Transcription
Welcome to Costa Navarino in Greece. A beautiful setting for a very timely conference, the Europe Gulf form. It's just such a pleasure that we're here with the managing director of the IMF, Christini Gorgva. We had a rich morning of discussions. They're off the record. Uh so we won't reveal the private conversations and who said what, but yet there were some surprising observations. And I'm just wondering uh what you took away from the morning the morning here.
Uh it was very interesting to listen to everybody the those who come from the Gulf those who come uh from Europe and I take two things u for the future of this forum. The first one is uh clearly there is recognition that the world has changed um to a great degree irreversibly and uh is more uh multipolar. there are centers of gravity that need to be reflected on and that in this world the Gulf and Europe have a lot of common interests and secondly it was also very impressive how much of those common interests uh got defined clearly open economies they want trade to flow. They want investments to flow and they don't want to let this be just a process on its own. They want to actively stimulate more of it between Europe and the Gulf. Uh secondly, a recognition that defense is going to be a higher priority. It is a higher priority for Europe and for the Gulf. there are two wars that are equally pressing in this direction and that there has to be more engagement in the future. uh the very nature of defense is changing will continue to change >> and and these two regions hadn't thought as much together on issues of defense >> not in the past now this is changing and three common interests to join forces for Africa uh they both have the uh proximity to Africa but also they both are engaged with Africa more individually then uh together. So I think there would be through the day other teams emerging but it was impressive that already we can see some areas where the forum can contribute.
>> Thank you for that. So the other thing that I felt in the room was on the one hand some relief at how resilient economies have been in Europe, >> in the Middle East, in the world, but also this balance between could resilience shift to crisis. >> Could you talk to us a little bit about where you see things going and what scenarios you see for the economy?
Uh the Gulf has been a bright spot on a rather gloomy economic horizon for quite some time. Why? Because the Gulf countries not only benefit from uh the u uh richness of oil, gas, but because they have put in place strong policies and institutions. they are now much more like advanced uh economies, much more like Europe in terms of their monetary policy, in terms of their fiscal policy, sometimes even do doing better. Uh and on the other side, we know that Europe is u struggling with slow growth uh and it is highly motivated to find a path through structure reforms to improve competitiveness. When I uh look at the uh uh overlay uh economically, what do I see? Uh both are impacted by this war quite severely. The Gulf of course dramatically because it is on the receiving end of attacks. Uh Europe through the higher prices of gas. So they both have a motivation to find a way to reduce the severity of this uh impact and it was interesting to listen to lessons they have learned. How do you build resilience? How you deploy this resilience looking forward there are four numbers to watch. Numbers tell a story. price of oil, inflation, cost of borrowing and uh risk of a more dramatic hit on financial stability. So when we watch these things, what do we see today? Oil price, inflation, cost of borrowing potentially going in the wrong direction.
>> Everything everything those numbers getting worse? numbers are getting worse. The U oil oil price is um uh hovering above $100 in our projections. If this continues through this year, we would see a much sign much more significant slowdown in global growth and uh potentially uh uping of inflation. Uh most significantly, yes, inflation is climbing up. Most significantly, we see recently that yield on government debt is also going up. All of this taken together puts a risk that central banks that are now in a look through the uh pressures of going u prices going up, they may need to act. How do they act? They will have to tighten. So if that is to happen then we might have all of a sudden cold water thrown on what has been buoyant uh market and um uh I am praying that u uh we see prudent approach by governments on how they can limit the risk of tightening by being very careful how they use their very limited fiscal space. When governments provide help in an unargeted manner, what they do is they throw gasoline on fire. They they make the u the risk of inflation actually uh worse.
So what's your best case scenario? What's your worst case scenario? And interestingly, maybe you can also share um how you compare this to the COVID crisis because many people have been doing that I think improperly.
