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Transcript of the Press Conference on Asia Pacific
October 13, 2017
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IMF Communications Department
MEDIA RELATIONS
PRESS OFFICER: Ting Yan tyan@imf.org
Phone: +1 202 623-7100 Email: MEDIA@IMF.org
PARTICIPANTS:
Changyong RHEE, Director, Asia and Pacific Dept
Markus RODLAUER, Deputy Director, Asia and Pacific Dept
Odd Per BREKK, Deputy Director, Asia and Pacific Dept
Kenneth KANG, Deputy Director, Asia and Pacific Dept
Ting YAN,Communications Officer, Communications Dept
MS. YAN: Good morning everyone and good evening to those who are watching us online in Asia. Welcome to this press conference on the IMF's Asia and Pacific Regional Economic Outlook Update. My name is Ting Yan, Press Officer at the IMF. Here with me today are Mr. Changyong Rhee, Director of Asia and Pacific Department of the IMF, Mr. Markus Rodlauder, Deputy Director, Mr. Odd Per Brekk, Deputy Director and Mr. Ken Kang, Deputy Director.
You may have seen the report which is entitled, “Making the Most of the Upswing.” Mr. Changyong Rhee will tell you more about this in his opening remarks and then we'll take your questions after that. With this, let me turn to Changyong.
MR. RHEE: Thank you, Ting. Good morning and thanks for coming. My comments today will be based on the Asia and Pacific Economic Outlook Update. Let's start with the key messages. First, as our REO (Regional Economic Outlook) presentation made clear, the global recovery is quite broad based and Asia continues to the main growth engine of the world. Region’s economic output is projected to grow by 5.6 percent in 2017 and 5.5 percent in 2018, which is 0.1 percent higher than expected in our April report. Actually, Asia's contribution to the global growth as of now is about 63 percent of the whole global economy. And among them, China alone can account for 34 percent, and India accounts for about 13 percent of the whole global economic growth. So, India and China alone account for close to 50 percent of the global economic growth and Asia as a whole, accounts for 63. So, that means Asia remains as the main engine of the growth.
This time what is a little bit unique is that one of the key drivers of the growth in Asia is export. Not only to the advanced economies because the economic growth in advanced economies is also picking up, but the intraregional trade is also increasing. That has caused a quite virtuous cycle. Together with export growth and investment, consumption is increasing so domestic demand is increasing together with export growth.
But second, it is a little bit premature to judge how long this upswing will last in the Asia region. Unlike U.S. and Europe which just started long awaited recovery, Asia has maintained a higher growth for a while and its growth rate is more likely to moderate due to several downside risks including tightening of global financial conditions, geopolitical risk and many others. So, we'll discuss how long this recovery upswings will last in Asia.
Third, the reason in the region faces important medium-term challenges and vulnerabilities including high leverages, rising inequality, slow growth is due to aging and low productivity growth. So, it's not a time for complacency even though the growth momentum is broad based worldwide.
And finally, the region’s favorable tailwind, at least in the short term, provide a window of opportunity for structure reform to tackle the medium-term challenges that I just mentioned and policy makers should not waste this opportunity. With that, let's go into more details of the economic outlook.
We revised our growth forecasts for most of the countries relative to our April forecast. In China, growth projections were revised up to 6.8 percent in 2017. This revision reflects stronger growth momentum in the first half of this year. Key factors have been the pickup in producer prices after the years of deflation, which in turn, boosted corporate profit. We also increased China's medium-term growth projections as we expect that the authorities can and will maintain a sufficiently expansionary macro policy mix to meet their policy target of doubling 2010 GDP by 2020. However, as this expansion policies come at the cost of further large increase in debt, it also implies that there is more downside risk in the medium-term due to this rapid credit expansion.
In Japan, growth is forecasted at 1.5 percent in 2017 well above their potential growth rate. Japan sustained above potential growth rate for six consecutive quarters through the first half of 2017, underpinned by strong external demand, fiscal support and higher consumption. Still, medium-term fiscal consolidation is needed. So, an important challenge for Japan is how to achieve medium-term fiscal consolidation without undermining current growth momentum.
