Transcript of the Asia and Pacific Economic Outlook

April 21, 2012

April 21, 2012

Anoop Singh, Director, Asia and Pacific Dept
Masahiko Takeda, Deputy Director, Asia and Pacific Dept
Jerry Schiff, Deputy Director, Asia and Pacific Dept
Keiko Utsunomiya, Press Officer, External Relations Dept
Webcast of the press briefing Webcast

MS. UTSUNOMIYA: Good morning, everyone. Welcome to the press briefing on the Asia and Pacific.

With me at the head table are Mr. Anoop Singh, Director of Asia Pacific Department, and Mr. Masahiko Takeda, Deputy Director, and Mr. Jerry Schiff, also Deputy Director of Asia and Pacific Department.

Mr. Singh will give short opening remarks, followed by questions and answers.

And we are also open to the questions submitted via the IMF Press Center. So, people who are participating in this online, please send us questions.

MR. SINGH: Thank you very much.

I am very happy to see you all. I'm sure I've seen you over time, in January as well, and I will brief you on our economic outlook for Asia.

I should tell you, we are going to be launching Economic Outlook for Asia in the Region, in Asia, in the coming weeks.

Let me start with just a few messages, and then go on to recent developments and the risks that we see ahead.

Well, first, as you've heard from my colleagues in the last few days, global economic prospects have improved. And clearly, activity in Asia, we believe, is gaining momentum, after the marked slowdown we saw last year. Certainly, Asia remains exposed to serious downside risks, but we are saying that, as conditions stabilize in markets and activity gains momentum in Asia, overheating pressures could rise again in Asia, and therefore, policymakers face a difficult task of ensuring their policies support stable, non-inflationary growth. They therefore may need to shift gears quickly, as overheating pressures begin to build again.

Now, briefly, on China, and more broadly on Asia, we have seen a decline in Asia's external current account surplus, significantly in China in recent years, and this is welcome, but clearly more sustained efforts are needed to strengthen the domestic sources of growth, and I will come back to this in a few minutes.

So, just briefly on recent developments and the outlook, as I mentioned, leading indicators for Asia have strengthened, growth is gaining momentum, and what is most important is that domestic demand in Asia in many countries has certainly remained strong, and that is why we see that inflation expectations in many countries in Asia are picking up.

We've also seen capital inflows into emerging Asia rebounding so far this year.

Numbers are certainly very impressive. You know that global growth is more like three-and-a-half to four percent this year and next year. You know that advanced economies this year, next year, are more like 1.4 percent and 2 percent.

We see emerging Asia this year and next year growing at 7 percent and 7.5 percent, and this is anchored clearly by China where we see growth remaining above 8 percent, picking up into next year.

We see India close to 7 percent and also picking up next year. In Japan, as well, we see growth picking up as it recovers from the earthquake of last year.

Inflation is declining in many countries, but clearly, it remains above many implicit or explicit target ranges in parts of Asia, and therefore we need to be concerned as overheating pressures build up.

And, briefly, on Asia's current account, it's going to be down to about 1.5 percent of GDP for this year, and essentially, in much of Asia, including China, the current account surplus is down to a third of where it was before 2007.

Let me talk briefly about risks. By and large, the risks to Asia come from outside the region. There are clearly three sources which are well known: first, risks to demands from advanced economies and therefore exports from Asia to advanced economies. Second, there are risks from further volatility that may take place in commodity prices affecting both importers, and exporters in Asia.

And third, there are risks from the further volatility of capital flows. Certainly, capital inflows have gone up in recent months, but there are risks from their further volatility. My sense is that Asia has the instruments, the tools, the policy space, the macroprudentials, and the exchange rate flexibility to deal with many of these risks.

At the same time, there are also upside risks, because macroeconomic policy stances in much of Asia are still very accommodative. And as I said, a further easing of global financial conditions could revive overheating pressures.

And therefore, the need to shift gears to resume the normalization of macroeconomic policies is probably coming close at hand.

Of course, the balance of risks is different from country to country. And certainly, economies with greater exposure to external downside risks and are also closer to a normal macroeconomic policy stance can afford to pause a bit longer. But overall, our sense is that, in light of the accommodative macroeconomic policy stances in much of Asia, monetary and fiscal policy, and in many countries still buoyant credit growth, we are probably close to the stage where we have to go back to a more neutral policy stance.

