Overview of the Macro Context

Jonathan D. OstryDeputy Director

Asia and Pacific Department, IMF

IMF/PFTAC Steering Committee Meeting, Port Moresby, Papua New GuineaMarch 27th, 2019

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Today’s Briefing

Recent Developments In Global Economy and Asia

Outlooks, Risks, and Opportunities in the Pacific

IMF’s work in the Pacific

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Global Overview

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Asia is exposed to swirling winds.

Headwinds Global growth deceleration

Crosswinds Trade tensions & talks

Elections

Tailwinds

Pause in monetary policy normalization

Drop in commodity prices

Stimulus measures4

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2017

Q1

2017

Q2

2017

Q3

2017

Q4

2018

Q1

2018

Q2

2018

Q3

2018

Q4

China India Rest of Asia Japan Euro area United States

GDP Growth(Percent; year-on-year)

Source: IMF, World Economic Outlook.Note: 2018Q4 is an estimate. Rest of Asia = Australia, New Zealand, Hong Kong, Korea, Singapore, Taiwan Province of China, Indonesia,

Growth in 2018 H2 decelerated, especially in Europe...

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…and regional trade plunged in late 2018 amidst ongoing trade tensions...

Source: Haver. IMF Staff Calculations.Note: REO-14 Asian economies included; moving average based on 2 lags and current levels.

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-8

-6

-4

-2

0

2

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Merchandise Imports: Growth Rate (Jan 2017-Dec 2018)(seasonally adjusted, deflated, 3-month moving average of

month-on-month, weighted by GDP PPP)

Advanced AsiaDeveloping Asia

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-8

-6

-4

-2

0

2

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Merchandise Exports: Growth Rate (Jan 2017-Dec 2018)(seasonally adjusted, deflated, 3-month moving average of

month-on-month, weighted by GDP PPP)

Advanced AsiaDeveloping Asia

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…led by an unexpectedly large dip in China’s January-February trade.

-20.0

-15.0

-10.0

-5.0

0.0

5.0

10.0

Total United States India Japan ASEAN Korea

Figure: China’s 2019 Jan-Feb Exports (Year-on-year, percent change)

Source: CEIC Data. IMF Staff Calculations.

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High frequency, forward-looking indicators suggest that weaker activity will continue into Q1 2019.

Manufacturing PMIs (50+ = expansion, seasonally adjusted)0 Jan-2018 Feb-2018 Mar-2018 Apr-2018 May-2018 Jun-2018 Jul-2018 Aug-2018 Sep-2018 Oct-2018 Nov-2018 Dec-2018 Jan-2019 Feb-2019

Australia 55.4 55.6 54.3 55.5 53.2 55.0 52.4 53.2 54.0 54.5 54.6 54.0 53.9 52.9China 51.5 51.6 51.0 51.1 51.1 51.0 50.8 50.6 50.0 50.1 50.2 49.7 48.3 49.9India 52.4 52.1 51.0 51.6 51.2 53.1 52.3 51.7 52.2 53.1 54.0 53.2 53.9 54.3Indonesia 49.9 51.4 50.7 51.6 51.7 50.3 50.5 51.9 50.7 50.5 50.4 51.2 49.9 50.1Japan 54.8 54.1 53.1 53.8 52.8 53.0 52.3 52.5 52.5 52.9 52.2 52.6 50.3 48.9Korea 50.7 50.3 49.1 48.4 48.9 49.8 48.3 49.9 51.3 51.0 48.6 49.8 48.3 47.2Malaysia 50.5 49.9 49.5 48.6 47.6 49.5 49.7 51.2 51.5 49.2 48.2 46.8 47.9 47.6New Zealand 55.8 53.4 53.0 59.1 54.3 52.7 51.3 52.2 52.0 53.6 53.5 54.8 53.1 #N/APhilippines 51.7 50.8 51.5 52.7 53.7 52.9 50.9 51.9 52.0 54.0 54.2 53.2 52.3 51.9Taiwan Province of China 56.9 56.0 55.3 54.8 53.4 54.5 53.1 53.0 50.8 48.7 48.4 47.7 47.5 46.3Thailand 50.6 50.9 49.1 49.5 51.1 50.2 50.1 49.9 50.0 48.9 49.8 50.3 50.2 49.9Vietnam 53.4 53.5 51.6 52.7 53.9 55.7 54.9 53.7 51.5 53.9 56.5 53.8 51.9 51.2

8Source: Haver Analytics

Prospects of a trade deal have improved but are still uncertain.+?

