Transcript of a Press Conference on the International Monetary Fund’s Spring 2011 Asia and Pacific Regional Economic Outlook

with Mr. Anoop Singh, Director of the Asia and Pacific Department,
Mr. Vivek Arora, Assistant Director,
and Mr. Roberto Cardarelli, Chief of the Regional Study Division,
Mr. Sean Craig, Resident Representative in Hong Kong,
and Ms. Keiko Utsunomiya, External Relations Department
Hong Kong
April 28, 2011

MS. UTSUNOMIYA: Thank you very much for coming to the Press Briefing for the Spring 2011 Regional Economic Outlook by the IMF’s Asia and Pacific Department. On my right, the second from the right, MR. Singh is the Director of the IMF’s Asia and Pacific Department. On his right is Mr. Vivek Arora, the Assistant Director of Asia and Pacific Department. And on my right, is Mr Roberto Cardarelli. He is the Division Chief of Regional Studies Division, which produces this report, Regional Economic Outlook of the Asia and Pacific Department. And on my far right is the resident representative of the IMF’s Hong Kong office, Mr Sean Craig.

Now I would like to turn the microphone to MR. Singh. He will give a few remarks and then we will take questions from the floor. Thank you. Anoop?

MR. SINGH: Thanks very much. Good afternoon and I’m very happy to meet you all. We are releasing our economic outlook for Asia, and it’s a pleasure for me to meet you and to update you. 

Before I go into our forecast, let me start out by expressing my condolences to the authorities and people of Japan, for the terrible losses that they have experienced from the earthquake last month. Thankfully the early and decisive actions by the Government and the Bank of Japan have helped to contain the initial damage, and we see an important role for policies in addressing the uncertainties that do remain by moving forward to reconstruction standing and improving confidence.

But now, moving on to Asia as a whole, our sense is that the recovery is now at a healthy stage. Export and domestic demand are both fueling rapid economic growth. Our prediction is for growth to remain robust and sustainable, close to 7 percent this year and next year. And as you look at the components, we see emerging Asia led by India and China, growing at close to 8 percent. We see also, although there are differences across Asia, we see economic growth remaining robust in many parts of Asia, including in the low-income countries and in the Pacific Island economies. So the output certainly of growth, looks very strong. Asia continues to lead the global recovery and the global growth momentum. This will remain the case in the coming years.

Having said that, let me make a few points about the downside risks that we do face. We have seen the emergence of overheating pressures in Asia in both goods and asset prices. We see the Headline CPI Inflation has accelerated in the last 6 months. Initially this has reflected in commodity prices; food prices and energy, but in some cases, we are beginning to see that these pressures are now spilling over into core inflation and to inflation expectations. Certainly credit dynamics here in Hong Kong, but also in many parts of Asia, are very strong. And we do see this reflected in the buoyancy in segments of property markets in a number of economies, including here in Hong Kong. 

So, therefore, our sense is that against the background also that output gaps are closing in Asia, there is a need to tighten further the macro-economic policy stances. This has in fact become more pressing, in our view, than it was even six months ago. In most economies in Asia, further monetary tightening is needed, as interest rates in those economies remain generally below the levels consistent with stable growth and low inflation. In many cases, policy rates are still negative in real terms.

Also in other economies where exchange rate policy is flexible, we see room for continuing exchange rate appreciation. This will help tighten monetary conditions. And across the region, we see scope for more fiscal consolidation, even though it’s important to target low-income households for protection against the higher food prices that are now part of the scene.

So those are the main comments that I want to make to start out. I want to end by making just one point as we talk about food prices, the effect on the poor. It’s really important for the Region to continue to target more inclusive growth. By inclusive, I mean to be sure that workers who remain employed in the most vulnerable segments of Asian bigger markets, remain protected. We are seeing inequalities in many parts of Asia, and narrowing these inequalities through inclusive labor markets, stronger social protection is also needed. It would not only reinforce stability, it would also help facilitate the rebalancing that Asia needs towards domestic demand and against simply an export-led model over the medium-term.

Those are my few opening remarks. We will have a Press Release for you and I hope you already have copies of our written Outlook that gives you the more detailed predictions of growth and inflation we see for parts of Asia. Thank you very much.

MS. UTSUNOMIYA: Thank you Anoop. Okay, now I would like to turn the floor to you all. If you have any questions, please raise your hands and identify yourself and affiliation before asking questions.

