Speech

Policies to Ensure Asia’s Sustained Economic Success

May 25, 2018

Ladies and gentlemen, good morning. It is my honor to be in Singapore for the fifth annual MAS Asian Monetary Policy Forum.

I would like to focus on the Fund’s view of key economic issues facing Asia at this moment of global economic strength. We heard last night from Tim Geithner about the lessons of the global financial crisis.

For the purposes of today’s discussion, let me highlight one core lesson that I think should be drawn from the crisis: do not take anything for granted. In essence, the IMF has made this a focus of our work since the crisis. We have constantly underlined the importance of building resilience. This has meant vigilance about vulnerabilities in the face of potential shocks.

So, allow me to take a few minutes to share with you some perspectives on three questions relevant to resilience and vigilance:

• How well is Asia prepared for unexpected shocks?
• What are the implications of recent inflation trends in the region? and
• Why Asia needs to deepen financial inclusion?

Policy Buffers

Let’s start by discussing policy buffers, which is the response to the first question.

There is a broad consensus that the short-term outlook for both the global economy and Asia remains strong. Most of you are familiar with our recent forecasts, which see 3.9 percent global growth this year and next.

But there is also an understanding that we continue to face risks—witness the uncertainty that hovered over some financial markets in recent weeks. This has once again raised the concerns about how Asia will respond to increased market volatility or even the next global downturn. Of course, we have seen other moments like this in recent years as central banks have carefully moved down the path of monetary policy normalization.

The Fund has had a clear message to Asia to deal with the uncertainties: we have consistently called on policymakers to rebuild monetary and fiscal buffers. We see this policy approach as essential for avoiding a sudden reversal of capital flows, for example.

Asian countries have certain defenses in place that heighten resilience, especially the increased reliance on flexible exchange rates. And overall, the region is better placed to resist shocks.

Nonetheless, some buffers have weakened. Let me now offer a few examples, starting with the less worrisome trends and moving toward those that might be of greater concern.

• First, our metric for assessing reserve adequacy shows that Asia’s reserve cover is down from immediately before the global crisis, but much higher than before the Asian crisis. Nonetheless, reserve adequacy remains at the upper end of the adequacy range and higher than in most regions.
• Second, the average current account balance is a little lower than in 2007. But there have been worries about specific countries.
• Third, external debt in Asia has substantially risen since 2007. And even before that, there was a significant increase in external debt after the Asian crisis.
• Fourth, public debt has risen to 59 percent of GDP from 46 percent in 2007. Fiscal balances also have worsened, with an average deficit today of 1.1% of GDP. They were in surplus in the earlier periods.
• Finally, perhaps the most striking change since the global crisis has been the increase in corporate and household indebtedness.

Many of you know that our message to our global membership has been to “fix the roof while the sun shines.” For Asia, this means that policy makers should focus on increasing resilience by strengthening fiscal and monetary buffers, and employing macroprudential measures where necessary.

The bottom line is clear: there is still work to be done for Asia to have strong defenses.

Inflation in Asia

Here, I would like to touch upon a key element of a policy to strengthen buffers. This is constant vigilance about inflation. As the central bankers in the room today know only too well, the subdued price increases we have seen in recent years offer no reason to relax. There are unique forces at work that require extra attention.

So let’s take a closer look at recent developments.

Our current Regional Economic Outlook for the Asia-Pacific analyzed the inflation trends. We saw sharp price declines between 2012 and 2015, when disinflation was broad-based by various inflation measures. Inflation forecasts through 2017 stayed constant or were revised down.

But we now see headline inflation picking up in Australia, Japan, Korea, and some ASEAN-5 economies. That is in line with other advanced economies and emerging markets, reflecting, in part, the recent rise of commodity prices.

