Transcript of a Press Briefing on IMF's Asia and Pacific Regional Economic Outlook

October 12, 2013

Washington, D.C.
October 11, 2013

Anoop Singh, Director, Asia and Pacific Department
Markus Rodlauer, Deputy Director, Asia and Pacific Department
Jerry Schiff, Deputy Director, Asia and Pacific Department
Hoe Ee Khor, Deputy Director, Asia and Pacific Department
Nigel Chalk, Deputy Director, Asia and Pacific Department
Keiko Utsunomiya, Communications Officer, Communications Department

MS. UTSUNOMIYA: Good morning, and hello to those who are on line.

Welcome to the IMF's press conference on the latest Asia and Pacific Regional Economic Outlook Update.

I am Keiko Utsunomiya from the Communications Department. With me here, at the center of the table, is Mr. Anoop Singh, Director of Asia and Pacific Department; immediately left of me is Mr. Nigel Chalk and Mr. Jerry Schiff; and left from Anoop is Mr. Hoe Ee Khor. And Mr. Markus Rodlauer will join us shortly.

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

MR. SINGH: Thanks very much.

Good morning, everybody. I am happy to see you all. We have released our economic update for Asia, which you probably have. It elaborates on the World Economic Outlook that you have seen, that was released by Olivier Blanchard a few days ago.

Let me give you some remarks on Asia. I will start by highlighting four key messages for the Region.

The first is that, in our view, Asia will remain the global growth leader, although we have lowered, to some extent, our growth forecasts.

Second, there have been capital outflows across Asia since May 22. But, our sense is that, although some countries have been subject to greater stress, the overall impact of these outflows has been manageable.

Third, if global financial conditions tighten further in the coming months, we are likely to see greater differentiation in the impact across the Region.

And, fourth, for that reason, credibility and clarity of policy is of the essence in this more challenging global environment that we are now in.

Let me elaborate on these to some extent.

Most importantly, although we have lowered our growth forecasts, Asia as a whole should continue to grow at a fairly robust rate, around 5 percent this year and above 5 percent next year.

If you look at emerging Asia, it is going to rise up to 6-1/2 percent next year. It shows how robust Emerging Asia continues to be despite the impact of the capital outflows in recent months.

As I said, our sense is that the adjustment process to the capital outflows that have affected many emerging markets has generally been orderly. And since last month, outflows have eased in many countries.

Clearly, there has been some tightening in financing conditions in Emerging Asia as a result, and this is weighing on growth in emerging Asia. There are also some domestic or homegrown factors which are important. Certainly we see in China further declining returns to investment, we see the effect of supply bottlenecks in India, and these are a drag on regional growth.

But, there are other positive counteracting factors. We see a stronger growth outlook building for advanced economies--you heard this on Tuesday in the World Economic Outlook. Many countries in Asia now have weaker currencies that will help exports. And, I must emphasize that in most Asian countries, domestic demand still remains fairly robust.

And now, let me elaborate on some individual countries: We assess China's growth this year will remain above 7.5 percent, perhaps 7.6 percent. It might decline a bit next year, but this is expected as structural policies move China steadily onto a lower growth path.

In India, there has been fallout from recent stress, and this is why our growth forecasts have been lowered, but corrective policies are being taken. As a result, we expect growth to pick up in India next year.

In Indonesia, too, growth is expected to slow in light of financial conditions and weakening investment, but we do see this stabilizing.

And in other ASEAN countries, growth remains fairly robust.

Now, I must emphasize that, in many ways, Japan remains a bright spot in the region. From the numbers and from the surveys, it is clear that what is called "Abenomics" is reigniting the economy and is starting the process to lift the country out of chronic deflation.

As you look at other countries in Asia, especially the low-income economies, our sense is that so far, they have been generally spared from the recent volatility. Of course, some individual countries have continuing rapid credit growth that needs to be addressed; and certainly in some Pacific Island economies, where growth has been weak, there are risks that external and fiscal imbalances are growing.

There are certainly risks ahead for the region, and this is why we are focusing our update on the policy challenges that we see. From all accounts, as I said at the start, we are in a new world, a tighter and more uncertain global financial environment, and what this means for countries in Asia and other emerging markets is that it has strengthened the need for coherent macroeconomic frameworks that are also well-communicated. This applies to monetary policy, fiscal policy, the use of macro-prudential tools, and structural reforms.

