As prepared for delivery
Dear Associate Dean Grimes, Professor Kring, distinguished guests, ladies and gentlemen,
1. A warm welcome to AMRO! We are honored to host this Roundtable at our office in Singapore and to partner with Boston University’s Global Development Policy Center, as well as with the Kyoto University School of Government and the Japan Foundation Center for Global Partnership. We also welcome our friends from the IMF who will be joining in the panel discussion today, and experts and practitioners from Singapore and from abroad.
2. This Roundtable brings us together to discuss how regional financing arrangements or RFAs can work together with the IMF to scale up and leverage regional expertise, while maintaining the principle of regional governance. This topic is at the core of what we do in AMRO, which is conducting macroeconomic surveillance and supporting the implementation of the Chiang Mai Initiative Multilateralisation (CMIM), the RFA for our region. As a young international organisation, we greatly value collaboration with peer international organisations and among the different layers of the global financial safety net, as well as our stakeholders, especially those in the financial sector and academia. In this regard, AMRO has signed MoUs with the IMF, the ADB and with the European Stability Mechanism (ESM) to forge strong partnerships.
3. This is also a very timely Roundtable as many of us will be going to the IMF and World Bank Annual Meetings in Bali, Indonesia, next week. AMRO will co-organise the third RFA High-Level Dialogue with ESM and FLAR (the Fondo Latinoamericano de Reservas) on the morning of 10 October, and in the afternoon of 11 October, AMRO, ADB and Bank Indonesia will jointly host a High-Level Policy Dialogue on the theme of “Regional Cooperation to Support Innovation, Inclusion and Stability in Asia”. We hope you can join us if you are in Bali next week.
4. My AMRO colleagues will share with you during the panel discussions on how we engage in the process of macroeconomic surveillance. What I would like to share briefly here is our overall assessment of risks facing the ASEAN+3 region.
5. The state of the global economy now gives us cause for both optimism and worry in our region. There is optimism because the U.S. economy, one of the drivers of global growth, is growing robustly due to a strong cyclical upturn in capex and boosted by fiscal stimulus. The Eurozone is continuing its robust recovery despite the shadow of Brexit. In normal circumstances, growth in developed economies would support global growth, and in turn external demand for our region and our region’s growth. Instead, the outlook for our region has been clouded, first by trade protectionism initiated by the U.S. and second, by tightening of global financial conditions. We have maintained our growth forecast for ASEAN+3 at 5.4 percent for this year and shaved our forecast for next year to 5.1 percent, and we are closely monitoring developments for downside risks that may shift our forecast.
6. The U.S. unilateral trade actions targeted mainly at China, with spillovers to our region, threatens not only regional growth, but can backfire on the U.S. Despite the tariffs, the U.S. trade deficit with China has continued to widen because fundamentally, the U.S. economy is importing, producing and consuming more with a robust economy. AMRO’s estimates consistently show that both the U.S. and China would lose in a trade war. In May this year – before the U.S. escalation of tariffs in June – we had done a simulation of a limited trade war between the U.S. and China and the results show that such a scenario can shave 0.2 to 0.4 percentage points off both U.S. and China’s economic growth and about the same magnitude from other regional economies because of the spillover effects. With the escalation in the past three months, our preliminary estimates for a worst-case scenario are that the losses on both sides could be three times higher. Some have said there could be trade and investment diversion to some of the ASEAN countries, but these effects take time to materialise and in the meantime, the impact on the regional economies through the regional supply chain and through rising policy uncertainty, will be significant and negative. More importantly, the disregard for international institutions and a rules-based multilateral trading system sets a dangerous precedent, and the region, which is among the most open to international trade, has to rally to defend this international system that has worked so well for so many.
7. The second risk of tighter financial conditions is well anticipated by financial markets and policymakers in our region and, so far, the U.S. Federal Reserve has communicated its intentions clearly on the path of monetary policy tightening. Compared to the “taper tantrum” five years ago, the U.S. economy now is growing robustly and this will test emerging markets globally, as the robust U.S. economy and rising yields cause investors to rebalance their portfolios and pull capital back to the U.S. Emerging markets in our region have received large capital inflows over the past decade, and some pullback, in line with other emerging markets, is to be expected. The normalisation process need not be disruptive. Emerging market valuations are not as high as they were five years ago. Emerging markets in our region have also wisely taken advantage of the strong capital inflows during the past decade to build up reserve buffers, and implemented macroprudential policies to contain the rise in financial vulnerabilities. This has paid dividends as investors differentiated our region from other emerging market regions this year during episodes of financial market turbulence. Nevertheless, escalating trade tensions could interact with tightening global financial conditions to amplify external shocks to our region, and we have to remain vigilant. In recent months, policymakers in our region have also demonstrated clearly through their pre-emptive, frontloaded and ahead-of-the-curve policy measures that they clearly prioritise financial stability in these uncertain times.
8 As Director of AMRO supporting the regional financial safety net of CMIM, it is our mandate to always keep an eye on the risks and stand ready with our policy advice. My message today is that it is not too late for the policymakers gathering in Bali next week to steer the global economy in the right direction. We hope that when we look back this time next year, we can look back at another year of shared prosperity.
Thank you, and I wish you all a fruitful seminar ahead.