Of course, should downside risks materialize from outside the Region, as I've said before, Asia has a lot of space to ease monetary and fiscal policies to deal with such shocks.

Let me therefore talk briefly about the medium-term outlook.

The best form of insurance that Asia has against these external risks is clearly to strengthen domestic sources of growth. This is good for Asia, it is good for addressing the global imbalances, and, as we've heard from the leaders in Asia, it remains a priority in many countries in Asia to build more inclusive societies. We have heard the Chinese leaders mention this from time to time.

Clearly, the external current account surplus, as I mentioned for China, has come down to under 3 percent from where it was at 10 percent in 2007. But the point is, how can this be sustained? And China's sustainable rebalancing will depend on its transition from growth being investment-led, which is where it has been. The high level of investment is what has driven the current account surplus down, creating risks from new domestic imbalances.

And, therefore, the most important point for China is to shift to consumption-led growth, and this is the priority as we all know it is in the 12th 5-Year Plan.

The recent decision by the People's Bank to increase the trading band is a welcome development that allows market forces to play a greater role in determining the level of the exchange rate. Clearly, in China the real effective exchange rate has appreciated by about 7 percent in the last 12 months, and this is part of an overall package to allow China to shift from investment-led to consumption-led growth.

In many other parts of Asia, in ASEAN economies, as well as in India, strengthening domestic demand depends on improving conditions for private investment.

In many countries, this requires the need to deal with infrastructure bottlenecks, enhancing public service delivery. We've seen this very much in ASEAN. This key point, on the importance of infrastructure has been made by many leaders, certainly in Indonesia and in the Philippines. We also know how important this is also for India. India will accrue a demographic dividend in the next decades, and capitalizing on it will depend on its ability to develop its infrastructure.

So, that's basically it. I would say that Asia is doing well, as you know. I gave you numbers. There are clearly downside risks, mainly external risks. Internally, it's from, in the short run, ensuring that overheating does not reemerge, and over the longer term, making sure that this growth is driven more by domestic demand, and this rebalancing, which is needed for Asia and the world, is something which is, I believe, the priority of leaders in many parts of Asia.

Thank you very much.


We would like to open up the floor to questions. Please identify yourself first before asking questions. Thank you.

QUESTIONER: What is your view of Korea’s economic outlook this year, and what do you think about Asian countries' role in world economy at this time?

MR. SINGH: Well, I can tell you Asia's economic role in the world economy is very large and is certainly very important.

As I mentioned, emerging Asia is growing at about 7.5 percent in 2013; it was 7 percent this year. This has been well above advanced economies growth rates.

Now, coming to Korea, I think in Korea we see that growth is going to pick up as the year progresses. We do project growth in Korea to go back to 4 percent next year.

The macroeconomic policy stance has been in firm control. The government continues to focus on aiming for fiscal balance. And, therefore, under the baseline, fiscal consolidation will continue, and I think the macroeconomic policy stance in Korea has been oriented towards this, and growth, we do project, will pick up to 4 percent this year. .

QUESTIONER: Last year, foreign loans in Sri Lanka have increased, while domestic savings have declined, giving the impression that the cost of living is eating into the people's pockets.

Under those circumstances, what sort of reforms or actions should be taken to alleviate this situation because this could give rise to social instability in the country if this continues?

MR. SINGH: Well, I'm happy to say, and you probably know we have recently concluded the review of Sri Lanka's program, and the most important thing I will say at this point is that, like many other countries in Asia, Sri Lanka is building up the fiscal space through tax reforms and re-prioritizing expenditures in order to focus on the infrastructure and other spending that is needed to support growth over the medium term.

In many countries in Asia, in ASEAN and in Sri Lanka, building this fiscal space is very important, and this is part of the objectives of the current program, certainly the objective of the government of Sri Lanka.

In terms of inflation, in terms of monetary policy, the focus has clearly shifted over the past few months to give much more flexibility to the exchange rate to ensure that confidence is maintained and inflation is also well-contained. So, we are seeing changes in policies taking place.

