Transcript of October 2018 Asia and Pacific Department Press Briefing

October 12, 2018


Changyong Rhee, Director, Asia and Pacific Department

Markus Rodlauer, Deputy Director, Asia Pacific and Department

Odd Per Brekk, Deputy Director, Asia and Pacific Department

Ken Kang, Deputy Director, Asia and Pacific Department

Ting Yan, Communications Officer, Communications Department

MS. YAN: Good morning, everyone. Thank you very much for coming to this Press Conference on the Asia and Pacific Region’s Economic Outlook. Today we are launching the report “Asia at the Forefront: Growth Challenges for the Next Decade and Beyond”. My name is Ting Yan. I'm the Press Officer of the IMF. And let me introduce our speakers today: Mr. Changyong Rhee, Director of the Asia and Pacific Department of the IMF. And we have three Deputy Directors here: Mr. Markus Rodlauer, Mr. Odd Per Brekk, and Mr. Ken Kang.

We'll start with Changyong's opening remarks to highlight some of the key messages of the report, and then we'll take your questions after that. We will also take your questions online, so please submit your questions on our Online Media Center. Thank you.

Over to you, Changyong.

MR. RHEE: Thank you, Ting. Good morning, and thanks for coming. Before I get into the report, let me just say that we are deeply saddened by the recent disasters in Lombok and Sulawesi, and we would like to send our sincere condolences to the survivors, friends and families of the victims, and the Government of Indonesia.

So, let me summarize the main messages from our recent Regional Economic Outlook. Good news first. Asia has made remarkable progress over the decades, and it is now at the forefront of the global economy in terms of growth. Indeed Asia accounts for more than 60 percent of world growth at this moment. So, growth as of now is relatively strong. But the region faces important near-term risks, including from tighter financial conditions, and rising trade tensions, which we will discuss shortly, as well as high oil prices.

And in the medium term, there are also some fundamental challenges, including the sustainability of Asia's trade-led growth model, the slowdown of productivity, and the risk and opportunities posed by the digitalization trend.

Let me explain these topics before turning to your questions.

Our new forecast first. As our Managing Director, Christine Lagarde, said at her press conference yesterday, the world economy is still strong, but the global environment has become more challenging. The U.S. dollar has strengthened, U.S. interest rates and oil prices have increased, and trade tensions have risen. These headwinds have put pressure on many emerging market economies, and Asian countries are no exception.

On account of these headwinds, Asia is projected to grow by 5.6 percent in 2018, unchanged from our forecast in April, and 5.4 percent in 2019, down by 0.2 percentage point from our forecast in April. Inflation across Asia is projected to increase to 2.8 percent in 2018, and 2.9 percent in 2019, reflecting higher commodity prices, but it still remains below target in several Asian economies.

In China, the authorities’ focus on deleveraging for the sake of financial stability implied slower growth this year, and that was of course appropriate and desirable from the IMF’s point of view.

Recent tariff actions, however, have provided additional drag, China's growth remains at 6.6 percent for 2018, but we have marked down its growth rate for 2019 from 6.4 percent to 6.2 percent, reflecting the direct impact of trade tension. We have estimated that already announced tariff packages would reduce growth in China by 0.7 percent.

But we believe that China could offset this partly with stimulus policies, boosting growth by about 0.5 percent. So together, we expect that current tariffs would have a negative growth impact on China of 0.2 percent. That is the reason why we revised down China's growth rate for 2019, from 6.4 percent to 6.2 percent, but we can discuss the trade issue a little more later.

In Japan, the economy is projected to expand by 1.1 percent in 2018, above potential growth. Growth is expected to decelerate to 0.9 percent in 2019.

In India, the growth rate is expected to pick up to 7.3 percent this year, and 7.4 percent in 2019, but this forecast has been slightly revised down on account of higher oil prices, tighter global financial conditions, and increasing global trade tensions.

In ASEAN, growth is resilient but set to slow as the external environment becomes less favorable. For example, our hosting country Indonesia still maintain a relatively resilient growth rate of 5.1 percent in both 2018 and 2019.

Growth in most of the rest of the region, including small states and Pacific island countries remains resilient and strong at this moment.

