Transcript

By Anoop Singh, Director, Asia and Pacific Department
With Kalpana Kochhar, Deputy Director, and Masahiko Takeda, Deputy Director

Saturday, October 9, 2010
Washington, DC

MS. KAMATA: Good morning.

This is an IMF Press Briefing on Asia and Pacific region.

I am Yoshiko Kamata of the IMF's Media Relations.

Let me introduce this morning's briefers. In the middle is Mr. Anoop Singh, Director of the Asia and Pacific Department. To his left is Ms. Kalpana Kochhar, Deputy Director of the Asia and Pacific Department; to his right is Mr. Masahiko Takeda, also Deputy Director of the Asia and Pacific Department.

Mr. Singh will give some brief opening remarks, and then we will take your questions.

MR. SINGH: Good morning, everybody. It is good to see you all.

It is a pleasure to be here and to update you again on the outlook for Asia.

Let me just say briefly that we are releasing our Regional Outlook shortly in Asia, so we hope to see you there as well.

As you know, Asia's strong performance since the crisis has continued unabated so far this year, and you have already heard from my colleagues the outlook for the global economy. In many ways, this is better than was expected some months ago. And there are new downside risks globally, but these are not new.

So, what are the implications for Asia?

It is quite striking. Activity in Asia has proceeded above trend in almost all economies in the first half of the year. A key point here is that private domestic demand has picked up. This is still fueled in many cases by still accommodative policy conditions but also in the first half of this year by very strong export growth. We expect during the second half of the year that activity will moderate somewhat to a more sustainable pace.

But it is important to note that the recovery as well as its composition remains quite different across Asia as well.

Let me say a few words on China. In China, output growth has somewhat moderated recently, owing to credit growth that is being slowed and the effects of measures to cool property markets. We also see that private domestic demand has continued to support growth, importantly, in India and Indonesia. And the export-dependent Asian economies, they continue to benefit from export growth that remains strong.

I should also mention briefly that economic activity has also accelerated in many of Asia's low-income countries, thanks to higher external demand, strong investment in the commodities sector, and also, accommodative macroeconomic policies. We are seeing in some countries that have been supported by IMF programs a markedly improved outlook, such as in Sri Lanka and Mongolia.

Therefore, all put together, we expect Asia to continue to lead the global recovery, growing overall by 8 percent this year and still by a sustainable 7 percent next year.

China and India will continue to lead the region's growth. For China and India, we expect growth this year at about 10 ½ percent and a little above 9 ½ percent, respectively.

So, what will support Asia's growth over the near term?

We see improvements in labor market conditions. We see, as I mentioned, still accommodative financial conditions. And both are expected to sustain both consumption and investment as components of private domestic demand.

Let me now go on to downside risks.

Despite Asia's strong fundamentals, important trade and financial linkages with advanced economies tell us that any further deterioration in global financial conditions--a slowing of the global recovery more than we expect, for example--will have important effects on the region. We are not at a stage of decoupling. In particular, I would point out that a weaker-than-expected recovery of demand in the advanced economies would affect trade, of course, and that more volatile capital flows would also hurt domestic demand.

Let me now go to the main policy challenges for the region.

Assuming our baseline scenarios hold out, the main challenge therefore would be to manage the exit from the policy stimulus now that, as I mentioned, the recovery is well underway. We see in most economies in Asia a closing of output gaps. We see in some countries emerging signs of inflationary pressures.

For at least these two reasons, in our view, Asia is now well at the stage to make further progress to normalize macroeconomic policy stances.

Now, it is important to note that many central banks have already taken significant steps in this direction. Overall, our view is that thus far, the pace of exit has been rightly measured, but monetary and fiscal policies in most countries are still generally accomodative, and therefore, the region can clearly accelerate its pace. Japan of course is an exception because of the growth outlook and deflation.

The other policy challenge the region faces is to manage capital inflows. Of course, capital inflows to Asia are expected to increase further in light of the growth differential and other factors.

At the same time, as historical evidence tells us, sharp jumps in capital inflows can pose significant risks to financial stability, particularly if they are associated with excessively easy domestic financial conditions. In that context, we have seen that many countries in the region have taken macro-prudential measures. This has been the case, for example, in Korea, Indonesia, Singapore and some other countries.

