Transcript of Asia and Pacfic Department Press Briefing
IMF News, April 20, 2018
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- Published: April 20, 2018
Key messages and headline projections
- Asia region remains the main engine of growth of the global economy, accounting for more than 60 percent of the global growth.
- Regional output is projected to grow by 5.6 percent in 2018 and 2019.
- The regional outlook is described as about 4.1 percent percentage point higher than we expected in October.
- Short-term risks around the forecast are broadly balanced; over the medium term downside risks dominate.
- Longer-term challenges include population aging, slowing productivity growth, and the digital revolution.
Growth projections and country highlights
- China
- Growth is expected to moderate to 6.6 percent in 2018.
- This is or .1 percentage point higher than expected in October.
- Near-term outlook described as benign and positive; medium-term risks relate to debt burden and financial sector imbalances.
- China seen as relatively insulated from spillovers of global financial tightening because "China's financial markets are not yet very integrated with the global financial markets" and "Capital controls are in place and have proven to be quite effective."
- Japan
- Growth has been above potential for eight consecutive quarters.
- Growth is expected to remain strong at 1.2 percent this year.
- Today's 1.2 percent growth rate is 1/2 percent higher than expected in October.
- Projected to slow to .9 percent growth next year (described as a gradual decline).
- Japan cited as a bright spot driven by private investment, Olympics-related demand, and favorable external environment.
- India
- Growth is forecast up to 7.4 percent in fiscal year 2018 and 2019.
- IMF sees recent major reforms: national Goods and Services tax, flexible inflation targeting, statutory monetary policy, public-sector bank recapitalization plan, new insolvency and bankruptcy law.
- Room remains to expand export orientation; statutory tariff rate cited as relatively high at about 15 percent.
- IMF projects growth rising from 7.4 percent in '17-'18 to 7.8 percent in 2019 (statement on role in region).
- Bangladesh
- Favorable outlook with growth at around 7 percent in fiscal year '17.
- Current account deficit projected to widen somewhat to 2 percent.
- Inflation has picked up to close to 6 percent.
- Priority: use cyclical upswing to implement structural reforms, address banking sector weaknesses (NPLs) and undertake comprehensive tax reforms.
- Indonesia
- Projected growth rising from 5.3 percent this year to 5.5 percent next year.
- Inflation seen to be manageable at around 3 percent.
- Current account deficit below 2 percent of GDP.
- IMF recommends rebuilding fiscal buffers, rebalance spending away from untargeted subsidies, and put in place a medium-term revenue strategy to raise a low tax-to-GDP ratio of about 10 percent of GDP.
- Structural priorities: labor market reforms, improve business environment, product market reforms to transition away from commodity dependence.
- Mongolia
- Extended Fund Facility program about one year old with "phenomenal" macroeconomic results.
- Fiscal adjustment by 15 percentage points of GDP.
- Rapid recovery in growth, large fiscal consolidation, improved balance of payments; next step: banking reform and asset quality actions.
- Mongolia remains dependent on commodity markets (coal and copper); coal expected to benefit from China’s shift to cleaner coal.
- Nepal
- Growth rebounded to about 7.5 percent in 2016/2017 after earthquake and trade disruptions.
- Inflation about 5 percent in February, mainly driven by food prices.
- Growth expected to moderate to around 5 percent.
- Priorities: strengthen institutions and administrative capacity, improve budget implementation, implement fiscal decentralization, upgrade monetary framework, accelerate financial sector reforms and supervision.
Inflation findings and analysis
- Asia has enjoyed relatively subdued inflation even as growth has picked up.
- Gaps between headline inflation and inflation targets are generally larger in Asia than in other regions.
- IMF analysis suggests low inflation in Asia has been driven mainly by temporary and global forces, including imported inflation, but these factors could reverse.
- Evidence indicates:
- Inflation process in Asia has become more backward looking (stickier), suggesting persistence if inflation rises.
- Phillips Curve has flattened: sensitivity of inflation to economic slack has decreased, implying larger output costs to reduce inflation if it rises.
Risks and scenarios
- Short-term upside risks: global recovery could prove stronger than expected amid strong consumer and business confidence and still-loose financial conditions.
- Short-term downside risks: tightening global financial conditions, reversal of easy financial conditions risking buildup of vulnerabilities, more inward-looking trade policies (tariffs), and geopolitical tensions.
- Medium- and long-term downside risks: population aging (risk of "becoming old before becoming rich"), slowing productivity growth since the global financial crisis, and disruptive impacts of the digital revolution on the future of work.
- U.S. tax reform and spillovers:
- IMF simulations indicate the current U.S. tax reform package will increase the level of GDP in Asia by 0.1 or 0.2 percent depending on the countries for the next three years accumulatively.
- Level of the GDP increase by 0.2 percent on average in the next three years (stated as already incorporated in the baseline forecast).
- U.S. nominal corporate tax rate reduced to 21 percent; U.S. state tax around 6 percent.
- Europe captured "more than half" of certain repatriated profits; Asia is "around 16 percent and 20 percent" (phrasing preserved).
- IMF judges overall impact on financial markets and exchange rates should be limited given repatriation is phased and relatively small in aggregate.
Policy recommendations
- General guidance
- Use the strong economic outlook to build buffers, increase resilience, and push structural reforms.
- "When sun is shining it is time to fix the roof."
- Fiscal policy
- With output gaps closing in much of the region, fiscal policy should be growth-friendly but generally geared toward strengthening buffers and safeguarding sustainability.
- Rebalance spending away from untargeted subsidies and unproductive spending toward social spending and infrastructure.
- Implement medium-term revenue strategies to increase tax-to-GDP ratios where low.
- Monetary policy
- Subdued inflation provides scope for accommodative monetary policy in much of Asia, but policymakers should remain vigilant for incipient inflationary pressures.
- Strengthen monetary policy frameworks and central bank communications to better anchor expectations.
- Exchange rate flexibility can help insulate economies from imported inflation.
- Financial and macroprudential policy
- Macroprudential policies remain important to handle excessive credit growth and financial vulnerabilities.
- Strengthen bank supervision, act on asset quality reviews, recapitalize banks where necessary.
- Structural reforms
- Prioritize product and labor market reforms, increase formal female labor participation, improve business environment by reducing complex regulations, address supply bottlenecks (notably in agriculture and distribution), and open services sectors.
- Protect intellectual property rights and investment protections to encourage technology transfer and innovation.
- Use the digital revolution as an opportunity while managing risks to the future of work.
Transcript of Asia and Pacfic Department Press Briefing, Washington D.C., April 20, 2018. IM F Communications Department, MEDIA RELATIONS.