IMF International Monetary Fund : PRESS BRIEFING APD
Changyong Rhee Director, Asia and Pacific department
Markus Rodlauer Deputy director, Asia and Pacific department
Odd per Brekk, deputy director, Asia and Pacific department
Kenneth Kang deputy director, Asia and Pacific department
Ting Yan communications officer, communications department
April 22, 2017
YAN: Welcome to this press conference on Asia-Pacific Regional Economic Outlook. I’m Ting Yan with the Communications Department in the IMF.
Here with me today are: Mr. Changyong Rhee, Director of Asia and Pacific Department; and Markus Rodlauer, Deputy Director; Mr. Odd Per Brekk, Deputy Director; and Ken Kang, Deputy Director.
With that, let me turn to Mr. Changyong Rhee for opening remarks, and we’ll take your questions after that.
RHEE: Thank you, Ting. Good morning. It’s my pleasure to brief you on the economic prospect and the policy challenges for the Asia and Pacific region. Today my comments are based on the forthcoming Asia and Pacific Regional Economic Outlook which will be launched on May 9 in Singapore.
Let me first highlight the three key messages from our report. Firstly, you heard that there is some recovery, the global recovery is quite broad-based, and in Asia also the outlook for the region remained quite robust. Actually, it’s the strongest in the world, and some data points to a pick-up in growth momentum in Asia.
Second, there are some upside risks, upside potential to near-term growth such as the broad-based cyclical recovery, in particular in advanced economies such as the United States, and in large emerging economies in Asia such as China. However, the outlook is also crowded with significant downside risks such as geopolitical tension, inward-looking trade policies, and rapid financial market tightening.
Over the medium term, Asia also faced some challenges including aging population and slowing productivity growth which I will explain later. Let me explain on this point before your questions.
So, let’s look at our economic outlook numbers first. The recent growth momentum in the largest Asian economies remains particularly strong, but reflecting sustained policy support in China and Japan. More broadly, across the region, forward-looking indicators such as Purchasing Managers’ Index suggest continued strong growth momentum in all of 2017.
Against this backdrop, growth for the region is focused to accelerate to 5.5 percent in 2017, and 5.4 percent in 2018, slightly over 5.3 percent growth in 2016.
In China, the GDP growth rate for the first quarter, which was just released, is 6.9 percent which is higher than we expected. And while the recent tightening measures were likely to slow the Chinese growth in the second half, we believe this first quota numbers suggest that there are upside risks to our current projection which is 6.6 percent for 2017.
In Japan, growth has been revised up to 1.2 percent, which is higher than we expected in January. In India we know that the monetization and temporary disruption by monetization had some negative impact on growth, but it is expected to gradually dissipate in 2017, thus our growth is projected to rebound to 7.2 percent in 2017, and 7.7 percent in 2018, in fiscal-year basis. India remains as the fastest growing large emerging economies in Asia and in the world.
Australia and New Zealand will maintain robust growth momentum around 3 percent. Korea’s growth is somewhat subdued that 2.7 percent due to ongoing geopolitical uncertainties.
The growth in ASEAN Five countries varies across countries, but and reflecting the heterogeneity of those economies, but on average ASEAN region continued to maintain high growth rate near 5 percent. Frontier economies and small states are expected to rebound in general, this year, owing to better global trade growth, and recovery in commodity prices.
So, let me move on to some risk factors, and medium-term challenges. While additional stimulus in the United States and stronger growth in China, which I just explained, can provide support for the global economy and the regional economy in the short term, the outlook is also crowded by several downside risks.
In the near term, continued tightening in global financial conditions could trigger further capital outflow from some countries which has some balance sheet weakness. And more inward-looking trade policies in major global economies, could significantly impact Asia given Asia’s heavy reliance on trade.
The medium-term growth also faces more fundamental headwinds particularly related to demographics and productivity growth. And this will be of two thematic topics that our Regional Economy Outlook which we will launch in May, will cover. So, we’ll discuss the recent trend of demographics in Asia and what are the implications for Asia’s growth going forward, and we identified the two factors. One is that Asia’s demographic speed of aging is quite rapid, and then we also calculate what it means, and how much it has impact on Asia’s growth rate in the next two decades.
