April 30, 2024
PRESS OFFICER: Huong Pinky Lan Vu
Phone: +1 202 623-7100Email: MEDIA@IMF.org
PARTICIPANTS:
Moderator:
HUONG (PINKY) LAN VU
Communications Officer
International Monetary Fund
Speaker:
KRISHNA SRINIVASAN
Director of the Asia and Pacific Department
International Monetary Fund
THOMAS HELBLING
Deputy Director of the Asia and Pacific Department
International Monetary Fund
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P R O C E E D I N G S
MS. VU: Good morning, everyone. Thank you for attending the IMF's press briefing on the release of the Regional Economic Outlook for Asia and Pacific. I'm Huong Lan (Pinky) Vu from the Communications Department, and joining me today are two speakers. The gentleman next to me, Krishna Srinivasan, Director of the Asia and Pacific Department, and the gentleman on my far left, Thomas Helbling, Deputy Director of the Asia and Pacific Department.
It's great to be back here in Singapore, in Asia, to launch this report and to see so many of you in person. We also have journalists joining from other countries in Asia and also from other parts of the world. A very warm welcome to all of you. The title of this Regional Economic Outlook is “Steady Growth Amid Diverging Prospects.” As we speak, the report, the blog, and the video of this report have been published on our website@imf.org.
I would encourage you to check it out and to start the briefing today. I would like to invite Krishna to give brief opening remarks and then we'll take the questions. Krishna, the floor is yours.
MR. SRINIVASAN: Thank you, Pinky. Good morning to everyone here. Let me begin by thanking our host, Singapore Training Institute, for hosting this press conference. Let me, instead of giving my normal opening remarks, I'd like to begin with some key messages from our Regional Economic Outlook.
Right, so the Asia Pacific region is marked by both resilient growth and rapid disinflation. The region remains inherently dynamic and will contribute over 60 percent of global growth this year, but it will slow down, growing 4.5 percent in 2024, after 5 percent in 2023. Drivers of growth are as diverse as the region, ranging from resilient domestic consumption in most ASEAN countries to strong public investment in China, and most notably in India, and to a sharp uptick in tourism in the Pacific island countries.
Disinflation has advanced throughout the region, albeit at different speeds. In some countries it remains above target, and that goes to Australia and New Zealand. In others, it is at or close to central bank targets, for example in emerging markets and in Japan, while in some there are risks of deflation, and that is, I'm talking about, Thailand and China. China is a source of both upside and downside risks to the macroeconomic outlook. Policies aimed at addressing stresses in the property sector and to boost domestic demand will help both China and the region, but sectoral policies contributing to excess capacity will hurt China and the region.
In the current context, Asian central banks should continue to focus on domestic price stability and avoid making policy decisions overly dependent on anticipated interest rate moves by the Federal Reserve. Asian countries are better placed to cope with exchange rate movements today, owing to fewer financial frictions and better macro-fundamentals and institutional frameworks, and should continue to allow the exchange rate to act as a buffer against shocks.
Policies to further reduce deficits and debt are an urgent priority, both to lessen the burden of higher debt levels and interest costs and to rebuild fiscal space needed to address medium-term structural challenges. Financial supervisors should continue to vigilantly monitor the buildup of risks associated with the passthrough of tighter monetary policies to corporate and household balance sheets. Industrial policies have been on the rise in Asia-Pacific and globally. They can lead to unintended consequences, such as trade distortions, which could reinforce geoeconomic fragmentation, a significant downside risk to the region and the globe.
Let me stop here and I'm happy to take your questions.
MS. VU: Thank you, Krishna. And we will now open the floor for your questions. For those in the room, if you would like to ask a question, please raise your hand, and wait for me to call on you. My colleagues will pass a microphone to you. And for those joining virtually, please raise your virtual hand and wait for me to call on you as well. Please turn on your camera when speaking. You also have an option to put your question in the chat and I will read it out loud for everybody here. When you speak, please identify yourself and your news organization. May I also please request you to keep your questions short and limit it to one or two questions so that we can get to as many journalists as possible.
With that, I will start with questions in the room. The gentleman over here please.
