Transcript of Asia Pacific Regional Economic Outlook Press Conference

May 9, 2017


Changyong Rhee, Director of The Asia And Pacific Department

Ranil Salgado, Assistant Director of the Asia And Pacific Department

Geoffrey Heenan, Resident Representative in Singapore

Ting Yan, Communications Officer

MS. YAN: My name is Ting Yan. I’m with Communications Department of the IMF. Today we are here in Singapore, to launch the 2017 Regional Economic Outlook for Asia and Pacific Region. I guess you have a chance to look at our report. It’s titled ”Preparing for Choppy Seas”. Here with me today, in the middle is Mr. Changyong Rhee, Director of the Asia and Pacific Department of the IMF, and sitting right next to him is Mr. Ranil Salgado, Assistant Director of the Asia and Pacific Department, and to Changyong’s right is Mr. Geoffrey Heenan. He’s our IMF resident representative for Singapore. With that, let me turn over to Changyong for opening remarks and we’ll take your questions after that. Thank you.

MR. RHEE: Thank you, Ting. Good morning. It’s my great pleasure to be here in Singapore to launch our new publication, 2017 Asia and Pacific Regional Economic Outlook. The outlook covers the economic prospect and policy challenges in the region, but it also includes two analytical chapters, which is critical challenges faced by the region over the medium term. One is population aging and the other is limited productivity growth.

Let me first highlight the three main messages from the report. The outlook for the Asia-Pacific Region remains quite robust, the strongest in the world, and in fact Asia remains the growth champion of the world still. And this data point to a pickup in growth momentum. There are some upside risks to our near-term growth forecasts, such as additional stimulus in the United States and stronger growth in China. However, in general, the outlook is also crowded by significant downside risks, such as geopolitical risks, inward looking policies and rapid financial market tightening.

Over the medium term, as I just mentioned, Asia faces challenges including population aging and slowing productivity growth. Let me explain on this point before we turn to your questions. So let’s start with short term growth outlook. The recent growth momentum in large Asian economies remains particularly strong, reflecting sustained policy support in China and Japan. And you know, Asia depends heavily on exports, so U.S. growth is higher than we expected and growth of China and Japan is strong, so it has benefitting many Asian countries across the region. And forward looking indicators such as Purchasing Managers Index suggests continued strengths in early 2017 in Asia.

Against this backdrop, growth for the region is forecast to accelerate from 5.3 percent in 2016 to 5.5 percent in 2017 and 5.4 percent in 2018. Let’s go to the individual country cases. In China, as you know, first quarter GDP growth rate came higher than we expected at 6.9 percent, while recent tightening measures are likely to slow growth in the second half of the year, the strong first quarter outlook is a definitely upside risk to our current projection of 6.6 percent in 2017. I think there is room that our next forecast can be higher than we currently forecast. But not every news is good. In this higher growth than expected in China is definitely contributing to the Asia’s growth rate. Also, we think that uncertainty is also increasing because the credit growth is quite rapid in China.

In Japan, growth estimate is revised up to 1.2 percent, and thanks to the, you know, the delay of consumption tax and the higher than expected export performance of Japan. And next year, when consumption tax increase is implemented, we expect the growth rate can go down to 0.6 percent, to not to have a sharp decline, we strongly recommend them to have a gradual increase of consumption tax.

In India, the temporary disruption caused by the demonetization are expected to gradually dissipate in 2017, thus growth is projected to rebound to 7.2 percent and 7 percent in next two fiscal years, and India is definitely a fast growing emerging economy in the world at this moment.

Australia and New Zealand will maintain good gross momentum at around three percent, and Korea’s growth is somewhat subdued at 2.7 percent in this year. And growth in ASEAN 5 economies varies, reflecting the heterogeneity of these economies, but on average, the region should maintain high growth rate near five percent.

Frontier economies and small states are expected to rebound in general in 2017 and 2018, owing to better global trade and the recovery in commodity prices. The handout provides more detailed, you know, the growth forecast for other countries.

