IMF chief predicts Asia will weather euro crisis

IMF chief predicts Asia will weather euro crisis

IMF managing director Christine Lagarde
IMF managing director Christine Lagarde

It has been a tumultuous first year for Christine Lagarde, as European nations seek to contain a sovereign debt and banking crisis that threatens to undermine the entire global economy.

‘‘ We expect, and are already seeing, a sharp V-shaped recovery in 2012 [for Thailand]. CHRISTINE LAGARDE IMF MANAGING DIRECTOR

Appointed 12 months ago as the first female managing director of the International Monetary Fund (IMF), Ms Lagarde here shares her views on economic trends with the Bangkok Post.

What is your latest forecast on the world economy and inflation, including for Asia? To what extent can emerging economies, including China and Southeast Asia, help offset the impact from the slowdown in world economic growth?

The IMF's World Economic Outlook Update, which is going to be released on Monday, contains our latest growth and inflation forecasts for the global economy and the region.

Concerns about sovereign and banking sector solvency in some euro economies have intensified recently but last month's European summit helped to address these concerns to some extent.

The US recovery has also been tepid, while growth in a number of major emerging markets is coming out lower than forecast.

Reflecting those concerns, Asia's growth has clearly slowed through the first half of this year.

In particular, spillovers from Europe are visible in lower exports, lower stock prices, some small capital outflows and higher sovereign and bank spreads.

Nevertheless, financial stress across the region remains lower than it was towards the end of last year, and far lower than in the aftermath of the Lehman shock of 2008.

Also, macroeconomic policies are fairly accommodative in the region and being eased further in a number of countries.

Against that background, and in light of strong underlying fundamentals, growth should pick up during the second half of this year provided measures taken in Europe are able to ease financial stress and alleviate a sharp deterioration in global financial conditions.

Overall, Asia's growth in 2012 could come fairly close to the 6% average recorded in 2011.

The most striking trend throughout Asia's rise as the world's leading source of exports has been the growth in intra-regional trade, with China playing a leading role. This could be a source of resilience to shocks from outside Asia.

How deep and how long could the global economic downturn be, based on the Fund's baseline and worst-case scenario of the euro area crisis?

With the euro area accounting for close to 15% of global output, economic and financial stress in this region will continue to have global ramifications.

Of course, the potential adverse spillovers from the euro area are deeper for those countries and regions that are more closely connected.

Moreover, in an environment where advanced economies, such as the US and Japan, are already struggling to find a stronger footing in the recovery amid pre-existing vulnerabilities, we need to ensure that the crisis in the euro area is contained through decisive policy action.

This is imperative given the strong linkages between the advanced economies and the rest of the world.

But I am encouraged by recent steps taken at the European summit, and with my expectation that European leaders will continue to build on these efforts I think the growth outlook, while weaker, will not change considerably.

What impact can Asian financial markets expect as a result of the unfolding euro area crisis and the policy measures taken by the advanced economies? What steps would you suggest Asian policymakers take to mitigate the impact of the euro area crisis on financial markets and the real sector?

As the recent financial tensions surrounding the euro area debt crisis underscore, Asia's external outlook remains uncertain.

The most immediate concern is a re-escalation of the euro area crisis that could trigger severe stress in interbank markets, a deeper recession and a much more generalised flight from risk.

However, it is important to keep in mind that Asian economies have improved their economic fundamentals substantially over the past 10 years. This should enable them to better weather external shocks.

In particular, corporate and banking leverage have been reduced and balance sheets strengthened, dependence on foreign funding has fallen and the domestic-foreign currency mismatches have become less pronounced.

There is also room in Asia for monetary policy to respond to further deterioration in global economic conditions _ all the more so as inflationary pressures have eased recently.

Fiscal policy could also be used in some countries. However, policies need to be determined on a case-by-case basis.

The region's policymakers also have measures at their disposal to stabilise financial markets and contain financial spillovers. Swap lines, regional pooling arrangements and the potential for most countries to draw down on their large stock of international reserves, if necessary, provide further reassurance.

How do you assess euro area policymakers' determination to restore trust in the euro common currency? How would you suggest policymakers of the euro area implement short- and long-term measures to contain the crisis and strengthen the currency?

The situation in the eurozone remains fragile, but I am encouraged by the significant steps that were taken at the European summit last month to address the immediate crisis.

In particular, we welcome measures to enable direct bank recapitalisation through the European Stability Mechanism (ESM), allow European Financial Stabilisation Mechanism (EFSF)/ESM sovereign bond purchases in the secondary markets and agreement on the terms for a "growth compact".

Of course, implementing these measures in a timely way is critically important to help restore longer-term confidence in the union.

Also, while these initiatives are steps in the right direction, more progress towards deeper fiscal integration and a fully fledged banking union is needed to decisively break the negative link between sovereigns and banks.

