Transcript of Asia Pacific Department April 2024 Press Briefing

IMF News, April 18, 2024

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• Published: April 18, 2024

Growth

• Regional outturns and revisions
  • Growth for the region reached 5 percent in 2023, much stronger than a growth of 3.9 percent in 2022.
  • The 2023 outturn was 0.4 percentage points higher than what was projected in the October 2023 Regional Economic Outlook.
  • The region is projected to grow by 4.5 percent in 2024, an upward revision of 0.3 percentage points relative to October.
  • The region is projected to grow by 4.3 percent in 2025.
  • With this, Asia would contribute about 60 percent of global growth.
• Drivers of growth (by country group)
  • China and India: investment expected to contribute disproportionately to growth, much of it public, especially in India.
  • Emerging Asia (outside China and India): robust private consumption will remain the main growth engine.
  • Some advanced economies (e.g., Korea): positive impulse from exports (including strong global demand for high end semiconductors); domestic demand to strengthen only gradually.

Inflation and Monetary Policy

• Regional inflation dynamics and groupings
  • Group 1 (inflation still above target): Korea, Australia, New Zealand — persistent price pressures from services.
  • Group 2 (headline and core inflation contained): most Asian emerging markets and Japan.
  • Group 3 (low inflation): China and Thailand — owed to falling commodity prices and weak demand.
• Outlook and policy guidance
  • Expectation that inflation will converge to central bank targets, requiring a differentiated policy approach:
  • "Tighter for longer" stance where inflation is elevated.
  • Accommodative macroeconomic policies where there is sizable slack.
  • U.S. monetary policy impacts:
  • IMF staff analysis shows U.S. interest rates have a strong and immediate impact on Asian financial conditions and exchange rates.
  • Recommendation: Asian central banks should focus on domestic inflation and avoid making decisions overly dependent on anticipated Federal Reserve moves; following the Fed too closely could undermine domestic price stability.
• Exchange rates and intervention views
  • Many Asian currencies have depreciated, largely reflecting interest rate differentials with the U.S.
  • On the Japanese yen:
  • The yen has depreciated by about 9 percent against the U.S. dollar so far this year (speaker’s assessment).
  • Japanese authorities are committed to a flexible exchange rate regime; G7 reaffirmation of commitment to a market-determined exchange rate was noted.
  • Guidance to authorities: allow exchange rates to move to act as shock absorbers while focusing monetary policy on domestic inflation pressures.

China: Performance, Risks, and Policy Implications

• Recent data and assessment
  • China's GDP in the first quarter of 2024 grew by 5.3 percent year-on-year.
  • The Q1 outturn was higher than staff projections (staff projection cited as 4.6 percent) and higher than market projections.
  • Other high-frequency indicators (manufacturing and PMI services in March) were reported as "quite strong".
  • The property sector remains subdued; inflation turned negative in late 2023 and early 2024 but returned to positive in February (March CPI cited as 0.1 percent in baseline remarks).
• Spillovers and channels
  • A more protracted slowdown in China would negatively affect the region through multiple channels:
  • Lower Chinese export prices (observed in H2 2023) can pressure profit margins of competitors and reduce export volumes for countries producing similar goods (e.g., Vietnam and Korea).
  • IMF past analysis cited: a one percentage point increase in Chinese growth has a 0.3 percentage point effect on growth in other countries in the region over the medium term.
  • Upside channel: robust, well-targeted policy support in China (for example, measures addressing stresses in the property sector) can restore consumer confidence and boost domestic demand.
• Policy advice for China
  • Distinguish support that boosts domestic demand (e.g., addressing property sector stresses, strengthening social safety nets) from measures that primarily boost supply capacity (which could reinforce deflationary pressures).
  • Address misallocation risks: scale back industrial policies that distort competitive neutrality, and accelerate SOE reform to prevent prolonged support for unprofitable SOEs.

Trade, Shipping Disruptions, and Geoeconomic Risks

• Red Sea and shipping impacts
  • Attacks on cargo ships in the Red Sea forced rerouting of vessels between Asia and Europe, driving up container prices and shipping costs.
  • Shipping disruptions are particularly detrimental for Pacific Island countries that depend heavily on imports and are poorly connected to global shipping networks.
• Geoeconomic fragmentation
  • Rapid implementation of trade restrictions in Asia and elsewhere poses a large risk; Asia has benefited substantially from trade integration, making geoeconomic fragmentation a major downside risk.

