requirements. Of course, corporate credit is also facing an
increased risk of default. We have also seen turbulence in markets in some
specific countries.

Ms. Elnagar: Tobias, what is your advice to policymakers?

Mr. Adrian: Central banks must act resolutely to bring inflation back to
target, to keep inflationary pressures from becoming entrenched, and to
avoid de-anchoring of inflation expectations. The high uncertainty clouding
the economic outlook hampers policymakers’ ability to provide explicit and
precise guidance about the future path of monetary policy. Clear
communication about the policy function, the unwavering commitment to
achieve the mandate of price stability, and the need to further normalize
and in some cases tighten monetary policy is crucial to avoid unwarranted
market disruptions.

Ms. Elnagar: Thank you, Tobias. We can open the floor now for questions. I
want to advise our viewers online you can ask your questions via WebEx.
Kindly use the raised hand option to ask your questions. We are going to
turn into the room and start here. Let me start. Chris, the Financial
Times.

Question: Financial Times. Thank you very much. I wonder, this morning the
Bank of England is set to intervene yet again with a financial stability
issue arising in the index-linked gilt market following the wider gilts
market last week. Is the only way of really solving this for the government
to reverse its mini-budget unfunded tax plans?

Mr. Adrian: That is an excellent question and let me put the question into
context. On September 23, the government announced a new plan in terms of
fiscal expenditures, and that triggered rising interest rates. The rise in
interest rates is what would be expected given the change in the outlook
for fiscal policy, but, of course, some of that rise has been disorderly.
There were spirals, disorderly amplification mechanisms at play that led to
a very sharp and quick increase in yields, threatening financial stability.
So the Bank of England stepped in with targeted and temporary asset
purchases at the longer end of the gilt market, and that did lead to a drop
in yields. They are now rising again and the question that was asked is
whether there is ultimately any way to stop the rise in yields unless there
is a shift in fiscal policy. So I would say there – certainly – a change in
the fiscal policy would change the trajectory of interest rates going
forward because the expansionary fiscal policy basically triggered a shift
in expectations as to what monetary policy is going to do going forward.
And, with the expansionary fiscal policy, the Bank of England would have to
raise interest rates that much more in order to contain inflation and to
get inflation back to the mandated objective. One part of the answer to the
question is, yes, the shift to fiscal policy would certainly change the
trajectory. Now, you were asking is that the only way to change the
trajectory in yields. As you saw in the recent two past weeks, asset
purchases can also change yields in the marketplace; but, of course, the
Bank of England has the inflation price stability objective, and that is
going to stand in the way of permanently having lower interest rates.

Mr. Natalucci: I can maybe step in for a second broadening the question. We
are essentially seeing a slight regime shift in terms of macro, where we
move from low inflation environment with low rates, low volatility, to an
environment where inflation is higher. It is decades higher, decades-level
higher. We see volatility higher, and so markets are fragile. We have seen
vulnerability that has been building over the last decades plus. Whether
this is liquidity mismatch, financial leverage, use of leverage, maturity
mismatch—and so that fragility in some sense makes the financial risk much
more elevated. We have seen some pressure on the plumbing. Maybe you can
think of the UK episode just as a warning shot. We also have seen waves of
stress that is propagated to the system through this deleveraging that is
affecting UK assets; results affecting assets across the globe. We have
seen high correlation between UK rates and US or European rates. We have
seen pressure in risk assets in the US or in other parts of the globe. So I
think it is that wave of stress has implication for asset allocation, for
correlation across assets. So clearly central banks should not pivot away
from fighting inflation. They have tools they can use to address market
dysfunction. There are repo facility, asset purchases. Clear communication
here is crucial I think in terms of separating what is done in pursuing
optimal flexible inflation targeting vis-a-vis addressing dysfunction in
financial markets. Finally, policymakers need to be prepared for what could
be a bumpy ride going forward. Some of these cracks, some of this pressure,
some of this weight, those are fragile markets, and that is why it is so
important to have a steady hand for these fragile times.

