Interview with David Burton: Asia's economic outlook bright, with China leading the way

• Pages: 81-84

Page 81

IMF SURVEY: What is the IMF's assessment of the outlook for Asia in the near term and the longer term? What are the risks to this outlook?

BURTON: With the global economic expansion strengthening and deepening, the near-term prospects for Asia look good. For emerging Asia-which includes all of Asia except Japan-we expect growth this year to be over 7 percent, broadly the same as last year. This rate incorporates a modest slowdown in growth in China, to perhaps about 8!/2 percent, as investment, which is overheated in some sectors, is cut back. For most other countries, we see significant pickups in growth on the back of strong export performance. Page 82

Moreover, the balance of short-term risk is probably on the upside, with the global economy gathering steam and the information technology sector, in particular, doing well. A downside risk is avian flu, but that seems to be receding.

Looking further ahead, there are reasons to be optimistic, though significant risks are present. Our baseline scenario for 2005 shows growth slowing only slightly, as some economies revert to growth rates that are more likely to be sustainable. However, the risks are familiar-including the need for an orderly adjustment of global current account imbalances and for managing the transition to higher interest rates globally and probably higher spreads on emerging market debt. In addition, China will need to strike the right balance between preventing overheating and avoiding an unduly sharp cutback in investment, particularly as a sharper slowdown than we have in our baseline scenario would have ripple effects around the region. More generally, for growth to remain strong in Asia, the region needs to continue with its agenda of domestic reforms. This means completing corporate and financial sector restructuring and, in some countries, further reducing high debt burdens.

IMF SURVEY: Quite a few Asian countries-Indonesia, the Philippines, India, Korea, and Taiwan Province of China-have elections this year. Are there concerns over their political resolve to carry out reforms?

BURTON: There is always a risk that preelection spending will put a dent in the budget-this is especially a concern in countries where the budget deficit is already big-and that politically difficult reforms will be postponed. We hope that once these elections are over and the political picture is clarified, there will be a new resolve to carry forward with needed reforms.

IMF SURVEY: How much progress has Japan made in restructuring its financial and corporate sectors? And is its period of stagnation finally over?

BURTON: Japan has made significant progress. If you look at the corporate sector, profitability has increased, particularly in the bigger, more export- oriented firms. On the banking side, too, the big city banks have made quite a lot of progress in dealing with their nonperforming loan problem. Progress is a bit less marked in the regional banks. As for the recovery, it's been driven not just by rising exports- hence, by the global recovery-but also by a pickup in private investment, reflecting progress in restructuring. There is more to do, and it's certainly too early to say that deflation is beaten. For the longer term, a big challenge will be reducing the high debt level and narrowing the large fiscal deficit.

IMF SURVEY: The ASEAN+3 economies-the 10 members of the Association of South East...