In India, growth rate in fiscal year 2017, was revised downward to 6.7 percent so it is a kind of exception for our revision for most of our other countries. Growth slowed in recent quarters, held back primarily by structural weakness in the corporate and banking sectors as well as transitory shocks from the November currency exchange initiative and the July Goods and Service Tax reform rollout. But still, I want to emphasize that this 6.7 percent growth rate which was the downward revision but is still very high growth rate compared to most other countries, and we expect India to return gradually to its medium-term growth path. And the recent high frequent data suggest the economy started to rebound already.
Korea is recovering as business investment has picked up. Growth rate was revised up to 3 percent despite increasing geopolitical tensions. In Australia, growth in 2017 was revised downward mostly because weather related temporary disruptions. In New Zealand, growth was revised upward driven by restocking and the supportive fiscal policy.
Growth in ASEAN countries is expected to accelerate to five percent in 2017. There are lots of trade among ASEAN. The high export and the high investment are important contributing factors.
After a deceleration in growth in 2016, in most small states and Pacific Island countries, activity is expected to rebound in 2017 with the recovery from the natural disasters which hit in several larger countries in the Pacific Islands, and the global expansion.
Summing up, as I mentioned, that Asia maintains as a key engine of growth, and the growth momentum is quite high. So, in some sense, we remain in a sweet spot. But the question is whether, given that Asia has maintained higher growth rate, how long this recovery and pick up will last. That is the question, unlike Europe and U.S., we just started recovery. And the output gap in Asia is quite close. So, given the conditions, how long the recovery will last is a key question. We think that in the short term the risk is balanced. On the upside, the recent strong performance in Europe and the U.S. has a potential that the growth rate might be higher than we expected, and that can increase Asia's exports to those regions and that provides an upside potential.
On the downside, even though currently capital inflow to the region has remained quite strong but we cannot exclude the possibility that capital outflow can accelerate together with unexpected and more normalization of advanced economies’ monetary policy. If this capital outflow could be sudden then it can have a large disruptive effect in Asian economy considering its current high level of leverages. On escalation of geopolitical tensions, especially in Korean Peninsula, could also be an important, you know, risk to the region. And also, there is some evidence that the current increase on Asian export could lose steam once the tech cycle peaks, and the pent-up demand for new mobile is met.
There is similar evidence that, you know, there are many factors which make us believe that the current trade expansion in the global economy has many transitory factors, such commodity price increase and inventory cycles.
But let's move on to the medium-term challenges, Asia also face, quite a serious secular headwinds in the medium-term from population aging, lag in productivity and growing inequality.
In our April presentation we emphasized that there is a risk that Asia can become old before becoming rich, at the time of the peak of their aging -- you know, in aging, the level of income in Asian countries is quite low, and that can cause many fiscal issues down the road, when aging problem becomes more aggravated.
Asia also has experienced a significant productivity growth slowdown since the global financial crisis. Since the early 1990s, the region has also witnessed rising income inequality which is a break from its own remarkable past of equitable growth resulting in high levels of inequality, particularly in large Asian emerging economies.
So, overall, I think in our policy recommendations, focus on two things, one is, how to maintain the short-term growth momentum in Asia, but at the same time, how to mobilize and rely on the structural reform to make growth more inclusive and build resilience in the medium term.
So, more in details, for monetary policy, subdued inflation in Asia provides scope for monetary policies to remain accommodative in most of Asian countries, however, we must distinguish two different set of countries in Asia currently, because of different inflation dynamics.
In those countries for which inflation has been below the inflation target for a long time, such as Korea and Thailand, the important consideration is the risk of de-anchoring inflation expectation. And in Japan where inflation expectations are already anchored at around zero, the challenge is to re-anchor its expectation at the targeted level of 2 percent. In those countries where inflations are low, you know, it's better to maintain the more expansionary monetary policy for a while.
On the other hand, there are several Asian emerging economies and developing countries where inflation is relatively low compared by historic standard, but they have a very high credit growth. China is a very good example. And in those countries the low interest rates which is maintained quite a while can exacerbate financial stability risk and the monetary policy has to pay attention to the financial stability also.
Therefore, financial sector policies including macroprudential policies should be tightened for those countries to mitigate financial risks in the context of easy monetary and financial conditions globally.