But regarding the risks, as I mentioned in the beginning, the balance has shifted to the downside in the near term and medium term.

The first risk is tighter financial conditions in the global financial market as the U.S. Fed continues to raise interest rates. Asian economies have so far been less affected by this tightening trend, compared with other emerging economies in other regions, but policymakers need to remain alert. Our simulations suggest that a tightening of financial conditions could lower the Asia's GDP by as much as three-quarters of a percentage point.

The second risk is the escalation of trade tensions. There have been several rounds of tariffs already, and further tariffs also have been proposed—for example, on the remaining $267 billion of China's exports to the U.S., as well as on the global automotive trade.

Considering all the current and proposed tariffs, as well as the knock-on effects on investment confidence and financial markets, our scenario shows that the peak impact on China's output could be as large as 1.6 percent over the first two years. For the U.S., the impact could be around 0.9 percent, and for Asia as a whole, the impact could be up to 0.9 percent in two years.

I should note here that many Asian economies have fiscal space, and thus we believe that short-term policy stimulus could offset much of the impact that I just discussed.

Now moving to the long-term challenges. Asia faces several medium and long-term challenges, the first one being slowing productivity growth, which is a feature of other regions as well. Our analysis of firm-level data shows that an important driver of slowing productivity growth has been a decline in firm dynamism. By that I mean declining firm entry (i.e., fewer young firms), and also declining exit of the so-called “zombie” firms.

Asia is also at the forefront of digitalization. Our research uncovers several interesting findings, We find that digital innovation, measured as TFP growth in the IT sector alone, accounted for nearly 30 percent of Asia's per capita GDP growth over the past 20 years, and this will surely rise going forward.

We also find that the e-commerce is quite popular in Asia, and companies that participate in e-commerce usually have higher productivity than those that don’t.

And also, digitalization can help governments boost their tax revenues and target their spending more efficiently and more transparently.

We find that automation, including via robotics, can displace some workers (though the effects are perhaps more modest than some have feared). At the same time, automation can help when economies have aging populations and declining workforces.

Finally., we find that Fintech innovation is quite rapid in Asia and can have a positive impact, but it can also have an adverse impact on financial stability.

So, what does this all means for Asian policymakers in the short term and medium term? I think in the short term we'd like to emphasize that Asia policymakers should be confident but not complacent. The region has strong fiscal and external buffers, good policy frameworks, robust growth, and is well placed to withstand shocks.

And that said, we believe that the today’s headwinds—whether from financial market tightening from the advanced economies or from trade tensions—could persist for some time. U.S. interest rate increases will occur for more than a year. So for this region, we believe that it's important for policymakers to save their ammunition for when it's truly needed.

What does this mean practically? We believe fiscal policy needs to focus more on building buffers, the exchange rate should be kept flexible and allowed to act as a shock absorber, and in some cases if inflation rises together with depreciation, monetary policy may need to be tightened. So, in general, we believe Asia is better equipped in dealing with headwinds. Policymakers should be confident but not be complacent.

Second, in facing trade tensions, we believe Asia needs to open more than close. Policymakers can take this opportunity to offset the decline in external demand by liberalizing their own trade and investment regimes, particularly in the service sector.

We have a study and our simulations suggest that further opening of the Asian economy, China and many other Asian economies, even if pursued unilaterally, can boost long-term growth by 5 to 10 percent. So, Asia's growth has been led by trade, multilateralism, but it still has large room to gain by opening, even unilaterally, to the world.

Third, strengthening firm dynamism, allow young, dynamic firms to enter, as well as facilitating the exit of zombie firms, is an important way to boost productivity and develop a new source of growth.

And finally, digitalization can be a new source of growth for Asia, even though we have to address accompanying risks. Measures to improve education, infrastructure, and the regulatory environment, would help make digitalization an even more important engine of growth in the near future.

So in sum: Asia's growth remains resilient—growth at this moment is strong—but there are challenges both in the short term as well as in the medium term. Policymakers should be confident but not complacent, as headwinds can last longer than expected. Maintaining sound macroeconomic policies and the pace of structural reforms will ensure that Asia remains at forefront of global growth over the coming decade and beyond.