These measures have been taken in order to minimize the risks from these capital inflows, but a further tightening of monetary conditions is still needed in most countries, including through exchange rate appreciation. I'll come back to that point shortly.

Also, continuing to withdraw fiscal stimulus would also help guard against the risks of overheating. Having said that, should global conditions worsen, the region has the room to delay in many cases the normalization of the fiscal policy stance.

Let me now go on briefly to the medium term.

Sustaining robust growth in Asia will require, as we have said in many papers in the last few weeks, continued progress with rebalancing growth toward domestic demand, a process that is already happening in many countries in Asia.

As you know, we have had a longstanding view that those countries with current account surpluses, many of which are in Asia, need to rebalance their economies toward domestic demand and away from a reliance on exports. This is the external rebalancing that Olivier Blanchard has spoken about as part of the efforts to maintain global growth over the medium term.

There has been progress in this direction in Asia, with trade surpluses already beginning to diminish, especially recently in China. However, to build on the progress already achieved and to sustain robust growth over the medium term, the economies of emerging Asia in particular need to accelerate this rebalancing, and doing so would be very much in Asia's own interest, and as I have just said, an important component would involve movements in exchange rates.

It is only natural, in our view, that as these economies strengthen, so too their currencies would need to be stronger. This is very much a sign of Asia's success. In addition, as policy conditions in Asia are normalized, policymakers often look for opportunities for policy actions that will reinforce both domestic consumption and investments. So it is a package of measures that is needed.

Finally, let me say and recall the commitment we made at the Asia Conference in Korea a few months ago--I hope many of you were there--that our commitment to Asia remains strong, and we are partnering closely with governments in Asia. We are trying to increase our presence in the region, strengthening our surveillance, partly by doing more work on the financial sector, and also trying to collaborate more closely with regional institutions.

Those are my opening remarks, and I look forward to any questions that you might have.

MS. KAMATA: Thank you.

Now we will take your questions. Please identify yourselves when you ask questions.

That gentleman--yes?

QUESTIONER: It is a question, really, about time scales. Rebalancing of demand in the Asian economies is obviously going to take time--I don't know how much time, but obviously time--and you are advocating now withdrawing stimulus or accelerating the withdrawal of stimulus. How great, if at all, do you rate the danger that this stimulus could be withdrawn before the rebalancing has taken place, and therefore, you move into a fresh dip in activity?

If I may, too, on China, the central bank governor was implying yesterday that the problem of the yuan should go away over time because there will be a rebalancing, and China's current account surplus with the United States will diminish, and therefore it will become less of a problem, so we really don't need to worry too much.

Do you share that optimism?

MR. SINGH: Thank you very much.

On your first point, I would say that the rebalancing process to raise the importance of domestic demand has begun in Asia. It is important to note, however, that there is considerable differentiation across Asia. In some countries, like China, the emphasis probably needs to be in raising consumption. On the other hand, the consumption ratio is really quite high in, say, Korea and India.

In many countries, the challenge is one of sustaining investment, and if I may briefly mention, there is the challenge of ensuring that over the medium term, the capital inflows that we expect will continue to rise in Asia are used increasingly to sustain infrastructure investment, and this does not remain a burden on the public sector alone.

Now, on China, we have made the point frequently--it will be in the Regional Outlook--that what we are looking for for rebalancing in China is a comprehensive strategy to rebalance China's economy, and we see that the senior leaders in China have made this point themselves frequently, including recently. The purpose of such a comprehensive package would be to increase the purchasing power of households--my point on raising domestic consumption--and thereby raise the labor share of income. You see that the consumption ratio in China has actually declined in recent years, although the rate of growth of consumption has actually been quite high in terms of its own percentage terms. And there is a need to reorient investment toward nontradable sectors.

So our view in China has been that the exchange rate appreciation, while needed, should not be viewed in isolation, and a broad range of policies will be needed if China is to successfully rebalance its economy. But let me, while I am on China--I know this is on your mind--let me make a couple more points on this rebalancing.

