Speech by IMF's Deputy Managing Director Shinohara for the 14th ASEAN Finance Ministers’ MeetingApril 8, 2010
Nha Trang, Vietnam
1. Good morning. It is a great honor for me to be given an opportunity to speak at this meeting. In my remarks I will touch on the economic outlook briefly and then talk about the main policy challenges for the region. I will also take advantage of the opportunity to give an overview of how the IMF is changing to strengthen its engagement with Asia.
2. Let me start with the economic outlook. As noted by previous speakers, the global outlook is shaping up better than expected and the IMF is forecasting world growth close to 4 percent this year—an upward revision of almost 1 percentage point from the October 2009 World Economic Outlook and will continue by a similar pace in 2011. However, this is likely to be a multi-speed recovery with a highly uneven distribution of growth across the globe:
- In most advanced economies the upturn is still weak and remains dependent on policy support. Advanced economies are expected to expand only by 2¼ percent this year, not even enough to recoup the 3 percent decline in output experienced in 2009.
- By contrast, most emerging market economies are already rebounding strongly from the crisis, and domestic demand seems poised to carry growth forward. Emerging Asia is, of course, leading the way in the global turnaround. Emerging Asia, which also includes China, is forecast to grow by 8½ percent this year, and the Association of Southeast Asian Nations (ASEAN) economies will grow vigorously by nearly 5½ percent on average this year and next.
3. Diverging growth trajectories across the world are, in my view, at the root of three key challenges facing ASEAN economic policymakers in the period ahead.Sovereign debt concerns in one country could be transmitted back to the banking system or to other countries.
4. First, the external environment facing the region remains fragile. In several advanced economies, high unemployment and weakened household balance sheets are holding back private consumption. For example, the savings rate in the US is projected to rise further as US households rebuild their balance sheets. At the same time, tighter-than-normal credit conditions are restraining investment. The IMF estimates that credit growth will return to positive territory only in 2011 in the US and Euro area, but still remain much weaker than before the crisis. The vulnerability of the recovery is amplified by severely limited room for monetary maneuver, stretched fiscal positions, and—in a few cases—high public debt burdens that could undermine market confidence.
5. In this environment, exits from policy stimulus in ASEAN economies need to take into account the uncertain strength of external demand. A delicate balancing act is in order. Unwinding too early could jeopardize the forward momentum; waiting too long poses risks to price and financial stability. In several regional economies, the time for stimulus withdrawal has arrived already or is approaching fast. But with downside risks still weighing on the global economic outlook, exit strategies must be able to adjust swiftly to unforeseen events. Gradual responses and early communication of the direction of policy are key to supporting confidence, anchoring expectations, and safeguarding policy flexibility. From this angle, the removal of fiscal stimulus planned for 2010 in some ASEAN economies seems generally appropriate since targeted support measures have been kept in place for “policy insurance” purposes.
6. Second, surging capital inflows could complicate macroeconomic management in emerging Asia, going forward. Brighter growth prospects and widening interest rate differentials vis-à-vis advanced economies will likely continue to attract capital to the region as risk appetite returns and global deleveraging plays out. In some economies, this could lead to overheating, imbalances in asset and credit markets, and the risk of abrupt capital reversals if sentiment shifts.
7. Thus, policymakers in a number of ASEAN economies face the challenge of nurturing the recovery while curbing the risks posed by spikes in capital inflows. The right policy response depends, of course, on individual country circumstances but options include: fiscal tightening; greater exchange rate flexibility; macro- and micro-prudential tools; and reserve accumulation to guard against an overshooting of the real exchange rate. Carefully designed capital controls can also be part of the appropriate response in certain circumstances, for example, if an economy is operating near potential, and if the flows are likely to be transitory.
8. Third and lastly, over the medium term the region’s main policy challenge is to ensure that private domestic demand becomes a more prominent source of growth. Once the inventory up-cycle now benefitting the region has run its course, Asia’s exports to advanced economies are expected to moderate because demand in these economies will be held back for some time by damaged balance sheets, ailing financial sectors, and the large budgetary adjustments necessary to regain sustainable fiscal positions. Fast-growing China may provide only a partial offset for the rest of emerging Asia to weaker demand from advanced economies, because the relative size of China’s import market is small. Indeed, the crisis has shown to ASEAN members the vital importance of a second, internal growth engine to cushion the impact of external shocks.
