Transcript of the Asia and Pacific Department Press Briefing

October 10, 2014

Washington, D.C.
Friday, October 10, 2014
Webcast of the press briefing Webcast

MS. UTSUNOMIYA: Okay. Good morning. Hello, everyone. Thank you for participating in this press conference by the IMF's Asia and Pacific Department. Today we are releasing the Asia Pacific Regional Economic Outlook Update which has been posted on line as of 8:15.

Let me introduce the speakers today. At the center of the table is Mr. Changyong Rhee, Director of the Asia and Pacific Department. On his right and next to me is Mr. Markus Rodlauer, Deputy Director and Mission Chief for China. On Changyong's left is Mr. Jerry Schiff, Deputy Director and Mission Chief for Japan. And then further left is Mr. Hoe Ee Khor, Deputy Director who oversees the work on ASEAN and the Pacific Regions.

With that Changyong will give opening remarks and then we'll open up the floor. Thank you.

MR. RHEE: Thank you, Keiko. Good morning. Thanks for joining us early in the morning. It's my pleasure to brief you on the economic prospects and major policy challenges for the Asia and Pacific Region.

Let me start with the key takeaways. This week you must have heard a lot about, you know, the new mediocre, and secular stagnation, but despite the markdowns in forecasts for many other regions I'm very proud to say that Asia and Pacific is the only region for which, you know, we have maintained our forecast since our April economic outlook, around 5.5 percent in 2014 and 2015. But this shouldn't imply that Asia can be complacent because downside risks also have increased. I can think about two important downside risks. The first one is the possibility of a sudden increase in financing costs if U.S. monetary policy normalizes faster than expected, and more than expected slowdown in China. And also continued sluggishness of Japan is now becoming a new challenge for many Asian countries. This suggests two policy priorities for most of Asian policy makers. In the near term they will need to further strengthen resilience to possible global financial market risks, and you know, this requires building policy buffers and also strengthening macro economy fundamentals. And over the medium-term structure reform is very important to lift medium-term growth prospects by delivering on the many structural reforms they promised.

So let me first elaborate our forecast a little more in detail. We are expecting that Asia as a whole will grow by 5.5 percent in 2014 and accelerating slightly to 5.6 percent in 2015. And two factors contribute to this resilient growth in the region. The first one is that, even though weak, the recovery of advanced economies actually increased exports from the region. And the second factor is that the still low interest rate environment in global markets and also robust credit growth in many countries helps boost domestic demand in the region. In addition some other factors have broadly offset each other. As you know the second quarter performance of Japan was disappointing and Japan's growth rate was lower than we expected. But at the same time the stronger growth in India offset some of the loss that we have seen, and the targeted stimulus in China helped to maintain the Chinese growth rate around 7.5 percent. But broadly there is a considerable heterogeneity within the Asia Pacific Region. So even though we didn't change our focus overall I cannot say that, you know, our focus is correct for every country. For example, we are forecasting that Japan's growth rate will slow down to 0.9 percent in 2014 and their growth rate will be 0.8 percent next year. However I want to emphasize that this 0.9 percent growth rate is still above Japan's potential. For China we are forecasting that its growth rate will be 7.4 percent this year and 7.1 percent next year. Yes, this 7 growth rate is much lower than the 9-10 percent growth rate they enjoyed in the last couple of years, but I want to emphasize that this moderation is a very desirable adjustment to a more sustainable growth path and they have to focus more on structural reform rather than short term stimulus policy. For India, despite headwinds from ongoing fiscal consolidation and tight monetary stance in response to a high end persistent inflation, our growth forecast for them is 5.6 percent in 2014 and 6.4 percent in 2015. ASEAN's economic growth rate will slow to 4.7 percent this year mostly due to the slow growth in Thailand due to political instability in the early part of this year, but its growth rate will pick up to 5.4 percent year next year as global trade recovers and domestic demand rebounds notably in Thailand.

Now let's focus more on some downside risks. As I just mentioned a faster-than-expected normalization of monetary policy in the United States would lead to higher interest rates and declining asset prices particularly in real estate, and our study shows that a five percent decline of the real estate prices, housing prices, might lower GDP growth rate by one percent in a year relative to our forecast. So it can have a significant impact. Geopolitical tensions could also disrupt trade and capital flows although at this moment Asia is less exposed to the Russia, Ukraine, and Middle East situations compared with other regions.