So next, let’s move on to the risks and medium term challenges. We usually emphasize downside risks but this year, we want to emphasize there is also upside potential too. While additional stimulus in the United States and the stronger growth in China definitely will, you know, provide support for the global economy and Asia in particular. But despite this upside potential, we still believe, still the outlook is also crowded by significant downside risks.

The downside risks are well known factors, it has been discussed quite a long time now. In the near term, continued tightening in global financial conditions probably following the normalization of U.S. monetary policy could trigger further capital outflows from the region, and you know, and then dollar appreciation. But luckily, I think so far, we haven’t seen any significant evidence that capital outflow started from the region. So capital outflow, in a respect, we have less concern than we expected.

But on the other hand, the strong dollar, and dollar appreciation can have a negative impact on the countires which have a large FX debt exposures, and in general, the higher interest rate can also have a negative impact on countries with high leverages. And we actually believe the highest downside risk, the largest downside risk is inward looking policies in major economies and the trade tension. And because Asia heavily rely on trade and the trade tension can definitely have significant impact on many Asian economies. Bumpier than expected transition in China, which is less likely now. And definitely, it has, can have large spillovers to Asia. And these are the kind of, you know, short term downside risks that we have been discussing in the last couple of years.

But overall, we believe this year, that the medium term growth challenges are more serious in Asia. The first one is aging problem in Asia. Many parts of Asia reap demographic dividends in the last decades, with the number working population growing faster than the number of dependents, and along with a very strong economic policy, this favorable demographic structure helped to propel Asia’s growth rate. But this dividend, it seems to be now ending in many Asian economies. That has many significant implications.

First, the speed of aging in Asia is exceptionally remarkable compared to the historical experience in Europe and the United States. For many Asian economies, per capita income, and the speed that, you know, the year that they required to become an aging society is less than 10 to 20 years, or on the other hand, U.S. and Europe, it took more than 30 and 50 years. So as a result, for many Asian countries, per capita income, relative to United States will be at much lower level than those reached by other advanced economies in the past at the stage when the working age population share begin to decline. In other words, many Asian countries risk growing old before they become rich. If I elaborate more, we actually estimate what will be the income level when the Asian countries reach the time when the working age population share begin to decline, and we compare, you know, the income level compared to the United States.

And in most of European countries and other advanced economies, by the time they reach the peak of working population, their income level is close to 70 to 80 percent of the United States income level in the past. But in Asia, except Singapore, Korea and Japan, most Asian countries, income level will much lower stages, when they, when they reach the peak. For example, China’s income level when, you know, the population aging reach their peak, is only 20 percent of the United States. And India, which will continue to grow, the income level when they reach the peak of aging population is about 30 to 40 percent of the U.S. GDP. And in Vietnam, it will be only ten percent of the United States.

So when you consider that this low level of the income, when they reach the, you know, aging peak, and this has a large implication how they can prepare the old age society, how they can build up the social safety net with this low income. And this must be a real challenge in the medium term.

So at this moment, we all know that Asia has quite a heterogeneous stages of aging. So, for example, we say Japan and Singapore, Korea is already old age society, but Indonesia, India has, you know, demographic dividend and still enjoy a younger population. But when you consider the rapid speed of aging, we believe that this problem, that being old before they become rich is a common phenomenon, irrespective of which stage they are in this population dynamics, and Asia policy maker has to really prepare for the near future that they become an older society.

And to make matters worse, productivity growth has slowed in Asia since, especially since the global financial crisis. And if any, you know, there is very little evidence for convergence toward the benchmark level of the United States. What I mean that is even though Asia countries, in terms of per capita income or income growth, we cut down our advanced economies quite rapidly. So there’s a convergence in income growth, income level. But on the other hand, if you look at the total factor productivity, Asia’s growth rate of the total factor productivity has not been higher than other advanced economies. So there is no evidence for the convergence in terms of productivity level, and especially this slowdown of the productivity growth is quite severe in the advanced economies in Asia also too.

