core sector communique

IMF Sees Singapore Reflecting Regional Trends: A Strong Rebound but with Challenges Rising

October 25, 2010

Asia remains firmly in the lead of the global economic recovery and strong growth in the region is set to continue, the International Monetary Fund (IMF) said today in Singapore, completing the launch of its new Asia-Pacific Economic Outlook (REO).

The expansion in Asia exceeded expectations in the first half of the year, the IMF said, prompting the Fund to revise significantly up its 2010 growth forecast for the region to 8 percent. Economies across the region are expanding strongly. China and India are leading the way with projected 2010 growth rates of 10.5 percent and 9.7 percent, respectively. In 2011, Asia’s growth is expected to moderate to a more sustainable pace of 6.8 percent.

Strong economic growth is leading to new policy challenges, according to the REO analysis. Inflationary pressures are building, while property prices in some markets are growing at double-digit rates. With Asia set to remain an attractive destination for foreign investment given the sluggish recovery in the U.S. and Europe, surging capital inflows could add further to domestic price pressures in the period ahead.

The time has therefore come for many countries in the region to intensify ongoing moves to normalize monetary and fiscal policy stances, according to Mr. Anoop Singh, Director of the IMF’s Asia and Pacific Department. “We welcome the steps so far taken by policymakers to address inflation risks and limit the build-up of financial vulnerabilities, but more now needs to be done given the continued strong growth in the region,” Mr. Singh said.

Developments in Singapore closely follow and highlight these regional trends and challenges. Singapore’s rebound has been exceptional as the regional and global recovery boosted Singapore’s exports. Despite the moderation in the second half of the year, growth for 2010 as a whole could reach 15 percent. Meanwhile, inflation is trending up and the labor market is tightening, in response to which MAS is appropriately unwinding stimulus and normalizing monetary conditions. With the extraordinary support that was extended in response to the global downturn being withdrawn, fiscal policy has also been refocused on medium-term objectives.

For Singapore, capital inflows have not posed significant concerns, although property prices have continued to rise. The authorities have rightly introduced macroprudential and other measures to forestall excessive exuberance and meet the growing demand for housing.

Turning to medium-term challenges for the region as a whole, rebalancing Asia’s growth remains the top policy priority. With external demand from advanced economies unlikely to return to pre-crisis levels in the foreseeable future, Asia will need stronger domestic demand in order to continue along a robust growth path. A broad range of reforms is needed to support domestic consumption and investment, including strengthening social safety nets, ensuring access to credit, easing restrictions in service sectors, and improving infrastructure. Continuing exchange rate appreciation is an important part of rebalancing. “It is only natural that, as Asian economies grow stronger, so too will their currencies,” said the IMF’s Singh. “This is very much a sign of Asia’s success.”

Agreements reached over the weekend at the G-20 Finance Ministers and Central Bank Governors meeting in Gyeongju, Korea will help strengthen the prospects for global rebalancing and sustained growth. In addition, reform of the quota and governance system will also shift country representation at the IMF toward dynamic emerging market and developing countries, thereby giving Asia a larger voice in the institution. The G-20’s call for continued work to strengthen the global financial safety net will also enable the IMF to work further on one of the key issues discussed at the July Asia-IMF conference in Korea.