Transcript of a Press Briefing by David Burton, Director of the Asia and Pacific Department, on the Regional Economic Outlook for Asia and the Pacific
April 11, 2008With Daniel Citrin, Deputy Director, Steven Dunaway, Deputy Director, and Kalpana Kochhar, Senior Advisor
April 11, 2008
MS. KAMATA: Good morning. Welcome to this press briefing on the IMF's regional economic outlook for the Asia and Pacific. I'm Yoshiko Kamata from the External Relations Department of the IMF. This briefing is live, and is being webcast. Those in the Media Briefing Center can submit your questions online. To brief you here are Mr. David Burton, Director of Asia and Pacific Department, Mr. Daniel Citrin, Deputy Director, Mr. Steven Dunaway, also Deputy Director, and Ms. Kochhar, Senior Advisor. Mr. Burton will make some opening remarks before we take your questions.
MR. BURTON: Good morning. And, let me add my welcome to this briefing on our latest regional economic outlook. We see this year, 2008, as shaping up to be quite a challenging one for Asia. Economic growth is certainly holding up pretty well so far, but we don't think the region is going to escape entirely unscathed from the slowdown already underway in the United States and, to a lesser extent, in Europe.
Already we are seeing exports to the United States and the European Union, and electronic exports in general, beginning to slow. So far this has been broadly offset by strong exports to Latin America and the Middle East as many countries in those regions continue to benefit from high global commodity prices.
Also around the region we're seeing that retail sales volume is declining somewhat, while industrial production and consumer confidence have started to ease, at least in parts of the region.
On the financial side, while the exposure of Asian financial institutions to structured products, and the subprime market in particular, is low, the region has not been immune to the turbulence that we have seen in global financial markets that began last summer.
While there are no signs as yet of any significant credit squeeze in the region, equity markets are down substantially, and that has had implications for the ability of corporates to raise capital through IPOs, notably in India, and credit spreads for banks and corporates have increased significantly.
At the same time as we're seeing signs that growth is starting to slow, inflation is rising significantly across the region. Now, this increase initially reflected spikes in food and commodity prices, and those pushed up headline inflation numbers, and that is something that is likely to be bolstered by the recent increases in rice prices that we have been seeing, and prices there have reached ten-year highs. However, what we're also seeing is that second-round effects, I think, are starting to kick in in a number of countries, reflecting the fact that domestic demand has been still pretty strong in many countries, and we're seeing that core inflation is starting to pick up, quite significantly in fact in a number of countries such as Indonesia, India, and Vietnam, and others too. At the same time, we're seeing producer price inflation is now rising quite rapidly across many countries in the region, and that points to a compression of profit margins and the possibility of further inflationary pressure ahead. So, inflation is becoming quite a significant issue around the region, I think.
Now, turning for a moment to our growth projections, and I'll come to a qualifier in a second, we've been forecasting that growth in emerging Asia is going to slow from about 9.2 percent last year to a little over 7.5 percent this year, before picking up next year. And in particular, growth in China is projected to decline by about 2 percentage points this year, mainly as a result of slowing exports as we envisage it.
Now, I should note these projections don't take into account the upward revision to 2007 growth in China that was made yesterday. Figures were revised up from 11.4 to 11.9 percent, by about half a percentage point. I don't think that is going to change the overall picture. We still envisage a slowdown of a similar magnitude in China, and across the region, but it will change the levels a little bit. Obviously for 2007, but there will be some carryover effects for 2008. We're still looking at the latest revisions and those are not fully incorporated into our projections.
Elsewhere in the region we also see India's economy as cooling this year, particularly as lower investment brings down growth a bit and we see that coming down right now to just a little bit below 8 percent. We also see economies with large trade and financial exposure to the United States and Europe, such as Singapore and Hong Kong SAR, seeing significant declines in growth this year, notwithstanding in Singapore's case the strong numbers for the first quarter that came in, I think, yesterday. But, they were broadly in line with our quarterly path that we had in mind.