Exchange rate flexibility should continue to be the main shock absorber in Asian market economy, if certain capital outflow happens. And regarding the fiscal policy we believe that the countries that have fiscal space should be used then to support structural reforms which I'll describe later, such as labor market reforms. In countries, there is less fiscal space, their current conjuncture is a very good opportunity to build fiscal buffers.
As for the structural reform, I think, as I mentioned, and to address medium-term challenge that Asia is facing, actually Asia should rely on structural reform rather than, you know, monetary and fiscal policy. But what should be the structural policy in general is very hard to generalized, because each has a quite different need at this moment.
So, I think probably you may have some time to discuss from your Q&As what are the specific structural reforms for each country. But overall if I generalize it, how to strengthen the resilience through the financial market reform and banking sector reform, how to rein in credit expansion for many countries is one issue.
The second issue is that how to -- for many Asian countries how to avoid the middle-income trap by investing in more humans and it's through the labor market reform, especially considering the automation and the many, you know, technical changes, how to address labor market issues is very important.
And also, for many countries, I think they use less buffers after the global financial crisis how to mobilize the domestic revenue to boost up their fiscal buffers is very important fiscal reform agenda. But what should work for individual country structural reform has to be country specific, which we can discuss later.
So, overall I'm very glad to report to you that Asia remains as an engine of growth. Relative terms, Asia's contribution to growth is going down slightly because the other region is also picking up, but the recovery of other region, broad-based recovery is increasing Asian's export, and that has a very virtual circle within the region and in the world.
So, for in the short term, I think the outlook seems to be very positive. On the other hand, behind this, you know, rosy picture, there is still headwinds waiting for us through population growth rate, or population aging problem, and lower productivity. And this is a good time for Asia policymakers to use this window of opportunities to address the medium-term challenges that we will face soon. Thanks very much.
MS. YAN: Thank you very much, Changyong. Now we can take your questions. Please identify yourself and keep your questions brief.
QUESTIONER: As mentioned by Madame Lagarde, this round of global economic upswing is broad-based. What role will the Asia-Pacific Region play? At the moment, in particular U.S. dollar remains relatively weak so far this year. How do you assess the risk appetite in the region? And regarding China, there has been discussion that yuan pricing of oil is coming, so what is your observation of the internalization of renminbi, as this month marks the one-year anniversary of renminbi inclusion in the SDR basket. Thank you.
MS. YAN: Let's take one more.
QUESTIONER: You have spoken about more labor sector reforms in India, but we've have the “Skill India” campaign in the country, but the problem which we face is of jobless growth, and the automation is taking over a lot of jobs, even while we have over 1 million people entering the labor force every year. So, what is the IMF's view on this? Thank you.
QUESTIONER: In terms of what kinds of structural reforms you would like in India to take? And I have one question on Bangladesh which is having a huge deficit problem in terms of Rohingya refugees, what impact do you think this refugee problem would have on Bangladesh economy? Thank you.
MR. RHEE: Okay. I will answer to the first question about Asia's contribution to current recovery, and then I will ask my colleagues to address the India questions, the India and Bangladesh questions.
As I mentioned in the beginning, you know, Asia still remains as the engine of global growth. It has remained, you know, for a while in the last five, six years. For example, like last year in 2016, Asia's growth account for about 60 or 70 percent of global growth. For now, relative speaking -- relative terms, its contribution slightly decrease to 63 percent, but if you think about 63, which is more than half of the global growth is -- account for by Asia, especially China, India. This year, Japan's growth is quite high, and that also contribute to the growth.
And the fact that the relative contribution is slightly decreasing, we have taken in a positive sense, because in the last couple of years, other emerging economies and advanced economies growth was quite weak. Asia had to lead the global growth alone, in (inaudible) sense, but now, together with the recovery of the advanced economies, especially Europe and the U.S., and together there are many commodity exporters -- you know, exporters' growth is all slightly picking up.
So, together with that, you know, Asia, and the other regions can actually mutually influence each other to have a more positive growth rate in the short term.
So the first message I want to say is that Asia remains as the engine of growth, and the growth rate remains as high. But as I mentioned I think, how it is going to be resilient and watched with a focus, should be more the medium term, because unlike other regions, because we start from high growth rate, is more natural for us to have a little bit lower growth rate. I mean, we are expecting the Asia growth rate, how we will moderate, China technically.