QUESTIONER: What is your view on China’s inflation and the measures needed by the Chinese corporates to tackle this problem?

MR. SINGH: Yes, thanks very much. That’s a really important issue. We have seen that in China so far, it has been driven largely by domestic supply conditions. We know that food prices have been an important factor in this. We know that the Chinese authorities at the People’s Bank are making sure that they are controlling credit; they are tightening monetary policy; they are raising interest rates to have increased reserve requirements. So what in fact China is doing, is China is withdrawing the monetary stimulus that was needed one and two years ago, and this needs to be done because credit growth has certainly been rapid and their recovery is at a very strong stage.

So our sense is that inflation in China should peak shortly, it should come down later in the year and it should come back to the target range of the authorities, which is closer to 4 – 4.5 percent.

QUESTIONER: Can you be more specific about the risk of a property bubble developing in Hong Kong? Do you think the Government is successful in doing what they are doing? 

MR.SINGH: Well I think we see in a number of economies in Asia that a rapid pace of property price inflation is a concern. The concern is simply because if you allow a bubble to develop, this would set the stage for a correction in the future that could be quite painful. Now looking at Hong Kong, our clear belief is that the authorities here are fully aware of the risks, and they’ve been taking a succession of measures against further increases in property prices. What they are tackling is a credit property price cycle, and they have been – the authorities, the HKMA – have been looking closely at banks; they have continued to act on prudential measures; they are continuing to lower loan-to-value and debt service ratios. I’m sure further steps will be taken so that they can be sure that property price inflation will be controlled and that a bubble with not develop. This is a major concern of the authorities. They are taking measures, and our sense is there are lags in this process, but I think these measures will continue until they are certain that a risk of a bubble developing is being addressed. Let me ask Mr. Arora if he’ll want to add to that. Okay that’s fine.

QUESTIONER: I have a question of Japan, the impact of the earthquake. Can you specify which responsive measures helped contain the economic impact?  Also give us figures in terms of the downside risk of the Japanese earthquake on the worst case scenario? 

MR. SINGH: Okay, well I think this is a very important issue. My view is that the authorities in the Bank of Japan have already taken substantial steps. Last week, the Government proposed its first supplementary budget in response to the earthquake amounting to about 0.8 percent of GDP. The Government intends to submit a sizable second supplementary budget in early summer, likely to surpass 1 percent of GDP, focusing more on large scale public infrastructure. You know of course the Bank of Japan has taken extraordinary actions to provide ample liquidity and stabilize financial markets. You know of course that on the very first business day after the disaster, the Bank of Japan provided a total of over JPY21 trillion of short-term liquidity "in the first day alone". They have also doubled the size of its purchases of financial assets, and there are further measures have been taken. These measures have already helped reduce risk aversion and ensure financial stability.  

So I think these steps have been taken. Now if you look ahead, now we are looking at the outlook for GDP: as we look back at the Kobe earthquake in 1995 and other natural disasters, it is to be expected in the first few quarters, there is a sharp negative effect on production. We’ve already seen data become available in Japan yesterday on industrial production, that goes in that direction.

Our sense is that as the reconstruction spending takes hold, you will begin to see industrial production increasing and a recovery coming back later in the year. And I do think that steps are being taken to ensure that confidence is boosted and industrial production recovers, and the reconstruction spending is focusing towards this.

MS. UTSUNOMIYA: I would like to take a question online related to Japan. Comments please on S&P’s downgrade for Japanese sovereign rating outlook. Secondly, is consumption tax needed for reconstruction cost?

MR. SINGH: Okay, thank you. Well, on the first issue, yes we have seen the report that S&P has downgraded the sovereign outlook from “Stable” to “Negative”, mainly because they have cited the reconstruction costs that will increase the fiscal deficit. Now our own view on that is that while the reconstruction costs will obviously add to the deficit, our sense is that the amounts are likely to be manageable and the spending will by nature be temporary, and will likely be spread over several years.

Now we do see that yields on Government bonds have remained low and stable since the earthquake, and, to us our sense, that indicates again that the Government has the capacity to fund its reconstruction efforts. Now talking of funding reconstruction, the question was asked about how the Government might do so and whether there is any room for a consumption tax increase. Well certainly there are many options for financing reconstruction spending. These could range from tapping reserves; contingency funds; reallocating spending; certainly issuing more debt and raising taxes. So far, the Government has already decided to tap contingency reserves and cut back existing spending and it is likely they will need to issue more debt.

