Transcript of a Press Conference on Asia and Pacific

By Anoop Singh, Director, Asia and Pacific Department
With Masahiko Takeda, Deputy Director, and Kalpana Kochhar, Deputy Director
Washington, DC, Saturday, April 24, 2010


Webcast of the press briefing Webcast

MS. KAMATA: Good morning.

I am Yoshiko Kamata of IMF Media Relations Office.

Welcome to this press briefing on Asia and the Pacific Region. This is a live, on-the-record press conference. Joining me today is Mr. Anoop Singh, Director of the Asia and Pacific Department; Ms. Kalpana Kochhar, Deputy Director of the Department; and Mr. Masahiko Takeda, Deputy Director 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.

It's very good to see you here this morning. It is a pleasure to update you on Asia.

As I think is probably well-known by this week, after the deepest recession in recent history globally, we know that Asia is leading this global recovery. In fact, activity in Asia has rebounded fairly swiftly over the past year and in the first quarter of 2010.

I do want to focus on a few points just now. By the end of 2009, output in most of Asia had returned to pre-crisis levels even in those economies that were hit hardest by the crisis. While the pattern of recovery has varied in Asia, as it has in other regions, it is important to note that both the more domestically oriented economies such as China, India and Indonesia as well as the more export-oriented economies are experiencing strong upturns.

We expect Asia to continue leading the global recovery and grow by about 7 percent this year and next year. As is now well-known, China and India will again lead Asia's growth with growth rates of 10 and 8.8 percent this year.

In our view, two factors are underpinning Asia's strong performance. First, the global and domestic inventory cycles are boosting Asia's industrial production and exports, and this should continue for much of this year as demand finally recovers in the advanced economies.

Second, we can expect that macroeconomic policies will begin to withdraw stimulus, but it is important to note that private domestic demand in the region is expected to remain robust. High asset values, strong consumer confidence, and a gradual improvement in employment conditions are expected to sustain consumption in Asia.

It is also interesting to note that Asia's faster recovery relative to the rest of the world seems to mark a break from the past. This is the first time that Asia's contribution to a global recovery has outstripped that of other regions.

Second, while in past recessions, we have seen Asia's recovery in those cases generally driven by exports, this time it has been reinforced by resilient domestic demand.

And finally, while in past recoveries, capital was somewhat slow or lagged in returning to Asia, this time it is fairly clear that inflows to the region have surged not only as a reflection of extremely high global liquidity, but also, I believe, because of Asia's improved economic resilience.

At the same time, it is important to note that Asia's relatively strong cyclical position may also pose some near-term risks. In particular, the growth differentials with advanced economies will likely lead to further capital inflows into the region.

Having said that, we do believe at this point that asset price inflation in Asia has so far been generally contained, with just a few local exceptions. Nevertheless, we are seeing increases in excess liquidity in many regional economies, and this does now raise some concerns.

It is to be greatly welcomed that we see policymakers in the region appropriately committed to continue safeguarding the macro economy and the financial system against the buildup of imbalances in local assets and housing markets and containing bubbles.

Just a few words on the medium term. As is now well-known, Asia's main policy challenge over the medium term will be to achieve a rebalancing that introduces a new engine of growth through its domestic demand. Having said that, it is also important to note that even in the best-case scenario, for example, China will provide only a partial offset to the weaker demand that can be expected from advanced economies. Why is this? Well, it is quite clear—because Chinese consumption is still smaller compared to advanced economies as is its ratio of imports of consumer goods to consumption.

Therefore, private domestic demand does need to be nurtured across Asia, but the reforms that will achieve this will obviously differ from country to country.

Those are my brief opening remarks. Let me end by saying that we are in the Fund trying to strengthen further our surveillance in Asia with a stronger regional and cross-country focus to our work. I want to point out that we are about to release our 2010 Spring Regional Economic Outlook that elaborates on the World Economic Outlook that you now have. We intend to launch this soon in Shanghai and New Delhi.

I also want to point out that we are organizing a high-level Asia conference in Korea on July 12 and 13 which we hope will bring together finance ministers, central bankers, the private sector, regional banks and companies, as well as academics, and we hope it will be a demonstration of our commitment to strengthen our engagement with all Asian economies.