So that real challenge is, how to make this moderation, this period to be more gradual, and Asia can maintain this growth momentum in the medium term, and that is why we brought up the -- why the structural reform is very important.
Having said that; let me ask Marcus to address the renminbi.
MR. RODLAUER: The RMB's inclusion in the SDR basket was a big step, a milestone for the Fund, and for the global economy. It was a big step in the internationalization of the renminbi, and also, more broadly, in the integration of the Chinese economy into the global financial system. This is very important for us, as the process for making sure that China feels at home in the international monetary system, and feels at home in the IMF, is continuing.
Given Chinese importance in the global economy there is no doubt in my mind that RMB internationalization will continue over the medium term. It will not be a straight line, because like everything else in economics, there will be ups and downs, and we have over the past year, perhaps, witnessed a bit of flattening out of the process, but assuming that China's rebalancing effort continues successfully, the policies to shift from investment to consumption, from old industries to services, and to make growth less reliant on debt.
If those reforms continue, there is no doubt in our mind that renminbi internationalization will take care of itself, and will continue up and up.
MR. KANG: I'll take the questions on India together, and then turn to the question on Bangladesh. As Changyong mentioned, the favorable outlook for Asia, including for India, provides an important opportunity to push forward with difficult reforms, and here we would highlight the three policy priorities in the area of structural reforms.
First, it's to address the corporate and banking sector weaknesses, by accelerating the resolution of nonperforming loans, rebuilding the capital buffers for the public-sector banks, and enhancing banks' debt recovery mechanisms. A second would be to continue with the fiscal consolidation through revenue measures, as well as further reductions in subsidies.
And lastly, it's to maintain the strong momentum for structural reforms in addressing the infrastructure gaps, improving the efficiency of labor and product markets as well as further agricultural reforms.
On the question about, specifically on labor market reforms, here I would point to two areas. One is on to reforming the labor and product market regulations, in order to create a more favorable environment for investment and employment. There is a need to reduce the number of labor laws which currently number around 250 across the central and the state level.
And the second area is to focus on closing the gender gap, to boost the employment opportunities for women in India. Here, the Article IV last year had done some research showing how improvements in infrastructure can be one important way to facilitate the entry of women into the labor force. But in addition, there is a need to strengthening the implementation of specific gender regulations, as well as to invest more in gender specific training and education.
On the question on the Bangladesh -- yes, it's reported that there are about 500,000 refugees who have entered into Bangladesh. At this stage, it's too early to conduct a proper assessment of the economic impact, and we are in close consultations with the authorities, and we stand ready to provide assistance when and if needed.
MS. YAN: Thank you. Let's take a few more questions. Here in the second row.
QUESTIONER: Question on Japanese inflation. So, you said inflation is expected to rise gradually but remain below target in your report. So, how long do you think it would take to achieve the 2 percent target inflation in Japan and what is a main driver to lower down the pressure in Japan?
QUESTIONER: As the biggest economy in ASEAN the growth in Indonesia is modest. It's not as we people in Indonesia expected. One of the reasons is private sector tends to (inaudible) in the last couple of years, even this year. So, my question is why the public consumption in Indonesia hasn't picked up significantly yet. What it takes from the parties such as government, banks to bring the private sector more optimistic? Thanks.
QUESTIONER: Two more questions on China. First, in the report you recommended gradual withdraw on money through monetary and fiscal policies. I want the reasoning if you can elaborate on this? We can't understand the monetary side, and the fiscal side you are saying that fiscal policy should only be used on structural reform high risk.
Second one is SOE reforms, state-owned enterprises reforms. Madame Lagarde also mentioned this yesterday. But in some cases we are seeing the combined SOE is even bigger and more dominant than before, and also we are seeing that some technology giants investing in these companies. I want your comments on this please.
MR. BREKK: So, on Japanese inflation and how we see the outlook for achieving the two percent target. Now, headline inflation reached .7 percent in August and core inflation .2 percent, so we're seeing some modest uptick in price pressures. And also inflation expectations have edged up lately.
