Thank you. Thank you very much. That was very kind of you, and a very good afternoon to everybody in the audience.
Dear President Tharman, ladies and gentlemen, dear friends, it is a delight to be back in Singapore on my way to Thailand for this year's Annual Meetings.
Singapore is a showcase of integration in regional and global value chains and of the benefits of this integration.
Next week, finance ministers and central bank governors of the IMF's 191 countries will come together to assess the direction of the world economy at a time of high uncertainty and rapid change.
It is vital that they do it. And Thailand is just the right host to have, another open and dynamic economy at the heart of a vibrant region. Since Thailand last hosted our Annual Meetings 35 years ago in 1991, the Asia-Pacific share of global GDP has grown from 25 to 43%.
Today, Asia and the world have steered through shock after shock with remarkable agility. But whether this fortitude will be sustained and whether the world's underwhelming growth rates this decade can be bettered will depend on our success in navigating three major crosscurrents.
The rapid arrival of AI, persistently high energy prices, and record levels of public debt. This will be the central focus of our discussion in Thailand next week.
Let me start from the context in which our meetings will take place. To put it simply, the global economy is being pulled in two opposite directions: a negative supply shock on the energy side and a positive demand shock from AI.
The combined impact of these two forces is highly uneven across the world. We will have our World Economic Outlook. It will show next week that steady global growth has continued since the spring. But behind the averages there are significant variations.
The largest hits to growth this year are in the economies ravaged by war: a war in Ukraine in its fifth year, a war in the Gulf in its eighth month, and too many other raging conflicts, destroying lives and causing global economic damage.
Smaller and more scattered hits to growth are also seen in other vulnerable countries, those reliant on energy imports and lacking sufficient policy space to cushion the shocks. But we also would see higher growth in a few places, which takes me to the role of AI.
Love it, hate it, fear it, AI is here, rapidly becoming a key driver of countries' relative fortunes in the world economy. Global investment to GDP in AI will reach and likely exceed the amounts that went into building the railroads, the electricity grid, and the telecommunication network.
We estimate AI hardware and related tech products now to account for more than one-tenth of world goods trade, and rising growth in AI-related trade reflects the investment boom in economies embedded in the value chain.
Those include the US, China, and India as net importers of AI hardware, building the infrastructure to be key AI providers. And then five of the seven other economies in the top 10 are in Asia, supplying everything from top-end microprocessors to memory chips, chipmaking.
Yet as this drives forward today's economies, it largely bypasses most others, increasing the risk of widening economic inequality across the globe.
AI also adds to energy demand. And this takes me to the second top-of-mind topic at our meetings: the rising cost of energy. And we did fertilizers, food, and key industrial inputs, with food security put at even greater risk by this year's super El Niño. In the Philippines, they call it the Godzilla El Niño.
This pushes inflation up and it drags growth down. So far, the energy price shock has been large but contained, thanks to energy efficiency, fuel source diversification, reserve releases, supply chain agility, and the usual demand and supply response.
Energy gets more expensive, we consume less of it. Nonetheless, despite a shaky recovery of flows out of the Gulf, oil prices remain around $100 a barrel, reflecting risks, high transport costs, and other factors.
Add to that a crack spread of about another hundred dollars per barrel due to a global shortfall in refining capacity, and we get retail prices of diesel and other refined products at record highs.
And in addition, natural gas supply from the Gulf remains severely impaired, reflecting more limited LNG transport options as long as the Strait of Hormuz remains threatened.
This has uneven impacts across the world, most at risk: Europe and Asia. And to quote Game of Thrones, winter is coming.
Price pressures may build further as countries replenish reserves and demand rises with the approach of the northern hemisphere cold season. Even if the war in the Gulf were to end soon, energy prices will likely persist high for some time. Brent futures, for example, now predict high oil prices through 2027.
[cough] High and... let me get some hydration. This is my energy.
Higher energy prices are, what are they doing? They're pushing up inflation. They're pushing up policy rates. They're pushing up benchmark yield curves after going up very significantly this year.
Look at this: US, German, and Japanese 10-year sovereign yields. They're now at their highest level since 2007, 2008, and 1996, and still climbing.
This takes us to the third major factor affecting the global economy today: excessive fiscal deficits, record levels of public debt, and high debt servicing costs.
Global public debt is near its highest levels since after the Second World War and is on track to soon exceed 100% of GDP. In other words, to cover our debt, we have to put everything we have produced in one year in that pile.
Who is the worst offender? Advanced economies, with some of the highest gross debt loads. We can see debt-to-GDP ratios are generally lower for emerging markets and lower still for low-income countries.
Although we need to recognize that in comparison to advanced economies, these two sets of countries also have relatively lower revenues to service their debt.
For many emerging market economies, the effects of rising core yields on funding costs are still being partially offset for now by tight risk spreads. These are the results of hard work over the decades to strengthen policies, frameworks, and institutions, but also still easy financial conditions.