Now in terms of further financing, our sense is that there are a number of options available and assure we are sure the Government will consider all the options including possibly a modest tax hike. I should add that some tax hike has been a standard practice in many countries in dealing with natural disasters. So our sense is that once the reconstruction efforts in Japan get underway, and that can only happen once we have a fuller estimate of the earthquake’s damage, it is likely that the attention in Japan will turn to linking the financing to a strategy of bringing down the public debt over the medium-term. That time I’m sure will come. 

QUESTIONER: The US Fed has announced that interest rates will remain low and for a longer period of time. Will the capital still flow to the emerging markets and will that intensify the overheating impact in the Asia Pacific region? 

MR. SINGH: Well I think we are seeing both now and over the medium-term, a significant growth differential between emerging markets like in Asia, and advanced economies. And it is likely that this will lead to continuing increases in the flow of capital from the advanced economies to emerging markets. 

Having said that, I should point out that since late last year, this surge in capital flows to Asia, has moderated. It remains high in some economies including in China, Indonesia and the Philippines, but if you look overall at capital flows coming to Asia, this has moderated since late last year. Therefore, we have to be prepared that these capital flows will be volatile, and therefore, the challenge for the Region is to ensure that its absorptive capacity rises. So I would say in the short-run, it’s important to act on overheating that you’re already seeing in Asia because all the output gaps are closing, and over the medium-term, to take the measures and to raise financial development, so that the capacity of Asia to absorb capital flows over the medium-term rises and ensures that those capital flows get directed into sectors and areas that are crucial for rebalancing and maintaining Asia’s growth at a high level over the medium-term.

So there are both short-term issues, but there are also important medium-term issues to ensure the absorptive capacity of Asia to capital flows rises over time.

QUESTIONER: Do you expect Hong Kong might start its rate hike cycle earlier than the States?  I mean when do you think it will be the starting point?  Secondly, on expectation of the Fed’s ceasing the QE and how would that affect Asia economy and the markets, do you expect there will be a huge correction?

MR. SINGH: Well I think we’ve already seen that tightening has started. It started with the ECB, I would say that if you look at this issue over the medium-term, the great differential, as I just said, the great differentials between emerging Asia and advanced economies are going to remain. And therefore the conditions for capital to move to emerging markets are probably going to continue. The question is will there be a surge? We’ve already seen that since late last year, the surge is not at a level across Asia that is exceeding previous peaks. In fact, as I said, there has been a moderation in capital flows to much of Asia since late last year, so I would say this issue is linked to differential growth conditions; differential cyclical conditions, and at the moment Asia has a number of instruments, many countries to deal with this, for example, Asia has taken prudential measures that helps; many parts of Asia have exchange rate policy which will also help. So Asia does have the instruments to deal with the surge and the challenge is to ensure that this surge becomes sustainable and directed to areas that will help achieve the rebalancing and growth momentum that Asia needs over the medium-term.

QUESTIONER: Sorry, I repeat the first question again. I was asking do you expect Hong Kong might start its rate hike cycle earlier that the States?  When do you think it will be the starting point? You still cannot hear me?

MR. SINGH: Well, if you look – I guess your question is “How is Hong Kong dealing with inflation?” and “What’s the rule of different policies in Hong Kong?”. It’s important to note that by itself inflation in Hong Kong is a way by which we achieve equilibrium in real terms, over the medium-term. So what we see happening is there is room in Hong Kong as in other economies for fiscal policy to play a greater consolidating role, but in Hong Kong, the share of the Government in the economy is quite small, and therefore although it will help, I think there is a lot of importance being extended to the prudential measures that Hong Kong has taken. I think the burden here is trying to control the credit dynamics that we’ve seen and the macro-prudential matters the HKMA is taking, is focused on ensuring the portfolios of the banks remain strong; the banks remain stable; they’re doing various kinds of stress tests; they’re lowering loan-to-value ratios, so a lot is being done to ensure that financial stability remains, and I think that is the most important near-term objective which the HKMA is doing.

MR. ARORA: I think I would just add one point, which is that the way in which Hong Kong tackles inflation is a little bit different from US, because there are no rate hikes as such. I mean, Hong Kong has a linked exchange rate system which has worked very well so far, and the tools that it then has to deal with inflation, are more the prudential measures to balance the supply and demand on the property side and some of the other measures that Mr. Singh just mentioned.

