Zhang Tao, Deputy Managing Director, IMF
Remarks at the Asian Financial Forum, Hong Kong, China
January 17, 2017
Good afternoon ladies and gentlemen. It is my pleasure to join you at this important event—and on its 10th anniversary—that helps shape Asia’s future.
2016 was a year of change. Political events in Europe such as the Brexit vote, geopolitical tensions, and a change in U.S. administration and policies all mean that we are facing a new landscape.
The U.S. Federal Reserve’s decision in December to raise interest rates for the second time in a decade is a healthy sign that U.S. growth is on track.
The move was not a surprise, but the sharp rise in longer-term U.S. interest rates since August, as well as the stronger dollar and a rise in long-term inflation expectations were a surprise. They showed a bigger change in expectations about the U.S. policy mix.
In the next few minutes, I will first share with you our latest views about the global economic outlook, and then focus on what this means for the outlook for Asia, and how Asia can respond.
Yesterday we published the IMF’s latest outlook for the global economy.
- We expect global growth to pick up pace from 3.1 percent in 2016 to 3.4 percent in 2017, and 3.6 percent in 2018.
- Growth in advanced economies is projected to rise to 1.9 percent in 2017, reflecting better performance that became evident in the second half of 2016 and a projected fiscal stimulus in the U.S.
- In emerging and developing economies we expect growth to rise to 4.5 percent this year.
I should, however, stress that there is a wide dispersion of possible outcomes around the projections, given uncertainty surrounding the policy stance of the incoming U.S. administration and its global ramifications.
Turning to Asia, the good news is Asia overall managed well the market surprises in 2016, and Asian financial markets were resilient for most of the year.
Following the results of the U.S. election, there have been some capital outflows from Asia with exchange rates depreciating vis-à-vis the U.S. dollar. Ten-year sovereign bond yields rose initially in most economies.
Nevertheless, in general, Asian emerging market economies were less affected than those in other regions. And, Asian markets affected during the May 2013 taper tantrum have generally been more resilient this time around.
Looking forward, Asia continues to lead global growth. We expect the economies in the region to grow above 5 percent both in 2017 and 2018, compared with around 3½ percent for the world in the next two years.
Moreover, Asia is expected to continue to make the largest contribution to growth in the world, by generating around two thirds of global growth.
Let me also highlight a number of risks in Asia.
For emerging markets in Asia, higher competitiveness from weaker currencies may help, but the vulnerable areas of their economies, like high corporate debt, will dampen their resilience. High corporate debt levels could reduce investor confidence when interest rates increase.
Also, low U.S. interest rates have been one of the drivers of capital flows into emerging market economies. Higher interest rate expectations may produce outflows.
Exchange rates and anti-globalization sentiment may give rise to protectionist pressures.
Within Asia, China is rebalancing its economy, which we believe is healthy for China and the region. We need to monitor its progress, and respond to any bumps that might occur along the way.
Facing these risks and large global uncertainties, policymakers in Asia should focus on strengthening the resilience of their economies. By building resilience, economies can also benefit most from the vast investment and trade opportunities opening up in Asia, which is the focus of today’s conference.
This means flexible exchange rates are crucial especially for emerging market Asian economies. Flexibility helps economies adjust to shocks, and can be a buffer against capital outflows. This allows portfolios to rebalance through currency changes rather than reserve losses.
For a number of economies in Asia, high equity prices, the rapid increase in house prices, and high levels of corporate debt mean that policymakers need to protect financial stability. The best way to accomplish this is through strong and proactive supervision. Supervisors should monitor and contain household and corporate debt levels, including debt in foreign currencies.
Macroprudential measures should help to manage housing risks, as we have seen in the economies of Australia, Mainland China, Hong Kong SAR, Korea and New Zealand.
Let me highlight a few important aspects in some economies in the region.
For China, this means continuing with reforms to rebalance the economy away from investment and credit, and toward consumption. A high priority is further reforms to state-owned enterprises to improve the allocation and efficiency of investment, including reducing excess capacity in some sectors, such as steel and coal. Financial and fiscal reforms will also help improve the allocation of capital and boost consumption.
In Japan, policymakers should revive the Abenomics reform agenda. The focus should be on a more effective incomes policy to help boost wages and prices, which in turn will lift inflation and inflation expectations.
Success will require a labor market that is not split between those who have job security with high wages, and those with low-incomes and little security. Further comprehensive structural reforms are needed to mitigate the impact of an aging population on potential growth.
In economies with an output gap and room to spend, such as Korea and Thailand, higher social spending or investment in infrastructure, respectively, would help their structural reforms.
Countries with higher public debt levels, like India, should continue to implement their medium-term plans to reduce debt and deficits. Japan and Malaysia should develop plans in these areas.
To conclude, let me emphasize that despite the good news in 2016, meeting the challenges of 2017 will require policymakers to prepare for the unexpected. This calls for building and further strengthening resilience. Ultimately, such resilience will be the foundation of sustainable, strong and inclusive economic growth for years to come.