In our projections, as you can see in the publication that is available, the expected inflation of .4 percent in 2017 supported by higher energy prices, slowly building wage price pressures, and a narrowing output gap, and significant reforms to reduce duality and to engender a stronger focus on nominal wages versus job security would be needed to generate stronger wage related pressures. Although, we see low unemployment for Japan, but for this to feed through to wages there needs to be reform in the labor market.
Against this background, we advise that the Bank of Japan's accommodative monetary policy stays accommodative. We have welcomed the new monetary policy framework introduced in September last year. By deemphasizing qualitative targets or focusing on interested target, and it puts monetary policy on a more sustainable footing. So, we think this is the right approach given the situation.
But it's very important in the case of Japan not to focus just on one policy. So, I think the main message is that the full package of policies are needed: fiscal, monetary and structural policies working together. And these have to be mutually reinforcing policies.
On that basis, in our medium-term projections we have inflation continue to edge up to something like 1-1.5 percent over the medium term.
MR. KANG: On the question on the outlook in policies for Indonesia our view is that Indonesian economy continues to perform well. We are forecasting growth to pick up to 5.3 percent next year from 5.2 percent this year. And inflation remains manageable, well within the target band.
In terms of the key priorities for strengthening growth and making it more inclusive I would point to two areas. First, there's a need to push further on fiscal reforms, particularly on tax revenue. Tax revenue as a share of GDP in Indonesia is around 10 percent which is low by compared to other regions. And there's a need to strengthen that in order to create scope for the government's ambitious agenda, for addressing the infrastructure gap and raising social spending.
The second area is on structural reforms to improve the overall business environment through further liberalization of the FDI regime, streamlining complex regulations, as well as steps to boost employment, especially for the youth. By some estimates, youth unemployment in Indonesia ranges between 20 to 30 percent. So, through increases to education, rationalization of labor regulations, as well as steps to boost more formal employment would strengthen job opportunities in Indonesia.
MR. RODLAUER: On the macro policies. Growth in China is very strong right now, so clearly there's no need for expansionary fiscal monetary stimulus in the economy. China's fiscal deficit is very high. As you know, our measure of the fiscal deficit, including local governments and other things is about 12 percent of GDP, last in 2016 and '17. That needs to come down over the medium term.
We are not arguing for an immediate adjustment there, but in the fiscal -- in China, really the more important thing is the composition of spending and of tax policy. There's a lot of scope and need to use fiscal spending to rebalance the economy from investment towards consumption, and also for the tax system to become a lot more rebalancing supportive. And here, in particular, China spends relatively little on social support, so shifting here spending also from investment to social support is important.
On the SOE reform that you have mentioned. It's true that the footprint of Chinese state-owned enterprises has increased a lot since the global financial crisis. The assets of state-owned enterprises were around 120 percent of GDP just before the global financial crisis, and this has now gone up to around 200 percent of GDP.
And we did some analysis of that in our last Article IV report where you see that the profits of state-owned enterprises are substantially weaker than in the private sector. In particular, if you also account all the subsidies and support from the state that they are receiving.
And, on top of that, the biggest problem of China, as we all know, is the high debt, corporate debt, and a lot of this corporate debt is concentrated in the state-owned enterprise sector. So, this is a key issue for China. The government is very focused on that. There's a lot of measures that have been done. Our view is that this can go deeper and should go faster, and therefore, this SOE reform will be a key topic in the next few years if China wants to be successful in rebalancing its economy while continuing to grow relatively fast.
MS. YAN: Let's take more questions.
QUESTIONER: IMF program extended fund facility is, you know, implemented in Mongolia. Any specific suggestions or things to tell the government that -- we're just forming our government and our finance minister has not been appointed yet by the Parliament. Anything that would, you know, take the new Parliament in the right path?
QUESTIONER: You had mentioned the point of normalization during your original opening remarks. Which countries do you think are the most vulnerable in Asia? Why? And what do you think they need to do about it? Thank you.
QUESTIONER: You mentioned a lot of challenge that Asia Pacific area facing in a mid- term-- the population aging, growing inequality. Which one is the most critical one we should pay attention to? That's my first question.
And my second question is what should China's role to be in this upswing of Asia you mentioned.