MS. UTSUNOMIYA: Okay, I have a related question online. In your recommendation, what kind of prudential measures for financial stability should be used during the continuous tightening process?  For China’s case specifically, what should be done?

MR. SINGH: Well I think this is an issue that we have looked at very closely. It is summarized in our written Outlook which you have. Our countries are dealing with this in different ways across Asia. It’s important to know that these target the vulnerability of financial sectors. They’re trying to direct the efforts at property prices. You’ll find in a number of countries loan-to-value ratios are being lowered and further steps will be taken. I think different countries and central banks have taken different steps to control the dynamics that they see, but overall the target is to focus on the vulnerability; the exposures; property prices and in Hong Kong we see that this has the effect already of raising costs, mortgage costs. So in the end, these measures do increase costs which affects the credit cycle, and this is a major target of central Banks in many parts of the Region, in Singapore; in Hong Kong; in China and others.

MR. CARDARELLI: Just to add that we have a chapter in the Report that shows that these measures that essentially have targeted to contain leverage from houses or from banks are useful to contain directly asset prices. But they should be considered as a complement to macro-policy responses, including increasing interest rates and making sure the interest rates are more in line with the cyclical conditions of this economy. So they’re useful measures and as Mr. Singh said, they’ve been different across regional economies depending on the specific circumstances of the countries, but they should not substitute, they should rather complement standard macro responses in terms of raising interest rates; in terms of letting exchange rates to appreciate, and especially also having tighter fiscal stances in many, many of the regional economies.

MR. SINGH: And just on that point, if you look at what other countries have done in other emerging markets and also what’s happening in parts of Asia, there’s definitely still room for further specific taxation measures. There’s certainly room to increase taxation of profit per property which has been done already in some countries. There is probably room to introduce a tax on property value, and certainly as we are seeing, there’s certainly room to boost land supply as well. So from the supply side; from the tax side and from property transactions side, you see across different countries there are still a number of policy options where the governments in this Region could go to ensure that the cycle is being tackled.

QUESTIONER: You talked about flows moderating in the last quarter. And pressure is on currencies to rise, and in that same vein, in the Report you talked about comparing capital flows in this period, compared to the previous two cycles. Isn’t that an indication that perhaps there’s room to grow in terms of more capital flows coming, and more currency appreciation, and more risks building?

MR. SINGH: My main comment was that the surge we saw last year seems to have been moderated in the last quarter of 2010 and the first quarter of this year. This is the case overall, but it is true that certain countries as I said, like in Indonesia or recently in China and the Philippines have seen a peak. But overall, it has been moderated. But as we look ahead, you are right in saying that we need to expect capital flows to continue mainly because a great differential will stay. Our projections are that Emerging Asia will continue to grow around 8 percent, and we know the advanced economies, their growth rate in the next year or two is about 2.5 (percent). So it is very likely that the capital flows will continue. 

The main question therefore is to build the absorptive capacity so these could be sustained, directed away from property and others perhaps speculative areas, and directed into infrastructure and other sectors crucial for maintaining growth over the medium-term. So I would say that is the major target to ensure that these capital flows, which will continue, get directed beyond short-term property or speculative areas into infrastructure and other areas that the region needs over the medium-term.

MR. ARORA: If I could clarify just one point on your question. The fact that you mentioned about the resurgence of inflows in the last few weeks is consistent with the point that was made earlier that, as long as the fundamental drivers, particularly the higher growth rate in Asia relative to the West, persists you can have periods when there will be a surge in inflows followed by a lull, but that the trend over time will remain positive. So the fact that they’ve come back is perfectly consistent with that story.

QUESTIONER: Do you think the appreciation of Renminbi would be a solution to tackle the inflation problem in China and what should China do?

MR. SINGH: I think we’ve made this point in our Regional Outlook and we made this point last year, too. If you look just beyond China to Asia and we look at a comparison with other emerging markets, there have been market pressures that have been experienced in Asia, in Latin America. We see that generally Asia has met these pressures principally by accumulating reserves, and compared to Latin America, less by exchange rate flexibility. You see this more compared to Latin America, so our view has been that exchange rate flexibility, appreciation in this context, is another measure that has tightened monetary conditions, so now looking more generally across Asia where there is overheating, for countries where exchange rate appreciation is a policy flexibility, it can do. Yes this will help address and tighten monetary conditions as they need to be tightened.