Let me finally say that we are distributing to you this morning a few pages that summarize the details of our Asian economic outlook which will be released shortly—I think next week.

Thanks very much.

MS. KAMATA: Thank you, Mr. Singh. Now we will take your questions. Please identify yourself. The gentleman at the back, please.

QUESTION:

I am interested in knowing, with the rising inflation in South Asia, do you think it will pose a serious threat to the recovery that the South Asian countries have demonstrated in recent months?

Thank you very much.

MR. SINGH: Well, I think it is clear—and I made a presentation on this yesterday—we are in a situation where output gaps in much of Asia have begun to narrow. We do expect output gaps to close this year in a number of economies including countries in South Asia such as India.

Therefore, it is not surprising that inflation has begun to turn up. I recently presented an outlook that shows how expectations have moved up. Let me make one point on that. There is a significant contribution to higher inflation coming from food and energy prices. There are reasons for that increase in food and energy prices, so we are not yet seeing an increase in underlying inflation at the same rate at which we are seeing a rise in overall inflation.

So, I think if you look at core inflation and core inflation expectations, they are still well below overall inflation trends.

Having said that, from our discussions that we have had over recent months, I think there is a clear commitment in many countries—in all countries, I will say—to ensure that inflationary expectations do not broaden to result in higher underlying inflation. So we are seeing monetary policy already being tightened in a number of countries. For example, India moved the second time just last week.

So I think that what we are seeing is, first, the narrowing to the disappearance of output gaps in Asia, including in India, and we are seeing rising inflation expectations, but we are also seeing firm, successive measures by a number of countries in Asia, including India, to ensure that we don't see a rise in general underlying inflation.

Let me turn to Kalpana and ask if you have anything to add on India.

MS. KOCHHAR: No, just to reinforce what Mr. Singh just said about policy measures. As you know, they have raised reserve requirements by 100 basis points and interest rates by 50 basis points just in the last three or four months. So I think the authorities are very mindful and are taking a calibrated approach to withdrawing stimulus.

MS. KAMATA: Thank you. Next question, please.

QUESTION: I have two questions. One is about Japan. In the World Economic Outlook Report, it talks about how Japan is suffering from deflation and how additional monetary policy easing might be necessary. Can you elaborate on specifically what Japan can do, because interest rates are already near zero, and also, deflation is there, but very moderate, and there needs to be a balance between how much damage deflation can do and what policy measures are necessary, and on the other hand, the consideration of how very easy conditions in countries like Japan might be accelerating the capital inflows in other emerging nations, therefore stimulating excessive capital flows. What is the balance between that, and how could Japan and other advanced Asian countries address that?

My second question is about the Chinese yuan. How imminent is it that China needs to act in turning into a more flexible currency policy, because there are signs of asset inflation that might turn into a dangerous one, and I think there is a domestic need for a more flexible policy regime. Is the need for it more imminent now than in the past?

Thank you.

MR. SINGH: Thank you very much.

Let me start by pointing out, as you will see in our projections, that we have updated our projections for Japan's output growth this year. We have done this because we have seen over the last quarter that private investment has begun the process of picking up, and there has been some improvement in sentiment as well. We have raised our forecast for 2010 to close to 2 percent. This is a reasonably significant increase over the last six months.

We also have confidence in this regard that the government, which is already working on developing a growth strategy for the medium term, will elaborate on their details soon.

On the issue of deflation, our present sense is that for a number of reasons, including the improvement that we are seeing in growth, deflation will begin to recede progressively, and we are seeing a return to positive inflation by the second half of next year.

I'm not sure if Jim Gordon wants to add to this, but let me just continue. You also asked, I think, about capital flows into Asia.

On capital flows, I think we can view this in a number of ways. I wouldn't focus only on carry trade. I think what we should be pleased that the higher growth prospects in much of Asia as well as, obviously, interest rate differentials are attracting higher capital inflows, and our sense is that such inflows are currently principally driven by the improved growth prospects we are seeing in Asia. This is therefore fundamentally good news.

It is also very important, as we have seen from the past, that recipient countries are able to best accommodate these inflows, and therefore, it is important that this is done, and we don't see the return to boom-and-bust cycles that we have seen during periods of previous capital inflows into different regions.