And, we also find that productivity growth rate, unlike the GDP growth rate, has now shown some convergence toward for the advanced economies. That implies — that if this trend continues, the it would be difficult to imagine that higher productivity growth rate can offset some of the negative impact on the aging in Asia. And today as we focus more on the short-term economic forecast. I’d rather, you know, not to want to go over the details, but our analytical work on this population growth and productivity growth rate will be released in May in Singapore.
So, let’s move on to the policy recommendations. Asia is poised to remain the global growth leader into the future, but as in the past, securing this leading position will requiring continuing policy upgrade, vigilance against the risks, and with reforms to boost domestic demand and address growth bottlenecks.
Appropriate demand support and structural reforms are needed to reinforce growth momentum, especially in structural reforms, because, as I mentioned, in the short term our outlook is quite robust, and Asia needs to use this opportunity to accelerate this structural reform effort.
As for the monetary policy, issues generally remain accommodative, given the inflation is in general below target, and there is a slack in most of Asian economies. However, for countries which are experiencing some sign of the accelerating inflation and higher credit growth, they should stand ready to raise policy rate, and tighten macroprudential measures if inflation pressures continue to increase.
Fiscal policy also should support and complement structural reform and accelerate rebalancing where needed, and when fiscal space is available. At the same time, countries with closed output gaps or higher debt levels, they have to start rebuilding fiscal spaces, focusing on growth-friendly fiscal consolidation measures. As I mentioned, structural reform is the key at this moment, and need to help rebalance demand and supply, mitigate domestic and external vulnerabilities, increase economic efficiency and potential growth, and foster more inclusive growth.
Addressing vulnerabilities by strengthening buffers and policy framework will help preserve financial stability. Now we believe exchange rate flexibility should continue to generally remain as the first line of defense against sudden tightening in global financial conditions, or a shift in towards protectionism in major trading partners.
More generally, preserving financial stability require global macroprudential framework, including to mitigate systems at risk associated with high corporate and household leverages and rise in interest rates.
Looking further ahead, it will be critical to deal with two challenges, long-term challenge as I mentioned, demographic transition and the productivity growth rate. And as mentioned earlier, we will discuss these topics in our launch in Asia-Pacific Regional Economic Outlook in May.
Thank you. Now, and we want to come to your questions.
YAN: The lady in the second row.
QUESTIONER: Thank you, sir. We’re with China Business Network. My question is how would you evaluate the trade environment (inaudible) in Asia against the backdrop of rising populism and protectionism in the region, as well as globally, and what role China can play. Thank you.
RHEE: Okay. As institution, the Fund believes firmly on the value and virtue of trade, and free and fair trade. And trade has been contributing to the economic growth so far, and especially for Asia, which has a large exposure. And then which heavily depends on exports in growth. Maintaining the trade momentum is very important, especially for Asia.
And for China, as one of the largest trade partner for many countries in the world, they are actually opening their market more. China also has to work on rebalancing because in order to have a new growth momentum, China for themselves also have to rebalance the economy. But at the same time by opening markets further, they can provide more import, more export, and more trade that will contribute to the global economy.
YAN: The gentleman here.
QUESTIONER Could you comment more on China’s first quarter GDP growth given we have a strong number, 6.9 percent? Will you raise your forecast for China’s growth in July when you update your projections?
RHEE: Marcus will be in Beijing so I’ll ask Marcus to answer.
RODLAUER: As Changyong noted growth in the first quarter has surprised almost across the whole range of indicators and good growth came in at 6.9. All the high frequency indicators, almost all of them are very strong. The reason for high growth is several. One, fiscal — and causing fiscal stimulus, create expansion, was very high. The real estate sector is very strong, and the external environment of course has also improved. So, we have raised our annual forecast to 6.6 from 6.5. And we have to look again at that forecast, and there is upside risk and we may very well revise it up further in the Article IV even though we do see also some likelihood that some of this strong momentum will slow in the second half. For example, in the real estate sector authorities are taking important measure to cool it and to restrain the too rapid growth in some areas. And they also see a new focus of policies on reigning in financial risks, financial stability risks, in the shadow banking particularly. And as these measures take hold we do expect some slowdown of the very strong momentum going into the second half.
