Recent Economic Developments and Outlook

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Recent Economic Developments and Outlook

• The World and the Asia Pacific Region

39th SEACEN Governors ConferenceColombo, Sri
Lanka, 12-13 February 2004 Sri Mulyani
IndrawatiExecutive DirectorIMF-SEAVG
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Presentation Outline

• Recent World Economic Developments
• US, Japan, Euro Area
• Asian Region
• Outlook and Risks
• Other Issues
• Exchange rate foreign reserves
• Trade
• Policy Response

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Recent Economic Developments Signs of Pickup
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Recent Economic Developments Inflation subdued
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US Recovery gaining momentum

• GDP growth of 8.2 in Q3 2003 4.O in Q4
• Reflects pick up in investment

• Private consumption remains strong...
• ...as has productivity
• Inflation subdued

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US Jobless recovery?

• Employment remains weak
• Sustainability of recovery?
• Budget deficit concern mounting over long term
  implications
• Trade deficit can the global imbalances be
  corrected with increased exchange rate
  flexibility in Asia?

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Japan Moderate recovery underway

• Supported by growing investments and exports
• Restructuring of banking and corporate sector
  remains slow
• Deflationary pressures still evident

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Euro Area Remains weak

• Still hampered by supply-side rigidities
• Fiscal deficits vs the Growth and Stability Pact
• Strong euro and monetary policy

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AsiaBright spot in world economy

• Positive impact from US recovery
• Strengthening semi-conductor markets

• Rebound from SARS-related slowdown and poor
  sentiment due to the Iraq war
• Strong domestic demand growth

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Outlook

• US to remain engine of growth for the world
• Growth in 2004 is expected to be 4.6, based on
  Consensus Forecasts
• Higher growth this year driven by
• reduced geopolitcal uncertainties
• policy stimulus
• dwindling effect of the bubble burst

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Outlook

• Asia expected to continue recovery momentum in
  2004
• Sustained by easy macro policy, strong growth in
  China
• Dampened recently by outbreak of the bird flu
• Needs to boost domestic demand further to support
  future growth

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Risks to Outlook

• Dependence on US recovery
• US depreciation accompanied by slower growth in
  the US
• Rise in interest rates could adversely affect
  recovery and is a risk to housing market
• Disorderly adjustment (overshooting), and G3
  exchange rate volatility
• Geo-political disturbances

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Other issuesExchange rate flexibility

• IMF position
• Reduce risk of future crises
• Domestic growth less dependent on global cycle
• Lower cost of holding foreign reserves
• Raise consumption opportunities where exchange
  rate is overvalued
• Allow for orderly adjustment of exchange rates
  considered undervalued

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Other issuesExchange rate flexibility

• Other Views
• Volatility has substantial effects on trade,
  investment and capital flow impact greater for
  emerging markets
• Necessary institutions and framework, and proper
  sequencing needed before increasing flexibility

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Other issuesReserves Accumulation

• IMF view
• Have increased more quickly than warranted by
  traditional considerations
• Costs exceed benefits
• Allow more exchange rate flexibility

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Other issuesReserves Accumulation

• Other views
• Self-insurance against future external shocks
  Funds own advice to many countries
• No specific benchmark depend on country
  circumstances err on the side of caution
• Difficulties in sterilizing interventions,
  leading to generous money supply
• Supporting US currency and government bonds

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Other IssuesTrade

• Failure of Doha round
• Regional and bilateral agreements cannot
  substitute for multilateral arrangements
• Trade is a tool of economic development and
  poverty reduction
• But link between trade and long-run growth is not
  automatic
• Requires supportive policies and institutions
• Funds effort to help bring talks back on track,
  including through its financing facilities

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Policy Response

• Macro policy should remain supportive of economic
  recovery
• Monetary policy can be a short-term instrument to
  stimulate growth but low interest rates could
  create/exacerbate imbalances, e.g. in the housing
  market
• Trade-off in fiscal policy between consolidation
  and stimulation automatic stabilizers should be
  allowed to operate

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Policy Response

• Strengthen balance sheets of public and private
  sector
• Countries with high public debt should focus on
  fiscal consolidation
• Resolving NPLs and strengthening insolvency law
• Improving corporate governance, and accounting
  and auditing standards
• Divestment from banks to ensure market-based
  intermediation of funds

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Policy Response

• External demand vs exchange rate flexibility
• Reduce dependence on exports
• Manage exchange rate volatility
• Gradual adjustment across the region while
  economic environment is benign

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End of Presentation

• Thank You