I just focused on the external factors, but Asia also has its own domestic challenges. Potential growth compared to the last decade has already declined quite significantly and could weaken further if structural reform is not implemented swiftly. Also there are several frontier economies with financial payment pressures and with a combination of a high current account deficit and fiscal imbalances. And some countries of ours are facing banking sector vulnerability.

So given these challenges, what policies are we recommending? First we emphasize that policy makers need to rebuild policy buffers by pursuing gradual fiscal consolidation and gradual tightening of monetary policies. In fact this normalization of fiscal and monetary policy has already been underway and central banks in Malaysia, Philippines, and New Zealand already have started raising interest rates. By contrast there are several countries, including Thailand, where because of the output gap interest rates have been appropriately cut to support growth. And in Japan we believe monetary policy should remain accommodative until inflation is consistent with the current target. In the event of capital flow reversals related to the normalization of U.S. monetary policy, probably exchange rate flexibility should remain as the first line of defense and foreign exchange intervention could be used to limit excess volatility and market dislocations. Macroprudential measures should continue to be deployed to address financial stability.

But more than anything else I think it's very important to emphasize the role of structural reform at this moment to strengthen both medium-term growth prospects, but at the same time to reduce the risk exposure to some turmoil in the global financial markets. But the reform agenda should vary considerably across the countries. For Japan and Korea the priority is to raise service sector productivity and address duality in the labor market. China should implement its, you know, comprehensive reform agenda blueprint to rebalance its economy and achieve sustainable growth. Many other emerging and frontier economies need to boost productivity by addressing long-standing supply-side bottlenecks and improve the efficiency of tax administration and public spending. Recent fuel subsidy reforms in India, Indonesia, and Malaysia, are very encouraging sign that Asian policymakers are very, you know, keen on the structural reform agenda.

So let me conclude. While the headline growth numbers for Asia Pacific Region are broadly unchanged, the global economic environment has become more challenging and the risk of further declines in the region's medium-term growth prospects is real. So we think that Asia Pacific policy makers have to take advantage of the resilient growth momentum to strengthen reform efforts to maintain medium-term growth prospects, as well as to be prepared for the possible, you know, financial turmoil in relation with monetary normalization in advanced economies.

With that I think my colleagues and I are happy to answer some of your questions. Thank you.

MS. UTSUNOMIYA: Thank you, Changyong. We'll take questions from the floor first. We encourage viewers on line to submit questions too. Okay, lady in the white suit please.

QUESTIONER: My question is about China's economic reform. So far how do you think China is doing with the conflict between the economic reform and the expectation of growth? What is the biggest challenge ahead?

MR. RODLAUER: Balancing the increasingly urgent need to reform and address the growing vulnerabilities on one hand, while supporting growth and avoid that it might slow too sharply, is an ongoing challenge for the authorities. Our view has been and continues to be that the growth momentum, although it has slowed moderately, is still relatively strong, around seven, seven and a half. And that the need to address the vulnerabilities is very urgent. And therefore our advice is to frankly reform over stimulus at this point. And only if the economy slows very sharply, below a very low floor, then you might want to think of major stimulus. I think so far the balance that the authorities have worked is the right one. We have seen many reforms that are starting to be implemented, in particular measures to contain risks. In the shadow banking systems we have seen all the regulations that have come out to slow down the momentum there, to reduce credit. We have seen the beginning of a correction in the real estate sector which is very necessary and the authorities have not stopped it. They are trying to manage it. So I think overall so far it is the right balance.

QUESTIONER: Still on China, in your report you really showed a concern over China's housing market. I wonder from your assessment how serious you think the downside risk can be? And we also see China’s government has proposed some measures to encourage purchases. How effective do you think it can be? Thank you.

MR. RODLAUER: As we have pointed out in the report perhaps the real estate sector at this point is the most serious short-term immediate risk to growth. I would however put it in perspective; while this is a cyclical risk, you know, we do really see -- and I want to emphasize that -- that the real risk for China is medium-term. It's not being able to implement the reforms that are needed to continue to sustain growth in China at the right level.

