core sector communique

Transcript of a Press Briefing by the IMF Asia Pacific Department

September 24, 2011
Washington, D.C.

MS. UTSUNOMIYA: Good morning, everyone. Thank you very much for coming to the press briefing by the IMF's Asian Pacific Department.

I am Keiko Utsunomiya, from the External Relations Department.

On my right, we have Mr. Anoop Singh, Director of Asia Pacific Department, Mr. Masahiko Takeda, Deputy Director and Mission Chief for India Mr. Mahmood Pradhan, senior advisor and Mission Chief for Japan and Singapore,

and Mr. Nigel Chalk, also a senior advisor and Mission Chief for China and Hong Kong.

With that, Anoop will make short opening remarks, followed by questions and answers.

MR. SINGH: Thank you very much. It's a pleasure to be here and see you again. I remember many of you from other occasions. Thank you for being here.

So, I will say a few remarks on our update of our Outlook for Asia.

I should tell you that we are going to be launching Economic Outlook for Asia and the Pacific in Asia next month; so, I do hope we will see you there. That will contain much more detail of our analysis in our launch next month.

Of course, as you know, these are uncertain times for the global economy and therefore, obviously, for Asia, we've seen turbulence in many regional financial markets this week that shows that clearly Asia has not decoupled from advanced economies. Asia remains greatly exposed to risks of contagion from the fragile, global environment. But let me first start with the context of where we are in Asia:

It is a reality that growth in Asia has moderated in the second quarter of this year and since them, mainly at the result, obviously, of weakening external demand, but the key point is that domestic demand in Asia has remained resilient.

And as you look at our overheating map, as you will see in our Outlook Report soon, these overheating pressures remain elevated in a number of economies. With credit growth still robust and the inflation momentum generally high in many economies, of course the dynamics of growth have varied across Asia.

Most importantly, in China, the domestic economy remains very robust. We are seeing solid growth in both consumption and investment.

In India, private consumption has boosted growth, and in many ASEAN economies where a factor has been investment, we are seeing stronger investment, and this is helping us in economies mitigate weaker export growth. And as you know, in Japan, we are seeing domestic demand recovering after this tragic earthquake and tsunami earlier this year, helped by the reconstruction, which is now clearly underway.

We will have more details about other parts of Asia in our Regional Outlook.

Now, you may ask, what's our basic outlook? So, essentially, we see growth in Asia remaining strong in our baseline scenario, a little bit less than we projected a few months ago, but as I said, domestic demand fundamentals remain strong, and we see emerging Asia growing still fairly robustly, between 7.5 and 8 percent in the next 1 to 2 years. We also do expect the inflation pressures to recede after peaking in some countries. We believe they already have peaked. So, that's our baseline scenario, and you'll see details of it coming out soon.

Clearly, the downside risks have increased significantly in recent months and recent weeks because of the global uncertainty. There's no doubt that any further escalation of the euro area financial turbulence and a renewed slowdown in the U.S. would have substantial trade and financial spillovers to Asia.

Our own assessment shows that the contagion through financial spillovers is a key factor, and this is the risk that Asia also faces. And, therefore, the challenge for Asian policymakers is quite difficult. It is what I will call a kind of balancing act.

They've got to safeguard growth and ensure they address the downside risks from the advanced economies were they to materialize.

At the same time, we are impressed that Asian economies remain determined to contain inflation, and to ensure that balance sheet vulnerabilities from accommodative financial conditions do not elevate.

Let's talk briefly about monetary policy. Of course, the challenges here are quite different across the Region. In economies where overheating pressures are more elevated and monetary conditions are clearly accommodative, our sense is that these economies should continue to return to a more neutral monetary stance, through further tightening of monetary policy and clearly flexible exchange rates, which we are now generally seeing.

But in economies where inflation has now come back to the central banks' target ranges and where the exposure to external shocks is greater, a pause in monetary tightening may be warranted until the uncertainties have somewhat abated globally.

