Transcript of Asia and Pacific Department Press Briefing
IMF News, October 13, 2022
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- Published: October 13, 2022
Regional growth outlook and shocks
- April WEO growth forecasts for Asia and Pacific downgraded by 0.9 percentage points in 2022 and 0.7 percentage points in 2023.
- Growth projected at 4.0 percent in 2022 and 4.3 percent in 2023 for Asia and Pacific.
- Region’s recent past average growth: 5.5 average growth over the previous two decades.
- Key materialized shocks:
- Significant tightening of global financial conditions raising government borrowing costs and depreciating Asia’s currencies.
- War in Ukraine provoking a sharp slowdown in Europe and keeping global commodity prices high and volatile.
- China’s uncharacteristic and sharp slowdown weakening regional and global momentum.
Inflation, monetary policy, and exchange rates
- Inflation dynamics:
- Asia saw more modest inflation in 2021; 2022 saw sharp volatility in global commodity markets after Russia’s invasion of Ukraine, putting additional pressure on headline inflation in the first half of 2022.
- Rising food prices drove headline inflation, particularly in Asian EMDEs; core inflation has also risen as output gaps close.
- Core inflation now exceeds central bank targets in most Asian economies.
- Monetary policy guidance:
- Advice for most of the region: monetary policy should continue tightening.
- Exceptions: China and Japan, where recovery has been weaker, slack remains substantial, inflation has not risen as sharply, and policy space exists.
- Baseline: inflation expected to have peaked by end-year.
- Risk: large exchange rate depreciations could lead to higher and more persistent inflation, requiring more monetary tightening.
- Exchange rates and trade:
- Many Asian currencies have depreciated sharply in 2022.
- Tightening of U.S. monetary policy widened interest rate differentials—a main factor driving depreciation across Asia.
- War in Ukraine contributed to deterioration of terms of trade for many countries in the region.
Fiscal policy, debt, and vulnerabilities
- Fiscal guidance:
- Fiscal consolidation should continue to support monetary policy stance and stabilize debt.
- Given limited fiscal space, interventions to mitigate global food and energy shocks on vulnerable households should be well targeted, temporary, and budget neutral to sustain consolidation.
- Debt dynamics and risks:
- Asia is now the largest debtor in the world besides being the biggest saver.
- Several countries are at high risk of debt distress.
- Public and private debt dynamics worsened following the pandemic because of slower growth, rising rates, and higher debt levels.
- Asia’s share of global debt rose from 25 percent pre-pandemic to 38 percent.
- Large depreciations and rising interest rates could trigger financial stress in countries with high leverage among non-financial corporates and households, unhedged balance sheets, and refinancing risks.
- If interest rates rise substantially, the fiscal balance needed to stabilize debt would increase, crowding out fiscal space for other priorities.
Fragmentation, trade, and integration
- Geo-economic fragmentation:
- Signs of growing geo-economic fragmentation are a concern.
- Asia and Pacific play a central role in global production and would suffer significant losses under sharp fragmentation scenarios that divide the world into separate trading blocs.
- The Regional Economic Outlook (launch on October 28) contains a chapter documenting potential losses from fragmentation scenarios.
- Regional integration:
- Inter-regional trade in Asia constitutes over half of total Asian trade.
- RCEP is welcomed as it demonstrates continued appetite for further regional integration and has the potential to promote trade, investment, and growth.
- Continued efforts at multilateral solutions, including through the WTO, remain important.
Country-specific points and forecasts
- China:
- Growth forecast revised to 3.2 percent for this year and 4.4 percent for next year.
- Main headwinds: zero-COVID strategy and continuing stress in the real estate sector, plus weak external demand.
- Recommended policy actions: find a safe exit from zero-COVID; comprehensive strategy to address real estate distress (including completion of presold houses and resolving property distress); provide more targeted fiscal support to boost consumption via improved social safety nets and targeted transfers; address medium-term productivity and labor force challenges.
- India:
- Forecasted growth next year: 6.1 percent.
- IMF view: 6.1 percent remains a bright spot globally; limited fiscal space constrains large-scale fiscal support; monetary policy likely to maintain a tightening bias given inflation; structural reforms and addressing scarring are key to mitigate slowdown risks.
- Bangladesh:
- Growth forecast this year: 7.2 percent; forecast for next year: 6 percent.
- Taka has depreciated by about 20 percent; reserves have gone down but remain at a comfortable level.
- Bangladesh has requested a program from the IMF composed of a regular UCT program and Resilience and Sustainability Trust program; negotiation mission to begin next week.
- Vietnam:
- First eight months growth: 8.8 percent.
- Growth forecast this year revised to 7 percent (instead of 6 percent in prior outlook); forecast for next year: 6.2 percent.
- Sources of growth: fiscal support, vaccination progress, strong export performance, manufacturing, and domestic consumption.
- Recent financial jitters noted; State Bank of Vietnam supported liquidity and communication; need to improve transparency in the financial sector and examine banking–property interlinkages.
- Indonesia:
- Projected real GDP growth for 2023: 5 percent.
- Challenges: risk from a steeper-than-expected global tightening cycle and China slowdown; commodity price declines could affect growth and the current account.
- Strengths: low public debt largely in local currency and strong policies and institutions.
- Nepal:
- Program with the IMF ongoing; post-Covid recovery continuing.
- Growth forecast: 4.2 percent this year.
- Reserves have declined but remain above six months of imports.
- Nepal Rastra Bank has raised interest rates; IMF supports maintaining a tightening bias and conservative implementation of measures; supports phase-out of import restrictions planned in October.
- Sri Lanka:
- IMF reached a staff-level agreement on a four-year EFF program on September 1.
- Initial disbursement requires IMF Board approval contingent on authorities taking prior actions and on reaching a solution on the debt situation.
- Sri Lanka’s debt is assessed as unsustainable at this stage.
- Two financing assurances needed for Board approval:
- Official bilateral creditors’ assurance to restore debt sustainability in the context of the program.
- Assurance that good faith efforts are underway to deal with private sector debt.
- Timeline for debt negotiations is uncertain and depends on creditors and complexity; IMF is working with World Bank, Asian Development Bank, and Asian Investment Bank to help close the financing gap and address longer-term growth problems.
- Sri Lanka remains a middle-income country; EFF is a regular IMF facility (non-concessional).
Policy recommendations and priorities
- Short-term:
- Continue monetary tightening where inflation and core inflation are above targets to anchor expectations.
- Implement targeted, temporary, and budget-neutral social support to shield vulnerable households from food and energy shocks where fiscal space is limited.
- Use macroprudential tools and strengthen financial sector transparency to limit financial stability risks from currency depreciations and rising rates.
- Medium-term:
- Address real economy scarring (education disruptions, labor market shifts) to prevent long-term human capital losses.
- Enhance productivity through structural reforms and digitalization; narrow digital divides and promote digital literacy (IMF programs such as Govtac support digitalization and government reform implementation).
- Reduce risk of geo-economic fragmentation by lowering trade policy uncertainty and rolling back damaging trade restrictions; pursue multilateral solutions.
- Strengthen debt transparency, debt management, and frameworks to handle sovereign and private debt distress.
Transcript: Asia and Pacific Department press briefing, October 13, 2022 (IMF Communications Department).