Question: Thank you. I have two questions. Firstly, about the Federal
Reserve. The Federal Reserve has been hiking interest rates in recent
months. How has it impacted emerging markets; and as the rate hike
continues, do you expect bigger spillover effects?

So, secondly, about China’s property sector stress. The report made
analysis on it. Do you expect that stress to lead to financial instability
or China, and what is your suggestion for China’s policymakers? Thank you.

Mr. Adrian: Thank you so much for those questions. The Federal Reserve in
the US has been increasing interest rates in order to get inflation back to
its 2 percent inflation target. We view the path of interest rates in the
US as appropriate, so we do view the tightening in the US as the
appropriate step to achieve the objectives, the inflation objectives, the
price stability objectives, of the Federal Reserve. Of course, other
countries are also changing their stance of monetary policy. Many countries
around the world are also tightening monetary policy. You know, some of the
exchange rate movements are driven by the differential stance of monetary
policy. So, for example, some countries have not seen a decline of their
currency vis-a-vis the dollar, but it is true that broadly there is a
decline of exchange rates vis-a-vis the dollar; and so there are two or
three reasons for that. One is a differential stance in monetary policy.
For example, when you look at a country like Japan where monetary policy
continues to be expansionary, while the US is tightening very sharply, so
you have seen an adjustment in exchange rates there.

Secondly, there are terms-of-trade shocks in many economies. Europe comes
to mind here where, of course, the imports of energy, oil, gas from abroad,
have driven to very large terms-of-trade shock, and that has tended to put
depreciation pressures on the euro. So those are some of the reasons why
exchange rates are moving. Most of those movements we currently see as
being driven by fundamentals. There is differentiation across countries.
These are necessary macroeconomic adjustments relative to the different
stance of policy, relative to different economic shocks, and they are not
necessarily disorderly at the moment.

Certainly, financial conditions are tightening globally, and that is true
in the US. It is true in many countries around the world, and there are
certainly spillovers of the tightening onto other countries as stronger
dollar, higher interest rates, of course, are tightening financial
conditions for countries around the world, and that might well continue
going forward as well. Let me also point out that in the report we have a
chart on the FX swap basis, so this is an indicator of cross currency
funding pressures, and that has widened as well across a range of
countries.

Now, turning to your second question, which is about the Chinese property
market, so we have seen stress in the Chinese property market. Of course,
compared to recent years, the growth rate in China has been declining to
some degree, and that is one contributing factor to the slowing of the
property market. But also, of course, there has been a lot of investment in
properties over many years, so that has also led to a demand and supply
imbalance in some regions in some cities. When we look at property
developing companies in particular, their stock and bond prices have been
declining, as the prospects for sales going forward, for example, have been
readjusted. So sales have been declining steadily. Now, the stress in
property markets is, of course, something that the policymakers in China
are very focused on, and so necessary policy steps are being taken. But
there is the potential for more turbulence, so there is the potential for
exposure to the banking system, for example, or to the market-based
financial system, and, again, we are flagging some of those risks in the
report and we are giving some precise numbers.

Mr. Natalucci: You may remember the October Financial Stability Report last
year. We had a box where we were qualitatively walking through some of the
steps and how contagion and spillover effects would work from the property
development sector to the real estate to the banks and to corporates and to
local governments. I think what we are seeing here in some sense is a
crystallization of some of these risks. As Tobias mentioned, essentially
liquidity issue in the property development sector turning into solvency
issue. We have an analysis of scenario in the report where we look at what
happened if crystallization of earnings decline, if [inaudible] inventories
are value on market prices, and we take account of outstanding financial
condition, you would find that 45 percent of the property developers would
be unable to make interest payments with earnings, and 20 percent of them
would be insolvent. You can see the liquidity issue essentially starting to
turn into insolvency. In terms of the propagation channels of spillovers,
one spillover would be to the banks. Banks are exposed to both the property
developers–it’s about 8 percent of their lending–and to the real estate
for another 20 percent of mortgages. Now if you apply and assume that 10
percent of these holdings becomes non-performing and you lower the recovery
value, the analysis shows that 15 percent of banks, or about 10 percent by
asset, would not meet the 4½ percent regulatory minimum of capital.

