Transcript

Transcript of the Press Conference on the Release of the Regional Economic Outlook for Asia and Pacific

October 27, 2022

PARTICIPANTS

Moderator:

HUONG LAN VU

Communications Officer

International Monetary Fund (IMF)

Speakers:

KRISHNA SRINIVASAN

Director of the Asia Pacific Department (APD), IMF

SHANAKA JAY PEIRIS

Division Chief of Regional Studies, APD

DAVIDE FURCERI

Deputy Division Chief of Regional Studies, APD

MS. VU: Good morning, everyone. Welcome to the IMF’s press conference on the Regional Economic Outlook for Asia and Pacific: Sailing into Headwinds. I am Huong Lan Vu (Pinky) of the Communications Department at the IMF. And with me today we have Krishna, Director of the Asia Pacific Department, Shanaka Jay Peiris, Division Chief of Regional Studies, Asia Pacific Department, and Davide Furceri, Division Chief of Regional Studies, also in the Asia Pacific Departments. I will be moderating the press conference today. We are so thrilled to be back in Asia, in Singapore, after three years of virtual engagements due to the pandemic. And we're very happy to see all of you here in this room, as well as seeing people connecting virtually. To start, I will give the floor to Krishna to give some opening remarks, and then we'll take your questions. Krishna, the floor is yours.

MR. SRINIVASAN: Thanks. Good morning, everyone. Thank you for joining us. As we launched our Regional Economic Outlook for Asia and Pacific, we have the report titled Sitting Headwinds. So let me begin by walking you through the three main headwinds we see facing the Asia Pacific region.

The first headwind is a global financial tightening. The Federal Reserve has become much more aggressive in tightening monetary policy as U.S. inflation remains stubbornly high. This has translated to tighter financial conditions for Asia. Sovereign yields have risen, and capital outflows in emerging market Asia have been as large as in past stress episodes, but they remain limited to a few economies.

The second headwind is the war in Ukraine, which has led to a spike in commodity prices. Most countries in Asia have also seen a deterioration of their terms of trade. And this has been an important factor behind currency depreciations so far this year.

The third headwind is a sharp and uncharacteristic slowdown in China. We have marked down Chinese growth for 2020 with 3.2%, its second lowest level since 1977. This reflects the impact of the zero COVID lockdowns on mobility and the crisis in the real estate sector. The slowdown is estimated to have important spillover to the rest of Asia through trade and financial links.

The headwinds are contributing to a global slowdown compared to the April World Economic Outlook. We have downgraded our forecast for growth in Asia and the Pacific by 0.9 percentage points in 2022 and 0.8 percentage points in 2023. So, we had growth at 4% in 2022 and 4.3% in 2023 while inflation grows more modestly in Asia in 2021. This change follows the sharp volatility in global commodities since the war in Ukraine. This increase reflects both rising food prices, particularly in Asian emerging market and developing economies, but also higher core inflation as region recovers and output gaps loss. Core inflation now exceeds central bank target in most Asian economies and in most cases by a wide margin. There is a need for further tightening of monetary policy to ensure that inflation returns to target, and inflation expectations remain well anchored.

Fiscal policy must complement monetary policy to fight inflation around the world in Asia. Fiscal consolidation is also needed to stabilize public debt. Asia is now the largest area in the world and so comes at high risk of debt. Distress positions and rising interest rates could expose financial volatilities from high leverage and unhedged balance sheets and further risks increases in public debt ratios.

The challenging conjuncture is aggravating the medium-term economic scars opened by the pandemic, which is expected to be worse in Asian. Much of the shortfall in growth in Asia relative to other regions can be explained by lower levels of investment, employment and productivity following the pandemic. While exact policy responses will depend on country specific circumstances, tackling corporate debt overhang and mitigating human capital losses will be important for a wide range of countries in the region.

