Transcript of an APD Regional Press Briefing

October 12, 2012

October 12, 2012
Tokyo, Japan
Webcast of the press briefing Webcast

MS. UTSUNOMIYA: Good morning, everyone.

My name is Keiko Utsunomiya. I am Press Officer for the International Monetary Fund.

Thank you very much for coming to the press briefing for the IMF Asia Pacific Department Regional Economic Outlook Update.

With me here at the table are: Mr. Anoop Singh, Director of the Asia Pacific Department and Deputy Directors of the Department--Mr. Masahiko Takeda, Mr. Markus Rodlauer, Mr. Jerry Schiff, and Mr. Hoe Ee Khor.

Mr. Singh will give short remarks, then we will take questions.

MR. SINGH: Thank you very much.

I am very happy to be here, and let me start by saying that being in Tokyo certainly is a clear recognition of the critical role of Japan and Asia in the world economy and of our constructive partnership with the Region.

As you know, we released our latest Global Forecast just a few days ago, and I thought I would talk to you this morning about the outlook in Asia. And perhaps I should start with three key messages.

First, as we know, growth in Asia has slowed, but Asia remains a growth leader, expanding by over 2 percentage points faster than the world average.

Second, obviously, as we know, there are clear downside risks, but our sense is that most economies in Asia still have room for a strong policy response were these downside risks to materialize.

And third, countries in Asia are clearly looking beyond the near term, looking at policies and growth models that will make growth more sustainable, more inclusive in Asia, and the reforms that are needed to make this happen.

So, having said that, let me talk briefly about the outlook.

As I mentioned, activity has clearly slowed across Asia Pacific, and while there have been some domestic factors in certain countries perhaps more than in certain others, the primary driving factor for the slowdown has been the sharp slowdown that we have seen in exports, primarily Asia’s exports to Europe. That has been the driving factor of the slowing of activity in Asia.

It is therefore not surprising that inflation in most countries in Asia is back within the comfort zones. As a result, we do see that financial conditions across Asia are generally quite supportive, and this is helping keep domestic demand still robust in several economies.

Now, if we look at the outlook, as I said, Asia is growing at least two percentage points above the world average, but it is worth pointing out that as you look at emerging Asia, we still believe that emerging Asia will grow by a little over 6 percent this year, and on our baseline predictions should rise closer to 7, around 6.8, for next year.

Therefore, Asia remains a global growth leader. And I will make the point that as you look within Asia, if we look at the ASEAN Region, you see several ASEAN economies including Indonesia, Malaysia, and the Philippines in particular--these are growing quite robustly, growing almost more rapidly than we see in regional growth trends.

As for China, our numbers show that China should grow this year by close to 8. We have reduced that slightly to 7.8. But under our baseline, China should pick up next year and go back above 8 percent.

Now, having said that, as I mentioned, Asia remains the global growth leader, but clearly, there are risks, and I would say these risks are mainly downside, of course, and they are mainly external, and they are linked to the situation in Europe if there were to be an escalation of the crisis there, and also, there are some concerns about what has been called the U.S. fiscal cliff.

I won’t go into these external risks because they have been discussed considerably in the last few days by my colleagues. But let me make another point, and that is that a food price shock remains another external risk which we should keep in mind.

But having said that, it is worth pointing out the sharp increase that we have seen in some food prices this summer has been much smaller and less broad-based than we saw a few years ago. It is important, therefore, that local prices of rice, which is a key commodity across most of Asia, have been stable, and overall, inflation expectations in the Region are generally well-anchored still.

Now, you may ask what about the other, domestic risks, and there clearly are risks from within the Region. But our sense is that in comparison, they are much smaller than the external risks. And people have asked about the risk of a hard landing in China, is there a risk of that happening, and can it happen from the real estate market. And obviously, that is a downside risk, but our sense is that this is a remote possibility. China is not having a hard landing, and the numbers are clearly recognizing that China will grow this year about 7-3/4.

Therefore, what are the policy challenges that are faced in Asia?

Well, over the years, we know that Asia has built up its policy buffers. Some months ago, I explained that over the last 10 years, as you look at fundamentals on the corporate side, on the financial side and external side, these have been built up remarkably across Asia over the last 10, 15 years, and this is why Asia is able to resist the shocks that are coming from Europe.