Turning to industrial Asia, growth is forecast there to slow by about half a percentage point to 1.7 percent in 2008, with growth in Japan slowing from 2.1 percent last year to 1.4 percent this year, and picking up a little bit next year.
So, the overall outlook for Asia, despite this slowdown, remains quite favorable, but I think the risks, as elsewhere, are tilted still to the downside. The main concern here is I think that a further deterioration in financial market conditions in advanced economies could occur, and that would have further implications for Asia. I think while the impact on the region's exports from a further decrease in foreign demand arising from such a shock would likely be sizable, I think the financial transmission channel, which admittedly is quite complex and somewhat harder to predict, could also be significant. That could potentially include confidence and balance sheets effects as well as volatility in capital flows to countries around the region.
Turning to some policy implications, the rising inflation that I mentioned around the region will constrain the extent to which I think macroeconomic policies, especially monetary policy, can be eased, certainly under our baseline scenario. Indeed, I think in a number of economies around the region, restraining inflation should be a priority at the moment. But in the event that we do see a sharper slowdown in the global economy than we're envisaging and sharper slowdown in the region, inflation pressures generally in the region should start to abate, including, I think, with that sharper slowdown leading commodity prices globally to ease, and that would provide some further room for countercyclical policies in many countries. In that connection, I would note that a lot of countries around the region have in recent years strengthened their public finances, and that has created some fiscal space for countercyclical fiscal policy, if it is needed.
I would also note, just returning to the inflation front, that greater exchange rate flexibility in a number of cases would provide policy makers with more monetary policy independence. And certainly in those countries where we are seeing pressures on the local currency on the strong side, particularly China, further appreciation would help dampen the inflationary pressures that we're seeing there through lower import prices, and would also help to rebalance growth in a way that is favorable for China in the long run, and helpful for the global economy.
Still on the policy side, given the sort of risks that we are seeing in global financial markets, I think monetary and regulatory authorities around the region need to monitor financial institutions and financial markets carefully, and think about how they would cope with further pressures there. That includes reviewing contingency plans for dealing with financial stress, including mechanisms for providing liquidity and for bank capitalization. Over the medium term they need to review their regulatory and supervisory frameworks in light of the lessons that are being learned everywhere from the current turmoil. And those were discussed, at length in the Global Financial Stability Report and in the press conference on that the other day.
As I mentioned earlier, a central issue here is the question of the extent to which Asia can delink from the rest of the economy in the current economic circumstances, and we do have a chapter in the REO that goes into this issue in some detail. I think the findings there are quite interesting. I think we actually find that trade and financial linkages between Asia's emerging markets and the United States and Europe have in fact been increasing in recent years, if you look at them in relation to GDP in particular, even as interregional trade has been growing, and even as exports to nontraditional markets have been increasing, too. Reflecting these deeper linkages, we see the correlations, in fact, between growth in Asia and that of the United States has been rising, as well as correlations between Asian financial markets and U.S. financial marks. And we see these correlations, not surprisingly, as being highest for the countries with the deepest trade and financial linkages with the United States.
So, the bottom line in all this is that while spillovers from the United States to Asia have on average been relatively modest—historically we came up with a relationship something like a 1 percent slowdown in the U.S. has a quarter to half a percentage point impact on growth in Asia, varying across countries—those linkages have become stronger. And in particular, financial linkages we found have become more important for the transmission of shocks, suggesting this channel could be important going forward.
So, the bottom line here is that while Asia maintains good growth momentum at this point, it is unlikely to delink entirely from the current slowdown, and it is going to feel the effects, although because of the strengthening of policy frameworks in recent years, it is going to be well-placed to weather these spillovers.
I'll stop there. We look forward to taking your questions.
QUESTIONER: You mentioned the rice price as part of the inflation problem. What view do you take about the decision of some of the traditional exporters of rice to halt or cut back on exports? And, are there policy ways to work around that, that which seems to have added to the troubles of select countries like, say, Bangladesh or North Korea?