But that being said our current assessment is that the correction in the real estate sector as I said is significant. It needs to be significant because the imbalances that have built up as you all know are quite large. And let me also put a footnote in there, there is no such thing as one real estate sector in China. As you know we have very significant excess demand in the large cities with prices continuing to rise and we have significant excess supply in the medium and smaller cities where, you know, we have prices correcting as needed. So what we've seen so far is that new housing starts are slowing down, investment in real estate is slowing down. I think this is a welcome slowdown. Our current assessment is that investment which showed last year about a 10 percent increase, this year will slow to around 5, and next year will slow to 0; so no new net growth of real estate investment, which doesn't meant that real estate will be stopped, it's just that the growth of investment will stop. That's a significant correction. It will substract about half to three quarter of a percentage point of GDP to what it would be otherwise. And that's built into our forecast of 7.4% GDP growth this year and around 7 next year. That also builds in recognition that the authorities have taken measures in a partial way, targeted way. I think these measures can be effective Over the last three or four years or so authorities have been very concerned as you know about the very rapid growth, and they've put on all these restrictions in various cities, mortgage restrictions in the second, third home purchases and so on; it makes sense to take these off at a time when you want to make sure that the contraction is not too serious. So again I think it's a careful measured support that's been given. The decline is necessary and in a way so far we are fine. But also -- and maybe I'm speaking too long -- it's also necessary to recognize there's uncertainty there. You know, the downturn could be more severe and in that case, additional measures might be needed. Just take it month by month as the data comes in.

QUESTIONER: My question is about the growth rate in Myanmar. I'm wondering what kind of challenges will Myanmar face to reach this projected growth rate? And this my first question. My second question is about foreign bank entry in Myanmar. Can it benefit small and medium sized businesses in Myanmar?

MR. SCHIFF: Thank you very much. I think that the transformation that's going on in Myanmar right now is unleashing the tremendous growth potential of the country and we see that. We think growth will be more than eight percent this year and they certainly have the ability to grow that rapidly over the medium-term. But there are a lot of challenges in the short and medium-term. I mean right now I think the biggest challenge is the fact that economic institutions are still developing and they will face a lot of challenges in dealing with the current environment where lots of new capital is flowing in. We are providing a lot of technical assistance, you know, as are other organizations. So we're quite optimistic but certainly there's a lot of work to be done in the coming years.

MR. RHEE: I just want to add that Myanmar is the one country that at this moment our Asian Pacific Department is very heavily engaged and with very close collaboration. So we actually are working very closely with the government. Regarding your question about foreign bank cooperation we are advising them that before the enactment of the foreign bank operation law and before the system is built, we are recommending them to review and allow them to start their operations. So even though the many, you know, the nine foreign banks got their license, probably it will take a little more time for Myanmar to prepare their system and then start operations.

QUESTIONER: Regarding the Myanmar mission, the government gave permission to nine foreign banks. I think five or six may be appropriate for the Myanmar economy. How do you see the number nine?

MR. RHEE: That was the Myanmar government, you know, that selects the choice. And definitely as you mentioned that there are pros and cons of having a large number of banks versus a small number of banks. But there's no magic number as you know. But on the other hand what we are emphasizing is that having a right system and then have it to supervise and regulate them properly is much more important. The numbers yes, in some sense may be a little bit, you know, larger than we expected, that's true, but on the other hand given that they have made that choice I think preparing for the more sound system and increasing their capacity to supervise and regulate foreign banks, now that becomes much more important task at this moment.

QUESTIONER: Can you talk a little bit more about the process of fed normalization, the impact? What real things could happen if it gets rough? And to add to which countries, where are there real vulnerabilities in Asia? And you've just said they can work their forex market, they can loosen the exchange rate, what else can they do? And just to add to that, is it already having a big impact, the Yen's fall and how Japan's demand has impacted the rest of Asia?

