Transcript of Asia and Pacific Department Press Briefing
IMF News, October 19, 2021
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- Published: October 19, 2021
Regional growth outlook
- The region's economic growth is downgraded by more than 1 percentage point compared to the April forecast to 6.5 percent in 2021.
- The region is expected to grow by 5.7 percent in 2022, 0.4 percentage point faster than projected in April.
- The downgrade for 2021 is the largest downward revision compared with any other region.
Differences across country groups and notable country projections
- Advanced Asian economies: forecast broadly unchanged for 2021 with upgrades in Korea and New Zealand and downgrades in Japan and Australia.
- Japan downgrade largely due to several extensions of state of emergency coping with spread of the delta virus.
- Korea upgrade reflects a stronger-than-expected recovery in high-tech exports.
- Emerging market and low-income countries: most of the region’s growth downgrade comes from these countries, led by India and ASEAN countries.
- India is projected to grow by 9.5 percent in 2021 after a sharp decline in 2020.
- ASEAN-5 (Indonesia, Malaysia, Philippines, Singapore and Thailand) face severe challenges from a resurgent virus and weakness in contact-intensive sectors.
- Tourism-dependent economies (Cambodia, Lao P.D.R., Thailand) face subdued outlooks.
- China: projected to grow by 8.0 percent in 2021, revised down from 8.4 percent projected in April; factors include spread of the delta virus and significant fiscal policy tightening. Tightening in the property sector is weighing on real estate investment and there are signs of stress for some developers.
- Pacific Island Countries: growth outlook downgraded, reflecting continued hit to tourism and constrained policy space.
- Mongolia: recovering from a deep contraction, supported by higher commodity prices (coal and copper); expected near 5.2 percent growth this year from around −5.0 percent in 2020 (as described in remarks).
Vaccination, pandemic dynamics, and medium-term scarring
- Slower vaccination in Asia is a key factor for the slowdown in 2021 growth momentum.
- Ironically, successful containment of the virus in 2020 contributed to slower vaccine rollouts in Asia.
- Divergence in prospects across countries, sectors, income, skill levels, age and gender will be the most important feature of the ongoing recovery. Output levels of developing countries compared with advanced countries are expected to remain below pre-pandemic trends in the coming years, reflecting differences in policy support and vaccine rollouts.
- Complementarity of policies: containment and vaccination are complementary; using both together can help re-open economies faster.
- Positive spillovers: significant positive spillover effects from neighboring countries’ vaccinations, supporting the need for more vaccine sharing. No single nation can fully recover until all countries are safe.
- Vaccination targets noted in discussion: vaccinate 40 percent of every country’s population by the end of this year, and 60 percent in next year (proposal referenced in remarks).
Risks to the outlook
- Evolving pandemic dynamics, including the possibility of COVID becoming endemic and lower vaccine efficacy against new variants.
- Rising inflation risks stemming from higher commodity prices, supply chain bottlenecks, and rising shipping costs.
- Increased risk of financial spillovers from U.S. monetary policy normalization if U.S. inflation pressures rise, potentially prompting earlier normalization.
- Inflation in Asia has been more subdued than in other regions so far, but risk is rising. Specific CPI mentions:
- Japan: inflation rate close to zero.
- China: CPI inflation around 1 percent.
- Korea: CPI inflation between two to three (percent).
Policy recommendations and priorities
- Health first: swift and broad vaccinations and equitable sharing of vaccines globally are critical.
- Fiscal: articulate credible medium-term fiscal frameworks to ensure debt sustainability while acknowledging the need to maintain accommodative policies in the short run where recoveries are fragile and inflation is under control.
- Monetary: balance rising inflation amid persistent slack; central banks should be prepared to act quickly if the recovery is faster than expected or if there is a tangible risk of rising inflation expectations.
- Financial stability: monitor emerging financial stability risks and take proactive action as needed, including macroprudential policies and measures to expedite resolution of debt overhangs ahead of policy normalization.
- Trade: trade liberalization can play an important role; reducing non-tariff barriers—significantly higher in Asia than in other regions—can help accelerate inclusive prosperity.
- Structural policies: accelerate digitalization and synchronized green public investment to lay foundations for an inclusive, green economic future.
- Use of IMF instruments: the IMF has used emergency lending facilities about $2 billion that can be used for vaccine purchase; the recent increase of special drawing rights (SDR) could help countries purchase vaccines, with Nepal mentioned as an example of using newly allocated SDR to buy vaccines.
Analytical chapters and thematic findings
- Chapter 1 (analytical): Vaccination dynamics—successful 2020 containment slowed vaccine rollout in Asia; vaccination complements containment; cross-border vaccination spillovers.
- Chapter 2 (analytical): Trade liberalization—reducing non-tariff barriers in Asia can accelerate inclusive prosperity.
- Chapter 3 (analytical): Evidence of strong positive spillovers from vaccinations across countries.
- Digitalization and CBDCs: Asia is at the frontline of digitalization, e-payments and CBDC experiments. Different countries pursue different objectives (e.g., China’s CBDC to reduce private payment platform monopolies and increase financial inclusion; Cambodia’s Bakong to increase payment efficiency and potentially de-dollarize). Lessons are evolving as multiple experiments continue.
Q&A highlights (selected)
- Inflation risks: current producer price increases in Asia have not fully transmitted to consumer prices; baseline expectation is inflation will return toward trend by mid next year, but uncertainty remains. Two concerns: (1) many Asian central banks have limited history/reputation with inflation targeting which could affect expectations anchoring; (2) U.S. inflation-driven earlier Fed normalization could have significant regional implications.
- Impact of U.S. monetary normalization: effects depend on underlying cause in the U.S. (demand-driven higher growth could boost Asian exports; supply-driven inflation with limited growth would be more negative). Higher U.S. rates could cause capital outflows, depreciation pressures, and higher domestic financing costs in Asia where leverage is higher than before.
- Supply chain disruptions and country examples: Vietnam experienced severe supply disruptions during a delta surge when vaccination rates were below 30 percent, affecting factories and global supply chains; Vietnam later increased vaccination to well above 60 percent and conditions improved.
- Vaccine sharing and IMF stance: IMF emphasizes vaccine sharing; highlighted that India and China, and Japan (donated 20 million doses and promised further 60 million), have contributed vaccines to other countries. IMF proposes the 40 percent by end-of-year and 60 percent next-year targets and supports members via lending and SDR allocations for vaccine purchases.
- CBDC experimentation: many Asian economies are experimenting with CBDCs and digital payment projects with varied objectives; it is early to draw definitive lessons but Asia’s frontline role offers opportunities to learn across pilots.
- Climate action in Asia: Asia includes many of the top emitters and many vulnerable countries; transition away from fossil fuels will be challenging and tech-dependent, but necessary to protect quality of life and safeguard export competitiveness as global regulation and carbon constraints evolve.
- Country-specific policy notes:
- Mongolia: use current favorable conditions (commodity prices, improved debt profile) to implement structural reforms, including banking sector reforms, to avoid recurring boom-and-bust cycles.
- Singapore: with vaccination rates well above 80 percent, Singapore is transitioning toward living with the pandemic and is an example for other countries; expected to grow about six percent this year (as characterized in remarks).
- Philippines: IMF cut 2021 growth forecast for the Philippines to 3.2 percent from 5.4 percent; vaccination (Philippines vaccination rate described as around 25 percent) is critical to recovery and to enable reopening and support of infrastructure-driven growth.
Transcript of Asia and Pacific Department Press Briefing, October 19, 2021 — IMF Communications Department