Will Asia Remain Resilient to Global Economic Headwinds? Near-term Economic Prospects and Risks By Naoyuki Shinohara, Deputy Managing Director

September 13, 2012

By Naoyuki Shinohara
The Deputy Managing Director
Second IMF-SCID Conference on emerging Asia co-hosted by JBIC
Tokyo, September 13, 2012

As prepared for delivery


  • Good afternoon everyone. I am delighted to be here and have the opportunity to address myself to you. I would like to talk today about the important role of Asia in today’s unsettled global economy.


  • Let me start by giving you a summary of how we see the Asian economies today. The bottom line is that economic growth in Emerging Asia has slowed down over the past two years, from almost 10 percent two years ago to about 6.5 percent this year. And recent data point to continued subdued growth, with no clear signs of rebound yet.
  • As you know, external factors have played a major role in Asia, while domestic demand so far has remained fairly resilient. Spillovers from Europe have caused a marked export slowdown, as well as in a decline in net capital inflows despite their most recent rebound.
  • However, financial markets stress today is lower compared to about a year ago. In particular, a number of steps have been taken by Euro area officials, and a number of important announcements have been made, that have helped stabilize the situation.
  • Most recently, the ECB announced its Outright Monetary Transactions (OMT) program, for intervention in sovereign bond markets of countries accepting EFSF and ESM support for their macroeconomic adjustment programs and adhering to the associated structural and fiscal reform efforts. As the Managing Director said, “Decisive implementation of the new intervention program will be key to repair monetary transmission, and support countries’ efforts to secure finance at a reasonable cost while they undertake sustained macroeconomic adjustment.”
  • More broadly, it is important for European policymakers to continue working towards full banking and fiscal union, at the same time as they implement the necessary structural reforms to revive economic growth.
  • Given the promising decisions in Europe, and assuming they are implemented and deepened, our baseline is that growth in Asia will start to pick up gradually, but we are still assessing the weak recent indicators, which suggest a delayed and more gradual pick-up. This baseline also reflects accommodative policy stances. Indeed in many Asian economies real interest rates are still lower, and structural fiscal deficits larger, than before the global crisis.
  • China’s growth picture largely mirrors that of Emerging Asia as a whole. Growth has come down quite a bit, below 8% year-on-year in the second quarter of 2012, on account of past policy efforts to rein in investment (especially in real estate) and stronger than anticipated external spillovers. The latest high-frequency indicators have been mixed but still point to some softening of the economy. We project a gradual pick-up into next year due to policy easing seen since the beginning of the summer and as the external environment improves.

Near Term Risks:

  • The most immediate risk to the outlook is that of heightened spillovers from a further escalation of the euro area crisis. Asia’s economic linkages with Europe imply that such spillovers could be considerable, especially if a generalized flight away from risk was also to occur.
  • If the monetary transmission mechanism in Europe breaks down significantly, this could have a big impact on credit supply in Asia: it would have a direct impact on private sector lending, including in the area of trade finance; and it would indirectly impact the wholesale funding of regional banks in some Asian financial markets.
  • In addition to financial linkages, Asia’s strong dependence on exports implies that it could be substantially impacted by a sharper than forecast recession in the euro area.
  • Another risk is the so-called US “fiscal cliff”, which refers to the major forthcoming fiscal tightening implied by existing budget law. Indeed if U.S. policymakers fail to reach consensus on extending some temporary tax cuts, and on avoiding deep automatic spending cuts, the U.S. structural fiscal deficit could decline by more than 4 percentage points of GDP in 2013. Spillovers to Asia through the external trade channel would be significant.
  • Food and oil prices, which rose sharply over the summer, could also present a risk. However, compared to the 2007-08 food price crisis, available supplies and buffers are generally in better shape; and inflation expectations are reasonably well-anchored—indeed they have been stable across most of Asia since the Spring.
  • By contrast, near-term risks from the within the region appear relatively small. For example, a hard landing in China stemming from a sharp correction in the real estate market constitutes an important downside risk for Asia, but is currently a low probability event.
  • Taking a step back, perhaps the biggest risk to the global economy today is what I will call the risk of a “muddle through”, that is the risk that policies do not fully address the problems in advanced economies, be it in Europe or the US, and the risk that such partial solutions create an extended period of slow growth with a negative impact on employment, incomes and poverty.

How have Asia’s fundamentals improved?

