World Economic Forum, oil, dollar

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Seventh APEC Finance Ministers’ Meeting
September 10, 2000
Australian Economy, IT, Telstra
September 12, 2000
Seventh APEC Finance Ministers’ Meeting
September 10, 2000
Australian Economy, IT, Telstra
September 12, 2000

World Economic Forum, oil, dollar

Transcript No. 2000/93






World Economic Forum


Monday 11 September 2000

11.30 am

SUBJECTS: World Economic Forum, oil, dollar


Mr Costello, what’s your reaction to the scenes which have unfolded here this



Well, the first thing is that the Forum has commenced this morning very successfully

with a very large crowd and I welcome that. There has obviously been some violent

behaviour by some of the protestors who have attempted to prevent people from entering. I

condemn such violence as has occurred and I call on those demonstrators to exercise their

right of protest peacefully. There is no reason at all to engage in pushing or shoving

against the police who are doing their job and ensuring that the Forum can go ahead.


In the sense that the Forum started late and less than half the delegates were here on

time, would you concede that the protestors have had a victory?


Oh no.

As you know I was one of the speakers at the first session which was a full hall and

although it was a little bit late because some people had trouble getting in, the truth of

the matter is that the Forum is on track. As I said, there is no reason whatsoever to

engage in any violence, and I condemn the violence that has occurred and I call on those

demonstrators to exercise their right of assembly peacefully.


Did you have any trouble getting in Treasurer?


I actually came in last night. I came in from the Regional Finance Ministers Meeting

and I arrived back in Melbourne at about 1 am and there wasn’t a great deal of action

at 1 am, I can assure you of that.


Treasurer, are you getting any advice on what we might do with the falling dollar?


Look, we don’t comment on movement in exchange rates. Obviously we watch it very

carefully. And there are international factors that are influencing the Australian

currency, in particular you’ve seen huge volatility on the US exchange rate and the

Euro, there are some trade imbalances between some of the major players in the world

economy and that is affecting some of the other currencies in the region. But from the

Government’s point of view, we will not be distracted for a moment from good economic

policy, and we reaffirm our commitment to strong fiscal policy, our commitment to good tax

policy, our commitment to structural reform and all of the economic fundamentals which

will make the real economy in Australia continue its growth. This is a strong growth



Mr Costello, would you like to see this Forum come up with a new plan for improving

international financial architecture?


In 1997 there was in our region, the Asian region, the worst financial crisis of our

generation, the worst financial crisis since the Second World War. And it’s obvious

that when there was massive flight of investment out of the economies of south and north

Asia, those countries went into absolutely severe recession. The only economy in this

region which managed to escape the Asian financial crisis was Australia, which actually

grew and strengthened. Now, there has been a lot of work done on strengthening the

international financial architecture, there’s been work on the Financial Stability

Forum, which Australia is a member of, in recognition of the role that we played as the

strong financial centre in this region during the Asian financial crisis. And there is a

new grouping which has been established called the Group of 20, again which Australia is a

member of in recognition of the role that it’s played as a strong financial centre

during the crisis.

Now, I think through those forums we should be working to reform the international

financial architecture. There’s a couple of areas in which we can do it. The first

is, we’ve got to ensure that there is full transparency by traders in markets,

including Highly Leveraged Institutions, and that’s been examined in the Financial

Stability Forum. Secondly, there’s more work that I believe can be done putting in

place procedures which would allow orderly workouts in the case of another financial

crisis. And thirdly, I think it’s important that developing economies which are

critical to the stability of the international financial system have a seat at the table,

which they will get at the G 20. Now, I discussed at the APEC Finance Ministers Meeting in

Brunei, over the last two days, some of the Australian ideas for reform of the

international financial architecture. We will continue to press those views at the next

forum of the G 20 which is meeting in Montreal in October.


The increase in OPEC oil production, when should that flow through to cheaper prices at

the bowser?


Well, there’s been an increase in production agreed by the OPEC economies, we

welcome that. With increased production over a period of time the world oil price should

fall, and if the world oil price should fall then it will flow through to petrol. We hope

that the announcement of increased production is sufficient to bring back world oil

prices, but we’ll have to wait and see whether that announcement is sufficient to

actually deal with the problem. Can I say in my talks with regional financial leaders over

the last two days there is concern right throughout the region and indeed the world about

the rising oil price. It’s affecting consumers here in Australia and from the

Government’s point of view we are pushing our case in all international fora for an

increase in world oil production to bring world oil prices down. But I can assure you

there are other countries that are taking exactly the same view, the economies of the

United States, Japan and Korea also noted their concern about the world oil price, a call

for increasing supplies at the APEC Finance Ministers meeting over the weekend. And we

hope that those oil-producing countries can see the wisdom of lifting supplies and

stabilising the price.


(inaudible) now says it’s up to Governments such as the Australian Government to

reduce taxes. What do you make of that?


