Transcript of France 2020 Article IV Press Briefing HTML File

Transcript of France 2020 Article IV Press Briefing

January 19, 2021

Jeff Franks

2020 Article IV Press Briefing

We had the executive board meeting for France last week. The main points from that meeting and our main points of analysis for the French economy at this time are as follows:

1-On the economic forecast , we see France is one of the more affected countries in Europe from the climate crisis. Our estimate for 2020 was that GDP declined by around 9 percent and we expect a recovery of about 5.5 percent in 2021 followed by a further recovery of 4 percent in 2022.

I should emphasize that the risks surrounding this forecast are extraordinarily high because the main risk factor is clearly still the dynamics of the virus itself. That is: what's going to happen with reopening after the second wave? Will there be a possible third wave? How fast can vaccinations take place? When can we get to a point of herd immunity through vaccinations that will improve the overall situation and allow economic recovery to take root?

One piece of good news since our mission was that the one downside risk has disappeared and that has been the risk of a no deal Brexit. We have a deal. It may not be an optimal deal from the point of view of all parties, but it certainly reduces some downside risks that the French economy have been facing before.

2-Key policy recommendationsand policy priorities as seen by the IMF staff and the Executive Board. And I'll divide those into two areas.

a-The short-run period : There are three main policy priorities. Number one is to tackle the health crisis itself. The health crisis, of course, is the number one priority. We encourage the authorities to do everything they can to address the problems facing the population in treatment and in vaccinations. Going forward, the progress in vaccinations will be key to helping the economic recovery. France began a bit slow, but has recently accelerated their vaccinations. And the latest numbers show some 450,000 vaccinations, which is about 0.74 percent of the population. That's still a bit below some other countries. But we understand that the authorities consider that they are on track to reach their objective of 1 million vaccination this month.

So first short term priority, continue to tackle the health crisis. That means treatment. That means continued public health and safety measures to stop the progression of the virus and of course, vaccinations.

Second, continue to support economic activity. We consider that the support for economic activity that the French authorities have undertaken so far has been excellent. They have provided a large quantity of support that has gone to both households and to firms. And that has been-- the take up of that assistance has been-- relatively high and it has made significant progress in cushioning the blow of the economic crisis. That support for households and for firms should continue as long as the health crisis continues and continue to be flexible in that respect. I notice that even over the last week with the new couvre-feu (curfew), there's been an additional round of economic support attached to that. That is appropriate. We think that that is an excellent way of continuing to be flexible and providing the necessary support.

The third area in the short run is to remain vigilant, about financial sector risks. We do not see major problems in the financial system in France at this time, but there needs to be continued close monitoring to ensure that that continues to be the case. The French banking sector went into this crisis in a relatively healthy position, and while profitability has slumped, the sector as a whole has not gone into deficit. And with the support of significant support from the government, we anticipate that the sector will continue to do well until the crisis.

b-Three main areas in the Medium-Term :

First, as the recovery begins, we would encourage the authorities to gradually tighten the focus of their emergency measures . So it's very appropriate in the acute phase of the crisis to try to support everyone. But as the crisis begins to ease, that focus of attention should be gradually narrowed on the firms and the segments of the population that most need it.

Second, provide support for the recovery process . And here the Plan de Relance was seen by IMF Executive Directors as an excellent step in that direction. Directors recognized very positively the green components, the emphasis on digitalization of the economy. And we would also encourage the authorities to continue to think about issues like poverty, inequality and the treatment of disadvantaged groups in this recovery phase. That's going to be very important. The economy that we will have in the world after this crisis will look somewhat different than the economy that we had before. There will be changes. Some sectors will be larger, some sectors will be smaller, some will grow faster, some will grow slower. And it's important for the recovery program to help that process along. And that's where assistance to digitalization and assistance to greening the economy are going to be very important.

The third medium term point of emphasis should be dealing with the aftereffects of the crisis . This is commonly called scarring. What are the damages that are coming out of the crisis that will need to be dealt with in the medium and longer term on the side of firms? We have encouraged and the authorities are moving forward to increase their equity-like support and not just loans and loan guarantees. This will help facilitate firms returning to investment as the crisis eases. In the banking sector, as I said, it has handled the crisis relatively well, but there will be some increase in defaults on loans as we come out of the crisis and the support becomes more focused. And banks will need to deal flexibly with that. They'll need to keep their capital buffers up high and they'll need to help facilitate that economic transition into new areas of economic activity.

