Transcript

Washington, D.C.
April 17, 2015

MS. UTSUNOMIYA: Good morning. Welcome to the briefing by the IMF’s Asia and Pacific Department. I’m Keiko Utsunomiya from the Communication’s Department. Let me introduce today’s speakers, Mr. Changyong Rhee is in the middle of the table. He’s the Director of the department. On his right is Mr. Markus Rodlauer, Deputy Director and mission chief for China. Chanyong’s left is Miss Kalpana Kochhar, Deputy Director and mission chief for Japan. On her left is Mr. Hoe Ee Khor, Deputy Director who oversees the works on ASEAN and the Pacific region.

Changyong will make a short opening remark and then we’ll take questions from the floor. This briefing is webcast live, and we encourage viewers to submit questions online. Thank you.

MR. RHEE: Thank you, Keiko. Good morning. It’s my pleasure to be here, to update you on economic and financial developments in Asia, together with my colleagues. This presentation is based on our Regional Economic Outlook, which will be launched in Singapore on May 7, and the details will come at that time.

Before I get to more details I’d like to highlight three key messages for today. First, despite a moderate recovery of the global economy, Asia will remain the most dynamic region even though there are significant differences among countries in the region too. Second, vulnerabilities are rising, especially for countries with rising domestic and foreign debt. While the debt level is still manageable, the margin for policy error is narrowing as global liquidity conditions tighten, and also the because of slower growth in the region compared to the past. So we say that now is the time for alert. Third, monetary and fiscal policy settings are broadly appropriate, and boosting resilience and potential growth through country-specific structural reforms remain top priorities.

So let me go to our forecast. Growth in Asia and Pacific region is expected to hold steady at 5.6 percent in 2015, easing slightly to 5.5 percent in 2016. Behind this stability we see considerable differences across the countries. For some natural resource exporters, such as Mongolia and Malaysia we revised down our growth forecasts.. A housing-led slowdown will continue in China and New Zealand.

By contrast, growth is expected to pick up in Japan, India, and most ASEAN countries. Behind this robust growth, domestic demand still remains the main driver of growth, especially for non-advanced Asian countries. We expect the windfall boost to real income from lower oil prices and strong labor market conditions will off-set the modest tightening of global financial conditions.

China’s growth rate is expected to continue to edge lower to 6.8 percent in 2015 and 6.3 percent in 2016 as adjustment in real estate, shadow banking, and local government finances continues. This slowdown is largely policy-induced and welcome as it will contain vulnerabilities and promote a more sustainable growth path.

In Japan, growth is expected to pick up to about 1.0 percent in 2015 and 1.2 percent in 2016, which is faster than potential growth rate. Private consumption will accelerate on low oil prices and rising real wages. We think in April the wage negotiation is very crucial, so having higher wages will help Japan continue on this recovery path.

India is a new bright spot in Asia, and its growth rate is expected to strengthen to 7.5 percent in 2015 and 2016, benefiting from recent policy reform announcements and lower oil prices. The implementation of these reforms will reinforce confidence and increase potential growth.

ASEAN countries are expected to grow by 5.1 percent in 2015 and 5.3 percent in 2015 with Malaysia’s slow growth, because of the natural resource price decline, more than off-set by a significant pick up elsewhere, notably in Thailand, the Philippians, Myanmar and to a lesser extent, Indonesia.

Most frontier and developing economies in Asia and Pacific are expected to grow above 6 percent in near time, but risks remain. Fiscal and current account imbalances are building in Laos, Myanmar, and Papua New Guinea. Public debt is still high and requires attention in Vietnam and Sri Lanka. Mongolia has been hit by large terms of trade shocks and is facing twin deficits fiscal and current account deficits - while reserves are relatively low.

In the Pacific Island States, the growth rate has increased, but several need to rebuild policy buffers and strengthen public finance management. The catastrophe in Vanuatu from Cyclone Pam is a strong reminder of the vulnerability of the smaller states to natural disasters, and the need for policy buffers and reserves to enhance resilience to these shocks.

Let me summarize some risk factors. We think slower-than-expected growth in China and Japan would have, potentially, sizeable spillovers to the rest of the region. Tightening global financial conditions and disruptive currency movements, possibly associated with asynchronous monetary policy in major advanced economies could affect financial stability. This is particularly the case where leverage and foreign exchange denominated corporate debt is high.

On the other hand, lower oil prices are net positive factors and we estimate that these lower oil prices will lower import bills in Asian countries by 1.7 percent of GDP, on average. But on the other hand, we are assuming that most of this windfall gains will be saved, and its impact on growth, on average, in Asian countries will be around 0.4 percent of GDP. But if this windfall is not saved but rather spent then I think we probably have to revise our forecasts.

