APEC Finance Ministers' Meeting, Remarks by Naoyuki Shinohara, IMF Deputy Managing Director
September 20, 2013Remarks by Naoyuki Shinohara, IMF Deputy Managing Director
Nusa Dua, Bali, Indonesia
September 20, 2013
As prepared for delivery
1. Good morning. It is a pleasure for me to address my colleagues from the Asia Pacific region today and to see so many friends.
2. In my remarks today, I would like to discuss the global economic situation and implications for the economic outlook and risks for emerging economies. In particular, I would like to focus on two main issues: the implications for the global and emerging economies of the unwinding of unconventional monetary policy in advanced economies, and what policies emerging economies can implement to ensure sustainable long-term growth.
3. I would like to begin by discussing the changing dynamics of the global recovery. Last spring, our World Economic Outlook (WEO) spoke of a three-speed economy. This involved a recovery in the US, rapid growth in emerging markets, and slow growth in the euro area and Japan. But these dynamics and relative cyclical positions of major economies have changed. The US outlook remains favorable, with fiscal drag expected to decrease in 2014, and continued solid private demand. At the same time, the outlook has brightened a bit in other advanced economies. In the euro area, recession finally appears to be abating, though growth will remain subdued. In Japan, Abenomics has been working so far, and the economy has rebounded vigorously, but will lose some of the steam next year as the fiscal position is expected to tighten. On the other hand, in China and other emerging economies, growth has slowed from post-crisis peaks, due to both structural and cyclical factors. The growth rates of emerging economies are projected to remain much above those of advanced economies, but below the elevated levels seen in recent years.
4. The most noticeable global development over the past few months has been a tightening of global liquidity conditions. Talk of tapering quantitative easing led to a large increase in US long-term yields earlier this year. This shift in expectations, reinforced by vulnerabilities in some emerging markets, led to declines in equity and bond prices, and in some cases to sudden bouts of exchange rate depreciation. In most countries, these shifts in prices and exchange rates remain manageable, and have led to only a modest tightening of financial conditions.
5. But in some countries, the shift in expectations about tapering has been large and interacted with domestic vulnerabilities, leading to challenges for policymakers. For instance, in economies with high inflation and weak external positions, the size of capital outflows and the re-pricing of financial assets have been larger, and some central banks had to tighten liquidity conditions further. By contrast, countries like Korea have bucked the trend: thanks to strong buffers and fundamentals, there has been no reversal in capital inflows.
6. Overall, global activity is expected to strengthen moderately, with the impulse coming mainly from the advanced economies. In the near term, indicators point only to a modest growth rebound in emerging economies, though their external demand should strengthen further if, as we project, the US and euro area continue to recover. And in a number of emerging economies, particularly in Asia, domestic demand should remain solid as financial market conditions remain generally favorable despite their recent tightening, and labor markets have been resilient.
7. Unfortunately, the risks to the global outlook remain on the downside. First, among these risks would be synchronized setbacks to growth in advanced and emerging market economies, including China. Continued weakness, or further retrenchment, of external demand would act as an important drag on APEC’s most open economies.
8. Second, the slow pace of structural reform creates some risks in many countries. In Japan, in the absence of credible fiscal and structural measures, the current macroeconomic framework may be ineffective in raising growth and inflation expectations. Elsewhere, the euro area remains a risk given banks’ need to repair their balance sheets and very limited progress in reintegrating financial markets. Without moves toward restoring bank health and a full banking union, with a fiscal backstop, a shift in sentiment toward European financial markets could lead to further stress in the region, which would have global implications. And in the US, the debt ceiling will need to be raised again later this year; failure to reach agreement on near-term fiscal policy would also have adverse implications for the global economy.
9. Third, the unwinding of unconventional monetary policy (UMP) itself raises risks. So far, UMP has helped support global economic activity and financial stability. However, there are tradeoffs between positive effects of UMP and the financial stability risks it may generate, such as unhealthy risk-taking, and therefore the pros and cons need to be weighed carefully in calibrating the pace of exit. It is also important to think carefully about what exiting UMP will mean as UMP has involved a diverse set of policy actions involving purchases of public and private assets as well as forward guidance. The impact on financial markets, including in the emerging markets, also needs to be taken into account. It is therefore important to communicate clearly the risks that are involved.
10. The most important considerations for the many APEC countries, particularly emerging economies, are spillovers from the UMP exit. UMP has undoubtedly led to rising asset prices and stronger capital flows into emerging markets. As a result, financial imbalances have built up. These have largely been good for economies with sound fundamentals, and rising risks have been contained by prudent macroeconomic and macroprudential policies. As UMP begins to be unwound, countries will have to ensure that risks remain contained, which will involve continuous monitoring and assessment.
11. In many APEC economies, vulnerabilities have also been contained by limiting foreign currency exposures and corporate leverage, and by allowing increased flexibility in policy regimes. Flexible exchange rates are an important first line of defense against external shocks such as those associated with the unwinding of UMP, but the right mix of other macroeconomic policies will depend on the specific conditions in each economy.
12. Finally, some countries are running significant current account deficits and have high inflation, partly explaining why they have experienced greater financial stress from Fed tapering. Central banks should be clear about monetary policy priorities and be ready to raise policy rates further if balance of payments pressures intensify, while exchange rates should continue to float with intervention limited to efforts to smooth volatility. But in parallel, significant reforms, such as bringing budgets closer into balance, prudential actions to safeguard financial stability, and moving to address infrastructure bottlenecks, should be pushed forward. These have been long-standing issues, but there is now an even greater premium on addressing them.