Our research has produced three main findings:

• First, low inflation has been driven mainly by temporary forces, including imported inflation. Our estimates indicate that weaker import prices, including commodities, contributed to half of the undershooting of inflation targets in advanced Asia, and most of the undershooting in emerging Asia.
• Second, the inflation process has become more backward-looking. Expectations are generally well anchored, especially in advanced Asia and economies with inflation-targeting frameworks. Still, the importance of expectations has declined in recent years, with past inflation playing a larger role.
• Third, the sensitivity of inflation to slack in labor markets has declined. This is something we have also seen in other emerging market countries outside of Asia. There seems to be a flattening of the Phillips Curve linked to integration in global value chains and automation. These factors weaken labor’s bargaining power.

Looking ahead, our findings suggest that inflation may rise in Asia as commodity prices rise and low inflation in advanced economies reverses as monetary policy is normalized. Weaker regional currencies could also become a factor. On the other hand, it is not clear what the long-term impact of technological change will be on prices.

So, central banks should be vigilant about imported inflation, and exchange rate flexibility can help provide useful insulation. It will be important to strengthen monetary policy frameworks and improve central bank communications to increase the role of expectations in driving inflation—and keep those expectations anchored to targets.

Financial Inclusion

Low inflation is generally thought to be good for low-income households. But there is another issue relevant to the poor that is relevant in assessing Asia economic prospects. That issue is financial inclusion—the final topic I would like to focus on today.

IMF research has shown that economies that reduce income inequality are positioned to achieve sustained levels of growth. So, targeted policy action to promote financial inclusion is essential to poverty reduction.

Financial inclusion also enhances the effectiveness of macroeconomic policies. Several studies show that financial inclusion strengthens the interest rate channel, making monetary policy a more effective tool.

Asia-Pacific countries have made considerable progress widening access to financial services and improving the quality of financial products available across populations.

Financial inclusion in Asia’s emerging markets is in line with other regions. But Asia’s low-income and developing countries actually show wider accessibility.

Nonetheless, the gaps are significant within countries—between rich and poor, urban and rural, men and women.

For example, In India, only about 46 percent of male adults from the poorest quintile of the population have a formal account. That compares with 79 percent in the richest quintile. This disparity is even more pronounced when measured by use of mobile transactions (a fourfold difference), or borrowing from a financial institution (about a threefold difference).

Gender disparities also remain significant, especially in South Asia. There, less than 40 percent of women have a bank account compared with nearly 60 percent for men.

Our research also shows a wider range of financial inclusion across Asian countries than within other regions. While some Asian countries are at the forefront of financial inclusion, others are only able to provide access to basic financial services. The largest disparity is in access to ATMs or formal banking services.

Digital financial services have expanded recently in many countries, including electronic banking, mobile banking, and mobile money. We have seen notable growth in Bangladesh, Indonesia, and Mongolia. In Pacific island countries, geographical dispersion represents a major obstacle to providing financial services. So it is notable that in Samoa, mobile products have proven popular.

Interestingly, mobile banking is one area where most Asia-Pacific countries lag sub-Saharan Africa. While Asia leads in traditional banking infrastructure, it is far behind Kenya, Uganda, Tanzania, and Zimbabwe in mobile transactions. In those countries, more than 70 percent of the population uses mobile banking services.

Clearly, there is enormous potential to deepen financial inclusion in the Asia. There are several steps that countries can take to address the issue:

• First, strengthening such infrastructure as credit bureaus, asset registration, payment systems, and microfinance institutions would lower the costs of financial services.
• Second, countries need to allocate adequate resources to expand internet and mobile phone connectivity.
• Third, in some countries, liberalization of the telecommunications and internet industries would help bring down cost and improve services.

Conclusion

In conclusion, Asia needs a concerted effort to build policy buffers that can weather unexpected storms. It needs strong monetary policy frameworks and central bank communications efforts to respond and adjust to an uncertain global environment. Finally, there must be an understanding of the obstacles to wider financial inclusion, and the ways that technological change can help make this inclusion possible.

These issues are inter-linked: the policies that address them can help make the Asia-Pacific region more secure as it builds upon an extraordinary legacy of economic success. But we simply cannot take that success for granted.

There will be many challenges in the coming years. Some can be anticipated, and some inevitably will take us by surprise. Our purpose must be to work to tackle them in a way that ensures strong, sustained and inclusive growth. Thank you!