Transcript of the Press Conference on Asia Pacific
IMF News, October 14, 2017
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- Published: October 14, 2017
Key messages and regional outlook
- Global recovery is "quite broad based" and Asia "continues to [be] the main growth engine of the world."
- Region’s economic output projections:
- 5.6 percent in 2017
- 5.5 percent in 2018
- Revision: 0.1 percent higher than expected in the April report
- Asia's contribution to global growth:
- "about 63 percent of the whole global economy"
- China: "34 percent"
- India: "about 13 percent"
- "India and China alone account for close to 50 percent of the global economic growth"
- Drivers of the current upswing:
- Export growth (including rising intraregional trade)
- Investment
- Rising domestic demand and consumption
- Short-term window of opportunity:
- Favorable tailwinds provide scope to implement structural reforms to address medium-term challenges.
Country-specific assessments and projections
- China
- Growth projection revised up to 6.8 percent in 2017.
- Factors: pickup in producer prices, boosted corporate profit, stronger first-half momentum.
- Medium-term growth projection increased assuming a sufficiently expansionary macro policy mix to meet the target of doubling 2010 GDP by 2020.
- Risks: further large increase in debt due to expansionary policies; corporate debt concentrated in the state-owned enterprise sector.
- Fiscal context: IMF measure of fiscal deficit (including local governments and other items) "about 12 percent of GDP, last in 2016 and '17."
- SOE footprint: assets rose from "around 120 percent of GDP" pre-global financial crisis to "around 200 percent of GDP" currently; SOE profits weaker than private sector and receive substantial state support.
- Japan
- Growth forecast: 1.5 percent in 2017, "well above their potential growth rate."
- Japan sustained above-potential growth for six consecutive quarters through the first half of 2017.
- Inflation and labor:
- Headline inflation reached .7 percent in August; core inflation .2 percent.
- Expected inflation: .4 percent in 2017 in IMF projections.
- Medium-term projection: inflation to edge up to "something like 1-1.5 percent" over the medium term.
- Challenge: re-anchor inflation expectations toward 2 percent; labor market duality and wage dynamics need structural reform.
- Policy: continued accommodative Bank of Japan stance; coordinated fiscal, monetary and structural policies; medium-term fiscal consolidation required without undermining growth.
- India
- Growth in fiscal year 2017 revised downward to 6.7 percent.
- Reasons for slowdown: structural weakness in corporate and banking sectors; transitory shocks from the November currency exchange initiative and the July Goods and Service Tax reform rollout.
- Outlook: expected to return gradually to medium-term growth path; recent high-frequency data suggest rebound already underway.
- Structural priorities:
- Resolve nonperforming loans; rebuild capital buffers in public-sector banks; enhance debt recovery mechanisms.
- Fiscal consolidation via revenue measures and subsidy reductions.
- Address infrastructure gaps, labor and product market efficiency, and agricultural reforms.
- Labor market: reduce around 250 labor laws across central and state levels; close gender employment gap; invest in gender-specific training and infrastructure to boost female labor participation.
- Korea
- Growth revised up to 3 percent, supported by pickup in business investment despite geopolitical tensions.
- Australia
- 2017 growth revised downward, largely due to weather-related temporary disruptions.
- New Zealand
- 2017 growth revised upward, driven by restocking and supportive fiscal policy.
- ASEAN
- Growth expected to accelerate to five percent in 2017.
- High intra-ASEAN trade, export strength and investment are key contributors.
- Small states and Pacific Island countries
- After 2016 deceleration, activity expected to rebound in 2017 with recovery from natural disasters and global expansion.
- Mongolia
- IMF Extended Fund Facility started in April; early program outcomes positive (growth up, balance of payments stabilized, fiscal improvements).
- Program: three-year EFF; authorities urged to maintain momentum and continue implementation despite government transitions.
- Indonesia
- IMF forecast: growth to pick up to 5.3 percent next year from 5.2 percent this year.
- Inflation manageable within target band.
- Policy priorities:
- Fiscal reform to boost tax revenue (tax revenue as a share of GDP "around 10 percent").
- Structural reforms: liberalize FDI regime, streamline regulations, improve youth employment (youth unemployment estimates range "between 20 to 30 percent"), boost formal employment and education.