QUESTIONER: Thanks. Hi, I'm Jovi from The Edge Singapore. Thank you for the presentation. So just a question here, Krishna. You said last week that expectations about Fed easing have fluctuated in recent months. And you recommend Asian central banks to focus on domestic inflation, avoid making their decisions dependent on the Fed moves. Indonesia just delivered a rate suppliers rate hike last week. What are your thoughts on this move? And have the ASEAN-5 central banks really been tracking Fed moves? And if so, which central banks in particular should proceed with more caution? Thanks.
MR. SRINIVASAN: Hi, Jovie. So, the point I was making is that you've seen policies, U.S. monetary policy in a stage where the strength of the U.S. economy, inflation surprises in the U.S., and U.S. monetary policy rate cuts are now to be delayed. So the question then of course is what does it mean for Asian central banks? And you've seen that in general, inflation in Asia has risen much less compared to other regions. So in relative terms, interest rates in the region are low. And so there is an interest rate differential which could pose a challenge to countries in the region.
And the point I was making is that you're going to see, because of this, exchange rates coming under pressure, and it's important to allow the exchange rate to be the buffer against shock so that you can meet your price stability objectives, your external objectives, and so on. And in that context, I also mention that central bank should focus on fundamentals and what is driving domestic conditions, domestic inflation and so on and so forth, and not be overly dependent on what the Fed does.
And I think that's the point we'd like to make here: that don't get yourself too tight to what the Fed does. Look at what's happening to inflation. If the exchange rate movements are leading to, say, higher passthrough, then there might be reason to tighten interest rates. But otherwise, just look to see what's happening with domestic inflation and tailor your policies accordingly. That's the point I was making. And I think, to a large extent, what we've seen is that central banks in the region have allowed exchange rates to move. We saw that in 2023. And I think that's the way to go, so that you reflect on what's happening in your domestic economy to make the policy changes.
MS. VU: Thank you, Krishna. The lady over here, please.
QUESTIONER: Good morning. I'm Liu Chang from CMG, China Media Group. As we know that China's economy grew by 5.3 percent in the first quarter of 2024, with industrial growth at 6 percent, manufacturing growth at 6.7 percent, and so on. How do you comment on China's economy in the first quarter? And according to your report, the first quarter growth came in stronger than expected. So will IMF revise upwards China's economic growth forecast for 2024?
And second question is the Chinese government has proposed to develop the new quality productive forces, emphasizing the leader role of the scientific and technological innovation in productivity. So what role do you think this will play in promoting China's economic transformation development? And how do you think the growth of China's economy will benefit the economic development of the Asia Pacific region? Thank you.
MR. SRINIVASAN: Very good question. Let me take your, your first and third question, and Thomas will take your second question. On your first question, you're absolutely right that when we put out a forecast, we had a growth, of course, in 2023 came about 5.2 percent. We had forecast growth of 4.6 percent in 2024 and 4.1 percent in 2025. Now, that was when, before the first quarter GDP numbers came out in China, which as you know, clearly was stronger than what we had assumed and what even markets had kind of forecast.
So that indicates that there are upside risks to growth in China. And like you also mentioned, PMI numbers have come out stronger in the first quarter. At the same time, you have factors, like on the real estate sector, where the weaknesses continue. And so there are offsetting forces. But we have the Article IV on China coming very soon, in a few weeks, and they will provide a more holistic assessment of all developments to revise their forecasts. And clearly there are upside risks of what we had predicted in our REO.
Your last question was what happens in China? How does it affect the rest of the region? I think there, we have done some, you know, work in the past which shows that in a region where intra regional trade is about 60 percent. So what happens to China has a significant bearing on rest of the region. And a one percentage point increase in Chinese growth leads to a 0.3 percentage point increase over the medium-term to economies in the region. So, it is a significant player in the region. So I'll stop at that. Your second question of productive forces, Thomas will take.
MR. HELBLING: Thank you. On the new productive forces, let me make three points. I think the first point is to recognize that as China has been developing and its income levels raising rapidly, innovation should play a more important role in growth. So in that sense, I think the authorities attempt to promote innovation is good policy going forward and helps improve growth prospects. And clearly digitalization, the green transition, the green economy, offer opportunities there for new innovation that could also benefit the rest of the world.
Point number two, I think this is only one way to promote growth. I think, and as we also stressed in our reports, it's important that innovation policy is done right, focuses on innovation in basic research and where you have clearly market failures, where the market itself would not promote enough innovation, instead of excessive support of new industries or of innovation that in the end may not be socially productive.