Finally, beyond the near time, potential growth is also declining even though Asia has a relatively higher potential growth rate at this moment. But if you look at the change of potential growth rate the change is clearer and manifest in the region, and how to manage this in the medium term is a very important policy issue.

So let me summarize our policy recommendations. With output gaps closed and closing and core inflation generally stable, current fiscal and monetary policy settings in Asia we believe are quite broadly appropriate to address cyclical needs and to rebuild policy space. With a notable exception in Japan, policy rates are above the zero bound allowing conventional monetary policy to be able to respond if necessary. In some countries, a tightening bias may be warranted to enforce external stability. In Japan, quantitative easing will need to be supplemented with progress on structural reforms.

Gradual fiscal consolidation would strengthen resilience where debt is high, such as in Japan, India, Malaysia, and Vietnam. The decline in oil and food prices provides an opportunity to phase out subsidies to make room for infrastructure and social spending.

Macro prudential policies should address financial stability risks, and foreign exchange intervention could be considered to smooth excessive currently volatility.

To boost productivity capacity and other challenges from aging and infrastructure gaps, structural reforms remain critical, with specific policies differing by countries.

Let me conclude. Asia is doing relatively well, and I think even in this Spring Meeting the news from Asia is much brighter than other regions. I think with effort to strengthen resilience, Asia will remain as a growth pole in the global economy.

But at the same time, some major economies are slowing, including China in our region. Medium term potential growth rates are also going down. Countries have also used policy space in coping with the global financial crisis, so vulnerabilities are accumulating. If you think about the slowing down of growth in the region and the accumulated debt in the region, in some sense, there isn’t as much margin for error.

In the past, when the region’s growth rate was very high, economies could “hide lots of sins”. But from now on, given the tight margin and tighter financial conditions, policymakers -- have to be even more alert than usual. In order to boost up the potential GDP growth rate to remain as a dynamic region in the world, Asia will require structural reform, which is a very important policy task moving forward.

Thanks very much and my colleagues and I will be happy to take your questions.

MS. UTSUNOMIYA: Thank you, Changyong. We would like to open the floor for questions.

QUESTIONER: My question is on China. You warned of the high debt situation in the Asian Pacific region and so can you elaborate more on China’s debt issue? Is there any silver lining behind this tough issue?

Second question is about the RMB exchange rate. The RMB seems to be the second strongest currency after the U.S. dollar. Mr. Blanchard said, several days ago, China and the United States has policy room to tackle the adverse impact of the strong currency, and so what are the policy rooms? Thank you.

MR. RODLAUER: Debt in China has been rising fast in recent years, but particularly since the global financial crisis. However, the overall level of the debt is not yet at a point where we would have immediate crisis worries. I think the issue in China is the trend that needs to be changed.

Let me elaborate a bit on that, on the public debt. We all know that the central government debt is small, but that’s not the whole story. If you add the local government debts that have been added over time by investment spending, infrastructure spending we come to a debt level on the order of about 55 percent of GDP. That is our analysis at the IMF that we have done since two years where we have augmented the central government debt we see with the other things that are out there.

So while this has been rising fast, I think the key issue is the trend. The level there’s still fiscal space to do things, if necessary. And we are quite heartened and encouraged by the efforts of the government over the past year to actually get a handle on this local government debt. You know, the new budget law that was just approved earlier this year is a milestone in much better controlling local government spending, in much more transparent budgeting, so I think that there is a real effort underway which we are confident that this will succeed in leveling off the public debt.

On the private and corporate and bank debt, there the major issue has been the very rapid expansion of shadow banking. Overall corporate debt is high compared to other emerging markets, but it’s not that high if you compared it to middle income and advanced countries. So again, there we were mainly worried about the trend, very rapid credit expansion is an issue in many countries. This is now also being addressed by very forceful measurers to reign in shadow banking, and also there we see the trend flattening out. The latest numbers on total social financing, which includes all bank and shadow banking, is down to 12 percent of annual expansion which is, of course, much lower than the 25 percent expansion we had seen just a year ago.

On the exchange rate, last year, 2014, our assessment has been and remains that last year the renminbi was moderately undervalued. It was weaker than what it should be compared to its fundamentals. And also the external position, the current account position, trade surplus, was higher than what it should be from a medium term point of view. Now, since last year we have seen, as you have noted, a very significant appreciation of the renminbi in real effective terms. It has been mostly stable, a little bit depreciating against the dollar because as the dollar went up, in effective terms, it has gone up by over 10 percent on the order of 12 percent since then. So if you add that up, last year moderately undervalued, and now it has gone up by 12 percent.