Now, looking at the near term, as I mentioned, were there to be downside risks materializing externally, there is room in Asia for monetary easing and for automatic fiscal stabilizers to operate in many countries, and also on the fiscal front, there is room for discretionary new fiscal measures or stimuli in several countries, including in China.

But having said that, I want to make the point, as policymakers recognize in many countries in Asia, that structural fiscal deficits remain in some countries, and therefore, there is a need for consolidation certainly in India and Japan. And I should mention here that we welcome very much what Japan has been doing, the Prime Minister and the Diet approval of a doubling of the consumption tax here in Japan by 2015.

Then, as I mentioned, policymakers are looking over the medium term, and there is a lot of consensus that the best insurance against external risks, especially in a protracted period of slow growth in the advanced economies, is to build domestic sources of growth. And that rebalancing of policies remains a policy priority for much of Asia.

It means different things in different countries. As you know, in China, as we have learned in the Five-Year Plan, rebalancing means relying more on consumption, but in many other countries in Asia, in the ASEAN countries, what is needed is more investment to drive growth forward.

This is particularly important because many Asian countries are reaching a stage which has been called by some analysts as a “middle-income trap.” And the question arises, is it the case that some Asian economies might face a middle-income trap.

My sense is that the rebalancing that is needed to ensure that growth becomes domestic-based in these countries in Asia are those fiscal reforms, those investments in social safety nets, especially in infrastructure, that will deal with the concerns of a middle-income trap.

I think there is a lot of consensus on this across Asia, and that is important, because ultimately, it is collective action that is needed in the global economy and in Asia to keep the growth momentum strong, as it needs to be.

Thanks very much.

MS. UTSUNOMIYA: Thank you, Anoop.

Let me remind you that this press conference is webcast live, and we are taking questions via online as well. So we encourage those of you who are watching to please send us questions.

QUESTION: Hello. I would like to ask--you have just mentioned that you believe that GDP growth in China should pick up next year to about 8 percent. Is it because the external economy has improved, or is there any internal factor that makes you believe that China’s GDP growth is going to pick up?

MR. SINGH: Well, the simple answer for that is based on two factors, and let me mention them, and I will ask my colleague Markus to make further comments.

The first is that it is based on our prediction for the global economy, or where we see Europe and the global economy developing next year. And that is very important because, as I said, the main driver of slower growth has been exports.

The second is that as you look in China across sectors, beyond those sectors affected by exports and manufacturing, you see that domestic demand in China remains fairly strong and robust. If you look at construction, if you look at infrastructure, if you look at services, if you look at retail, if you look at the labor market, you see that these remain fairly strong.

So our sense is that in a baseline scenario, barring a downside shock, China has the domestic momentum in its demand conditions for growth to pick up next year back above 8.

Markus, do you want to add to that?

MR. RODLAUER: Yes, if you look at the reasons for the slowdown, it is clearly initially a policy-induced slowdown in China where the government stepped on the brakes forcefully. If you look, for example, at the public investment numbers, state-owned enterprise investment and infrastructure investment by the government which were, as you know, in 2009-2010 very, very high, then it was slowed down forcefully, and actually, during the first six months of this year and the last couple of months of last year, we saw negative growth rates of investment--and when this slowing of the economy was somewhat unexpectedly compounded by a much weaker external environment, the government decided to take the foot off the brakes. And when you look at the recent months of investment growth, retail sales, you see that these growth rates are now coming back from the negative territory they were in earlier this year to much more normal growth rates that are consistent with the medium-growth path laid out in the Five-Year Plan, that is around 7-1/2 to 8 percent.

QUESTION: Thank you.

I have a question about monetary policy. IMF generally supports ultra loose monetary policy by advanced economies. Yesterday, Brazil’s Finance Minister Montega expressed concern about ultra loose monetary policy by advanced economies. He said it is currency war. How do you assess the concern from emerging countries?

My second question is on Bank of Japan’s monetary policy. This report said that quantitative easing of monetary policy may be needed to accelerate achievement of the BOJ’s inflation goal of one percent. Could you elaborate your analysis on this point?

