Transcript of Press Briefing on the Regional Economic Outlook for Asia and Pacific

May 9, 2018


Changyong RHEE, Director, Asia and Pacific Department, IMF

Koshy MATHAI, Chief of Regional Studies Division, Asia and Pacific Department, IMF

Sally CHEN, Resident Representative for IMF Hong Kong SAR Sub-Office

Daisy WONG, Press Officer, Communications Department, IMF


MS. WONG: Good morning everyone. Thank you for coming to the press conference today on the IMF’s launch of the latest Regional Economic Outlook for Asia and Pacific. I’m Daisy Wong with the Communications Department of the IMF. Here with me today, in the middle, is Dr Changyong Rhee. He’s Director of the IMF’s Asia and Pacific Department. Joining Dr Rhee is Mr Koshy Mathai, he’s the Chief of Regional Studies at the Asia and Pacific Department; and Ms Sally Chen, she’s the IMF’s Resident Representative for Hong Kong. Before we take questions, may I ask Dr Rhee to give us some opening remarks? Dr Rhee, please.

MR. RHEE: Thank you, Daisy. Good morning, thanks for coming. It’s my great pleasure to share our views on Asian economic outlook with you today. Not much has changed since we published our Regional Outlook during our Spring Meeting in mid-April, but I will highlight some recent developments in our presentation today. Let’s start with our key messages.

First, the region remains the main engine of global growth, accounting for more than 60 per cent of the global growth. Regional output is projected to grow by 5.6 per cent in 2018 and 2019; 5.6 per cent is about 0.1 percentage point higher than we expected in last October, supported by trade as well as accommodative global financial conditions.

Second, in the short term, clouds are gathering. Risks are broadly balanced for now. But over the medium term, downside risks dominate; including from a tightening of global financial conditions, a shift towards more inward-looking trade policies, and an increase in geopolitical tensions. Over the longer term, Asia faces a number of important challenges, from population aging, slowing productivity growth, and the digital revolution, which of course brings huge opportunities together with challenges.

Third, Asia has enjoyed relatively subdued inflation even as growth has been strong; but policymakers should not be complacent -- temporary global forces have been a key driver of low inflation in Asia; and these could well reverse in the near future.

Fourth, the strong economic outlook provides a valuable opportunity to focus macroeconomic policies on building buffers, increasing resilience, and pushing ahead with structural reforms to address longer-term challenges. As our Managing Director mentioned, while the sun is shining, it’s the time to fix the roof.

Let me expand on some of these points before we turn to your questions.

For most economies, we revised our growth forecast upward relative to last October’s forecast. In China, growth is expected to moderate to 6.6 percent in 2018 - 0.1 percentage point higher than expected in October - as financial, housing and fiscal tightening measures take effect. Hong Kong economy’s growth is expected to remain strong at about 3.6 per cent in 2018. In Japan, growth has been above potential for eight consecutive quarters and is expected to remain strong at 1.2 percent this year. In India, growth is forecast to rebound to 7.4 percent in fiscal year 2018/19 as the economy recovers from disruptions related to the currency exchange initiative and the rollout of the new Goods and Services Tax.

So broadly speaking, the big picture is quite bright in Asia. Another good news is that the current pick-up and growth momentum is quite diverse and broad-based. In the last couple of years, China actually led Asia’s growth; but currently, India is one of the fastest-growing large economies in the world. The growth momentum of Japan is also quite strong. So overall, I think Asia has many growth engines at this moment. On the other hand, clouds are gathering. So, let’s discuss about risks.

On the upside, the global recovery could again prove stronger than expected amid strong consumer and business confidence and still loose financial conditions; especially US growth may be higher than expected due to the temporary fiscal stimulus. Recent releases of national accounts data for Q1 in China and the US are broadly in line with our projections, even though Q1 performance in the Euro Area seems slightly lower than we expected.

On the downside risk, Asia remains vulnerable to a tightening in global financial conditions. In the last few weeks, US 10-year sovereign yield started rising, the US Dollar strengthened, and capital flows to emerging markets slowed down. We haven’t seen capital outflow evidence, but still there is some evidence building up that capital inflow to the emerging markets slowed down. Another downside risk is definitely the more inward-looking trade policies, as highlighted by recent tariff actions and announcements. That will certainly affect an open region like Asia. Also, geopolitical tensions could have serious repercussions on financial markets and on oil prices.