MR. BURTON: It's certainly true that decisions that go in the direction of limiting exports of commodities where prices have risen increase the problem for everybody else. And it is desirable as far as possible to avoid those sorts of responses. It is understandable that countries want to limit the extent to which prices rise in their own countries, but the best sorts of response is to allow market forces to operate, to allow prices to rise so that there can be a supply response, strong supply response in producing countries, and to deal with the adverse consequences, particularly for vulnerable groups, as far as possible through targeted subsidies. So I think that is a better way to go. We would hope that those sorts of export restraints could be avoided as far as possible, and the problems of high prices, particularly on low income groups, could be addressed through targeted subsidies.
MS. KAMATA: We have an online question related to the commodity question again. The question is: Most Asian countries are responding with subsidies to exports and export controls to rising commodity prices. Aren't monetary responses more appropriate, and perhaps even reform of the monetary systems away from the soft pegs?
MR. BURTON: I mentioned earlier that for some countries, particularly those experiencing appreciating pressures, and particularly countries that have inflation problems, allowing those currencies to appreciate can have the benefit of dampening the effects of rising commodity prices, particularly with what we have seen with the weakening of the dollar in recent weeks, commodity prices in dollar terms, in particular, have been rising. Those currencies that are linked closely to the dollar have been feeling the full brunt of those increases. And, if there are pressures to appreciate, allowing the currency to move up can have a significant effect in dampening the impact of commodity price increases domestically. That adds to the case for allowing currencies to appreciate in the current circumstances, where there is pressure for them to do so.
QUESTIONER: I was interested in your comments about financial linkages being a very strong factor in the fact that Asia is exposed to the problems that we're experiencing now. Could you elaborate more on those financial linkages that are causing that?
MR. BURTON: As I said, Asia has quite limited direct exposure to the subprime problem and to structured products in general. The financial systems in Asia have generally not been affected the same way that the ones in the U.S. and some European banks have been affected. That doesn't mean that Asia is completely immune to what is going on, because we have seen, first of all, that risk aversion has risen and concerns about a global slowdown have taken root. We have seen stock markets come down quite a long way in Asia. They were quite richly valued before, but they have fallen quite a long way. And, that has implications for the ability of corporates to finance themselves through IPOs, and that has certainly been a factor in India, to cite one country.
We have also seen credit spreads for corporates and sovereigns rise quite a lot around the region, not out of line with what has happened in other emerging markets, perhaps less in some cases, but still that has also had an effect. We have seen the ability of corporates to finance themselves in dollar markets, for example, is pretty well dried up for the time being. We are seeing very little of that. Domestic bond markets are holding up reasonably well. And, related to all this, we have also seen portfolio flows in many countries dropping off, so there have been some quite significant effects. They're not totally disruptive effects, but they are being felt. I think that a question is, if there is further turbulence in global financial markets, what effect will that have on Asian financial markets? I think we would continue to see more of the same of those sorts of effects, and they could have a significant impact on growth in the Asia region. But, these linkages are complex. Exactly how it will all play out, certainly in my mind, at least, is uncertain. But, it is potentially quite a significant factor going forward.
MR. DUNAWAY: One other area is in the money markets. Banks are facing higher costs for wholesale financing, and in Asia in particular banks play a very critical role in the financing of corporations. So, that is probably a very important channel as well.
MR. BURTON: There are some banking systems around the region that to some extent are reliant on wholesale funding including from foreign markets. They have seen some increasing costs. That is, as Steve mentioned, another channel.
QUESTIONER: Can I go back to the rice question. In your earlier response you said that putting restrictions on exports was not the most desirable response, and in due course market forces would ensure that the markets return to balance. Have you done any work on what the market response would be, say, to generate an increase in supplies of rice? And what sort of figures do you have for that? Where is the market response going to come, is the basic question? Where is it going to come from? Where are they going to grow more rice?