Overall, as countries in Asia have generally demonstrated in recent months, flexible currencies should remain the principal line of defense in the event of renewed capital outflows.

Regarding policies, on the monetary side in many countries, the monetary stance remains still fairly accommodative. It already provides insurance against further downside risks. Of course, there are countries such as India and Indonesia where inflationary pressures have been elevated for some time; and also in some low-income countries. In these countries there is a likelihood that monetary policy will need to be further tightened in the coming months.

On fiscal policy, for most countries, we do believe that a moderate pace of consolidation is needed, as many countries need to rebuild their fiscal space. If there were to be further shocks, there is room in many countries in Asia for automatic stabilizers to operate, even to provide greater fiscal support.

In China, where we had the Article IV consultation recently, it has been clear that slowing the growth of credit, especially in the shadow banking sector, remains a priority, and it is fully appropriate that the People's Bank of China intends to advance financial reforms further to prevent any further build-up of risks as part of the overall process of rebalancing, shifting the growth model to be more reliant on consumption and services.

It also helps greatly in China that the authorities’ intention is to strengthen the management, transparency, and the governance framework of local government finances. And as you know, the authorities have planned an audit on local government operations.

And finally, in Japan, to strengthen monetary transmission, steady implementation of the Bank of Japan's Asset Purchase Program needs to continue. And, as in many other countries, careful central bank communication is essential to further raise inflation expectations and lower real interest rates.

On the fiscal front, as the authorities fully recognize, concrete measures are needed over time to contain fiscal risks. Certainly, raising the consumption tax as planned by the authorities by late 2015 is a key ingredient.

So it is a reality that Asia is probably moving to a lower pace of growth over the medium term, and there are constraints in some countries on further macro policy support for growth. Therefore, as markets further differentiate and discriminate across countries, I want to repeat that the case for structural reforms to boost productivity in particular is becoming ever clearer. We have seen that where such policies are being adopted, and as countries rebuild strong fundamentals, they are helping these countries to weather the turbulence from the current global environment.

So, overall, we are essentially optimistic that despite the more complex global environment, Asia will remain a growth leader, with Emerging Asia growing above 6 percent this year and next year.

I want to also remind you that we have important events coming up in the next few months.

For the Pacific Island economies, where we have intensified our dialogue and our work, we are planning a conference in November, in Vanuatu, to look at the policies that could ignite growth and contain risks in the Pacific Islands.

You are probably aware also that the Managing Director, Christine Lagarde, will be going back to Asia later this year. She will be visiting several countries.

And we are very much looking forward, as I am sure the rest of the world is, to Australia taking on the chairmanship of the G20 in the coming months.

Thank you very much.

MS. UTSUNOMIYA: Okay. We would like now to open up the floor to questions. Let me remind you that we welcome questions on line, too.

QUESTION: Mr. Kim of the World Bank said that the delay in tapering in the U.S. had opened up a window of opportunity of two to three months for the emerging market economies to make the necessary adjustments. Is that a realistic time frame?

MR. SINGH: You know, our position on this is not only being governed by the global environment, although that has increased the urgency.

You saw the Regional Economic Outlook we did in the spring, whose focus was on what countries in Asia need to do as they near the middle-income status.

We recently had a conference in Stanford that tried to look at what is needed for Asia to remain a growth leader over the medium and long term, and essentially, the message is clear: Countries in Asia need to further strengthen their productivity over time. The recent global environment gives this more importance--it strengthens the urgency of this. But the need is there in many countries--not only China, where it is probably the most important, but other countries, too. As they near the middle-income status, they have got to focus on productivity and efficiency much more than on factor accumulation. I should add that in many countries in Asia, demographics will remain positive for some time, and this helps. So, overall, as you look at the next decade and beyond, this is a key factor--taking the structural reforms that will boost productivity and lessen reliance on factor accumulation.

QUESTION: I want to ask--besides managing shadow banking and controlling credit growth, what other major reforms and tasks are important to Chinese policymakers?

Secondly, what is your comment on the recent launch of the Shanghai Free Trade Zone? What other critical issues should Chinese policymakers tackle to push forward the reform?

MR. SINGH: I think the answer to that question is quite straightforward. If you look at the Article IV Consultation Report which was publicized a few months ago, the issue in China is very clear, and what is important is that our recommendation is fully endorsed by the Chinese authorities. The goal is to move China's growth model from being based on investment, and credit-financed investment, to being based more on consumption and services. And the policies needed to accomplish this are many. Financial reforms are certainly among them, in part to change the relative price of labor and capital.