As for the spillover to the local government sector, a big chunk of their
revenues come from land sales, for example, so with declining land sale,
the revenues get affected. You see pressure on local government financing
vehicles. So you can see how some of these risks are crystalizing. So in
terms of policy and what we advise the Chinese authorities to do, I think
there is an urgent need for action at the central government level to
restore confidence in the housing sector, address financial stability, and
prevent some of the spillover action. For example, complete the unfinished
housing to essentially put a floor on the housing market, restore
confidence in the housing market, and also address the business model of
the property developers. It is a combination essentially of financial
stability policies, as well as structural measures that actually deal
directly with the business model of property developers.

Question: Financial Times. You mentioned the measures that the Bank of
England has had to take to ensure financial stability. I am just curious if
you think this is going to be an approach that other central banks globally
are going to have to adopt as they continue to raise interest rates to
fight inflation. Is this something that we can maybe anticipate from the
Fed, and what kind of communication challenges do you anticipate could come
from this?

Mr. Adrian: Thanks so much for this question. At this point we do not
anticipate these actions being necessary in other countries. But, of
course, we do flag many vulnerabilities in financial markets. So now there
is leverage in many countries around the world and many segments of the
market, in particular in the nonbank financial system. There are maturity
mismatches, liquidity transformation, hidden leverage; and so there could
certainly be financial stability problems and market dysfunction in other
countries as well. It is not our baseline, but in the downside risk
scenario, it could materialize. The kind of tools that the Bank of England
has deployed, i.e., lending facilities, lending of last resort, repo
facilities, outright purchases of risk assets in the market segment where
the dysfunction is taking place, these are classic actions of central banks
that is in the toolkit of most central banks around the world. So in that
sense, it is classic central banking to do what the Bank of England is
doing. It is fully endorsed by us, but it is not in the baseline for other
countries at this point. But, of course, there is always a tail risk that
financial stability instances or financial instability could occur in other
countries as well. It is just not the baseline. It is a downside risk.

Question: International Financing Review. How important is it for the US or
the Fed to pound down inflation to 2 percent, with the hikes, for financial
stability? Is that a good target? Should it be a different one? Has it been
discussed as a coordinated thing worldwide as to what the target is,
because it is affecting a lot of the EM market and its interest rate, so I
was wondering whether it was international coordination and there was a
target that was being considered to be optimal in that sense?

Mr. Adrian: Thanks so much. There is certainly a debate, or there has been
a debate around the level of the target, but it is really a debate that was
done in the context of very low inflation. At that time, people were asking
whether inflation targets should be higher than 2 percent in the context of
deflationary pressures. Changing the target in the current environment
would be unwise because it would feed into credibility problems of central
banks, so if you are above target and then you raise your target, that is
undermining credibility; and we have seen a number of examples of such
changes in the history and generally that has not gone very well. The
2-percent target is generally viewed as a good objective. Of course, as I
explained earlier, there are spillovers from tighter monetary policy in
advanced economies, including the US, but other advanced economies as well
onto other markets around the world. But it is important to note that most
emerging markets do have high inflation as well, so a tighter stance of
policy and tighter financial conditions is actually appropriate for many,
not all, but many emerging markets around the world as well.