QUESTIONER: The GFSR report identified quite some Asian countries with either high debt from the corporate sector. So I wonder how serious these problems could be. And also in the end you are saying the exchange rate flexibility should remain the first line of defense, I wonder in the latter half of this year when the federal reserved shrinks its balance sheet could that problem be exacerbated? And also is capital control a measure to be used?
RHEE: Okay. You know, corporate debt is in general higher leverage in Asia, is an important issue. And we, in the last couple of our regional outlooks, we addressed this issue. Still, it remains one of the vulnerabilities in Asia. The degree is quite heterogeneous across countries. Some countries have higher corporate debt and credit expansions, some countries have more household debt.
So I want to mention two things. One is compared with the situation in the late 1990s when they had the Asian financial crisis, they have much more buffer. So if you ask me whether this can be some kind of immediate risk factor, I think the situation is much better. But on the other hand, their leverage level is quite increased after the global financial crisis. So if the global financial conditions tighten and interest rates go up, definitely, degrees vary across countries, but this can be a risk factor. That’s why we are emphasizing how to reign in credit growth, how to improve the regulation, how to introduce a better macroprudential kind of thing. So definitely is a risk factor in Asia.
And whether exchange rate flexibility can be a solution for this problem, in general we believe external exchange rate flexibility is a good policy to address a negative — temporary shocks, global shocks. But on the other hand, for this leverage problem, if your leverage is also denominated by foreign currencies, it has different impacts. So it’s kind of not a simple question. So I wouldn’t say that the exchange rate flexibility is actually the reason we emphasis exchange rate policies to address this issue. Actually, before you accumulate large excess debt, it’s much better to prevent it. And once you have a large leverage, especially in foreign currency, then this will complicate the problem and you can see how to apply this exchange rate flexibility as a good macroeconomic tool. So macroprudential policy before you raise this high level of foreign debt is important.
Balance sheet unwinding. I think it really depends on the speed and when how it will happen. In general, we believe that the U.S. would not increase interest rates, unless they see the strong evidence of the economic recovery. So if it comes gradually and together with economic recovery and if it’s well communicated, we believe its impact can be manageable. And in general, when U.S. economy is growing it’s good news to Asia. But if this comes very rapidly and not well communicated and then definitely it has an impact that we had discussed.
And I think capital control — and we believe that the capital flow management cannot be a substitute for the good macroeconomic policy that we mentioned, macroprudential, regulations. And, you know, it can be used sometimes, but you should emphasize they should not be a substitute for the better and a good macro policy in general.
YAN: Ian, in the back
QUESTIONER: You mentioned free and fair trade. Would you characterize China’s market access and all of the dynamics that go into that as free and fair trade? Reserve holdings globally, as a share of currency I think it’s like 60 percent of the dollar. It’s been rising over the last several years. And the renminbi is around 1 percent even though it’s been included in the SDR. I wonder why. If you can offer some insight as to why that is.
After the financial crisis, there was IMF audit, its internal audit, saying that the Fund, while it did warn of the financial crisis, it didn’t do so clearly enough and loudly enough. And I wonder, though the IMF has obviously pointed out the credit risks in China in the financial sector, whether the IMF is speaking loudly enough and clearly enough about the very real risks within the world’s second largest economy.
RHEE: Why don’t I address the renminbi holding issues and then I’ll ask Marcus to answer the two China questions, trade and financial market risk.
You mentioned that the renminbi has international reserves holding for many other central banks remain as 1 percent and why it’s not improving. Well, actually, I see that fact in a different angle because it was 1 percent before renminbi was in included in SDR basket. So there is no change. But during this period, in the last one year, still is a strong expectation of the renminbi depreciation. So I was actually surprised of how the renminbi holding of many other central banks actually didn’t decrease given this expectation.
