for joining CNBC. We really
appreciate the time. I want to start with the updates to the
World Economic Outlook today. And tying that into the whole
lens of how you view financial stability risks, because it
seems to me that the biggest financial stability risks of all
is that of a macro economic downward surprise. Would you
characterize it the same way? Yeah, absolutely. We have
downgraded our growth forecast for this year and for next year.
So growth is forecast to slow from this year 6.1% to only
3.2%. This year, and 2.9% next year. So those downgrades 0.4
and 0.7%, respectively, relative to the earlier forecast from
April, we also have a kind of adverse scenario where growth
would slow even more, and the likelihood of a recession is
fairly elevated. At the same time as growth is expected to be
slower. Inflation is actually expected to pick up so it will
take longer for inflation to go away. And the overall magnitude
of inflation is expected to come later this year. How would you
describe overall financial conditions right now? And do you
see a distinction between the financial conditions we're
witnessing in advanced economies versus emerging market
economies? Yeah, so financial conditions have tightened
everywhere in the world. And that is a consequence of
monetary policy tightening, in order to get inflation back to
target. Central banks around the world have started to tight
monetary policy, having said that, financial conditions are
at, you know, roughly neutral historical levels in the US and
the euro area. While they are fairly tight in emerging
markets, in particularly in Eastern Europe, in Sub Saharan
Africa and in the Middle East, so emerging markets have
experienced much more of a tightening in advanced
economies. What role do you think the stronger dollar has
been putting in some emerging market economies in that
situation? Because at the end of the day, a lot of these
countries are still important commodities at an elevated
overall commodities price, but also with a very strong dollar
as well.
Exactly the Donna's really strong because the Fed has
tighten monetary policy relatively aggressively. And the
dollar has broadly appreciated against other advanced economies
and emerging markets. Of course, this is increasing input prices,
in particular, the import prices for commodities and food, which
tend to be invoiced in US dollars.
So this is going to put further pressure on emerging markets to
raise interest rates and to tighten monetary policy. So how
does the IMF view rising yields here, because there's one
argument suggests that rising yields are just a reflection of
a normalization of monetary policy. We've been in a super
low interest rate environment for a long time now. But the
other view is that they've risen very much very quickly, and it's
the speed of the move that is worrisome.
Well, both views are correct. The speed has been has been very
fast and has been worried some times. But so far, I would
characterize financial market conditions as being orderly.
However, there is a risk of some disorderly tightening at some
point down the line. Secondly, it is true that we have had this
very low for long interest rate environment for over a decade
since the global financial crisis. And the current interim
increase in interest rates is a kind of normalization for those
from those levels. What we're seeing in the yield curve at the
moment in the euro area is that yields the real yields are still
fairly negative, and they are normalizing over coming years.
In the US, this normalization is somewhat quicker, but at the
moment, we don't see an outsize tightening priced into yields.
Well, let me just bring a line in your report saying that
global high yield defaults are seen as having bottomed out at
historically low levels. And new debt issuance has slowed
dramatically, but just reading between the lines so far, we
haven't actually started to see a spike in default rates then.
Exactly, exactly. So we are seeing more countries in debt
distress or close to that distress. However, those tend to
be fairly safe.
More countries, the dollar amounts that we're talking about
here are fairly small, even though there are many countries
that are in that distress. There are also some corporations in
distress. And just to that point, you see that there are
some small countries in that distress. Yeah, you mentioned
about 1/3 of emerging market borrowers now have yields
borrowing yields of more than 10 percentage points. What sort of
knock on effects can we expect from countries that are trying
to finance the public debt at such high interest rates right
now?
Yes, some of those countries might come to the IMF for
programs others might engage in in debt renegotiations. And
certainly all those countries will have to adjust the fiscal
positions and a word on stock markets because we've obviously
seen a huge pullback. And we're many of these global markets
that these indices are trading a pullback of 20 30%. Even more,
in some cases, what sort of financial contagion effects you
see from that. So to date, the pullback has been more or less
orderly, and in line with valuations. So we don't see a
very outsize a widening of spreads or deterioration of
financial conditions more broadly. And it could certainly
be the case that as earnings are being revised downwards, we
could see further downward adjustments to equity
valuations. And I know that cryptocurrencies is an area that
EMF at the IMF have looked into very, very closely, we've seen a
huge wealth destruction in that space. are you encouraged to a
certain degree that there hasn't been a huge financial contagion
effect from crypto into other more traditional financial
assets? Yeah, absolutely. So as the stock market has come down,
crypto valuations, including valuations and Bitcoin have also
come down. And that correlation in between crypto valuations,
and stock prices is something that we had pointed to for many
months already.
Having said that, there have also been some collapses of
stable coins. For example, the Terra Luna universe of stable
coins, and associated products has collapsed. And that was
disorderly. But it did not have broader spillovers either within
the crypto universe or to the traditional financial system. So
I agree with you that somewhat reassuring. And then finally,
just in the very adverse scenario that the IMF have
spelled out in the World Economic Outlook, of potentially
a global recession, how much of a pullback could we see in
financial assets, how much more of a pullback so we would expect
a recession that is fairly shallow, so recession was growth
rates around zero for the next year, that's in the adverse
scenario.
So it's not a kind of, you know, very sharp recession, like the
one we saw in the response to the Covid crisis back in 2020.
Or in the global financial crisis. So the adverse scenario
does have growth around zero, but it's not an extremely sharp
recession. So there would certainly be a further pullback
of risk asset valuations.
But it might not be disorderly, it might be orderly.