For high-debt countries in the Euro area, the situation is more challenging, as bond spreads to German bonds, they keep rising in France and Italy, but not only, also in Portugal, in Ireland, other countries that have worked hard during and after the Eurozone crisis to strengthen their debt management and reduce the levels of debt.
Now, AI enters this mix in two ways. First, rising long-term private bond issuance competes for savings. Look at this, the jump in this column.
Second, some portion of the increase in core yields may reflect anticipation of faster growth in the future.
Yet, expectations of higher growth solving fiscal problems can cause policy complacency. Policymakers had a relatively easy ride over the last 17 years, as for all that time, interest rates were stuck below GDP growth rates.
Now is no more the case. Economists are fond of expressing this as the interest-to-growth differential. How many are economists in this room? Let me see. Okay. So, we economists will love this. It is the difference between interest rate and growth.
Now, what does it mean? It means that when interest rates are way below growth, you can service your debt with more ease. Used to be the case, no more.
In the past many years, we have had it easier. Now we see the interest rates climbing up, growth is somewhat disappointing. We are in a tougher position.
So if we were to rely on growth to take us out of the fiscal hole, we may be deeply disappointed. Without fiscal efforts, we cannot get back to fiscal sustainability.
Higher core bond yields, of course, also reflect fiscal policy. With the succession of recent shocks having ballooned the public debt, and with most primary deficits having remained larger than their prepandemic averages, 2015 to 2019, fiscal space is crying out for replenishment.
The situation demands an urgent and comprehensive set of policy responses. And let me speak to monetary policy first. In many countries, inflation exceeding target has been a headache for quite some time. In the US case, for the last five and a half years.
We draw comfort from long-term inflation expectations staying anchored. But let us not forget the simple fact that inflation is only anchored until it is not. I learned the hard way from Bulgaria's hyperinflation this lesson.
The AI building boom is inflationary. The energy and food shocks are inflationary. Tariffs, defense spending, and high public debt can be inflationary, and memories of the recent high inflation are still fresh.
Now may be a good time for prudence bias in many countries' monetary policy, and it is highly appropriate that the US Federal Reserve, the ECB, and the Bank of Japan have all raised rates and spoken firmly. Bank of Japan just yesterday, with future policy rates being repriced accordingly.
Staying in the central banking lane, a few words on financial stability policy, given rising economic and financial concentration in AI, which we would be wise to keep in mind.
Let's remember Amara's Law, which states we tend to overestimate a new technology in the short run and underestimate it... sorry, the reverse. Stay with me. We overestimate new technology in the short run and we underestimate it in the long run.
And it is somewhere in the transition between today's AI building boom and tomorrow's arrival of AI's benefits that we will traverse into this period of maximum risks. In other words, we have today strong corporate earnings. They're driving up share prices right there.
And they're driving up wealth effects. We all feel richer. Should earnings fall short, hyperscaler leverage and large and growing global holdings of US equities could turn a disappointment into a far-reaching shock.
The first line of defense, of course, regulation and supervision. Now let me go to the third topic that will be top of mind for us in Bangkok: fiscal policy, a place where all pressures meet.
Elevated yields are inflating the interest bill at a time of tight budget constraints and competing spending priorities, including from defense. Higher policy rates then lift the short end, feeding directly into the cost of short-term debt.
And yet we don't see decisive action in the high-debt advanced economies, where the need of the hour is for credible medium-term fiscal consolidation plans, supported in some cases by upfront fiscal measures, including to take some of the pressure off monetary policy.
Emerging markets can find themselves confronting not only higher funding costs from rising benchmark yields and wider spreads, but also more volatile capital flows related in part to financial innovation. These economies too should strive to expand their fiscal space while also growing their foreign exchange buffers.
And what about low-income countries? They are already hurting from financing constraints, high interest-to-revenue ratios, small tax bases, and shrinking aid flows. They may be forced to cut development spending much needed for their economies and their people, a regrettable spillover that shows the collective nature of the fiscal challenge.
Putting all this together, what would be my message to the world economy policymakers next week? It will be this: we cannot keep delaying necessary policy action. You have the tools, now have the wisdom to use them.
At the IMF, we know fiscal consolidation will be a heavy lift after a succession of shocks, where each time fiscal policy had to step in to cushion the impact. People have grown accustomed to state support, and yet some very tough political choices stare us in the face.
How could policymakers succeed? They need to do two things. First, explain to people why consolidation is needed, why it is in their interest. Take some pain today for growth tomorrow.
And second, make plans to limit the cost to future growth to the extent possible and to protect the most vulnerable in society.
They also have to do a third thing. They have to pursue complementary structural reforms.
I'm sorry about the noise. You're okay? Okay. We're okay. Okay. Thank you. And now we are more than okay. We are great.
So let me go to this very simple point. Growth alone cannot solve the fiscal problem we have accumulated, but growth certainly helps.
Ambitious reform programs would support the fiscal effort by delivering better workforce skills, more flexible labor markets, greater ease of corporate entry and exit, better access to patient capital, and energy security.