Political uncertainty looms ahead.

MarchMicronesia

ThailandTuvalu

AprilIndonesiaMaldivesSolomon Islands

MayIndia

PhilippinesAustralia

JulyJapanNauru

NovemberHong KongMarshall Islands

DecemberKiribati

Upcoming Elections in 2019

+?

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In response to these developments, AE central banks and regional authorities have eased policies.

Expected Fed Fund Rate vs. FOMC Dots(end-of-period, percent)

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China India Korea

Figure: 2019 Growth Impact from Fiscal Stimulus (% of GDP)

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2.00

2.25

2.50

2.75

3.00

3.25

29/12/2018 31/12/2019 31/12/2020

FOMC median dots (as of Dec. 2018)FOMC median dots (as of March 2019)Federal funds rate futures (as of March, 2019)

Source: Bloomberg Source: IMF staff estimates.

The drop in commodity prices in late 2018 helped soften inflation in most economies and may bolster growth.

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Selected Asia: Headline CPI Inflation(percent change, year-on-year)

Cambodia China Hong Kong SARIndia Indonesia KoreaMalaysia Philippines SingaporeTaiwan POC Thailand Vietnam

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19

Feb-

19

Mar-1

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Source: Bloomberg. IMF Staff Calculations.

Commodity Prices(Index; average)

WTI & Brent AverageCommodity Metals Price Index (RHS)UN FAO World Food Price Index (RHS)

Source: Haver Analytics; and CEIC Ltd.

Asian EM financial conditions improved.

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020406080

100120140

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

2016 2017 2018 2019

Emerging Asia Excluding China Non Resident Portfolio Inflows(In billion US dollars)

Source: IIF.

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02040

Austr

alia

Lao P

DRVi

etnam Ind

iaTa

iwan

Pro

vince

of C

hina

Kore

aMa

laysia

Hong

Kon

g SAR

China

Sing

apor

eNe

w Ze

aland

Japa

nTh

ailan

dInd

ones

iaPh

ilippin

esMo

ngoli

a

Braz

ilTu

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Arge

ntina

Contribution from change in reservesContribution from change in exchange rateEMPI (since Sep 2018)EMPI (from Mar 2018 to Sep 2018)

Exchange Market Pressure Index (EMPI)(Percent change in U.S. dollar/local currency exchange rate plus percent change in reserves; since Sep 2018)

Source: IMF staff calculations.Note: As of Feb 2019.

Trade Tensions & Talks

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US-China Deal: Every silver lining has a touch of grey, especially if the multilateral approach to trade was put at risk.

Benefits Uncertainties Downsides

Electronics

Aircraft

Machinery

Machinery

Furniture

Oil Seeds

Toys

Vehicles

Other

Other

0 100 200 300 400 500 600

US Imports from China

US Exports to China

US-China Trade of Goods Structure(Billions of USD)

~130B

~530B

Total Deficit: ~400B

Source: Comtrade. IMF Staff Calculations. Based on 2017 data.

Closing the US-China bilateral deficit via managed trade will be a challenge.

How might the trade deal impact other economies?

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-60 -40 -20 0 20 40 60 80 100

Electronics

Machinery

Vehicles

Oil seeds

Aircraft

Optical

Mineral fuels/oils

Plastics

Wood pulp

China's Import Structure for Top Products Imported from the United States

KOR JPN MYS

60 40 20

JPN DEU KOR

DEU JPN GBR

BRA CAN ARG

FRA DEU BRA

JPN KOR DEU

RUS SAU AGO

KOR JPN SAU

CAN IDN CHL

U.S. Top-10 Exporters Excluding U.S.(2017; Share of China's total imports of each product)

Despite the possible deal, trade policy uncertainty will likely remain above historical averages.