And finally, on the fiscal side, 'PLAN NOW, ACT LATER': we do not see a need for any fiscal consolidation in the short run . We want the authorities to continue to spend whatever they need to spend to support the economy in these times of crisis. But debt in France is high. And we think that now is the time to begin the planning process to develop and approve a credible medium-term fiscal consolidation plan. That plan could start in a couple of years once the crisis has eased and the recovery is solidly underway. And it should go over a period of several years to bring France's deficit down and to put the debt to GDP ratio on a sustained, declining path. That program should focus primarily on the expenditure side once that happens, and because we think that the tax burden in France is already quite high.

The final thing that I would say is that although France has faced some of the more difficult challenges among European countries, they are also well placed to recover relatively quickly. It will require, however, firm action going forward to continue to support the economy and support the recovery process. We would strongly encourage the authorities not to abandon the reform plans that they were implementing and were proposing before the crisis. Both will continue to be relevant once the crisis eases.

Q&As:

QUESTION: Can you talk a little bit more about the and the risks in the corporate sector and the and the spillover risks to the financial sector.

MR. FRANKS: You rightly point out this, that we've actually seen that bankruptcies in France during 2020 at below their normal level. And that is in part because of direct government support, loan guarantees, a temporary suspension of bankruptcy processes. And we expect that bankruptcies will therefore rise above their normal level once we begin the easing of the crisis period, that that is not something that is necessarily bad. It's part of the normal creative destruction process of regenerating economies. So what we would encourage is that the authorities think about maintaining or even expanding support for the bankruptcy procedures in France to help that happen as quickly as possible. We encourage banks to be flexible in dealing with corporate debt problems and insolvency problems to facilitate that process as quickly as possible. Now, the risk there might be that if you get an extraordinary wave of insolvencies, then you begin to have an increase in unemployment, a decrease in new firm creation. And that's something that we want to try to try to avoid.

QUESTION: How much do you estimate the equity gap to be?

MR. FRANKS: We did some work on that number and I think the number that we've come up with is something on the order of 1.3 percent of GDP. Some of that gap is being covered by some of the measures that the government is contemplating. But there is still room for additional support there.

QUESTION: What is your view of France's plan for les Prets Participatifs? Will that be sufficient to get their corporate balance sheets?

MR. FRANKS: That's an excellent question. It's about the proper perspective and whether or not that is an effective and sufficient mechanism. Let me step back from that for a minute and just say, European firms in general tend to be overly dependent on debt as opposed to equity. And this is not just a recommendation specific to France, but for many European countries. We think that it would be ideal to try to increase equity support, particularly in these times of crisis, to reduce dependence on debt. One of the recommendations in the financial sector assessment (FSAP) of France that took place recently was to try to change to the relative tax treatment of equity versus debt to discourage high debt and, relatively speaking, encourage equity.

So this is part of an overall process. And it's not just something specific to France. We think that the Prets Participatifs has the potential to be an excellent mechanism to help support firms with equity and quasi equity support. We also think that it should be scaled up as needed and that the authorities should take a very flexible approach to using this mechanism as demand requires that they should look at any potential problems with the procedures for assessing the Prets Participatifs to make sure that it is agile and readily usable by firms. So we think it's a good mechanism. We think it will be scaled up. There are also mechanisms for subordinated lending that were included in the recent 2021 budget, and that could also serve a useful purpose in this respect.

QUESTION: Would you say that the fiscal consolidation starts in a couple of years or so, does that mean that you're comfortable with it starting after the presidential election next year, or do you think it should begin earlier, given that the economy is probably going to start recovering in a meaningful way in the second half of this year?

MR. FRANKS: That's an excellent question. The criteria that we outlined in our staff report were essentially first that the recovery should be underway. That is, growth turns positive. Secondly, we would like to see it begin after the point at which GDP has achieved its pre-crisis level. And thirdly, we want that growth to not just be positive, but to be solid, to have the downside risks abate. So those would be the three criteria that we would use.

If you look at our forecast for economic growth, 9 in 2020, plus 5½ in 2021, and plus 4 in 2022, it would only be at the end of 2022 or at the beginning of 2023 where we would see the French economy retain its pre-crisis GDP level.

So the short answer is if the recovery is quicker, yes, we would like to see that consolidation start in 2022. But under our current forecast, we would envisage the recovery of the consolidation beginning perhaps only in 2023. But it should be state-contingent . It should not be on a specific year. It should be based on when the economy reaches the point of health that would make consolidation less damaging.

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