MR. RHEE: You asked many questions. It may take a little more time (laughter) but you can -- as for the impact of this normalization of U.S. policy -- we can think of several challenges. The first one is the, you know, like 2013 May we can think about capital outflows and the exchange rate movement, okay. So as many people say it's a repeat of the, you know, tapering tantrum for the fragile five, that's what most people say. But I think compared to other emerging economies Asian emerging economies are in better shape at this moment. If you look at their foreign reserve adequacy ratio and their liability ratios and the current account in India/Indonesia. If you look at other market fundamentals and also, more importantly, they learned a lot of lessons from 1997 as well as 2000 where it is believed that one cause, you know, kind of a significant financial crisis as in, like 1997 or even 2013.

So in some sense we are less concerned on the possibility of financial crisis. But on the other hand, what we are worrying about is that the normalization of US monetary policy will increase the funding cost. Interest rates will increase and that works through two channels. One is real estate prices, as I mentioned, and our study shows that five percent decline of the housing price can lower gross domestic product by about one percent relative to our forecasts.

So in some sense, even though it's not a crisis that it will can definitely affect growth potential, and the growth rate of the region. This is the first risk.

The second risk is corporate liability. You know, if interest rate goes up, you know, the cost increase that they can cause has some problems. But when you look at the corporate liabilities as a whole, actually, Asia is much better shaped than Latin America and Eastern Europe. And also, the liability of the corporation sector as a whole has significantly declined compared to 1997. So overall, we are less concern but problem is that well, there some pocket of vulnerability.

We have, I think, I recommend you to read, we have a very good study in April regional economic outlook. We analyzed this corporate liability problem and what we found is that even though overall the leverage ratio increased, leverage is not an impending problem but there is some small segment of concentration problems.

For example, the companies with leverage ratios bigger than two on average has about 30 percent in corporate borrowings and then, also, companies with interest rate coverage less than one which means that interest payment is higher than their earnings. And with those companies with the interest rate coverage better than one owns around 25 to 30 percent of the corporate liability as a whole.

So when interest rates increase a small section of the concentrated, you know, high leveraged companies may have difficulties and they may cause some slowdown of economic activity. So overall, I think we are concerned but at this moment, we are more concerned about the impact on the growth slowdown rather than a financial crisis. But as you know, there is always possibility so you shouldn't be complacent.

QUESTIONER: Good morning. In India, citing high growth and the growth potential in other -- the industry and the government seem to be suggesting that this is the right time for the Central Bank to lower rates. But in your report you said that the high inflation is still a concern.

So what's the comfort level, where the monetary policy needs to be at? And also you said that there should be further liberalization of FDI. The government has already undertaken reforms on defense, railways, construction and more FDI liberalization in insurance and pension sector is underway. What are the further FDI measures that you're looking at? Thank you.

MR. SCHIFF: I mean, on the question of monetary policy, we do see inflation as still a serious problem in India. And we think that it's going to be necessary to maintain a tight monetary policy for some time. Of course, inflation in India also has potentially a very negative distributional impact on the poorer members of society.

So it's important to bring inflation down. We think that the critical factors for raising growth are not so much on the monetary policy side but in terms of structural policy and continuing to work to eliminate the structural impediments to growth including things on the -- with regard to stepping up infrastructure and eliminating the blockages to more manufacturing and exports by the country.

MR. RHEE: As for further FDI measures, I think the new government is actually going -- doing many good things but the most important one is the speed of reform implementation. And they actually expedited a few major, infrastructure projects but in India, and everyone is looking at implementation, not the plans, at this moment.

So actually showing that they can implement things quickly, that will actually boost up the confidence. So implementation, I want to emphasize implementation rather than additional further, you know, plans.

QUESTIONER: According to Mr. Rhee, you said that Indonesia should decrease our fuel subsidy as a part of structure reform. But what will happen to Indonesia if we never decrease our fuel subsidy because right now we have a deficit current account and our currency is still volatile.

MR. KHOR: Yes, it is indeed true that I think they should reduce the fuel subsidy. And I think the reason is very obvious because the fuel subsidy is a heavy burden on the budget and it's eating up about three to four percent of the expenditure.

So by reducing the fuel subsidy, they will be able to release room for investment in infrastructure which will then increase the growth potential of the economy. And you also help to reduce the current account deficit. I think the authorities are very much aware of this and, you know, they are determined to do that.