MR. BURTON: We're still looking at this issue. I don't have any figures for you at this point. But I imagine that the response would come from some of the larger rice producing areas, probably be some shift in land use as a result of higher prices. I think everybody hopes, too, there will be some help from the weather going forward, as well, and that will be a factor, too. I think historical experience suggests that you would expect to see a significant response to the sort of price increases that we have seen. We're still looking at that, and I can't give you quantified estimates of this at this point.
QUESTIONER: The Beijing Olympics, have you done any calculation on whether this will have any measurable economic impact on China, either ramping up spending and activity this year or, comparatively, leading to a comparative slowdown next year? And the turmoil that has been associated with the Olympics, at least that in Tibet, is that an economic factor on your radar screen?
MR. BURTON: Maybe I will pass this question on the effects of the Beijing Olympics on China's growth, both in the buildup and in the aftermath, to my colleague, Steve Dunaway, who knows more about China than I.
MR. DUNAWAY: The revision to GDP that David mentioned has led to a lot of speculation about whether China now is the No. 3 economy in the world. So just given the overall size of GDP, the Olympics is not expected to have a measurable impact. It didn't in the construction phase, outside of Beijing, where obviously in the city it did have a major impact. So we would not expect to be even able to see an effect on the overall level of China's GDP, just given the size of the economy at this point.
Turmoil, as well, Tibet is not a major producing region, and in terms of the GDP of that region, is not that high that it would have a tremendous impact on the overall growth in China.
QUESTIONER: Could you just give us an impression of how big a threat inflation is overall in this whole equation, basically, in comparison to the issues to do with the global slowdown?
MR. BURTON: I think it varies across countries, but it is a significant issue, important issue in a number of countries that needs to be addressed. And probably right now it is more of a priority than the slowdown in some places. I can give you some examples where inflation is of particular concern and needs to be tackled right now. And I would say Vietnam is a case, inflation is running close to 20 percent. They need to start cooling that off. Dealing with that problem is a priority for them right now. As Kalpana just mentioned, Sri Lanka is another case where inflation has picked up to 25 percent according to the latest figures, and clearly cooling that off and bringing inflation down is a priority there. Indonesia is another case where, admittedly at a much lower level, inflation has picked up to about 8 percent recently. And so priority needs to be given to dealing with that. China is a further case, inflation is now running at —
MR. DUNAWAY: — 8.3.
MR. BURTON: - 8.3 was the latest figure. And again, admittedly it is mostly food. But, you do see some signs of nonfood inflation picking up. There is a fear that it could start to build into wage pressures, and other prices, and become more widespread. So it needs to be a focus there.
We saw just yesterday the Singapore took some monetary policy measures because growth was somewhat stronger than expected in the first quarter, and inflation is running quite high there, too. So, again, clearly, it is a priority for Singapore, too. So there are a number of countries around the region where right now worrying about inflation is more important than worrying about a slowdown in growth, quite frankly. That could change, if the global economy turns out to be much weaker than we envisage and growth slows down and commodity prices come off. Then, the balance of priorities could shift. I would say right now, for several countries in the region, particularly inflation is probably the biggest concern.
MS. KAMATA: Another question from online: What will happen if China eases its demand for commodities? Will global prices fall?
MR. BURTON: Certainly that would have some effect. China is one of the countries whose fast growth has had an impact on global commodity prices. And, if China's demand eased, that would clearly help.
Steve, do you want to add some more to that?
MR. DUNAWAY: Quantitative, I don't know, but the one other thing to think about, too, is in terms of the supply side as well. At present, there are major new mining resources being developed, even within the Asian region. In Lao [PDR] there is major copper mine under development. In Mongolia, too copper and potential coal mines are under development. So, the supply of commodities we would expect over the next couple of years to rise as well, and that would probably be a more major impact in terms of bringing commodity prices down over time than anticipation of a decline in demand in China.
QUESTIONER: What about giving India a bit of attention. What are the main concerns in India right now?
MR. BURTON: In a second I'll hand over to Kalpana who knows more about India than I do. But one of them, as I just mentioned, is that inflation is running a little on the high side, and that deserves some attention immediately. There is also an important ongoing structural reform agenda that needs to be advanced in India, but let me ask Kalpana to take over on this question.
