Monday, July 24, 2017

Asia: Preparing for choppy seas

The outlook for Asia and the Pacific is the strongest in the world, but it is shrouded by challenges at home and abroad, according to the latest IMF report for the region.

The April 2017 Regional Economic Outlook for Asia and Pacific: Preparing for Choppy Seas finds that policy stimulus continues to support healthy domestic demand in China and Japan in the near term, which is good for other economies in Asia as well. Broader global conditions are also favourable. Growth is accelerating in many major advanced and emerging market economies, notably the United States and commodity exporters, and financial markets are still resilient for the most part. Nonetheless, there are challenges ahead. Particularly, over the medium term, there are fundamental headwinds to sustained strong growth, including from aging populations in some countries and a slower catch-up in productivity. Myanmar has a favourable medium-term outlook, with its continued reform efforts gradually helping the country to catch up with more advanced economies.

After a slowdown in 2016, regional growth is forecast to speed up in 2017. Growth in the region decelerated to 5.3 percent in 2016 from 5.6pc in 2015 despite broad improvement in economic activity in the second half of 2016. Net exports continued to pull down growth; domestic demand remained strong, supported by robust private consumption. GDP growth is forecast to reach 5.5pc in 2017, revised up by 0.1 percentage point compared to the estimate in the IMF’s October 2016 World Economic Outlook, and 5.4 percent in 2018. Accommodative policies will underpin domestic demand, offsetting tighter global financial conditions. The acceleration in 2017 reflects expected recovery in Asian trade, resilient domestic demand, and continued policy support.

The aggregate outlook for the region, however, masks differences across countries. Among the larger economies, projected growth in China and Japan for 2017 was revised up because of continued policy support and strong data toward the end of 2016. China’s GDP growth is expected to stay strong but continue to slow gradually to 6.6pc in 2017 as recent tightening measures take effect — and to 6.2pc in 2018. Japan’s growth is projected at 1.2pc, with momentum set to continue into 2017, but will probably then weaken along with fiscal policy consolidation and the planned consumption tax increase. Some of the upward revision in Japan reflects the comprehensive revision of the national accounts in 2016. In India, temporary disruptions, primarily to private consumption, caused by cash shortages accompanying the currency exchange initiative are expected to gradually dissipate in 2017. Thus, growth is projected to rebound to 7.2pc in financial year 2017-18 and to 7.7pc in the following year. In Korea, growth is expected to remain subdued at 2.7pc in 2017, owing to geopolitical uncertainty, and increase to 2.8pc in 2018.

Projected growth for Asia, excluding India and Korea, was revised up in 2017 by 0.3 percentage point compared to the estimate in the October 2016 World Economic Outlook. The Myanmar economy has picked up pace in recent months after a soft patch in 2016. While data is not yet available, real GDP growth for financial year 2016-17 is likely to have been around 6 percent. Growth is expected to reach around 7 percent for 2017-18 on account of continued recovery.

Near-term growth is encouraging, but downside risks continue to dominate the economic landscape. Global growth could get a boost from economic stimulus in some large economies, particularly the United States. However, continued tightening in global financial conditions could trigger further capital flow volatility. Private debt has risen in many economies in the region over the past decade, and higher borrowing costs could tip some companies and households over the edge and constrain growth. More inward-looking policies in major global economies would significantly impact Asia given that the region has benefited substantially from cross-border economic integration. A bumpier-than-expected transition in China would also have serious repercussions.

Medium-term regional growth faces challenges from population aging and slowing productivity. Asia is a diverse region, and some areas risk growing old before becoming rich. This is because the pace of aging is faster in Asia compared with the experience in Europe and the United States. For many countries in the region, on current trends, per capita income (benchmarked against the United States) will be much lower than that reached by advanced economies at a similar peak in their aging cycle. Slowing productivity growth since the global financial crisis, which kept the region from catching up with the United States and other countries at the technological frontier, has made matters worse. The slowdown has been most severe in the advanced economies of the region. Without reforms, productivity growth will likely remain low for some time, with headwinds from rapid aging becoming increasingly important.

Growth can be reinforced by appropriate demand support and structural reforms. Buffers are needed, especially for countries nearing full productive capacity. Policymakers should also deploy macroeconomic policies to support and complement structural reforms and external rebalancing and, if needed, to boost demand. Exchange rate flexibility should generally remain the main shock absorber against a sudden tightening in global financial conditions or a shift toward protectionism in major trading partners. Policymakers should continue to rely on macro-prudential policies to mitigate financial stability risks. But what really needed is structural reforms to meet challenges of changing demographics to boost productivity. At the top of the list are labour market and pension system reforms. Advanced economies should focus on strengthening the effectiveness of research and development spending and taking measures to raise productivity in the services sectors. Emerging and developing economies must focus on attracting foreign direct investment and expanding the economy’s capacity to absorb new technology and boost domestic investment.

With continued reforms, Myanmar’s medium-term outlook is favourable as it catches up with more advanced economies. To tap this potential, the immediate task is to maintain macroeconomic stability by stabilising inflation and containing the widening account deficit. To this end, the authorities should reduce money supply growth by phasing out the central bank financing of fiscal deficits, keep fiscal deficits in check, and ensure exchange rate flexibility. Structural reforms should continue to lay the foundation for inclusive and sustainable growth. Myanmar has made considerable progress in the mobilisation of domestic revenue. The reform momentum on this front should be maintained, along with continued prioritisation of expenditure toward health, education and key infrastructure. Building on recent achievements in financial sector reform, the authorities should accelerate the issuance of key bank regulations and further strengthen bank supervision.

The IMF will continue to assist Myanmar in undertaking these and many other reforms. The Fund maintains a productive dialogue with the authorities on policy issues and has provided substantial technical assistance and training to Myanmar. The Fund is encouraged by Myanmar’s commitments to reforms and looks towards continued cooperation with the authorities.


Yasuhisa Ojima is the IMF resident representative for Myanmar, taking up the position since September 1 in 2015.