The prospect of greater geo-economic fragmentation was also a significant risk to the region. In the report, we document worrying early signs of fragmentation and provide evidence of the potential consequences of dissolving global trade links. One such sign of fragmentation pressures comes from the measures of trade policy uncertainty. This spiked in 2018 amid tensions between the United States and China and has increased again amid Russia's war in Ukraine as sanctions created uncertainty around future trade relations. Our analysis shows that a typical shock to trade policy uncertainty like the 2018 build up of China-U.S. tensions reduces investment in the region by about 3.5% after two years. It also decreases gross domestic product by 0.4% and raises the unemployment rate by 1 percentage point.

In addition to rising uncertainty, the prevalence of harmful trade restrictions has increased since 2019. The sectoral decomposition of trade restrictions has also been shifting. The shared restrictions that target high tech sectors has been steadily increasing since the global financial crisis. Since the war in Ukraine, restrictions targeting the energy sector also increased sharply, while those aimed at high tech sectors also remain high.

To consider the long-term risks of deeper fragmentation scenario, we describe the consequences of a purely hypothetical global economy divided along the lines implied by the votes cast on March 2nd, 2022 United Nations General Assembly motion to condemn Russia's invasion of Ukraine. If the world fragments into two separate blocs, then the losses become significant. Global losses are of 1.5% of GDP. But whereas those of Asia are slightly over 3%, losses are especially large for countries with a high level of openness and that have production structures that straddle both blocs. Let me close here and take questions.

MS. VU: By now, the full report of the Regional Economic Outlook for Asia Pacific and the accompanying press release should be available on IMF.org. A blog on the impact of fragmentation on Asia has also been posted on the IMF Blog.

So please do check them out. I'm going to open the foor for your questions. For those who are in the room, you can just raise your hand and my colleague will pass the microphone to you. And for those who are joining online, you can just put your name on the chart or raise your hand. Alternatively, you can put your questions in the chat and I will read it out loud for you. So let me go with the question in the room first.

Jason please.

QUESTIONER: Thank you. Hi, Jason Douglas from The Wall Street Journal. Just on your point about fragmentation at the end, Krishna, can I ask about the U.S. export ban on chips to China or the attempt to do so in a way? Is that something that any effort have yet made, any effort to figure out the macroeconomic implications of that? And would you expect it have any economic implications outside of China, in Asia more broadly? Thank you.

MR. SRINIVASAN: So, Jason, thanks for the question. We haven't done the analysis yet. But if you remember, a couple of years ago, we had done some work on technological decoupling between the U.S. and China where we showed that the losses could be quite significant if there is technological decoupling, and that extends to both U.S., China, and the rest of the world. If you look at that analysis, that could feed into that kind of thing. That’s a very specific example of technological decoupling. You can reference that.

MS. VU: Michelle please.

QUESTIONER: Thank you, Michelle Jamrisko from Bloomberg. I wanted to ask a little bit more on the policy responses. I know you mentioned in the materials that it's going to vary by country, of course, but especially recently with a lot more talk about market intervention, you know, how to mitigate against the strong dollar. I'm wondering if any of those concerns you have there, any specific moves that you think are ill advised at this time?

MR. SRINIVASAN: Michelle, thanks for the question. If you look at the exchange rate movements in the region or more broadly, they reflect three factors. One is the terms of trade shock following the war in Ukraine. Associated with that is a slump in external demand. And then, of course, the interest rate differential between the U.S., advanced economies with the rest of the world.

So in most cases, the exchange rate developments reflect fundamentals. In fact, some work we have done in the REO tells you that there was a very good relationship between terms of trade shocks and exchange rate movements first, and then now that's been complemented by what's happening to interest rates. So in that context, exchange rate flexibility is the shock absorber. We would want exchange rate to be more flexible so that the shock can be absorbed.

But there could be cases where there are significant financial fragilities or there could be cases where very sharp movements in exchange rate could affect a country's ability to meet its inflation target. Because inflation expectations could get unanchored and so on. In those cases, some form of intervention is something which our integrated policy framework, if you're familiar with that, talks about that. So in most cases, I think the response should be to allow the exchange rate to move, because this reflects changes which are basically quite fundamental.

