This is part of a monthly series, “Economists Exchange”, featuring conversations between top FT commentators and leading economists about the coronavirus economic recovery
The year 2020 will be remembered as the worst recession since the Depression. Green shoots of growth in the summer were crushed by a second wave of the coronavirus pandemic that did not discriminate between rich and poor, leaving low-income countries hardest hit economically.
With the promise of a vaccine and broad political consensus to rebuild the global economy and stem the damaging aftershocks, 2021 is projected to be the year of recovery. At the centre of this effort is the IMF, one of the most important financial policymakers among the international institutions.
As the fund’s managing director, Kristalina Georgieva has kept a hand on the pulse of the world economy throughout the Covid crisis, signalling problems early so that they can be addressed, especially for vulnerable countries and emerging markets.
Her message is optimistic but cautionary — “Vaccines are wonderful, but they’re not a magic wand,” she warns. Recovery is coming but it will be partial and uneven. To succeed, it must be supported by decisive and unified action by all quarters “acting together”. Such co-operation could deliver a growth rate in the world economy of 5.2 per cent, a significant climb from the minus 4.4 per cent expected by the IMF for last year.
In an interview with Martin Wolf, the FT’s chief economics commentator, the Bulgarian economist says that a durable exit from the Covid health crisis depends on two things. First, not withdrawing policy support prematurely but injecting stimulus where it is needed. And second, ensuring that vaccines are available everywhere, as fast as possible. “Having vaccines is not the same as having applied them universally,” she points out.
Fresh stimulus could herald a “transformative” year for the climate economy, and new opportunities for investment in much-needed job creation, particularly in the digital skills sector. But tightening policy around non-banking financial intermediaries will be paramount, as will acting quickly to restructure debt and minimise bankruptcies. The ease of borrowing now for both companies and governments means we’ll need “incentives for good behaviour” in the recovery.
On the plus side, the IMF has $1tn extra firepower since the 2008 financial crisis, of which it has deployed $102bn so far in the pandemic. But Ms Georgieva’s particular worry, she says, is lobbying: “Don’t touch my bank. Yes, it’s weak, don't touch it.”
Martin Wolf: We’ve had the most extraordinary rollercoaster ride in 2020, an incredible year. I sense a return of optimism. People are beginning to think that maybe we’ll get this under control from a pandemic point of view in 2021 and then the economy will come back. How do you see this?
Kristalina Georgieva: We project minus 4.4 per cent [growth in 2020], somewhere around this number. We got some good news in the third quarter after a devastating first half of the year. But then we were hit by a second wave in many places, and the green shoots of recovery were snowed over.
What we are stepping into 2021 with is weaker recovery momentum, but with the promise of vaccines to anchor us to what we have been projecting for 2021 — a year of uneven recovery. And yet, recovery nonetheless.
We projected 5.2 per cent growth for 2021, based on the assumption that a durable exit from the health crisis will indeed happen next year. With vaccines, this seems to be the more likely scenario.
But let me make a very important point. Vaccines are wonderful, but they’re not a magic wand. They will take time to be applied around the world, and this is why our main messages for 2021 are twofold.
First, do not withdraw policy support prematurely; having vaccines is not the same as having applied them universally. And two, act decisively for vaccines to be quickly available everywhere, to everyone, because this is what would bring a durable exit.
If we apply vaccines universally as fast as possible, we could give a boost to global output of $9tn between now and 2025; $9tn, clearly a number not to sniff over. To sum it up, partial uneven recovery is indeed coming. We can boost it by co-operating and acting together.
MW: Is it your sense that there will be political changes towards global co-operation, particularly over vaccines, and maintaining policy support, especially in developed countries?
KG: Let me give credit where credit is due. Last year, we did see remarkable co-operation among central banks and finance authorities. I don’t think we have recognised them enough for what they have done to act in a synchronised manner to put the floor under the world economy.
It helped us, the IMF, to do our job for low-income countries. We tripled concessional financing and that was a saviour to many economies in incredibly difficult moments.
This being said, there are two areas of co-operation for 2021. One is on vaccines. The case for co-operation on vaccines is clear, but vaccines don't inject themselves. They require health systems. And let’s remember, in many developing countries, health systems are excruciatingly weak, so the world needs to support low-income countries decisively.
We have to build a health system globally that makes people more resilient to shocks to come, because — let me be frank — this is not going to be the one and only health emergency. We know that with the climate emergency, resilient people will be absolutely essential.
And two, this crisis is not going to magically waive all the scarring that it has caused. There will be scarring. Debt levels are high, corporate debt levels are high, official borrowing is high, and once policy support is withdrawn, not everybody will make it to the other side of this crisis.
Having global co-operation to make sure that we are resilient and we have as limited scarring as possible is going to be absolutely essential.
MW: In the end though, isn't it inevitable that there will be some global scarring, with many countries poorer than we expected or hoped they would be, back when we made forecasts in 2019?
The IMF itself produced a very interesting forecast in October which showed that its expectations for 2025 are now significantly worse, not colossally/catastrophically, but significantly worse for all regions of the world, than they were a year earlier.
KG: Yes, of course. Look, we asked producers not to produce, consumers not to consume. We shrank the economy in 2020. In 2021, the recovery will not bring us up to the pre-2019 level.
Let me remind us we weren’t in great shape in 2019. We had low productivity, low growth. My first speech as managing director was about synchronised slowdown. And we had rising inequality and a looming climate crisis. None of this has gone away.
We project a total of $28tn loss of output by 2025. In other words, we are going to be somewhat poorer than we would have been without this crisis. And this is exactly why it is paramount to decisively act and act together. Policymakers do have tools.
