Speeches & Transcripts

Sri Mulyani Indrawati Speech at 17th ASEAN Finance Ministers Meeting

April 4, 2013

Sri Mulyani Indrawati 17th ASEAN Finance Ministers Meeting Bandar Seri Begawan, Brunei Darussalam

As Prepared for Delivery

Your Excellencies, Ladies and Gentlemen.

It is a great pleasure and honor to attend this meeting on behalf of the World Bank Group and to meet again with many old friends and colleagues present here today.

I was asked to review recent developments and outlook for the global and regional economy and to suggest some key development challenges.


More than 4 years after the financial crisis hit, high-income countries continue to suffer from volatility and slow growth.

In contrast, developing countries have weathered the great recession relatively well.

Their growth rate is only 1 percentage point below the 2000 – 2007 period average.

Most developing country prospects remain solid.

East Asia in particular has become a global engine of growth, growing at 7.5 percent last year.

Measured in comparable prices, East Asia is set to contribute some 40 percent of global growth this year.

The risks for the global economy have declined, but remain and countries around the world remain vulnerable to commodity price shocks, potential demand shocks, a freezing of capital flows, and, from within the region, an unexpected slowdown in China.

Countries in East Asia are generally well placed to absorb external shocks.

International reserves are high, banking systems are much stronger than in the past; and most countries have the fiscal space to counter adverse shocks.

Financial market conditions have greatly improved since mid-last year, supported by policy action, but confidence remains fragile, and authorities should remain on guard for possible future disruptions

Three policy factors in particular have underpinned confidence in financial markets:

- The extension of quantitative easing in the US;

- The agreement on regional banking institutions in the EU and the ECB’s commitment to do “whatever it takes” to preserve the Euro; and

- Japan’s recently announced commitment to target higher inflation.

Renewed confidence and continued exceptional monetary policies in advanced countries re-ignited capital flows to developing countries.

Gross capital flows to developing countries bounced back strongly in the second half of 2012 Capital flows have remained strong with a record level of international bond issuance in early 2013.

Like in advanced countries, financial markets in developing countries have performed well since mid-last year.

Developing country bond spreads (EMBIG) have declined since June, and are now well below their long-term average levels.

Developing country stock markets have increased as well since June 2012, although high-income markets outpaced them.

Recent volatility following the Euro Finance Minister’s decisions on support for Cyprus illustrates how fragile financial market confidence still is, and is likely to remain for considerable time to come, as developed countries continue to reform their economies and financial systems.

The real economy in high income countries remains weak, but there are signs of a turnaround. Recent developing countries’ performance remains strong.

Activity in high income countries remained under pressure in the fourth quarter of 2012, plagued by concerns on the “fiscal-cliff” in the US and debt sustainability in the US, some parts of Europe, and to a lesser extent Japan.

Forward-looking indicators have turned more positive.

Purchasing Manager Indexes are on the rise.

Stock markets, boosted by continued exceptional monetary policy, have reached record highs, while unemployment and the housing market in the US have started to show more promising trends in recent months.

Recent performance has been more robust in developing countries, where industrial production grew at a 7.7 percent annualized pace in the three months ending December (the latest available data).

Developing-country import demand has recovered substantially, with Chinese imports expanding at a 23.2 percent pace in January 2013 and at a 15.9 percent (December) annualized rate in the other developing countries.

Prospects are for a modest acceleration of growth between 2013 and 2015

Global GDP is projected to expand at just below 2 ½ percent in 2013, and to gradually strengthen to around 3.3 percent by 2015.

For high-income countries, fiscal consolidation, high unemployment and fragile consumer and business confidence will continue to weigh on activity in 2013.

In particular Europe will continue to struggle for positive growth, while growth in Japan and the US will be stronger this year.

Better financial conditions, a relaxation of monetary policy, and somewhat stronger high-income country growth would prompt developing country growth to accelerate to around 5½ percent this year and slightly higher in 2014 and 2015 — roughly in line with growth of potential GDP.

We project GDP in East Asia and the Pacific to grow by 7.9 percent this year, and 7.6 percent in 2014.

Growth is still led by China, which is projected to grow by 8.3 percent this year, and some 8 percent next year.

ASEAN countries continue to show strong domestic demand, which compensates for a weak external environment. Indeed, for most of ASEAN’s members, growth is near capacity and inflationary pressure has started to re-emerge in some of them.

Further policy stimulus at this point in time seems therefore unwarranted for now.

The modest growth outlook is subject to downside risks

The likelihood of a serious crisis of confidence in the Euro Area has declined significantly, but remains a factor to consider.

Policy uncertainty in the United States still remains and possible fiscal deadlock could yet affect growth in that country as well as in the rest of the world.

While a progressive decline in China’s unusually high investment rate is expected over the medium-term, a disorderly unwinding could have significant consequences– particularly for developing commodity exporters.

Against this background, developing countries face considerable challenges

In the short run, there are two issues prominent on the agenda:

1. First, developing countries would have to remain prepared for possible disruptions in the global economy.

Commodity export dependent countries, some of which in East Asia, would in particular be well advised to prepare for possible disruptions in global growth.

Rebuilding policy buffers for fiscal and monetary policy action when needed would pay off, notably for those countries that currently show some signs of overheating.

2. Second, several countries in the East Asia region need to manage renewed strong capital inflows.

Maintaining an appropriate macroeconomic stance and sufficient flexibility in the exchange rate and applying macro-prudential measures to ensure these flows do no fuel asset bubbles are priorities.

Fortunately, the bulk of capital flows into East Asia.

In the medium run, developing countries would have to seek new sources of growth other than growing demand from developed countries.

1. Investing in infrastructure and education to enhance the potential growth rate of their economies.

Several countries in East Asia, in part because of their rapid growth, have run into bottlenecks in infrastructure and a shortage of skills, and removing those could accelerate growth.

With abundant liquidity in financial markets, financing infrastructure should not be an issue, but two challenges need to be tackled:

(i) The right vehicle for intermediation needs to be found.

- In this context, we at the World Bank closely follow the experience with the ASEAN Infrastructure Fund that you will be discussing at this meeting; and

(ii) The volume of bankable projects needs to be drastically increased.

- This requires not only improvements in sector policies, but also more funding for project preparation.

2. Further integrating among developing economies.

- ASEAN is an excellent example as to how regional integration with low external barriers among emerging economies can spur growth and productivity.

- Deepening this integration as already planned, and broadening this approach to include more countries can indeed be an important new engine of growth.

I would be pleased to further discuss these and other development challenges and policy solutions.

Thank you very much