Mr. Natalucci: One thing to add. I think price stability is a prerequisite
for sustained macrofinancial stability. That is why it is so important that
central banks act resolutely to bring inflation back down to target. We
want to see entrenched dynamics. We want to prevent inflation expectations
from being de-anchored—essentially something that would damage their
credibility that has been built over all these years. Also, communication
is important. In clear communication–and this has to be a different kind
of forward guidance than was given when we were at zero lower bound—cannot
provide the same effective explicit guidance, but being clear in terms of
the policy function of the central bank, what are the objectives; what are
the steps to hit the objective, and what is the intertemporal tradeoff, and
their commitment to bring inflation down. Again, this is a new world. I
think we are going to face higher rates and high inflation probably for a
while.

Going back to the previous question, it is important to distinguish between
volatility and dysfunction. High volatility is something that is in
markets. Investors will have to learn how to price liquidity. It is a
different price than when you are at the zero lower bound. Dysfunction is
another issue. That is when you think about lender of last resort tools to
deploy. Again, price stability is a prerequisite to have growth and to have
macrofinancial stability.

Question: Before we move to the room again I want to acknowledge one thing
that we had received a question online similar to the Fed one, so I want to
tag onto the Fed. He is asking again about the Fed and the stop-and-go
monetary policy, so if you want to add a little bit before we turn to the
room.

Mr. Adrian: Again, we are very comfortable with the kind of path that is
currently priced into markets, which is very closely aligned with the dots
of the Federal Reserve policymakers. We are very comfortable with the kind
of expected path of monetary policy going forward. We think that this is
necessary in order to get inflation back to target, and we do think that is
the right monetary objective, is to go back to inflation target in the
appropriate time. Of course, monetary policy is always conditional on
economic developments, so there could be inflation surprises to the upside,
for example. There could be worse-than-expected prints for real activity,
and there could be a variety of other shocks globally, and so over time,
monetary policy would always take those shocks into account and readjust
what the optimal path is going forward.

Question: Thank you for taking my question. The Wall Street Journal. You
wrote, Mr. Adrian, that we have yet to see a global systemic event, so from
the answer to the last question, I take it to mean you think the UK
situation is contained, but I am just wondering if you could elaborate on
or clarify on what a global systemic event would look like?

Mr. Adrian: Absolutely. As you are saying, at the moment, our baseline is
one where economic activity is slowing down. Inflation is coming back to
target, where interest rates are increasing, financial conditions are
tightening; but that is in a more or less orderly manner. Of course, there
is a downside around that baseline, and when you look at Figure 2 in the
GFSR, that shows you our quantitative assessment of how big this kind of
downside risk is in the time series. So it shows you how big is the
downside risk relative to other historical episodes. And so we are in the
worst quintile here, so the only times where things were worse was in times
of acute crisis, such as the euro crisis, the global financial crisis, or
the 2020 COVID crisis. So, in that sense, we are certainly at a stressed
moment. Again, the baseline is one where things continue to be orderly.

Now, in terms of spillovers from the UK to other countries, so we have, of
course, seen that their yields are movements that are correlated to some
degree, but we have not seen the kind of dysfunction spill over into other
markets to date.

Mr. Natalucci: I think the core of the financial system, so the banking
sector, is stronger than it was pre-GFC. So they have higher level of
capital, better quality of capital, liquidity buffers, central bank
counterparties. There have been a number of reforms put in place
post-financial crisis that make the core of the system stronger. However,
some risk has moved away towards the NBFI, the nonbank financial
institutions. There are some risks, whether this is liquidity mismatch,
whether this is financial leverage or interconnectedness with the banking
system, we have seen a few episodes where stress in the periphery of the
system came back to the banking sector from the back door, so I think that
is where there are some more concern perhaps. We had one chapter in the
Global Financial Stability Report that looks at open-ended investment Fund
and maturity and liquidity mismatches there.

Clearly, you need to have visibility. Sometimes it is more difficult to
have visibility into this corner of the periphery. There is probably
financial leverage that we don’t perceive. And the other thing is the
cross-border effect. Some of it has to do with cross-border impact. That is
why I think international cooperation and sharing information is so
important, because something that happens in the periphery of the system
may affect other countries either through the banking system or through
other channels.