And so when you think about the internationalization of renminbi, what is the impact of the renminbi’s inclusion in the SDR, it will take time. And when there is a market expectation of the renminbi depreciation, if you are the central banker you do not want to have a capital loss, but the fact that it remains as 1 percent as in the 1 year before despite a strong depreciation expectation means that the fact that renminbi’s included in SDR, that really helps the usage of renminbi in trade with others and it really shows the potential that the renminbi can grow very fast in the future if the expectation changes as international currency.
So how you can see these things, you can interpret differently. But I want to emphasize that people talk about the internationalization of renminbi and people talk about the impact of including renminbi in the SDR basket. This is a medium-term issue and it’s too early to judge whether it has been successful or not. So I’d rather, you know, not just look at the one year-one year variation, which can be affected very much by the market expectation.
And then having said that, Marcus?
RODLAUER: Does China undertake unfair trade practices? First, you all know that it’s the WTO that has the mandate to address trade policies and also regularly reviews those trade policies by the members. So we at the Fund focused on economic and financial policies and structural policies as the affect the macroeconomy as part of our surveillance. And we do that, of course, regularly in the Article IV.
That said, and more broadly on China, we have been encouraging China in its efforts to transform and rebalance the economy for many years, and perhaps more and more so every year as we have gone on in recent years. This rebalancing effort has made a lot of progress on many fronts, including in the external sector, which as you know has adjusted from over 10 percent current account to under 2 percent. So that has been major progress. But they are also very clear that this effort is by no means finished. China’s economy remains beset by many distortions, such as an excessive role of the state, large resource misallocation in many areas, state owned enterprises that lack budget constraints and financial discipline. And these incomplete reform areas also continue to affect and distort China’s external position and its trade and the capital flows, which therefore remain at some distance from the sustainable balance that we and they are looking for.
In sum, therefore, the wide ranging and interlinked and complex and increasingly urgent task of rebalancing and transforming China’s economy is the focus of our work. And the successful completion of that also is needed in order to achieve lasting external balance.
Now, on the financial crisis question. Are we loud enough in predicting a crisis in China? I think if you look carefully at the Article IV report of last year you will see that we are I think very clear in saying that China is making good progress on rebalancing on many fronts, but financial trends on their recent trajectory are dangerous and not sustainable. Why are they not sustainable? Again, many reasons. They’re in the financial sector itself. The issue of supervision, discipline there, the fiscal pressure, quasi fiscal pressure from local governments, the state-owned enterprises, the lack on their budget discipline, and the heavy reliance on growth in these traditional sector, which means the absence of new sources of growth that are strong enough consumption. So this is to rebalance, if you would, to adjust very quickly and sharply in the financial sector.
So in lar ‑‑ therefore what we are saying is the trend is sustainable now. When this will become and unravel in some way or another nobody can predict. China has many buffers. It’s a very unique economy, as you all know, that has a large power of state to reallocate resources. It’s in control of much of the financial sector.
So whether this unbalanced situation will unravel in one year, two years, or three or four years, is not ‑‑ nobody can predict this. We are very clearly saying that unless these trends change, the risk of a disruptive adjustment rises every year. Now are we predicting a crisis therefore? No, we are not, because we are still cautiously optimistic that China will find its way through those challenges as they have in the past.
BREKK: Just to our friend, since you asked a question in a somewhat philosophical way about the reserve currencies. I think when you ‑‑ there are reasons for expecting very slow changes in terms of reserve holdings.
I think you’re rightly pointing out that the U.S. dollar has a smaller share or larger share now than its share in the global economy. That is pretty clear, and certainly very clear that China has a smaller share. But I think a number of reasons when you look at countries that are reserve currencies, they have certain characteristics.
One is that they have financial stability. They have deep financial markets, good regulatory practices, and they also have open financial markets, open capital accounts. They have some fiscal frameworks. They have strong legal frameworks. So there’s a whole set of issues, very fundamental issues, that determine which currencies are reserve currencies.
