Global Economic Outlook

1. We are encouraged that prospects for the global economic recovery have improved since the International Monetary and Financial Committee met in April 2003. The threats posed by the geopolitical uncertainties associated with the war in Iraq and the SARS epidemic have now abated. Recent economic indicators in some countries, particularly in the United States, Japan and emerging Asia point to a strengthening of global growth during the second half of 2003 and in 2004. Moreover, developments in the global financial markets in the first half of 2003 were supportive of the global economy. The prospects for a gradual recovery, albeit moderate, are supported by reduced geopolitical tensions, and additional economic policy stimulus.

2. Notwithstanding the improved prospects, there remains a number of downside risks in the global economy. These include the large global current account imbalances. If these imbalances remain unchecked over the medium term, we are concerned that the risks of a disorderly adjustment could lead to disorderly and large misalignments of the major currencies, which could threaten economic and financial stability in the emerging economies. In view of this development, emerging Asia is being urged to share in the adjustment of the large global current account imbalances. While Asia is prepared to play its role and in fact has been contributing to the adjustment process by adopting inflationary policies to promote domestic demand, it should be highlighted that the large global current account imbalances are largely due to the structural weaknesses in the economies of the major industrial countries. Although some measures have been initiated to address these imbalances, a more decisive approach to structural reforms is crucial to tackle their deep-seated structural problems. The Euro area economies still need to undertake structural reforms in labor and product markets, while corporate and financial restructuring are required in Japan. The US needs urgently to reestablish a credible medium-term framework to restore a balanced budget as well as to address their low rate of savings. Having said that, I would also highlight that many countries in my constituency have and will continue to promote domestic sources of growth, shifting away from externally-driven to domestically-driven sources of growth. Nevertheless, the global impact of such steps taken by most emerging countries would only be felt in the medium to long term. Therefore, structural reforms in major countries remain key to addressing the large and persistent global current account imbalances. Caution is necessary to ensure that policies to address these imbalances do not undermine stability in the global economy. Towards this end, policy coordination across the major countries and further improvement on surveillance is crucial.

3. Emerging market economies remain vulnerable to developments in the global financial markets, particularly the movement of volatile capital flows. The increased inflows into emerging markets in early 2003 were due largely to temporary cyclical factors, including less opportunities for higher returns in the industrial countries. More recently, the yield increase in mature financial markets has caused some consolidation in emerging bond markets. Given the high level of portfolio managers' exposure to emerging market bonds and equities, a continuation of this trend could lead to potentially destabilizing effects on emerging countries. The resultant volatility in exchange rates would be disruptive to growth prospects. In this respect, we welcome the IMF's multilateral surveillance initiatives, which increasingly monitor and assess the impact that economic and financial policies in the key financial centers have on the rest of the world. At the same time, many Asian countries have also strengthened their efforts to further develop domestic and regional capital markets as well as efforts to mitigate the impact of sudden reversal of capital flows. The setting up of the Asian Bond Fund among EMEAP central banks is a positive step in this direction.

4. The emerging market economies in Asia have weathered the global economic slowdown and other external shocks well, and are set to be the fastest growing region going forward. Overall, regional growth was sustained and continued to be supported by the resilience in exports and domestic demand. Going forward, the outlook for the near future is for a further strengthening of the emerging Asian economies. The prospects for better growth will be boosted by strong domestic demand due to timely macroeconomic stimuli and decisive policy actions taken by the countries in the region as well as the receding concern over SARS. On the external front, the improved outlook for the major industrial countries would help to sustain the export sector.

II. Strengthening Surveillance

5. We support the Fund's efforts to further improve the quality of the Fund's surveillance to effectively help prevent crisis and preserve financial stability and sustainable growth throughout the membership. While the Fund has made encouraging progress on strengthening its surveillance on emerging countries, less focus has been given to enhance the effectiveness of surveillance on the developed and systemically important countries. Given that the global economy depends heavily on the performance of the developed countries and any global imbalances would pose a systemic threat to the rest of the world, surveillance over these countries must be more effective. Therefore, I support the Managing Director's call for surveillance to be even-handed across the Fund's diverse membership.

