Pursue reform or be the ‘new mediocre’


The global economy is finally stabilizing nearly a decade after a major financial crisis erupted, but new challenges are emerging and it is up to Asian economies to turn risks into opportunities to avoid becoming the “new mediocre,” the Philippine central bank governor said.

In an opening statement late Monday at a financial forum in Cebu, Bangko Sentral ng Pilipinas (BSP) Governor Amando Tetangco Jr. highlighted four key areas of global change that could make or break these economies in the region: growing protectionism, financial spillovers, the middle income trap and demographics.

“Asia’s ability to withstand these shocks will crucially depend on the structural reforms and proactive policies that it will undertake in key areas. A misstep in this direction and Asia may also become the ‘new mediocre,’” Tetangco warned.

The gathering was the BSP-Official Monetary and Financial Institutions Forum (BSP-OMFIF) Debate—a sideline event of the 3rd Association of Southeast Asian Nations (Asean) Finance Ministers’ and Central Bank Governors’ Joint Meeting and Related Meetings held on Mactan Island.

Citing International Monetary Fund (IMF) data, Tetangco said global growth will continue to gain momentum to 3.4 percent in 2017 and 3.6 percent in 2018, from 3.1 percent in 2016.

The World Economic Outlook of the IMF also showed growth projections for emerging and developing Asia at 6.4 percent in 2017, before moderating to 6.3 percent in 2018.

The Asian experience
“Asia, like the rest of the world, suffered significant impact from the Global Financial Crisis but it proved to be resilient,” Tetangco said, referring to the 2008 crisis.

He cited empirical evidence showing that relative to the rest of the world, the depth of the output decline in Asia was smaller by almost three percentage points and the cumulative output loss was lower by 11 percent of annualized gross domestic product in the third quarter of 2008.

“[With this] let me list four things that could either be a risk or an opportunity… The list is not at all meant to be exhaustive, but it is representative. Therefore, whether Asia will follow the AE’s [advanced economies]new mediocre or not, would depend on how Asia would overcome the risks and/or take advantage of the opportunities,” he said.

Referring to the preparations being made by Asian economies against a growing tide of protectionism in the world markets, Tetangco said the level of openness in the region is varied.

Closer PH-Asean trade ties
“For some, like the Philippines, domestic aggregate demand has been the main driver of growth for years now. For others, like China, they have moved away from export-oriented to more service-oriented growth,” he said.

“In the meantime, intra-Asean trade has been increasing. In the case of the Philippines, Asean (as an aggrupation) has moved to become our number 1 overall trading partner,” he added.

Financial spillovers and inflation pressures
Tetangco warned of possible sudden asset price volatility in Asian emerging markets that could happen if and when the United States Federal Reserve raises its key interest rates further this year.

He said “disorderly reactions to possible US interest rate hikes and broader uncertainty about asynchronicity of monetary policies in advanced economies could lead to capital flow reversals and spikes in asset price volatility in Asian emerging markets.”

“This could contribute to large currency depreciation and inflationary pressures. Regional financial conditions are increasingly determined by global factors such as US interest rates and investors’ risk aversion,” he said.

Reform is key
In addition, the BSP chief said domestic vulnerabilities or slow progress of reforms could trigger a switch in investor sentiment, also leading to a sudden tightening of domestic financial conditions.

Many Asian economies are considered to be in a stage of development during which, historically, sustained rapid growth becomes difficult—a situation known as the middle-income trap.

After almost a decade of being above historical trends, potential growth in emerging Asian economies appears to have declined by about 2 percentage points during the past few years, Tetangco said, quoting an Asian Development Bank observation.

Sustaining growth through the middle-income band requires significant reforms to the institutions of economic policy-making and political processes, he said.

Thus, he added, for Asian countries to avoid the middle-income trap, sound macroeconomic policies that can effectively counter boom-bust cycles may be considered to create opportunities out of their favorable demographic trends, as well as policies that promote education and infrastructure, to build strong governance and institutions and foster greater trade integration.

Asia is entering a period of being at both ends of the demographic spectrum, he pointed out.

“While many East Asian countries are concerned with aging populations, other Asian countries are less affected. An aging population increasingly requires policy action for East Asian countries,” he said.

For countries that have relatively younger populations, such as India, the Philippines, Indonesia, and Malaysia, however, dependency ratios are expected to decline.

“Prudent policies can help mitigate the adverse effects of demographic trends,” he stressed.

Tetangco concluded that emerging challenges in the global economy will continuously test the resilience of Asia.


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