Transcript

Transcript of a Press Briefing on the Economic Outlook For Asian Countries

January 30, 2012

Webcast of the press briefing

MS. UTSUNOMIYA: Welcome, everyone. I’m Keiko Utsunomiya for the External Relations Department. Hello to the people in the room and good morning to the people in Asia. This is the press briefing for the International Monetary Fund’s latest outlook for Asia and Pacific.

At the head table on my right is Mr. Jerry Schiff, Deputy Director of the Asia and Pacific Department or APD as we call it. He’s also Mission Chief for Japan. Next is Mr. Anoop Singh, Director of APD, then Mr. Masahiko Takeda, Deputy Director of the APD, also Mission Chief for India. At my far right is Mr. Nigel Chalk. He’s also the Deputy Director of APD and Mission Chief for China and Hong Kong SAR.

Mr. Singh will give you brief opening remarks before taking questions. Thank you.

MR. SINGH: Okay, thank you very much and thank you all for being here. We are holding it later this afternoon because we’re hoping to do this online with Asia.

As you know, the IMF released its latest global economic forecasts just last week, and I thought I would brief you in more detail today about our view on the outlook in the Asia-Pacific region.

So I guess I should say I have four key messages for you this evening. First, while growth has certainly slowed over recent months in Asia, Asian economies have proven generally resilient to increased turbulence in global financial markets, and they are helping support global growth.

Second, we are still certainly worried at the risk of contagion from a further deterioration in global financial conditions.

Third, in the event of a further slowdown in the global economy, our sense is that most economies in Asia have room for a strong policy response.

And fourth, the recent decline in, external surpluses of China and many other Asian economies is certainly very welcome. And sustained efforts continuing in this direction in the medium term will reduce exposure in Asia to the external risks as we are experiencing now, and maintain Asia’s support of global growth. So, in both the short term and medium term, there are positive factors coming from Asia.

Let me now take a few minutes to talk about the recent developments and outlook. I’ll make a few comments now, and I will make a more elaborate version of my remarks available to you after we have finished.

First, as I said, activity has slowed in Asia mainly because export growth has lost momentum, because of weaker growth in regional and global trading partners. But a main point is that robust domestic demand is helping offset this drag from external demand. This has allowed Asian economies to hold firm. Of course, there is variation across the region. Let me in particular say that investment and consumption have remained resilient in China, supported by strong corporate profits and rising household income. And Asian banks have so far used their balance sheet capacity to step in and ensure a continued flow of credit and trade finance in the face of what they’re seeing, a gradual deleveraging by European banks.

I should also add that, as we have seen growth has slowed in Asia, inflation pressures have, therefore, waned. And it’s not surprising, therefore, that the pace of macro policy tightening has generally paused. In some cases it’s been reversed. We certainly do expect inflation to recede further in the coming year.

Looking ahead, as I said, thanks to robust domestic demand, we expect growth in the Asia-Pacific region to remain close to 6 percent in 2012, recovering further to 6.5 percent in 2013. And most importantly, emerging Asia will remain the fastest growing region in the world, led by China and India. In China, even with this drag from external demand, as I said, growth will remain in the 8 to 8.5 percent range this year, returning close to 9 percent by 2013. And in India, growth will stay around 7 percent, edging up we think to above 7 percent next year.

Now, of course, these are our baseline predictions, and there are clear risks. In particular, an escalation of the European events and the possible debt crisis could result in global growth falling by 2 percentage points relative to our baseline, as explained in the WEO update last week. Clearly, Asia would be greatly affected if this happened, because standard trade effects would combine with confidence effects and contagion in the financial sector to produce large spillovers to domestic demand. There would be a knock-on effect on domestic demand. And, therefore, policy responses by Asia will be needed, without which the impact on Asia’s growth would be substantial. And our position is that many countries, nations, certainly have that room and capacity to respond if these risks arise.

Now where is this capacity available? For many economies, the room is greater on the fiscal side. The pace of fiscal consolidation could certainly be slowed in many economies which have relatively low levels of public debt, such as China, of course, but also many of the more export-dependent economies in Asia. And certainly if these severe downside risks materialize, another round of fiscal stimulus could be taken. Indeed, many Asian countries could advance their plans which they already have over the medium term to boost social safety nets and increase consumption and investment. And these policies would have long-term positive effects on rebalancing and growth, but fundamentally also on incoming equality, which remains an issue in many countries in Asia.

