Transcript of a Press Briefing on IMF Asia and Pacific Regional Economic Outlook
October 19, 2007With David Burton, Director of Asia and Pacific Department
October 19, 2007
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MS. KAMATA: Good morning. This is a briefing of the IMF's regional economic outlook for Asia and Pacific. The report was just released this morning.
With us, to my right, Mr. Steven Dunaway, Deputy Director of the IMF's Asia and Pacific Department. Next to him is Mr. David Burton, Director of the Asia and Pacific Department of the IMF. And next to him is Mr. Daniel Citrin, Deputy Director of the Department, further to my right is Ms. Kalpana Kochhar, Senior Advisor of the Department.
This press conference is live and on the webcast. For those on the webcast, you can submit your questions online.
Mr. Burton will start with brief opening remarks and then we will take your questions. David.
MR. BURTON: Thank you, Yoshiko.
Good morning and welcome to this press conference on our regional economic outlook. Thank you for coming. As Yoshiko said, I'll make a brief statement and then we'll be happy to take your questions.
We see developments in Asia as generally positive this year. Growth has continued to trend higher, led by China and India, while domestic demand has played an increasing role in some economies, particularly the Newly Industrial Economies and the ASEAN-5 group.
Export growth picked up after a bit of a lull earlier in the year, including as a result of a recovery in electronics goods. Most indicators suggest that strong growth momentum continued into the third quarter.
Inflation pressures remain largely under control. Food prices have raised headline inflation numbers in a number of countries, especially in China, where prices for a small number of agricultural products spiked, owing mainly, or entirely, to supply factors. And that sent headline inflation to a decade high of over 6 percent.
But there's been little evidence so far of second round effects and core inflation generally remains well contained. However, I think, especially with recent increases in oil prices, inflation in the region needs to continue to be closely monitored.
The region has continued to experience large current account surpluses and capital inflows. As a result of these, exchange rates have generally appreciated in most countries, though more so in some than others. At the same time, intervention by central banks has pushed the region's reserves past the $4 trillion mark, with China continuing to account for the bulk of the increase.
Asia was not at the epicenter of the recent global financial market turmoil and markets and financial institutions in the region have generally held up well. Direct exposure to the U.S. sub-prime mortgages and, more broadly, to leveraged and complex structured credit products appears to be small, including for hedge funds in the region. Most markets have recovered the losses experienced when the turbulence first started. And in some cases, they've attained new highs.
The outlook is for growth to moderate during the remainder of 2007 and 2008. Our latest forecast is for growth in Asia as a whole to decline from about 8 percent this year to 7.2 percent next year, and in emerging Asia from about 9½ percent to 8½ percent as external demand, especially from the United States and Europe, slows.
I should note also that this forecast assumes an effective policy tightening in China and some slowdown there.
In general, we expect a pattern of somewhat weaker exports and investment across much of the region with only some limited de-linking from the global cycle. The region's current account surplus is projected to rise to 5 percent of GDP this year and next, largely reflecting a continued increase in China's trade surplus.
The sub-prime crisis, however, has increased uncertainty about the outlook for the global economy and for emerging Asia in particular. A further bout of global financial volatility could have significant spillovers on the region, including by potentially reversing capital inflows. The main risk, though, is of a sharper showdown in the United States and other advanced economies than in our baseline scenario, and correspondingly slower export demand growth for Asia.
There are also risks on the upside, though, mainly in China and India, where investment could be stronger than currently envisaged.
Turning to policy issues, in the event that growth slows more than expected, we do see scope for some easing of monetary policy in much of the region, except for a few countries where inflation pressures remain relatively high. In addition, most countries have room to counter any slowdown by letting automatic fiscal stabilizers work. The region will also need to begin to draw policy lessons from the recent financial market turbulence, to help guide the further development of financial institutions. I think these lessons are likely to include the need for strengthening reporting and disclosure requirements to ensure greater transparency, and enhancing pricing and provisioning rules to deal with complex financial products.
That's it for the outlook. I'd just like to say a few words about the special topics covered in our latest regional economic outlook.
Chapter II looks at the region 10 years after the Asia crisis and asks the question how much stronger is Asia? A number of prominent commentators have argued that Asia has not learned the right lessons from the crisis but we take a somewhat different view. We assess potential vulnerabilities in a number of areas and conclude that Asia has come a long way as a result of financial sector and corporate governance reforms, as well as sufficient improvements in macroeconomic frameworks. While some pockets of vulnerability persist and the region-wide challenges relating to ongoing integration into the global economy remain, I think the region is much more resilient to shocks than it was 10 years ago.
Chapter III tackles the issue of the effectiveness of central bank intervention in foreign exchange markets. With official reserves continuing to increase sharply across much of the region, it's natural to ask whether sterilized intervention has been successful in influencing the level rate of change or volatility of the exchange rate.
With the caveat that the analysis was constrained somewhat by the availability of only monthly data, and also by various methodological challenges, we find modest evidence that intervention reduces exchange rate volatility. However, perhaps somewhat surprisingly, we were unable to find evidence that intervention influences the level or the rate of change of the exchange rate on a sustained basis. I'd say these results, however, are consistent with the stated objectives of a number of monetary authorities in the region of intervening primarily to smooth volatility.