QUESTIONER [Inaudible]

MR. SRINIVASAN: So one would expect that as inflation turns the corner in the US and other parts of the advanced economies, interest rate tighten, the differentials will come down and that will be an automatic reversal of action. So that's the way it works, right? When you see the differentials rising, you see the exchange rate moving one way, one scenario moves the other way. So that's the way it is.

MS. VU: Thank you. We will go to Emma.

QUESTIONER: Emma Conners, Australian Financial Review. I'm just wondering about the impact of the US visa ban. So we spoke a bit about the attempt to ban semiconductors, but what about the effect on the labor market? I mean, the restriction of international labor seems like a bit of a worrying development. I'm just interested in your views.

MR. SRINIVASAN: Correct me if I'm wrong, Jay, but we haven't done much work on that front. But I would say that fragmentation can take different forms, right? You could have fragmentation where you have labor mobility being constrained across blocs of countries. And that, again, is going to have an impact on economic outcomes. But again, we haven't quantified that in any meaningful way. But that could be another form of fragmentation. In this paper, what we have done in the regional economic outlook, we focus a lot on trade fragmentation, basically, when trading stops between in sectors across blocs. But we talk about the fact that financial fragmentation could be an important element, which kind of makes the situation even worse. So if you add to that one more form of fragmentation, which is labor mobility being constrained, outcomes are going to be that much worse. And given the fact that Asia is a big hub in trade, it's likely that Asia will again suffer the most when you build up that fragmentation.

MS. VU: Takashi.

QUESTIONER: Takashi from Nikkei. The recent Chinese leadership reshuffle and the impact on economic growth in China? Do you think zero-COVID policy will continue for a long time, and hence, pushing down the growth rate in 2023?

MR. SRINIVASAN: Thanks for that question, Takashi. So again, as we have noted from our report and tables, we have lowered the forecast for China for this year to 3.2% and next year to 4.4%. And that is because of two factors which are domestic and of course, external headwinds across all the region. And the two domestic headwinds, one of which is the zero-COVID strategy, which as you saw, had a significant impact in quarter two when there were massive shutdowns and so on. And that disruption continues. Every time there is an outbreak of the pandemic, there are shutdowns and frequent disruptions. And of course, the second factor is the real estate sector, which is in crisis. So these two factors explain a lot of why China's growth is slowing down. And one would hope that with the party Congress behind us, there would be further attention being paid to policy response to this.

So in our baseline, what we assume is that these restrictions relating to the COVID pandemic would be gradually lifted in 2023. But we don't see a quick resolution of the real estate sector because that could be that could take longer. But what we are seeing is that it's important to work on both of these policies. One, because the tradeoff between health outcomes and economic outcomes on the zero could become much more striking. And stock now and the real estate sector, which is a big component of the Chinese economy, needs to be addressed in a comprehensive way, and that should help address growth going forward.

MS. VU: Do you have any more questions from the room? Maybe I go to online participants for a while. We have a question from Takashi's colleague - Kazuya Manabe, from Nikkei, Japan. Can various disruptions be inflation pressures for APAC countries?

MR. PEIRIS: During the early part of this year, we had much more supply chain disruptions, including Shanghai and the port lockdowns. We saw definitely certain delivery times increase, producer prices increase. And given the supply chains, it does feed through to prices. But I think initially the bigger effect has been that output. What we've done in the REO shows that the supply shocks have had a big impact on the region. So supply shocks originating in China can have quite large impacts across the region. The supply chain disruptions have impact on prices, the delivery times and delivery of goods and intermediate goods. Thank you.