And, about Shanghai, I think it is clear that this is intended to be another way to exemplify this focus on shifting the growth model, for example, to increase the emphasis there on services. It goes back to what was done 30 years ago--I think the authorities plan to do that again. It will demonstrate that they want to change the growth model, increase consumption and the role of services in the economy. I think this is among the factors that they have in mind for Shanghai.

QUESTION: Indians don't agree with the assessment that the growth projection will be around 3.8 percent, as the IMF/World Bank report is saying. They are saying they will go up around 5--more than 5 percent this year. Do you agree with their assessment? And what are the specific policy changes that you would like India to make?

MR. SINGH: On that issue, it basically comes down to our assessment of how quickly the economy will respond. So we have lowered the growth forecast for this fiscal year to be close to 4-1/4 per cent, and this will rise in next fiscal year to be just above 5 per cent.

I don't believe there is a huge difference. The issue simply is how quickly the economy responds. Among the factors we have now are the external shocks, and the monetary tightening that is taking place to address inflation pressures: and the likelihood that it takes time for investment to respond.

It is true that the Cabinet Committee on Investment has certainly greatly increased the rate of investment approvals, and this certainly helps. Overall, I would say that a number of policies have been taken, including opening up to FDI, focusing monetary policy on bringing inflation down further. And the exchange rate has depreciated. These are all factors that will help growth recover.

The issue is what is the lag; when will this happen? Our sense is, going by historical evidence, it will take several quarters, and the economy may only fully recover next year. I certainly hope that we are wrong and that the economy recovers faster and the lags are shorter. And this is what explains principally the difference in our growth projections.

QUESTION: Yesterday, the Russian weekly Zafstra published an interview with Japanese economist and former Executive Director for Japan for the IMF, Daisuke Kotegawa. Being asked, "What is your evaluation of the current global financial situation?", Mr. Kotegawa said: "My experience and research indicate that a financial catastrophe accompanied by a global collapse could happen in the immediate weeks ahead unless leaders of the major economic powers adopt certain specific, tough measures." I would just like your comments on what Mr. Kotegawa said.

MR. SINGH: Well, I certainly know Mr. Kotegawa very well, and I respect his views greatly. It is part of having a public debate. But, this is not our prediction.

QUESTION: Could you kindly review the challenges facing the CLMV [Cambodia, Lao P.D.R., Myanmar and Vietnam] countries. While they are supposed to undertake reforms amid these global challenges. Laos is dealing with debt. Vietnam is facing banking problems still; Cambodia, with political uncertainty; and Myanmar, the currency reforms that they are taking.

MR. SINGH: Well, I would say you are basically right in that there are concerns, and I would say that policies are being taken.

It is true that in Lao P.D.R., there are concerns and pressures from a much higher current account deficit which have emerged as FDI into Lao P.D.R. has been reduced. And in Lao P.D.R., but also in Cambodia, the authorities are very conscious that credit growth has been very rapid, and needs to be significantly reduced.

In Vietnam, we had a consultation discussion just a couple of months ago, and I think there is much greater emphasis by the authorities on macro stability, and there is greater evidence in Vietnam that this is happening. You have seen how inflation has come down from where it was not long ago, close to 20 percent, to where it is now, between 7 and 8 percent. It is still somewhat above the target range of the State Bank of Vietnam, but I think it is very clear that in Vietnam, there is strong emphasis on maintaining macro stability.

Now, having said that, the authorities are also concerned about the fundamentals of the economy, in particular in the corporate sector and the financial sector, and they have announced their intentions to take whatever steps need to be taken in the coming years to improve these fundamentals, especially address the NPLs of banks, and take the restructuring steps that are needed on the corporate side.

So there is high recognition of the need to strengthen these fundamentals over the medium term.

About Myanmar, as you know, we have a Staff Monitored Program with Myanmar. Our overall sense is that events, reforms, and the evidence in Myanmar all remain highly positive. There are concerns, of course. Inflation has gone up. But the newly independent central bank has this as its major focus. And what is important is that the authorities are focusing very much on ensuring that the budget deficit remains within their target range.

So I would say there is a lot happening there. Overall, policies are highly focused in Myanmar.

MS. UTSUNOMIYA: Let me take a question on line relating to Cambodia.