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2015

m120

15m3

2015

m520

15m7

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m920

15m1

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16m1

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m320

16m5

2016

m720

16m9

2016

m11

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m120

17m3

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m520

17m7

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m920

17m1

120

18m1

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m320

18m5

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m720

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m11

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m1

Figure: US Trade Protectionism & Agreement Policy Uncertainty

(0-100)

Protectionism Agreement

Source: Hlatshwayo (2018) and IMF Staff Calculations.18

In sum, US-China deal should be positive, with many issues remaining.

Trade deal• Lower tariffs, reduced uncertainty, and structural

reform in China would be helpful for global growth• But trade diversion would likely affect some

countries• China’s market opening should be accessible to all,

not undermining multilateralism

Pacific Island Countries

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What does this mean for the Pacific Islands: there are global headwinds but also idiosyncratic factors.

Global growth decelerationLow commodity prices (for commodity exporters)

Tourism[Fishing]Low commodity prices (for commodity importers)

Tailw

inds

Headwinds

CrosswindsCrosswinds Spillovers from trade tensions

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Tourism is an important driver of growth in the region.

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20%

40%

60%

80%

100%

Sam

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Tong

a Fiji

Vanu

atu

PNG

Solo

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Isla

nds

Tim

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Mar

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land

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Pala

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Australia New ZealandChina JapanPacific Island Markets Other Markets

Share of Visitor Arrivals, by Source Markets(In percent of Total Arrivals)

Source: South Pacific Tourism Organisation (SPTO).

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2012 2013 2014 2015 2016 2017

Arrivals Y-o-y percent change (rhs)

Visitor Arrivals in Selected Pacific Island Countries(In thousands of persons)

Note: Includes Fiji, Samoa, Palau, PNG, Solomon Islands, Tonga and Vanuatu.Sources: South Pacific Tourism Organisation (SPTO).

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And fishing revenues have been buoyant.

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2011 2012 2013 2014 2015 2016 2017 2018proj.

Kiribati Tuvalu Nauru Micronesia Marshall Islands

Outlook on Fishing Revenue in the Pacific(Fishing revenue in percent of GDP)

Sources: Countries authorities, and IMF staff projections.23

Debt has been rising amid weakening fiscal balances, although…

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The pattern of debt differs across countries

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Short term risks are on the downside…

…And long-term trends pose challenges

• Climate change

• Non-communicable diseases

• Demographic changes due to migration

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• Natural disasters

• Weaker than expected global growth

• Loss of correspondent banking relationships

• Infrastructure delays (Authorities’ view)

Raising long-term growth is a key developmental challenge.

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EMDE inter-quartile range

EMDE index

EMDE Asia index

PICSs index

Real GDP Growth(Index, 1990 = 100)

Sources: IMF, World Economic Outlook, and staff calculations.27

201020182020

But there are other opportunities: technology could offer new growth opportunities to the PICs.

Submarine Internet Cable

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SamoaTongaVanuatu

Correspondent Banking Relationships/ AML CFT

Tourism Based

Cook IslandsFiji

Fishing License Fees

KiribatiMicronesiaTuvaluNauru

Solomon Islands

And regional approaches could provide opportunities.

Financial Inclusion

Marshall IslandsPapua New Guinea

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Palau

IMF’s work in the Pacific.

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Country Surveillance

• Integration with Capacity Development

• Adjusting for Natural Disasters

• Non-Technical Summary for Cabinet

• Note on Central Bank Digital Currency

• Paper on Correspondent Banking

• Paper on Fintech

Policy Development

• Focus on Building Resilience to Disasters

• Independent Evaluation Office: Review of Small States

• Comprehensive Surveillance Review

• Capacity Development Strategy

Outreach

• IMF Management visits to the Region

• Annual Meetings Event• Non-Technical Summary

for Cabinet

What is the IMF doing?

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Capacity Development

• Scaling up revenue mobilization

• Joint CARTAC/PFTAC workshop

• Recruitment of Macro-Adviser

More Tailored Training

• Macro-training (PNG/Solomon Islands)

• Fiscal Sustainability for Low Income Countries

• Debt Sustainability Analysis• AML/CFT • Roundtable on Correspondent

Banking

What is the IMF doing?

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Thank you for your attention!

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