According to the IMF’s October 2014 update of its analysis of the Asia-Pacific region, Asia’s near-term growth prospects remain solid, in contrast to downward revisions for other regions. Despite a mild slowdown earlier this year, the Asian economies are expected to grow 5.5 percent in 2014 and 2015, broadly sustaining the pace of the last two years. With some exceptions, the inflation outlook should remain benign across most of the region.
Downside risks have increased, but so has resilience, including in countries most affected by the period of heightened volatility triggered by the market’s reaction to taper talks by the U.S. Fed last year. Nonetheless, the authorities in the region need to take further action to strengthen policy buffers and address medium-term challenges to stability and growth.
What is driving Asia’s solid growth prospects? First, stronger global growth should help boost exports across most of the Asia-Pacific region. Second, global financial markets have rallied, buoyed by expectations of increased growth and risk appetite. Policies in Asian economies have also been generally supportive—in particular, real short-term interest rates remain below their levels prior to the global financial crisis. These factors should help support robust domestic demand growth going forward.
The IMF expects the positive spillovers from Asia’s steady growth momentum to benefit the small island countries in the region, including Solomon Islands, according to the October issue of the Asia and Pacific Small States Monitor. Average real GDP growth in Asia’s small island economies, which stood at 1.5 percent in 2013, is expected to climb to 2.3 percent in 2014 and 3 percent in 2015. In particular, investment in Pacific island countries’ domestic infrastructure, along with steady growth in emerging Asia, Australia, and New Zealand, are expected to underpin the short- and medium-term economic performance in the small Pacific island economies. In addition, such country-specific factors as the increased confidence following a return to democracy in Fiji and robust tourist arrivals in tourism-intensive economies have also helped boost growth prospects. High-frequency indicators in several small island economies already point to a pick-up in domestic demand in the first half of this year.
The impact of the severe floods that hit Solomon Islands last April and the ensuing disruption in gold production, owing to the closure of the Gold Ridge mine, have weakened economic performance. Nonetheless, there are incipient signs of economic recovery. And the IMF’s Extended Credit Facility (ECF) program with Solomon Islands is also helping restore growth in the country, thanks to the authorities’ strong commitment to the reform agenda.
Despite the solid outlook, Asia continues to face significant risks to stability and growth amid a still weak and uneven global economic recovery. In the near term, investors could overreact to rising U.S. interest rates and pull money out of the region. Higher corporate leveraging and rising household debt could also amplify the adverse effects of higher interest rates. Finally, an escalation of geopolitical tensions could hurt exports and economic activity more broadly.
What role should policies play?
Addressing medium-term risks calls for a renewed push for structural reforms across the region. Solomon Islands has been making significant progress in implementing ambitious structural reforms in the context of the ECF-supported program. Recent reform efforts in public financial management (PFM), including publication of the PFM roadmap and the mid-year budget outlook, constitute major strides in the right direction. Such reforms, along with a sound mix of macroeconomic policies to maintain adequate policy buffers, would not only make Solomon Islands’ growth stronger and more sustainable, but would also strengthen the economy’s resilience to external shocks. An IMF mission led by Patrizia Tumbarello will visit Honiara in January 2015.
By Patrizia Tumbarello,
IMF Mission Chief for Solomon Islands