And then, we also looked at what the global risks and domestic conditions imply for fiscal policy. As you know, in many Asian economies, fiscal positions remain accommodative with structural deficits that are still higher than they were in 2008.

And, therefore, our sense that the normalization of the fiscal policy stance that Asian economies are undertaking, this should be allowed to continue and run its course. Of course, if the downside risks I have spoken about to the global outlook were to materialize, clearly Asian economies have the scope to reverse course and to use a range of measures, including fiscal policy, as they did in response to the global crisis in 2008.

But let me now make a few comments also about what this means for the medium term.

I think it is clear from recent events in advanced economies that Asia will clearly benefit from further progress in developing domestic sources of demand, and our sense is that the intentions and commitments the Asian economies have to generate domestic sources of demand, these could be advanced and accelerated at this time.

Clearly, this will require more exchange rate flexibility, appreciation, and greater priority to sustainably retargeting spending and building social safety nets.

Not only would these measures increase domestic demand and build the resilience of Asian economies to external , most importantly, if done correctly, they would reduce growing income inequalities in the Region, thereby making Asian growth more inclusive.

In this context, you know that, over the last two decades, Asia has seen historic reductions in poverty. The challenge now is to build on that and to ensure growth becomes more inclusive and to address clearly increasing inequalitiesthat we see across Asia.

Thank you very much.

MS. UTSUNOMIYA: Thank you, Anoop.

Now, we'd like to turn the floor over to you. Please identify yourself, with affiliation, before your questions.

QUESTIONER:

Are there any specific economies that you think are in a more difficult situation than others that need to be flagged ahead of any further turbulence in the euro area or slowdown in the U.S. market?

MR. SINGH: Well, that's a good question, and as you know better than I do, Asia is a large Region; one has to study this country by country.

If you look at emerging Asia, we are projecting China to continue growing around 9.5 percent this year, and 9 percent next year. We see India close to 8. We see emerging Asia growing around 7.5 to 8. These are robust growth rates.

The challenge, I think, is to ensure that accompanying overheating pressures are fully addressed. We see in Asia that the credit cycle is at a very advanced stage, even relative to other Regions, including Latin America. It is very important that this does not result in a decline in credit quality in coming years, and this is why you've seen the attention that Asian economies have given to addressing this.

For example, in China, it is very important that the People's Bank has set a clear target for its growth of bank credit for this year.

And it also very clear that, in China, addressing inflation, as set by the Premier, remains the top priority.

This is also the case in India.

It is interesting that, just a few days ago, India further tightened monetary policy and raised its policy rate despite the external risks we see. These are important events because overheating pressures need to be addressed.

Inflation is also higher than target ranges in some other parts of Asia, such as e Vietnam I should tell you that I hope to meet Vietnam State Bank Governor Binh in just a few hours from now--he has made it clear that reestablishing macro stability, bringing inflation down remains the top priority for the State Bank of Vietnam. So, I think in Asia we are seeing clear attention to this.

I should underscore that, as you are looking at vulnerabilities, we should be aware of the inequalities that are growing. As you look at the speeches given in recent months by the Chinese Premier, by the Indian Prime Minister, by the Indonesian President, and the Singapore Prime Minister, you see that the attention they give to addressing inequalities is very high. This is the right thing to do, because we need to look beyond the short-term effects of global events and look over the medium term.

And that's why I said, by advancing rebalancing, not only will it help build domestic demand, it will allow them to shift policies either to consumption, say, in China, investment elsewhere--to build a framework that will address these inequalities.

QUESTIONER:

From 2008, especially a country like Sri Lanka, engaged in fighting with these residual--I mean, all the downturns. What should they do at this moment, , to face the new future of the danger zone?

MR. SINGH: Well, I think you will agree with me that Sri Lanka has come a long way in the last year. It is really quite remarkable that GDP growth is expected this year to be between 7 to 8--I think it is around 7.5 percent.

Inflation has moderated, and I think we've seen a big change. We've seen investment begin to come into Sri Lanka. We have had a program supporting these policies. This program continues through May of next year. It is clear that,overall, a lot has been done in Sri Lanka.

