OREANDA-NEWS. November 30, 2015.
Remarks to the South East Asian Central Banks
Governors’ Conference
Mitsuhiro Furusawa, Deputy Managing Director, IMF
As Prepared for Delivery

Introduction

Good morning. I am honored to speak before the 51st SEACEN Governors’ Conference and High-Level Seminar. I would like to thank our Philippine hosts for their excellent preparations and warm hospitality.

I welcome the opportunity to meet with this gathering of central bankers because of the important contributions you have made to the economic resilience and sustained prosperity of Asia.

I know that this is very much on your minds at this time of unease about the global economy—something that was a focus of the IMF Annual Meetings in Lima last month. Many of you attended the meetings so you know that a central theme was the policies needed to counter uncertainty.

I am told that in Lima there was too much gloom and doom in the air. On the other hand, some took the view that the tone was too optimistic. Perhaps both responses are understandable. The focus was on the risks we face, but I would prefer to characterize the tone of meetings as what might be called optimistic caution.

So with this in mind, I would like to explore the outlook for the global economy and Asia—offering an overview of the risks that temper our forecast. First and foremost, the largest economy in the region, China, is slowing and rebalancing at the same time, which has led to some spillovers to the rest of Asia and global trade. Some other challenges emanate from outside the region, particularly the impending normalization of U.S. monetary policy and drop in potential growth in advanced and emerging economies. Each has the potential for spillovers that can affect your economies, and I would like to highlight them today. Together, they will explain our optimism and our caution.

The Global Outlook

Let’s begin with the global outlook. The IMF is projecting growth of 3.1 percent this year, down from 3.4 percent in 2014 and rising to 3.6 next year. The 2016 growth would be the fastest since 2010, but each of these forecasts is slightly lower than our previous projection in July.

The primary reason for this reduction is the shifting trends of the advanced and emerging market countries. Several advanced economies are strengthening, although at a slightly slower rate than we foresaw in July. Their growth should be 2 percent this year and 2.2 percent in 2016. Now there is a need for upgraded policies that can take that growth to a higher, more durable level.

At the same time, you are well aware of the decelerating growth of the emerging markets and, relatedly, the developing countries. This will be the fifth straight year of declining growth for the emerging markets. We are projecting 4 percent growth this year for the group, and 4.5 percent in 2016, down from 4.6 percent last year. Again, these are off a bit from our earlier forecast. Some countries have shown greater resilience; some need to take policy steps that can strengthen growth. Nonetheless, we cannot lose sight of the fact that emerging markets as a group are still growing quite fast. And as I said, we see this group rebounding next year.

How to explain the relative weakness worldwide? Weak commodity prices obviously are key, particularly for producers of oil and base metals. That said, we can’t forget that many economies are benefiting from these lower prices. Still, commodities are not the whole story. Global industrial production weakened in the first half of the year, consistent with the uneven strength of demand in major economies. World trade also slowed and investment was weak worldwide.

But there is something else contributing to this weakness. Caution about the risks and uncertainties facing the global economy has itself become a tangible element of the slowdown. Concern about the interest rate environment, about the future of oil prices, about future demand from advanced and emerging economies: all play a part in business decisions. Lower expected future growth has in turn dampened demand for investment. This is a point I will return to in a moment.

The Outlook for Asia

Allow me to turn to our forecast for Asia. First and foremost, we must not lose sight of the fact that Asia—and particularly emerging Asia—remains the fastest-growing region of the global economy. So we must maintain a sense of perspective about current trends.

The deceleration of growth among the emerging market economies certainly affects this region. But we still see Asia growing at 5.4 percent this year and next. This reflects the region’s relatively strong labor markets and disposable income growth—especially here in Southeast Asia.

Asia’s performance is impressive if you take into account the renewed slow growth in Japan and, most importantly, China’s continuing deceleration from its era of high-velocity growth.

China’s slower growth is one of the most important transitions influencing the world economy: from export-led growth to a model increasingly driven by domestic consumption and services, and less debt-financed public investment. This is an essential transition to create an inclusive, market-driven economy that produces safer and more sustainable growth. For all the market concerns about China’s prospects, growth in that country remains robust by any standard except its own over the past generation: we project 6.8 percent this year and 6.3 percent in 2016.

So what about the risks? A sharper-than-expected slowdown in China—or a more rapid shift in the composition of Chinese demand—is one of the key risks facing Asia. The spillovers from this transition could affect each of your countries, your markets, and your business communities. Another risk could include further U.S. dollar strength accompanied by a sudden tightening of global financial conditions.

As I said earlier, these are all playing into an uncertain outlook and increasing the mood of caution.

Policy Actions

So what are the policies needed to counter uncertainty so that this region can continue building on the gains attained so far?

We saw the impact of interest rate worries in 2013 on your markets, and then, to a lesser extent, at various subsequent points. You have done an excellent job of preparing for the inevitable rise in U.S. rates. Now the challenge is twofold: first, for the Federal Reserve to ensure that it continues to do an effective job of communicating its intentions so as to minimize new shocks. Second, you need to continue preparing for the unexpected—particularly capital outflows—with the monetary and macroprudential tools at your disposal.

On China, you know very well from the past few months the impact that the rebalancing effort can have. The Fund estimates that a one percentage point slowdown in Chinese growth is associated with a 0.3 percentage point decline for other Asian countries. The recent shift in the renminbi regime also has had ripple effects. And all of this has been magnified by falling commodity prices and interest rate uncertainty. The magnitude of the spillovers from China took markets, businesses, and policy makers by surprise.

So now that this episode has passed, what comes next? The watchword here must be vigilance, and the response is the same as with interest rates: address potential vulnerabilities before they become weaknesses. The next session will address the question of how to enhance economic resilience. To give an example, corporate leverage is one such vulnerability that could amplify shocks. It is important to strengthen supervisory and regulatory frameworks. Enhanced monitoring of corporate sector would also be useful.

Meanwhile, it is crucial that the Chinese authorities focus on the downside risks of the rebalancing effort—and communicate their intentions to help guide market expectations. Effective communications can reduce the uncertainties that we see affecting growth expectations.

Conclusion

To conclude: we need to have a clear understanding of the challenges ahead. SEACEN provides a forum to foster the communications and cooperation that is essential to addressing these challenges. What the IMF is trying to bring to the process is a perspective on issues that are both global and granular, which could shed light on the appropriate policies. We can offer a toolkit of analytics, technical assistance, and financing. We can assist in defining the appropriate adjustments to your macroeconomic frameworks.

So, the bottom line is that we should remain optimistic about the future of Asia as long as we exercise caution in this time of uncertainty, and address potential vulnerabilities before they become weaknesses. I look forward to discussing these issues with you today.