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Transcript of a Press Conference on the International Monetary Fund’s Regional Economic Outlook for Asia and the Pacific
October 27, 2010
TIM CALLEN: Good afternoon, and welcome to this press briefing for the IMF’s latest Regional Economic Outlook for Asia and Pacific. My name’s Tim Callen from the IMF’s external relations department. I’ll be moderating the briefing. Let me introduce to you the speakers we have here.
First of all, on my left is Mr. Anoop Singh, Director of Asia Pacific Department. On my right, Mr. Vivek Arora, Assistant Director, Asia Pacific Department. To Anoop’s left is Mr. Milan Zavadjil, the IMF’s Senior Resident Representative here in Jakarta. And to Milan’s left is Mr. Robert Cardarelli, who’s head of the regional studies section in Asia Pacific Department.
With that brief introduction, I’ll ask Mr. Singh to make a few remarks.
ANOOP SINGH: Good afternoon, everybody. It’s a pleasure to be here. I’m pleased to be back in Jakarta after some time. Indonesia, is a key factor in Asia’s recovery. And this morning, we did present our economic outlook for Asia to a group here in Bank Indonesia. So I’m very pleased to tell you our projection and our assessment is that we expect Asia to continue leading the global recovery in the near term.
Our projections currently are that Asia, as a whole, should grow by 8% this year, moderating to around 7% next year. If you look at this from the point of view of emerging Asia, it is even more striking. Emerging Asia this year should be grow by around nine and a half per cent, and should continue strongly at around 8% next year. And it’s important to point out the roles being played in this by China and India.
We expect China this year to be growing by well over 10%, close to ten and a half per cent. We expect India to be growing close to 10%, between nine and a half and 10. We are also pleased to note that Indonesia is recovering and growing robustly.
So we looked briefly at what will support Asia’s growth over the medium term and we would like first to point that we do expect to see continuing improvement in labour market conditions and financial conditions should remain accommodating. And what’s very important is that these will continue to sustain private domestic demand in Asia, which is very important from the rebalancing perspective over the medium term.
Let me also point to certain risks. Of course, Asia remains dependent for external demand on the advanced economies and of course is also subject to financial conditions, were there to be renewed turbulence in the advanced economies. But, overall, at the current time, the main challenge that we see for Asia is to manage the exit from policy stimulus, now that the recovery in Asia is well underway.
We see that the output gap in Asia is rapidly closing. It has already closed in some economies and should be closing in many others by early next year. We are also seeing some signs of emerging inflationary pressures in some countries. Therefore, for both of these reasons, Asia is well at the stage to advance, effectively and forcefully, in bringing its macroeconomic policies back to normal.
Thus far, the pace of exit, in our view, has been rightly measured and, in many ways, cautious. And, of course, Asia remains a highly differentiated region across its countries. But, having said that, overall, our view is that the region is now at the stage where it can clearly accelerate the exit from stimulus.
Let me also say that managing capital inflows is another policy challenge that Asia is facing. From many points of view, the resurgence in capital flows to Asia demonstrates how much markets expect Asia to remain the leader in economic growth over the medium term. Therefore, it is not surprising to find that capital flows have been boosted to Asia. That’s understandable.
Now there are both short term and medium term considerations from that. In the short run, it is important to manage it carefully, so it does not complicate the macroeconomic policy stance. We have seen in the past that sharp jumps in capital inflows can lead to problems in the financial sector, and these need to be carefully managed.
We have seen a growing number of countries in Asia taking macro-prudential measures to help deal with these capital flows as one of several policies to manage the inflows. I should also point to the importance of building absorptive capacity and increasing the ability of Asia to absorb these capital inflows over the medium term to help boost infrastructure and other development. That is important for rebalancing growth in Asia over the medium term.
My final point is on rebalancing, as we look over the medium term. And here, it is our assessment that sustaining robust growth in Asia will require further progress with rebalancing growth towards domestic demand. We have had the view that those countries with current account surpluses, many of which are in Asia, need to rebalance their economies towards domestic demand so that they do not remain reliant on exports and demand from the advanced economies.
