## Public Lecture on Global and Regional Economic Prospects by Naoyuki Shinohara, IMF's Deputy Managing Director

_IMF News, February 7, 2011_

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## Bibliographic details
- Published: February 7, 2011

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### Global and Asia outlook — key findings
- Global recovery to proceed but remain multi-speed with considerable downside risks.
- Advanced economies projected to expand by 2½ percent during 2011–12.
- Upward revision to October 2010 forecast mainly due to a U.S. fiscal package expected to boost growth by ½ percent in 2011.
- Japan: a package with a similar growth impact will sustain a moderate recovery in 2011.
- Emerging and developing economies expected to remain buoyant at 6½ percent.
- Asia led global recovery in 2010 with growth at about 8 percent; expansion expected to moderate to 6¾ percent in 2011.
- IMF petroleum price projection for 2011 is $90 per barrel, up from $79 per barrel in the October 2010 forecast.
- Downside risks in advanced economies include turbulence in sovereign debt markets, weak private and financial sector balance sheets, fiscal sustainability concerns, and weakness in real estate markets.
- Risks for emerging economies center on overheating, rapid rise of inflation pressures, and the possibility of a hard landing; high food price inflation beginning to feed into overall inflation.
- Emerging markets account for almost 40 percent of global consumption and more than two-thirds of global growth; a slowdown would seriously affect the global recovery.
- A one percentage point decline in U.S. and euro area domestic demand could subtract about 1/3 percentage points on average from GDP growth across smaller, more open ASEAN economies.
- Financial spillover risks to Asia are generally more manageable due to small overseas bank exposures, large gross official reserves, and relatively low government debt levels compared with other regions.

### Rebalancing growth — findings and constraints
- Rebalancing toward stronger domestic sources of growth is a major challenge; implications differ across countries.
- Consumption is not generally weak across Asia; China is an exception with a low or declining share of consumption in GDP.
- Factors behind China’s low consumption share: falling household income share in GDP and rising household saving rate due to precautionary motives and weak social safety nets.
- Investment-to-GDP ratios across the region are not generally low; however, investment patterns diverged:
  - Economies with large domestic demand bases (India, China): investment share dipped after the Asian crisis but has risen nearly continuously since 2000.
  - Economies with weaker domestic demand bases (Korea, Taiwan Province of China, Hong Kong, Singapore, leading ASEAN): investment share fell steadily after the Asian crisis.
- Decline in private investment share contributed to widening current account surpluses in parts of Asia.
- Two important factors holding back investment: financing constraints and shortfalls in infrastructure suppressing returns to private investment.
- Infrastructure complementarities: better infrastructure can lower transportation and energy costs, improve matching of resources to firms, and boost productivity; basic infrastructure provision in emerging Asia still lags (example given: electricity generating capacity per capita below Latin America levels).
- Financial development gaps: corporate bond markets and venture capital are underdeveloped in parts of the region, constraining financing channels especially for smaller and service-oriented firms.

### Capital inflows — dynamics and policy responses
- Capital flows to emerging Asia surged after the 2008–09 contraction; in some cases (including Indonesia) they surpassed pre-crisis highs.
- Composition shifting toward debt flows where local bond markets are sizable (e.g., Indonesia and Malaysia).
- Drivers: positive interest rate differentials, expectations of exchange rate appreciation, relatively sound fiscal positions, higher longer-term growth prospects, stronger policy fundamentals, and capital market deepening.
- Most countries accommodated inflows via a combination of currency appreciation and reserve accumulation:
  - India: abstained from intervention since end-2009, allowing exchange rate adjustment.
  - Indonesia and Thailand: intervention rapid; reserves are 30 and 40 percent above their pre-crisis levels, respectively.
- Asian policymakers effective at controlling money growth in response to reserve accumulation; low sensitivity of money supply growth to central bank foreign asset build-up.
- Policy options and considerations:
  - Greater exchange rate flexibility can buffer domestic monetary tightening and reduce imported easy global monetary conditions.
  - Flexible exchange rates reduce likelihood of domestic demand overheating and expectations of abrupt appreciations, dampening inflows.
  - Sterilization has worked so far, but central bank balance sheet structure and limited fixed income market depth may constrain further sterilization; introduction of new instruments (e.g., central bank paper where currently not possible) may be needed.
  - Macro-prudential measures can mitigate consequences of volatile inflows; measures taken in Asia have targeted banking leverage, short-term foreign capital inflows, property price inflation, and foreign currency exposures.
  - Market response to measures (Indonesia, Korea) was relatively mild when measures were narrowly targeted, phased in gradually, and well communicated.
  - Longer-term objective: improve local market absorption and channel inflows into productive, long-term investment by lowering restrictions on foreign investment in services, promoting public-private partnerships for infrastructure, and developing financial markets to broaden access to finance.