Question: Can you give us a sense of India’s financial stability situation
right now? And I would also like to have your comments on India’s inflation
situation and what the steps the Indian government is taking to address
this.

Mr. Adrian: Monetary policy has tightened in India, similar to other
emerging markets as well, where inflation has been above target, and
certainly inflation has been above the RBI’s target recently, so we do
expect tightening of monetary policy going forward as well. In terms of
financial stability, there are some preexisting vulnerabilities, both in
the banks and in the nonbanking system, in India that are certainly still
there and that are a cause of concern. We have flagged them in the
Financial Sector Assessment Program that we did in India some time ago, but
some of these issues remain in India.

Let me turn to Antonio to complement me on financial stability in
particular.

Mr. Garcia Pascual: Sure. Thanks for the question. On the monetary policy
side, I think Tobias addressed. The Reserve Bank of India has appropriately
been tightening to fight inflation, inflation being above target; and since
May, if my memory serves me well, it sort of delivers 190 basis points rate
hikes and we think further tightening is needed to bring inflation to its
target.

On the financial stability, the issues as Tobias will mention, they are
longstanding, and they pertain both to the bank and nonbank. On the banking
side I think the issue is related to a prudent underwriting standards to
have adequate and build further capital, so recognize problem loans because
that can be a drag. If they are left on the balance sheet, it can be a drag
to future lending and the recovery for banking system, and those we see as
the key issues.

Question: Thank you for taking my question. Glad to see everyone again
after three years. I would like you to talk a little bit more about the
financial situation in Sub-Saharan Africa. In your report, you talked about
shocks and vulnerabilities, especially debt distress, many of those loans
given by the IMF and the World Bank, of course. It always beats me how you
give loans and [inaudible]. If you can talk a bit about debt distress in
Sub-Saharan Africa and the situation there in general. I know Africa is a
big continent, and you can give us some examples. And what you see there,
what your fiscal policy recommendations are.

Mr. Adrian: Absolutely. These are excellent questions; and, of course, we
do a lot of work in Sub-Saharan Africa, including in the financial sector,
as well as on debt issues. Let me first note that the very sharp rise in
food prices and commodity prices has hit many Sub-Saharan African countries
very, very hard. Most countries are importers of food in particular, and
this comes on top of previous crisis. The COVID crisis already hit
Sub-Saharan Africa hard. Now we have this rise in commodity prices and, of
course, the tightening of global financial conditions that we already
discussed. So many countries are already in debt distress or are close to
debt distress, so they entered the crisis with high debt, with high
vulnerabilities, and now addressing those debt issues is certainly one of
the priorities. Secondly, inflation is very high in many countries. So that
has triggered tightening of monetary policy. There is a variety of shades
across countries, but it is certainly also important to contain
inflationary pressures. Finally, I would say that protecting the most
vulnerable is very important. As you know, in the World Economic Outlook we
are flagging, and in the Fiscal Monitor report as well, which is going to
be released tomorrow, we are flagging that extreme poverty has been
increasing recently, and so targeted fiscal policies to help the most
vulnerable is particularly important in some Sub-Saharan African countries.
Having said that, of course, in an environment with high inflation, an
over-expansionary stance or more expansionary stance of fiscal policy is
problematic for most countries, so in general we would want to see that
fiscal policy is aligned with the objectives of monetary policy in these
circumstances.

Question: Bloomberg. I was wondering about the Bank of England and the
intervention that they have done. You talked about asset purchases. There
is a bit of a problem with signaling because obviously asset purchases is
being linked with quantitative easing, which is monetary loosening. We
currently have a monetary tightening. The Bank seems to be wanting to
extricate itself from these asset purchases at the moment and do more
traditional liquidity operations. Is there a sort of fundamental issue that
the Bank is going to struggle to sort of square this circle because asset
purchases are difficult to operate just now?