QUESTIONER: Mr. Rhee said earlier that Indonesia, just like the rest of the region, Asia and Pacific, still remains resilient, but with more challenges ahead. So, seeing that the IMF also had predicted that the region and as well as Indonesia. What is your view on this [inaudible] project and do you feel the same way as the IMF does? And the second one, what kind of policies or other aspect that the government should focus on in order to maintain a resilience and strengthen the economy in the midst all of these challenges?

QUESTIONER: Indonesia is a country that contains great economic potential, and that hasn’t gone unnoticed to the part of the global community. Now, how do you find Indonesia's macroeconomic stability in global market? What are emerging strengths that explain structural economic, macroeconomic growth?

MR. KANG: As Changyong mentioned in his opening remarks, the global economic environment has become more challenging, reflecting U.S. monetary policy normalization, a stronger U.S. dollar, and higher international oil prices. And these developments generally have affected emerging markets including Indonesia and other countries in the region. The Indonesian rupiah has declined by about 11 percent against the U.S. dollar. But other countries including the advanced economies such as New Zealand and Australia have also seen their currencies fall by as much as 9 percent. So, Indonesia is not exceptional in that regard.

Despite this turbulence, the economic fundamentals in Indonesia remain sound, with low public debt at about 30 percent of GDP, continued robust growth expected to remain above five percent this year and next, inflation remaining within the target band, ample international reserves of over $115 billion, and a fairly robust financial system with a healthy capital ratio above 22 percent.

Moreover, the Indonesian authorities have reacted appropriately to these external pressures by pursuing policies that prioritize stability. This includes a tightening of monetary policy by raising the policy rate by 150 basis points since May, targeting a lower fiscal deficit, and allowing the exchange rate to adjust in line with market conditions.

In addition, it is important to remember that Indonesia has taken important reforms in recent years by adopting inflation targeting, a fiscal rule, and Basel III standards, as well as opening up its FDI regime. We support these measures as they will help to safeguard macro and financial stability. But in addition, Indonesia has the capacity to boost potential growth over the medium term. We just recently issued a book titled Realizing Indonesia’s Economic Potential where we lay out the case for a comprehensive package of structural and fiscal reforms that can lift growth over the medium term. This includes a medium-term revenue strategy that aims to raise additional revenue of about 5 percent of GDP which can be used to finance higher spending on infrastructure and on social areas such as education, health and job services. Combined with comprehensive structural reforms in the labor and product markets, this will help to stimulate private investment and activity.

These two combined reforms have the capacity to lift potential growth in Indonesia by as much one percent over the medium term. So, to sum up and to repeat the key message, Indonesia can be confident as it remains resilient but at the same time it must be vigilant and adapt quickly and flexibly to changing macroeconomic conditions by pursuing sound macro policies and vigorous structural reforms.

QUESTIONER 1: Mr. Rhee just said that even in unilateral agreements Asian countries should promote openness more. Here people also talk about fixing and reforming the global trading system. I wonder from a supply-chain standpoint how Asian countries could get involved, contribute or even influence this process. Governor Yi said yesterday that China's monetary policy remains neutral, and in your report I understand that China may stimulate the economy again and then slow down the deleveraging process. I wonder on what conditions do you think it is necessary to reverse that course and to stimulate again.

QUESTIONER 2: I have got a couple of questions focusing on the Philippines and so how are the Philippines planning on paying back their debt given that the U.S. interest rates are rising, and the dollar is getting stronger and how are they trying to fight inflation? People can't afford basics such as rice or fuel anymore.

QUESTIONER 3: Indonesia and Singapore yesterday signed an agreement for a 10-billion-dollar swap line. Do you think that could trigger more of these bilateral agreements between different Asian economies and if that happens how will it impact IMF's role in lending to these countries and their relationship with these countries? I also have another question. You mentioned rather broadly on how central banks, the policy makers need to be alert to the global changing environment. Are there any specific changes that any of the countries or the policy makers in Asia need to be thinking about more so than others?