We are now reaching a point where we are close to, it’s no longer being undervalued. But I want to add right away that we are just now in the middle of updating our assessment of last year. So I wouldn’t want to prematurely, you know, put out the judgment. We are in the middle of that, but you can see where the direction of the currency has been going.

At the same time, the overall external position has also improved further. The trade surplus has gone up. We have seen a major positive terms of trade. Shock to China, also, with the oil price, so putting all this together, the currency moving towards equilibrium, but the external position is still strengthening. That is an issue that we need to carefully success in the upcoming Article IV consultation.

QUESTIONER: In the report you said that India is the new bright spot in Asia, but there are still concerns from the investor’s point of view on tax, be the minimum alternative tax or the retrospective tax. Then there are land acquisitions problems on the legislative front that still have not been fully cleared up. And also, there’s not enough credit growth. The World Bank report shows that of the total capital inflows most of it is portfolio investments. So are these also factored in or are you banking only on the benefits from the lower oil prices for growth? What are the risks that you see? Thank you.

MS. KOCHHAR: You mention a number of outstanding issues. There are, obviously, issues that need to be tackled. So our view on India is that the improved performance is not just because of oil prices. We do believe there are some fundamental strengths in the economy that are beginning to materialize. This is not to minimize the issues that still need to be tackled, and that’s why Mr. Rhee said in his opening comments that much more needs to be done.

Now, on things like land acquisition and so on these are very difficult issues, as you know, and the laws are being rethought and relooked at. There’s been several phases at which this reform has taken place, but I think in the next phase they should be able to tackle some of the problems that they saw before. That said, the legislative agenda has actually moved quite a lot in the last few months, so there is, definitely, room for optimism, and it goes beyond just oil prices.

QUESTIONER: Just to follow-up, where do you see the growth coming from? Just which other areas that you see, mainly? Thank you.

MS. KOCHHAR: Mainly a pickup in investment. Consumption growth has been relatively strong, but mainly a pickup in investment. And there are hopeful signs that the investment that had already been approved is starting to pick up.

QUESTIONER: So according to the IMF, India’s growth rate will be better than in China, so is it going to be the next China in the region, and how will it impact the region and their commodity prices as well?

MR. RODLAUER: I don’t think it’s that useful to compare growth rates of countries so different at such different stages of development and income. You know, while rates may be different, for example, the contribution to growth that China is delivering now to the global economy, at half the growth rate of maybe 10 years ago, still is larger because it is so much bigger economy at a much higher income level.

So India is at a very different stage of its development. There’s a lot of catch up to be done, so the opportunities for rapid growth are different and are there. So I would rather say that China is now reaching a very different phase in its development. It is moving to a very different path of growth. Whereas, India is, again, at a point of great opportunities to now exploit advances in infrastructure, advances in investment, advances in other structural areas that will enable it to reach rapid growth going forward, if it manages these challenges.

MR. RHEE: I want to add that this is good news, right? Because in order for Asia to be maintained as a center of growth of the global economy, while Chinese economy is maturing and growth is desirably slowing down ,now we have a new big country which can lead the growth in Asia. I think that’s very good news for all of Asia.

The more difficult issue to answer is whether India can follow the same development strategy that China, Japan, and Korea, and East Asia countries used which is export-led growth and based on manufacturing sector. Given the technology progress and given the change of the economic environment of the advanced economies, whether India can use the same strategy to be a second China or the new growth pole --- that will be a difficult question to answer right now. But still, having a good sign from India is, I think, a good blessing for Asia.

QUESTIONER: In your remarks you mentioned a lot of countries in the region, but I couldn’t find Vietnam here in the growth picture. So I’d like you to elaborate on the growth prospect for Vietnam. And the second question, public debt is now a very big headache in my country, can you give the specific policy recommendations? We are a big oil exporter and lower oil prices is hurting Vietnam. Thanks.

MR. RHEE: We are forecasting Vietnam to have a growth rate in the next two years, of 6.0 and 5.8 percent, which is very similar to last year. Vietnam had a structural problem even before the global financial crisis which is NPLs and the large investment and high leverage.

After that, Vietnam introduced structural reform and it made good progress, so the situation is much better. But still, we think that Vietnam needs to address this NPL problem and the capital adequacy of the banking sector is still much improved, but that’s a kind of weakness point. That is why Vietnam’s growth rate is not actually picking up as high as before. And at the same time, as you know, the Vietnam economy is relying much on exporting to advanced economies, and also on export to China, where growth is slowing.