Thirdly, what we have also emphasized is that besides promoting innovation, China would also benefit from other structural reforms, what we call horizontal structural reforms that benefit the economy at large. There we have emphasized in particular level playing field between state owned enterprises and private enterprises. We have emphasized role of giving the market a greater role in allocating resources in capital markets, more focused on returns of investment rather than investment guidelines.
And then finally, point number four, I should add, I think we have also advocated rebalancing of the economy. Still, China's growth is still very dependent on high investment rates. We see a rebalancing where consumption and the services sector play a greater role; would also be important for a more balanced growth path going forward and less imbalances in the economy. Thank you.
MS. VU: Thank you. The gentleman on the far left, please.
QUESTIONER: Andrew Staples, Economist Impact. Two questions if I may. First, a quick comment on the yen and the recent movements that we've seen there and maybe linking in with the inflation deflation story that we see there. And secondly, on China, just following on from the previous point about the growth that we've seen in quarter one, to what extent is that at the cost of overcapacity, and how concerned is the Fund about the exportation of deflation from China to the rest of the world? Thank you.
MR. SRINIVASAN: Andrew, thanks. I'll answer your first question and then Thomas will answer your question on China. So on the yen itself, I think I'd like to make some broader points. In general, we view commitment to exchange rate flexibility as being very important. And here I would note that the Japanese authorities are fully committed to an exchange flexible exchange rate regime. Now, flexible exchange rate regime, as you know, serves an important role as a buffer against shocks, including to, and so that allowing adjustment to occur.
Now, the U.S. dollar has been strong related to other currencies I mentioned in my first response. This largely reflects the U.S. economy, inflation surprises and U.S. monetary policy. Now, I'm not going to comment upon what's happening the last couple of days, but what I would note that the yen has depreciated quite significantly against the dollar, by close to 35 percent since the Fed started hiking and more recently by about 11 percent since January of this year. Now this to a large extent reflects, you know, interest rate differentials, but you also seen other factors playing an increasing role, such as large carry trade positions. So we need to look at this data to see what are the relative contributions.
Now, there are occasions where country authorities determine that it's appropriate to intervene. For example, market functioning can sometimes be impaired and lead to outsize and rapid dislocation exchange rates that can be disruptive and can pose financial stability challenges. In cases of market dysfunction, intervention can sometimes be appropriate, but we are in close engagement with the Japanese authorities to get a fuller picture of what's moving the yen and what are the relative contribution of various factors.
MR. HELBLING: So on your question on China, on Q1 itself, we wouldn't look at that in the context of the overcapacity discussion. We see two main factors. Private consumption has been stronger than we expected based on our estimates. We attribute this mostly to larger than expected lunar new year bonuses. So it's mostly sort of a one-off factor. On the consumption side, we think household saving rates don't appear to have changed for high levels. And the second factor was a greater contribution from net exports, largely based on what we saw very strong export volumes in the first month. So at the moment, we don't yet see a strong change in growth patterns or any other factors.
Turning then to overcapacity, it's a complex issue. There are a number of dimensions and a number of issues to look at. One, is the macroeconomic perspective. And so there, China at the moment has excess capacity, but we would not call it excess capacity. It's more economic slack. As you know, the economy has experienced, experienced a number of shocks recently, the Pandemic, of course, but then also a large real estate correction that has weighed on domestic demand, like large corrections in real estate markets have done elsewhere. That is, we think, the main factors why there is at the moment excess capacity in the economy.
There's an output gap, as you may have seen in the Article IV for last year, we quantified it at 2 percent of potential GDP. So that's still a sizable output gap. And as part of the correction, there's some downward pressures on prices in this context. That's part of the macroeconomic consequence of the real estate correction. And there, if you look at that, the issue really is how does the macroeconomic adjustment to that shock unfold? And is the policy mix right, because domestic demand is relatively weak in that context. And so, we have argued that policies supporting domestic demand would be more appropriate than, say, that policies that try to support the economy mainly through supply side measures. There is some tendency for expenditure switching in the sense that economies try to export when there's slack in the economy as is part of the natural adjustment in the circumstances.