So, and even when I looking forward, prospected productivity growth will remain low for some time is real. And, you know, considering the headwind from the aging population, definitely this will be the main challenge of the medium term growth prospect in Asia. So, with respect, with this in consideration, let’s move on to discuss the policy recommendation.

Asia is poised to remain the global growth leader into the future, but as in the past, securing this leading position will require continuing policy upgrades, vigilance against risks and reform to boost domestic demand and address growth bottlenecks. Appropriate demand support and structure reform are needed to reinforce growth momentum. Regarding monetary policy, it should generally remain accommodative, given that inflation is in general below target, and there is a slack in most Asian economies. However, there are some central banks, which should stand ready to raise policy rate and tighten macroprudential settings if inflation pressure increase or credit growth remain very high.

Fiscal policy should support and compliment structural reforms and external rebalancing where needed and when fiscal space is available. At the same time, countries with close output gaps or high debt levels should start rebuilding fiscal spaces focusing on growth friendly fiscal conservation measures. Structural reforms are needed to help rebalancing demand and supply, mitigate domestic and external vulnerabilities, increase economic efficiency and potential growth and foster more inclusive growth. Addressing vulnerability by strengthening buffers and policy framework will also help preserve financial ability. Exchange rate flexibility should generally remain the first line of defense against a sudden tightening in global financial conditions, or a shift toward protectionism in major trading partners.

More generally, preserving financial stability requires robust macroprudential framework including to mitigate system at risk associated with high corporate and household leverage and rising interest rate. Looking further ahead, it will be critical to deal with challenges from demographic transition and boost productivity. Given the rapid pace of demographic transition, policies aimed at protecting vulnerable elderly, raising labor force participation and prolonging strong growth (inaudible) should be a priority. Structural reform can help tackle these challenges, particularly in the area of labor market and pensions systems. Macroeconomic policies should adapt early on before aging problem sets in, particularly with a view to safeguarding the sustainability and protecting all priorities.

Okay, so in general, we believe that in the short term, Asian economic conditions are better than expected and policy makers should not waste this opportunity. Using this favorable environment, they have to focus more on the structural reform, this is a chance to accelerate the structural reform to prepare for the future. Thanks very much. Now, we will move to your questions.

MS. YAN: Thank you very much Changyong. Now we can open the floor for questions, and for those who are watching us online remotely, you’re also welcome to submit your questions via our press center.

QUESTIONER: I would like to find out, I mean what is your view that you talk about policy, continuing policy upgrades. India is coming up with initiatives and all that. How do you see that? How do you -- are that enough, or more should be done?

MR. SALGADO: As Changyong mentioned, India is one of the, or the large, the strongest growing large economy in the world, right. Its growth rates are in the seven to eight percent range. And this partly reflects many of the policy upgrades I think you are alluding to. We think the most critical of those is the work done to set up the implementation of the national goods and services tax. That’s a very good example of a policy upgrade that will help raise fiscal revenue, which is important in terms of the needed fiscal expenditures that India needs, both in terms of hard infrastructure, soft infrastructure, social spending et cetera.

But it’s beyond that. India has done substantial steps in other areas, liberalizing the investment environment as well as for foreign direct investment. I think the current Modi government is also focused on establishing policies that will lead to competition between states, which will improve economic policies in India as well.

They’ve also taken steps in terms of an area where we previously had some concerns which is kind of the buildup of non-performing assets. They’ve taken steps to, beginning the process of recognizing and then resolving those NPLs. That still remains a concern for us in terms of the process and that needs to continue. In the short run, there was also a little bit of a hiccup in the economy, due to what we call the currency exchange initiative. Changyong mentioned demonetization. We think that will have only a short run effect on the economy. We believe most of that effect is through as now the new cash has been issued. And that should help consumption pick up, again from a few quarters of below trend growth in that area. So overall, I think we see a very positive outlook for India. It’s been strong in the last few years, and we expect that to continue in the next few years.