At the same time, we are that, you know, increasing fuel prices will affect the poor so we are also supporting some kind of a targeted program for the poor to alleviate the cost of increasing fuel prices. This is not just for Indonesia but also some of the other countries in the region and we are very glad that across the region, I think, many of the authorities are very aware of that and a feel subsidies are a heavy cost on the economy because it benefits not just the poor but also the middle income.

And to the extent that you be more targeted in terms of the benefits to the poor, you can release resources for other spending, you know, social spending and infrastructure investment.

MR. RHEE: I want to emphasize one more short term factor and if everyone is worrying about some possibility of financial instability in the early next year, I think, having maintained sound macro fundamentals is very important at this moment for many Asian economies. So fuel subsidy reform in Indonesia will definitely contribute to containing the fiscal deficit. It will boost up the confidence of the new cabinets which will be announced probably next week, I think.

So I think that will actually really improve the resilience of Indonesian economy to possible shocks in the next year. So in terms of timing, rather than doing later, maybe doing all year will help Indonesia very much.

QUESTIONER: The Mongolian economy has double digit growth for the last three years but this year is very bad and FDI declined. We have passed many laws to address FDI again. We had many laws implemented last year without much effects. What is the IMF's recommendation on this? And second is about the government shifts in the pipeline right now. Will it be good for the economy? What is the IMF view?

MR. RODLAUER: Thank you. Indeed Mongolia has suffered a steep decline in direct investment which is one of the reasons why the economic situation is difficult now. Looking at the reasons why this has declined, there are two of them, I think. One is policies. We all know about the mining law issues that were there before and the investment climate.

The other one, frankly, is the global international situation that as we all know, commodity prices have declined sharply. Demand is lower and supply is continuing to catch up to the previous boom. So we have this usual phenomenon where supply is catching up with a lag and demand is declining. So the commodity situation and the mining situation are very different than it was a few years ago.

So in that context, there are two things that can be done by Mongolia. One is to address the issues in the investment climate. I think they have done a lot.

QUESTIONER: I have follow up question about the US monetary normalization. How it will affect the specific countries like China? I also have a question about the exchange rates in China. Some economists suggest that China should devalue its currency to boost its exports and to shore up its economy. How do you comment on these views? Thank you.

MR. RHEE: Let me be quick because this question is kind of recurring many times. I think compared with other open economies in Asia such as Hong Kong, Singapore and many economies with open capital markets, China will be less affected by the normalization of US monetary policy. Actually, the problem is more for the other economies with small, open economies. And in that sense, China has room to cope with this monetary normalization of the US. But I do not want to -- but I want to emphasize that for us, even we actually think that, you know, about six point five percent to seven percent growth rate in China next year is not a bad thing.

So we are actually emphasizing that they need to do more structural reform and shouldn't, you know, use -- shouldn't worry too much about the slowdown of growth unless it is really low. Really low means that we are saying that even about six point five percent to seven percent is a desirable adjustment to a more sustainable path.

So for China, we really want to emphasize the continuation of the structural reform agenda that they started. That is more important than the cyclical factors.

MS. UTSUNOMIYA: Okay, the last question please.

M QUESTIONER: I have a question regarding the Umbrella protest that recently happened in Hong Kong. Since it just happened, it might be too soon to make a conclusion. I’m just wondering if you could talk briefly on the short-term impact on Hong Kong's economy especially FDI and the financial sector as well as Asia in general. Do you think it might potentially cause financial instability in the long term? Thank you.

MR. RHEE: It's too early to judge the impact but so far, it's only lasted two weeks. And in the last two weeks, we didn't see any big movement in financial markets. So I don't see it has impacted things significantly. And so it is too early to tell, you know, these true impacts but so far we didn't see any big changes in Hong Kong markets.

MS. UTSUNOMIYA: Okay, this will conclude our press conference. Thank you and see you next time.

MR. RHEE: Keiko?


MR. RHEE: I want to just thank you to Romain and his team who have produced this excellent REO report and I hope that -- we couldn't cover all other countries but I hope that you can refer to our report in other countries. Thank you very much.

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