The Global and Regional Outlook

The Global and Regional Outlook Task Force on Economic Challenges’ Meeting 8 December 2008 Olaf Unteroberdoerster Resident Representative, Hong Kong SAR, International Monetary Fund

The global economy is set for a major downturn

Despite aggressive policies to stabilize markets…

... credit is rapidly decelerating

History suggests that banking stress brings severe and long recessions

A significant slowdown is expected in the U.S. economy, raising the specter of deflation

The U.S. recession is going to be more severe than in 1991

However, large risks to the forecast…

…because the housing downturn could be sharper than expected…

...and credit growth could be even lower than expected

The corporate sector may already be coming under severe stress

What does this mean for Asia? Growth to slow sharply next year…

…and coming exclusively from domestic demand

However, downside risks abound

The forecasts assume smaller export and domestic demand slowdowns than in previous crises…

...and recent data show a sharp contraction in demand for Asian exports

…as well as rapidly softening domestic demand...

Slower growth and tighter funding conditions may put pressures on corporate Asia

Some countries may be more vulnerable than others • Vulnerability factors differ across countries and include: • Current account deficits • Reliance on wholesale funding, including by banks • Significant foreign participation in domestic equity and bond markets • Corporate stress from sudden stops in financing • Domestic macro imbalances • Property sector booms • Lower commodity prices

Policies needed to support corporate sector and aggregate demand... • In many cases, room to ease monetary and fiscal policy further to address downside risks to growth • Need for public recapitalization of banks cannot be excluded. • Action is needed to guarantee trade financing • Direct support to corporates may be required if banks do not resume lending • Aim to minimize distortions • Formulate exit strategies

Longer term challenge: a new financial architecture... • The G-20 Summit on Financial Markets and the World Economy focused on reforms needed to address the weaknesses exposed by the financial crisis • Priorities for reform include: • strengthening transparency and accountability • enhancing sound regulation • promoting integrity in financial markets • reinforcing international cooperation, and • reforming international financial institutions

...and a new role for the IMF • Enhancing the resources of the Fund in line with increasing private sector flows • G-20 summit agreed to review the adequacy of resources • Resources could be increased by large Fund quota increase, in tandem with increasing voice of emerging markets and developing countries • The Fund, along with an expanded FSF, should identify vulnerabilities and provide early warnings, and develop recommendations to mitigate pro-cyclicality • All G20 members to undertake FSAPs

The Global and Regional Outlook