The second dimension is the particular nature of the shock. What I have in mind is the real estate correction, which is a large sectoral shock, which has macroeconomic implications, which I just described. But then, since it's a large sectoral shock, it has also meant that some sectors downstream from the actual construction industry also have large excess capacity, more so than the economy at large. If you think of construction, that's a non tradable sector, but some of the downstream sectors are tradable if you look at construction material, including ceramics, et cetera, et cetera. So that's partly where excess capacity is also looking for other outlets of demand. And there our clear recommendation is such excess capacity not to subsidize or prevent the necessary adjustment or insolvency procedure if companies are not profitable anymore and need to be resolved rather than supporting them after a big sectoral shock.
And the third dimension is excess capacity in some of the new industries. And we have looked at that more in the context of industrial policy, where industrial policy has its purpose, in particular, if it corrects for market failure, if it looks to promote activities where the market itself wouldn't produce much. So if you have social returns that are higher than private returns, including support of basic research, for example. And there we have argued, including in the last article four, that it would be beneficial if China scaled back industrial policy partly for its own benefits, to reduce risks of misallocation of resources and excess capacity, which also hurt Chinese economy, and also to reduce negative spillovers to the rest of the world. Thank you.
MS. VU: Thank you, Thomas. I'm seeing many hands up online, so we'll move to WebEx for now. Let me start with Feny from Business Indonesia. Feny, please go ahead.
QUESTIONER: Hello. Good morning, everyone. My name is Feny from Business Indonesia. As you know, Indonesia is undergoing a government transition from President Jokowi to President elect Prabowo Subianto. On the monetary side, Bank of Indonesia has just raised its benchmark interest rate to 6.25 percent. My question is, this situation will change the Indonesia 2024 growth projection or in the future? And also, what is the IMF recommendation for Indonesia’s new government? Thank you very much.
MR. SRINIVASAN: So let me answer that question, and maybe Thomas can add to it. So we have growth in Indonesia being pretty robust at 5 percent in 2024 and 5.1 percent in 2025. If you look at Indonesia's macro fundamentals, whether it's a fiscal deficit which is at the bottom, or 2.2 percent below the ceiling, they have, if you look at inflation, it's in the target range. So if you look at the macro fundamentals, things are looking pretty good, and we are waiting to see details of the new government when it comes into office. But from what we've seen, there is more emphasis on continuity of policies, and there is some talk about, you know, raising spending. At the same time, there's also talk about raising revenue measures and so on. We'll have to see the details of how the fiscal plans pan out. But overall, we see this as a way of continuity in reforms, continuity in the way Indonesia made good progress over the years. And that's reflected in pretty much strong fundamentals.
MR. HELBLING: Maybe just to add to Krishna, two points. One, as Krishna mentioned, 5 percent is a very robust growth rate, and Indonesia has performed very well, growing very close to potential over the past decade or so, except, of course, for the Pandemic. We have long emphasized that Indonesia has potential for higher growth, in particular with the right structural policies. If Indonesia closes the infrastructure gap, if it closes education gaps, if it improves on governance structure, we could see higher potential growth.
Point number two, similar to what Krishna already mentioned, the government, of course, would have to play an important role in closing infrastructure and education gaps, and also promoting governance reforms. For raising spending on education and infrastructure, I think, another key reform is revenue reform. Indonesia has a tax ratio of about 10 percent, which is very low relative to the structural spending needs for education, infrastructure, social safety net. So, we see determined action on revenue reform where the IMF has laid out options for revenue reform as of utmost importance for the new administration. Thank you.
MS. VU: Thank you, Thomas. Next, I go to Keisha. Keisha Taasan, please.
QUESTIONER: Good morning. This is Keisha Tassan, a reporter from the Philippines Star. Going back to the currency depreciation in the region, can I also get your comment on the peso? When the peso depreciates significantly against the dollar in 2022, the BSP hike rates aggressively. Do you think that if the peso depreciated further and if Philippine inflation rose higher than expected this year, would the BSP deliver one more rate hike or would policy easing happen next year instead and not this year? So, can I get your quick take on your growth and inflation outlook for the Philippines as well for this year? Thank you.
MR. SRINIVASAN: Thank you. On Philippines, let me just give you the numbers for growth. We have 6.2 percent this year and 6.2 percent for next year, too. And Philippines is one country which has done very well in terms of the growth being resilient and inflation is coming down.
