Sri Mulyani Indrawati, Managing Director, World Bank, on the region’s economic outlook

Sri Mulyani Indrawati, Managing Director, World Bank

The global economy appears to be moving into a new phase, in which output in advanced economies is firming, albeit probably not as strongly as we would have liked. Developing country growth appears to be slowing, including in the Asia-Pacific region. Our retreat, of course, came in the wake of the decision by the US Federal Reserve to defer its tapering of quantitative easing (QE). It is a positive move in the short term for both developing and high-income economies. We know governments have now been given some breathing space. Clearly the risks and uncertainty about eventual tapering remain. But this is the time for policymakers to seize the moment to address domestic vulnerabilities and reduce external financing exposures.

So what is the economic outlook? For the most part, the views of the World Bank Group are similar to those of the IMF. Global GDP is projected to expand about 2.4% in 2013 and gradually strengthen to around 3.2% and 3.5% in 2014 and 2015. Asia-Pacific Economic Cooperation (APEC) emerging markets and developing economies are forecast to contribute almost 50% of future world growth. Outside of India, the impact of the expected accommodating monetary policy on the Asia-Pacific region has been limited so far.

After slowing down for several quarters in a row, growth in China is showing signs of stabilising at 7.5% due to external conditions and domestic policy aimed at rebalancing growth away from investment and exports. Despite gradual adjustment to tighter financial conditions, expansion in other developing countries is firming or holding steady. However, for many APEC economies, the balance of risk is once again on the upside. As QE policies are withdrawn, interest rates will likely rise further, which will increase debt-servicing costs and raise the cost of capital. On the positive side, however, when tapering does happen it will signal further recovery in the US. Weaker exchange rates in developing countries will boost exports over time.

China’s moves to rebalance away from its dependence on investment and rein in credit growth could have significant implications for developing countries. Slower investment growth, and consequently slower GDP expansion, could call into question the profitability of past investments and associated loans, with potential effects in the region over the medium term.

Excess capital inflows from loose monetary policies have fuelled asset-price inflation in neighbouring countries, increasing the risk of property bubbles. Thus, as liquidity is restrained and interest rates rise, the tapering of QE could have serious consequences in the APEC region. In countries that have already recovered from the crisis, macroeconomic policy stances may need to be adjusted to contain or prevent inflation, asset-price bubbles and deteriorating current accounts.

The countries most vulnerable to swings in global capital flows could continue to strengthen their balance sheets, by reducing their reliance on short-term and foreign-currency-denominated debt. The significant effort throughout the region to develop local currency bond markets is clear evidence that policymakers have understood and responded to this need.

I am convinced that countries in the Asia-Pacific region need to make structural reform a priority in order to extend their growth potential, which remains 1 to 2 percentage points below pre-crisis levels. In order to sustain faster rates of growth, developing countries will need to redouble their efforts to reduce bottlenecks by improving their investment climate, investing in infrastructure, making better use of their labour pools and boosting productivity.

The APEC Finance Official Process, under Indonesia’s chairmanship, has rightly identified infrastructure financing as one of the priorities for the bloc’s discussion in 2013. In times of uncertainty, it is particularly important to focus on long-term and stable investment.

Maintaining economic systems that allow people to benefit from growth has been a feature of the economic development in the Asia-Pacific region over the past decades. This is vital to ending extreme poverty and boosting shared prosperity. We hope it continues.

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