Transcript of a Press Briefing on the IMF Asia and Pacific Regional Economic OutlookDavid Burton, Director, IMF Asia and Pacific Department
April 13, 2007
Director, Asia-Pacific Department
Deputy Director, Asia-Pacific Department
Deputy Director, Asia-Pacific Department
Assistant Director, Asia-Pacific Department
Sr. External Releations Officer, External Relations Department
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Ms. Bhatt: Good morning everyone, and welcome to this press briefing on the IMF's 2007 Asia Pacific Regional Economic Outlook. Copies of the Regional Outlook are available in the Press Room as well on the table at the back. I am Gita Bhatt from the External Relations Department. Let me just introduce the speakers. At the center is David Burton, Director of the Asia and Pacific Department. We also have Dan Citrin and Steve Dunaway, both Deputy Directors of the Asia and Pacific Department. At my far right is Jerry Schiff, Assistant Director and Head of the Regional Studies Unit in the Asia and Pacific Department.
I will now turn to Mr. Burton for some brief remarks and then we will open the floor to questions. I want to remind those watching on the Media Briefing Center to please submit your questions early so that we will have a chance to get to them. Thanks.
Mr. Burton: Good morning, and welcome to the Asian Department's briefing on the regional outlook. As Gita said, I will make a few brief opening remarks and then we will take your questions.
As everybody knows, 2006 was another strong year for growth in Asia. The outlook is for continued solid economic performance in 2007, with only a slight moderation in overall growth expected for this year, from 7.6 percent last year to just over 7 percent this year. This forecast, this moderation reflects an easing of external demand, particularly from the United States, but also assumes an effective tightening of policies in China and India.
With a moderation in export growth expected the regional current account surplus should stabilize this year to around 4 1/4 percent. But I think over the medium term a further rebalancing of growth away from net exports and toward greater reliance on domestic demand will be important for keeping growth on a sustainable footing.
Inflation pressures appear to be contained throughout much—though not necessarily all—of the region, and most ASEAN countries and in the newly industrialized economies relatively soft domestic demand growth. Some appreciation of currencies and, to a lesser extent, lower oil prices have all contributed to reduced price pressures. These factors have been supported by gradually rising real policy interest rates over the past two years in much of the region.
In a few countries, though, high credit growth and, in some cases, asset price rises are some cause for concern, and the authorities in those cases will need to remain vigilant and ready to further tighten monetary conditions as needed. I think India and Vietnam are two such cases, and further monetary tightening may also be needed in China, where credit and investment growth continued to be rapid.
On the financial market side, Asian financial markets demonstrated their resilience in bouts of global market turbulence and the bouts that we saw in mid-2006, and then again more recently in February/March of this year, I think generally faring as well or better than emerging markets in other regions. I think looking ahead, Asia's good economic prospects point to likely strong investor growth, investor interest in the region. We will come back to that broad issue a little later.
The risk to the outlook in Asia are broadly the same as those for the global economy, which you have heard about earlier this week. They include a larger-than-envisaged slowdown in the U.S., and also the possibility of an upward spike in oil prices. With markets generally tight, indeed we have seen oil prices on something of a rising trend in recent weeks. The region could also be buffeted as well by further bouts of financial turbulence, especially if either of the first two risks were to materialize.
But for the region, an upside risk is that the near-term growth outlook in both India and China could be stronger than we forecasted if the measures that are being taken to try to restrain growth do not gain as much traction as we expect.
While economic prospects for the region generally remain strong, I think policymakers still face a number of challenges, and these include ones related to ongoing financial integration and deepening, and also developments in global terms of trade. Of course, those are not the only challenges they face; they also include aging populations, growing income inequality, rebalancing growth more toward domestic demand, as I mentioned.
But with the first group of challenges in mind this time our latest regional outlook examines a number of issues, including the evolution of capital flows in Asia, housing price developments, and the effects of commodity price booms, especially on low-income countries.
On the capital flows issue, our review finds that net capital flows to Asia remain close to their long-term average of about 2 percent of GDP, and have in fact declined slightly since their recent peak in 2004. So, while currencies in the region have continued to see some upward pressure and reserves have continued to accumulate, it is really current account surpluses rather than net capital inflows that have been the major cause, although capital inflows have contributed.
At the same time, gross inflows and gross outflows have risen sharply and are now, after all, close to historic highs in terms of GDP. Of particular interest is that capital flows have increased nearly fivefold over the last 10 years, and I think this increase in outflows reflects ongoing portfolio diversification in the region, supported in some cases by the removal or easing of restrictions and outflows, and I think to some extent—well, to a large extent, this is a natural part of ongoing integration into the global financial system and regional financial integration.
Another thing we found is that the volatility of growth flows has risen quite markedly; although the volatility of net flows has been largely unchanged, the volatility of gross flows has risen quite substantially, with surges in inflows at times associated with strong pressures on exchange rates or asset prices. So, this volatility can pose challenges for policy.
I think the increase in the size and volatility of gross flows points, in particular, to the need for further enhancing the development and resilience of financial systems, including in the context of the various initiatives under way at regional financial integration. I think this process would continue to go hand in hand with a further gradual liberalization of capital accounts where restrictions remain.