In the short run, they are trying to ensure that inflation remains as targeted. Over the medium term, what's most important is to build up the fiscal space to ensure that the needed infrastructure and development spending and social spending, where targeted, takes place.

QUESTIONER: With regard to China, for years the IMF's capital account surplus forecasts have been a bit on the high side and the IMF is now revising them down. Could you explain why the IMF got that wrong?

And given the declining current account surplus and also the recent rise of the currency that you cited, do you still feel that the yuan is substantially undervalued?

MR. SINGH: Thank you very much.

To answer your last question first, on the exchange rate, this is currently under review and we will be making our assessment in the coming months.

On the current account, I think what is happening is we are seeing the external imbalance, the current account surplus certainly declining faster than we expected.

And in terms of our projections, you are right, our current projections show that it will likely go up but probably only close to 4 percent, 4.5 percent, whereas in previous years, we have projected it to go up to much more. This is for a number of reasons.

China is experiencing a number of factors which are probably going to be sustained, such as a secular decline in the terms of trade and high levels of investment. These are among the reasons why we are seeing the current account coming down so fast, and to remain around 4 percent in the coming years.

Our concern on China, one that is certainly shared by the authorities, that so far it looks like this is being driven much more by investment and not enough by consumption.

If you look at the data, you look at consumption to GDP, you see that the consumption ratio in China is still falling. Of course, growth is at 8 percent, so you may argue, even though the ratio is falling, consumption is still rising fast, but as a ratio to GDP it has been falling.

And therefore, the challenge is to sustain this in an inclusive way, to sustain this in a way that does not allow new domestic imbalances to come in place of the external imbalances. They've got to raise consumption, but this is not just our view. This is, as I said earlier--this is a main priority of the 12th 5-Year Plan. And as you look at what they have in mind, in financial liberalization, fiscal spending, social safety nets, a lot of steps have to be taken, and China takes these steps one by one, and I think those steps are being taken, but they need to continue to be sustained, including on the exchange rate to ensure that new domestic imbalances do not get created as China works to reduce their external imbalances.

QUESTIONER: I got two questions. First, regarding the IMF projection for Cambodia this year, I see it is a little bit below from other international financial institutions, like the World Bank or ADB. Why? Another question is that the IMF recently warned about the new license to the commercial bank in Cambodia. But we see that the loan and deposit is growing a lot, 30 percent year on year. So, can you give me some idea on that?

MR. SINGH: Well, I'm happy to say that I was in your country just a few weeks ago, and it was the first time I had been in Cambodia. We spoke about this with your authorities, who I enjoyed meeting greatly. We also met your Prime Minster a few weeks ago. And I'm happy to say, before I got to Phnom Penh, I spent a day at Angkor Wat. And for all those in this room who have not been to Angkor Wat and to Cambodia, I would recommend you go there quickly; it's a remarkable place.

On growth, and my colleagues will come in, but we see our numbers as strong. We see growth at about more than 6 percent. It's been more some years back, but it is at 6 percent for this year. And, I think even more than in other countries in Asia, is the importance of building fiscal space for development spending in Cambodia, and this is clearly the aim of your authorities. It will take time. They recognize the need to build development spending to raise potential growth over the medium term.

On financial institutions, my colleague will respond.

MR. TAKEDA: Let me give you a bit of a general answer to that.

In many countries, including your country, financial liberalization is important to mobilize domestic resources for useful investment, but at the same time it should move cautiously, hand-in-hand with the improvement in the capacity of, say, bank supervision.

So, in that sense, you have to strike the right balance between expanding the number of banks by issuing more licenses versus to what extent the authorities can make sure that the existing banks, as well as new banks, will do their business in a sound way. That is the difficult balance that one has to strike.

MS. UTSUNOMIYA: Let me take a question from the Philippines online.

"For the Philippines, what can IMF suggest to improve the business climate to increase private investment and boost growth? What barriers and bottlenecks have you identified?"

"Also, the Philippines Central Bank has recently kept policy rates steady amidst perceived growth in economy in the first quarter. Does IMF think this is a good move given low Philippine inflation rate? Are further cuts foreseen in the year?"
MR. SINGH: Thank you very much.

I'm going to ask my colleague to speak a bit more on the Philippines. I would only make one point on the Philippines: Growth is picking up. It's going to be close to 5 percent, 4.7, next year.