MR. RHEE: I will ask Markus to answer the Mongolia issues, but let me first, you know, discuss which country is more vulnerable when the normalizing starts. IMF is not a credit agency, so we cannot say which countries -- we cannot mention the ranking of vulnerability, as you know.
Overall, we can say that there has been a huge increase in credit and we know that China's credit expansion is rapid, but it's not just for China. If you look at many of Asia’s frontier and developing economies, credit has expanded quite rapidly after the global financial crisis.
One other qualitative change is that in several of the advanced Asian economies now the household debt is also starting to increase. Yes, it's from the very low level, but household sector debt is also starting to increase. So, one interesting aspect is that even though the public sector debt in Asia, you know, there are some exceptions, but remains, you know, stable.
But private sector debt, corporate debt, household debt has increased and increasing quite rapidly. So, that means that, you know, when the normalization happens, when global interest rate increase we are not expecting, you know, another round of crisis in Asia in the short term. Because, you know, Asia has become much more resilient.
But increase of this interest rate can have a very negative impact on their domestic demand, investment, and, you know, consumption. And then also, together with the right increase of liquidity, in many countries bank balance sheet doesn't have much buffers. They need more capital.
So, you know, together with that, what we are worrying about is this normalization can have some negative impact on the growth prospect of Asia through the, you know, tightening and rising interest rate and other things. So, if you ask which country's more vulnerable, in general, countries which has committed large debt which has weak balance sheet will be mostly affected.
As for the challenges, I think they're very difficult to prioritize which challenge is most important. Broadly speaking, there are several advanced Asian economies which already experience rapid aging. And for those countries Japan is a great example to see what's going to happen in the future, and they have to adjust not only the structural policies, but also think about their, you know, how to adjust the macroeconomic policy, especially monetary policy to avoid so called new mediocre in the medium term.
Especially the labor market issues and if many Asian--- you know, growth rate is going down and many females in Asia doesn't want to get married, and this is a, you know, kind of collective suicide because the growth rate goes down. So, how to address this female labor participation, labor market issues. That becomes more important for these advanced economies.
But on the other hand, for middle income and frontier economies, infrastructure is very important. How to, you know, secure the infrastructure investments. You know, structural reform addressing this rapid credit expansion is a very key issue. So, what role should China play?
I think definitely China's growth itself provide ample opportunity for Asia to maintain, you know, its growth for the last ten years. I think China was the main reason for Asia's -- one of the main reasons how Asia maintains its high growth rate. Together with that now China is in the face of the rebalancing of its economy, rising middle income, you know, class coming on.
So, you know, together with that how do, you know, regional integration with China and other countries this will be a very important task. And if China opens its market more to its neighbors in Asia, to the world, that would really boost up the, you know, regional as well as the global growth rate. And the recent effort for China's economy to increase the investment neighbors' growth through the One Belt One Road initiative, Belt Road initiative. That's a really positive development for the region too.
MR. RODLAUER: On Mongolia, the program started in April and has made a very good start. Actually, you've seen the growth numbers. Growth is up. The balance of payments has stabilized and the fiscal also. The budget is doing quite well, on the revenue side particularly.
Now, with the recent change of government there has been some interruption in the reform process, obviously, as the new government was being formed. We understand that a new government is now in place. We have had initial discussions with the prime minister. You have seen the reports in the press. That was very encouraging because he expressed strong support for the program. So that, I think, also was a good restart of our engagement.
If there's one key message we would give to the new authorities is that a good start has been made, but by far the end is far down the road. Some of these improvements we have seen in the economy are because of external factors, strong global growth, exports are doing well, (inaudible) to China, prices of commodities. These can be temporary, but more importantly the problems in Mongolia are deep.
This is exactly why we have a three year program, an EFF arrangement with Mongolia. So, there's no time now to be complacent. In the opposite, we need to get going again and keep implementing the program. The authorities are here this week. We will have discussions with them tomorrow and over the weakened, and we hope that on the basis of that we can very soon field a mission that will visit Ulaanbaatar and Mongolia to reassess the economy. It's now half a year since the start of the program, and go forward together.
MS. YAN: This concludes our press conference. Thank you very much for your time and interest. Have a nice day.