MR. SINGH: Well, I think the main point I will make is that as you look at what Asian policymakers have said about the monetary easing generally, including in Malaysia and other countries, recently, they have recognized that we are in a situation where capital inflows have resumed into Asia, which they have welcomed, and they have not expressed the concerns on the easing that we saw in some cases in the last years.

I think we have also seen that in the last year, there have been concerns about how much the deleveraging by European banks might affect Asia, and that impact has been fairly manageable.

So my point is that as financial markets in recent months have somewhat stabilized, this has been helpful to Asia because it has meant that the deleveraging has been manageable; in fact, it has somewhat paused in the first quarter of this year.

On Japan, you asked about Bank of Japan’s easing. I think there is a consensus all around that there is an inflation target of one percent, and my sense is that the Bank of Japan is doing all it can to ensure that it meets the objective.

We have certainly been of the view that the Bank of Japan has more room for further easing to achieve that, and we have seen that the Bank of Japan has successively acted, and our sense is that they still retain room to do more.

Let me ask my colleague if you want to add to that.

MR. SCHIFF: I mean, I think, as you said, we feel there is room in terms of amounts and kinds of assets that the Bank of Japan can purchase, but also, we have emphasized that a durable exit from deflation will probably need a more comprehensive approach that includes monetary accommodation but also structural reforms to get growth kick-started and some fiscal adjustment, obviously.

So we don’t see exiting deflation as only a matter of monetary policy, but certainly monetary policy is a very key element of that.

MS. UTSUNOMIYA: Any other questions, please?

QUESTION: The dynamics, if you like, of the global slowdown, obviously, in Asia, too, are more complex than many people had expected. So, given that this is an ongoing, complex process, is it possible to make any meaningful forecast at this time that the situation has hit bottom, or not? And, if so, how can you base such confidence?

One further factor--I believe world trade trends are looking distinctly weak at the moment, so on the face of it, it looks as though things are still moving down the mountain. Do you disagree?

MR. SINGH: Yes, well, I think that is probably a reason why we are trying to give our Outlook Updates quite often--I think we are doing them on a quarterly basis. And it clearly is very difficult, but I think forecasts are needed because they guide policies.

I think we are in a situation where we need to look very carefully at what is going on. There are differences from 2008-2009. The role of China is very important. Just on that point, I would make one other comment, that when the global crisis first occurred in 2008-2009, it was interesting that Asian exports to China recovered very fast. And the concern of China is such that Asian countries are so closely linked to China’s outlook. It is interesting that this year, we see that the fallback or the drop in exports of many Asian countries to China has been greater than we saw three years ago.

I make that point just in a sense to underscore your point that this is a complex situation; these updates are given frequently; it is difficult to make predictions; it is more important that we update them as we are doing. But forecasts are ultimately needed for policymakers to take actions.


MR. TAKEDA: If I may add to Anoop’s answer, I think it may be useful to explain the way we make our forecasts.

You have to make some assumptions going forward, and I think WEO is making it clear as to what kinds of assumptions on which our baseline scenario is based, such as the euro zone’s policy adjustments and avoidance of a U.S. fiscal cliff. So that is our baseline. And our Regional Economic Outlook is also based on that scenario.

However, there are uncertainties attached to those assumptions, and that will result in sort of a more blurred image going forward, namely, uncertainties surrounding our baseline scenario tend to be larger, inevitably.

QUESTION: Coming from a trade-dependent country like Malaysia, we find that recently, we had to depend a lot on domestic demand. Do you see with these changes taking place abroad there has been this shift for countries like ours to actually look more to domestic demand to prop the economy, or do you see in medium term that we would come back to the export dependency?


I think that for much of Asia--well, I think the first answer I would give is you have to look at this country by country. This is not a message that applies equally to all countries.

I think overall, it is a reality that across Asia, we are seeing excess savings; we are seeing current account surpluses. They are changing, of course, in some countries; they are coming down. But there has been export reliance. The growth model needs to change for two reasons.