It is important to note that although this trend of domestic demand in China has already had positive spillovers in many Asian economies--countries that export commodities, capital goods and others--it is important to remember that China alone cannot make up for a loss of demand from advanced economies even with China's rebalancing proceeding. China's GDP is only about about

one-third that of the United States, and China's consumption is only about one-fifth that of the United States. China's share in world imports of consumer goods is only about 3 percent. So these ratios are low. There is strong and high room to improve. But the question is that it will not quickly be able to make up for the loss of demand globally from the advanced economies.

QUESTIONER: Following on the theme of my colleagues, what do you see--these IMF meetings were convened with talk of a currency war swirling outside--that may have been overblown--but what you do see as the IMF's role in the currency debate going forward? What precisely can the Fund do?

MR. SINGH: Well, I'm sure you have been hearing the current comments made by Dominique Strauss-Kahn and others in recent days.

Just as a context to my response, let me make one point. You have probably seen our estimates that look at the benefits from collective, collaborative policy actions in the medium term that we have done for the G20. These projections show that the global economy can expect significant upside benefits from policy collaboration, and conversely, there will be significant downside disadvantages from lack of collaboration and policy cooperation.

So I think what Mr. Strauss-Kahn has emphasized in recent days again is the need for policy cooperation, moving ahead with policies across countries in a concerted way, and he has also said that the IMF is ready and is already trying to move this collaboration forward.

So my answer to your question is that the global economy, particularly at this time, emphasizes and reemphasizes the benefits from cooperation and collaboration in policies, not a situation of wars of any kind.

QUESTIONER: I have two questions about Japan's currency. First, I think the IMF assessed that Japanese currency reflects on fundamentals in the medium term, in the WEO, but many Japanese, especially exporters, think it is too high because it hit the highest level in 15 years. So, can you tell me more information about your assessment for the Japanese currency?

Secondly, Japan's government took intervention in the currency market, and they said it was a policy action for further disorder in movement in the currency markets. Do you agree with this assessment, or what is your assessment for the Japanese intervention? Thank you.

MR. SINGH: Thanks very much.

The main point I want to make on Japan is that Japan has, for at least six or seven years, perhaps more, had a policy of having its exchange rate market-determined, and we do expect that this policy will continue in the future.

As you know, the Japanese authorities have announced that their intervention--it was done some weeks ago--was to deal with a short-term disruptive movement, and they have made it clear that in the future, their policy will be to go back--that the exchange rate will remain market-determined.

You also asked about the level of the exchange rate. It is true that there has been a lot of volatility recently, but our sense is that looking at its medium-term equilibrium, the aim is basically in the range of medium-term equilibrium. And in the first half of this year, before this sudden movement, we had seen that Japan's exports were doing quite well.

Let me ask Ms. Kochhar if she wants to add anything to that.

MS. KOCCHAR: No.

QUESTIONER: I wonder if you could comment on Cambodia's economic performance this year compared to its neighboring countries, like Vietnam, Laos and Thailand, and also what is the outlook for next year? Thanks.

MR. SINGH: Thanks very much.

Well, I am pleased to say that we have had very close contact with the authorities. A team has just come back from Cambodia. The economy is certainly recovering well from the contraction we saw last year. As we will be putting out in our Regional Outlook coming out soon, we see that growth in 2010 should be almost close to 5 percent, and under the conditions and the outlook we have in mind, it should increase to beyond 6.5 percent in 2011.

I will make one point about Cambodia and our role. We have been carrying out a Financial Sector Assessment Program for Cambodia, and we do believe that this is an important time for it in Cambodia. It tries to develop for the medium term a crisis management framework and improved supervision and regulations. But the government is also firmly looking at policies that would improve the business environment. And as we look at Cambodia relative to other low-income countries in Asia, it remains the case that important steps are needed in Cambodia's case to raise the tax ratio. I should mention that Cambodia's tax-to-revenue ratio to GDP lags many comparator countries in the region by at least 5 to 7 percentage points. This is important for several reasons--most importantly, as in other countries, to raise infrastructure investment including in agriculture, but also, I think the main point is to broaden and improve the business environment, attract capital into Cambodia, and broaden the sources of growth.

