Transcript

Istanbul, Turkey
October 4, 2009

MS. KAMATA: Good morning. This is the IMF press conference on Asia and the Pacific region. I'm Yoshiko Kamata, with the Media Relations of the IMF.

Joining us today is Mr. Anoop Singh, Director of the Asia and Pacific Department. With him are Ms. Kalpana Kochhar, Deputy Director; Mr. Jim Gordon, Senior Advisor, and Mr. Mahmood Pradhan, Senior Advisor of the Asia and Pacific Department. Mr. Singh will have some opening remarks, and then we'll take your questions.

MR. SINGH: Thank you very much. I'm very happy to meet you all this morning.

We are distributing a statement on the Asian outlook, which you will have shortly or you may already have.

But before I begin on the Asian outlook, let me start by offering support and condolences to the various countries in the region that have been hit by natural disasters in the past few days, as you know. These terrible events in those countries have imposed a dreadful human and economic toll and our thoughts and wishes are with those who have suffered losses, and we remain in close contact with the authorities about these events.

Let me now give you a brief assessment of where we are with the outlook on Asia.

As you know, Asia was hard hit by the global crisis through both trade and financial channels. The global economy is now pulling out of recession, but the recovery is likely to be slow and protracted. The global economy is still forecast to contract slightly this year, but to return to growth of around 3 percent next year.

Despite a difficult first quarter, when average growth in the Asian region was zero, an economic turnaround now appears underway in many parts of Asia. Indeed, second quarter data showed average growth in the region picking up to 2 ½ percent and exceeding that achieved in virtually all other sections of the world. Asia, therefore, now looks set to emerge from the global downturn faster and stronger than other regions. We expect that Asia will grow by 2.8 percent this year and 5.8 percent next year.

Given the global environment, China’s and India’s growth this year will be particularly impressive at 8½ percent and close to 5½ percent, respectively.

Let me highlight our view that the Asian region has benefited greatly from a strong and effective policy response on a number of fronts.

First, central banks quickly eased monetary conditions. In China, for example, monetary policy has spurred extraordinary levels of credit growth.

Second, currencies in many countries were allowed to move flexibly.

Third, the fiscal stimulus in Asia was proactive and larger than the average in the G20.

And, fourth, financial regulators used a diverse and flexible set of measures to restore confidence and stabilize financial markets.

The rebound we are seeing in Asia has been based on strong public demand, a global restocking of inventories, and support for the recovery from the financial sector. And now there are beginning signs of stronger private demand growth.

However, caution is still warranted. Why do I say that? First, the inventory cycle in the U.S. and Europe will continue to provide a short-term boost to growth in Asia, but this is likely to run its course by early next year.

Second, under current budget plans for many countries in Asia, fiscal support to growth will likely taper off next year. In this regard, it is worth noting experiences in the region, especially Japan during the 1990s where a fragile banking system did leave the economy vulnerable to adverse shocks, suggesting a reason to be cautious on withdrawing stimulus during the early stages of a recovery.

Let me briefly point out that we expect to discuss these issues and the implications for today's advanced economies from Japan's experience in the 1990s at a seminar on Tuesday [October 6] afternoon, where I hope we will see you.

So, then, in light of the weak prospects for external demand for Asia, in most cases our view is that fiscal and monetary policies should continue to provide stimulus until there are firm and entrenched signs of a broad based and sustained recovery in private domestic demand.

There is, of course, considerable heterogeneity across the region, and individual countries will obviously have to be cognizant of their own inflation developments and public debt in deciding the extent and scope of continued stimulus.

In addition, the growth impetus in Asia will need to come more from within, and this transition from public to privately led growth, which to us is a key issue, would have to be managed carefully.

At the same time, productivity will need to improve to prevent the change in the primary growth drivers from lowering growth or employment. These issues are elaborated in some detail, especially the drivers to growth in the region, in the statement we are distributing to you just now this morning.

Now what I can say about our role as the IMF [is that] we remain fully engaged in the region and are trying to intensify this further.