You’ve had a world oil price which over the last year and a bit has gone from

US$12 a barrel to US$33 a barrel. That is nearly a 300 per cent increase, an extraordinary

increase. Now, one of the reasons why the world oil price has gone as high as that is that

there’s more demand as the world economy picks up, but there is not sufficient

supply. And along with countries like the United States and Japan, along with the whole of

the Asia Pacific region, which made a call at the Finance Ministers Meeting for increasing

supplies, we call for an increased supply to stabilise that price back downwards. Let me

make this clear, it’s not just important for consumers, it’s very important for

Australian consumers and I make the call in their name, but it is also important for

economic development in the region and there are a lot of countries in this region which

have gone through very severe recessions or are still very weak, the Japanese economy is

still weak and recovering, and that kind of increase, a 300 per cent increase in world oil

prices is not going to help their economic recoveries.


Does the weak dollar and higher oil prices put pressure on Australia’s inflation

rate and our interest rates? Does it change anything as far as you’re concerned?


Well, the oil price is an external price over which we have little control other than

exercising our diplomatic rights to call for an increase in production. As an external

factor it does have an effect. We’ve made it clear in Australia, and I’ve said

it before, it does have an effect on domestic prices, most notably the price of petrol.

Now, obviously if the oil price were lower and petrol prices were lower, your prices would

be lower. But when you’re looking at monetary policy it’s very important to bear

in mind the difference between domestic price pressure and external events. It’s very

important to bear in mind the contribution which is coming from external events which can

go two ways. We hope it does go a second way in the future. And so we actually try and

abstract. We don’t ignore it, but we actually do try and abstract the effect of that

international event in the way it feeds into prices.


Does that ‘we’ include the Reserve Bank? You are talking about ‘we’

of (inaudible)?


The Reserve Bank noted, I think, in either its last statement on monetary policy or the

one before it that there had been a contribution to prices by oil and it abstracted that

contribution which had come from oil, it noted it, it noted it in its actual decision.

Now, there’s an obvious reason for that, isn’t there? If your monetary policy is

directed at restraining prices or inflation, there’s no point in overrating external

events. They aren’t going to respond to Australia’s domestic monetary



If Australia’s fundamentals are so sound, why is the Australian dollar at record



The Australian fundamentals are sound on every measure. Growth is above 4 per cent, we

will have the June Quarter out next week and I think it will show that growth continued in

the June Quarter above 4 per cent. We are coming into our fifth surplus Budget in a row.

The Australian Government debt to GDP ratio is about 8 per cent. I think you heard in

there that the Japanese debt to GDP ratio is heading to about 130, the US is about 40,

Europe is about 50. Our inflation is low, although being affected as I’ve already

acknowledged by oil prices. And the world economy is strengthening. We had an increase in

our exports of, I think, up to 30 per cent, which I expect to continue. Now, they are the

fundamentals of the real economy. There has been volatility on exchange rates around the

world, and you’ve seen that reflected, I think, principally in the US dollar, Euro

exchange rate.


We’re following (inaudible).


Now, obviously we follow these events very carefully and we monitor them very

carefully. The important thing, however, is the economic policy settings. And the economic

policy settings of strong fiscal policy, low debt, high growth, a better tax system,

structural reform, are the economic policy settings which are right for Australia which we

intend to continue.


Does the Australian dollar deserve to be higher?


Look, experience has taught me this:- that commenting on levels in relation to currency

is not a good idea, and I think I begin every one of my press conferences most probably in

relation to your questions by saying, I’m not going to comment on future movements in

the currency.


But it doesn’t (inaudible)


I haven’t commented in the past, and experience has taught me that the capacity

for misunderstanding on this issue is rather great, so I’m not going to comment on

future movements in the currency. I emphasise, however, as I’ve said before, we watch

it very carefully and we are going to make sure that we have the correct economic policy

settings in place.


Do you rule out a freeze on indexation increase in petrol under any foreseeable



Yes, we’ve ruled that out. The Government took a policy to the last election which

involved a reduction of excise, the abolition of wholesale sales tax, the application of

GST, and the continuation of an arrangement which was legislated in 1983. Legislated in

1983. We had no policy of changing that legislation, and we have no intention of doing so.

And I’ve made that clear on numbers of occasions. I’m also going to make this

point:- in February we will be fully indexing pensions, that is we fully index pensions to

the CPI and as a measure to fund that we fully index excise rates. If there were an

argument that you shouldn’t index your excises, so too presumably there would be an

argument you shouldn’t index your pensions. And since I’m not hearing anybody

arguing that case, that pensions should not be indexed in February, I’m not taking

seriously the argument that excises shouldn’t be indexed. They are the two sides of

the coin. And that is the Government’s policy, what’s more, its legislation

which was put in place in 1983. What’s more, it’s bipartisan policy today

between the Government and the Labor Party, not because the Labor Party has joined us, but

because we joined them. It was their legislation because we joined them under their

legislation of 1983. Nor did the Government indicate at the election that it would be

changing that policy and in fact what the Government indicated at the election it has put

in place in full.

Thank you very much.