Having said that, I should also point out that fiscal consolidation remains a priority still in countries like India and Japan, to anchor confidence and rebuild the space they need to meet future challenges.

And briefly now on monetary policy: As I said just now, monetary tightening has been appropriately paused in many Asian economies, and some have also begun to reverse this tightening.

Now, as you look ahead, my sense is the room for further easing is constrained in some economies where underlying inflation pressures remain, certainly in India. Or, for example, in China, which is still working through the stimulus from its previous credit expansion of the last two years. In Japan, by contrast, I should say monetary easing remains the key lever to boost growth prospects. And our sense is that asset purchases under existing programs could be expanded.

So I’ll talk briefly now about the medium term. And certainly for much of Asia, for the authorities in Asia, economic rebalancing and strengthening domestic sources of growth remain a key priority. And this is very important, and maybe I should talk a bit more about China here. In China, continued progress in implementing the policies that are already established and identified in the 12th Five-Year Plan will have a further effect on lowering the external surplus. So far, I should say that some of the reductions we’re currently seeing is more of a reflection of temporary factors, such as strong domestic investment and, of course, weak external demand. And, therefore, it is very important that we see, as the authorities want to establish, policies to strengthen domestic consumption that will ensure that the recent decline in the external surplus is sustained over the medium term.

Having said that and still on China, financial liberalization policies would also help with this rebalancing. Why? Because they would reward household savings, by offering them market interest rates, and would allocate capital more efficiently, and these are all objectives recognized by the authorities and by the People’s Bank.

Now briefly about the other countries in Asia, especially emerging Asia. Certainly in many Asian economies, as for example India -- domestic demand will remain dependent on improving the conditions for private investment. And this will require in many of these countries addressing infrastructure bottlenecks and, enhancing governance

As you look at other parts of Asia, I would add that raising female and old-age labor force participation to core demographic change will be key to strengthening growth prospects in the more advanced countries, certainly in Japan and Korea.

So, Keiko, that’s about what I want to say. Let me end by saying that actually this is a very important year for us in Asia. You probably know that our annual meetings this year will be held in Tokyo in October. Our view is that this is recognition of the critical role of Japan and Asia in the world economy, and we hope it also reflects the IMF’s growing and constructive partnership with the region. I am sure there will be many events on Asia and in Asia in the coming year. Let me stop at this moment and ask if you have any questions.

MS. UTSUNOMIYA: Thank you, Anoop. I just want to remind you that this is a briefing on Asia and Pacific, so if you could, please refrain from asking other region-specific questions. Thank you very much.

With that, if you have questions, please raise your hand, and identify yourself first.

QUESTIONER: Thank you. Your growth rate projection of Korea for this year was presented in Mexico City recently. I think it’s at 3.5 percent. With that growth rate, what are the downside risks to the Korean economy? And with that growth rate, could you continue to urge Bank of Korea to raise the interest rate to the level of neutral interest rate, which is at 4 percent? MR. SINGH: All right. Thanks very much. I think you’re certainly right in pointing out that our growth outlook for Korea is somewhat weaker than we forecast at the last WEO update in the fall. As I said just now, it reflects mainly the outlook for weaker growth in European countries, where we are, in fact, predicting a recession. It also reflects a weaker growth outlook for Japan.

Now as a highly open economy, in Korea and other countries in Asia, some slowdown in growth is unavoidable. But the point I have tried to make is that we’ve seen in Korea and other countries domestic conditions that are holding growth relatively strong. Certainly in Korea, employment remains robust. The underlying economic and financial fundamentals are strong. And you ask what can the authorities do if the downside risks materialize? I think there’s no doubt that in Korea, as well as in many other countries in Asia, there are ample policy buffers to offset and address uncertainties which could materialize in the world economy. They certainly have room to do so.

QUESTIONER: Considering the possibility of hard landing in China, do you think China should continue its policy towards the housing market?