We are in close contact with the authorities in Cambodia.

MS. KAMATA: Thank you. Let me take his question, and then we have an online question from the Philippines, too. So let me first take your question and then take the one from the Philippines online and then come back to you, to the floor.

QUESTIONER: Thank you. The other thing [inaudible] China's trade surplus-to-GDP ratio will decline in coming years, but the IMF doesn't quite agree on that projection. I wonder, in your new projections for Asia, do you change that stance or something?

The second question is: do you think that for emerging markets, if the exchange rate really [inaudible] in a significant way, that could delay the movement in interest rate adjustment?

Thank you.

MR. SINGH: Thank you very much.

Well, I'll be looking forward to seeing Deputy Governor Yi Gang in a few hours, so we continue to talk about projections.

I think the most important point here is that in China, as you know, the current account surplus as a share of GDP has almost halved over the last few years. This has obviously reflected two factors. As we know, global demand contracted in the last two years; but also, the marked increase in China's imports and demand for commodities and capital goods. So the current account surplus has halved.

It is true that there are at the moment some differences in the projections for the current account surplus in the coming years. Our view so far has been that as external demand recovers, and the fiscal position moves toward balance, let me say, the trend for the current account surplus to become larger again is there. That is a basis of our current projections.

We have done projections for the medium term showing that China's current account could go back up to 7 to 8 percent of GDP over the next four or five years.

Now, Deputy Governor Yi Gang has, I think, rightly pointed out the implications, in his view of the comprehensive rebalancing policies, that they are aiming to implement--both financial, fiscal and others--and he sees that the current account surplus will not rise as much as we do, which certainly would be closer to that rebalancing that the global economy needs over the medium term, and we hope that he is right.

QUESTIONER: [Inaudible; off-mike]: --exchange rate and interest rate, the relation of these two, if exchange rate could delay the interest rate movement, please.

MR. SINGH: Well, I would, you know, try to separate these points. From a near-term point of view, output gaps in most economies in Asia, as I mentioned, have closed or are about to close, and the time has come to accelerate the withdrawal, probably starting out with a monetary stimulus.

Now, exchange appreciation or flexibility is part of that process, too. It helps the tightening. But I would also look at the exchange rate flexibility and appreciation over the medium term, because it is part of the medium-term external rebalancing that the global economy needs. So I would separate the two but make the point that in the short term, both should be consistent and self-reinforcing.

MS. KAMATA: Thank you. We are running out of time, so let me take this online question from the Philippines, and then take one from the lady, and then from the gentleman in the back.

This is a question from the Philippines. "Why did the IMF raise its growth forecast for the Philippines to 7 percent this year and to 4.5 percent next year? And what should the government do to sustain growth while keeping on track with its fiscal consolidation plan?"

MR. SINGH: Well, the Philippines is among the countries whose recovery has been very strong. And we do see that in the first half of this year, real GDP growth in the Philippines was close to 8 percent, and for the year as a whole, it should be close to 7 percent, and that this recovery has been stronger than we expected some months ago. And, as with some other economies in Asia, it is not just exports. It is also investment and private consumption which have been picking up more than we expected.

Just on that point, I will say that inflation has remained fairly steady, but like other countries in Asia, there is a trend upward, but it remains within the central bank's target range.

Over the medium term, I think the focus of the new government rightly remains to aim for a medium-term fiscal consolidation in order to emphasize the importance they give to fiscal prudence. And like other countries in Asia, t he Philippines does need social and infrastructure spending, and therefore, the kind of fiscal consolidation that the Government has been thinking about over the medium term is more revenue-based fiscal reforms.

We have also done a recent Financial Sector Assessment, and I think it shows that the Philippines continues to benefit from its sound financial sector, and there are further steps that they are taking.

So overall, I would say the priorities are threefold--fiscal reforms, revenue reforms; number two, raising infrastructure and social spending; and number three, improving further the business environment to ensure that capital flows also support the infrastructure increase that is needed in the Philippines.

MS. KAMATA: Thank you. Let's take two questions--one from this lady and then one from the back--and then we'll wrap up.