### Cambodia perspective — opportunities and priorities
- Two of Cambodia’s three main growth engines restarted in 2010: garment exports and tourism arrivals grew at about 10 and 20 percent, respectively in 2010.
- Construction activity remains sluggish; subdued imports of construction materials and sustained drop in real estate prices indicate lingering overhang from pre-crisis construction boom.
- Policy priorities: create additional engines of growth (e.g., agriculture and food processing), make growth more inclusive to benefit the rural poor.
- Global rebalancing and greater reliance in Asia on domestic demand present opportunities for Cambodia to diversify exports and benefit from rising regional demand for agricultural products, raw materials, and tourism.
- Cambodia already benefits from regional investment in textiles and could become a beneficiary of Chinese outsourcing amid rising regional wages.
- Government initiatives cited as timely: anti-corruption law (potentially improving tax collection and expanding fiscal space for public investment), renewed emphasis on agricultural development and rural infrastructure, and the recently adopted Rice Policy.
- Example of development impact: an irrigation project in Kampong Cham province financed from resources released by the IMF’s Multilateral Debt Relief Initiative (MDRI) improved villagers’ lives.
- IMF support: substantial technical assistance and resident advisors in Cambodia to strengthen financial system surveillance and supervision, public financial management reform, and tax policy and administration; ongoing dialogue through resident representative office and Washington-based teams.

### Policy recommendations and priorities
- For Asia overall:
  - Rebalance growth toward stronger domestic demand; country-specific strategies (boost consumption in some economies; promote private investment in others).
  - Mitigate infrastructure bottlenecks to raise returns to private investment.
  - Deepen financial markets (corporate bond markets, venture capital) to broaden financing channels.
  - Manage capital inflows through a mix of exchange rate flexibility, prudent intervention, enhanced sterilization tools, and targeted macro-prudential measures.
  - Communicate clearly on macro-prudential measures to limit adverse market perceptions.
  - Channel inflows into long-term productive investments by liberalizing suitable foreign investment restrictions and promoting public-private partnerships for infrastructure.
- For Cambodia:
  - Pursue policies to diversify growth (agriculture, food processing), improve inclusiveness (rural focus), address infrastructure bottlenecks, and strengthen competitiveness.
  - Implement anti-corruption and public financial management reforms to expand fiscal space for development spending.
  - Continue IMF-supported technical assistance in financial supervision, public financial management, and tax administration.

*Source: Public Lecture on Global and Regional Economic Prospects by Naoyuki Shinohara, IMF's Deputy Managing Director — February 7, 2011.*

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## References

- [Indonesia and the IMF](http://www.imf.org/external/country/IDN/index.htm)
- [Cambodia and the IMF](http://www.imf.org/external/country/KHM/index.htm)
- [Republic of Korea and the IMF](http://www.imf.org/external/country/KOR/index.htm)
- [Malaysia and the IMF](http://www.imf.org/external/country/MYS/index.htm)
- [United States and the IMF](http://www.imf.org/external/country/USA/index.htm)
- [People's Republic of China and the IMF](http://www.imf.org/external/country/CHN/index.htm)
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_Source: https://www.imf.org/en/news/articles/2015/09/28/04/53/sp020711_