Fiscal Policy and Debt Sustainability

• Regional fiscal assessment and recommendations
  • Governments should focus on consolidation to curb the rise in public debt and rebuild fiscal buffers.
  • Forecasts show debt ratios would stabilize for most economies on current fiscal plans, provided governments underpin these plans with concrete policies and follow through.
  • Even with stabilization, debt would remain significantly higher than before the Pandemic.
• Growth-friendly consolidation strategy
  • Priority on revenue mobilization: collect more revenue and streamline expenditure rather than across-the-board expenditure cuts that would harm growth.
  • Reducing debt service costs would free up budgetary space for development needs, social safety nets, and climate mitigation/adaptation.

Country Highlights and Specific Figures

• India
  • Registered strong growth; IMF projects 6.8 percent for FY ‘24, ‘25.
  • Drivers: private consumption and public investment (CapEx in infrastructure); some recent uptick in private investment.
  • Inflation about 4.7 percent (noted as "close to the mid target of 4 percent").
  • Downside risks: volatile global commodity prices (notably oil), food price shocks, weather-related shocks, and geoeconomic fragmentation.
  • Policy priority: invest in education and health to equip a growing young labor force (about 15 million people added to the labor force every year).
• Sri Lanka
  • Program outcomes/indicators cited:
  • Real GDP expanded by 3 percent year on year in the second half of 2023.
  • March inflation was 0.9 percent versus a 70 percent peak in September 2022.
  • Reserves increased by 2.5 billion in 2023.
  • Primary balance reached a surplus of 0.6 percent of GDP in 2023.
  • Caveat: negotiations on debt restructuring (official and private creditors) continue; progress with official creditors described as encouraging, private creditor discussions ongoing.
  • Ongoing priorities: fiscal consolidation, reserve rebuilding, structural reforms including governance and anti-corruption.
• Vietnam
  • Projected growth "close to 6 percent in 2024" as a rebound from a challenging 2023.
  • Medium-term growth expectation: about 6.5 percent.
  • Drivers: relatively strong external demand and supportive policy stance; need to improve policy mix and business environment to realize potential.
• Bangladesh
  • Program context: hit by multiple shocks; emphasis on monetary tightening to tackle high inflation.
  • Policy recommendation highlighted: transition to a more flexible exchange rate regime to build external resilience and reserves.
• Korea
  • Export impulse expected from strong global demand for high end semiconductors.
  • Exchange rate moves: volatility noted but "limited currency mismatches and manageable pass through to inflation" reduce macro balance-sheet risks.
  • Monetary policy guidance: focus on domestic inflation (which remains above target in some economies), maintain a tight stance where appropriate.
• Nepal and low-income countries
  • Concern highlighted: some low-income countries allocate more to debt repayment than capital expenditure, risking crowding out of capital spending.
  • Recommendation: pursue growth-friendly fiscal consolidation with emphasis on revenue mobilization (reduce exemptions, improve tax efficiency) rather than large cuts to capital spending.

Near-term shocks and quantified effects

• Example provided from IMF Research Department:
  • A 10 percent increase in oil prices would weigh down global output by 0.15 percent in the following year and increase global inflation by about 0.4 percentage points.
  • Implication: oil importers in the region (e.g., Nepal) would experience larger adverse impacts from oil price rises; shipping route disruptions (e.g., Red Sea) raise shipping costs and affect trade-dependent countries.

Events and Next Steps

• Regional Economic Outlook launch
  • The Regional Economic Outlook for Asia and Pacific will be launched on April 30th in Singapore.

Transcript of Asia Pacific Department April 2024 Press Briefing — IMF Communications Department, April 18, 2024

References

• Australia and the IMF
• Bangladesh and the IMF
• India and the IMF
• Japan and the IMF
• Nepal and the IMF
• New Zealand and the IMF
• Republic of Korea and the IMF
• Singapore and the IMF
• Sri Lanka and the IMF
• Vietnam and the IMF
• IMF Policy Advice -- A Factsheet
• Transcripts
• PRESS CENTER
• https://www.imf.org/en/home