MS. KOCHHAR: Inflation is a big issue. It is 7.5 percent. This may not seem very high, but politically it is a hot issue, as you know. It's mainly due to food, fuel, and some due to metals. The other thing is, activity has come off a very fast pace, but it is still pretty strong. So, there is a real question about dealing with inflation, even though it seems to be mostly supply driven, before it becomes entrenched in expectations, and spills over into the second-round effects David spoke about. That really is an issue there. India continues, the stock market has come off, but there is still capital inflows because there is a growth story there. And so the challenge of managing capital inflows, while doesn't seem to be as huge of an issue as it was a year ago, it still continues. All the recommendations that David mentioned earlier about exchange rate flexibility, allowing the exchange rate to appreciate a little, to take pressure off imported inflation, but also to help corporate capital inflows, all those remain. The fiscal situation remains an issue, with public debt at 80 percent of GDP. Some progress made there, but much more to be done. So, in some sense, the issues haven't really changed that much, but the immediate issue is inflation, coping with it.
QUESTIONER: My question is to anybody who wants to answer this. Again, on India, over the last several months there has been some concern over the rupee-dollar exchange rate fluctuations. What kind of implications do you see for India in the short and medium term of that?
MS. KOCHHAR: Just to put it in perspective, there was a fairly sharp appreciation of the rupee about this time last year. And actually, the rupee has remained stable against the dollar since then. In our consultation report, which you will find on our website, we took issue with whether that was the right policy response to capital inflows.
In the medium term, productivity differentials between India and the rest of the world would suggest that capital inflows would continue, perhaps not at the level that we saw in the middle of last year, so that would argue that there would be a tendency for the exchange rate to strengthen over time.
MR. BURTON: Maybe I could just add, while agreeing with all that, that one needs not to look at just the exchange rate vis-à-vis the dollar, one needs to look at the exchange rate in effective terms. At a time when the dollar has been weakening quite a lot, if you just look at the dollar rate, you can get a rather misleading impression of what exchange rate policy has been. It may look like a currency has been strengthening a lot, whereas in reality, in effective terms, it has not been doing very much at all. That is true for the Chinese renmimbe. It has moved quite fast against the dollar since late last year, but if you look at it in effective terms, it has not moved very much at all. You will find the same thing if you look at India as well. It may have moved quite a lot against the dollar in the past year, albeit most of it in a spurt about a year ago, but in effective terms it has probably moved a lot less. If you worry about competitiveness of exports generally, then if you look at it in effective terms, you realize that it is less of a worry than you might think.
QUESTIONER: Excuse me if this has been addressed, I arrived late. But, the notion of exporting inflation in pricing from China, is that something that you would see as, exporting companies of China, are they able to absorb any wage pressures on their export pricing? Is the competitive situation such that they need to tighten their margins?
MR. BURTON: I'll hand over to Steve on this in a second, but I just note that productivity growth in China has been, and continues to be, pretty fast. So, they can absorb quite a lot of wage growth and cost increase, without raising prices. There is quite a capacity to do that. But it is also true that perhaps the age which benefited many countries, when prices of goods exported by China were falling in local currency terms in foreign markets, is probably, if not over, is much diminished, and the benefit from that is not there. That is part of the reason, that is contributing, at least, to some of the inflationary pressures you're seeing around the world.
MR. DUNAWAY: If you look at, at least the listed companies in China, reported profits are pretty substantial. So there probably is room and margins to accept some and absorb some of the increase in prices.
The other thing, too, is the ability of Chinese firms to pass on those costs, particularly in the context of a global economy which is growing much slower, with the U.S. potentially, as the WEO said, in a mild recession. The competitive pressures are such that their ability to pass on those type of price increases may not be that great. So, it would be hard, at least I think for me to see, that there would be a significant inflationary response that would come from those rising pressures in China right now.
MS. KAMATA: Thank you very much for coming. Just to remind you, the copies of the report and the text of the opening remarks are at the back of the room.