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Posted on 30 Mar 2022

Message from Secretary General_January 2022: IMF Forecasts for 2022 and Implications in ASEAN

Towards the end of 2021, there was hope that the pandemic situation was going to improve, until the Omicron variant arrived. 2021 left and 2022 arrived and there appears to be no end to the COVID19 pandemic worldwide.

IMF Forecast for 2022

The International Monetary Fund (IMF), in their 25 January 2022 announcement, moderated their global growth forecast to 4.4%, lower than the original GDP growth of 4.9% for 2022. The reduction is mainly due to the markdown in forecasts for the largest 2 economies (US and China):

• A revised assumption removing potential fiscal policy package from the baseline, earlier withdrawal of monetary accommodation, and continued supply shortages (↓1.2% for US).
• Pandemic-induced disruptions related to the zero-tolerance COVID-19 policy and protracted financial stress among property developers (↓0.8% for China).
• Other developed economies are facing weaker demand, supply disruptions, mobility restrictions and labour crunch amid the ongoing pandemic situations

The IMF also expects inflation to remain elevated at around 3.9% for developed countries and 5.9% for developing economies in 2022. Food prices are also expected to rise 4.5% globally due to supply disruptions. 

Global growth is expected to reach 3.8% in 2023, as drags on growth dissipate in the second half of 2022.

IMF Forecast for ASEAN 2022

ASEAN-5 (Indonesia, Malaysia, Philippines, Thailand, Vietnam) growth has been revised to 5.6%, down 0.2% from the October 2021 forecast, for the similar reasons above.

IMF has reduced their 2022 forecast for Indonesia to 5.6%, down 0.3% from the October forecast. 2023 growth was also revised to 6% from 6.4% previously.

Similarly, the 2022 forecast for Thailand was reduced to 4.1%, down 0.4% previously. However, 2023 forecast was up by 0.7% to 4.7%.

For Malaysia, growth for 2022 is expected to be 5.7%, down 0.3% from October 2021 forecast. The 2023 forecast remained unchanged at 5.7%.

Forecast for Philippines remained at 6.3% for 2022, while in 2023, the economy is expected to grow at a 6.9%, a slight 0.1% lower compared to the previous forecast.

There was no published forecast for Vietnam, although it is part of the ASEAN-5 forecast.

Risk to the Outlook

The outlook is based on assumptions and potential risks that may affect the outlook on growth:

• Ongoing pandemic

• Slow vaccination program in emerging and developing countries, affecting recovery
• Spread of the less severe but more transmissible Omicron, threatening labour shortage, increasing pressure on hospitals and may lead to more mobility restrictions
• Severe illness, hospitalisation, death cases are assumed to reach low levels in 2022; this may not happen as mutations may prolong the pandemic

• The US tightening monetary policy may lead to capital flight from other countries during recovery and increase debt risks for businesses
• Duration of supply disruptions, especially due to:
  • Bottlenecks at the ports and land transport, though shipping capacity is also limited
  • Potential labour supply crunch, mostly in the US
• China’s economy slowing down that may have spill over effects on exporters and emerging / developing markets due to
  • Leverage property developers
  • Exposed bank and financial institutions as they may tighten credit
  • Less investments and private consumption
• Climate Emergency
  • More natural disasters (floods, droughts, wildfires) are expected and these will strain supply chains and increase inflation

• Geopolitical Tensions in Europe and East Asia, threatening energy supply, trade flows and policy cooperation needed to recover from the pandemic, all leading towards slower global recovery

How Should Policymakers Respond?

The IMF has called on policymakers to look into 6 areas:

Health Policies

Stamp out the pandemic globally by helping all countries with the fight against COVID19; this requires financing, vaccines, tests, treatments, equipment and other efforts. Without this, the virus is more likely to mutate and the pandemic will be prolonged. For countries with high levels of immunisation, there is a need to balance between risk of high number of cases and economic harm from mobility restrictions.

Monetary Policies

Interest rates are on the rise, as countries try to balance between fighting inflation and risking slowing down employment and economic recovery amid debt risks. Effective communication on tightening of monetary policies should consider potential market reactions that may result in financial volatility and tighter financial conditions.

Prepare for Tighter External Fiscal Conditions

Tighter external financial conditions due to external monetary policy tightening could lead to capital flights and higher inflation for countries still fighting the pandemic. Tighter policies in emerging and developing countries are likely to happen, to prevent pressures from such external conditions.

Fiscal Policy

Public finances are under strain as global public debt hit record levels to cover pandemic-related spending at a time when demand and tax receipts fall. Higher interest rates will make borrowing more expensive. Fiscal space is already limited and most countries would need to focus on targeted support to preserve fiscal sustainability. Further mobility restrictions will worsen the situation.

 

Higher growth and stronger tax revenues may be required for countries to avoid the risk of debt distress.

Structural Reforms

The pandemic has disrupted global economies and deep structural reforms are needed to offset the impact of the pandemic. IMF has highlighted the need for the catching up in education for those who have their education delayed without digital alternatives and reskilling workers during the shift towards a likely digital economy. IMF also called for the reduction of tariffs and trade barriers to ease supply disruption and inflation pressures. These, combined with a global cooperation on strengthening supply chain will help reduce the hoarding incentives and allow for smoother adjustments to future shocks.

 

Climate Policies

The IMF also pushed for urgent international action on climate change, where large coordinated global policies are needed to meet the new goals set at COP26 last November. Carbon pricing and reductions in fossil fuel subsidies can also generate resources to finance the needed policy response: green infrastructure investment and research subsidies for renewables and storage technologies, as well as compensatory transfers to those adversely affected by the energy transition. Adequately resourced multilateral climate finance initiatives are also needed to ensure that all countries can invest in needed mitigation and adaptation measures.

What are the Implications for ASEAN?

Based on the latest outlook, here are the key points:

1. Stamping out the pandemic is critical and delays to control the pandemic will create more mutations and strain public resources
2. Inflation is expected to remain high in 2022
3. External monetary tightening policy will affect capital flows
4. Interest rates are likely to go up to counter inflation
5. Effective communication on monetary policy is necessary to manage financial markets volatility
6. Fiscal space remains tight with high debt levels for many countries
7. Carbon pricing and reduction in fossil fuel subsidies can generate resources for climate change strategies and other fiscal needs

So, what’s next will depend on national level actions and performance. The upcoming quarterly results will help give some guidance on the 2021 economic performance as well as trends in the various ASEAN countries.

Source:SEAISI