It is a fact that the government sees the potential growth rate of the Philippines as much higher. The government sees it closer to 7 to 8 percent.

And our view is that, in order to achieve that growth in the Philippines too, it is very important to build investment, both private and public investment. That is the key.

We have certainly heard this from the Philippine leaders. In order to achieve the potential growth of 7 to 8, they need to build up investment, both private and public infrastructure.

Masahiko, please.

MR. TAKEDA: The Philippines is expected to grow faster this year amidst a rather subdued global environment, and that is because, unlike last year when fiscal spending was somewhat slow in order to introduce a more rigorous procedure for government procurement and investment, budget spending is expected to accelerate.

So, there will be a pickup in growth this year. And at the same time, our inflation forecast is around the midpoint of the central bank's target range. In light of these, we don't think that any easing is urgently needed for now. Maybe the central bank, Banco Central, can still wait and see in terms of where this year the economy is going.

QUESTIONER: What is your view about Bangladesh economy? In Bangladesh, inflation is rising, balance of payment is under pressure, and growth is slowing down. What our government should do in this context?

MR. SINGH: Well, I'm very glad you asked about Bangladesh. It is very important for us.

You know that the IMF has recently approved a three-year program for Bangladesh. It's probably the largest ECF program that the Fund has granted so far. It is about 600 million SDR. And I would say that this is recognition of very important steps that Bangladesh is taking, in both the short term and planned for the medium term.

Clearly, inflation has been higher than the target, and this is partly because of external pressures, oil prices, and commodity prices. As a result, macro policies in the last several months have been progressively tightened to ensure that inflation comes back into range.

While they have been doing this, the government has been moving in a number of fronts to raise potential growth. And again, there, as I said earlier, infrastructure investment is very important. And for that, Bangladesh needs fiscal space.

And among all the steps the government is taking, they are building up now the process of having a value added tax, together with other tax reforms. So, I will say steps are being taken.

In summary then, Bangladesh has taken steps to ensure macroeconomic stability for the near term, , and to take the longer-term measures that will build the fiscal space so government can do the infrastructure that Bangladesh, perhaps more than other countries in Asia, needs to raise its potential growth.

QUESTIONER: I have a question about Japan: What do you evaluate Japan's reconstruction efforts so far? And also, what do you see the impact of the issues of whether to restart nuclear power plant operation, so, whether to restart or not?

MR. SINGH: I'm going to ask my colleague to answer that.

But before, let me just say that we value very much the fact that Japan was the first country to announce its contribution to the Fund's Firewall. This has been very important, demonstrating the leadership of Japan in the Region and globally. And as you know, we are looking forward that our next Annual Meetings, when I hope to see you all again, will be in Tokyo.

Jerry, please.

MR. SCHIFF: Thank you.

So, on the nuclear power issue, as you probably know, 53 out of the 54 Nuclear power plants are currently closed, and nuclear power has, prior to the earthquake last year, accounted for about 30 percent of electricity supply.

I think after the earthquake, the Japanese economy showed a tremendous amount of flexibility in dealing with these shortfalls. They were able to come through the summer, peak demand, reasonably well.

Already this year, imports of gas to provide alternatives to nuclear power have increased sharply. So, we expect, again, this summer for the Japanese economy to be able to deal with this issue, but it will have some costs, higher prices of energy and some rearrangement of production that will raise production costs. And overall, we think that the nuclear power situation may cost the economy about a quarter percent of GDP growth this year.

On the reconstruction efforts, you know the government has budgeted over several years 4 percent of GDP in spending, that's proceeding. Obviously, it takes time to get certain projects started, but we know that reconstruction is proceeding, and there are even signs of labor shortages in the affected areas, which suggest, again, that things are moving ahead.

MS. UTSUNOMIYA: Okay. Let me take two questions from India and then go back to the floor.

"The IMF has its latest WEO reduced growth projection for India in 2012, the only emerging economy for which it has done so. Have the risks to India's growth risen?"

And "Can India get back to high growth rates without stepping up economic reforms and which, according to you, are the most pressing reforms?"

MR. SINGH: Let me ask my colleague to answer that, but let me just make one point on that.

India is still growing close to 7 percent, and that will pick up next year. This is really robust and strong.

