Asia in 2017 and Beyond: Prepare for the Unexpected by Building Resilience
IMF News, January 17, 2017
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- Published: January 17, 2017
Global outlook and headline projections
- Global growth projected to pick up from 3.1 percent in 2016 to 3.4 percent in 2017, and 3.6 percent in 2018.
- Growth in advanced economies projected to rise to 1.9 percent in 2017, reflecting better performance in H2 2016 and a projected fiscal stimulus in the U.S.
- Emerging and developing economies expected to grow by 4.5 percent in 2017.
- Wide dispersion of possible outcomes around projections due to uncertainty about the incoming U.S. administration’s policy stance and global ramifications.
Asia’s near-term performance and contribution to global growth
- Asia managed market surprises in 2016 and Asian financial markets were resilient for most of the year.
- Post-U.S. election effects:
- Some capital outflows from Asia.
- Exchange rates depreciated vis-à-vis the U.S. dollar.
- Ten-year sovereign bond yields rose initially in most economies.
- Asian emerging market economies were generally less affected than other regions.
- Markets affected during the May 2013 taper tantrum were generally more resilient this time.
- Asia expected to grow above 5 percent both in 2017 and 2018.
- Asia expected to continue making the largest contribution to world growth, generating around two thirds of global growth.
- World growth expected to be around 3½ percent in the next two years.
Key risks for Asia
- High corporate debt in some emerging Asian economies:
- May reduce investor confidence when interest rates increase.
- Dampens resilience despite competitiveness gains from weaker currencies.
- Changing U.S. interest rate expectations:
- Lower past U.S. interest rates supported capital inflows into emerging markets; higher expectations may produce outflows.
- Exchange rate movements and anti-globalization sentiment:
- May give rise to protectionist pressures.
- China’s rebalancing:
- Viewed as healthy for China and the region, but progress must be monitored and responses prepared for potential bumps.
Policy recommendations to build resilience
- Exchange rate policy:
- Flexible exchange rates are crucial, especially for emerging market Asian economies, to help adjust to shocks and serve as a buffer against capital outflows.
- Flexibility allows portfolio rebalancing through currency changes rather than reserve losses.
- Financial stability and supervision:
- Protect financial stability where there are high equity prices, rapid house-price increases, and high corporate debt.
- Strong and proactive supervision is recommended.
- Supervisors should monitor and contain household and corporate debt levels, including debt in foreign currencies.
- Use macroprudential measures to manage housing risks (examples cited: Australia, Mainland China, Hong Kong SAR, Korea, New Zealand).
- China-specific:
- Continue reforms to rebalance away from investment and credit toward consumption.
- Prioritize further reforms to state-owned enterprises to improve allocation and efficiency of investment, including reducing excess capacity in sectors such as steel and coal.
- Financial and fiscal reforms to improve capital allocation and boost consumption.
- Japan-specific:
- Revive the Abenomics reform agenda.
- Focus on a more effective incomes policy to boost wages and prices, lifting inflation and inflation expectations.
- Address labor market segmentation to reduce disparities between secure high-wage workers and low-income, insecure workers.
- Implement comprehensive structural reforms to mitigate aging population effects on potential growth.
- Other economies:
- Economies with an output gap and fiscal space, such as Korea and Thailand, could increase social spending or invest in infrastructure to support structural reforms.
- Countries with higher public debt levels, like India, should continue medium-term plans to reduce debt and deficits.
- Japan and Malaysia should develop plans to reduce debt and deficits.
Conclusion
- Despite positive developments in 2016, meeting 2017 challenges requires preparing for the unexpected through building and strengthening resilience.
- Resilience is framed as the foundation for sustainable, strong, and inclusive economic growth over the coming years.
Remarks by Zhang Tao, Deputy Managing Director, IMF; Asian Financial Forum, Hong Kong, China; January 17, 2017.