We are strengthening surveillance, bringing a stronger regional and cross country focus to our work. Our Regional Economic Outlook is going to be launched in Seoul and Tokyo later this month and early November. However, some of the main items of the Outlook are contained in the statement I am having distributed to you this morning.

The Fund has allocated well over $50 billion in SDRs to Asia, and at the same time the region has contributed significantly to the IMF in bolstering our resources for crisis prevention.

We have revamped our lending facilities, including extending our support in new ways for low-income countries. In Asia, we are now supporting programs in Sri Lanka and Mongolia.

You have seen the clear commitment to increase the quota share of emerging markets and developing countries that will give Asia a larger voice in the IMF.

And, finally, I want to point out that we are establishing a new advisory group for Asia that we hope will provide us insight and advice from Asia on how to further enhance our surveillance role in the region.

So those are my brief opening remarks in addition to what you will get in the statement. And now I'll be happy to answer any questions you might have.

MS. KAMATA: Thank you, Mr. Singh. Now we will take your questions.

QUESTIONER: Can I find out how serious do you see the threat of a resurgence in inflation next year, and the formation of asset bubbles in some of these markets?

MR. SINGH: Let me just say that for virtually all countries in the region, we continue to see negative output gaps, and, although we hope that is going to be reduced over time, we do believe that the priority is to achieve a sustained recovery. Therefore, we are emphasizing that virtually all countries in the region have the room to maintain both fiscal stimulus and monetary stimulus.

Of course, some countries may be ahead of others in the timing when monetary stimulus may have to be reduced, but our view at this stage is that virtually everywhere there is evidence of negative output gaps, and, therefore, there is time to keep the stimulus positive for fiscal and monetary policy. In reaching this kind of assessment, we have looked very closely, as I mentioned just now, at the progress and the experience of Japan in the 1990s and risks that arise from withdrawing stimulus prematurely before there is firm evidence of a sustained recovery.

MS. KAMATA: Any other questions?

QUESTIONER: Just a very broad question. Looking into the sort of longer-term, assuming that in all this sort of forecast for longer-term growth, we're going to see a period of very slow growth in the U.S. I wondered if you could-- a need, as has been said so many times, for Asia to increase its domestic demand. Could you explain how far would Asia have shift its economic growth model in order for the world economy to achieve balanced growth? And with it, is that something that would interest how that would take place-- what would have to be done?

MR. SINGH: That is a very important issue for us, and it is very important for the authorities.

There are many ways I can answer that question, but let me perhaps make a few responses based on China, which obviously is relevant for many other countries in the region.

As the Chinese authorities, including the premier, said some time ago, the key policy priority for robust, sustained growth in China is to rebalance the Chinese economy away from investment and exports towards making private consumption the primary driver of economic growth in China.

I think the Chinese authorities are thinking about these important issues in a very significant way.

For example—to take just take one statistic–China's imports are only 4 percent of total global imports. And China’s consumption, for example, is just one-eighth of consumption in the United States. The need for a shift towards private demand and private consumption is very real and very recognized in China, and other parts of Asia.

Therefore, what is needed in China and related countries is a fairly comprehensive strategy for how to rebalance growth, and these policies need to be aimed at basically increasing the purchasing power of households, raising the labor share of income, and reorienting investment towards non-tradable sectors.

The public recognition of this shift is actually quite large with the authorities in Asia. But we should be cautious and realistic in recognizing ourselves that this kind of transition, important as it is, will take time to implement and we need to allow that time.

So, as we look beyond the near term, once the recovery has taken full effect, you will see more evidence in terms of policies by Asian authorities to ensure that growth is sustained by this rebalancing strategy.

This is a very important issue and I mentioned to you that we are establishing a new regional advisory group. We would like to get help and advice from Asian experts on, firstly, how this can be done and, number two, how the Fund, how the IMF, can play a helpful role in this regard.

I am sure that this question and details from it will be very important in these kinds of press conferences in the years to come.

MS. KAMATA: Thank you. Next question.