In particular, it will be important to put in place a pan-European deposit insurance scheme and bank resolution mechanism with common backstops.

So we have considerable progress, but still more can be done.

How can the new emerging markets play a role in saving the global economy?

Since we are in Asia, let me give you a couple of specific examples of what countries in this region can do, not only to support the global economy, but also to strengthen growth prospects at home.

The best way to meet this dual challenge is for Asia to continue to pursue its agenda of economic rebalancing.

This will require different approaches in different economies in the region.

For China, it means achieving a successful transition from investment-led to consumption-led growth, and measures under the 12th five-year plan to achieve this transition are welcome.

By contrast, in many Asean economies, where private investment has been more subdued, strengthening domestic demand will depend on improving the investment climate, including by addressing infrastructure bottlenecks and enhancing public service delivery.

There is also scope for further cooperation in Asia, primarily in the trade and financial areas, to strengthen the region's own sources of growth.

As already noted, much progress has been achieved, and intra-regional trade is growing fast. But more can be done.

Advancing the trade liberalisation agenda could provide an additional boost and strengthen the region's resilience to external shocks.

Deeper financial integration _ with better access of consumers and investors to financial services _ would strengthen domestic demand in the region.

Last but not least, pledges by emerging markets to boost IMF resources _ including the US$1 billion (31.7 billion baht) committed by Thailand _ signal their strong resolve to improve global economic and financial stability and put the world economic recovery on a sounder footing.

These resources are being made available for crisis prevention and resolution and to meet the potential financing needs of all IMF members. In turn, we at the IMF commit to safeguard our members' interests and resources.

Could the global economic slowdown pose problems to the world's effort to improve human well-being through better health care and education and to reduce development gaps among economies?

The global crisis already has had a devastating impact on people's well-being in all corners of the world.

Nearly 200 million people around the globe are unemployed, an increase of 27 million since the start of the global financial crisis. The World Bank estimates that the global financial crisis pushed 64 million people into extreme poverty.

This is a potential disaster _ in economic, social, and human terms.

A prolonged or renewed downturn would only worsen the situation. It would place more pressure on public finances, and could imply enormous obstacles in countries' efforts to improve health and education, close enormous infrastructure gaps and reduce poverty.

This underscores the importance of decisive policy measures.

In Thailand, the immediate focus is, understandably, on fully recovering from the 2011 floods. More broadly, we see a need for larger investment in human capital, including health and education, as well as physical capital, especially in regions outside of Bangkok.

Despite Asia's rapid growth and success in reducing poverty, income inequality has increased and poverty rates remain a concern. What can be done to promote growth that is more inclusive? How can employment, quality education and health, and access to financial services be ensured for everyone?

The global financial crisis has heightened awareness of the potential impact of rising inequality on economic and social stability and growth.

Mutually reinforcing policies will be needed to reduce inequality and increase inclusiveness, but the necessary mix will vary from country to country.

In particular, the relatively low share of education and health spending in GDP across Asia points to an important potential role for fiscal policy to strengthen inclusiveness. For example, there is scope in many countries to reduce inefficient subsidies, especially on energy, that are expensive and do not really reach the poor and vulnerable groups.

Conditional cash transfer programmes are an example of a policy increasingly used effectively in many economies.

Improving infrastructure in regions that have lagged behind would also improve incomes in those regions and help to reduce inequality.

What is the economic outlook for Thailand in 2012 and beyond?

Thailand suffered from unprecedented negative shocks to the economy in 2011.

First, the earthquake in Japan in March disrupted supply chains and slowed production, albeit temporarily. Then, massive floods that began in August and worsened in October-November, caused serious economic hardship. The disruption was larger than expected and GDP growth came to a halt.

We expect, and are already seeing, a sharp V-shaped recovery in 2012. We project real GDP growth of 5.5% in 2012 and 7.5% in 2013, boosted by reconstruction efforts.

Looking beyond the immediate recovery, long-run GDP growth ultimately depends on the potential productive capacity of the economy.

Sustaining and increasing investment, as well as strengthening support for lower-income groups, is therefore the key for promoting growth.

In your tenure at the IMF, what is it that most concerns you? What do you think are the challenges?

My constant concern and ambition is to make sure that the IMF continues to be relevant to its membership.

For the IMF to be relevant, it has to be representative of the membership and therefore credible from an institutional point of view, and it has to be relevant from a quality point of view.

We need to both represent our membership, and we need to provide the quality of advice, the quality of service, the quality of technical assistance, the quality of surveillance, that will make us constantly relevant.

The role of the IMF is evolving. We have to be agile and reflect upon and learn the lessons from the global financial crisis. And we need to be able to invent and reinvent ourselves in many ways.

Parista Yuthamanop


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