And when you think about this you also realize that that, in the right hands that the change is going to be as slow inevitably as Changyong said. And ready changes, these are very fundamental changes in other world changes. And you can think about the pound being a reserve currency, and the U.S. dollar. These reflect the economic tectonic shifts and not just economic shifts. In fact, wars and so on, so it’s a very fundamental question.
Now the good news is that the kind of policies that you have to pursue in order to become reserve currency are policies that also should have future economy on its own and stable growth plot. So just as a general thought, thank you.
YAN: So we will take the question in the third row here.
QUESTIONER: When India first announced a demonetization scheme, top economists of the world said that it would have a devastating effect on the Indian economy. But the latest IMF position takes it down to just .4 percent. Can you give us an insight into it?
KANG: The question about India’s demonetization scheme, you’re correct. It came as a surprise, and in our forecast we did reflect the temporary dislocation associated with the scheme. We had lowered our forecast by almost a full percentage point compared to the October we owe for growth this year. And about a half a percent for growth next year.
That being said, we are seeing signs that the impact of demonetization has abated. Some estimates point to about 75 percent of the cash has been replaced in the economy. And recent indicators such as industrial production and PMI have also recovered nicely.
I think in general we support the government’s efforts to combat the illicit financial flows, and to produce the share of the informal economy. That being said, I think you’re right that since cash is such an important element in the Indian economy, it is very important to as quickly as possible replace this currency in order to restore missing transactions, but also to support to the household’s capacity to spend.
YAN: So let me go online to take some questions. The question is, you talked about the need for more opening trade in Asia. Could you please talk about the possible impact of the RCEP-regional comprehensive economic partnership-free trade agreement now being negotiated?
RHEE: I think that has been continuing so far. I don’t think that the current economic situation will change the dynamics, and you know, together the multilateralism, I think this bilateral or the regional trade pact will definitely have to open the regional economy. So I think ‑‑ I don’t see any changes in the momentum.
YAN: Let me take a couple of more questions.
QUESTIONER: I have three questions. First question is the geopolitical uncertainty is included North Korea confrontation as well as the conflict between South Korea and China? And the second question is that if without geopolitical uncertainty, how do you evaluate and expect the Korea growth rate?
And then my third question is as you know there will be presidential election next month. And many candidates promise many social benefits to the people to win the election. So would you recommend to next government what they should focus on maintaining a sustainable growth? Thank you.
RODLAUER: Is the risk of geopolitical tensions included in forecast? So far we have not seen any significant impact on South Korea’s trade investments or growth performance from regional tensions. And therefore, the simple answer is no. We have not included that in our forecast other than, you know, the border uncertainty that seems to be already affecting investment in Korea, but not specifically.
What’s that risk of that going forward? We see the Korean economy not only being quite resilient to external shocks and tensions; historically this has been the case. And we expect it to be so going forward. The economy has very strong buffers. As you know they have a strong fiscal position for reserves, very strong ample banks are liquid for capitalized and a flexible exchange rate regime provides a useful and important shock.
So bearing a very sharp escalation, we do not feel this is a major risk to the economy right now going forward. Do we recommend to the future government anything?
I think we are looking forward to the elections and then in working with the new government. I think at this point we do not want to prejudge or advise a Korean government.
YAN: The gentleman in ‑‑ yeah, please.
QUESTIONER: The Philippines is one of the fastest-moving economies in the region. However, external shocks and domestic political noise particularly on the government’s campaign against illegal drugs has resulted to capital outflows and a weak peso. How they think this would affect the economy going forward and what are your recommendations to preserve the strong growth?
KANG: The Philippines as you point out growth in our view is expected to remain robust at around seven percent in both this year and next year led primarily by domestic demand, but also recovery in exports. Our view is that the stance of policies remains sound. Fiscal policy is appropriate focusing on inclusive growth and promoting social expenditures and infrastructure.