But our current view is that what we are seeing is basically good news. They are driven by growth prospects in Asia, and these are currently, by and large, being managed well.

On China, I think there is a lot of recognition [on this issue]. We have discussed this with the economic team. There is great recognition in China as well as in other parts of Asia of a new engine of growth over the medium term. This is based on, as I said earlier, boosting domestic demand, especially private consumption. What we have discussed with the economic team in China and other parts of Asia is that this requires a range of policies—fiscal, financial, and others—which will raise the labor share of income and boost private consumption. And I think there is widespread recognition—and we have made this point a number of times—that strengthening the currency is part of the policy mix and part of the range of policies needed to raise the labor share of income, raise private consumption, and help introduce a new engine for growth over the medium term.

So I see the strengthening of currencies in Asia as part of this complex set of policies to raise consumption over the medium term.

MS. KAMATA: Thank you.

The gentleman down there in the third row, please.

QUESTION: Hi. Could I get you to talk some more about the gap between private consumption in Asia and private consumption in the U.S. and other richer countries given how Asia is now the engine of growth, as you say, and how important it will be for consumption in Asia to pick up and help rebalance the global economy?

MR. SINGH: Well, I can probably be brief on that issue. We can meet later on to talk about this in more detail. This was the subject of the WEO a few days ago.

I think it is well-recognized that this kind of rebalancing between the advanced economies and the emerging countries is needed. The most important point I will say at this stage is to point out that if you look at the extent to which we can expect the balance between consumption, say, in China and consumption in the advanced economics to alter or to change over the medium term, we are not going to be able to find, even in the best policy scenario, China or Asia making up for the shift in consumption and savings which we can expect in the U.S. and the advanced economies over the medium term. And therefore, while it is very important that Asia introduces this new engine of growth, not only for the global momentum but also for its own sake in terms of social welfare, raising the labor share of income and so on, it is not going to substitute fully or even mainly for the changes that may occur in the advanced economies, and it is very important to bear that point in mind.

MS. KAMATA: Thank you.

The lady back in the second row from the back, please.

QUESTION: Thank you.

You have such an optimistic projection for Indonesian growth this year, which is 6 percent. I want to mention two things happening currently. One is the rupiah appreciation that might hurt our exports, and the second one is the non-economic factors, especially the budget revision discussion that has been drawn out and often delayed due to the political process in our Parliament. Do you think it will impact our prospects for this year?

My second question is there are still growing concerns in our country over the implementation of the Asia and China Free Trade Area. Do you think we should worry about the China factor, and how can we compete with China? Can we grow as fast as China? How can we get there?

Thank you.

MR. SINGH: You are right in pointing out that we have seen really a remarkable improvement in Indonesia in the last year, and you are right in pointing out that our growth projection has moved up to 6 percent, and we see considerable potential for this to rise further over the medium term.

Let me say that the strengthening of the rupiah that we have seen, you are right, has been significant. In fact, the rupiah is now back to the pre-crisis level. There has been a real improvement. We are not seeing this currently affecting Indonesia's export capacity, but having said that, I will make the point that Indonesia is benefiting considerably from the improvement that is taking place in its domestic demand.

We know that Indonesia is among the countries in Asia whose performance had been boosted by the resilience of its own domestic demand, and we expect this to continue.

As far as the fiscal outlook is concerned, I would say that I have been impressed by the extent to which the economic team in Indonesia is putting emphasis on raising infrastructure and addressing the obstacles to higher growth, and I do expect that this emphasis on infrastructure investment both in the public sector as well as in the private sector will have a very important impact on Indonesia's future growth outlook.

On the issue of trade integration, we are seeing the ASEAN community and the ASEAN industry moving to closer trade integration. We see this as a positive development particularly over the medium term. If we assume that domestic demand is going to recover and become a new engine of growth in Asia, we can have intra-regional trade in Asia then focusing more on demand within Asia and not principally dependent on external demand. We know that intra-regional trade in Asia has grown a lot over the last ten years, but the point remains that this increase in intra-regional trade in Asia has been principally based on external demand and not on demand within Asia, and that is the category which I think needs to change and will change over the medium term.