One aspect we are focussing on at this moment is low inflation in Asia. Despite strong growth, inflation in Asia has remained relatively low. Indeed, the gaps between actual inflation and inflation targets are generally larger in Asia than in other regions.

Our analysis suggests that recent low inflation in Asia has been driven mainly by temporary forces, including imported inflation from advanced economies, and higher oil and commodity prices, but these could of course reverse. Moreover, the inflation process has become more backward-looking, that is stickier, suggesting that if inflation rises in the future, it may persist. And finally, there is some evidence that the Phillips curve has flattened, which means that the sensitivity of inflation to economic slack has decreased. This suggests that if inflation rises again, the output cost to rein in inflation pressure may be large. So for Asia policymakers, now is a good time to be more attentive to the inflation dynamics in the region. I do not mean that at this moment, inflation momentum is very strong; but there’s a good reason that Asia policymakers need to be more attentive.

So, what should we do and what is our policy recommendations for Asia? Against this backdrop, policies should aim to strengthen buffers, increase resilience and ensure sustainability. With output gaps closing in much of the region, fiscal policy should generally be geared towards strengthening buffers and safeguard sustainability. Subdued inflation provides scope for continuing accommodative monetary policy in much of Asia if the output gap still exists. But given our research findings on inflation, policymakers should be vigilant towards any incipient signs of inflation pressure. Strengthening monetary policy frameworks and central bank communications can better anchor expectations, and exchange rate flexibility can help to insulate economies from imported inflation.

The current growth momentum, in sum, provides an opportunity to pursue fiscal, financial, and structural reforms; including those to promote inclusive growth and allow economies to reap the full benefits of the digital revolution. In sum, the big picture is bright; but clouds are gathering. So it’s a time to fix the roof while the sun is shining. That is our key messages. Thank you. Now, to your questions.

MS. WONG: Thank you, Dr Rhee. We are now ready to take your questions. May I ask you to identify your organization and your name, please?

QUESTIONER: How concerned are you about what’s happening in Asian countries that run a trade deficit? Philippines, India, Indonesia… they’ve been in the crossfire in recent days or weeks. Their assets are being sold off. So what are the risks that you think they’re facing, and what measures can they take?

MR. RHEE: You know, if you look at the current account deficit, trade deficit in Asia, yes, there are several countries which have current account deficit. But compared with historic average, they are quite low and manageable. For example, you talked about India, Indonesia and Philippines. Their current account deficit is less than 2 per cent and even less than 1 per cent, which is much improved.

So the question is that in the last few weeks, there was a pressure on exchange rates and there is a depreciation pressure. But we believe that that is a natural adjustment process due to the more tightening of global financial conditions. In the last 1.5 years, the puzzle that many economies have been discussing is that given that the US has started to normalize its monetary policy and interest rates increase, why the Dollar has not appreciated very much and why there is no sign of capital flowing out from emerging economies.

Maybe there are many structural reasons to explain those things. But at this moment as US continues to increase interest rates, I think definitely the delayed response from the capital markets may have started. So it’s a little premature to say, but I think rather than a domestic problem, it’s more like global financial conditions… now see some sign of the Dollar strength; and then also the adjustment in interest rate differential gap in Asia becomes larger, there is some pressure on exchange rates in Asia.

But if you ask me whether we are concerned, at this moment, not much. I think there is room for Asian interest rates to also go up, and also there’s room to rely on the flexible exchange rate system more compared with the period in 1997. At that time, the largest amount of Asia’s external debt was denominated by the Dollars. But thanks to the many policy efforts, such as Asia bond initiative, if you look at many Asean economies including Malaysia, Indonesia and others, yes, there were many foreign participation in their bond market; but their participation is also large in the domestic currency denominated bond market. So even though together with the interest rates in US increase, there is more exchange rate depreciation pressure in Asia, its impact on real economy - given that the lion’s share of the debt is also denominated by the domestic currency - there’s no default risk and they have more room to manage this process.

So basically, my message is that recent exchange rate pressure is mostly due to the global factors, rather than the domestic factors. Asia has more buffers now. Current account is better. They have more reserves and they have low inflation, they have low interest rate; and also the largest amount of debt is now denominated by domestic currencies. So, there’s more room to manoeuvre. Having said that, definitely, it’s a time to watch closely.

QUESTIONER: You mentioned that Asia Pacific would still be the driver of global growth this year. Last year, you put sort of Asia’s share at 60 per cent of the global growth, with just India and China being about half. Do you have some rough numbers for 2018 of how much Asia’s contribution will be?