6. The Fund's current efforts to develop better tools, processes and guidelines for vulnerability assessments are timely and appropriate, and could enhance the Fund's ability to contribute positively towards crisis prevention. However, in achieving this objective, the Fund should also be cautious against putting undue demands on countries to provide data and information and in the adoption of high frequency vulnerability assessments. Greater flexibility should be accorded to member countries in any new requirements to reflect differences in member's circumstances. The administrative and institutional capacity as well as the stage of development of the member countries should be considered before imposing new requirements. At the same time, technical assistance should be provided to improve their institutional capacity.

7. We broadly agree with the strategy to promoting data transparency but participation in the Fund's Data Standard Initiatives should remain explicitly and implicitly voluntary. More important, they should not be included as part of the Fund conditionality in any of the Fund's programs. Financial Soundness Indicators (FSIs) should not be included in the Special Data Dissemination Standard (SDDS) due to the ongoing development of FSIs. We welcome the current phase of consolidation for SDDS and concur that the emphasis should continue to be on consolidation in the period ahead. The current environment of increased financial market integration underscores the importance of greater transparency and disclosure as a key tool of crisis prevention. While being committed to greater transparency, we still believe that there are significant trade-offs between greater transparency to the general public and candid discussions between the authorities and the Fund during surveillance exercises. The failure of the end users to accurately assess the economic and financial situation and understand the underlying objectives of policy measures can lead to incorrect decision-making. Misleading news can exacerbate market instability and have potentially adverse consequences on otherwise sound economies. In addition, disagreements between Fund and member countries contained in the report could cause confusion to the public and may affect the Fund's credibility, weaken the ownership of the Fund programs, and have a negative impact on markets. The financial markets in many developing countries do not have well-established institutional frameworks, and sufficient depth and sophistication to fully absorb adverse developments. Against this background, further work by the Fund toward greater transparency should take into account these concerns. Indeed, there is a significant difference between providing information for surveillance purposes and publication for public consumption.

8. As for the Article IV consultation, discussions should be conducted in a spirit of consultation based on mutual trust and confidence. The authorities should be given ample opportunities to present their views on the Fund's assessment and their priorities in their development agenda should also be appreciated. The assessment should also take into account the social and political structure and realities as well as the stage of development of the member countries. As for the developed countries, it is beneficial if the assessment includes an analysis on the spillover effects of their policies in particular their structural policies on developing countries. At the same time, developed countries should take heed of the IMF's recommendations including having the political commitment to carry out the proposed recommendations that would benefit the world economy as a whole.

9. Although we agree that economic and financial crises can be prevented by strengthening surveillance, it is impossible to eliminate all potential contagion risks. Therefore, we believe that the Contingent Credit Line (CCL) has an important role to play in preventing crisis, particularly in an environment of greater integration of financial markets and with high vulnerabilities to contagion. In the event of financial market pressures, the CCL will provide reassurance of Fund support, and reinforce the incentives for implementing sound macroeconomic policies. In this regard, I urge the Fund to continue to find ways to address the weaknesses of the existing CCL and welcome the Fund's commitment to help countries with good policies to become more resilient to crises.

10. We welcome the Fund's current efforts on crisis resolution, which focus on promoting the inclusion of collective action clauses (CACs) in international sovereign bonds as well as on contributing to initiatives aimed at formulating a voluntary code of conduct for sovereign debtors and their creditors. However, given the contractual nature of CACs, any decisions as to the inclusion and design of CACs should be left to the debtor and its creditors and continue to be on a voluntary basis. We see the importance for countries to exercise flexibility in designing the CACs. Factors such as differences in legal systems, market infrastructure and other country circumstances as well as changes in global financial markets should be taken into account. Serious consideration should be given to the legal framework of the country concerned that could thwart, delay or derail the restructuring process. We also note that some emerging market economies continue to have reservations, particularly given the increased cost associated with the inclusion of CACs and uncertainties regarding the benefits of CACs. Meanwhile, we support current initiatives to develop a voluntary code of conduct as it could facilitate a continuous dialogue between creditors and debtor, promote corrective policy action to reduce the frequency and severity of crisis and facilitate the orderly and expeditious resolution of crises. Adoption of the code should, however, be on a voluntary basis.