Finally, Chapter IV looks at the recent evolution of trade patterns in Asia. It confirms that the importance of exports to the region remains as high as ever. The analysis also confirms that the expanded presence of emerging Asia in world trade has resulted largely from intra-regional integration, mainly reflecting the development of specialized supply chains, with China playing the main role as a final assembly point.
However, there's also evidence that emerging Asia has begun to move away from a concentration in lower-end exports towards more sophisticated products and that the degree of competition within Asia, between Asian economies, is increasing. The implications of this include that the claims that Asia is de-linking from the rest of the world may be somewhat premature and that export dynamism continues across the spectrum of emerging economies and that the structure of exports in Asia is evolving quite rapidly.
Let me stop there and we'll be happy to take your questions.
MS. KAMATA: The lady down there.
QUESTION: Thank you. I'd like to know more about the China and India case. Should we be very optimistic about their success? Meaning, are there any challenges behind this good news? And for smaller economies or much lower income countries like Vietnam, what are the implications and impacts? Thank you.
MR. BURTON: Well, one can be optimistic about China and India. Both represent remarkable success stories, China's going back a long way. I think the increase in India's growth to high levels is more recent, but nonetheless impressive.
That's not to say that both economies don't face a number of difficult challenges going forward if they're to sustain this performance. I'd say on China that a major challenge is to rebalance economic growth. Right now it's very heavily dependent on both net exports and investment. And you see their dependence on their exports in the rising current account surplus, which has risen very sharply in the last two or three years.
So for China's growth to be sustainable, it does face the challenge of rebalancing and that will require policies across quite a range of areas. It requires more effectively reining in credit and investment growth. It requires more rapid appreciation of the renminbi to help balance activity away from exports. It requires policies to strengthen social safety nets, expenditures in health and the education areas that can remove some of the incentives for strong precautionary saving on the part of households. It requires further reforms of the financial sector so that they can play a better role in the development of the economy.
And India, too, has done remarkably well in recent years. But it faces a number of challenges. It has still high public debt, although it's made impressive progress in reducing its fiscal deficit in the last few years. It's recently been facing some inflation pressures, although they've taken steps to tighten monetary policy and those appear to have been reasonably effective so far.
And of course, above all, there's a range of structural reforms that India needs to take to further deregulate and open its economy so that it can have more broad-based growth, particularly in the manufacturing sector going forward, to drive growth and to drive the employment creation that it will need, particularly with its relatively young population and the need to provide jobs for new entrants for the labor force.
QUESTION: Your Managing Director yesterday talked of increasing use of PPP assessments. The OECD, in its report last week, says India has already surpassed Japan in terms of PPP and is now the third largest economy in the world. Do you agree with their figures and their assessment?
MR. BURTON: I would have to check the ranking on the basis of PPP GDP of economies globally.
It's certainly true that developing lower income countries have higher GDPs on a PPP basis than on a market exchange rate basis. I would also note that there's some new PPP data that are going to be released fairly shortly. There's a World Bank international comparison project that's done a pretty thorough job of recalculating PPP GDPs for some 140 or so economies around the world. And I think that will probably give us a much better picture of GDP on a PPP basis for many economies and allow us better to assess the ranking on that basis.
So probably it's best to wait until the data are available to reach firmer conclusions because there are some serious flaws with the current database.
QUESTION: Could you describe for me how you see the best path for China to revalue its currency in a way that would be compatible with its own internal stability?
MR. BURTON: Well, I think China has made a start. As you know, it de-linked from the dollar in July 2005 and it's been appreciating its currency relatively gradually since then. Against the dollar it's moved about 10 percent. In nominal effective terms it's moved a little less that, about 6 percent. In real effective terms it's moved about 10 percent, again over that period.
Our view continues to be that the renminbi remains considerably undervalued in relation to longer term fundamentals, that they do need to move faster, and that they should pay more attention in how they adjust the renminbi, not just to the relationship to the dollar, but also the nominal effective rate, looking at a relevant basket of currencies and not just the dollar rate.
MS. KAMATA: The gentleman down here.
QUESTION: You have talked in your report about sterilized intervention in the context of a [inaudible] surplus. I mean, the old style problem of doing sterilized intervention with a [inaudible] still exist.
I come from Sri Lanka. We still have that kind of problem and our inflation is very high now. And last year the IMF office was closed. Is there a danger of due to your budget cuts, maybe reducing engagement in countries like Sri Lanka and continuing to get into old style of problems which other countries have got over?
MR. BURTON: Well, first let me say, we're certainly not reducing our engagement with Sri Lanka at all. We have quite frequent staff visits to Sri Lanka. We stay in frequent contact with officials, as we do with officials in many countries, by telephone, by e-mail; they visit Washington. We'll be meeting over the weekend again, as we always do at Annual Meetings, with officials from Sri Lanka.
So we're monitoring and closely following the situation in Sri Lanka, as we do in many countries. And Sri Lanka does have some issues. Inflation has picked up and they need to pay more attention to that. And over the medium term they need more fiscal adjustment. So there are issues in Sri Lanka, but we're closely in touch with officials there about them. And we have, in no way, reduced our level of engagement with Sri Lanka.
