April 13, 2021
PRESS OFFICER: Keiko Utsunomiya
Phone: +1 202 623-7100Email: MEDIA@IMF.org
1. Warm greetings from Washington and good evening to you in Asia. It’s a pleasure to be with you and to give you some of the highlights of the IMF’s Regional Economic Outlook for Asia Pacific.
2. The pandemic has resulted in unprecedented output losses in the Asia-Pacific region. Losses varied widely across economies as a function of the stringency and effectiveness of containment policies; dependence on tourism and contact-intensive services; and the degree of policy support. Some of the Pacific Island countries have been among the worst affected.
3. Although a recovery is now underway, and the pandemic is receding in some countries, elsewhere, second or third waves of infections are raging, notably in India and some of the ASEAN economies. While exports and manufacturing generally have held up due to surging global demand for pandemic-related supplies, services are taking longer to recover, adding to sectoral divergence. The pandemic has increased income inequality by disproportionately hurting low-wage and informal earners, as well as young and female workers. Divergence is thus multi-dimensional: across countries, and within countries across sectors, age groups, gender, and skill level. A region known for its trademark growth-with-equity model now runs the risk of entrenching excessive inequality.
4. Let me turn to our detailed, country-level forecasts.
• Overall, we expect regional growth to come in just above 7½ percent this year, and just short of 5½ percent next year. While these averages are a welcome rebound from last year’s contraction, they mask significant heterogeneity at the country level, and this divergence seems likely to persist.
• For China, growth has been marked up to 8.4 percent this year due to stronger net exports, reflecting higher global growth and the US fiscal stimulus. India has seen a more sizeable upward revision to 12.5 percent on account of continued normalization of its economy and a more growth-friendly fiscal policy, but the current surge in infections presents a worrisome downside risk.
• Revisions have generally been positive for the advanced economies in the region. Australia’s growth projection has been revised up to 4.5 percent given the better-than-expected outturn in the final quarter of last year, and healthier domestic demand expected this year. The outlook for the Japanese economy has improved thanks to unprecedented domestic policy support and favorable external conditions, with growth in 2021 now projected at 3.3 percent, and 2.5 percent next year. For Korea, growth should pick up to 3.6 percent this year, and moderate to 2.8 percent in 2022, driven by the favorable external environment for manufacturing and exports.
• Against these upward revisions, growth in the ASEAN economies has been marked down to 4.5 percent given still high Covid-19 caseloads in Indonesia, Malaysia, and the Philippines, which will slow the pace of normalization in contact-intensive sectors. The outlook for tourism is also expected to remain subdued, affecting prospects in Cambodia, Lao PDR, and Thailand. The humanitarian crisis in Myanmar gravely concerns us all: in addition to the tragic loss of life, we project that the coup will have a devastating impact on livelihoods that could last well into the medium term.
• South Asia excluding India is recovering, led by Bangladesh due to higher-than-expected exports and remittances, notwithstanding the recent spike in infections. Outlooks in Maldives, Nepal, and Sri Lanka are affected by weak tourism and limited policy space.
• The pandemic has inflicted a devastating toll on the Pacific Island Countries, particularly those highly dependent on tourism and volatile commodities trade. This will add to pre-existing vulnerabilities—not only because of uncertainty about when borders reopen and tourism recovers, but also due to ongoing natural disaster and climate risks, stresses from high debt and over-leveraged balance sheets, diminished policy space, and dwindling correspondent banking relationships.
5. The recovery in Asia depends on a smooth handoff from public support to private demand. After the historically unprecedented stimulus in 2020, fiscal policy in the region is expected to continue to do its part this year, with the fiscal stance remaining supportive in the region. However, there is notable cross-country variation, with some economies expected to soon begin moderating fiscal support on the back of strong health indicators and large stimulus last year. The evolution of current account positions will reflect a balance between positive spillovers from the US fiscal stimulus and some waning in demand for pandemic-related exports.
6. There is huge uncertainty surrounding our projections.
7. Setbacks in the vaccine rollout, questions about the potency of the vaccine against new variants of the disease, and a resurgence of the virus, together constitute a key downside risk. On the upside, however, a faster vaccine rollout would propel the economic recovery. Strong international cooperation remains essential to ensure adequate vaccine production and universal distribution at affordable prices. In this regard, the efforts of China and India have been commendable, and we hope both countries continue to make supplies available to other countries while ensuring adequate supplies at home.