"The Fund raises Cambodia's economic forecast to 7 percent this year, up from its 6.7 percent April projection. What are the grounds for this rise?"

MR. SINGH: Well, I think, as I said earlier, the authorities have been doing what they can to improve structural policies and to ensure that growth remains robust and becomes more broad-based. This is a long-term process, and there are concerns that credit growth needs to be further moderated. But certainly, policies and their external exposures remain fairly sound, and policies to raise growth are taking effect.

QUESTION: I have a question for Mr. Schiff, because according to the Article IV of Japan that was released by the Fund a few months ago, it says that if the economy fails, it will pose a great threat to the global economy. So, a few months later, what is your evaluation now of the impact of this very loose monetary policy on Japan's economy, and what are the chances of failing or not failing? And do you think that Japan now has a very reliable fiscal policy adjustment and a long-term growth model as they needed?

MR. SCHIFF: Thanks. A lot of good questions there.

I think the progress so far under "Abenomics" has been positive and broadly in line with what we would have expected. Growth in the first half of the year was almost 4 percent. It is in large part domestic demand. Consumption has grown rapidly. Investment is just starting to rise. But clearly, there is no guarantee of success yet, and in particular, we would like to see the economy move from one in which growth is mainly stimulus-driven to one where it is more self-sustained. And there are a few key indicators to look for.

One is to see investment continue to rise and to broaden out. Right now, investment is largely in domestic-based parts of the economy. We would like to see that broaden out.

And we would like to see wages begin to rise. We see labor markets tightening, but wages are not yet going up. We think that is a critical part of the overall policy.

So we think the economy is moving in the right direction, but we need to see some more signs before we feel fully confident. Whether those things are going to happen depends in large part on some of the policy areas that you alluded to, in particular the growth strategy and the policies to deal with medium-term fiscal problems. On the latter, the consumption tax increase last week--or two weeks ago--from 5 to 8 percent is a very important step, but clearly they need to do more over the medium term, and they need to lay out a series of more specific and concrete fiscal plans.

On the growth strategy, there is a special session of Parliament that is beginning next week, and we expect to see a number of significant measures come out of that.

MR. SINGH: Just a further comment on Japan.

As you probably have seen, the data tell us that in the last 9 to 12 months, FDI flows from Japan to many countries in Asia have really increased, and also, bank lending from Japan to many countries in Asia has also increased. This has been very positive, because it has come at a time when the tapering concerns have led to other outflows, and this has helped many countries in the region.

QUESTION: As you know, Chinese President Xi Jinping has pursued a very aggressive investment growth strategy around his ideas for a new Silk Road Development Project, as was announced at the SCO (Shanghai Cooperation Organization) Meeting, in addition to his ideas for a Maritime Silk Road, which was discussed when he went to Indonesia. Do you see this as the type of great project development that could lead to a new global paradigm of investments in projects of these sorts as opposed to bailouts of the monetary markets?

MR. RODLAUER: I don't want to comment on the specific project. First, I don't know the details of it. But I think in terms of a broad strategy, clearly, the challenge for China is to sustain its high growth rate by shifting the model of growth from one that is based mainly on factor accumulation, building factories and infrastructure investment at home, financing this with credit, to one that is more based on productivity increases and consumption.

That is the challenge that we are looking at from a medium-term economic perspective, and while, certainly, the authorities, the new government that took office earlier last year, has already embraced fully this goal and this strategy, we are waiting for the specifics in terms of actual measures that will deliver that. One milestone probably will be the Third Plenum that will be held in November now. All eyes are on that. Equally important will be what actually will be implemented on the ground over the next one to three years. So I think that is the focus of our advice, and that is the focus of policy reforms in China.

MR. SINGH: And this reinforces that this is a very important period ahead, the next few months. In the two largest economies in Asia, Japan and China, we will be hearing the next stage of their growth and structural reforms. This will have great importance for the Region and the global economy.

QUESTION: Singapore this summer revised its growth forecasts upward. Would you say it is benefiting from the recovery in the advanced economies that we saw detailed in the World Economic Outlook? Is it being cushioned from the Chinese slowdown as well?

MR. SINGH: Where Singapore is concerned, you are right. We have raised the growth forecast significantly back to 3-1/2 percent. We do expect it to remain at that level in 2014 as well.