11. While we support the Fund's involvement in promoting CACs and the code of conduct, it is also important to carefully weigh the use of Fund resources and strike a right balance between crisis resolution and crisis prevention efforts. We believe that more emphasis should be given to the latter.

III. IMF Quotas and Governance

12. Besides providing financing and technical assistance, strengthening the voice and participation of developing countries in decision-making of the Fund form a significant part of efforts to support the developing and emerging countries. We believe that the IMF quotas and voting structure need to be improved without delay to better reflect the changes in the global economy and enhance the governance at the IMF. This requires a strong and coherent political will on the part of developed countries, as prime-mover of change, to increase the voice of the developing countries. The voice of the developing countries will only have real weight if the major countries agree to be more open to a fair global participation. It is unfortunate that there was no consensus on improving the voice of the developing countries during the 12^th General Review of Quota early this year. We therefore urge the Fund to expedite the 13^th Review with fundamental reforms to the structure of the quota system and to urgently address the long standing governance issues of the Fund. In this respect, the eroding share of basic votes as a percentage of total votes of Fund members, is our main concern, as it effectively weakens what little say the small developing countries have, in decisions taken by the Fund. In the voting structure of a multilateral institution such as the Fund, all members should have adequate voice and representation. An increase in the basic votes would serve as a good first step towards improving the balance of voting power amongst the Fund's membership and would be seen as a serious effort to increase the voice and participation of developing countries, in line with the Monterrey Consensus. However, in the interim, as any changes in the basic votes would require an amendment to the Articles of Agreement, a consideration would be to grant special increases to selected countries whose calculated quotas are significantly higher than the actual quotas, which would then be reflective of the current economic strength of such members in the global economy.

IV. Role of the Fund in Low-Income Countries

13. Despite the progress made by the low-income countries in implementing sound macroeconomic policies and structural reforms, they continue to face severe problems associated with the continued volatility in their terms of trade, natural disasters, HIV and other pandemics. As a result, the relatively improved growth rates do not translate into poverty reduction. Therefore, implementation of the poverty reduction strategies constitute a major challenge for these countries which have limited financial resource and institutional capacity. The Fund should play a more dynamic role in these countries and ensure concerted efforts are undertaken to enhance the success of Fund-supported programs. In this regard, conditionality of the programs such as PRGF and HIPC Initiatives should be compatible and carefully designed according to countries' circumstances and prioritization and sequencing in implementing reform measures should be adequately emphasized. Past experience shows that besides capacity constraints, some of the countries in our constituency face difficulties in implementing the agreed measures due to the stringent conditions of the program. Further simplification of the procedures is necessary and in some cases, flexibility should be accorded, depending on the situation. In addition to providing financial assistance, equally important is the Fund's role in providing technical assistance and advice in creating an environment that is conducive to sustainable growth in the medium and longer term.

14. Another aspect that requires the Fund's attention is the efforts to lessen the debt burden of the low-income countries. The removal of the unsustainable debt level is crucial to enable the country to redirect the resources to development purposes in particular in providing basic needs and to improve the quality of life of the population. This justifies the need for the speedier implementation of the HIPC Initiatives.

V. Conclusion

15. While recent economic and financial indicators point to an improved global economic outlook, the global economic recovery is still fragile. Therefore, it is crucial for macroeconomic policies to remain appropriately supportive, while structural reform efforts need to be reinvigorated to strengthen confidence and reduce vulnerabilities over the medium term. At the same time, greater economic and financial cooperation at both regional and international levels is also important to support economic recovery. The international financial institutions should be more effective in their respective roles to support efforts in strengthening the global economic recovery as well as to maintain stability in the international financial system. Addressing the long-standing governance issues of the Fund via the quota review process would enhance the effectiveness of the Fund in performing its duties.