MS. VU: Thank you, Jay. We have a question from Sophie Xiang from 21st Century Business Herald, China. The report mentions that depreciations and rising interest rates could expose financial vulnerabilities from high leverage and unhedged balance sheets. From the perspective of both financial markets and the real economy, which markets or economies in the Asia-Pacific region could be the vulnerable spot? What are your recommendations for dealing with the risk？

MR. SRINIVASAN: So thanks for the question. So if there's one factor which is quite striking in the Asian outlook is the fact that Asia share of global debt has increased from 25% to 38% pre-pandemic to post-pandemic. And again, this is not just public debt, it's also non-financial, corporate and household debt. So in the context of rising interest rates and slowing growth, you could see debt problems coming to the fore. And it's not just public debt. Fiscal policy has to one compliment monetary policy so that they are talking to each other. But more importantly, fiscal policy has to maintain a consolidation to address these debt problems in order to make sure that they remain sustainable in the region. So there are countries where public debt has risen quite sharply. So for those countries, the fiscal consolidation needs to continue. There are other countries where, household debt has gone up. And there, again, is a mix of, corporate workout procedures and macroprudential tools to be used to address these rising or elevated debt concerns. I don't want to get into specific countries, but you can look at our report where you can see where debt levels have gone up. And that could give you an impression where the problem could rise.

MS.VU: Thank you, Krishna. We have a few questions on China. I would ask these questions now. The question from Zhang Zhiwen, People's Daily China. What's your comment on China's economy and the new opening policies raised by the report of the 20th CPC National Congress? Another question from Lanxu Zhou, China Daily: How do you see the prospect of China's high-quality developments in the next five years based on the key signals released by the 20th CPC National Congress? And now the question on China from Kelly Yang, China Daily Hong Kong. What is your prediction for China's economic future now that the National Congress has concluded?

MR. SRINIVASAN: I'm going to repeat what I just said, that there are short-term factors which are affecting growth in China. The two key factors are, of course, the zero-COVID strategy and the real estate sector, which is in crisis there. In addition to that, there are external headwinds. So these are factors which are clearly important in the short run, which need to be addressed to get growth going. But beyond the short term, there are issues of competitive neutrality between the private sector and SOEs, the issues of productivity, aging, labor market, and so on, which need to be addressed. So, beyond the near-term, how China addresses these other issues is important to ensure robust growth over the medium term. And again, we've just had the party Congress, the direction of policy will become clearer once the new leaders are in place. But my hope is that these policies will be addressed in a way so that growth resumes in a more robust way.

MS. VU: We have a follow-up question from Feni Freycinetia, Bisnis, Indonesia. How big is the impact of China's slowdown on the economy in the Asia-Pacific region? What strategies should countries in the region, including Indonesia, take to anticipate this situation?

MR. SRINIVASAN: So let me answer the first part and then Jay can take the one on Indonesia. So again, I like to give data out and one of the data is intraregional trade in Asia is about 50%. And a large part of that is China. So anytime China slows, it has an effect on countries which trade a lot with China. In two countries that trade a lot with China are Japan and Korea, you can see that, growth is slowing. So clearly, when China growth slows, it's going to affect the whole region because China is the most dynamic or the biggest trading partner in the region. Now on implications it would have on Indonesia, Jay can handle that.

MR. PEIRIS: Maybe I'll just add that we do have a box in our conjunction chapter in the REO on China spillovers in the region, and there are some newer aspects which might be the kind of question how different countries might be affected differentially. So, when the slowdown, as I mentioned, the supply shocks matter, the demand shocks matter, but a bit more granular, we do separate out how would the real estate slowdown affect the region compared to private consumption being weak? Obviously, if the real estate slowdown is more pronounced, you have commodity prices being affected more and countries like Indonesia being affected more. If it's private consumption, it would be the more manufacturing and agriculture economies would be affected more in the region. So we have that analysis is in the box and I think those differential impacts are quite important. And of course, Indonesia being a commodity exporter but has benefited from the current terms of trade, would be more effected from the investment side slowdown in China. Thank you.

MS.VU: Thank you, Jay. When we are on Indonesia, I have a question here from Abdul Azis Said, Katadata Indonesi, Indonesia: What are the prospects for the Indonesian economy next year? What is the downside risk and upside risk for the economy?