We do believe their macroeconomic policy stance is appropriate and allows them to achieve this higher growth rate. And as you know, in Singapore, they have been taking a number of measures including macro-prudential measures to ensure that concerns from property prices are addressed fairly early.

Do you want to add to that, Hoe Ee?

MR. KHOR: Yes. Just to elaborate on what Mr. Singh has just said about Singapore, they had suffered from high inflation for several years, and we finally see inflation coming off. At the same time, growth has been pretty volatile in the past and should now be around 3-1/2 percent. So in some sense, I would see that as a soft landing for the Singapore economy.

There are still challenges in the economy, even though inflation is down, the labor market is still very tight, so they need to manage that.

But Singapore is a very open economy and subject to external shocks, so as you can see from the data, the growth can swing sharply from one quarter to the next. So we are expecting that over the long term, it will be about 3-1/2 percent. That is where it potentially is.

MR. SINGH: Just briefly on Singapore, it also exemplifies what I said earlier, that the policies there do correctly aim to raise productivity, which is most important in Singapore and other countries in Asia, as there will be future declines in the labor force, and therefore, what is crucial is to continue to raise productivity. That is a broader focus for Asia.

QUESTION: You have pointed out that it has been a kind of rocky road since May, when the markets started anticipating the taper. Going forward, as the normalization of these policies in the advanced countries goes ahead, do you expect it to be that rocky, or more smooth? Do you expect the countries in Asia to see this volatility in outflows and currencies, or is it going to be easier to deal with?

MR. SINGH: You know, let me go back to what we said in our Regional Outlook in the spring of this year, where we did say that some countries in Asia are overheating. In many countries in Asia, financial imbalances were building up, financial policies were very accommodative, and therefore, for at least the last 6 to 12 months, we have been pointing out that these conditions need to normalize.

Overall, in most countries in Asia, financial conditions still remain more accommodative--in some cases, significantly more accommodative--than they had been in previous years, and therefore, the whole process of tightening conditions and ensuring growth remains in line with potential growth needs to happen.

The concern is that it needs to happen in an orderly way, and the tapering increases the volatility, it increases the risk that it happens in a disorderly way. That is our concern.

But overall, financial conditions need to tighten because there are financial imbalances in many countries. It is how happening. It needs to be orderly. That is the main issue.

QUESTION: As you already alluded in the previous question that the Asian currencies--emerging market currencies including Asia--were under a lot of pressure since May, I am just wondering if the currencies have adjusted enough, particularly in India and Indonesia, to allow their economies to rebalance, and have the countries done enough to assure you that the worst is over?

MR. SINGH: Well, you know, we don't like to comment on what is going to happen with the currencies from week to week, but overall, as you have seen, between May 22 and the end of August was the period when the effect was quite significant, in some cases, in some countries, disorderly. But in the last month, most currencies have recovered.

So I would say that overall, Asia has the fundamentals to deal with this volatility. We just need to make sure that the volatility does not reignite and become larger, and Asia needs to build its fundamentals further. But overall, they have managed this relatively well except in some countries where there had been market concerns. In those countries, policies are being taken.

So, as we look ahead, we hope there is a fine balance that this can be managed in an orderly way. That is our baseline projection.

MS. UTSUNOMIYA: Last question, please.

QUESTION: Returning to Japan real quick, do you see any policies Japan undertakes to address its fiscal imbalances as potentially having a negative growth effect? I mean, "Abenomics" has only recently begun to take hold in terms of addressing deflation. So do you see the consumption tax as having any kind of drawback in terms of growth?

MR. SCHIFF: Well, I think that fiscal adjustment in the near term, other things equal, tends to depress growth, but of course, in the long run, if they don't adjust, there is the possibility of various forms of fiscal problems which would be much worse for growth. So there is a tradeoff there.

But the key is really to set out a medium-term plan that is specific and concrete and that people understand, and to generate more confidence that this large public debt burden can be addressed. Then, the implementation could be more flexible to take into account cyclical considerations, for example.

But to the extent that you don't have a medium-term plan, you have less opportunity to do that.

We think the consumption tax is something that can be weathered by the economy this year. The government has also announced the outlines of a stimulus package which will help to soften the impact but again I would emphasize the need for a medium-term plan.

MS. UTSUNOMIYA: This will conclude our press conference on Asia Pacific.

Thank you all for coming. See you next time.

[Whereupon, at 10:03 a.m., the meeting concluded.]


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