QUESTIONER: Just we see recently that China's import demand for metal has been pushing up the world price. We also see some oil price rising recently. So, how likely do you expect that the commodity price could have a spike and may be pushed up suddenly in Asia? What --- that inflation comes before the U.S. and European countries.

The second one is—with this kind of massive stimulus program, how do you see if in the future, another wave of over-capacity is built up after that? Maybe the countries need to invest more and that would take us to this over-capacity. How do you assess that problem? Thank you.

MR. SINGH: I think many central banks in the region are concerned in some cases about asset prices and about the eventual return of inflation. Our own position is -- also shared by the authorities-- that this is not a concern for most counties at this time. And as I said, there is a considerable case for maintaining monetary stimulus.

Now I know that there has been concern in some countries, including China, about the rise in equity prices, in property prices. We see these developments just as evidence of potential risk. We don’t see these as problems just right now.

It is certainly true, for example, in China that equity prices have risen substantially this year, but yet they are still well below their peak of two years ago. Property prices have started to recovery recently, but they have been well backed by gains in disposable income.

The outlook for inflation, more generally, is still held down by still declining prices of raw materials and other imports, partly as the result of what you said: large capacity in key industries.

So there is no doubt that some countries will come before others to tightening monetary accommodation. But we don’t believe that this is a big issue at this stage for virtually any country in Asia, where basically you’re trying to look for two or three quarters of growth before concluding that we need to now start tightening the monetary stimulus.

We may be close to it in some economies, but I don’t think we are generally there at this time.

MS. KAMATA: Any other question?

QUESTIONER: There has been a lot of talks about the shift that needs to be done in order to encourage private demand in Asia. I was wondering if you could elaborate perhaps on the medium term. You spoke about the government stimulus's that will end, let's say, mid-2010 or early 2011.

Where do you expect the growth for Asia to come at that particular point where Europe and the U.S. will perhaps still be in the middle of a very sluggish recovery and most likely we can't expect this fundamental shift to have occurred yet in demand within Asia itself? Is that a very dangerous point in other words for the continent?

MR. SINGH: Just a general answer. You know some time back there was a lot of attention by many analysts that Asia and some other regions are beginning to decouple from advanced economies. What we have seen in the last year actually is the opposite.

As we see, Asia’s recovery now taking place is very fundamentally based on the advanced economy developments. And, in fact, in some ways, Asia's dependence on the global economy is perhaps even stronger today than we would have thought two years go. We’ve seen the recovery in Asia stronger and more focused in export- dependent Asia because those are the economies that suffered the most from the problems in trade last year.

The global economy remains critical in the near term for sustaining Asian growth, but, of course, there are economies in Asia, such as India and Indonesia and some others where domestic demand growth is already playing an important role.

Our focus really is two-fold. The fist is look very carefully at the external economy, and we need to make sure that that is being sustained in order to be confident that the Asian recovery is going to be sustained.

But then we have to look beyond that at the medium term, and we have to find a way in which Asia can become more dependent on its own domestic demand growth and the issues I just talked about in restructuring the economy and rebalancing.

QUESTIONER: Recently Japan’s Hatoyama administration announced some policy which boosts domestic demand in Japan, such as subsidies for children. How do you assess that new policy? Is it effective to boost Japanese domestic demand?

MR. SINGH: Well, I think you've raised a very important question that many people are looking to Japan to see what their policies are. I think it is well recognized in Japan as well the importance of developing new drivers for growth in Japan.

We certainly welcome the government's intentions to improve public sector efficiency in a way that would allow them to reform social spending in a way that’s going to raise the importance of private demand.

It is still too early to make a specific assessment. The government is going to announce a policy statement in a special Diet session in late October. So the economic impact of their proposed reallocation of the fiscal stimulus is very difficult to assess at this stage because details are not yet known.

But let me turn to Mr. Gordon and ask him if he has anything more you want to say on that.

MR. GORDON: I think it's a very good answer.

MR. SINGH: So this is an important issue and we will wait and see what the government announces very soon.

MS. KAMATA: Thank you. Maybe we can conclude this press conference, and thank you again for coming this morning.