Sri Lanka has introduced new fiscal reforms to broaden the tax base, to remove exemptions, to bring these in line with international standards, and I think we can be quite confident the government and the central bank remain confident to carry forward these reforms.

We have just come back from discussions in Colombo just last week. We will continue these discussions for the current review while they are here in Washington. Our program is in force; our program continues through next May. We have a couple of more reviews left of that program, and we are working with the government to address the pressures that arise as they are recovering from the events of the last so many years.

QUESTIONER:

I'm just wondering, where do you think the biggest areas of overheating are in housing markets in Asia? And also, how could loan-to-value ratios and adjustments of loan-to-value ratios be used in a way that's sort of politically plausible to sort of mute those pressures?

MR. SINGH: Well, I'm going to ask my colleague, Nigel Chalk, to respond, but let me just say that we were asked earlier what are the risks and vulnerabilities we see in Asia.

Clearly, when you have emerging market growth at this level, there are risks. Among those risks are clearly what we're seeing in asset prices. It has been a major factor in China and Hong Kong. We have seen in China the government acting almost every couple of months to take measures. My sense is that in the markets in China, we've seen some decline in transactions and volumes. I think there is some evidence that the efforts are taking effect, but let me ask Nigel to speak more about this.

MR. CHALK: Yes, just from a China and Hong Kong perspective, I think we see in some of the large cities on the mainland and in Hong Kong itself, pretty high valuations on property, particularly relative to underlying incomes. And that's clearly a risk for financial stability and it's a risk for macro stability.

What the Hong Kong Government in particular has done is to approach this problem through a number of mechanisms--as you said, loan-to-value ratios--trying to insulate the financial system from any potential downturn in the property sector. That's been quite effective in terms of reducing leverage in the property sector, which helps insulate the economy should there be a property downturn, the financial sector will be pretty well protected.

Taxation of short-term transactions, particularly high-frequency flipping properties, and also land supply has been a very important strategy that the government has taken.

We've seen a succession of these measures over the past couple of years. They now seem to us to be slowing the market, changing expectations in the market, flattening off the pace of property price growth. I think it remains to seen, we'll have to wait for a few more months' data, whether what we're seeing now in the market is a slowdown in response to the uncertain global circumstances or is actually a more structural slowdown due to the measures the government has taken.

QUESTIONER: And there aren't any other areas, particularly outside Hong Kong, that you think are particularly interesting where there have been fewer actions?

MR. CHALK: I think really what we've highlighted in the property sector has been Hong Kong and China as being the main areas where we see quite high valuations.

QUESTIONER: Singapore?

MR. SINGH: Well, there have been quite a few pressures in other countries--been over the years--in Australia, some in Singapore where they have clearly moderated andin India.

So, I think we do need to look at property prices and asset prices across the Region, but it's most in China and Hong Kong.

You may say some more about Singapore.

MR. PRADHAN: Just to add on, Singapore's measures have probably been very effective. They're broadly similar to what Nigel has been describing for Hong Kong. They are loan-to-value ratios--probably a little bit more emphasis in Singapore on transaction taxes to raise the cost.

What's interesting is they have specific measures to discourage high turnover or flipping properties at a high frequency through escalating transaction costs over the years.

So, far, as you probably know, they've been taking these measures for about a year, and the latest kind of price data for the last two, three months, and transactions data suggest that they're quite effective.

I might add just a more general point, and this is a comparison, say, between Singapore and Hong Kong, where Hong Kong, given its unique monetary policy framework probably has to rely more on these types of measures, but interestingly, even countries which have more flexibility on monetary policy like Singapore are also resorting to these measures, the broader point being that, this time around, many countries are addressing asset price pressures through measures under than the kind of more general monetary policy.

QUESTIONER:

I have two questions.

The first is, if you monitor in recent weeks, the Indonesian rupiah has weakened, like, for example, in the middle of September they accelerated by more than 2 percent. Do you think that this trend is temporary? And do you think that Bank of Indonesia should intervene the rupiah and keep it below 9,000? And what is your view about intervening to support bond market?