QUESTION: Thank you. You finally called me up.

First, you said that Asia has recovered fast, but that is really not good. You have got to talk about it is the nature of the financial crisis, that it is the practice of financial activity and subprime mortgage, so we have got to understand that.

I disagree with your report, particularly on page 5. There, you mention standard of living and growth. You particularly mention two countries, India and China. We know that India and China are really relatively poor countries. Sixty percent of China's population is poor. So I think [inaudible] need to do something about that. I think in your meeting, the coming meeting in Korea, you may need to add this to your topics.

The other thing is this. Advanced countries export pollution and occupational disease to Asia and Pacific region, so that is a very big problem, too. And I think you also need to think about building up the schools of public health both in China and in India, because that would help much. And particularly, I think that if you want to consider the Asia and Pacific region as an engine of growth, that is a disaster for the coming world, because those things, as I said, and not just pollution and occupational diseases, also contribute a lot to climate change. So I would like to suggest that both the IMF and the World Bank think about some very basic issues.

Thank you.

MS. SINGH: Well, I'm going to ask my colleagues if they want to make any reply, but I am very pleased to hear your questions, because you have broadened the focus. And I want to emphasize to you that we are giving a lot of importance to low-income countries in Asia. We recently had a conference in Vietnam just a few weeks ago which brought in low-income countries in Asia. We expect that this is going to be a very important aspect of our conference in Korea.

We are focusing very much on poverty, but having said that, I do want to point out that it is my sense that over the last 10, 15, 20 years, we have seen a greater reduction in poverty in Asia, for example, in China, that has no historic parallel.

Let me ask Masahiko if you want to add to that or have any comments.

MR. TAKEDA: Well, the only thing I can add is that in the upcoming conference in July, we have one session, plenary session, dedicated to the transition of Asian countries from low-income country to emerging status. So in that context, we will be able to deal with the poverty issue.

MS. KAMATA: Thank you.

The gentleman in the second row, please.

QUESTION: Hi. Could you tell me what you estimate about potential growth of Japan in the context of a framework of growth?

MR. SINGH: Well, I like the fact that in a very short question you have asked a very basic point.

Let me respond by saying that the Government has already set an objective for the medium term. They do expect to reach that target over the next five years. The Government is developing, as I mentioned earlier, a growth strategy to achieve it, focusing also on nontradable sectors.

We have done some work ourselves on the factors that could help elaborate scope of policies in growth. I'm not going to give you a number just now on potential growth. I think the Government has produced one. I will point to Article 4 consultations coming up by us in Tokyo in a few weeks—Jim Gordon will lead that—and I think we will have more to say on the growth prospects.

But I have said that we have raised our near-term outlook. The Government has produced a number for the medium term. We do see a lot of emphasis with the new Government in looking to raise the growth outlook, and we do see a push to elaborate policies beyond the tradable goods sector to expand it.

MS. KAMATA: Thank you.

Any other questions? Okay, the last question from the gentleman in the last row.

QUESTION: Thank you. The South Asian countries have been trying for decades now to form a regional grouping, but they have had very little success. How important is this regional grouping to the South Asian region, and are there alternatives if there is going to be equitable growth in the region?

MR. SINGH: I will ask Kalpana if she has a comment to make, but let me just make one general point.

We are putting a lot of priority on the growth of regional institutions, organizations and communities across the world, and we are supporting to the extent we can the growth of regional surveillance as well in Southeast Asia and in South Asia. So I think we are very much in favor of these developments and are doing our best to support them.

Do you want to add?

MS. KOCHHAR: You are right in point out that there hasn't been much success in forming a regional grouping up to this point, but I think the prospects for that are very good now. You have a very rapidly growing large economy in the South Asia Region, and that is India, and India is now also integrating much more with the rest of Asia. For example, trade between China and India is growing rapidly. Of course, it is mostly imports from China—but it has grown very rapidly in recent years.

So prospects for integration both in the South Asia region amongst themselves and with the rest of Asia I think have greatly improved and will continue to do so.

MS. KAMATA: Thank you.

Let us conclude this press briefing. Again, thank you very much for coming. The handout of the summary of the economic outlook is available at the back of the room, so if you haven't picked it up, please do so.

Thank you.



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