MR. RHEE: Yes. Actually last year was about 65 per cent, I think, close to a third; and the growth proportion is slightly down. I think we didn’t calculate again, but my guess is that it can be between 60 and 65 per cent because Europe’s recovery is going on and US growth rate is higher. So if you talk about the relative contribution, yes, may be slightly down.

But it’s a healthy sign because after the global financial crisis, in the last couple of years, Asia, especially China alone, was driving the global growth. But at this moment, the US is recovering and Europe is recovering. Even within Asia, India and Japan is also recovering. So, it’s quite broad-based. So, I wouldn't focus much on whether it’s 66 per cent or 64 per cent. In general, Asia remains as the global engine; and when global growth is led by multi-engines, it is a good sign.

QUESTIONER: Would you please add some colour on the economic growth of Hong Kong? Would you please explain why do you forecast the GDP growth next year will drop to 3.2 per cent, and how do you forecast the trend of housing prices of Hong Kong in this year or maybe the coming year? Thanks.

MR. RHEE: Let me ask Sally, who is our representative in Hong Kong, to answer this question.

MS. CHEN: First of all, we’re not in the business of near-term forecasts, but what I’ll say is this. Hong Kong’s growth prospect remains fairly buoyant boosted by the factors that Dr Rhee just mentioned, including still fairly strong and healthy growth in Mainland China.

Now regarding housing, this of course is the main issue for Hong Kong given all the public discussions. We’ve said in our Staff Report last year, and we will look into this further this year, on the possibility of tightening global financial conditions on Hong Kong. The expectation is that with interest rates rising and with global financial conditions tightening, that could have some impact on Hong Kong’s housing market.

QUESTIONER: I actually want to follow up on the property market in Hong Kong. Hong Kong officials have been warning that people have been all over too comfortable with the low interest rate environment. What’s the IMF’s take on that? Do you see the property market bubble bursting any time soon? Also, another question is about the ongoing trade dispute between the US and China. We’re seeing China officials heading to Washington DC for the discussions. Could you briefly tell us more about your take on the risks associated with that? Are we seeing a trade war imminent, and what’s the impact to the region? Thank you.

MS. CHEN: Thank you for your continued interest in the housing market in Hong Kong. Certainly in Hong Kong, by our own estimation as we’ve stated in our Staff Report last year, is that housing prices here are overvalued; and we have warned repeatedly the possibility of higher interest rates on dampening the household balance sheet through the wealth effect, specifically through the impact of possibility of higher interest rates on dampening housing prices. That said, the likelihood of a housing market bust in Hong Kong is very, very limited for reasons you just mentioned, that there is essentially a structural imbalance between supply and demand. Demand factors here remain fairly buoyant.

So in that regard, our primary risk is related to how households here will react to higher interest rates and whether they can shoulder higher interest rate burdens associated with tighter financing conditions. Our assessment last year suggests that buffers in the Hong Kong economy remain fairly sizeable. Certainly, the banking sector have also built up sizeable buffer as well. So in that regard, the negative impact on the Hong Kong economy from tighter financial conditions, by our estimate, remains fairly modest and manageable.

MR. MATHAI: Thank you. Then you’d asked about trade as well. I think it’s fair to say that we’re quite concerned about unilateral actions taken. The issue really is one of escalation. Right now, the actions are fairly limited in a sense. But if the tensions escalate, that could have quite a serious impact on global trade and investment and growth. We’ve done some modelling - it appeared in our World Economic Outlook a couple of years ago - that suggested that if tariffs were to rise by 10 per cent across the world, that would have fairly substantial impacts on growth and on investment.

Trade, after all, has been a major engine of growth for the whole global economy, and especially for Asia. So, this is an area of big concern. It’s not just the US and China that would be affected. Of course, given the complicated trading relationships now and global supply chains, pretty much all countries in the world are going to be affected; which is why our Managing Director always emphasizes that there’re not going to be any winners coming out of this kind of tension.

If you look at China’s exports to the US, a full 30 per cent of the value added there represents inputs from other countries. So naturally, if tariffs are applied to Chinese goods, the impact is going to be felt by all the suppliers of inputs who are selling to China as well. Generally, we have a rule of thumb that we like to use based on some other analysis that we’ve done that if growth in China were to slow by 1 percentage point, growth in the rest of Asia would probably slow by around 0.3 percentage points. So it’s not the end of the world, but it is a fairly substantial impact that could be there.