And my second question is, our President plans cabinet "revamp" sometime soon. Do you think it is going to impact our economic performance?

MR. SINGH: Thank you very much.

I'm very happy to say that, just yesterday, my colleagues and I met with the Ministry of Finance from Indonesia; we had a very good discussion.

Let me just tell you that we did discuss a lot the importance of raising infrastructure investment in Indonesia. I think it is important to recognize that, while Indonesia's growth rate has really increased a lot in recent years, we agree that the potential for Indonesia is even higher, and with implementation of the kind of infrastructure initiatives, PPPs, and other policies that the Ministry of Finance has in mind, we can be reasonably confident that as you look ahead in the medium term, Indonesia's potential is going to rise beyond 6.5.

Now, why do I say that? I say that because as you look to the medium term, beyond the next two or three days, it's more important to realize that Indonesia would remain an economy that's going to be attractive to foreign investment.

And, as we look at capital flows, clearly Indonesia has benefitted a lot already. But in recent days, clearly there have also been significant equity losses.In some ways, the Indonesian equity market I think was significantly hit in the last few days. It has also shown up in Asian currencies. There has been--I presume there's been some some intervention, but I think we should look beyond that.

I would look over the next few years to the likelihood that potential growth could rise. Look at what the Ministry of Finance has in mind in terms of infrastructure, broadening the basis of growth, and I think we can be confident that Indonesia will remain a very attractive emerging market to get new investments. The challenge is to get the investments into areas and sectors that will build potential growth. This is the Minister’s target, we will work with him towards that, and we are also confident that Indonesian potential remains very high.

As for changes that the President might take, I clearly have no idea, but I am very confident that the economic team is strongly committed to maintaining macro stability and increasing potential growth in Indonesia.

MR. PRADHAN: Can I just add, on your question on intervention, I think the intervention in the exchange rate market has been appropriate, and the reason I say that is because, Indonesia, like some other countries in the Region for the last two years, the capital inflows they've experienced has a very, very large presence of foreign investors in the local bond market, and what's important for the exchange rate is that part of the intervention activity of Bank of Indonesia is to maintain liquidity, because you see this global volatility and one-way flows, meaning outflows, at present, the foreign exchange market becomes very liquid, and where Bank of Indonesia has been intervening, it is not only to support an exchange rate level. As you said, the exchange rate has also been affected fairly substantially, but it's also to support liquidity in the market to make sure there's a two-market and where they're intervening is the one month forward.

We are less sure whether they should be intervening in the local bond market. I think the local bond market is where they should let yields rise. That is the volatility that foreign investors should be getting accustomed to.

So, while we support the intervention in the exchange rate market, we think they do not need to intervene, or to be that supportive, of the local bond market.

QUESTIONER:

I just wonder, have you ever evaluated the size of possible outflow from the emerging markets, I mean, different stages of euro crisis, such as, I mean, if Greece defaults, how large the outflow might be.

MR. SINGH: Well, that's a broad question. Let me just make one or two small points, and that is we have seen that net capital flows to emerging markets, including Asia, they've certainly been highly correlated with global financing conditions.

We've seen that when we have low global interest rates and low risk aversion, capital flows to emerging markets certainly have risen, as you know, significantly.

The concern of the last one year has been, what does Asia need to do deal with huge capital inflows. I think that's a very important point.

So, we are seeing some outflows now, it is not surprising, and I think the main point is that capital flows react quickly to risk aversion. If this rises as they have in recent days, it is quite normal that it would be a response to developments outside Asia. But if you look at where the Region has been and you look ahead the next few years, this two-speed global recovery or momentum will continue. Emerging markets in Asia will be growing much more rapidly than we thought advanced economies could. So, you will see that capital flows are going to come back, because it will be attracted both for cyclical and structural reasons.

QUESTIONER:

You alluded to the fact that the fiscal policies in several of the emerging markets are very accommodative.

So, given that backdrop, do they really have the firepower to fight back in a contagion that might emerge after--from the euro zone. And countries like India, which are in serious fiscal slippage, are they particularly more vulnerable?