However, also in the near term, I think there is also some scope perhaps for limited sterilized intervention to help cope with smoothing volatile capital inflows and, of course, generally robust monetary frameworks are important for anchoring inflation expectations in the face of these sorts of inflows.
Turning to housing prices, briefly, we find that while they have arisen around the region somewhat faster than inflation in recent years, and there are certainly pockets of rapidly rising prices in Asia, however on the whole, we do not find a marked deterioration in affordability, perhaps except in Australia and New Zealand, as real incomes have tended to outpace real house price increases. Although, obviously, judgments in this area are very difficult, we do not find any clear evidence for the region as a whole that house prices are significantly out of line with fundamentals, although, as I say, there are pockets where that may not be true.
Lastly, and very briefly, on the commodity price issue, the global commodity price >> has amounted to effectively a positive fiscal and balance of payments shock for a number of lower income countries in Asia. That does have the potential to improve living standards and reduce poverty. Of course, with these sorts of positive shocks, it is also possible for them to be handled in such a way that they end up doing less good than they should or even more harm than good in some instances. So, our advice to governments in these countries has been to formulate transparent and forward-looking strategies to manage and spend these resources in a way that takes into account long-term development needs and also intergenerational equity. I am going to stop there and we will take your questions.
Question: Does Asia need the IMF anymore? What should be the role of the IMF with regard to Asia going forward?
Mr. Burton: Well, I certainly hope that Asia needs the IMF, and I think the IMF has an important role to play in Asia going forward. It is a different role than the one that is sort of traditionally associated or more recently associated with the IMF, and that goes back to the Asia crisis. It is the role that we play in much of the rest of the world, in Europe, in most regions, and I think it is one of providing surveillance, checking to see whether economies are on the right path, providing advice on a range of important macroeconomic and financial sector policy issues, also bringing to bear, I think, as we do in other regions, the experience of the membership around the globe to policymaking in Asia. I think that is also an important role that we can play.
We are also playing a role in discussing things like regional financial integration in Asia and, again, bringing the experience of the membership at large to bear on that issue, and also discussing with Asian officials the implications of global financial developments for Asia. As you can see from what I said before, that is obviously a very important with the increase in gross inflows and outflows to the region that we are seeing.
So, I think overall the Fund has an important role to play in Asia. It is not the role of the Asia crisis of the years immediately afterwards; it is a different role. It is a role where we are partners in discussing policy issues, both in individual countries and across the region and across the globe with countries in Asia. It is an advisory role; it is a two-way role. Asia is an important player in the global economy and we need to know what is going on in Asia. We need to know Asian policymakers' perspectives on issues to understand global financial stability issues as well. So, overall there is an important role to play. It is a different role, but it is, as I say, a very important one.
Question: With regard to financial integration in the region, the Secretary General of ASEAN recently said that one of the challenges that they are having as an organization with regard to that is the idea of sovereignty in a lot of these countries and that some of these are newer countries and they are very committed to their own currencies and their own ways of doing things. How would you suggest that you approach that?
Mr. Burton: Well, we have discussed monetary cooperation issues in Asia with officials in Asia, with regional meetings. It is certainly our view, and I think it is quite widely shared, that any sort of monetary integration is really quite a long way off at best. So, I do not think those sorts of issues are likely to arise in the near term. Countries in Asia are at very different stages of development; they are a long way from the sort of convergence, economic convergence that you would need to make monetary integration a realistic possibility. So, as I say, I do not think those issues are likely to arise.
The sort of integration that we are talking most concretely at this point involves integration of financial markets, which involves improving and putting in place common regulatory frameworks, trading platforms, and so forth, across the region. Those sorts of things are ongoing and are realistic possibilities, but I do not think they raise the sort of issues that you mention.
Question: I have a question regarding the Japanese economy Japanese fiscal policy. In the World Economic Outlook, the IMF suggested Japan raise their consumption tax as a fiscal consolidation. But I remember in 1997, when Japan had raised the consumption tax from 3 percent to 5 percent, some say that it was one of the causes of the Japan's long recession. So, I am just wondering whether or not now is the best time for Japan to raise the consumption tax.
Mr. Burton: I will turn to Mr. Citrin in a second to answer this question in more detail, as he is our mission chief for Japan. I would say that at some point in the process of fiscal consolidation, an increase in the consumption tax will probably be necessary in Japan. I am not sure exactly what the right timing for that is. I would say, though, now we are seeing a recovery in Japan that is much more firmly grounded and rooted and based, in particular, on good structural reforms across the banking and corporate sectors than was the recovery in 1997. So, I do not think we see the same sorts of risks today that were present then. There were also a number of other factors that contributed to reversal in 1997, not just the consumption tax. Dan, would be like to elaborate a bit on that?