We do see therefore that Asia needs a comprehensive range of policies towards rebalancing, an important component of which will be movements in exchange rates. It is only natural that, as countries strengthen, their currencies will also need to be stronger, and we see this as a sign of Asia’s success. Therefore, as conditions normalise in Asia, our view is that policy makers should look, as they are looking, for opportunities for policy actions that would reinforce both domestic consumption and investment. And this needs a comprehensive package of policies - fiscal, financial and others, including flexible exchange rate policy. Thank you very much.
TIM CALLEN: Thank you very much, Anoop. We’ll turn now to take your questions. I wanted to say that if anybody wants to ask a question in Bahasa, we have someone here who will do the translation, so please feel free to do that. What we’ll do is, if I identify you for a question, could you please make sure you’re to a microphone? We know some in the back who don’t have microphones, if you could come up and speak into a microphone at the table. Please identify yourself and the organisation to which you’re affiliated. Thank you. So, the gentleman up there on the right.
QUESTION: Hello, Anthony Deutsch with the Financial Times. My question is about currencies and exchange rate fluctuations, which you touched on briefly. Firstly, do you expect, or are you concerned about some of the diverging views among G20 countries on currency policy? And you mentioned about allowing currency values to rise in Asia, which I’m assuming is a reference to China. Can you say whether you think China should be allowing its currency to rise more? Thank you very much.
ANOOP SINGH: Thank you very much. Well, let me start by saying that, if we focus only on currency levels, there is a risk that it will miss the broader picture. As we have pointed out in our Regional Economic Outlook, what is at stake globally is rebalancing, between, and within, advanced economies and emerging market economies.
It is very important to focus on the policies that will facilitate and sustain the rebalancing which needs to happen in order for global growth to be sustained over the medium term. Now, clearly, exchange rates, as you’ve said, are a focus on that, and this has been in the news a lot.
However, it is my view that if you focus only on currency levels, it does risk missing the broader picture. The broader picture is that of policies that will guide the rebalancing. So take the case of China.
It has been our view for some time, and this was reiterated in the report of the recently concluded Communist Party meeting in China, that domestic demand growth is going to be the adjusted Chinese growth model over the medium term, and this involves a comprehensive package of policies in the financial sector, fiscal, social security and exchange rates. But it is very important to recognise that it needs a range of policies, not one. And it needs collaboration between countries and that is why the role of the G20 and other avenues of policy collaboration become very important.
So my answer to you is twofold. One, we need to look at the whole picture, not just one instrument. And, number two, a lot depends on policy collaboration, including by the G20.
QUESTION: May I? Hello, I’m Parista from the Bangkok Post. You mentioned that the priority of Asian economies is to rebalance growth and manage capital inflows. So I have two questions. The first one is, could you give us your estimate of the magnitude of foreign capital inflows to the region in the short term, maybe to the end of next year, and for this year? And the second question is, how confident are you that the regional economies can survive in the immediate term, because their strengthening currencies have hurt exporters, financially?
ANOOP SINGH: Well, thanks very much. As far as foreign capital inflows into Asia are concerned, let me make two points. These were at a recent peak, earlier this year. Since then, they have slightly moderated but they do remain very strong. As we look at the surge that has taken place in capital inflows in much of Asia over the last year, and we compare this to where it was in the pre-crisis years, we see that they are not above the pre-crisis levels for all countries.
They have surged, but they have not gone beyond where they were some years ago. That’s the first thing I will say. The second thing I will say is about increasing absorptive capacity. It has both short run as well as medium term consequences. In the short run, Asia has a wide toolkit to deal with these inflows.
One measure in the toolkit is to exit from policy stimulus and that will help. And we are seeing that countries have begun this process of tightening monetary, but and fiscal policy, this is very important.