Mr. Adrian: Let me just say again that what the Bank of England intended
was to arrest market dysfunction in a specific segment of the longer-dated
gilt market; and that has been reported to be associated with
liability-driven investments in particular. So we saw a very rapid increase
in longer-term interest rates following the September 23 announcement of
the change in the budget, and once the Bank of England stepped in, yields
came down very quickly, very dramatically. Now interest rates are rising
again but they are not rising as quickly or abruptly as they were back in
late September. So in that sense, of course, the Bank of England Bank of
England does not want to see these disorderly increases in rate rises, but
some increases in rate rises, of course, would be expected given the change
in the budgetary outlook.

Now, having said that, as was already mentioned in the WEO press
conference, there is an expectation of more announcements on the budget
side, and that would be an important input into how longer-term interest
rates are evolving going forward.

Mr. Natalucci: Maybe if I can add a couple of things. I think the Bank has
been very clear that they are not targeting the level of interest rates.
Those are backstop operation. They are aimed addressing dysfunction in the
gilt market, whether this is the nominal market or whether [inaudible], but
they are not targeting the level of rates. This is just about dysfunction
in the markets and preventing essentially market dysfunction that may turn
into financial stability issues. We are avoiding fire sales or deleveraging
that would have an impact on the market itself. This is a backstop
facility. The other point on the communication, it is really important to
separate the pursuing of flexible inflation targeting from financial
stability mandates. There are different tools that can be used.
Communication about the separation of the two and the resolve of the bank
to actually achieve the inflation mandate, I think that is something that
is very important to communicate.

Question: I was wondering if you could talk about the role of trade in
stabilizing the global financial market, and specifically if you can talk
about Africa, Sub-Saharan Africa and Africa in general. They started
implementing the Africa Free Continental Trade, and how can they integrate
that into the global economy to boost and also stabilize the economy?

Mr. Adrian: Thank you for this important question. Trade is generally good
for economic growth, and so we are certainly supportive of more integration
across African countries and of Africa within the broader global economy.
We do expect that more trade would be associated with more growth, so that
is basically my answer.

Question: Project Syndicate. You have been asked a lot of questions about
Britain, and I am sorry but this is not really a question about Britain but
about the spillover. This problem began in one of the supposedly best
regulated financial systems in the world. How confident are you that
specifically the pension systems in other countries, and particularly the
United States, are not going to be subject to the same issues because
liability-driven investment is actually very widespread in the US as well.
So you have talked a lot about the macro implications, but you have not
told us whether you have looked specifically at the American pension
system. And just one remark. Back in 2007, the leading British mortgage
bank, Northern Rock, collapsed a year before the financial crisis, and this
was considered to be a one-off, bizarre event, but it turned out to be a
perfect blueprint for what happened in the US a year later.

Mr. Adrian: Thanks so much for this thoughtful question. We did the UK
FSAP, the Financial Stability Assessment, in the UK last year. It was
published I think in February of this year. And when you look at the
recommendations, a lot of the recommendations are about deepening the
understanding of risk-taking, i.e., maturity transformation, liquidity
mismatches, and leverage in the nonbank financial system. So this is, you
know, the kind of risk-taking that we have seen in LEIs, fits exactly into
that bucket. Of course, the recommendations include to take necessary steps
to make sure that risk-taking is appropriately regulated in this segment of
the market; so better data, better regulation.

We did a Financial Sector Assessment in the US as well, and we also flagged
that the nonbank financial system has pockets of risk and that appropriate
regulations of those pockets of risks are a first order. We are certainly
flagging many vulnerabilities in the nonbank financial sector in the Global
Financial Stability Report. Again, our baseline is one where the future is
a slight decline in economic activity and tightening of financial
conditions, but these things evolve in a somewhat orderly manner; but there
is a lot of downside risk around that, and I do want to be clear that these
downside risks could certainly materialize, but it is not our baseline.