One is to ensure growth continues and is more reliant on domestic factors, and the other is to make growth inclusive, because we have seen in many countries in Asia that inequalities have grown over the last 10 or 15 years, so what is needed is a growth model which does two things. It makes growth more reliant on domestic factors, and also, it makes growth more inclusive, so the reversals we have seen in income inequalities change. And I think the policy mix that is needed is, fortunately for us, similar in both regards. So the policy mix that will make Asian growth more reliant domestically can also be the policy mix that is needed to make growth more inclusive, which is doing much more for social spending, infrastructure, education and health. It varies country by country, but it is a message that applies to many countries.

MS. UTSUNOMIYA: Let me take one question online and then get back to you. —“Can you tell me more about the outlook for the Philippines? What will be drivers for growth and downside risks to it? What should government, monetary and fiscal officials do to further spur and support economic growth?”

MR. SINGH: Well, thank you very much.

I was very pleased to meet yesterday both the Governor of the Central Bank Tetangco and Secretary Purisima.

It is important to note that the Philippines are among those countries in ASEAN that are probably growing close to their potential. They are growing close to 5 percent--4.8 percent for this year and next year. And as you look at what the Philippines needs to do, they have made infrastructure spending an important focus of their policy efforts over the medium term. And I think they are trying to build infrastructure financing. The focus is on domestic demand, but in a way that is focused on infrastructure, to raise potential growth. And certainly we see the potential for the Philippines to raise its growth rate well above 5 over the medium term.

Masahiko, do you want to add to that?

MR. TAKEDA: Philippines’ economy has been long dependent on consumption, and there has been a serious constraint imposed on investment, partly because of the fiscal difficulties. But the authorities have made strenuous efforts, and the fiscal situation has improved very dramatically. So, as Anoop just said, now is the time to improve infrastructure to lay the foundation for long-lasting domestic investment-led growth.

MR. SINGH: As you look at fiscal reforms that are planned in the Philippines, it is interesting to note that they are planning consolidation, they are planning revenue increases, but they are doing this in order to ensure that spending on infrastructure can rise in a sustainable way. So you see exactly the kind of fiscal reforms that many countries in Asia need to build infrastructure in a sustainable way.

QUESTION: My question is what effect may the ongoing crisis in the European economies have on Bangladesh’s economy? What steps can Bangladesh take to face this negative impact?

Another question--what is your observation about Bangladesh’s current economic situation?

MR. SINGH: Why don’t I ask Masahiko to give some response on this?

MR. TAKEDA: As you know, Bangladesh’s economy is relatively more exposed to the European situation because your textile industry, which is a very important part of your economy and an export driver, is exposed to European risk. So, in that sense, Bangladesh’s export growth has slowed markedly, and that has been a negative sort of drag on the economy. But at the same time, partly because of the economic reform efforts being made with the IMF’s support, the economic conditions are improving gradually. This is again the main objective of the program, to make room for the government to increase the developmental spending for Bangladesh, and that will lay the foundation for medium-term sustained growth.

So, as the country sticks to this economic program, we see that the medium-term future of the Bangladesh economy is bright.

QUESTION: How far is Bangladesh making success in implementing the IMF ECF loan facilities?

MR. SINGH: We are now in the process of completing the first review. The program was approved earlier this year, and we are now in the middle of discussions with the authorities to complete this review process, and hopefully, we can come out with a positive agreement soon. Let me just make one point to focus on Bangladesh. If we look carefully at the measures that the government has spelled out in its program, the ECF, they are also planning the kinds of fiscal reforms that the country needs. They are trying to change the focus on spending from subsidies to infrastructure spending.

You know that in Bangladesh, infrastructure spending has been low for many years, many decades, and for that, Minister Muhith is completely convinced that this needs to rise in a sustainable way, so he is acting on both fronts. He is taking fiscal reforms on the tax side, the efforts to bring in a value-added tax. He is acting on the spending side by trying to shift the focus from untargeted subsidies to infrastructure spending while maintaining targeted spending on the safety net where it is needed.

It is a very important mix that the country needs, and this is part of their program.

MS. UTSUNOMIYA: Let me take on more question from online and then come back to you for one more question from the floor. “The report mentions some Asian countries have reached development stage exposing them to the middle-income trap. Is Indonesia included in that category? If it is, what are the indicators, and what should the government do to handle that?”