8. The changing external environment is a central driver of risk in the region, given Asia’s outward orientation to trade and capital flows. For export-oriented economies in Asia with strong linkages to the United States, the US fiscal expansion will provide positive spillovers through the trade channel. But US interest rates are already on an upward trajectory, and this is spilling over to Asian Emerging Market economies. If US yields rise faster than markets expect, or if there is miscommunication about future US monetary policy, adverse spillovers through financial channels and capital outflows, as during the 2013 taper tantrum, could present challenges by compromising macro-financial stability.
9. The consequences will vary according to country-specific trade and financial linkages. The share of foreign holdings of Asia’s government debt has diminished in recent years, reducing exposure to the changing risk appetite of nonresident investors. In addition, greater official reserve holdings, more flexible exchange rates, stronger supervision over bank balance sheets, and better anchored inflationary expectations should together help to dampen the impact of any faltering in foreign investors’ risk appetite. However, the increase in leverage across government, household, and corporate balance sheets means that higher borrowing costs, when they occur, will hurt.
10. What is the message? If I choose only one, it is for divergence to be vigorously countered across all the dimensions I described — history must not be allowed to become destiny.
11. A first priority is to ensure that vaccines are widely available and to overcome vaccine hesitancy. Boosting vaccine supply and administration capacity are essential to underpin the recovery.
12. Fiscal support, targeted towards vulnerable groups, should remain accommodative until private demand recovers. Broad lifelines should be phased out only gradually as the pandemic recedes and future support should then be geared to achieve needed reallocation of resources toward new dynamic (green and digital) sectors. Even now, policymakers need to be attentive to anchoring public debt in credible medium-term frameworks, especially where fiscal space and buffers have been eroded.
13. Monetary policy should continue to be data dependent, attendant to macroeconomic and financial-stability risks. The challenges going forward are considerable, given changes in the international environment, the possibility of renewed bouts of capital outflows, and the risks from inflated housing markets in some countries. Policy makers will need to deploy the multiple instruments in their toolkits to safeguard macro-financial stability in this challenging environment.
14. A renewed structural reform drive is essential to boost productivity and output potential while fostering greener and more inclusive growth. Let me mention three imperatives.
15. First, trade has been a powerful driver of growth and poverty alleviation in Asia for decades—it’s been a cornerstone of the Asian miracle. To fulfill Asia’s potential for trade-led growth, restrictions that impede trade need to be reduced. These include tariffs and non-tariff barriers, such as quotas, subsidies, local content rules, and licensing requirements, where progress has stalled since the 1990s, notwithstanding welcome recent regional initiatives such as the RCEP and CPTPP. Easing of trade & technology tensions and facilitation of digital trade would also provide a welcome fillip to growth.
16. Second, corporate debt vulnerabilities, especially among small & medium enterprises, need to be addressed by pivoting from pandemic liquidity support to solvency support to facilitate balance sheet repair, enable zombie firms to exit, and allow dynamic entrants to thrive. Pandemic support policies, while necessary in the short term, have obscured pre-pandemic vulnerabilities and allowed unviable firms to continue operating. As such policies are withdrawn, insolvency frameworks need to be strengthened to allow non-viable firms to exit, while assuring adequate credit flow to productive firms, and facilitating fresh equity capital to help companies overcome debt overhangs and grow job opportunities.
17. Third, the welcome shift toward a greener energy mix during the pandemic must now catalyze further efforts to advance the green agenda. Increased investment in green technologies coupled with higher carbon prices are essential to reduce emissions. Policies should build on recent country initiatives, including incentives for energy efficient vehicles in China; tax-rebates for efficient home appliances in Korea; and support for climate resilient infrastructure in Japan. Policy strategies need to internalize political-economy considerations and limit adverse distributional impacts: only in such cases will greener growth be politically sustainable. In this respect, safety nets to compensate losers, and trampoline policies to allow workers to shift from declining to new sectors, will need to be improved.
I thank you for your attention and look forward to your questions.