MR. PEIRIS: I think maybe I can just build on what I just mentioned. The economy has actually been doing quite well this year, partly because of the positive terms of trade, they are the commodity exporter. So we're forecasting 5.3% for this year, and only a gradual slowdown to 5% next year, compared to many other economies where we are expecting a more pronounced slowdown, again because it's a commodity exporter. But inflation is rising, and headline inflation has risen above target. Even core inflation is moving up there. So I think there are headwinds to Indonesia from the external demand, external financial conditions which will impact this year and next year. And so that's one headwind we see as important to watch. But we do expect inflation to come down next year and that'll be a key factor how things will play out in Indonesia. The risk for Indonesia is no different from the region, which is an intensification of the three headwinds and a greater persistence of global financial tightening. Commodity prices less of an impact. But the slowdown in China will be something to watch very closely, as I mentioned before. Thank you.

MS. VU: Thank you. We have a question on Japan from Kazuya Manabe, Nikkei Japan. What are your views on the outlook for inflation, wage growth and consumption in Japan, which is suffering from high inflation for the first time in decades, albeit inflation is relatively lower compared with other countries?

MR. SRINIVASAN: So again, on Japan, what we have seen is a recovery taking place following the pandemic. And domestic demand is picking up. And also, Japan is affected by what's happening on the external side. Going to inflation, what we've seen is the various measures of inflation in Japan. So the measure which we follow is core inflation which is 1.9%. The question, of course, is whether that is going to be durably at 1.9% or exceed 2%, which is their target. And there the important role of wage growth is relevant. And you see that wage growth has been pretty muted in Japan. So the question, of course, is if wage growth is so muted, then can core inflation rise in the durable basis about 2%? And given the fact that wage growth is still very slow, we support the accommodative monetary policy stance, which Japan is pushing right now.

MS. VU: Thank you, Krishna. We have a question from Sovan Nguon, news correspondent for Xinhua News Agency in Cambodia. Cambodia's economy is to grow by 5.1% in 2022 and 6.2% in 2023. What is your comment on these growth rates? Have the Regional Comprehensive Economic Partnership (RCEP) and the Cambodia-China Free Trade Agreement given a boost to these growth rates?

MR. FURCERI: We have seen a quite robust recovery in Cambodia for this year and we also expect for next year. For next year, it's likely to be a slow moderation as you just mentioned. Regarding the trade agreement, I think this is a good step for many countries to the extent it signals international cooperation more broadly. So, I think that the participation in the RCEP is a good step, not only for the short term, but also for the medium term.

MS. VU: Thank you, Davide. We have a question on Malaysia from Mahanum Abdul Aziz, Berita Harian, Malaysia: Do you see Malaysian economy has strong fundamental and ample buffer to withstand any shocks going forward? What about the outlook for Malaysia's economic growth in 2022 and 2023? Do you see Bank Negara Malaysia need to hike its policy rates more aggressively to narrow the interest rates differentials with the U.S. Any suggestions for Malaysia?

MR. PEIRIS: Thank you. Malaysia is a bit similar to commodity exporters. It's also a commodity exporter, but it's a bit more of a diversified, highly integrated manufacturing economy as well. This year has been very strong like we have seen in the rest of the emerging Asia. So, we are expecting growth at 5.4% this year, 2022. But the headwinds from the external demand and also financial conditions, we expect to have more impact in Malaysia and we therefore expect growth to come down to about 4.4% next year. So we have a slowdown and that's across the region. But, it has to do with the fact that they are highly integrated through supply chains across the region and to the EU and the US, which, as you can see from our global economic outlook, the forecasts for the EU and the US are quite weak in 2023. So 2013 is going to be a tough year.

But at the same time inflation is moving higher, both headline and core inflation, so Bank Negara has hiked 75 bps this year and that has held back expectation and they did quite fast even before inflation went above the target bands. But given what we are seeing in the region and in the economy, output gaps are closing, core inflation is above target, headline inflation may come down a bit because of the easing commodity prices. But given the persistence of core inflation and some other factors we are seeing, you would expect many other countries in the region to have to stay the course on the tightening cycle to anchor inflation expectation and bring down inflation to be below target or within target by 2024, as we project at the moment. Thank you.