MR. SINGH: Well, thank you very much. On China we have Mr. Chalk here. He’s probably going to say some more, but the basic point is that we don’t see hard landing as a likelihood event in China. As I just told you, we expect China’s growth to remain well above 8 percent both this year and next year, even with the risks and events we’re seeing in advanced economies. As I said just previously, China certainly has room to address new shocks and, in fact, it’s clearly the case that in China and other countries, too, there would then need to be a policy response in order to ensure that Asia is to some extent protected from downside risks. And in China, as I said, the room is greater on the fiscal side. There is room for a fiscal stimulus if downside risks materialize. I will say that room is greater on the fiscal side than on the monetary side. And China is still working off the monetary stimulus that it extended two years ago. But let me ask Nigel if he wants to add to this.

MR. CHALK: Just on the property sector, I think we see the property sector right now as appropriately deflating. We were concerned of a propensity for the property sector to be bubbly, to have high price growth. It seems to us the price growth has leveled off, transaction volumes are coming down, and investments are relatively strong in real estate. So right now we don’t see any real need to backpedal on those property measures that were put in place.

Over time we do see some benefit in transitioning from those sort of administrative measures to control property towards something a bit more structural, including higher interest rates, higher cost of capital in real terms, implementing a property tax more widespread than is currently in place, and also developing other financial instruments because a large part of the demand for property is as an investment instrument. So we feel that offering other instruments to savers would help prevent a property bubble.

QUESTIONER: What buffers do you think China needs to boot against a deteriorating external economic environment?

MR. SINGH: Well, I think it comes back to what we were just talking about. The buffers are that over the medium term and, also in the short run, China can move away from its reliance on external demand, and it needs to build up domestic demand. So far, our sense is that it is investment that has been the principal driver of domestic demand and the Chinese authorities want to shift to making consumption the main driver, and, as I said, it’s clearly in their 12th Five-Year Plan. And, for example, they’ve also told us that there is a clear effort to raise the social safety net, and in that framework they want to expand also low-income housing. So there is an established set of policies that they want to implement to raise domestic consumption as opposed to relying on domestic investment. And I think these can be brought forward.. But again, let me ask Nigel if you want to add to that.

MR. CHALK: I agree. I think the main way to insulate yourself from a collapse in external demand is you rely on your domestic demand much more. China’s made some progress in that; it’s still quite investment-based. They still need to get household income up and consumption going. Ultimately, that’s how you protect yourself.

I think over the near-term, obviously it’s going to take some time to get there. Over the near-term, they have plenty of space in terms of fiscal policy they could respond with. They could reduce income taxes, particularly social security contributions. They could provide direct support consumption as they did in 2008 or ’09 where they subsidized consumption on certain durable items. Social housing is another mechanism. There are other ways to get more money into the hands of households in order that they can consume it through the fiscal system.

QUESTIONER: I think your views are too optimistic because I heard some experts say China’s banking debt and local government’s debt are still critical right now and too much to sustain. You said, the public debt of China is not serious right now, and China’s government has greater room for that. But I think many experts say this is a crisis of a bubble burst.

MR. SINGH: Well, I want to ask my colleague, Mr. Chalk, to comment on that. There is a lot of controversy and debate on what are the hard landing risks. And our team has just come back from China. We will be conducting Article IV discussions in China in the coming months. And our recent projections are based on our recent visit. As we explained, we don’t see these hard landing risks as likely.

As far as the comment you made on local financing vehicles and property prices, yes, these have been risks, but our sense is that these are being addressed. And am I right, Nigel, that when you look at property prices, these have moderated, and volumes have declined. And, therefore, our sense is that these risks are being addressed, and our projection is clear that growth should remain above 8 percent as a baseline. And if there were to be greater risks externally, China has sufficient fiscal space to respond. Nigel, do you want to add to that?

MR. CHALK: Yes, and so I think in terms of domestic risks, I think we would point to, as you said, the property sector, local financing vehicles, and even more broadly than that, the big expansion of credit that was done post-financial crisis, which is still being worked through. And then potentially the growth in non-bank financial means intermediation, which has grown quite fast in the last couple of years and is probably less well regulated than the banking system.

So those are the three domestic risks. We don’t think that there are no domestic risks. They’re certainly there, but we see the property sector as being relatively managed by the measures the government’s taken to try to gradually deflate it in terms of the credit, the banks are proactively dealing particularly with the loans. They have the local government financing vehicles, and the CBRC, the local regulator of the banking system, is very much on top of making sure those loans are appropriately provisioned for, that the banks have sufficient capital backing them. We don't see that that's a systemic issue. It certainly is -- it's a risk.