Number one, they can inject stimulus in the economy to put it on a different trajectory in terms of productivity and job creation. We now know that the digital future has arrived. But it hasn’t arrived for everybody. Policymakers can do a lot to expand access to the knowledge economy to more people and firms, and in all countries. This is a precious investment in digital transformation and skills that we ought to make.
And two, we can use 2021 to be the transformative year towards the new climate economy. And climate investment can be job-rich and, boy, do we need these jobs. Just in tourism, the projections are that 120m jobs may be wiped out because of the pandemic.
If policymakers were to be determined to invest in a green recovery, that means investing in building installations, investing in electric mobility, investing in reforestation and mangroves restoration.
MW: Let’s talk about the financial aspects of this. There is a general expectation that there is going to be a lot of bad debt in the private sector as a result of this tremendous shock. Companies have borrowed. Many governments have supported their borrowing, rightly. But they are going to come out with a huge debt overhang.
And then we are inevitably concerned about the state of the financial intermediaries. When we went in, people thought that the banks were in very good shape. But if there’s a lot of bad debt among their borrowers, it’s bound to affect their balance sheets.
How worried should we be that we’re going to have aftershocks in the form of debt overhangs, defaults, suppressed investment?
KG: We calculate that shortfalls vis-à-vis mandatory capital requirements would be in the order of $220bn. On the scale of the global financial system, this is manageable. So we are in a resilient place but we cannot take financial stability for granted.
I want to frame three issues that policymakers need to wrestle with.
One, low [interest rates] for longer. This is why we can carry so much debt without breaking our back. However, low for longer creates problems of its own, because it exacerbates risk-taking. Firms and governments are more at ease to borrow than they otherwise should be. And that is a risk we have recently flagged. We published the paper “‘Low for Long’ and Risk-Taking”. Obviously we need strong macroprudential [policies], but we also need incentives for good behaviour.
Two, because of low interest rates, banks are less profitable. When they’re less profitable, we see less appetite to lend. This is why we have to inject a growth momentum because otherwise we would see a problem in the service they’re supposed to provide.
And three is something that you said quite correctly. You brought it up: non-banking financial intermediaries. They were the unfinished business after the global financial crisis. Actually, I remember I had a fireside chat with Randy Quarles [vice-chair of the US Federal Reserve] in January. And this is what we talked about; that non-banking financial intermediaries are not sufficiently regulated, and the policies applied to them are not strong enough.
In March, we saw for the naked eye, evidence that they are not in the best of shape. Central banks stepped up, they did what needed to be done. Short of that, we would have been in trouble. And now the Financial Stability Board is coming up with their comprehensive review of the March market turmoil.
There are already some countries where the problem of corporate debt is severe. And in some low-income countries and emerging markets with weak fundamentals, government debt level is very high. In some cases, unsustainable.
So what is our advice? Front it. Act decisively on debt restructuring. Act decisively on anticipating there will be bankruptcies. Minimise those bankruptcies. And when they happen, have the resolution mechanism in place.
What I particularly worry about is lobbying. Don’t touch my bank. Yes, it’s weak, don’t touch it. There has to be forward leaning in, fronting these issues before they become a sour point. As support starts to fade, we will see these problems coming up. Remember Warren Buffett, when the tide goes down, we see who has . . .
MW: Been swimming naked.
KG: Been swimming naked, exactly.
MW: Since you’ve been talking about emerging markets, should we be expecting a significant wave of sovereign defaults? We have some already. There are restructurings, notably Argentina.
KG: We had two restructurings, Ecuador and Argentina. And we have Zambia. There are two very important factors to keep in mind. One, many emerging markets have taken to heart lessons from prior crises. They built strong buffers, they built reputable, well-respected, independent central banks, supervisors and regulators.
In this crisis, they were very fast to go back to borrowing at low interest rates. Some of them have taken some unconventional monetary policy measures, and so far we see that market reaction is positive.
Finally the G20, China included, have agreed to act together. They have given the fund a mandate, and the mandate is to come up with programmes for countries with unsustainable debt so we can bring it down to sustainable levels.
MW: After the dust has settled, do you think we are going to want to change the relative position of banks and non-bank financial institutions? Or will we actually want them more or less to continue doing what they’re doing in different but related ways?
And if we do, does this mean we are going to have to create a completely new global system of financial regulation which covers banks and non-bank institutions essentially in similar ways?
KG: Banks and non-banking financial intermediaries play an important role. They not only complement each other, but they expand options by having this diversity of roles. So we have not had any discussions around one absorbing the other or changing mandates.
I want to praise my colleagues at the fund, Tobias Adrian [the IMF’s head of monetary and capital markets] and his team, for flagging early this issue of non-banking financial intermediaries being the unfinished business.
Bringing policy tightness around non-banking financial intermediaries is absolutely paramount. That is where we think we need to zero in on.
Do we need a global system? [What] I actually see, and I may be a minority in that regard, is that since the global financial crisis, there has been a build-up in three areas. One is countries have built up strong buffers, central banks built up reserves. Now we have some $11-12tn in reserves.
Second, we built institutional capacity for global co-ordination and decision-making, and the FSB plays a very important role in that. And third, the IMF got a step up in our financial capacity. We now have $1tn to deploy, and the combination of those three is what makes us so resilient.
If you look at the story of this crisis so far, yes, we have deployed $102bn. What is more interesting is 82 countries have benefited from our support. This has never happened before.
But we still have up to $1tn. If you take the pre-existing commitments, we still have $730bn capacity. What this tells you is that this triage has made the world economy more resilient. And I think we need to continue to build on it.
This is the edited transcript of an interview between Kristalina Georgieva and Martin Wolf