In an unforgiving global environment that leaves no room for self-inflicted injuries, I will urge authorities everywhere to slash red tape, clean out the cupboards of obsolete rules accumulated over time, and free up the power of entrepreneurship.
And happily, these are the same attributes and policies needed to get the best out of AI, where the core benefits derive not from the short-run boost to demand from laying the tracks, but from the long-run boost to productivity from adoption.
Our research suggests that AI, if done right, could over time deliver up to half a percentage point of extra world growth annually. Just think of it. Going from 3% to 3.5% would add an economy the size of Germany to the world economy over a decade.
We will learn as we go. But we know AI preparedness is key: digital infrastructure, labor market readiness, and regulatory guidelines, guardrails.
So why do we need that? Because we need to capture the benefits and manage AI's substantial perils, and they are not trivial: large-scale labor market fallout, serious cyber instability risks, and frontier models threatening to escape human control and run amok.
Mr. President, Singapore can take pride in knowing that it ranks at the very top of the IMF's AI Preparedness Index. Bravo and keep it up.
Success requires nobody to be left alone to harvest the transformational power of AI. Which is why it will be so important to deliver AI access around the globe. And that of course calls for cooperation.
In our interconnected world, countries cooperate not out of charity, but out of self-interest. That is how trade finds its way around the obstacles thrown at it. That is why our members are keen to come together next week in Bangkok.
President Tharman, you have made substantial contributions to international cooperation, and as we heard, among them was leading the IMF's highest guiding body through a period of economic turmoil in Europe. Cooperation kept the crisis from festering and spilling over the rest of the world.
Today you host us here for this kickoff of our 2026 Annual Meetings as the president of a country that has successfully transformed its economy, dramatically improving the lives of its people.
How did Singapore achieve this? Prudent policies, sound institutions, and collaboration with its neighbors and the rest of the world. These are the very same qualities the global economy needs in its quest for prosperity during this time of profound change.
And it is so fitting that I call on the world to embrace these qualities right here from this stage at the Lee Kuan Yew School of Public Policy in Singapore, for which I thank you.
Well, thank you, Kristalina. Thank you for your clarity and candor. You know, Kristalina's curtain raiser speech, as it's called traditionally, exemplifies what the IMF is about.
People think of the IMF often as some sort of global rescue force. Yes, it is a very important part of the global rescue system when countries fall into trouble, plays a very important role, but that's not the fundamental role of the IMF. The fundamental role of the IMF is what's called surveillance.
Telling the world, including the most powerful countries, where the storm clouds are, how they're moving, and what we need to do to avoid the hurricane. And I think you've done that exceptionally well in your curtain raiser speech.
What's changed over time is who the prime actors you're referring to are. If you think of the main themes of Kristalina's speech, and particularly the challenge of resetting fiscal policy and ensuring that debts are brought down to more sustainable levels.
In the 1980s, 1990s, part of the 20... the, are they called noughties, the first decade of the new century, it is principally emerging markets, some large, some small, but we had some very difficult problems in emerging markets.
Then we entered the 2010s when it was a group of European economies that caused the largest problems, and they troubled Europe and they troubled the world, and the IMF had to expend very significant resources to support their structural adjustments and their very painful transition back to being able to tap on the markets.
And in fact, the global community got together to raise additional resources for the IMF for the purpose, but they were relatively small European countries.
Now we're talking about something different. We're talking about the largest or the systemically important economies of the world facing the largest fiscal challenges. The IMF will not be able to rescue them.
But all the more that your objective, fairly hard-hitting advice has to be taken seriously, and the markets too need to listen carefully to what the IMF says, because you can't go there with a fire hose. You can only warn, you can advise, and we all have to be prepared.
I would say the most important exhibit... Sorry, I'm going on a little bit longer than I intended, but I really want to emphasize the exhibit which Kristalina showed on what's called R minus G, the interest rate compared to the rate of economic growth. And her main point was one can no longer be complacent.
Because you can no longer... well, interest rates are no longer significantly below economic growth, and in many countries they're now higher. And that's now a structural situation. It's not cyclical. It's here to stay.
I would go a little further and say to those who are hoping that, well, economic growth is going to go through a new miracle phase and therefore debt-to-GDP ratios come down, that there's a further twist to the problem, which is that future growth may not mean future government revenue growth.
And ultimately, it's what happens in your budget that matters. You've got a growing interest cost on your budget, and you need revenues. And it may very well be that if we succeed in the AI revolution, as I hope we do, it may very well mean a different distribution of income between capital and labor.
And the same economies we're talking about, the same systemically significant economies, are ones which actually get most of their tax revenues from labor, not from capital. So that's a further structural issue and challenge, and it means we have to sit back and reset fiscal policy in a far more fundamental way.
And not get away with the complacency of simple arithmetic ratios, debt divided by GDP, and you hope GDP growth is rapid enough and therefore the debt-to-GDP ratio comes down. It is not so simple.