  • Asia may be better able to withstand the above risks today than it was in the past thanks to improved fundamentals.
  • In many Asian economies, including those hit hard during the Asian financial crisis of the late 1990s, firms and banks have drastically reduced their leverage. Debt-equity ratios have fallen by two-thirds over the last decade, and more dramatic declines have been recorded for economies hit hard by the Asian financial crisis, such as Korea and Indonesia. As a result, firms in Asia now broadly have lower debt-equity ratios than in Latin America and Emerging Europe. And banks in Asia, having improved their balance sheets, do not experience the same pressures to deleverage as major global banks elsewhere do when global liquidity is drying up.
  • Together with healthier bank and corporate sector balance sheets the reliance on foreign funding has also been reduced. The ratio of short-term foreign debt to official reserves--a key indicator of external vulnerability--has fallen by one third or more in several emerging Asia economies, and by more than in the Latin American region.
  • There are also much smaller potential currency mismatches than there used to be. Banks’ foreign currency loans to the private sector have fallen as a share of total loans, in some cases to negligible amounts.
  • But while fundamentals are stronger, there are new potential sources of vulnerability stemming from Asia’s greater interconnectedness with the rest of the world. For instance, foreign participation in local government bond markets has increased rapidly, such as in Indonesia and Malaysia; this benefits domestic financial conditions but also increases exposure to risks from a sudden shift in investor sentiment.
  • There are also social vulnerabilities, which have grown with rising income inequality across the Asia region. Although the region has enjoyed rapid growth over the last decade, and levels of absolute poverty have fallen sharply, growth has not been sufficiently inclusive.
  • This is in contrast to other emerging market regions, where income inequality has fallen. It is important to remember that social and economic vulnerabilities feed on each other. For instance, more inclusive growth, by boosting social safety nets, could also help strengthen domestic demand in the region.

What can Asia do manage risks?

In the near term…

  • The main near-term challenge for policy makers is to support growth while minimizing legacy risks from past stimulus and rebuilding policy space.
  • Given the subdued economic outlook and the uncertainties surrounding it, the current stance of accommodative macroeconomic policies is broadly appropriate. Central banks can generally afford to look through the recent spike in food prices provided they guard against second-round price effects on inflation.
  • And should severe downside risks materialize there is overall ample space to ease monetary and fiscal policies aggressively, along with a range of measures aimed at stabilizing financial systems such as those taken during the global financial crisis.

…and over the medium term

  • The best form of insurance against external risk remains strengthening domestic sources of growth. In that regard economic rebalancing, the topic of this year’s Conference, remains a policy priority for much of Asia.
  • Boosting intraregional trade could also help dampen the propagation of external shocks throughout the region, especially if horizontal trade benefited. Intraregional trade has already increased from 45% to 55% between 1998 and 2011, but there remains room for raising that share further by advancing the trade liberalization agenda.
  • Greater regional financial integration, which is currently lagging the degree of trade integration, could also make Asia more resilient.
  • First, by deepening and diversifying countries’ overall degree of financial integration, more regional integration would afford countries a wider range of instruments and financial assets to obtain insurance against shocks and smooth consumption.
  • In fact, IMF research finds that so far, many of the more advanced Asian economies share financial risks, as reflected in the term structure of bond markets, substantially with the United States, but much less so with other Asian economies.
  • Second, deeper financial integration with better access of consumers and investors to financial services would also strengthen domestic demand in the region and support economic rebalancing.
  • Asia’s prospects and the Annual Meetings

  • Asia’s prospects will be a focus—along with many other issues—next month as the global community comes together in Tokyo at the Annual Meetings of the IMF and World Bank.
  • All eyes will be on Tokyo as Ministers and Governors from our 188 member countries arrive to discuss global economic and financial developments, in particular the state of the global economy, the Eurozone crisis, how to restore jobs and growth, the ongoing transition in the Arab countries and issues relating to low-income countries.
  • Among the expected 15,000 participants will be other key country officials, members of international organizations, representatives of the private—mostly financial—sector, civil society organizations, and international press, who will attend about 300 events.
  • We are especially happy to have our Annual Meetings in Tokyo this year, given that it marks the 60th anniversary of Japan’s membership in the IMF (August 13, 1952).
  • Japan is the second largest member of the IMF. The Annual Meetings present a unique opportunity to showcase the role of Japan within the global economy as well as the important role of Japan in the IMF.
  • The IMF is very thankful to Japan for extending its hospitality. I am very much looking forward to returning to Tokyo in October, when I am sure we will see Japanese organization and hospitality at its best.


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