MR. RODLAUER: China's economy has experienced some slowdown already earlier this year. That slowdown was somehow expected because it reflects the progressive adjustment of financial conditions due to deleveraging and the strengthening of financial supervision, reining in shadow banking. We expected that, and, as Mr. Kang said, this was welcome. So financial conditions in China have tightened because of that. Second, we have seen local governments in the course of this year profoundly change their investment policies. In fact, local governments in China have fallen way short of their annual investment program. So, these two things combined have slowed the economy.

On top of that we have some external shocks. Rising trade tensions, emerging market stress, and exit from unconventional monetary policy. So, these things together probably imparted some stronger drag on the economy, and in that context, we have seen adaptation of monetary policies in China—the 100-basis point reduction of reserve requirements. But when the governor says that the policy remains neutral, what he means probably—although I can't really speak for him—is that financial conditions overall remain on a tightening bias. They just have taken their foot off the brakes a little bit because the combined forces of financial adjustment, local government slowdown, and external shocks were really exerting more of a drag.

Overall, I think your second question is whether it’s time to throw out or to stop the adjustment and reform process? I think very clearly that the answer is “no”—and the IMF and the authorities themselves have said this. There is absolutely no reason to throw out the deleveraging effort. I think the deleveraging effort has to continue and is continuing particularly on the regulatory side. You have seen the financial regulations and the asset markets and the shadow banking, that continues to happen. And by the same token policies have to be adjusted every day, every week to the overall conditions, and I think that is what we are seeing now.

MR. RHEE: As for your question about the multilateralism and the global trading system, I think basically I want to repeat what MD mentioned. Fix it not break it because many Asian economies have benefitted from this global trade system and multilateralism, and also as I mentioned, our study shows that there is still large room for Asia to gain from opening. So, if the trade tension between the U.S. and China escalated, Asia will be heavily affected because of many Asian countries are exposed to both China and the United States, but by opening more, even unilaterally, and further developing regional supply chains, many Asian countries can actually gain. That is our point. So rather than retreat from multilateralism and trade, Asia should go forward and show by example the benefit from trade.

And, another issue is that the existing trade regime could not have anticipated all the technological changes we’re seeing. Asianscan contribute to improve and fix the current trade system by incorporating the new issues.

And as for your question about the bilateral swap with India and Indonesia and Singapore, I think we welcome it because we are thinking about the safety net on three different levels: individual countries’ own efforts, including sound macroeconomic policies and reserve levels. Also, regional—that is a safety net including bilateral swaps across countries as well as regional swap arrangements such as CMIM. And finally, the global safety net, which is the IMF.

These three things can be complementary. That is why we are emphasizing governance reform of the IMF and having enough ammunition to combat a global shock. But also, it can be complemented by regional as well as individual safety nets, and this bilateral swap between Indonesia and Singapore I think is a good way of strengthening the regional safety net.

And let me turn now to the question of what kind of new policies Asian policymakers should be thinking of, different from others. I want to say that although Asia's relative posture is much sounder compared with other emerging economies, it shares large pressures at this moment. So do they have to rely on some policy responses such as capital controls or import restrictions?

I’d say that given Asia’s stronger fundamentals, policymakers in the region don’t need seem desperate by relying on these sorts of policies. Especially during the capital inflow period there was much academic evidence that some of these measures can have an impact, but there is less evidence of their efficacy during outflow periods.

Given this, I think Asian policymakers have to rely on more fundamental responses, focusing on sound macroeconomic policies instead of relying on other steps that could make them look desperate. So, Asian policy makers need to be confident.

MR. KANG: As for the question on the Philippines, I think there were two parts. One was on the capacity to repay external debt as interest rates rise and second on steps to fight inflation. Overall, I think the debt repayment capacity in the Philippines remains strong. If you look at some of the numbers, public debt as a share of GDP is relatively low at about 40 percent. External debt as a share of GDP is even lower at 20 percent. The current account deficit has increased on the back of higher oil prices and import demand but at a 1.5 percent deficit, it still remains manageable.

Moreover, reserves at about $80 billion represent seven months of import coverage and about four times the size of short term external debt falling due. But perhaps most importantly, growth remains robust. We are projecting growth to be at 6.5 percent this year and to rise further to 6.7 percent the following, next year.