MR. RHEE: You asked what is our view on the, on India’s reform effort compared to other countries. We have some studies, and India is definitely one of the countries which performed excellently in pursuing the reform. And we believe that is a major reason why India’s growth rate remains robust and is one of the highest among emerging economies.

QUESTIONER: You mentioned India’s aging population, whenever that happens, is going to be just 40 percent of the wealth that you see in U.S. or the earnings of the U.S., that’s a lot of concern, because you also talk about the aging people’s care and all of that. Can you elaborate on that, and how concerned are you about that? What can be done?

MR. RHEE: This is not just for India’s problem. I mean the reason why we are highlighting this is that even the higher growth rate in the region than other countries, compared with other countries, we believe that Asia’s growth leader in the current situation is better than other regions. So there is some risk there that we can be too complacent. If you look at the medium term growth, I think this aging problem is, can become a serious issue for many Asian economies including India and China and many others.

So, first of all, I think what we want to contribute is by making this problem more explicitly and giving a warning to the policy makers. As you mentioned, what Asia can do, I think at this moment, we have to look ahead. You know, we have cases of the problems because of aging in Japan, and now we are looking at Singapore is another example. Singapore already have you know aging problems and they are really trying to find the solution for it. So we can learn lessons from Japan and Singapore and Korea and many, and even other advanced economies to prepare for this aging problem.

For example, from Japan, we can, one lesson that we can learn is that instead of waiting until this problem becomes real serious, you have to think about what should be the proper monetary and fiscal policy in preparation for this, aging in the future. Second, definitely you have to think about how to protect old people so you need to prepare the fiscal space, and you may need more revenue mobilization, large enough to prepare for social safety net. And third, the productivity growth can offset this trend, so how to increase productivity is one of the other topics that’s important and how to make your old people to work harder, I mean work longer and how to make the female labor participation increase. This is another solution. And also probably Asia may have to be a little more open minded for the immigration policy too, you know, to offset this trend. So there are lots of other issues, but our key message is that instead of waiting too long, you may have to think about, even you are at the stage of enjoying demographic dividend as of now.

QUESTIONER: I have actually two questions. One is a bit broader scoped, but you briefly mentioned the debt situation in Asia. Can you -- well, elaborate on that one. And the second one goes to Ranil, you talked briefly about demonetization in India so now in hindsight, does this whole thing have any positive effect for India out of your perspective? Thank you.

MR. RHEE: Regarding debt situation, I think overall, let me first start with if you compare with Asia emerging economies and developing countries with other region overall, deby situation is better actually. So, and then let’s compare with a situation in 1990s when Asia has a financial crisis. The situation is much better now. So we are not saying that because of debt problem, we are seeing the immediate adjustment or financial market adjustment. It’s not that our point. Our point is that after the global financial crisis, many Asian countries also rely on credit expansion, so that debt level is going to continue to increase. That has many implication. In the short period because leverage is increasing quite rapidly, the quality of loans, and the quality of asset, quality of investment in question, especially when you look at the profit rate of many Asian corporates, the profit rate is, you know, quite low.

So if this trend continues, we can definitely see that this can be a risk, which is currently accumulating. Second, you know, when the interest rate goes up, this corporate debt in some countries, it’s in the household debt in other countries. The cost of funding will increase, and then this will definitely act as one of the main factors to slow down the growth. So if you ask me, depending on the countries, is the current debt situation, whether it’s the household debt, whether it’s corporate debt, is it a kind of factor that will trigger a crisis or adjustment, I think probably it’s not at that stages. But if you ask me whether this can be a significant factor which can, you know, slow down the Asian growth rate, yes, definitely it’s true.

And the third one is that, you know, given, we are saying that the risk is increasing, it’s better to actually address this issue, especially there are several countries where the credit expansion was quite rapid, and it’s better to control is as of now, to rather than waiting until too late.