- Bangladesh
- Reported about 500,000 refugees (Rohingya) have entered Bangladesh; "too early to conduct a proper assessment of the economic impact"; IMF in close consultation with authorities and stands ready to assist if needed.
Risks and vulnerabilities
- Downside risks to the Asian upswing include:
- Tightening of global financial conditions and potential sudden capital outflows.
- Escalation of geopolitical tensions (notably on the Korean Peninsula).
- Potential peak and slowdown in the tech cycle that has supported exports (e.g., mobile demand).
- Transitory nature of global trade expansion drivers (commodity price increases, inventory cycles).
- Rising leverage and balance-sheet vulnerabilities:
- Increase in private sector debt (corporate and household) across many economies.
- Household debt rising in several advanced Asian economies from low levels.
- Bank balance sheets with limited buffers in some cases; need for stronger capital positions.
- Medium-term secular headwinds:
- Population aging (risk Asia becomes "old before becoming rich" in some cases).
- Productivity slowdown since the global financial crisis.
- Rising income inequality, notably in large Asian emerging economies.
Monetary, fiscal, and financial policy guidance
- Monetary policy
- Subdued inflation in Asia provides scope for accommodative monetary policy in most countries, but countries differ:
- Where inflation has been below target long-term (e.g., Korea, Thailand): avoid de-anchoring inflation expectations.
- Japan: re-anchor inflation expectations toward 2 percent.
- In economies with low inflation but very high credit growth (e.g., China): low interest rates can exacerbate financial stability risks; monetary policy should consider financial stability.
- Financial sector policy
- Strengthen macroprudential measures and tighten financial sector policies where credit growth is rapid.
- Maintain exchange rate flexibility as the main shock absorber in the event of capital outflows.
- Fiscal policy
- Countries with fiscal space should support structural reforms (e.g., labor market reforms).
- Countries with limited fiscal space should use the favorable conjuncture to rebuild fiscal buffers.
- In China specifically: focus on composition of fiscal policy to rebalance from investment toward consumption and social spending rather than immediate stimulus; medium-term reduction of fiscal deficit needed.
- Structural reform emphasis (country-specific)
- Financial market and banking sector reforms to rein in credit expansion.
- Labor market reforms, human capital investment and measures to address automation and labor-force entry.
- Fiscal reforms to mobilize domestic revenue and build fiscal buffers.
- SOE reform (China): accelerate and deepen reforms to reduce excessive state footprint and address corporate debt concentration.
Q&A highlights (selected)
- Renminbi internationalization
- RMB inclusion in the SDR was a "big step"; renminbi internationalization expected to continue over the medium term, but not in a straight line—depends on continued rebalancing (shift toward consumption, services, and less reliance on debt).
- Japan inflation timing and drivers
- Modest uptick in inflation; structural labor reforms (reducing duality, stronger nominal wage focus) needed for stronger wage pressures.
- Bank of Japan accommodative stance supported; combined fiscal/monetary/structural approach recommended.
- India structural reforms
- Priorities: resolve banking sector nonperforming loans, rebuild public bank capital, continue fiscal consolidation, address infrastructure and labor/product market inefficiencies, close gender employment gap.
- China macro policy stance
- Current growth strong, no need for expansionary stimulus; focus on fiscal composition, social spending, and rebalancing.
- SOE reform should go deeper and faster to support rebalancing while maintaining growth.
- Mongolia program message
- Good start under the EFF but reforms must continue; improvements may be partly driven by external factors, so sustained program implementation is critical.
- Vulnerability to normalization
- Countries with large private-sector debt and weak balance sheets are most at risk from normalizing global rates; Asia is more resilient than in past crises but vulnerabilities remain.
- Most critical medium-term challenges
- No single priority; varies by country:
- Advanced economies: population aging and labor-market participation issues (including female participation).
- Middle-income/frontier economies: infrastructure needs, credit expansion control, and revenue mobilization.
- China’s role in the upswing
- China's growth and regional economic integration remain important for Asia; deeper market opening and regional investment (e.g., Belt and Road initiatives) can be positive for regional growth.
Transcript of the Press Conference on Asia Pacific, October 13, 2017 — IMF Communications Department