ONLINE QUESTIONER: Deputy Managing Director Mr. Furusawa said that the BoJ will likely take a back seat when the economy faces a downturn as Japan was already doing quite a lot on monetary policy. Does the IMF think it is almost time for BOJ to start normalizing policy? If not, how can Japan prepare to ramp up stimulus when needed.

MR. BREKK: So, let me first mention that we concluded the 2018 Article IV consultation mission in Japan last week, on October the 4th, and that Managing Director Christine Lagarde gave a press conference, which you can now find on, as along with the concluding statement. So, we have a fairly recent, comprehensive assessment of Japan if you want to look at that.

On our question: do you think it’s time for the BOJ to consider exiting from the easing policy? The short answer is no. Maybe that’s too short, so let me elaborate a little bit. We think it’s too early to talk about normalization of monetary policy in Japan. Reaching the inflation target is a central objective of Abenomics, and it’s one that is likely to take a prolonged period of time. This is what we have learned since Abenomics started six years ago. Given that, it is very important to ensure that the easy monetary policy stance can be sustainable. And that is why we support the Bank of Japan’s yield curve control framework, introduced in September 2016, and which put monetary policy on a more sustainable footing. The focus now is on how can you make it even more sustainable? And in that regard, the changes in the monetary policy framework introduced in July, which included a bit more flexibility in long-term interest rates and also included, importantly, forward guidance on interest rates, was a step in the right direction.

There are further steps that could be taken to further boost inflation expectations, such as moving toward a more standard form of inflation targeting framework, including publication of BOJ staff interest rate projections, etc.

Let me make one final point, which is that monetary policy cannot do it alone. What is needed to reach Japan’s reflation objectives is a comprehensive and mutually supportive package of fiscal, monetary, and structural reform policies.

ONLINE QUESTIONER: What impact would the recent devaluation of the rupee have on the Indian economy and what does it tell us about the status of the Indian economy?

MR. KANG: On the question on rupee depreciation, I think it’s still too early to make a full assessment of its economic impact, but it appears so far that the impact looks to be limited. Growth remains fairly robust, at 8 percent in the most recent April-to-June quarter, and is expected to accelerate from 7.3 percent this year to 7.4 percent next year. On exports, for the first five months of the fiscal year, exports in US dollar terms have risen by about 16 percent. It will take same time to see the impact of the depreciation on exports, but a weaker rupee has the benefit of improving competitiveness, especially as other countries are also allowing their exchange rates to adjust.

ONLINE QUESTIONER 1: Do you think it’s correct for Japan to push ahead with the GST increase next year?

QUESTIONER 2: On the debt issue, your colleagues a couple of days ago highlighted the growth in global debt. Can you talk a little bit about that and which countries in your own particular region are especially vulnerable on that issue?

MR. BREKK: That is an important question. Now, the government has reaffirmed its commitment to go ahead with the consumption tax increase in October of 2019. And from our perspective, this will bring in much needed revenue. The important thing when doing this will be to implement a temporary set of mitigating measures so that you make sure that fiscal policy remains supportive of reflection and growth under Abenomics. And more specifically, to that end, we have recommended maintaining a neutral fiscal stance in 2019 and 2020 so that when the consumption tax increase comes into effect, the temporary measures would support consumption and achieve a more even path for GDP. It will also be important for its effectiveness that the government communicate this policy very clearly. That is going ahead, and I think that’s what we’re seeing.

Over the medium term, final point, beyond the 2019 consumption tax increase, we support a gradual fiscal consolidation of about half a percent of GDP per year. But this should be in the context of a well-specified and credible medium-term fiscal framework. And on the consumption tax specifically, we are suggesting a continued gradual increase, steady increase, until the rate reaches at least 15 percent, and to combine this with a reform of government healthcare and pension spending. This approach, we think, will help protect medium-term growth while putting the debt on a sustainable path. Thank you.

MR. RHEE: Let me take the question on which country is vulnerable on account of debt accumulation. The IMF is not a credit rating agency, so I do not want to discuss individual countries and their vulnerabilities. But on the other hand, the problem of debt accumulation, emphasized in our Fiscal Monitor by Vitor Gaspar a few days ago, is one that affects all regions—Asia is not an exception. In many advanced economies, after the global financial crisis, public debt increased quite a lot. One difference in Asia is that there was also a sharp run-up in private debt. So, the nature of the debt accumulation is different, but still after the global financial crisis, it’s true that in Asia, leverage and debt levels have increased.