But still, the fact that Vietnam’s growth rate has improved recently and then also maintained the current level I think is a good sign, showing some fruits of the past structural reform effort. I think they have to continue. But the structural problem of addressing liquidity conditions in the banking sector, that has to be addressed as soon as possible.

QUESTIONER: What about the second part about public debts?

MR. RHEE: Fiscal policy in Vietnam has been accommodative and public debt is, therefore, rising as you have pointed out, and therefore, we have been consistently recommending that returning to a fiscal policy of consolidation is good for Vietnam, especially raising revenues will be important to have this consolidation while still being able to safeguard the priorities, social and capital expenditures. So this is an issue that Vietnam will need to address.

QUESTIONER: A follow-up question for Mr. Changyong. You have mentioned a very critical problem in Vietnam, that’s the problem in the banking sector. We really want to resolve NPL and set up asset management companies. From your point of view, what should be done to establish such better market in Vietnam? Thanks.

MR. RHEE: I wouldn’t give that negative evaluation. What Vietnam has done so far, I think is positive. I would rather not say that this is really not working. I would say that it has worked, but not as fast as we desired. So the real issue is to whether -- you can do two ways of doing the NPL disposition. You use lots of public money and clean the banks.

But the down side of that approach is that your public debt will increase in one shot quite significantly. Given the large public debt problem, that may cause several other problems. If you do it gradually then there is a risk that, if the external economic conditions worsen, then actually you do not see much progress of the NPL disposition which is what we are observing at this moment.

So whether you take a gradual approach or the one shot approach depending on the public debt situation, and the willingness of the people. You may need to pay more taxes to do this one, so there is a tradeoff. So it’s a policy choice. So far, the authorities decided to take a gradual approach, but there is still, I think, depending on the economic conditions and if the economy can afford some more taxes to clean up these things, you may be able to accelerate, but that is a policy choice.

QUESTIONER: India just revised its formula for growth rates. I’m wondering how confident you are in the accuracy of those formulas? Secondly, what is the risk of real estate collapse in China? I think the GFSR said there was something like 25 percent of GDP wrapped up in real estate and that risk was a global risk. Finally, in the WEO you say, Asian emerging markets whose firms borrowed heavily in U.S. dollars may need to find an appropriate balance between preserving financial stability via moving their currency in tandem with U.S. dollar and maintaining external competiveness by destabilizing their exchange rate against major trade partners. Who are you referring to in particular and why is that -- can you elaborate on the dynamics there?

MR. RHEE: Before I move the China question to Markus, I think as for India, our statistics department will send a TA team very soon to India to cooperate in the -- to make more progress. So at this moment, I don’t have any specific comment on the new statistics. We know that broadly speaking they introduce a new methodology which is more consistent with a global standard, so we have to commend them to introduce new methodologies and update their statistics. But the details, our statistics department has to go over there and work with them.

QUESTIONER: And your growth forecasts are relying on their growth forecasts?

MR. RHEE: We actually used the new statistics from the government. But as you know, in order to have a better forecast we need a longer time series. But the new statistics only come for the last two years, so we are a little bit limited in making our forecast, but we know their methodologies, and I think we did our best to adjust our old series into their new series.

But probably after our TA we may have a better understanding of how we can adjust our statistics and our forecast better. But at this moment it’s a little bit premature to discuss the details. Markus?

MR. RODLAUER: As you have said, the real estate sector in China is very important, 16 percent of GDP direct, but a third of GDP coming indirect, so backward and forward linkages. As you also said, it’s now going, as were necessary, to do a correct, and it had started about a year and a half ago. We see this correction as very necessary given the oversupply that has been created over many years of excessive investment in that sector.

We see it proceeding, perhaps, somewhat faster than we had initially expected it to be. But, again, we are encouraged by this pace because it reflects, A, quite significant measures by the government to reign in the sector. As you know, a number of measurers have been taken on the financing side as well as on the purchasing side to slow this investment. It reflects market adjustment, and it reflects a tolerance by the government to accept a somewhat slower growth as a result of that.

What are the risk of this becoming even worse? I think the first risk in our mind is that it will stop because it needs to continue to proceed for two, three years so the excess supply is worked off. We feel the government, and we believe, has sufficient levels at its disposal to make sure that the correct does not become disorderly. As you know, they have a number of resources there, they have a number of policy actions they can take to underpin the sector as needed, so we are confident that in the near term there is not a risk of hard landing in the sector and in the economy as a whole.