MR. SINGH: Well, I spoke about this some time ago; I am not going to say very much more. I would say that you look across Asia, and you draw up a list of countries that could be in the middle-income trap, this is going to happen sometime from now. At the moment, Indonesia retains the potential to raise its growth rate over the medium term. It is planning to do so through its infrastructure spending. And I know I am again talking about infrastructure, but when I met the Minister of Finance in Indonesia a year ago, it was central to his focus, too--how do they sustainably raise capital and infrastructure spending in Indonesia.

And I think if we look at what the ASEAN community is doing, they are building up an infrastructure fund that is going to help Indonesia and other countries.

So I would say this kind of rebalancing is crucial because it is going to allow countries to delay and address the burdens that may come from what is called the “middle-income trap.”

QUESTION: Regarding what you mentioned, Mr. Singh, regarding Asian countries, that they had very substantial growth in the financial sectors, I have a question about Cambodia. Ninety percent of funds for the Cambodian microfinance institutions is coming from European countries. I am wondering whether you see any spillover risk to the sector, and what does IMF recommend for the central bank?

MR. SINGH: Well, I am very happy to meet you again. I was there a few months ago; I am hoping to come to Cambodia again, I think, next month. It is striking that if you look at Cambodia’s growth, its recovery in the last two years has been quite remarkable. Growth is holding up well, above 6 percent, closer to 6-1/2 percent in 2012, and despite the headwind from Europe, we see that exports are holding up, tourism is holding up, and inflation is stable.

So you ask about the spillover risks from external sources, especially from Europe, and my sense is that, clearly, there are risks, but so far, Cambodia has been able to deal with the export risks.

As you look across Asia, you see, as I mentioned, that in some countries, there has been a big drop in exports to Europe. If you look at Cambodia, which has not been the case as much.

We have to look more carefully at the composition of exports, and it is possible that the higher value-added export products from some countries have been more affected by the slowdown in Europe, but this has not affected other countries, including Bangladesh and also Cambodia, as much.

So, right now, Cambodia is holding up. Growth is above 6 percent. They are also planning important fiscal reforms to raise revenues to use for infrastructure spending, which is clearly needed.

I look forward to seeing you when I come next month.

MR. TAKEDA: Your question is a rather sector-specific question--namely, microfinance in Cambodia which is 90 percent funded by European banks, right. We are not--actually, I am not fully familiar with the sector-specific situation, but generally speaking, Asia’s exposure to European banks’ funding has been relatively limited, and although there has been some deleveraging--namely, withdrawal of funding from Europe--basically, this has been fairly smoothly absorbed, including by some of the additional funding which has come from regional banks, including Australia, Japan, et cetera.

I am not sure if this applies to the microfinance industry in Cambodia, but one thing we can say is that so far, European deleveraging has had relatively limited impact on Asia in general.

MR. SINGH: And also, as we look at other countries in South Asia where microfinance has been important, it is more dependent on local funding and therefore less exposed to deleveraging from foreign banks. I think they have held up much better than other sections of the financial systems.

MS. UTSUNOMIYA: One quick question. This is the last one.

QUESTION: I have some follow-up questions on China.

First, given the consequences of the 2009 stimulus, how large is the room for stimulus policies in China this time around? And also, do you think China has already entered a stage of inevitable structural slowdown in the medium term, and how can China avoid the middle-income trap?

MR. SINGH: Very briefly, let me just say that as you see what the authorities are doing, it is quite clear that they are trying to move away from the stimulus of 2008-2009, and this is why they are not introducing a new monetary stimulus. And our sense has been that if there were to be a shock, there is more room on the fiscal side. And I think what the government is doing, we agree with the way they are making the policy mix.

As you look ahead, it is clear that as you move from one growth model which is investment-based to another growth model that is more consumption-based, there is going to be a structural change, there is going to be a change in growth. You see this also recognized in the Twelfth Five-Year Plan. The Twelfth Five-Year Plan projects growth to be 7-1/2 percent. It is partly reflecting a shift in the growth model which has implications for growth, and that is why the prediction is 7-1/2.

Markus, do you want to add to that?

MR. RODLAUER: No, thanks.

MR. SINGH: Thanks very much.


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