Public Lecture on Global and Regional Economic Prospects by Naoyuki Shinohara, IMF's Deputy Managing Director
IMF News, February 7, 2011
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- Published: February 7, 2011
Global and Asia outlook — key findings
- Global recovery to proceed but remain multi-speed with considerable downside risks.
- Advanced economies projected to expand by 2½ percent during 2011–12.
- Upward revision to October 2010 forecast mainly due to a U.S. fiscal package expected to boost growth by ½ percent in 2011.
- Japan: a package with a similar growth impact will sustain a moderate recovery in 2011.
- Emerging and developing economies expected to remain buoyant at 6½ percent.
- Asia led global recovery in 2010 with growth at about 8 percent; expansion expected to moderate to 6¾ percent in 2011.
- IMF petroleum price projection for 2011 is $90 per barrel, up from $79 per barrel in the October 2010 forecast.
- Downside risks in advanced economies include turbulence in sovereign debt markets, weak private and financial sector balance sheets, fiscal sustainability concerns, and weakness in real estate markets.
- Risks for emerging economies center on overheating, rapid rise of inflation pressures, and the possibility of a hard landing; high food price inflation beginning to feed into overall inflation.
- Emerging markets account for almost 40 percent of global consumption and more than two-thirds of global growth; a slowdown would seriously affect the global recovery.
- A one percentage point decline in U.S. and euro area domestic demand could subtract about 1/3 percentage points on average from GDP growth across smaller, more open ASEAN economies.
- Financial spillover risks to Asia are generally more manageable due to small overseas bank exposures, large gross official reserves, and relatively low government debt levels compared with other regions.
Rebalancing growth — findings and constraints
- Rebalancing toward stronger domestic sources of growth is a major challenge; implications differ across countries.
- Consumption is not generally weak across Asia; China is an exception with a low or declining share of consumption in GDP.
- Factors behind China’s low consumption share: falling household income share in GDP and rising household saving rate due to precautionary motives and weak social safety nets.
- Investment-to-GDP ratios across the region are not generally low; however, investment patterns diverged:
- Economies with large domestic demand bases (India, China): investment share dipped after the Asian crisis but has risen nearly continuously since 2000.
- Economies with weaker domestic demand bases (Korea, Taiwan Province of China, Hong Kong, Singapore, leading ASEAN): investment share fell steadily after the Asian crisis.
- Decline in private investment share contributed to widening current account surpluses in parts of Asia.
- Two important factors holding back investment: financing constraints and shortfalls in infrastructure suppressing returns to private investment.
- Infrastructure complementarities: better infrastructure can lower transportation and energy costs, improve matching of resources to firms, and boost productivity; basic infrastructure provision in emerging Asia still lags (example given: electricity generating capacity per capita below Latin America levels).
- Financial development gaps: corporate bond markets and venture capital are underdeveloped in parts of the region, constraining financing channels especially for smaller and service-oriented firms.
Capital inflows — dynamics and policy responses
- Capital flows to emerging Asia surged after the 2008–09 contraction; in some cases (including Indonesia) they surpassed pre-crisis highs.
- Composition shifting toward debt flows where local bond markets are sizable (e.g., Indonesia and Malaysia).
- Drivers: positive interest rate differentials, expectations of exchange rate appreciation, relatively sound fiscal positions, higher longer-term growth prospects, stronger policy fundamentals, and capital market deepening.
- Most countries accommodated inflows via a combination of currency appreciation and reserve accumulation:
- India: abstained from intervention since end-2009, allowing exchange rate adjustment.
- Indonesia and Thailand: intervention rapid; reserves are 30 and 40 percent above their pre-crisis levels, respectively.
- Asian policymakers effective at controlling money growth in response to reserve accumulation; low sensitivity of money supply growth to central bank foreign asset build-up.
- Policy options and considerations:
- Greater exchange rate flexibility can buffer domestic monetary tightening and reduce imported easy global monetary conditions.
- Flexible exchange rates reduce likelihood of domestic demand overheating and expectations of abrupt appreciations, dampening inflows.
- Sterilization has worked so far, but central bank balance sheet structure and limited fixed income market depth may constrain further sterilization; introduction of new instruments (e.g., central bank paper where currently not possible) may be needed.
- Macro-prudential measures can mitigate consequences of volatile inflows; measures taken in Asia have targeted banking leverage, short-term foreign capital inflows, property price inflation, and foreign currency exposures.
- Market response to measures (Indonesia, Korea) was relatively mild when measures were narrowly targeted, phased in gradually, and well communicated.
- Longer-term objective: improve local market absorption and channel inflows into productive, long-term investment by lowering restrictions on foreign investment in services, promoting public-private partnerships for infrastructure, and developing financial markets to broaden access to finance.
Cambodia perspective — opportunities and priorities
- Two of Cambodia’s three main growth engines restarted in 2010: garment exports and tourism arrivals grew at about 10 and 20 percent, respectively in 2010.
- Construction activity remains sluggish; subdued imports of construction materials and sustained drop in real estate prices indicate lingering overhang from pre-crisis construction boom.
- Policy priorities: create additional engines of growth (e.g., agriculture and food processing), make growth more inclusive to benefit the rural poor.
- Global rebalancing and greater reliance in Asia on domestic demand present opportunities for Cambodia to diversify exports and benefit from rising regional demand for agricultural products, raw materials, and tourism.
- Cambodia already benefits from regional investment in textiles and could become a beneficiary of Chinese outsourcing amid rising regional wages.
- Government initiatives cited as timely: anti-corruption law (potentially improving tax collection and expanding fiscal space for public investment), renewed emphasis on agricultural development and rural infrastructure, and the recently adopted Rice Policy.
- Example of development impact: an irrigation project in Kampong Cham province financed from resources released by the IMF’s Multilateral Debt Relief Initiative (MDRI) improved villagers’ lives.
- IMF support: substantial technical assistance and resident advisors in Cambodia to strengthen financial system surveillance and supervision, public financial management reform, and tax policy and administration; ongoing dialogue through resident representative office and Washington-based teams.
Policy recommendations and priorities
- For Asia overall:
- Rebalance growth toward stronger domestic demand; country-specific strategies (boost consumption in some economies; promote private investment in others).
- Mitigate infrastructure bottlenecks to raise returns to private investment.
- Deepen financial markets (corporate bond markets, venture capital) to broaden financing channels.
- Manage capital inflows through a mix of exchange rate flexibility, prudent intervention, enhanced sterilization tools, and targeted macro-prudential measures.
- Communicate clearly on macro-prudential measures to limit adverse market perceptions.
- Channel inflows into long-term productive investments by liberalizing suitable foreign investment restrictions and promoting public-private partnerships for infrastructure.
- For Cambodia:
- Pursue policies to diversify growth (agriculture, food processing), improve inclusiveness (rural focus), address infrastructure bottlenecks, and strengthen competitiveness.
- Implement anti-corruption and public financial management reforms to expand fiscal space for development spending.
- Continue IMF-supported technical assistance in financial supervision, public financial management, and tax administration.
Source: Public Lecture on Global and Regional Economic Prospects by Naoyuki Shinohara, IMF's Deputy Managing Director — February 7, 2011.