QUESTIONER: Some ministers present here for the assembly are very concerned about the possibility of external crash in many of the emerging markets in the medium term. Do you agree with this possibility; do you see this possibility of external crisis? Do you agree with this possibility or of this concern?

MR. SINGH: Do you mean external crisis in the sense of the currency wars; is that what you mean?

QUESTIONER: Yes, in the sense of payment balance.

MR. SINGH: Well, I think I just spoke a bit to the issue of the currency wars, and I made the point that collaboration is very important. In terms of external crisis over the medium term, that is not even among our downside risks for emerging markets; it is not. We have a very positive projection for Asia.

And of course--I think what you mean is what are the risks for Asia if the downside risks materialize in the advanced economies. On that, maybe I'll make one point. I did say that Asia has not decoupled. Although there is growth of domestic demand, but still it has not decoupled. I would say that it is important to note that among the shocks that would hurt Asia the most would be shocks to investment in the advanced economies. So, if there are shocks to growth in the U.S. and Europe arising from a shock to investment, it is possible that that would affect Asia the most, and that is because of Asia's strength in the export of information-technologyrelated products.

Beyond that, I think the focus for the medium term is one of rebalancing, so I think the focus in Asia is quite clear. External rebalancing would be helped by exchange rate flexibility and strengthening, but this is best done and achieved with domestic and internal rebalancing in Asia, which means continuing rather strongly the shift we are already seeing to domestic demand from exports. But at this stage, we don't see crises.

As I also mentioned earlier, while Asia would be affected by shocks to financial flows and the financial sector in the advanced economies of Europe, the links, while they are significant, are not expected to create big shocks for Asia, partly because Asia's dependence on wholesale funding is genuinely low, and where it is not very low, the ratio of reserves is high. So we are seeing that from a financial standpoint, the risks are probably less than the risks from the trade.

MR. TAKEDA: I don't know exactly what is the mechanism of crisis that you have in mind, but I think there is this view, partly related to the experience of the East Asian crisis, that when advanced countries are in recession or interest rates are low, money starts to flow into emerging markets, and then that creates a temporary boom or excesses, but such a capital flow can stop for whatever reason--maybe the excess is seen to be too much or the advance countries start to recover, and interest rates rise, and money may flow back to advanced countries.

So, right now, we are seeing sort of the first part of that, but there has been a big change over the past 10 years or so compared with the time of the East Asian crisis. Exchange rates are generally more flexible, and financial sector regulation has been strengthened, and there is more vigilance in terms of containing asset price bubbles on the part of emerging market policy authorities. So we are hoping that the same mistake won't be repeated going forward, and it is part of our job to make sure that that won't happen. Thanks.

MS. KAMATA: Okay, the last question, in the back row, and then we will conclude.

QUESTIONER: Sir, what are the major challenges faced by Pakistan's economy--

MS. KAMATA: Sir, I'm afraid that Pakistan is actually covered by the Middle East and Central Asia Department, so maybe you can defer to them.

QUESTIONER: But can I ask another regional question?

MS. KAMATA: Regional, on Asia; okay, go ahead.

QUESTIONER: On Asia. What are your estimates that South Asian countries can reap the benefits by enhancing trade ties with each other, especially in the context of Pakistan and India?

MR. SINGH: Well, this is an important point that you are raising.

We have seen that intra-Asian trade has gone up tremendously over the last decade, much more with East Asia than within South Asia. Even having said that, much of that trade and its increase has been focused on processing goods for export to advanced economies and not principally based on final demand from within Asia.

So the kind of rebalancing we see over the medium term would increase intra-Asian trade destined toward final demand within Asia. And as we look at and compare the trade in South Asia, intra-South Asia, as I said, it is much less than with East Asia, and we have seen the leaders of the South Asian economies speak out very firmly in favor of increasing regional trade within South Asia.

I was recently, just a few weeks ago, in Dhaka, and I was struck that the Prime Minister of Bangladesh clearly said that an objective for the future is to increase trade. I do think that this is an important objective of countries in South Asia.

MS. KAMATA: Thank you. We'll wrap up the press briefing. Thank you very much, all, for coming.