Mr. Citrin: I think first of all, starting from the overall fiscal situation, everyone recognizes the tremendous burden of public debt in Japan, and that over the medium term, especially in light of the dramatic aging of the population that has already begun, that a major effort to adjust the fiscal situation is needed. In fact, over the last two or three years, there has been a fairly dramatic adjustment that has already begun to take place, with the fiscal deficit improving by something like close to 3 percentage points of GDP, I believe, and this has not in any way derailed the economic recovery that has been taking place in Japan. So, from that point of view, sort of strong efforts to adjust the fiscal situation have not damaged the recovery.
Now, in terms of how to achieve the adjustment, of course, that is a matter for the Japanese public and political parties to decide. Clearly, there has been and there continues to be a preference to do as much as possible on the spending side, first, before tackling the tax side, and that certainly seems to make sense to us. But at some point, I think people recognize that given, in particular, the increasing burden of social security spending over time as the population ages, that some increase on the tax side will be necessary, and then, you know, the choices between consumption tax or other types of taxes. I think most standard economic analyses would suggest that in terms of growth, in particular since consumption tax, VAT in Japan is much lower than in the rest of the world, it would be least damaging to growth to take steps in that area as opposed to, for example, corporate taxes, which are already quite high.
Question: Does the IMF share the view of some members of the G7, notably the United States, that China should do more to ease the value of its currency?
Mr. Burton: Well, I think if you look at what we have written about this issue for quite a long time, including in this year's Article IV report and last year's Article IV report, you will see that we have long held the view that a more flexible exchange rate policy in China would be desirable, particularly from China's own economic perspective, and we have been suggesting that consistently for quite some time.
You see in China a problem of very rapid credit growth, very rapid investment growth. They are having trouble reining this in. But they have difficulty using conventional monetary instruments to do that. It is, in part, the limited flexibility of the exchange rate that makes it difficult to use monetary instruments. It tends to encourage capital inflows and make problems more difficult.
So, we think just in at first place, from the perspective of macroeconomic management in China, a more flexible exchange rate would make it much easier for them to keep money and credit growth and, hence, investment growth more firmly under control than they have been able to do so far. Steve, do you want to add anything to that?
Mr. Dunaway - The only thing I would say is, as David pointed out, this is an ongoing problem here. For the last three years, in essence, the key macroeconomic control problem in China is try to contain investment growth and credit growth, because of concerns that too rapid credit and investment growth will feed back to the banking system eventually in terms of nonperforming loans. So, it is to be able to exercise that macroeconomic control that they need the flexibility.
But from a medium-term perspective as well, the flexibility will help in this idea of rebalancing the Chinese economy toward more reliance on domestic demand and self-sustaining domestic demand. In the meantime, what you have is more and more resources going into the traded goods sector, which in the long term may not be the most effective use of those resources and, overtime, it makes the problem worse. That is why we have taken a view that a more rapid appreciation of the currency would be appropriate. Again, at least from our perspective, the key is in terms of this is in the best interest of China itself.
Question: A follow-on from that question with regard to Japan. The Europeans believe that the yen is grossly undervalued and that they are suffering badly, and from a Japanese point of view, you have referred to the consumption problems that they have and the economy has not pulled out of deflation convincingly. What is your take on the current exchange rate level between the yen and the euro?
Mr. Burton: Well, I would start by noting, I think, that inflation in Japan remains very low; in fact, core inflation has dipped, become negative again. We believe that is temporary but, nevertheless, underlying inflation is still very weak in Japan. So, we think that the monetary policy that is being followed by Japan, that of very cautiously removing monetary accommodation, and we have seen two 25-basis point increases so far since the zero interest rate policy was ended, is the appropriate strategy. I think it would be very bad for Japan and I think it would be very bad for the global economy if the recovery were to falter in Japan and if the economy were to slip back into deflation. I do not think that is terribly likely, but there is a risk there and that risk needs to be guarded against.
The corollary of keeping an easy monetary policy is weakness in the near term in the yen but, as I say, we do think that from Japan's perspective, but I think also from a broader global perspective, a cautious normalization of monetary policy is the right approach and that may mean, in the near term, a relatively weak yen.
I would note that, also, Japan does not intervene in the foreign exchange at all; it has not intervened since 2004, so it is a fully market-determined rate. Looking sort of further ahead, I would expect that over the medium run, once monetary policy has been normalized, and given the sort of trends we see in savings and investment in Japan and elsewhere, you would expect to see a strong yen over the medium run, but in the near term, as I say, we think it is appropriate for monetary policy to remain on a cautious normalization path.
Question: What impact would a more protectionist U.S. trade policy have on countries in Asia? We know that the Democrats are likely to pursue that. The President will lose probably his fast-track authority. The Korean bilateral agreement may just squeak through; it may not. So, what are your views about U.S. trade policy going forward?
Mr. Burton: On that, I would just say that obviously Asia is a region that depends heavily on exports, and exports have been a major source of growth for Asia and will continue to be so, so that any move toward protectionism anywhere, and I am not going to comment on the U.S. in particular or what is happening in the U.S., but any move toward protectionism anyway is clearly bad news for Asia, so Asia has a very strong interest, as does the rest the global economy, in avoiding any sort of move toward protectionism anywhere in the world.
IMF EXTERNAL RELATIONS DEPARTMENT
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