Second is, you’ve already seen in many countries in Asia, in the recent past, flexibility in the exchange rate. We see, for example, in Indonesia, if you look over the past one year, you see that the nominal effective exchange rate has appreciated significantly. For many Asian currencies, it takes us back to where we were about ten years ago.
But it remains the case, as I said earlier, there is room for greater flexibility, and greater strengthening. And we do believe that is an important measure in this toolkit to deal with capital inflows. It’s also consistent with dealing with possible overheating.
The third point I will make is that many Central Banks have begun the process of taking macro-prudential measures to avoid volatility. We recently had a discussion on this issue, when we spoke in Washington a few days ago, when we spoke about the measures being taken by Central Banks, the macro-prudential measures, to deal with and better address the capital inflows.
So I do think that Asian economies have a toolkit which they are using, and as we look beyond the short term, as we look over the medium term, the challenges are to ensure that these inflows are channeled into sectors, such as infrastructure, such as is the intention of the Government of Indonesia, to help its rebalancing over the medium term.
QUESTION: Hi, I’m Michelle from the Inquirer. There were earlier reports saying that the U.S. Fed is poised to further loosen its already very loose monetary policy stance. So, in that case, wouldn’t it create much more trouble if Asian Central Banks will start increasing their interest rates, because that would shift much more influence to this part of the world?
And, second, how urgent is it for Asian Central Banks to raise their interest rates, especially since some of them, like in the case of the Philippines, still have a favourable inflation outlook?
ANOOP SINGH: Thanks very much. Well, I think your first point refers to the short run cyclical conditions that are leading to the surge in capital inflows. That is happening because there is a very big difference between the monetary policy in the advanced economies and what we’re seeing in the emerging markets. So I think, for these cyclical conditions, as I mentioned, a range of measures are already being taken, such as the macro-prudential.
It’s important that we look as much to the medium term, as we do to the short run, because, I think, as you look to Asia’s growth differentials, compared with advanced economies, these are probably going to remain. And therefore, while we have cyclical conditions now, these are probably going to be sustained from a structural perspective over the medium term. So we do need to look at both dimensions - the short run cyclical and the medium term structural.
On inflation, it is pretty clear that many Central Banks in Asia have begun to exit from the monetary stimulus, some time ago. We have seen several interest rate changes, you saw quite a number in Australia some time ago, and we saw, just two days ago, that China has also raised its policy rate.
So I think that monetary tightening is underway. And I said earlier, this is understandable, because we see inflationary pressures rising in many economies. And we also see certain pressures, in some countries, from property prices. But, fundamentally, we see that Asia outer gaps are being closed.
And when that happens, it’s a very simple economic consequence, it’s time to exit from the policy stimulus.
And what’s also important is there are lags in effects. And since Asia is well under way in closing its gaps, and given there are always lags of several quarters by which monetary policy affects economies, Asia is right to have begun the process and our view that this is now the time to accelerate that shift in most economies.
It’s important to note that Asia is highly differentiated and large set of countries. So we do need to look country by country and not be perceived as having one measure for all countries in Asia.
QUESTION: Hi, I’m from the Jakarta Globe newspaper. What do you think about the possibility of a bubble in this market? What do you think about the Government’s policy of managing capital inflows into this market? Is the Indonesian Central Bank lagging behind other neighbouring nations in not increasing interest rates?
ANOOP SINGH: Thanks very much. In my presentation this morning, I did point out that, in terms of the capacity of the domestic economy and financial market, it is true that Indonesia has received a surge in inflows. This partly why we have seen a significant appreciation in nominal terms of the Rupiah, as we all know.
This surge in inflows is large, relative to the size of the financial economy domestically. However, as we look at the effects of that, macro-economic, financial and price bubbles, I would say Indonesia is managing the process well. Now why do I say that? You look at where inflation is, and although inflation did rise a bit, we know core inflation remains at around 4, and headline inflation has come back below the top end of the range, below 6. From an inflationary point of view, it remains within the range of Bank Indonesia.