MS. VU: Thank you, Jay. We have a few questions on Vietnam. Nguyen Thi Thanh Huong from the Financial and Monetary Market Review: What's the growth prospects for Vietnam in 2023? And we have another question along the same line from Thu Nguyen, Voice of Vietnam: What is the IMF’s take on Vietnam's current economic situation and what is the prospect for Vietnam in the near future?

MR. FURCERI: We currently expect a strong rebound in economic activity in Vietnam. We projected growth at about 7% for 2022, mostly driven by the rollout of the fiscal package, stable credit growth, the lift up of COVID-19 restrictions as well as a strong demand from trading partners in the first part of the year. We also see a positive outlook regarding inflation. Inflation has risen, but from a low level to just 2.6%, if you look at the number in August. We expect that inflation is likely to stay within the central bank target of 4% because of a stable currency, something that has been different compared to other countries, capped administered prices and limited food price. So for next year, since Vietnam is a very open economy, you would expect to see some slowdown due to the fact that the external demand is weakening mostly for key partners such as the U.S. and the EU.

In terms of risk, I think like Krishna and Jay said for other countries, especially those that are very open, the main risks are coming from external side - the tightening financial conditions and the intensification of the war. But especially in the case of Vietnam, a weakening external demand from key trading partners, also the U.S. and the Euro area. Now, there are also some positive upside risks. We discuss about fragmentation. We have a situation where clearly fragmentation is going to be bad for many countries, but there are also some countries that is some potential of the diversion of trade where trade and FDI could be diverted from some blocs, from some member of the blocs to Vietnam. This could be an upside risk in the case of Vietnam.

MS. VU: Thank you, Davide. We have one follow up question on Vietnam from Nguyen Tat Dat, Vietnam News Agency: The role of Vietnam's economy in the Asia-Pacific region.

MR. FURCERI: T here are two roles. In the short term, we are witnessing very strong growth for Vietnam. So the growth rate of 7% is probably one of the largest in the region, which means two things. The first is that it will contribute to the growth for the region, but also the role of Vietnam in the region will increase, just because of the fact that its growth rate is larger than other countries. And the second, again, is what I mentioned in the case of fragmentation. So now if you have a situation like what we are talking about in a very illustrative scenario where the world is divided in blocs and there is trade diversion and FTA diversion, the role of Vietnam would be a positive role in the sense that it will be able to absorb some of this trade diversion and FDI diversion within the region. So in some sense, it will soften the impact of this extreme scenario for the Asia Pacific region.

MS. VU: Thank you, Davide. Let me now come back to the room to see if we have any more questions here.

QUESTIONER: I am Siti from Kyodo News. I have a question about the impact of China's negative economic slowdown. I am more interested in the real estate crisis. China has a lot of infrastructure projects in Southeast Asia. So what do you think the impact of that in the real estate crisis on countries in Southeast Asia disposed to infrastructure projects, such as BRI? How severe and how prolonged do you see that, and how soon it can turn the corner? And my second question, if I can ask a second one, you know, about countries that are trying balance between China and U.S., such as Singapore. What's your suggestion on how countries in the region can manage this fallout and this tension between China and U.S. in trade? Thank you.

MR. SRINIVASAN: Thank you. So in terms of the growth, we forecast 3.2% for this year and we expect 4.4% next year. So there's recovery being built up there. And part of that is recovery is built on the zero COVID strategy slowly going away and going back to normalcy in a gradual way. So that's what underpins our 4.4% growth forecast.

Now, clearly, what's happening in the real estate sector has an important bearing, not just in Chinese growth, but also in terms of what they import for the housing market from other countries in the region because you've seen that investment in housing is coming down and prices are coming down. So it is activity slowing. And to the extent activity slowing, it does affect what China imports from other countries in the region for the real estate sector. The real estate sector has a problem for the short term, and probably have a longer-term problem. The longer-term problem is how you incentivize the local provinces to have their own revenues. Right now, the revenues come from land sales. So the incentives for them kind of feed into this the overbuilding of housing and so on. So once the measures are taken to address the near-term problem, one would expect that the drag on the rest of the region would come down.