Now, clearly, the point you made is as similar to what, you know, we saw one question about Indonesia and Japan. You do see that interest rate differentials will likely put pressure on currencies to depreciate. Now, this can create a dilemma for Asian central banks, including for the Philippines. Now, exchange rate volatility can be disruptive to the importers. In the short-run, importers might not benefit from the exchange rate depreciation, especially if they are locked into transacting in dollars and have to pay a higher price for imports from abroad.
And so you do see there is an issue of impact of the exchange rate on imported goods and so on. But our advice remains pretty much what I said at the beginning. When faced with such volatility, central banks should focus on fundamentals. And here, what I mean is that they should orient their policies to not too rigidly, to expectation about U.S. interest rates and the U.S. dollar, which may be unrelated to Asia's monetary stability needs. Instead, they should try to focus on domestic demand conditions and its implication for inflation.
I would also argue that fortunately, Asian central banks are on a stronger position today to focus on domestic conditions than, say, even ten years ago. This reflects stronger policies, stronger macro fundamentals, better institutional frameworks. Just for example, you look at the share of foreign investors in domestic bond market has come down quite sharply. You also see that vulnerability of balance sheet exchange movements has also declined. So in many ways, central banks are in a better position to focus their attention on domestic conditions. And so that is where the emphasis, I would say, should be placed. Look at what's happening to domestic inflation. If exchanges depreciate and they later pass through to higher inflation, then there is reason to tighten monetary policy. Otherwise, allow the exchange rate to act as a buffer against shocks. I think that would hold you in good stead. Thank you.
MS. VU: Thank you. I think we'll take one or two more questions online. Zhenyu Ji, please. Thank you.
QUESTIONR: Thank you very much for taking my questions. So my name is Zhenyu Ji from Tencent News. First off, before my question, I would like to, you know, confirm, Mr. Helbling, you answered the question earlier that you said overcapacity, the definition is not very accurate. You mentioned that excess capacity is more accurate description. So I just want to confirm with you, is that correct?
MR. HELBLING: So, yes, two points and both, you're correct. I think overcapacity has many meanings and one needs to look at the context. In the right context, overcapacity itself is not necessarily well defined. And then I've argued point number two, that on the macroeconomic side, there is this concept of slack, which is basically that the economy is producing below potential. We would certainly argue that China at the moment is still producing potential. And so, we would then prefer it to call by the regular macro or by the regular name for sort of slack or a negative output gap rather than overcapacity.
QUESTION: Okay, thanks so much for the confirmation. So actually, my question is regarding the weak yuan. So we see the monetary policy divergence, especially between the U.S. Federal Reserve and the China central bank. The China is still battering the deflation, as you have mentioned in the remarks. So, the weak yuan is benefiting to the exports but also hurting the consumption. So can you talk about the potential risks and how the weak yuan may oppose to China's transition from the export or investment boost economy growth reaching to the consumption driven region? Thank you.
MR. SRINIVASAN: I think Thomas touched upon it briefly. When we're talking about boosting consumption, I think one of the key things, which key aspects the Chinese economy is faced with a property sector crisis, right? And if you look at any chart in consumer confidence, you will see that ever since the crisis in the property sector, confidence has plummeted. So if you want to boost consumption in China, you have to address the property sector in a very comprehensive way.
And there, we have been quite clear about what policies are needed. We've talked about the fact that you need about 5 percent of central government spending to finish prepaid housing. You need a policy which would allow prices to adjust. And more importantly, you need a way by which you triage the developers so that you separate the viable developers from the non-viable developers. All of this is aimed at restoring confidence in China's property sector, which would provide a greater boost to consumption down the road.
The other thing which I think Thomas already mentioned is that there's been a structural issue of high precautionary savings in China. And for that we have emphasized reforms which would address boosting social safety nets, which would in some sense reduce the need for precautionary savings and boost consumption. So these are the policies which we're talking about in terms of what is needed to address weakness in consumption, propping up domestic demand and, closing the slack, which Thomas talked about. I hope that answers your question.
QUESTIONER: Yeah, thank you. Thank you so much.
MS. VU: Thank you. Let me go back to the room. If you have more questions. The lady over here, please, in the first row.