And we have seen across Asia the recognition that this kind of exchange rate flexibility and this appreciation is indeed also part of a package of policies that over the medium-term, including in countries like in China, will have rebalanced economy; rebalanced policies to raise the labour share of income and raise domestic consumption. So I would say the flexibility and strengthening of the exchange rate will in the short-run help tighten monetary conditions and over the medium-term, it would help take forward the rebalancing of policies and raising of domestic consumption that is needed over the medium-term.

MS. UTSUNOMIYA: Okay, I have a question from the Philippines. What should the next phase of growth for the Philippines and Asia entail? What are the risks and what should Governments do to achieve sustained growth?

MR. SINGH: Well I think as you see this from the Philippine perspective, we see that the great outlook has already improved. If I were to make one comment on the Philippines, I would then pass this on to my colleague Mr. Arora. I think in the Philippines as in other economies, as you look over the medium-term, increasing infrastructure investment is going to be very important, and as you look at how to do this across Asia including in the Philippines, it has to be beyond just the public sector. So the challenge is how do you do this for the private sector? How do you get capital filtered for them in the structure? How do you carry forward the kind of PPP, projects that will absorb private capital with the Public Sector, so improving infrastructure spending is going to be crucial to raise investment overall and therefore growth over the medium-term.

Vivek, do you want to add to that?

MR. ARORA: Yes, I'll just make three quick points on the Philippines. First of all, the forecast that we have for the Philippines now is 5 percent, both this year and in the medium-term. That’s an upgrade from where we were a year ago when we thought that the medium-term outlook was around 4 percent in the Philippines. And the 5 percent growth in the Philippines is roughly the same as what we project for some of its neighboring countries. In the past, Philippines used to lag behind its neighbors but we now project that it will be in roughly in line with its neighbors going forward. That’s the first point, that the forecast we have is actually upgraded relative to where we were a year ago.

But there is still the question you raise, which is why can’t growth be even higher, or what will it take for growth to rise even more? Here I think the main constraint to higher growth in the Philippines is low investment. The investment-GDP ratio is around 15 to 16 percent. It’s very low compared with, obviously with China, but also with many other countries in Asia. The low investment rate comprises both low government investment and low private investment. To raise government investment, government revenue needs to rise, as it has fallen to very low levels. That needs improvements in tax administration, tax policy and so on. And then to raise private investment, it needs, as Mr. Singh said, better infrastructure, but it also needs some improvements maybe in the perceptions of the business climate, and also more collaboration between private and public sectors through PPPs and the like.

So there is quite a lot of progress that can be made to raise investment, and the third point I’d make is that over the last six to seven months, the Government has actually made substantial progress towards raising investment. There’s been a determined push to strengthen tax collection and tax administration that is starting to pay results. There is a clear move to improve governance, I mean specifically the business climate, and there is a clear push to strengthen PPPs, Public-Private Partnerships. So all of these hopefully should have a positive effect on investment and on growth, going forward.

QUESTIONER: Other than tightening Monetary Policy, what else should this Government do to tame the wide inflation?

MR. SINGH: You know, I think that is perhaps the most important issue that we try to deal with in our Regional Outlook. If you look at most countries in Asia, as I think I said earlier, we are seeing two factors at work. We’re seeing the output gaps are closing in Asia and demand pressures rising domestically in many countries. At the same time, there are shocks coming from external sources, from food prices and energy. So the concern we have now, is that we are seeing a spill over, from food prices into core inflation. This is now beginning to happen. To our minds, this raises even further the urgency of tightening policies to ensure that there is not a spillover.

Our prediction is that peaks will be reached this year, and there will be some moderation in 2012. However, for many countries, inflation will stay for this year, at the top of or close to the top of the ranges set by the central banks or by the authorities. I think we are seeing tightening taking place. There are many options to do this. Across Asia, you see interest rates that are much below where they were pre-crisis; you see policy rates that are negative in real terms. You look at fiscal policy; you compare where Asia currently is to where they were pre-crisis; and you find them to be in either higher deficits or smaller surpluses. So there’s certainly room for fiscal consolidation. And then as I said earlier, exchange rate flexibility, where it applies, this flexibility which will give you appreciation, will also help tighten monetary conditions. 

So I think there are a number of options for Asia. You’re seeing across Asia, countries moving in these directions. My sense is you will see this continuing, and as it continues, our sense is inflation should peak and should then moderate later this year and next year. Thank you very much.

MS. UTSUNOMIYA: Okay, with that, we’d like to conclude today’s Press Briefing. Thank you very much for coming and we’ll see you again sometime soon.

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