On the second question, our report shows that it’s not just the fact that you have two countries, which have these trade issues. The trade uncertainty by itself causes a significant impact on investment and output. So if you think of those as three stages, you have trade uncertainty going up which has an impact on output investment and so on in the region. And then you go from there to trade restrictions. Actually, from just uncertainty to restrictions, that also magnifies the impact on the region. And then if you have the severe point of the fragmentation, then things get really worse. So you can think of the three stages of how fragmentation comes into play, that that's how you should look at it.

What do you do to address that? I think the region is trying to address that. Many countries in the region have signed agreements. The RCEP is one of the trade arrangements. But the question is are these trade arrangements are inconsistent with each other or do they contradict each other? That's an important issue. And more broadly, one has to think in terms of working in a more multilateral way and enhancing multilateral trade through the WTO and so on. So that's where the emphasis should be placed from a more durable perspective.

MS. VU: Thank you, Krishna. We have more question from the audience.

QUESTIONER: Hi, this is Sulin Tan from CNBC. How would you characterize the current capital flows out of countries in Asia given the exchange rate changes? And also which countries are experiencing the largest outflows?

MR. SRINIVASAN: That’s a very good question. So if you look at capital outflows in the region, I think in many ways, it is very similar to what we saw in the taper tantrum, except that now you see it's affecting a few countries more than the others. For example, we saw a lot of capital outflows out of India. We saw a lot of capital flows out of Taiwan Province of China. You saw moderate outflows from Indonesia, moderate outflows from Malaysia, but you saw some net inflows into Thailand. And more recently, you’ve seen inflows back into India. So the picture is a bit mixed. It reflects a bunch of things, reflects such as economic developments and the interest rate differentials vis-à-vis the US. So at this point in time, I think I would say that it is very similar to what we saw in the taper tantrum episode, but it's concentrated only in a few countries.

QUESTIONER: Any of these countries should worry about the level of the flows going out?

MR. SRINIVASAN: As of now, it seems quite manageable. But the question is, of course, when some of these downside risks materialize, what will happen? Will capital outflows increase? What will happen? That is something which is open to question.

MS. VU Thank you, Krishna. Do we have more questions from the room? Otherwise, I'd go to online participants. We have a question on the Philippines from Joann Villanueva, Philippines News Agency. What's your latest growth forecast for the Philippines and the factors behind the outlook? Do you see more hike in the BSP's rates this year? How much and by when? What are the factors behind your forecast on the central bank's key policy rates?

MR. PEIRIS: Thank you. Maybe I'll take that. So this year, we've mentioned for the ASEAN five economies, It's been relatively solid from a growth perspective. Our growth forecast for the Philippines this year is a solid 6.5%, but we do expect it to slow down to 5% next year. So that's a bit of a significant slowdown due to external headwinds, tightening, financial conditions, all of the above. I think one important part of the Philippines is that headline and core inflation went above the central banks of 2 to 4% target zone sometime back and it remains above the target. The BSP has been one of the more aggressive hikers in the region. And, given where inflation is, particularly core inflation being quite persistent, you would expect that they would continue to hike. I don't think we could predict exactly timing and how things work out. But the degree of persistence of core inflation is the key thing to watch. Headline inflation can come down. But the two things to watch would be core inflation persistence, because output gaps are closing a bit, but also second round effects, and here we mean by wages. The Philippines already centralized wage bargaining systems, so what are the implications of the current high headline inflation? The evidence we have in the region is that second round effects are actually quite common from high commodity prices or even high headline inflation. So second round effects are something to watch out for and the degree of persistence in inflation is quite significant. I think we may have to stay the course on monetary tightening for a while in the region. Thank you.

MR. SRINIVASAN: If I would just add to this. I think this links to what a question Michelle asked before on exchange rate pass through. What we have seen in the analysis that Davide and Jay have done shows that pass through is actually higher now in the context of elevated inflation. So that kind of feeds into what Jay was saying. The more persistence of inflation including a passthrough from exchange rate depreciations. That is something which countries have to worry about and that's why tightening monetary policy, addressing inflation head on would remain quite important.