QUESTIONER: Thank you. Katia Dmitrieva, I’m from Bloomberg News. I wanted to follow up on your China comments. I noticed in the report there's a line that you might revise up further the forecast growth outlook for China. Are you actively doing that now or are there certain things you're looking for that would lead you to more confidence in the economy and revising that forecast up for the year?
MR. SRINIVASAN: So, Katia, as I mentioned, in response to your question, before, clearly, Q1 GDP came out stronger than we all expected. We expected markets expected and so on, which provides an upside risk to -- when I say risk, upside move towards GDP. We use the word risk, you know, in that sense. But we also, like I said, we also have certain developments which go the other way. For example, on the property sector we had expected some improvement in what we see as investment and in stats we don't see that.
So there are some tailwinds. There are some headwinds. What the team is going. The team will be going to China, Beijing, this month. In fact, the mission starts soon. They will look at all these factors put together and see what it means for the growth forecast. So like I said, just based on Q1 GDP, there's an upside risk to higher growth. But we need to look at all factors coming in and by the time the team does its forecast you'll have more data on various things. The PMI’s look good, but we need to look at all these strategies put together. But given where we are today, I would say there are upside risks or growth forecast. Does that answer your question?
QUESTIONER: Yes ,thank you.
MS. VU: Yes, the gentleman here, please.
QUESTIONER: Hi, good morning. I'm Hung Dang from Vietnam Television. So as I see in the report, we are now forecast to have 5.8 percent for this year GDP growth and 6.5 percent next year, something 0.4 percent minus from the previous forecast. So I would like to have your specific comments on your forecast, focusing on three aspects, the positive side, the major risk, and your recommendation. Thank you.
MR. HELBLING: So on the forecast for Vietnam, as you know, ‘23 was a difficult year. There was still -- there were spillovers or leftovers from the domestic factors. There was a bank problem late ’22, corporate bond markets froze, and real estate markets contracted. These factors weighed on domestic demand. Last year and in the second time, global goods production or the global demand for goods weakened relatively to previous years as the global economy adjusted in the structure to demand. And like other ASEAN economies, Vietnam suffered from weak external demand.
So on both sides there is an improvement this year. Both construction is starting to improve, domestic economy is recovering further after the slowdown in early ‘23. And on the external side the outlook is improving and we expect this improvement to be gradual over two years given relatively little fiscal policy support and given the overall policy mix.
On the risks to the outlook, part of it is on the external side, global growth more generally. We also could potentially see some risks to Vietnam from increased global economic fragmentation as this could spill over through downstream linkages. Also in Vietnam internal side, we see still some risks to financial stability, in particular related to the construction sector. On the macroeconomic policy side, monetary policy probably needs to be tightened a bit given inflation developments. Fiscal policy is about right. There is some scope for increased spending together with domestic revenue mobilization reforms. The issue of low tax revenue also applies to Vietnam. And finally, we see possibility for structural reforms, closing education gaps, infrastructure gaps, improving connectivity and similar reforms to boost the growth potential.
MS. VU: Thank you. The gentleman at the back, please.
QUESTIONER: Yes, Ken Hickson from ABC Carbon Express. As you might detect from the title of my media group, I'm very interested in climate and climate impacts. And we are seeing, particularly in the last few months, incredible impacts in Asia with heat, heat waves, heat stress, et cetera, which is impacting agricultural production, that's impacting tourism, and many other parts of the economy. To what extent are you able to take that into account when you're making your forecasts, and, I suppose, the additional global impacts felt in Asia from geopolitical events in Europe and the Middle East?
MR. SRINIVASAN: Thank you. It's a very good question. You're absolutely right. We've seen climate related changes. Change is affecting many parts of the world, including notably in Asia. And to a large extent, we do take into account what's happening in various sectors in our forecasts. I won't say it's hundred percent there, but we do make every effort to take into account these developments in making our forecast.
Now your second question was --
MS. VU: On geopolitical tensions.