9. From a multilateral perspective, strong and sustained growth needs a better balance of global demand. Unless countries with excessive current account surpluses before the crisis develop new sources of demand and growth, together with the necessary adjustments in countries with excessive external deficits, the world economy will not attain a high growth path.
10. A broad array of measures that include reforms in product, labor, and financial markets as well as in fiscal structures and in exchange rate policies has the potential to produce a successful shift in the pattern of growth. (Specifics, of course, vary from country to country, but the overarching objective should be to support private demand and the development of nontradable sectors. Some countries may need to increase consumption; others will need to promote private investment.) In most ASEAN economies, broad-based reforms to improve the environment for private investment and to raise productivity in services (such as measures to strengthen competition, human capital, and innovation) should be a key element of the growth strategy.
11. A challenging global and regional environment sets the context for the final topic I would like to talk about today—how the IMF is changing to play a supportive role in the post-crisis world. (I have a genuine feeling that the IMF is changing, although I am with the IMF only for a short period.)
12. A “New IMF” is in the making with the goal of making it more flexible and useful to member countries. I believe that much has been accomplished and much more needs to be done. Allow me to mention a few of the changes particularly in four areas:
- One, crisis lending has been stepped up. The IMF has responded quickly to the global crisis with lending commitments reaching a record-high of more than $160 billion. Within this envelop, concessional assistance has also increased sharply.
- Two, the IMF has become more flexible. We have overhauled the lending framework to make it better suited to country needs and streamlined conditions attached to loans. We have introduced a new insurance-type facility, the Flexible Credit Line, which provides financing to members that pre-qualify—with no further conditionality. In other ways too, our approach has evolved. Our messages on tough policy issues, for instance, have become more nuanced, more tailored to circumstances you can see in our recent thinking on capital controls.
- Three, we have intensified surveillance of systemic countries. For example, we have been focusing on the problems in advanced country’s financial systems, highlighting the write-down and recapitalization needs of their banks. We have also been focusing on potential spillovers from systemic countries and developing an Early Warning Exercise to identify global systemic risks to alert countries about potential problems emanating from abroad.
- Finally, the IMF is contributing to ongoing efforts to draw lessons from the crisis for policy, regulation, and reform of the financial architecture. We are working closely with such bodies as the Financial Stability Board and the Bank for International Settlements, with each institution exploiting its comparative advantage.
13. Pulling all this together, I believe that the IMF is now better positioned to be an effective partner for economic policymakers in Asia. For example, tailored advice and policy analysis could help in designing appropriate exit strategies and coping with capital inflows. Also, the IMF’s expanded resources and renewed lending framework could provide a stronger safety net, thereby facilitating the pursuit of policies to rebalance global demand.
This said, more remains to be done to strengthen our engagement with the region. One priority is to make its lending instruments even more flexible and better suited to our members so that they do not carry the stigma still associated with the use of Fund resources. Another priority is to strengthen our surveillance function, for example, (by producing more thematic reports which would focus on countries facing shared policy concerns such as commodity prices, or) by giving more emphasis to multilateral surveillance for systemic countries in order to access their outward spillovers on the rest of the world. Yet another priority is to look at ways to collaborate more closely with regional mechanisms such as the Chiang Mai Initiative (CMIM). Our view is that there needs to be three levels of international safety net: national, regional, and global. There is an important role for each of these to play. We welcome the recent activation of the CMIM. We could also do more for our low-income members in the region, for example, by providing insurance against shocks or strengthening our presence on the ground to facilitate capacity building. We are exploring how best to make progress on all these fronts. We want to listen carefully to ASEAN’s ideas and views so that we can make a real progress. Lastly, we need to address the long-standing grievances with our governance. The discussion on the next set of quota and voice reform has already started and needs to be completed by January next year. This would boost the IMF’s legitimacy and effectiveness not just here in Asia but everywhere. A speedy approval of the reforms on quota and voice agreed in 2008 needs to be implemented promptly.Thank you.