MR. SINGH: Well, I would answer your question in two ways.

Firstly, in much of Asia, the scope to use fiscal policy is probably easier than in many other parts of the world, certainly compared to the advanced economies.

Particularly in China, were there to be the shocks to result from what's happening and what could happen in Europe, I think China has the room to reintroduce a fiscal stimulus, although in the case of China, it probably should be directed towards consumption and not investment, because that will be consistent with its rebalancing.

Let's talk about India. I think India has made it very clear that it wants to address the inflation pressures. We know that inflation has remained high compared to targets. The WPI has been close to double digits, and we can be convinced that the authorities, the Reserve Bank of India, remain committed to bring this down to target range.

At the same time, I will say that the government has put forward a budget deficit target for this year which is ambitious and challenging, but also appropriate. They are targeting a fiscal deficit in our definititon of about 4.5 to 4.6 percent of GDP; the government recognizes clearly that this will need certain further reforms to subsidies--fuel, and fertilizer, but they are also trying to broaden the indirect tax base. They are trying to improve collections. They are trying to make sure that the priority spending to education and health do not have to be cut.

So, I think there is a sense in India for fiscal reforms that will maintain spending to priority areas very important for growth and for inclusiveness while carrying out adjustment to subsidies that have been discussed for several years.

But let me ask Masahiko if you want to add to that.

MR. TAKEDA: First of all, I think it's useful to have a clear idea about the difference between deficit and debt.

And when we talk about, say, fiscal normalization is appropriate or can continue, we are talking about the size of fiscal deficit relative to domestic demand.

But when you talk about firepower, the question is how large the debt is, how much more you can add fiscal stimulus without threatening debt sustainability. So, that's a useful distinction. And I guess not all but many Asian countries have still--their debt level is not that high. In that sense, firepower might be there.

But in the case of India, it is known to be a relatively high-debt country. So, the government has a debt reduction target, we are supporting it, but also this is a bit similar to the Japanese situation. The Indian debt is not extensively owned by foreigners. So the domestic savings base have been supporting India's debt.

So, in that sense, although the level of India's debt is higher, we are not that much worried about it. My sense is that India does have the firepower if fiscal policy has to be mobilized to cushion the external shock.

MR. SINGH: Just one more point on that.You know from the attention the Prime Minister has given in recent years in India to building infrastructure in a sustainable way, this is a major target.

So, fiscal reforms are being taken to ensure that this goes ahead, priority spending takes place, and other fiscal reforms are supposed to be consistent with ensuring sustainability over the medium term.

QUESTIONER: I'm interested in the impact on Asia, obviously, of the Eurozone crisis and the U.S. near crisis. I mean, you know, we're obviously not looking at a short-term slowdown this time, we're looking at a potentially fairly long slowdown in both Europe and in the U.S.

Now, in that situation, how much insulated is Asia, really? So, first could you say whether you're seeing that in banking flows, interbank transactions, capital flows, equity markets, or what?

And secondly, at the time of the 2008 crisis, there was a clear perception that the authorities were going to act very decisively. This time, I don't think there's any such perception.

In that situation, do you think that the psychology in Asia that is supporting relatively high consumption and domestic investment can persist or inevitably will it be sucked down into the vortex?

MR. SINGH: Well, these are key questions.

As you can imagine, we are doing all kinds of models to illustrate what are the effects. Essentially, what we learn from some of our models is that were there to be a drop of 1-2percent of growth rates in the advanced economies, the effect on Asia would be significant. For example, for larger Asian economies, a 1 percent decrease in US GDP growth could lower growth by at least about 1/3 percent.

A lot depends on what Asia can do to compensate, and I think both for the global economy and within Asia, the role of China is very important, as we saw in 2008, 2009, and 2010.

Now, our sense is that China has the room to return to greater fiscal stimulus if needed. Our sense is it will help them if this is done more through consumption, fiscal spending in consumption-related areas, education, and health.