Even beyond the direct trade channels, what we’re concerned about is the non-trade channels. Look at what happening on 23 March of this year. The day after the Section 301 tariffs were announced by the US, equity markets across Asia, across the world took a major hit that day. What’s going to be the impact going forward, what’s going to be the impact on business confidence, on consumer confidence? There’s a lot of uncertainty related to this. What’s going to be the impact on growth? These are some of the concerns that we have, and we hope the tensions can be resolved in a smooth way and using the multilateral fora that we have at our disposal. Thanks.

QUESTIONER: Yes, just to follow up on that. In the Outlook Report, you guys highlighted that US fiscal stimulus is going to help Asian exports and things, the outlook this year. How does that effect interact with the trade measures that you were just talking about?

MR. RHEE: We have one study which shows that our baseline is that current US fiscal policy packages will increase US growth by 1.2 per cent in the next three years.

MR. MATHAI: Yes, on a cumulative basis.

MR. RHEE: On a cumulative basis, the level of GDP will increase by 1.2 per cent. It has, in the short-term, positive spillover to the world. To Asia, depending on the countries, the impact varies from 0.1 to 0.5 per cent. Countries like Cambodia and Vietnam, which has a large exposure for trade and also to US exports, the impact will be largest around 0.4 and 0.5 per cent. China and others, the growth impact will be around 0.1 and 0.2 per cent. So, it will be cumulative in the next three years.

But I think the issue is that in the short term, it definitely has a positive spillover. But its medium-term impact is more uncertain because together with US fiscal policies, US debt level will increase; and together with that, higher budget deficit and higher debt may cause US interest rate increase further, Dollar can strengthen; and that have some negative impact down the road. So in summary, we believe the US fiscal policy is good for the world for the short term; but in the medium term, its impact will be offset.

QUESTIONER: (inaudible)

MR. RHEE: I think the first question is asking about the current US and China dialogue. But let me emphasize, as Koshy mentioned, it’s the beginning of the talk. So, we should not judge what will happen based on what’s currently going on. We really hope that this process can be resolved without unilateral or unconventional measures. We hope that this can be resolved for the global economy. Regarding the US trade account, bilaterally, I think it’s hard to forecast. But overall, I think this US expansionary fiscal policy will actually increase US current account deficit rather than decrease it.

QUESTIONER: I have a question about China. Can you share a bit more on why you think that China growth prospect remains strong, and what are the immediate or short-term risks in sight? Thank you.

MR. RHEE: I think China’s growth momentum is now definitely moderating. Last year, China’s growth rate is 6.9; now we are forecasting 6.6. I think it’s a natural process for the convergence. As China’s economy is getting bigger, its growth rate slows down. But what we are saying is, compared with a couple of years ago when China had large depreciation pressure, current financial market conditions seem to be well-managed. And the rebalancing is actually progressing, even though moderately.

Also, they have a new economy coming. China is moving from the export-oriented economy to the domestic consumption; and the growth rate of new digital economy and new service sector is actually quite higher. Many see that as a new growth frontier for Chinese economy.

Having said that, I think what we are concerned is that even though despite recent government’s very successful policy to rein in credit expansion, they have successfully reduced the credit expansion banking sector. For example, the bank asset growth rate used to be 15 per cent a year. But last year, it went down to 9 per cent. So, it’s a good sign.

On the other hand, if you look at credit expansion of the overall economy, such as total social financing, the growth rate is still quite high at 14 per cent. In order to have a more smooth transition, we believe that addressing the credit expansion in a more modest way is an essential step to secure the kind of soft landing for Chinese transition period.

QUESTIONER: Could you give me a comment on impact on geopolitical risk? There was big change in Iran, but the Korean peninsula situation is going to better than before. So, how do you assess?

MR. RHEE: I think this geopolitical situation at this moment is in quite flux, as you mentioned the Iran deal yesterday, and also the forthcoming US and North Korea summit. So, we have to get to know how the things would really work. It will be premature to comment on this impact on economy at this moment.

QUESTIONER: I want to ask about in the Asia market. They have benefitted from the lower interest rate in the past few years. But now, as the US continues to increase interest rates, do you think the market underestimates the impact to the Asia market?