And then in terms of the non-bank financial intermediation, you've seen some regulatory moves to try and bring some of that non-bank financial intermediation onto the bank's balance sheets, for example through tighter regulation of trusts,. What we see is the steady steps to try and address those problems. They are risks. We don't see them as systemic. We don't see that they're going derail growth in China, and we still think growth will still be in the 8 to 8.5 percent range this year.

MS. UTSUNOMIYA: If you don't mind, can I take a couple of questions on line and then come back to you?

A couple of India-related questions. What will be a bigger issue for India to manage, current account deficit or fiscal deficit? And, Euro zone is expected to end up in a recession in the coming quarters; how hard will India be hit?

MR. SINGH: All right. Let me make a few comments and turn to Mr. Takeda to add to them. It is clearly the objective of the Indian authorities to cut India's fiscal deficit. It is clear that a smaller deficit would reduce the government's demands on savings, allowing more lending to take place to the private section. And I think it is a clear objective in India to bring the fiscal deficit down as part of its fiscal consolidation.

Now, again, we're talking about what are the downside risks for India if the European situation deteriorates. I think it is also clear that in India, as in other economies, demand for exports would certainly be hit, and certainly for India, we've already seen effects on private investment.

My sense so far is that the financial effects on Asia are being contained. We are seeing Asian banks, including Indian banks, stepping in where deleveraging is taking place from European banks. And so far, my sense is that there are increases in funding costs, yes, for India and other countries. But supplies are generally being maintained in key areas.

Masahiko Takeda, please?

MR. TAKEDA: Well, the question is posed as to, what's your bigger concern, the current account deficit or the fiscal deficit. But maybe that's not a very productive way of looking at it. The way we see it, the biggest challenge India is facing is how to revive private investment, which is a source of medium-term growth. And linking to that issue, maybe fiscal deficit has a role to play.

Reducing the fiscal deficit, as Anoop mentioned, will create room for private investment to grow, by reducing the crowding out. So in that sense, that's an important factor. But even more important are all sorts of fiscal reform measures that the Indian government can take to improve investment and business conditions in India, so that the private sector has a bigger incentive to increase their investment. And this has been the major emphasis we have put in our recent mission in India. Thank you.

MR. SINGH: Let me just make one additional, that point. Masahiko was right in pointing to private investment. I think one has to look at the rebalancing challenge in the whole of Asia, beyond China.

In India, as well as in many other countries in Asia, certainly some of the ASEAN economies, the priority comes to raising private investment, yes, but this requires also greater infrastructure investment as part of the process of raising potential growth. If you look at many ASEAN countries, such as Indonesia and the Philippines, it's very important that infrastructure investment be raised.

So in India, what is planned, for example, is to introduce certain fiscal reforms that would give more space for higher infrastructure investment, especially in the energy sector, which is affecting overall investment in India, among other factors.

MS. UTSUNOMIYA: Okay. One more from online What needs to be done by the Philippines to hit or even reach the updated forecast of the IMF? What challenges are hindering the Philippines from achieving these? MR. SINGH: Well, I think that comes back to what I was just saying about investment in the Philippines. You know, our estimate is that the Philippines medium-term growth potential is already reasonably high, it’s been around 5 percent. In the authorities' view, potential growth targets are, or should be, even higher. But the main point I want to make is that in order to raise potential growth in the Philippines, it needs more investment, especially in public infrastructure. And this is part of the package of measures the authorities have in mind.

Now, over the short run, this year the Philippines is among the few countries in Asia where actually growth should pick up. And this is partly a result of the higher public construction spending that is already taking place there.

QUESTIONER: The Japanese administration now plans to raise the consumption tax to 10 percent by 2015, and the IMF office said that it's not enough to put the public debt rate to consistently downward, and I think this same kind of discussion was held in department last summer. What is your current view? MR. SINGH: All right. Well, thank you very much. Jerry Schiff is here. He's our mission chief for Japan and he might make further comments. But let me just make a few points at this stage in response to your questions.