At the same time, I think what we are worried about in Asia is the speed of accumulation, which is quite rapid in some cases. So they have good buffers, and if you consider their asset side, which Vitor emphasized, Asia looks good. But the rapid accumulation of debt nonetheless raises the concern that there could be some risk of misinvestment—efficiency may have been a problem, so it eventually may backfire later. So, these are the kinds of issues that Asia has to be concerned about.

QUESTIONER: I was just wondering the trade tensions between United States and China. It’s no doubt we’re going to have short term impact, but if we look at long term, do you think it will promote regional integration from Asia and Pacific Asia if the companies shift supply chain from let’s say United States to Asian countries. So actually, it could be opportunity for Asian countries for development. Maybe it could promote like an ASEAN currency or monetary or economically, it’s going to be integration opportunity for the ASEAN Pacific region. Thank you.

QUESTIONER: I’m just wondering how you see the most recent stock market falls and some rapid movements in the currency market affecting Asian economies. I know that we shouldn’t focus too much on short term market moves, but the declines have been pretty significant and there are some concerns that this could be a deeper adjustment, so just trying to get a sense of how you feel about potential impact on the Asian economy.

MR. RHEE: For the second question first, I think it would be risky to comment on the recent volatile movement of stock prices, but in my opinion, this really shows very well how the global economy is integrated. Now, the US stock market falls and the next day, Asian stock markets fall by four or five percent, and this has a spillback again to U.S. markets, whether this is because of the global financial market tightening, whether it’s due to the fear of the trade tensions, all of these things. These kinds of spillovers and spillbacks are one reason why we’re concerned that current pressures could persist unless problems are resolved quickly. I don’t know what will be the end result. Many countries have buffers that they can use to react. So, we’ll see how it goes, but no one can be free from surge shocks.

And that will lead into the first question that you asked. I take it your question to ask whether there can be a winner if there is a tension between the U.S. and China, there can be trade diversion even in the short term, medium term, whether there can be a winner and not just losers. And whether they really promote some kind of regional integration.

So theoretically, yes, in the short term as shown in some of the graphs in our study. For example, China does not import US soybeans and thus now they are importing more from Latin America, so in the short term, there can be winners and losers depending on the supply chain.

But our simulation really shows that this direct trade impact is quite small compared with other impacts such as on business confidence and financial markets. So yes, probably companies may try to develop new supply chains, but will these really be able to compensate for today’s lost trading relationships, including those between the US and China? I’m very doubtful. So, I think overall, as our MD has said, there will be no winners from global trade tensions. I think that’s quite an accurate assessment.

QUESTIONER: My question is, could you elaborate what [inaudible] is faced by southeast Asian economies in the short term considering we trade a lot with China and also part of the supply chain with China. And also, what are your policy recommendations? Thank you.

MR. RHEE: I think in the opening remarks, I mentioned three things. Global financial market tightening, which means the dollar appreciation, and the other is the trade tension, and the third one is rising oil prices. So, in the short term, I think that high oil prices have a large impact in this region, in front of other things. But what we are worrying about is the combination of all three. Asia has strong buffers, but smart policies and management will be needed to withstand these combined shocks.

So, I think if you ask me what is my best advice, Asia is moving fast because fundamentals are very good. The shock is from the outside. The headwinds are coming. So, what is the best policy? Probably it would be going slower to make things safer. Now I know that many Asian economies are facing elections and many political agendas, but because of that, if you want to keep on going too fast while the headwinds are coming, you may make a mistake. So, I think my first advice, given that the headwinds are coming from the outside, maybe be a little cautious and maybe be more conservative. You are growing faster than the others.

MS. YAN: Thank you very much Changyong and thank you very much for coming today. This concludes our press conference. You can get the hard copies of Changyong’s remarks in the Press Center. And we also encourage you to attend our other regions’ press conferences in the afternoon. Thank you. Have a nice day.

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