MR. SALGADO: Sure. Regarding India and the demonetization issue, so we see three, I think, main benefits from what the country went through. One was in terms of bringing more of the economy towards the -- activities towards the formal economy. That has the additional benefit, which is the second point, of bringing more of the economy, potentially into the tax base. So therefore, it leads to the important goal of domestic revenue mobilization, which is needed in India to support other important expenditures for the economy.

And I think the third positive is in terms of financial access and inclusion. So this also encouraging Indians to, and poorer households, to open bank accounts and thereby it promotes financial inclusion, improving payment systems in India and all of this I think is promoting financial sector development and inclusion.

QUESTIONERI just wanted to ask regarding Macron’s victory in France, how significant is it for Asia, and does it give an indication that protectionism might not be the norm in advanced economies in the future?

MR. RHEE: As for the, if you had asked me this question three to six months ago, I probably, I don’t know, answer that I’m very seriously concerned on the possibility of the trade tension in the global economy. But now, I feel a little bit better, you know, for example like President Xi and President Trump, you know, called each other and they decide to have 100 days to discuss the trade issues and ideally hope that they can end up some solution which can increase global trade rather than reduce it.

And second, I think in the last week, I mean a couple of days ago, the French, the result of French election really shows it’s good news to the, you know, free open trade and globalization and reduce the uncertainties of the Eurozone. So I think it’s at this moment, I’m a little bit more, I hope and optimistic that these trade tensions will resolve without big tensions. But if trade tension intensifies, whatever the political reason in the future, I think that Asia is the region that will be affected most because of the supply chain and the Asia’s dependence on trade is quite significant. So at this moment, I’m cautiously optimistic.

MS. YAN: We received questions earlier online. In your original economic outlook document for Asia-Pacific, you have some large GDP growth downgrades for Brunei Darussalam. So what are the reasons behind these downgrades?

MR. SALGADO: So for Brunei, it’s primarily two reasons. The first one is adjustment to lower commodity prices, so relative to a few years ago, oil and gas prices have come down so the government has been following a process, an appropriate process of fiscal consolidation linked to the lower commodity prices. And that has led to government spending restraints and that’s one factor. And the second factor is related to more operational difficulties with, or production challenges associated with aging oil and gas fields in Brunei.

So we think though that growth will turn positive staring in 2018, for a number of reasons. One, mainly due to investments in the gas sector there, so we have major investments, and foreign direct investment into projects related to the gas fields. And this new gas field will subsequently then lead to additional production of gas going forward. We expect that to begin starting in 2019, so you’ll see substantial export and GDP growth related to that. Overall, we think the country is well positioned to absorb the drop in oil revenues with lower oil prices, and in particular, it has very substantial financial buffers that they had accumulated during those years of very high oil prices.

MS. YAN: Okay. We have a question here.

QUESTIONER: Yeah, I just wanted to clarify something. Changyong, you came out with this example of China, Vietnam and India in the income if the population gets older. And what is that, is that GDP per capita you’re referring to?

MR. RHEE: Yes.

QUESTIONER: Thank you.

MR. RHEE: It’s GDP per capita, we hand out and slide.

MR. SALGADO: Right, that purchasing power parity.

MS. YAN: So we have more questions online. This is a question on Sri Lanka. Do you think Sri Lanka should do more to bring down inflation and also do you think Sri Lanka’s debt repayment situation has improved?

MR. SALGADO: First regarding Sri Lanka and inflation, part of that reflects the drought in Sri Lanka, which hit agriculture and subsequently food prices. So Sri Lanka, the central bank has been tightening monetary policy more related to very strong credit growth. So we expect that as the, well, we hope that as the drought condition ease, that the increase in food prices will come down. Sri Lanka has also taken steps to increase imported foods to contain the rise in food price inflation. That along with steps by the central bank to restrain credit growth will allow inflation to come more towards target. In terms of the debt issues, that is partly reflecting our arrangement with --

MR. RHEE: Actually Sri Lanka is under our program, and the second review is well under, going very well. We’re going to have a board meeting soon so I think that will definitely help to enhance their debt sustainable situations.

MS. YAN: Do we have more questions here?