Now, it has fallen, and as you look at the information, the data, it's fallen because of investment. Within investment, it's fallen more in corporate investment and therefore the environment in India is such that in order to get back to 9 percent where Indian authorities want growth to be, it's going to be very important to build up investment and to rebuild corporate investment.


MR. TAKEDA: Well, India's growth has been slowing down for a number of reasons, including, for example, global uncertainty or higher interest rates because central bank has been tightening.

But as Anoop has mentioned, an important part of this is an investment slowdown, and this is linked to the structural factors, structural impediments to investment.

And to be a bit more specific, there are problems with power supply, coal supply or, in terms of land acquisition, government approvals, et cetera.

So, if India can take care of these bottlenecks and impediments to private investment, then India can accelerate and move to a higher growth path.

MR. SINGH: And just one more point on India.

As we look at where capital flows are coming back in emerging Asia this year, as I said, they have come back quite strongly in the last few months, and that includes India.

MR. TAKEDA: By the way, just one thing.

Two days ago, our Article IV staff report for India was published. So, a lot more detail can be found in this staff report.

Thank you.

QUESTIONER: Your opening comments on China and your answer to my colleagues' questions sort of build on that research note that you put out to accompany the WEO earlier this week.

My question is, more concretely, what sort of reforms are you looking for from China to stave off a worsening of domestic imbalances?

And given the political transition that's going on in China this year, as per the calendar, plus the infighting that's made headlines over the scandal in Southwest China, is political risk on your radar when it comes to discussing China and thinking about China?

MR. SINGH: Well, on your second question, it's not something we talk about.

But on your first question, I think our working paper which was released just a few days ago, spells out quite in detail the steps China needs to take, and I could spend the next few minutes going into all of that. But what is important for me to emphasize is, if you look at the 12th 5-Year Plan, and you look at what the government plans and wants to do, especially steps that ultimately will raise household income and therefore household consumption, this basically is what China needs to do, and the 12th 5-Year Plan recognizes the need to do it.

And it's complicated, and it takes time, because it means changing the structure of the economy including the cost of capital and other inputs to production, for example. That involves moving ahead with financial liberalization. And that is certainly on the government’s radar.

So, it is not simply changing fiscal spending, it also goes to the cost of capital, the financial sector, the exchange rate. This is a package, and this is all laid out in the 12th 5-Year Plan, and it needs to happen to avoid these domestic imbalances emerging as China rebalances externally.

QUESTIONER: What do you think is the most outstanding factor in the outlook of Vietnam economy? And what do you think about the fiscal policy of the Vietnam government?

Secondly, given the restructuring of the banking sector in Vietnam, what do you think would be the outlook of that process in this year and what are the costs of that process?

MR. SINGH: I'm going to ask my colleague to answer that.

Let me just say that I was very happy to meet State Bank Governor Binh. I met him recently when I was in Cambodia for the ASEAN meetings, and we talked about many of these issues.

And certainly, in Vietnam, growth remains fairly strong. It is certainly above 5 percent but please, Masahiko.

MR. TAKEDA: Okay. In the case of Vietnam and talking about the outlook and stability of the economy, I think the most important thing is for the policy authorities to rebuild market confidence. Namely, there's been a period of instability, including exchange rate stability, but the authorities started this rebuilding of confidence process about a year or so ago when they put out this Resolution 11.

And some progress has been made. The exchange rate has been stable and inflation has been coming down, but still, there's a way to go.

And in particular, the central bank needs to be cautiously moving forward. Since inflation has been coming down, there's room for monetary easing or cutting interest rates, but if interest rates are cut too fast, then that can introduce, again, instability and loss of confidence. So, that's the most important thing.

Next, your question on fiscal policy. After some over-performance last year, there will be some worsening of the budget balance this year. But, by and large, fiscal policy has been broadly managed prudently. Still, we think that fiscal policy has more to do by consolidating so that it will help in terms of, say, containing inflation.

The second one is banking sector reform. I understand the Prime Minister has published the restructuring plan for small weak banks. We welcome this and we hope that the plan will be implemented and financial stability will be maintained.

MS. UTSUNOMIYA: We would like to conclude the press briefing here. Thank you very much.


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