MR. SRINIVASAN: Yeah, on geopolitical tensions. Again, we do, we, we do take that into account. Some of this goes into our, what we call as a baseline forecast, and some of this goes into what we call as downside risks. For example, some of the tensions in the gulf, some of that is incorporated in our baseline, but some others are not. For example, if the tensions intensify, what would happen to oil prices? We do have estimates of what, you know, say a 10 percent increase in oil price would do to global output. You know, we have these calculations. But to do that on a country by country, sometimes when we don't know how the risk is going to pan out, we put that as a downside risk which will incorporate, if the risk materializes in the forecast going forward. But for many, it's there in the baseline. Some we have to take it as part of the downside risks.
MS. VU: The lady over here, please. The lady in the first row.
QUESTIIONER: Thank you, sir. We've talked quite a lot about China. I want to ask another question. Is China's relationship with Southeast Asia, ASEAN countries, where in the private sector we're seeing a slew of Chinese businessmen, entrepreneurs coming to this part of the world, a lot of them, Vietnam, Indonesia, Malaysia, looking for the next growth and investment opportunities. What does that mean to the ASEAN economies? Thank you.
MR. SRINIVASAN: It's a very good question. As I mentioned before, this is a region where trade within the region is quite significant. Intra region rate is about 60 percent. China is a key player there and, you know, investment follows trade. And so you can see those linkages pretty strong. And if China slows, the region slows. And what we have seen is a lot more interest in the ASEAN countries, which you already had those links before, so it's not something which is new, except that now you see maybe a little bit more intensification, possibly in response to, you know, risks of geo economic fragmentation. So they see greater merit in trading with countries in the region.
So that's one thing. And also, as we've seen what's happened to global supply chains, you see they have lengthened, right? So sometimes goods which are exported from China, to say the advanced economy like the U.S., are now being routed through ASEAN countries, like Vietnam. So those are kind of linkages which are happening in response to fragmentation pressures. But this linkages between China and ASEAN has always been there, and which is why I was saying that what happens to China has an important bearing on the region. Do you want to add something to that?
MR. HELBLING: Maybe just to add two points. The first point, that of course, ASEAN as a whole is a big market and it's a very dynamic market. In some economies you have enormous potential. Also from the demographics you have in several countries, including for example Indonesia or Philippines, you have the potential for a strong demographic dividend. I think that's the first point.
And the second point. China has long been integrated in global value chain. It was for a long time more so of the final assembly point. But now that the domestic industry has developed and has developed the capacity also to produce final goods developed in China, it's naturally looking for outlets and for exports. And then for exports, often it means that you also have to be present in local markets. And like other multinationals, China's large companies have started investing abroad. And so the two elements come together, of course.
MS. VU: Thank you. We'll come back to Webex for a moment. Julfick Fazan, please go ahead.
QUESTIONER: Thank you for taking my question and thank you for the presentation. My question is regarding Sri Lanka. What is the near-term and long-term outlook for Sri Lanka, given the fact that authorities in Sri Lanka are now starting to make comments that, given the regional growth experienced with countries like India, China, and other countries, they look to piggyback on these economies to achieve some sort of stability and economic growth?
MR. SRINIVASAN: Thank you for the question. It's a very good question, a very timely one. As you know, Sri Lanka has an IMF supported program. This is a program that the authorities have developed and it's been supported by Fund- IMF financing. The Sri Lankans faced a very difficult challenge when they embarked upon this program. And so far, what we've seen is performance under the program has been pretty good, and that is reflected in the outcomes. For example, GDP growth has been better than it had been forecast. You see some bottoming out, some green shoots, as I would say. Inflation is coming down quite sharply from 70 percent to, you know, well below. -- what's the number now? I forget the right number, but it's coming down very sharply. Reserves are building up.
So overall, the country is doing well under the program, and the reform measures your country has taken are pretty significant. The road ahead is not easy. There are many more things to be done. They've also moved on issues like governance and reducing corruption and so on, which as are part of the government's program. But going forward, the challenges remain. You have to stick to this program so that you can make a durable exit, and the economy comes on a durable basis, comes out of the crisis. So it's important to make sure that you work on the fiscal adjustment package, on governance issues which are part of the program. And I think if the government continues with adhering to the program, you will see much better results down the road. Even now, the fact that growth has come back stronger than expected, inflation is lower than, many people expected. I think all these are very good signs that the program is delivering.
MS. VU: Okay, we'll stay in the neighborhood and I will invite Samuel Rahman Sazhat from Bangladesh. Are you able to turn on your camera?