MS. KAMATA: Next question.
QUESTION: Can you reiterate a little bit about why China and India are so crucial to driving economic growth at the moment? The extent of it. Just a more general question.
MR. BURTON: Well, I guess the simple answer is that they're both large economies and they're both growing very fast. And I should point out that all our world economic outlook numbers are done on a PPP basis, so that global growth, and contributions to global growth, are calculated using PPP weights, not market exchange weight rates.
China has become, over the years, a very open economy on the trade side. Which means it's very much engaged with the rest of the world and the rest of the region. And that means that its economic performance has an important impact on global economic growth. And India, too, though it's historically been more closed than China, has been opening up. And it is having a greater impact than it used to through trade channels, although it remains somewhat less open than China.
MR. DUNAWAY: Let me just add one thing in looking at this. In an accounting sense, as David said, in terms of contribution to growth because the two countries are large and growing fact, they account for a significant portion of world growth.
But as we point out in one of the chapters in the Regional Economic Outlook, this question of de-linking from the rest of the world. They [China and India] do account for a lot of growth, but the initial impetus to growth still comes very much from domestic demand in the rest of the world and not domestic demand generated independently in Asia.
QUESTION: In all this talk about the impressive economic growth of India and China, there's also a lot of concern about uneven development in these two countries. How do you factor in this when you look at both the medium term and the long-term?
MR. BURTON: It's certainly true, I think, that—
QUESTION: [off microphone]
MR. BURTON: It's certainly true that in China and in India, but in Asia generally, inequality has been rising. And we had a chapter that covered this issue in our Regional Economic Outlook of a year ago, the one that was issued in Singapore. It documents the extent of this and speculates a little bit about what the reasons for it might be.
We found that a primary one was technological change. Trade may play a small part, but technological change was favoring skilled workers and tending to drive up wages of skilled workers and widening disparities between skilled and unskilled. And also between urban and rural areas.
So it's certainly a challenge. I think most economies would like to see growth relatively evenly distributed. It's important for social harmony, for a variety of reasons. And I think there are a number of things that one can do, and they're discussed in the chapter, at least to help growth become more evenly distributed. These include things like development of financial sectors so that they provide financial services more evenly across economies, making sure there's adequate investment in infrastructure, particularly in poorer areas, adequate expenditure on health and education, including in poorer areas.
So there is a range of policies that you can implement that can help to make sure that the benefits of growth are more evenly spread. But it's certainly true that they haven't been evenly spread in recent years, and that it's an important issue that the region needs to worry about.
QUESTION: Is there a general apprehension that is building in people like you that in all these runaway economic growth in India, China, at some stage some provinces are just going to be left behind?
MR. BURTON: Well, as I say, it is important to make sure that that doesn't happen, and I've discussed some of the policies that can help. I guess to the extent that in India, for example, that states have some autonomy in the policies that they follow, and it's up to individual states too to make sure that they follow policies that are conducive to growth and that they don't get left behind.
Kalpana, would you like to add something on that?
MS. KOCHHAR: Sure. We're actually doing a study on the increase in inequality. You're quite right, it has increased. Poverty has come down but inequality has gone up.
An interesting element of that study is that across states, the states that have de facto liberalized labor laws or are more liberal in applying the labor laws, tend to have had a smaller increase in inequality. So there are definitely policy links, as David just said, about which states and the way they run their policies and the impact. And the lessons for the Indian government are, in fact, in addition to the ones that he mentioned. Education is very important. The link between the skill premium and inequality is very close in our results. And are labor laws, in order to generate more employment opportunities for low-skilled workers.
QUESTION: I wanted to ask about the new currency surveillance regime that the Managing Director was mentioning yesterday. A quick summary of it might be—with that new system in place, you have a bunch of new tools and new justifications to bring a country in for consultations or to provide greater scrutiny to currency regimes. Among them would be misalignment or increasing foreign reserve accumulation.
The latter one I just mentioned is in here. You see with China it's higher. I'm just wondering if you can give us an update. Has that figure for China or any other country, is that close to triggering an extra look at any of these countries at this point in Asia? I'm sort of asking for an update of have you begun the process of this closer scrutiny on currency? And is this maybe a trigger—is this report sort of a trigger for looking at countries in Asia?
MR. BURTON: I think we've always tried to look closely at exchange rate policies in our member countries. The new surveillance decision provides an impetus to do that more closely and thoroughly than we have before.
On China, I would just say that the Article IV consultation is still ongoing there so at this point I can't say exactly how that's going to be concluded.
And on India, the Article IV consultation is about to begin and exchange rate policy along with many other policies, including in the financial sector—as it is with all countries—will be an important focus.
But I would note that the exchange rate in India has been increasingly flexible in recent times. In fact, it's appreciated a lot against the dollar, and indeed, in effective terms, in recent weeks. So India has certainly moved quite a long ways toward having a pretty flexible exchange rate policy.
MS. KAMATA: Any other questions?
Thank you all for coming, and again, the hard copies are down there at the entrance. Thank you.