Thank you Minister Basri.
I would like to thank Indonesia for chairing the 20th APEC Finance Ministerial Meeting and to express my appreciation for your warm welcome, Minister Basri, and the stimulating discussion we had at our retreat.
What I take away from the retreat is a shared understanding that the global economy appears to be moving into a new phase, in which output in advanced economies is firming, albeit probably not as strongly as we would have liked. Developing country growth appears to be slowing, including in the Asia-Pacific region.
Our retreat, of course, came in the wake of the decision by the US Federal Reserve to defer its tapering of quantitative easing. As we noted, it is a positive move in the short-term for both developing and high-income economies.
We know governments have now been given some breathing space.
Clearly the risks and uncertainty about eventual tapering remain. But this is the time for policy makers to seize the moment and address domestic vulnerabilities and reduce external financing exposures.
So what is the economic outlook? For the most part, the views of the World Bank Group are similar to those of the IMF. Global GDP is projected to expand about 2.4% in 2013 and gradually strengthen to around 3.2% and 3.5% in 2014 and 2015. And APEC emerging markets and developing economies are expected to contribute almost 50% of future world growth.
In advanced economies, growth is recovering on the back of accommodative policies. GDP growth has turned positive in Europe, strengthened in the US and remains robust in Japan.
This momentum is expected to continue into the second half of the year, despite fiscal consolidation, buoyed by a recovery in the housing market and employment growth.
Outside of India, the impact of the expected accommodating monetary policy on the Asia-Pacific region has been limited so far.
After slowing down for several quarters in a row, growth in China is now showing signs of stabilizing at 7.5 percent, due to external conditions and domestic policy aimed at rebalancing growth away from investment and exports.
Despite gradual adjustment to tighter financial conditions, growth in other developing countries is firming or holding steady. Excluding China and India, developing country import volume growth rose by more than 5% in the second quarter.
However, for many APEC economies, the balance of risk is once again on the upside.
The cost of international bond financing for developing countries has increased by 88 basis points since May.
As QE policies are withdrawn, interest rates will likely rise further, which will increase debt-servicing costs and raise the cost of capital.
On the positive side however, when tapering does happen it will signal further recovery in the US. Weaker exchange rates in developing countries will boost exports over time.
China’s moves to rebalance away from its dependence on investment and rein in credit growth could have significant implications for developing countries. Slower investment growth, and consequently slower GDP growth, could call into question the profitability of past investments and associated loans, with potential effects in the region.
Excess capital inflows from loose monetary policies have fuelled asset price inflation in neighboring countries, increasing the risk of property bubbles.
As liquidity is restrained and interest rates rise, the tapering of QE could have more serious consequences in the APEC region.
So what can be done?
In countries that have already recovered from the crisis, macroeconomic policy stances may need to be adjusted to contain or prevent inflation, asset-price bubbles, and deteriorating current accounts. This would also help restore depleted policy buffers, which may be needed in the future.
The countries most vulnerable to swings in global capital flows could continue to strengthen their balance sheets, by reducing their reliance on short-term and foreign currency denominated debt.
The significant effort throughout the region to develop local currency bond markets is clear evidence that policy makers have understood and responded to this need.
One of the main risks for the Chinese economy appears to be domestic with regard to the ability of firms to continue to service loans issued during the investment boom. If the decline in investment rates in China is done in an orderly fashion, it will help other East Asian economies to adjust their spending cycle.
It will surprise no one at this table to hear that I am convinced that countries in the Asia-Pacific region need to make structural reform a priority in order to extend their growth potential, which remains 1 to 2 percentage points below pre-crisis levels.
To sustain faster growth, developing countries will need to redouble efforts to reduce bottlenecks by improving their investment climate, investing in infrastructure, improving labor utilization and boosting productivity.
The APEC Finance Official Process, under Indonesia’s Chairmanship, has rightly identified infrastructure financing as one of the priorities for our discussion this year. In times of uncertainty, it is particularly important to focus on long-term and stable investment.
In developing countries alone, financing needs have been estimated in the range of US$1 to US$1.5 trillion per year.
Addressing these long-term investment needs will require significant progress in project selection, quality and implementation, coupled with mobilizing private financing and capital markets. This is why we at the World Bank have started looking into the creation of a Global Infrastructure Facility as a very practical way to leverage public and private resources.
Challenges also arise from a changing pattern of competitiveness and comparative advantage as emerging economies increasingly penetrate global production and trade. So future growth in advanced economies will require supporting a recovery of demand as well as a reallocation of resources to new sources of growth – new products, new services, and new jobs, which can sustain good lifestyles.
Maintaining economic systems that allow people to benefit from growth has been a feature in the Asia Pacific region over the past decades. This is vital to ending extreme poverty and boosting shared prosperity. We hope it continues.