QUESTIONER: And the final question?

MR. RHEE: We can discuss later, basically, in the region, when we give our advice on the FX market flexibility when there is a shock to the region because of aasynchronous monetary policy of advanced economies. And I think the most effective way at this moment is allowing more exchange rate flexibility. Like what they did in 2013 QE tapering period.

But there are several countries in Asia which have a large FX denominated debt such as, you know, dollar denominated debt. In their case, large depreciation caused by the capital outflows can have a negative impact on their balance sheet. In those countries we are talking about how to balance the trade-off between more flexibility versus its impact on the balance sheet. Those are the examples of why we think that when they do the exchange rate policies they have to consider several different aspects of this exchange rate movement. You mentioned competitiveness and other issues, but we can discuss further later.

QUESTIONER: Okay. And just to be clear, you’re not talking about China de-pegging from the dollar?

MR. RHEE: We are not recommending China de-pegging to dollar. We are recommending China to have a more flexible exchange rate system and the gradual movement, so opening the band and those kind of things.

MS. UTSUNOMIYA: Let me take one question from online and I’ll come back to you. On Vanuatu, it’s said that even after Cyclone Pam the country is not eligible for the IMF’s catastrophe, containment, and relief trust. Is that true? What could be done given that only two small island states are eligible despite high debts and storm risks?

MR. KHOR: Sorry, so you say what is not adequate? Sorry.

MS. UTSUNOMIYA: Some say, apparently that Vanuatu is not eligible for CCR.

MR. KHOR: We have a mission in Vanuatu right now and they are doing their regular Article IV consultation, but they are also negotiating with the authorities for an RCF and RFI facilities. These are quick disposing facilities that the Fund has in response to natural disasters and shocks of this kind.

So the authorities are very keen to access the Fund facilities and we are, you know, in the process of trying to draw up the program for the authorities. The money they now have access to is about -- the maximum is 100 percent of the quota, which will be about 22 million SDR. It’s small relative to the size of the damage and the losses that it suffered, it’s true. But the amount of money that the IMF is able to provide will be able to capitalize financing assistance from all the other countries, especially Australia, New Zealand, and the other IFIs like the World Bank and the ADB.

So we play a catalytic role in Vanuatu. It’s true that, you know, the size of the financing that we have at the moment is not very large for shocks of this kind. But many of the donors do look to us to provide a macroeconomic framework so that they can also support the country.

MS. UTSUNOMIYA: Thank you. We have time for one more question.

QUESTIONER: In WEO, I have to look for Japan’s influence defined from what BOJ is seeing now. You project 1 percent growth for 2015 and the following year 0.9 percent while BOJ’s aiming 2 percent and their confident. According to them, it’s close to 2 percent. Why areyour projections so different?

The next question is about your recommendation for BOJ to consider increasing private asset purchases. What do you mean by that? Also, extending the longer term maturity when the BOJ is already buying up to 40 government bond maturities?

MS. KOCHHAR: Thank you. So first, on your question of BOJ’s inflation target. As you know, there’s been years of entrenched deflationary expectations and the BOJ’s trying to raise inflation in a durable manner. Last year we did project that the target would likely be met, in the medium term which is already different, I think, than the BOJ’s own horizon.

But since then, there’s been a very large shock in the form of oil prices. While the shock is obviously good for the Japanese consumer and the investor, it will keep headline inflation suppressed for some time. So in this sense, this development could delay the attainment of the BOJ’s inflation target.

But what I want to say to you is, you know, the exact timeframe of when the target is reached is, in our view, less important than the goal of raising inflation and expected inflation in a durable manner. So, for example, this year’s projected inflation is based on four factors. One is the fact that you had a big depreciation. The fact that we forecast a gradual rise in oil prices as the year goes on. That base wages during the upcoming wage round will go up, and finally a recovery in domestic demand for these reasons. Still, we all need to be a bit modest, I think, about how to generate inflation after a long period of deflation. But that said, those are the factors that we have used to forecast the path of wages that you see in the WEO.

In terms of our recommendations for the BOJ, what they should do, we, obviously, support very much the strategy of quantitative easing that they have undertaken so far. The advice that we provided is if there is a need to do more we’ve given some ideas on how the BOJ can extend the QEE. Yes, you’re right, they’re already buying at the long end, but we think there’s scope to continue to do that.

MS. UTSUNOMIYA: This will conclude our briefing this morning. Thank you very much for your participation. See you next time.

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