IMF’s Gita Gopinath Says There Could Be Greater Demand For Dollar Liquidity
In its latest world economic outlook report, the IMF has estimated a sharp v-shaped recovery next year for the coronavirus-struck global economy. World output, that grew by 2.9 percent in 2019, will contract 3 percent this year and is estimated to grow 5.8 percent next calendar year, the WEO says. Notable in the forecasts is that China and India are the only two large economies that are expected to grow this year and next.
In her foreword to the report, the International Monetary Fund’s Chief Economist Gita Gopinath states that the 2021 growth rates will be above trend but the level of GDP will remain below the pre-virus trend. The most important bit is the last bit.
A partial recovery is projected for 2021, with above trend growth rates, but the level of GDP will remain below the pre-virus trend, with considerable uncertainty about the strength of the rebound.IMF World Economic Outlook - April 2020
Scenarios And Responses
The forecasts are all predicated on a baseline scenario that by the second-half of 2019 the pandemic has faded and containment measures gradually lifted. The worst case scenario — where the outbreak takes longer to contain in 2020 and there is a second outbreak in 2021 — has world GDP contracting by 6 percent this year with no growth next year.
The impact of “The Great Lockdown” is far more severe than the global financial crisis of 2008-09, the IMF notes, and would likely mark the deepest dive since the Great Depression. Equally, governments and central banks have reacted much more rapidly than during the GFC, acknowledges Gopinath in an interview with BloombergQuint.
This crisis has called for all hands on deck and prompted much more closer collaboration between fiscal and monetary policy this time around, she points out. Other countries should adopt the kind of collaboration happening between the Fed Reserve and the U.S. Treasury Department.
Central Bank Action And Dollar Liquidity
In a series of singular and coordinated actions, central banks, especially in developed western economies have provided monetary stimulus and liquidity facilities. Among the more effective measures have been the U.S. Federal Reserve’s swap lines to provide dollars to central banks in other countries. This has been prompted by a rush to safety and higher demand for the dollar.
Even if the crisis doesn’t take a turn for the worse, there could be greater demand for dollar liquidity.Gita Gopinath, Chief Economist, IMF
The IMF is thinking of a short-term liquidity line, she said, adding that there will be need for other kind of options as well.
The IMF Fiscal Monitor report puts the size of the global fiscal stimulus at $8 trillion — $3.3 trillion in spending and revenue measures; loans, equity injections, and guarantees totaling $4.5 trillion.
Gopinath expects the $8 trillion fiscal stimulus number to grow. While many of these are targeted measures to support households and businesses during the pandemic, the chief economist says broad-based fiscal measures, such as infrastructure spending, will be more effective in lifting aggregate demand and should be resorted to once the outbreak fades.
Her bigger concern though, as stated in the report as well, is for developing countries and emerging markets that have lesser fiscal space, that can't borrow as cheaply as advanced economies. “Downside risks to IMF’s forecasts are biggest for emerging and developing economies,” she says.
Watch | Gita Gopinath In Conversation With BloombergQuint’s Menaka Doshi
Here are the edited excerpts from the interview:
You’ve explained how uncertain the current scenario is and how difficult therefore it is to make these forecasts. The report says “A partial recovery is projected for 2021, with above trend growth rates, but the level of GDP will remain below the pre-virus trend, with considerable uncertainty about the strength of the rebound.”
One of those uncertainties s the timeline. What have you estimated in terms of timelines and various scenarios?
GITA GOPINATH: Right, yes, the baseline number that you quoted, the minus 3 percent, assumes that the pandemic crisis peaks in the first half of this year and then you start seeing containment measures coming off gradually in the second half of this year. In that scenario, we have negative 3 [percent] for 2020 and then we have a 5.8 [percent], like you mentioned, for 2021.
Now, there are alternative scenarios where the crisis goes into the second half of this year, and we have built those scenarios. Those are the cases also where the financial crisis will be just that much worse. In that situation, we would have global growth for 2020 at negative 6 percent and 2021 growth would be basically around zero which means that there will be hardly any recovery. So, these are the kinds of scenarios that we built. I think we’re very clear that there is tremendous uncertainty around this.
Is the potential of a second outbreak factored into these scenarios? How much worse does it make the numbers, if that were to happen, let’s say, in the second half of this year?
GITA GOPINATH: Yes, indeed. We have exactly considered this situation where you have a second round that comes about in the second half of this year. In that scenario, we’re talking about a doubling of the contraction, which is instead of being negative 3 percent; we will be down to negative 6 percent, which is of course, getting now even closer to depression levels.
The other uncertainty is on how demand recovers. Let’s assume the IMF’s baseline scenarion - there are going to be behavioural changes as you’ve pointed out based on a variety of different things. Can you talk us through how you approach demand recovery?
GITA GOPINATH: When we think of demand recovery, of course, there is the traditional piece which is that in the peak of the pandemic, we will have a substantial rise in unemployment in many parts of the world. So the question is how quickly will firms start rehiring workers? How quickly will firms start going back to business as usual? We’ve taken that into account, of course that varies across countries, some countries rely much more heavily on the kinds of sectors, it depends on social interactions like using Zoom in entertainment, and travel, while others depend less on it. So there is variation based on that.