But having said that, we also realize that probably the impact of any new stimulus from China would probably be less both in size and effect than it was a few years ago.

And therefore, overall, we cannot or should not expect China or Asia to be able to respond in a way that will very significantly offset the effects from Europe.

Our best guess is that probably China could offset about a a quarter of the shock. So, overall, our view is that Asia would be affected significantly, and this is why we are saying that the time has come to advance rebalancing, but we recognize that, to advance the rebalancing of policies is not easy because this is an exercise that needs to take place over several years; it cannot be done overnight. But there is room to advance it, to stimulate it, but I think we cannot say that China or Asia can act in a way that would fully offset. No, that is not going to happen. They will be severely affected.

MR. PRADHAN: On the first question, where are we seeing stresses in financial market. I would say, compared to 2008, the reaction of financial markets is a little better. And by that, I mean, we're not seeing any problems in inter-bank markets. We're not seeing any problems, any significant problems, in dollar funding markets. That's partly because the Fed swap lines are being reactivated, at least for the major central banks.

What we are seeing is fairly straightforward reduction of foreign investment positions in Asia, and the largest price moves, not surprisingly have been in markets that are just large and liquid. So, it bears no relation to what might be the longer-term impact of slower growth in Europe and the advanced countries on Asia as Anoop has been talking about.

So, the largest reactions you see are Hong Kong, Korea, India, Indonesia, that's because that's where the largest investment positions are, and some of these markets are the most liquid in Asia. So, you don't see a lot of reaction in other countries, but that could be very different from what the real channels of slower growth in the advanced countries and how they will affect countries differently in Asia.

So, clearly, India, China, Indonesia, which are larger domestic demand economies where at least growth comes more from domestic demand may be more insulated than the export-oriented economies.

Thanks.

MR. SINGH: Maybe on China, do you want to say some more about the room and what we think China could do if they are forced to act.

MR. CHALK: Yes, I think the first thing to point out is where we see the current global outlook, our WEO forecast, our baseline scenario, we don't see any need for further stimulus. The economy is doing pretty well. Growth is humming along nicely.

Of course, if there was a major external shock, that would hit China hard through trade channelspredominantly, financial channels much less so, given the capital controls and lack of exposure of Chinese banks to Europe and the global markets.

Should that happen, there is plenty of scope of China to respond. That response, in our view, should predominantly come through the budget, much less so through the banking system and through credit, as happened in 2008 and 2009.

There's scope to reduce taxation on labor, support consumption, including through reductions in the taxation of consumption, transfers to low-income households, transfers to people who are unemployed, continuing to build out the social safety net in pensions and healthcare. All of these things we think would both provide direct stimulus to the economy and support demand, but also would help achieve the rebalancing that is being prioritized by the government in their five-year plan. So you would basically get a twofer in that type of policy, rather than a very investment-oriented stimulus, where you move away from the broader agenda of rebalancing and getting private consumption to drive the domestic economy.

MS. UTSUNOMIYA: Okay. Let me take a question from Online Media Briefing Center.

"What are the effects of the U.S. Fed's operation in the IMF outlook for ASEAN-5? What are the challenges and opportunities for ASEAN-5?"

And also, he has Philippines' specific questions: "What is the potential for the Philippines to exceed IMF's growth forecast of 4.7 percent in 2011 and 4.9 percent in 2012? What needs to be done? What are the challenges faced by the country in trying to meet and/or exceed this forecast?"

MR. SINGH: All right. Thanks, thanks very much.

Like for other countries, I think our estimates for Philippine growth have been somewhat moderated. They have probably been reduced below 5 percent to something like 4.7, 4.8 for this year, and around close to 5 for next year.

The main point I will say is that our assessment of the medium-term potential growth remains at least at 5, probably more, and this is based on our assessment of trends in productivity, what we see in investment and employment.

The most important point that I will say is the government clearly has in mind significant--like Indonesia -- reforms, including infrastructure, PPPs, building public investment, catalyzing private investment, improving governance.