These issues have been publicly discussed in Japan considerably in recent months. And as you said, the government certainly plans to raise the consumption tax to 8 percent and then onward to 10 percent by 2015. This is their plan to do so. At the same time, the government is also considering other pension-related reforms. This is all quite well-known. And there's no doubt that we certainly welcome the government's plan to raise the consumption tax. Why? In some ways, the consumption tax is the most appealing measure to take because, as we've learned from other experiences, it is more growth friendly and less distortive than other options.

And as you look at where the tax currently is in Japan, at 5 percent, it's at one of the lowest rates in the world, and therefore it's clear that that is an option that should be taken. And your point I think was, does the government need to do more than 10 percent? I think it is well-recognized in the government that more measures need to be taken to reduce the fiscal deficit further because their objective is to bring the public debt ratio down, and this was a key point made for advanced economies in the Fiscal Monitor released last week.

So it has been our sense, as we have discussed this in debates and with the authorities over time, that raising the consumption tax gradually, not immediately -- say to 15 percent beyond 2015 -- would be more in-line with the tax rate in other countries. And that, along with the other reforms that are planned in Social Security and other spending, will then clearly bring the public debt ratio down. And I think this is the objective. So certainly what the government has in mind is essential. It is welcomed. And is well-recognized, more needs to be done in a gradual way.

Let me ask Jerry Schiff if he wants to add to this.

MR. SCHIFF: No, I think that's right. There's agreement on the overall objective, which is to bring the debt-to-GDP ratio down. We think it's important to do that by the middle of this decade, for reasons of confidence. And as Anoop said, what's currently on the table is a good start to the package that will get us there.

The only other point I wanted to mention is that it's really -- it's critical that Japan put in place a medium-term framework that's credible, that people believe. And if they do that, it will reduce any kind of negative impact on growth of fiscal adjustment -- you know, people will have confidence of the general direction. Thus, they'll know the path and that confidence will be a positive for economic activity.

QUESTIONER: You recommend additional asset purchase to boost the Japanese economy by Bank of Japan. Could you elaborate on your assessment? Do you think additional asset purchased like FRB’s QE2 is appropriate for Japan, or middle size of asset purchase is better? So, how do you think about that?

And the second question is Chinese currency. So, IMF pointed out the Chinese RMB is significantly undervalued on the previous Article IV consultation. Do you think you should change your assessment?

MR. SINGH: All right. Well, thank you very much. I should say that our team working on Japan, led by Jerry Schiff, will be in Tokyo in the coming weeks. So we will have more discussions on what the options are for Japan.

So far, under its asset purchase program, the Bank of Japan has purchased about 10 trillion yen, as of end of last month at least, which is about half its target of what it wants to do in purchases of JGBs, equities, corporate debt So clearly, there is still room under the current framework to do more.

Thus, the Bank of Japan has the room already to accelerate those purchases under the existing program. And clearly, if external downside risks materialize, the point I was making is those overall targets can certainly be increased. I think that's all.

Your next question was on Renminbi. I will say that on our assessment of the exchange rates, that is a process we normally do in the spring, and we are moving to that process in the coming months. So we will be assessing, not just the renminbi, but other currencies too as we normally do, looking at the medium term equilibrium and trying to assess where they are in relation to that level. And we will be doing that in the coming months.

QUESTIONER: Just to follow up on the China currency question, given that there are some elements that have changed, and you mentioned the surplus as narrowed, how may that affect your judgment on the currency?

And my second question is on Australia. It's a country heavily relying on exports. Given the evolution of the external demand, do you think they can go back to surplus as they were planning to next year?

MR. SINGH: On China, the external balances are just one factor explaining exchange rates. Maybe Nigel should expand that?

MR. CHALK: It's generally a complicated exercise because it's not a unilateral assessment of China. We do a multilateral assessment of every country at the same time. Hence, we take into the account the changes that happened in the United States, in Europe, in Japan, in China, and that's what we build our ultimate assessment of exchange rates.

This year it's made somewhat more complicated by the fact that -- as you may have seen in November when the Managing Director discussed our surveillance priorities for the year, she's instructed the staff to look again at the methodology to come up with a multilaterally consistent assessment of external positions. We would build a revamped Consultative Group on Exchange Rates (CGER), which is our usual methodology. So we're changing the methodology and revamping the methodology.

The idea is that by the spring meetings, we would have that methodology and the updated assessment to present to the executive board. That's the current timetable.