QUESTIONER: My question is on China, so how actually confident are you with, because as you mentioned, there is a bumpier-than-expected transition in China, which was a (inaudible) so actually how confident are you with China continuing (inaudible) region, given that how they might actually be say the U.S. China relations, or say the North Korea peninsula conflict may actually deteriorate? Thank you.

MR. RHEE: I think the geopolitical risk that you mentioned and also the trade tension between China and U.S. has many elements, other than economics, it’s also related politics. It’s very hard to forecast. So as I mentioned, as I explained before, I am cautiously optimistic that it will resolve peacefully and also with, you know, will resolve efficiently. But, so at this moment, it’s very hard to incorporate that tail risk. But without that tail risk, I think our view on China is very, you know, if you look at the first quarter growth number, the 6.9 percent is a lot higher than we expected. So we probably need to even upgrade our focus, which we just released in 6.6 percent, so definitely this is upside risk to many other Asian countries which has a strong supply chain, and you know, China growth is still important for many other Asian economies.

Having said that, why I mentioned that we have some concern is that when you look at the nature of the economic growth at this moment in China, you know, strong real estate market is one of the reasons for the higher growth, and if you look at credit expansion, that is still a lot higher than the even GDP growth rate. So this will definitely you know, ask many questions, how can you maintain the efficiency of the investment with this rapid credit growth, so it’s not just the level of the credit growth, but also whether, when, how this money will be invested, where this money goes on, so that’s one issue.

Second with this rapid credit growth, we are seeing that very complicated and complex interlinkage between the bank and non-banking sectors, and so that may you know, cause a more counterparty risk if some adjustment happens. So we are not saying that China will have immediate concern for the financial market adjustment. They have policy spaces, the authorities know this problem very well. So in the short term, we are not thinking this is a serious risk.

But on the other hand, you know, in the last couple of years, this rapid credit expansion definitely build up the risk, so even though the policy makers know this problem very well, you’d like to you know, address this issue. So I think it’s a medium term risk that you’re emphasizing.

MS. YAN: So we also have a question online:What do you think of yesterday’s announcement that Bangko Sentral Philipinas Deputy Governor Espenilla will succeed Governor Armando Tetangco when his term ends?

MR. RHEE: I probably a biased person to comment on because I know the governor to be very well personally and we are looking forward to having a very close collaboration with him and congratulate him for his senior appointment.

MS. YAN: Okay. We have one more question here.

QUESTIONER: Yeah, once again, back to India on GST. How do you see the implementation? Are they ready? I mean the sudden disruption caused by demonetization was pretty shocking for a certain level of society. And now here comes the GST. They are well prepared it seems. But do you think they can slowly roll it out? Are they ready? Is the IMF giving some advice to them?

MR. RHEE: We have been working very closely with them in preparing this introduction of GST. This is not an India specific issue actually. There are several countries who introduced GST recently, and then it requires, you mentioned, requires a lot of collaboration between the business sector and the government. So IT system has to be you know, well prepared and well implemented. So I wouldn’t say that this is an easy thing. If you look at the international evidence, definitely there is hiccups and down the road there is some adjustment. This just be an ongoing process. But I’m very confident because India has prepared for this GST introduction for quite a long, you know, a couple of years.

And you know, and also I think you have to think this GS tax, not just a fiscal policy. One of the biggest problems of the Indian economy in the past is a lack of integration. We talk about regional integration and integration to the global market. But if you look at the tax system, India has been really fragmented across province. So this GST, the value of this GST is integrating the Indian economy as a whole. And I think pretty much, once you see the gains, I think the resistance on the, on you know this GST from the business sector and others will much reduced after they seen the real gains. So based on the international evidence and based on the India government preparation in the last couple of years, we believe it’s going to be smooth.

MS. YAN: Thank you. And any more questions? If not, we are wrapping up here, and thank you very much for your time and interest in our REO report and we look forward to working with you closely. Thank you very much.

MR. RHEE: Thank you.

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