MS.VU: Thank you, Jay and Krishna. Let us get to some questions on Bangladesh. A question from Tauhid Hossain, Jamuna Television, Bangladesh. How do you think Bangladesh is going to survive the upcoming extreme food inflation, which is being alerted by the government here? And another question from Syful Islam, Financial Express: Bangladesh is gradually heading towards danger zone with high rate of inflation and continued fall of forex reserve. What measures the country needs to take to overcome the crises?

MR. SRINIVASAN: Thanks for the question. So let me answer that question in a more general way. So as you know, Bangladesh, like India, is a big commodity importer. And like many other countries in the region, it has been affected by the terms of trade shock arising from the war in Ukraine. So there was pressure on external accounts, there was pressure on inflation. They reached proactively or preemptively to the IMF for financial support. And to their credit, they also approached the Fund for this new facility called Resilience and Sustainability Facility, which addresses more transformative changes, notably climate change. So they're trying to address both the short term problem arising from stress on external accounts and longer term challenges from climate change.

In terms of how do you address the food price inflation? Again, the advice we've been provided to countries is there are many people who are being affected by food price inflation. So provide temporary and targeted support to such people and if possible in a budget neutral way because all countries or many countries face fiscal pressure. So you want to provide support for the vulnerable population, but you do that to the extent possible in a budget neutral way so that you don't lose credibility in terms of the fiscal balance.

MS. VU: Thank you very much, Krishna. I think with that we have come to the conclusion of our press conference today. Thank you, Krishna, Jay and Davide. And thanks, everyone, for joining us here in the room as well as online. We look forward to seeing you again at our future events. Krishna, would you like to say a few works?

MR. SRINIVASAN: So let me just sum up in three bullets on how we see the region. So this is a region which is now growing at 4% this year, 4.3% next year. And there's both good and bad here. Good in the sense that this is one of the most dynamic regions in the world, the strongest growth you've seen across all regions in the world. At the same time, if you compare to its own history, this is by far the lowest growth you've seen the last 20 years, abstracting from the pandemic year. So average growth in Asia was 5.5%. This is 4%, which is well below the average.

The second issue is inflation is rising beyond food and energy. Core inflation is well above target across many countries. We are worried about persistence of inflation, including because of the exchange rate passthrough. This puts the onus on monetary policy to stay the course on tightening.

Now, fiscal policy as the question on Bangladesh came up. Fiscal policy has two roles to play. One is to complement monetary policy so that they are moving in the same direction, they are talking to each other. But there are people who are hurting from the cost of living crisis. So provide temporary and targeted assistance, and to the extent, make it budget neutral. And at this point in time, given the rising debt levels in the region, it's very important for countries to articulate good medium term fiscal frameworks.

Now, going beyond the near term, the two risks highlighted in the report, one is the scarring where the expected losses in Asia are at 9%, significantly higher than the world average, which is 5.3%. Asia has a lot more to do to address the scarring issue.

The second issue is a fragmentation, where we talk about progression from rising trade uncertainty and more restrictive measures could eventually escalate into fragmentation where the world is divided in blocs. And that, again, Asia risks losing a lot because it is a key player in global supply chains. And in a fragmented world, it risks losing more than anybody else.

While these risks are significant, they don’t have to be destiny. Significant premium should be placed on policy calibration and communication. To address these challenges, greater emphasis can be placed on digitalization, investing in education, addressing corporate debt issues, because, as I said, you know, debt has risen across the region. But most importantly, international cooperation because we want to avoid the risk of fragmentation. So it’s very important that we all act now and act together. So let's not forget the gains of the past when we think about policies. Thank you. I’ll stop there.

MS. VU: Thank you, Krishna, for the summary of the key findings of the report. Thank you, everyone, for joining us today. Take care and goodbye.

MR. SRINIVASAN: Thank you.