MR. SINGH: All right. Well, briefly on Australia, you're right in saying the authorities have certainly committed to return to a surplus by 2012-13, and we have supported that. The authorities have believed that an exit from fiscal deficits is needed to rebuild fiscal buffers and support monetary policy..

Having said that, it is also the case that were downside risks to materialize, with a further slowing of the global economy, in Australia the authorities probably have more policy flexibility than almost any other advanced economy. Why? It currently has probably one of the highest policy interest rates, and it probably has the lowest net public debt-to-GDP ratio. So clearly, Australia has the ability to take actions if there were to be a further external deterioration. But barring that, we support the objective of moving back to a fiscal surplus as planned..

MS. UTSUNOMIYA: Okay. One from the floor.

QUESTIONER: Let me ask about the security factor on Korean Peninsula. Do you think the power transition in North Korean regime from demise from Kim Jong-il will make the South Korean economy more vulnerable?

MR. SINGH: I think that, so far, we have seen stability in Korea and in the region.

MS. UTSUNOMIYA: Okay. Let me take one question from online. Japan posted its first annual trade deficit since 1980. Will this likely become a trend, and does that bode ill for the yen? Has the dollar bottomed against the yen or will more intervention be necessary from Japan?

MR. SINGH: Well, let me just make a few points and turn to Jerry Schiff to add to it. The first question I think was on the trade deficit.

I think it principally reflects, in Japan, special factors. We've had the earthquake. We've had the tsunami. We've had the floods in Thailand, which have also affected Japan. All this has lowered exports and raised imports for reconstruction. So I think the trade deficit reflects temporary factors. If you look beyond that, clearly Japan is one of the largest external creditors in the world, with sizeable income flows. So if you look at the current account, it's certainly in surplus.

Now as far as the currencies are concerned, let me turn to Jerry and see what you want to add on.

MR. SCHIFF: I would just say that, as Anoop said, this past year the trade deficit was slightly negative based on a number of special factors. But we don't expect -- we're not projecting a trade deficit next year; although, it's possible that over the medium-term one could emerge due to long-term trend factors, including the aging of the Japanese population and the decline in the labor force. But over the medium term we don't expect a current account deficit. Because of the very large income flows we don't see that as something to be overly concerned with at this time.

MS. UTSUNOMIYA: Okay. If I may, the last questions from online. What are some of the external risks you foresee for Malaysia for 2012 when the bulk of the government's transportation program projects will be rolled out, which should boost domestic demand?

And also, briefly, shouldn't Japan's rebuilding process, as well as transfer of some of the production basis out of Thailand, provide growth momentum, too?

MR. SINGH: So on Malaysia, I think we should also recall what Governor Zeti said just, I think, a few days ago -- they're clearly watching it closely. The governor was very clear in her assessment that monetary policy is still accommodative and it is widely accepted that growth will likely moderate a bit this year, and also that the current level of interest rates, in her view, are supportive of growth.

So I think we have a policy framework already in Malaysia that is accommodative of growth, and although we are expecting some moderation of growth in Malaysia, it will still remain certainly close to 4 percent in 2012. We do know also that Malaysia is well-placed to withstand the shocks, and it certainly has sufficient room, as many other countries do, to use monetary and financial policies as needed to provide a great cushion for any greater external downturn.

But the most important point I want to make for Malaysia, as you look at what Malaysia can do to raise domestic demand, it is significant that the government already has a medium-term program, the Economic Transformation Program, which will provide much more support to domestic demand and growth over the medium-term. And that's going to be a significant factor building up Malaysia's resilience and building up its growth momentum in coming years.

MS.UTSUNOMIYA: Jerry, would you like to add?

MR. SCHIFF: Yeah, there was a question on reconstruction spending in Japan and indeed that will have a positive impact on growth this year. We estimate something around three-quarters of a percent contribution to GDP growth, but that positive is somewhat offset by the negative of the much, much slower growth globally and the impact that will have on Japanese exports.

MS. UTSUNOMIYA: Okay. We have to wrap up the briefing. Thank you very much for you all for your participation. Sorry for those who submitted questions that we couldn’t answer; we try to get back to you via e-mail. Good night, and have a good day to the people in Asia. Thank you.

MR. SINGH: Thank you, all, very much.

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