Mr. Natalucci: The only thing I would add was the point I was trying to
make before. Yes, the core of the system is stronger. There are risks that
migrated somewhere else. There are a number of vulnerabilities that have
been building over the past decade. Volatility is higher, and we start
seeing some warning shots in the plumbing, and there are these waves of
deleveraging of different parts of the economy. Those are fragile times.
Markets are fragile. Investors need to readjust the way they do asset
allocation, the way they think about risk, the way they think about
liquidity; what is the price of liquidity. That fragility I think is our
concern. A tightening of financial conditions that is disorderly could
interact with this vulnerability; it takes you into territory where
financial stability is a risk.

Mr. Adrian: Or put differently, so quantitatively, the kind of level of
risk that we are flagging at the moment is the highest outside of acute
crisis.

Question: I have two questions. First of them, how to address risk in major
economies, including Egypt, from a strong dollar? The second one is, you
focus on the demand side in addressing inflation while encouraging central
banks to raise rates. What about supply-side? Can we expect a plan from IMF
to raise a supply to lower inflation?

Ms. Elnagar: Because we are on the topic of emerging markets and emerging
economies tightening, Yolanda Morales is also asking about if emerging
central banks began early tightening the early monetary policy, are they at
risk to go too far in an aggressive policy? Can it be a financial risk?

Mr. Adrian: Thank you so much. Egypt, of course, has approached the Fund in
order to ask for a program, and this is one of the roles of the IMF, is a
lender of last resort to help countries that are hit by adverse shocks.
Egypt is certainly one country that has been hit by a series of negative
shocks. Perhaps Antonio can say a little bit more about that in a moment.

In terms of Mexico, Mexico was one of the countries that hiked interest
rates early and that as a result of that has been ahead of the curve in
terms of getting inflation to be contained. Is there too much tightening?
In our view, the tightening in the emerging markets, in a country like
Mexico, so it is difficult to say that in general, but in many Latin
American countries, including in Mexico, we do feel that the tightening has
been appropriate, and, of course, the primary goal of monetary policy is to
get inflation back to target. Antonio.

Mr. Garcia Pascual: Sure. On the central bank policy, so the Central Bank
of Egypt has been tightening monetary policy appropriately and has
delivered already since the beginning of the crisis 300 basis points. We
think the Central Bank of Egypt should carry on, should continue with this
task to bring inflation to target. Currently inflation is too high at
almost 15 percent, and therefore widely above the target of 7 plus 2 minus,
2 percent. So therefore I think the key objective remains that of bringing
inflation gradually back to target. I think that, as well as making sure
that Egypt can address the high debt levels and address the issue of gross
financing needs, so I think those are the key issues, and obviously our
advice to the central bank is to remain focused on price stability as it
has been doing over the last year.

Question: Considering the global economy is more complicated and global
market is more volatile, from Europe, Asia, to Africa, everyone cares about
Fed’s policy and Fed has a lot of work to do right now. Do you think the
Fed still can be soft landing? The second question, you just mentioned
there is no worrisome currency disorder now globally, but as the market
expressed, the Fed could go further, so do you think there could be, at
some point, Asian currency could be a repeat of 1997 crisis? Thank you.

Mr. Adrian: Well, no crisis is ever alike, so it is difficult to think of a
repeat of a crisis per se; but, of course, as we are flagging in the
report, there is heightened risk of financial instability. Market
dysfunction is something that we have seen very broadly across the globe in
March 2020 in the so-called Dash for Cash. At the moment, we see it more
narrowly in the gilt market, a certain amount of dysfunctional market
developments broadly. It is not our baseline, but it is a risk, and it is a
heightened risk at the moment.

Ms. Elnagar: Thank you very much. With this we end our press briefing. I
would like to thank our speakers, Tobias, Fabio and Antonio. Thank you for
coming. To all viewers online, I would like to let you know if you have any
follow-up questions, please email us. We would like to remind you of the
Fiscal Monitor press conference tomorrow at 8:30 a.m. here. Thank you.