QUESTIONER: Hello? Am I audible?
MS. VU: Yes, we can hear you.
QUESTIONER: Okay. I have some camera issue in my device.
MS. VU: Yeah, please go ahead.
QUESTIONER: Okay, my question to you then is IMF is now in Bangladesh and they will continue their outlook in our banking sector. And what is your outlook about and what should we do to improve our goals?
MR. SRINIVASAN: So thanks for your question. I didn't hear your question very clearly, but let me answer what I thought your question was about. In terms of the outlook, I think you said. Bangladesh was a country which proactively reached out to the IMF for support for its home grown program, which has two components. One is macro stability and addressing the longer structural issues related to climate change. On macro performance, so far, there have been significant improvements. Just to give a number, growth in 2024 was 5.7 percent, and in 2025 we have it at 6.6 percent. There have been improvements in the monetary policy framework. There have been improvements in the fiscal performance.
I think where Bangladesh was struggling a little bit was the fact that while the current account was adjusting well, partly because they were restraints on imports and so on, the financial account wasn't doing very well. So in some sense, you could see that in the bleeding of reserves and the taka coming under pressure. Now, it's important that the next stage of the reform agenda is to allow greater exchange rate flexibility, which would help you address the problems in the external sector in the financial account. And once you do that, you know, you'll see a greater sense of stability coming back in the external accounts, which, in tandem with the improvements the government is making on the fiscal side, you should see more sustained recovery from the crisis that every country has faced in the region because of multiple shocks and starting from the COVID Pandemic.
MS. VU: We have time for one more question. I would like to invite Anthony Rowley.
QUESTIONER: Krishna Srinivasan implied that the linkage between U.S. monetary policy and monetary policies in Asia, various parts of Asia, have diminished in importance. That was the way I took it anyway. It rather surprised me. Very briefly, obviously, there's many parts of this question, but why is that and where does U.S. monetary policy still impact monetary policies in Asia?
MR. SRINIVASAN: The point I was making, Anthony, is not that there's been a, for a lack of a better word, kind of decoupling -- what do you call it? I was saying that the interest rates in the U.S., where they are, and the fact that Asian economies had to -- the relative to its size, the inflation was much more muted in Asia. If you look at what happened to inflation, it started rising across the globe in 2020, but inflation peaked at about half of what we saw in other regions, right? So in that sense, central banks in Asia had to tighten monetary policy less compared to other regions, and so that differential was there. And that allowed the interest rate differential to put pressure on the currency and many of the central banks. If you look at any chart on exchange movements, you see many of the central banks in Asia allow the exchange rate to move, to be flexible. Whether it's the Japanese yen, the Korean won, the Indonesian rupiah, they all allow the exchange rate to move.
And so in some sense, why is that? One could only say that it reflects improvements in macroeconomic fundamentals, institutional frameworks, and also, you know, the kind of balance sheet stresses that you saw before, they may have diminished over the years. And that allows central banks to be more confident, allowing the exchange rate to move. And that's what we've seen. And so I think that's where I was saying that it's important for central banks to look at what's happening to domestic inflation. What are domestic inflation pressures, domestic conditions there which are contributing inflation, and act according to that, rather than just being fixated on what the U.S. does and so on. That's the point I was making.
QUESTIONER: What about the impact on capital flows, for instance, particularly banking flows?
MR. SRINIVASAN: You do see some capital outflows in the region, and that's part of the course. But the question is, in some sense, some of the capital went, and it's come back. So you see, other than, I think, in China, where you see saw portfolio outflows, I think for most of Asia, capital flows have been coming back. So, it's not something which is different to what we've seen in the past.
And I would say that one thing which people point out is, why is FDI not picking up? I think that is a thing. FDI in general, across all EMS, has been pretty sluggish. And that, again, I would in some sense possibly attribute that to how you see interest rates in the U.S. if, you know, when you can get a 5 or 6 percent risk free return, maybe some investors are postponing the investment of FDI into EMS, including Asia. But overall, portfolio flows in Asia have been pretty robust.
MS. VU: Thank you, Krishna. We have come to the end of our press briefing today. Please note that the video recording and the transcript of this briefing will be made available on our website, at imf.org, very soon. Thank you very much for your participation today. We look forward to seeing you at our future events. Have a wonderful day.