But, as I said, it is important, as we look at Indonesia and other countries, to look at the lag with which monetary policy affects prices and economy. That is why, in many countries, the time has come to start the process. But, where Indonesia is concerned, we see inflation is well within the range, and we do not evidence of the kind of property price increases and bubbles that are beginning in other Asian countries. But we do not see it happening in Indonesia.
QUESTION: Hi, Andre from Dow Jones. I’ve a few questions. Is there concern in the IMF about Japan? What are the practical next steps for the Asian financial authorities right now, on rebalancing? How might tightening of policies take place?
ANOOP SINGH: Thanks very much. On Japan, we have made this point that the challenge for Japan, which is certainly shared by the Government, is to implement a comprehensive strategy that would do two things. It would lift growth, which is needed, and ‘reflate’ its economy. Now what do I mean by that?
Such a strategy for Japan, could include perhaps more aggressive monetary easing, but an important further step has been taken by Japan very recently. This could be combined with structural and fiscal reforms. As you know, the Government has already announced its intention to take these structural reforms and to have a medium term package for growth, and to have fiscal reforms.
So what is needed in Japan, shared by the Government, is such a broad based approached, which would both lift confidence and help jumpstart investment and employment. So it’s a broad based strategy that’s needed, not just on monetary easing, but also on structural and fiscal reform.
On rebalancing, it’s important to distinguish between those countries in Asia, where the priority is to raise consumption, such as China, and those countries where the priority is to raise investment. But Asia, as I said, is a highly differentiated economy and, as we look into these rebalancing policies, it is very important to distinguish between countries where consumption is high or investment is high, and where these policies need to be balanced by a shift from public to private sector.
So I do think the rebalancing story for Asia is very important. If you look at our Regional Economic Outlook, which we put out this morning, there is a section, which goes into issues of rebalancing as far it affects investment.
QUESTION: Hi, capital inflows are raising a lot of concern, as it’s kind of a repeat of what we saw around the financial crisis. So it’s good to hear that you say that they may not have yet received pre-crisis levels. But does IMF see capital inflows reaching those levels and, if so, would we see a slew of capital controls coming back into play?
ANOOP SINGH: I think it’s very important, as you look at capital inflow into Asia, that you try and compare the flows by country, to where it was in pre-crisis years. It has surged, but I don’t think it’s gone beyond where they were in pre-crisis years. As you look at the measures that can be taken, we see that Asia has a wide toolkit.
By that, I mean Asia has a wide set of measures, some of which are already being used, like macro-prudential. There is further room on the fiscal side, and for some countries, there is greater exchange rate flexibility, which would also help balance and address these capital inflows.
Now, as far as capital control concerns are concerned, I have not seen this as a major discussion point in Asia. I think this depends very much, on country by country circumstances. In our view capital controls can play a role, but they have to be carefully defined by country, by circumstance, and by duration.
Our sense is that they could play a role at some stage, for a temporary period. But, at this stage, I think Asia has a sufficiently wide toolkit that countries are currently employing to deal with the challenge.
QUESTION: Hi, I’m from Saigon Marketing newspaper in Vietnam. Our situation is probably quite different from the rest of Asia. Our currency keeps losing value. Inflation is getting quite high. It’s been predicted that Vietnam would be most vulnerable, if there was a currency war. What’s your take on that?
ANOOP SINGH: I’m glad to have your question. We have been meeting officials from the state bank in Vietnam in the last few weeks. We have been informed by them that they plan to continue with their commitment to deal with inflationary pressures. They have told us their objective is to bring inflation down. We see that inflation in Vietnam has already begun to come down.
I think dealing with the short run macro-economic possibilities is a very important objective for the state bank of Vietnam. They have also adopted a policy of tightening the fiscal stance. We do see that the fiscal deficit has come down. I would agree that, as we look at Vietnam, the next 6-9 months are very important, because the Government and the state bank have agreed that dealing with potential macro-economic vulnerabilities is very important.