Well, the best case scenario of course is for the war to end today. Even if the war is to end today, it would take three to four months at least for normalization of supplies because you have to clean the straight from mines and then tankers are very slowm moving vessels. That is to say that March we didn't feel any impact. April a little bit, May is going to go up. Then we have June and July and August. Uh and that means that uh restrictions of of quantities uh are going to bite, not just prices are going up. Yet, if we have an end of the war, we would have a more uh manageable situation in which growth would slow a bit, not a lot. Inflation may not even provoke central banks to take action. If we are in the end of the year and oil prices are still above $100, inflation continues to climb up, then central banks will be forced to pay attention to longerterm inflation expectations. They have to have a signal that they're not going to sit idle. They will act. If they act, that means tightening of financial conditions in a world of very high debt.
>> And this debt service is going to bite in the limited fiscal space countries have. If we are in 27 and there is still a situation of uh uncertainty even if it is not an active war um um the phrase no war no peace >> was used if we are in that place then we may see dangerously slipping down to uh recession uh territory and that of course for a world that needs the opposite. If we need more growth uh is going to be quite taxing. What are the factors that would determine where we land? Duration of hostilities and their impact on the strait and size and magnitude of destruction of physical infrastructure in the Gulf.
>> So the worst case scenario could be as much as 2027 world recession of some sort.
>> Yes, that could be. And of course we pray that is not the case >> but that needs more than pray. It needs peace.
>> And last question uh at the >> co you asked me about that compar compares to CO.
>> Yes please. Please >> not co it co was a abrupt supply and demand shock. The world economy came to a standstill and then there was gradual recovery. Everybody was hit with the same virus, no discrimination and the geopolitical environment was before two wars that now have made the world uh more complicated in this case. First, if you are an oil exporter, you're in a better position. US economy is doing better. So, so uh do other economies that are actually scaling up production Canada um Angola come to mind? Uh second, if you have fiscal space, if you are a well wealthy uh country or if you have built reserves >> of oil, China has 1.4 billion barrels of of reserves, then you can deal with this. If you don't, you're in a very difficult position. This asymmetry is very profound and it may mean that some countries avoid recession and some countries don't. Uh and it is very important to recognize that our ability as a global community to handle this shock uh is undermined by the very fact that this is not a virus.
>> Yeah. but a geopolitical uh uh problem that that restricts ability to cooperate >> at a time when we have less fiscal room for maneuver to start with.
>> Last question. I it interests me a lot at the IMF World Bank meetings. I had conversations with central bank governors, finance ministers, and you talked about debt and inflation and and of course the the dangers of what's going on in the Middle East. But what came up a lot almost as often was mythos and artificial intelligence. If you're looking at a geopolitical warning or or a hinge point in the economy, I call them inflection points.
>> Is it the Iran war or is it really mythos and artificial intelligence?
>> Well, actually it could be both, >> right?
>> Um the um artificial intelligence story is very real. The world has been changing already. We expect on the positive side to see increase in productivity and up to 0.8% 8% stronger growth in the years to come. This is so important in a world that has been lingering with slow growth for so long. But it also creates two major risks. One is the risk of division within countries and across countries. Some do well and others fall behind. The labor market is going to transform. Who are going to be the winners? Are we going to see losers?
>> A new sort of digital divide.
>> Can we see can we see a repeat of the story of globalization when yes we went up um on on the whole but some were uh left behind and the second one is financial stability risk. What Mitsus is telling us is that now vulnerabilities can be exposed and then exploited even by people who have no literacy either digital or financial literacy. And this is where the importance of conversations on how we can deal with these risks. And you know frankly if I want this war to be over it is also because it sucks away attention from the most important revolution technological revolution of our times rather than putting the guard rails and protecting against financial stability risks uh we are divided um and and understandably preoccupied with the impact of the war in the Middle East.
So, madam managing director, it's wonderful to have this conversation here in this beautiful setting in Greece where I think we've we're discovering that there's a lot of potential in this Europe Gulf relationship that hasn't been realized. And thank you for letting us understand >> and I think we will see more closeness between two parts of the world that have so much in common.
>> Thank you so much.
>> Thank you.