MS. CHEN: This is an issue that we’ve looked into for the Fund, and we’ve had some analysis in the recently published Global Financial Stability Report. Two issues here I want to highlight. As you correctly said, low interest rates have certainly supported asset performances, not just in Asia but globally. What’s interesting about the current rate hike cycle in the US, and we have a chart on this in our GFSR, is that since the start of the rate hike cycle, financial conditions in the US have actually eased compared to previous cycles; and this has led to an environment where asset prices continue to appreciate up until now.

So the risks associated with that, as you correctly implied, is that this could lure investors into a sense of complacency. But we’ve seen in recent weeks that that’s no longer the case. In February, we have what we called a VIX tantrum; the VIX index jumped. Certainly, as Dr Rhee mentioned just now, in recent weeks, US interest rates jumped and US Dollar has appreciated. This has again, as mentioned earlier, has introduced some volatility and some losses in some emerging markets.

But on net, if you scan the macro conditions, we would say that in EM and certainly Asia, economies broadly have better buffers today than we’ve seen in the recent past. So on net, we are not worried. What we’re seeing right now is a healthy adjustment from the conditions we’ve seen in recent years.

MR. RHEE: If I may just add a few things... I think that’s a question that I’m mostly frequently being asked. If the global interest rate goes up, whether it’s time for Asia to increase interest rates. Let me comment on two things. One is the statement that Asia interest rate has to go up together with US interest rate, assuming that fixed exchange rates stability is a good thing to have, assuming the exchange rate should not move. Then most adjustment should done by the interest rate alone.

We have some concern there. As I mentioned in the previous questions, we believe for many reasons because of buffer, because more domestic debt is held by foreigners, there’s room for Asia to rely more on the exchange rate flexibility. So when they allow more depreciation, if for example, that causes inflation to increase, then I think monetary policy would have room to increase interest rates, because of inflation rather than the exchange rate itself.

So, our first point is that don’t just think about interest rate adjustment should bear the whole burden. You have to rely also on the exchange rate flexibility. When you rely on the exchange rate flexibility, because of the depreciation pressure, if inflation picks up, then it’s a time to consider tighter monetary policy and increase interest rate. At the same time, you can rely also more on the macro-prudential policies if the inflation pressure is more on the asset side rather than the general CPI.

So those are, broadly speaking, some principles that we have. In Asia, I think because of the bad memory of 1997, somehow when the depreciation pressure is coming in, and because of all the above that I just mentioned… thereby the interest rate adjustments. I think that is some myth that we had because of the 1997 crisis. But it’s a time for us to look at what is the optimal combination between interest rate increase as well as exchange rate flexibility.

QUESTIONER: Sorry, just a follow up on rates. So you said earlier that Asian countries have room to raise rates as well. Any of them, in particular, have more room than others? Are any countries perhaps running too loose of a monetary policy at the moment?

MR. RHEE: I think it’s better not to identify the specific countries at this moment. But I think that let’s say that there were several countries we are not recommending to increase interest rates at this moment; especially countries with very low inflation, even though growth momentum is picking up. A good example is Thailand. Another example is Singapore. When inflation rate is very low, we do not see an immediate reason to increase interest rate to cover this. Overall, it really depends on country specifics.

QUESTIONER: This question may have similar issues, but there are headlines this morning about Argentina appealing for IMF support. I don’t want to ask you about Argentina, but do you see in this region of Asia Pacific any significant risk that there may be new appeals for IMF support coming from governments in this region?

MR. RHEE: I think we should not be complacent, but general condition for Asian economies at this moment is much better. Argentina and Venezuela and others, if you compare their debt level and their level of reserves, they are much more vulnerable than many Asian economies. But what we are concerning at this moment is not a chance of another round of financial crisis. hWat we are worrying about is that still after the global financial crisis, even the buffers increase significantly, leverage also increased in Asia quite a lot - China corporate leverages; and Korea and Australia, the household debt is increasing. Even Hong Kong household debt is reaching 70 per cent of GDP.

Many Asean economies also rely on fiscal stimulus to cope with the global financial crisis. At the same time, they really accumulate the buffers. So for your question, if you are asking for any chance of immediate financial crisis, I can say that I’m happy to say that I’m less concerned about that. But on the other hand, whether this new tighter global financial conditions can actually stifle the growth momentum because of high leverage, yes definitely. There is a significant risk and we have to watch for it.

MS. WONG: Thank you, Dr Rhee. I think we are running short of time. If we don’t have the last question, I want to conclude the press conference today. Thank you very much to all of you for coming to the press conference today.


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