We also welcome the tax reform proposal which should aim to improve the income tax and VAT systems and create the space needed for the government’s social and developmental needs. Monetary policy is also on track given that inflation remains within the central bank target range.
So overall we don’t see signs that investors have lost confidence at all. In fact, if anything, investor confidence remains strong as reflected in the positive credit rating outlooks that the Philippines has. I can’t comment on the political and security issues. But just to say that when we look across countries in the world, we do find that economic policies that focus on inclusive and robust growth provide the best environment for providing the economic opportunities and prosperities for a young and growing population like in the Philippines.
YAN: Let me go back to online questions. We have questions on Nepal. So the questions are first, the IMF has made a forecast of 5.5 percent growth for Nepal. What do you think needs to be done for sustainable growth for Nepal?
Secondly, what is the impact of decline in remittances inflow to countries like Nepal due to slower growth in Gulf region? And relatedly, one of the major threat for the economic growth in low-income countries like Nepal is climate change and other natural disasters. What should be done to minimize impact of such disasters in the economy?
KANG: Okay. I’ll take the question on Nepal. I think that we are seeing signs that Nepal is enjoying a broad-based recovery. And we have growth projected around 5.5 percent for both this year and next following a slowdown caused both by the 2015 earthquake, but also by the trade disruptions along the southern border.
In terms of the priorities looking ahead, I would cite four. First, fiscal policies should be oriented to facilitating as quickly as possible the post-earthquake infrastructure and reconstruction spending.
Second, monetary policy needs to be tightened in order to better support the exchange rate pay and to improve competitiveness by closing the inflation gap with India.
Third, there is concerns about the rapid growth of credit in the economy. And there is a need to accelerate financial sector reforms and supervision through better loan classification and provisioning practices.
On the topic of what Nepal should do to address the risks of climate change and other external shocks, I think here there is a strong case for structural reforms, both to unlock the economy’s potential, and to diversify its export base. But also to strengthen the infrastructure system particularly in transportation as a way to improve the domestic business environment.
These will all help to produce robust growth and give the country the buffers it needs to adjust smoothly to these shocks.
YAN: Let me take one more question before we wrap up.
QUESTIONER: We’ve noticed a pickup in trade in Asia in recent months. I wonder how sustainable you think that is. It is just represent at a base effect, or is it based on sustainable demand?
RHEE: This is a million dollar question. This is actually a question that we, not only Asia but other are looking at. We know that the recent recovery is broad-based, not just for Asia, Europe, and the U.S., but broad-based doesn’t necessarily mean how long it’s going to, and you know, it is going to be robust or not.
And I think at this moment it’s hard to say. The evidence isn’t strong enough to have one view. And as you can see that recently the (inaudible) price increased, but in the last couple of weeks that the INO price goes down again, and really have mixed signals.
As for the trade we find that in the last quarter nominal trade has increased quite significantly all over the world. So but that’s largely a benefit from the commodity price increase. So the question coming in to the question whether this commodity price increase and is it really driven by the demand increase caused by the real recovery, or is it due to the temporary factor partly effect by the speculative, you know, capital flows, and having speculative investment, or is it some other, you know, things that are going on.
So I’d rather say not to jump to the conclusion. So we probably need a little more data to see how robust it will be, and when you look at the trade, the nominal ‑‑ the value terms increase quite rapidly, but in volume terms still it’s quite mediocre. And that in terms of Asia, I think our trade is recovering but it’s not as, you know, we are not kind of exceptionally high either.
I would rather be more cautious. At this moment, that is why we are emphasizing that we see the economies turning and the evidence of the growth momentum picking up is definitely real things. But it’s not big, you know, it’s mediocre. And then also how long it’s continue, partly depend on what kind of policies the leaders will use. So that’s why we emphasize the policy coordination, and we emphasize the importance of growth friendly economic policies all over the world.
So probably we attend the situation for the next round of this economic outlook. Thank you.
YAN: Thank you. And this concludes our press conference. As Changyong said, we will be launching the Asia‑Pacific Regional Economic Outlook Report on May 9th in Singapore. So stay tuned and see you then.
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