1. Good morning. It is my great pleasure to welcome you all to
the launch of the latest issue of the IMF's Asia and Pacific
Regional Economic Outlook (REO). We are honoured to have Mr. Anoop
Singh, Director of the Asia and Pacific Department of the IMF, and
his colleagues to share with us today their views on the region's
economic and financial developments, the outlook and the
challenges, and what can be done to manage the risks and promote
sustainable growth in the years ahead.
2. I like the theme of this issue of the REO - "Managing the
Next Phase of Growth" - as this is what concerns us most in Asia at
this juncture. We are now some two-and-a-half years after the
outbreak of the global financial crisis, and Asia has been leading
the global recovery - a recovery that is maturing as rightly
pointed out by the IMF. The question is where and how we should
move on from here. And looking ahead, managing the next phase of
growth is very challenging as we are facing complications of
unprecedented scale and dimensions.
3. Specifically, the US and Europe, the two largest markets for
Asia's exports, are still facing steep challenges in the adjustment
process and the situation is still rather fluid. For the US, the
rather sticky structural constraints such as high unemployment and
depressed housing markets suggest that self-sustainable growth
momentum remains uncertain when policy supports are withdrawn. In
the case of Europe, while some progress has been made in resolving
the sovereign debt issue, risks remain on whether certain economies
can overcome the challenge without substantial debt restructuring.
Looking ahead, external demand from these two markets is likely to
remain subdued in the near future. Meanwhile, closer to home, the
disastrous earthquake and the ensuing nuclear crisis hitting Japan,
a key importer and exporter for many economies in the region, is
adding further downside risk to export and production growth in the
region. Last but not least, political instability in the Middle
East and North Africa (MENA) region will likely keep oil prices
elevated for some time. This in turn would drag on global economic
growth, add upward pressures on inflation and heighten volatilities
in the global financial markets.
4. All these complications are making life difficult for policy
makers in the region. While Asia, having learned well the lessons
from the Asian financial crisis, has managed to get through the
recent global crisis relatively unscathed, we are now entering
uncharted waters, and there are both imminent and longer-term
policy challenges.
5. First and foremost, it is challenging to manage the large
capital flows. The divergence in the growth rates of advanced and
emerging economies have been driving fund flows to Asia, resulting
in signs of overheating in certain pockets of the region. The
increasingly negative real interest rates as a result of rising
inflation in many regional economies will add fuel to the already
high credit growth and heated asset markets. That said, we must
also be wary of the risk of reversal of the fund flow. The recent
surge in headline inflation and the more favourable near-term
cyclical conditions in advanced economies have already brought
forward expectations of the start of rising interest rate cycles.
With the normalisation of monetary policy stances in the advanced
economies becoming more imminent, the risk of an abrupt reversal of
international capital flows is increasing. This calls for
pre-emptive policy actions to contain the build-up of overheating
pressure and another boom-bust cycle in the region before such
abrupt reversals of capital flows occur.
6. Secondly, some of the conventional wisdoms in monetary policy
may be challenged by paradigm shifts in the next phase of growth.
Conventionally it has been suggested that central bank normally may
not need to react proactively to commodity price inflation because
of their transitory nature and limited pass-through to core
inflation. However, the recent increase of commodities prices such
as food and oil could be more sustainable because of structural
change in demand and supply. For instance, structural factors such
as slowing of crop yield growth, fast population growth and higher
income elasticity for food in developing countries would continue
to support higher food prices. Policy markers would therefore need
to pay attention to these developments in calibrating the
appropriate degree of monetary tightening.
7. Thirdly, there is also a need to diversify the sources of
growth for the region, in order to generate sustainable growth and
redress global imbalance. In this regard, it is worth-noting some
encouraging developments that are underway in the region. The first
one is the deepening intraregional trade and increasing orientation
towards domestic consumption. The robust economic growth of the
regional economies over the past year has mainly been propelled by
strong domestic demand, while the contribution from net exports was
either small or negative. In fact, the aggregate trade balance of
the region has been gradually declining since 2007, and if
intra-regional trade is excluded, it has declined notably from
about 4% of the regional GDP in mid-2007 to less than 2% at
end-2010, the lowest in more than a decade. This gradual change in
trade pattern, with regional economies shifting their export
markets from deficit countries like the US to surplus countries in
the region, has also been contributing to global rebalancing.
8. We also should not overlook the positive attributes of
capital flows. While challenging to manage, capital inflows present
important opportunities for boosting broader-based growth. The key
is to channel the capital flows into good uses, and particularly
towards productive investments. In this regard, promoting capital
market development is important to open up additional channels of
funding for long-term investments such as infrastructure. The good
news is that the region is already taking steps in the right
direction by improving the financial infrastructure of bond markets
and expanding the investor base. Meanwhile, many economies are also
making greater use of public-private partnerships to promote
critical infrastructure investment projects.
9. In the face of these significant uncertainties and challenges
ahead of us, IMF's assessment of the prospects and risks, as well
as advice on policy response for the region is particularly
important at this juncture. We look forward to the presentation by
IMF and the dialogue during the panel discussions.
10. Thank you.