But one of the policy recommendations we make is that once we’re in the recovery phase, countries should be providing, for instance, hiring subsidies for firms so that the recovery moves along much more quickly. The other recommendation we have is for countries that have the space to do a kind of a broad-based fiscal stimulus.
A broad-based fiscal stimulus does not work now in the containment, but it will work once you get past the containment phase, and this will include infrastructure projects, things on those lines, and that will be another source of demand. So public sector demand will have to remain high, even in the recovery.
Is it fair to assume that let’s say for the next several quarters once the worst of the pandemic is behind us, you expect government spending will drive this world?
GITA GOPINATH: That alone can’t do it. I think we need government spending also to support the recovery, but it’s not possible for that to be the only channel. A recovery will have to come from resumption of all kinds of consumption activity, and in terms of firm hiring.
Investment tends to respond with a lag, especially in this environment when there is so much uncertainty that there could be a second round of this pandemic. So I would expect investment may hold off in terms of private sector investments and that’s where public sector investments can play a role.
It’s quite clear that both governments and central banks have reacted rather quickly, as opposed to, let’s say the gradual way they reacted in the global financial crisis. Have they done enough?
GITA GOPINATH: That’s right, they’ve really moved much more rapidly. Now this is not uniformly across the wall in terms of the scale. So we have a total of about $8 trillion discretionary fiscal stimulus in the world, of which $7 trillion is from G20. Again, among the more richer nations of the world, this impact we’re seeing if you look at unemployment numbers and retail sales numbers that are coming out... you’re already seeing governments announcing additional stimulus packages. So I expect this number will grow.
I think the bigger concern is other developing countries and emerging markets that have lesser fiscal space. They cannot as easily borrow as cheaply as many of the advanced economies can and therefore are more restricted. For them, it is very important that they have access to concessional financing and it’s also very important that for those countries debt service relief is provided at this time.
How effective in your assessment have measures such as the Fed’s swap lines been? Should we anticipate more such measures in the weeks and months to come? Where do you see some of the hidden risks?
GITA GOPINATH: This crisis one of the things that you’ve seen play out is this rapid tightening of dollar liquidity in international markets, and to ease that the U.S. Fed triggered the swap lines, some of them were from the previous time they did this with the global financial crisis, but they also extended it into a couple of countries.
My sense is that if this crisis takes a turn for the worst, and even if it doesn’t, I think that we could have a situation that there could be even greater demand for dollar liquidity in the international markets, and that would require international support for it.
At the International Monetary Fund, we are, in fact, thinking of a short term liquidity line that can serve some of that purpose, in addition to our flexible credit lines. But there will be probably more need and more demand for other kinds of facilities.
This line that the IMF may extend, or any further action by the Fed, do you think it will further broaden the kind of securities that will get purchased? We’re already hearing a lot about the Fed being open to buying (close to) junk in the last few announcements that they made, just to be able to keep corporate debt markets going.
Also, what would the IMF line help with? Would it help countries like India?
GITA GOPINATH: What this crisis is doing is that it’s pushing otherwise viable firms to become non-viable. That’s the kind of situation we don’t want to allow. Because many of these firms that are now just slightly-below investment grade, were well above investment grade. These prices just brought a collapse in revenue for them that changed their prospects. That’s nothing to do with bad management of these companies. But it has to do with a completely external shock. So it makes a lot of sense for central banks and policymakers to support more broadly than they would have done in the phase of other kinds of phases.
I expect that institutions like the IMF, and that’s what we doing, we have about 100 countries that have approached us for financing. We are providing rapid financing for them. To make sure that we meet the needs-- we think are about $100 billion at this point, in terms of rapid financing needs, we have actually increased access to our rapid financing facility so that we can provide the necessary support. Like I said, we’re also providing debt service relief to our poorest member countries. We just did that for 25 member countries, but these kinds of measures will be needed.
Are you concerned, as many other people are, about potentially lurking risks in the shadow banking industry now, what we call NBFCs in India, or alternative asset managers or even private equity, it’s not very clear how tight liquidity conditions are there and what the implicit risks could be.
GITA GOPINATH: We were concerned about is even before the virus hit, we’ve been explaining that in our global financial stability reports where we talk about risks building up in many parts of the world — non-banking sector, the non-regulated ones, and this is the corporate sector, but also NBFCs, and that concern just got manifold at this point in time.
Now, the priority of course for the governments around the world is to do the spending that needs to be done on the health side, and to ensure that people and firms are maintained so that when we’re in the recovery phase, that we can go back to normal as soon as possible.
But regulatory agencies will have to keep a very close eye on these kinds of developments that we will see in the non-performing loans, in terms of distress in the non-bank financial sector and they will have to think of a plan of how to address that as we get out of the peak of this thing.
Any unconventional measures that you’d expect central banks and maybe even governments to resort to to address these risks?
GITA GOPINATH: You’ve seen the kinds of measures that are being taken by major central banks around the world. Now, I think what we’ve seen this time around is a much closer working on fiscal and monetary policy because this crisis is calling for all hands on deck. So for instance, in the U.S., what’s happening here is you have the Fed that’s doing the lending. But its backstop in terms of credit risk is on treasury, because that’s not something central banks can pay. That kind of a collaborative step, I suspect is going to roll out in other countries of the world. But these are the kinds of measures that will be needed.
Gita Gopinath also discussed monetary and fiscal measures taken by India to fight the impact of the coronavirus. Click here for her views on that.