My sense is that as you look at Philippines over the medium term, like Indonesia, we can be fairly confident that as these investment reforms are undertaken and implemented they catalyze both public and private investment. It also makes growth more inclusive.

We can be fairly confident that the government's projection of raising growth to a potential rate of 7 to 8 percent, this can be reached. I think many countries in ASEAN are in a position now where they are dealing with investment. We have seen over the last 10 years that private investment and public investment in many ASEAN economies did not recover significantly from where we were 10 years ago, and this is now a major part of the objectives of ASEAN authorities. We've seen this in Indonesia, we've seen this clearly in the Philippines, we've seen this as an investment intention by the new government in Thailand. We are seeing what Malaysia is doing, not just to build investment but, for example, Malaysia is also broad-basing its growth, building its service sector.

So, we are seeing in many ASEAN economies policies to go beyond export orientation, to build the services sector, to build non-tradable sectors, and most fundamentally, to ensure that public and private investment rise so that the potential growth can be raised over the medium term.

I will be very positive as we look beyond the next few days and weeks and months to what governments in ASEAN are projecting for investment and potential growth. These are achievable.

MR. TAKEDA: There was another question about U.S. monetary policy: on the impact of "Operation Twist". I think the way to look at it might be the following: There are broadly two effects coming from that to, say, ASEAN-5 countries in this case, and major emerging market countries in general.

Number one, if that helps U.S. recover, then that is generally positive for the U.S. as well as the rest of the world.

But the second one which has been cited as a side effect of U.S. monetary easing is that might encourage an outflow of capital from the U.S. and excessive appreciation of the exchange rate in emerging market countries. But clearly, right now, that's not an issue. If anything, the global risk aversion is moving the capital in the opposite direction. So, it is highly unlikely that operation twist will have such an effect.

MS. UTSUNOMIYA: Okay. Last question, please.

QUESTIONER: Thank you.

My question is, I know you mentioned about capital inflow into this Region, but we are also seeing a hiking outflow from this Region, especially in terms of foreign reserves. So, how do you find the influence of the hiking outflow of the emerging markets from the Asia Pacific to the advanced economies and is influences towards exchange rate system.

And the second question is, before the financial crisis, lots of Asia Pacific countries trying to open their capital accounts, but after the crisis, some of the governments are more hesitant in opening. So, how do you find this problem?

MR. SINGH: Well, thank you.

On the first issue of capital flows, I think we had an answer from my colleague Masahiko how we can expect trends to develop in the coming days, but I would look beyond just the next few days to look at where things will be over the next few years.

I think Asia, China are building frameworks to attract FDI in the Region in sustainable areas that will raise potential growth. I think we can be quite confident this will continue. As I said until a few months ago, we were talking about what Asia can do to moderate inflows. We are now somewhat concerned about outflows; I think that will change.

I think it is very closely correlated to risk aversion. Right now, the risk aversion is one direction, as that changes, we will see capital coming back.

I think much of Asia, especially ASEAN economies, opened their capital accounts a long time ago. I remember Indonesia was almost the first country to open its capital account many decades ago.

I think what we have seen is that, in recent years, countries have taken a more measured approach, and we do believe this kind of capital account opening needs to take place carefully on a measured basis.

We've seen that India has been careful in opening its capital account, and I think the process of integration is taking place. I think we would see further capital account opening as part of overall integration being built in Asia, not just in trade, but in the financial side.

My sense is, as you look ahead the next few years, we will see much more financial integration within Asia. It needs to happen, including deeper bond markets but, fundamentally, more financial integration within Asia.

MR. PRADHAN: Briefly, I'll just add to that.

I think what you're seeing in terms of capital market measures are what we call macro prudential measures. None of the measures that we've seen in the last two years have actually restricted capital outflows into Asia, and for many of the ASEAN economies, as well, including Korea as well. None of them are restricted, most of the equity and fixed income markets are still completely open.

Thanks.

MS. UTSUNOMIYA: Okay. Thank you for attending and thank you for sending questions. Please note that Asia Pacific Regional Economic Outlook will be released in a few weeks' time.

MR. SINGH: Thank you all.