Inflation needs to come down further. We need to remove the pressure on the dong in exchange markets. And I think the short run effects, to deal with possible macro-economic vulnerabilities, is very important. The Government and the state bank do have the objectives of bringing down the vulnerabilities, bringing down inflation.
This is important because, as we look ahead over the medium term, Vietnam has a very considerable potential to raise its medium term growth. But the challenge for Vietnam in the short run is dealing with the pressures we see in the exchange markets, dealing with the macroeconomic concerns, and bringing down inflation.
QUESTION: I’m from BusinessWorld in Manila. How can countries in Asia improve their absorptive capacity? In the Philippines, inflows have increased. The peso has appreciated,, and the stock market index has reached a record high. But how does the Government improve our absorptive capacity?
ANOOP SINGH: Thanks very much. Well, I think for the Philippines, as well as for other countries in Asia, it’s very important to increase the absorptive capacity, not just to capture inflows, but to build the capacity in a way that channels inflows to the sectors needed for re-balancing investment and growth over the medium term.
What we have in many countries, including the Philippines, is a concern that infrastructure investment has been low. It has mainly been addressed by the public sector. We need to build an economic framework that channels this into the private sector. Some countries are looking at PPPs to see if they can be enlarged or adapted to bring a greater private sector role into infrastructure.
At the same time, across Asia, financial sector development and innovation is very important. We need to build up longer term instruments to absorb these inflows. We need to build up the corporate bond markets. I think that the financial instruments that will build up funding markets are something on the mind of many Asian economies.
We have recently done a study on what is needed to raise bond markets, especially corporate funding, from the capital markets in Asia. We expect to discuss this with countries in the ASEAN region soon, but the financial sector side is crucial in order to raise investment and private sector role and capital inflows into infrastructure over the medium term.
QUESTION: Hi, maybe I will speak in Bahasa? (TRANSLATED QUESTIONS) How would you compare the crisis in 1998 and the one in 2008? What do you see as the major differences? Will capital inflows return to pre-crisis levels? What is the IMF’s view on capital controls? What would you recommend to the Indonesian Government on capital controls?
ANOOP SINGH: I’m happy to take those questions. The first thing is that the Asian financial crisis of 1998 and the current global crisis are two completely different things. What we have now, what we have had now, is a global crisis in the advanced economies. The second difference is that addressing the current global crisis obviously has global consequences, in terms of advanced economy demand for products from emerging markets, and because the financial sector was at the root of the current global financial crisis.
What I will say is that Indonesia, and other countries in Asia, have so developed and reformed their themselves over the last decade, that they have been able to withstand some or many of the effects of today’s global crisis. For example, the financial sector in Asia was not exposed to the concerns that we saw in the U.S. and in other advanced economies.
You look at the public debt of Indonesia and other Asian economies. It is sound and very different from other advanced economies. Because of these reforms that led to these outcomes, Asia was able to withstand the current crisis and lead the global recovery.
I think the capital inflows need to be looked at in two ways. The first is, as I said, the cyclical, short run effects. The second is the longer run measures to raise absorptive capacity and to channel inflows to infrastructure and other sectors.
For the short run, to deal with these inflows, it is very important they don’t lead to excess liquidity. It is very important they don’t lead to financial difficulties. I do think that Asia has a comprehensive tool kit of measures to deal with the short run. Macro-prudential measures have been taken by Central Banks aimed at these short run effects.
Asia still has room in other measures, such as fiscal policy and exchange rate policy. The kind of controls you mentioned can be used in certain, well defined conditions for temporary periods. But we don’t see that in the front line of measures currently in Asia.
TIM CALLEN: Ladies and gentlemen, thank you very much for coming to this briefing. There are materials available, in terms of press releases and the Regional Economic Outlook. If you don’t have them already, please pick them up on the way out. There’s material on the IMF’s online briefing centre available here. I would also urge you to take a look at that as a way of getting access to information and data on the IMF. Thank you very much.
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