Post on 20-Dec-2015
Developing Asia Developing Asia amidst the amidst the
global slowdownglobal slowdown
Economics and Research Department
Asian Development Bank2 April 2008
Key issuesKey issues
• Growth and inflation in 2007• Challenging external environment
in 2008 and 2009• Myth of uncoupling• Growth will ease but remain solid• Inflationary pressures will mount• Structural responses for long-run
growth
Growth in Developing Asia in 2007Growth in Developing Asia in 2007
• Region’s 8.7% growth in 2007 tested speed limits
• Led by PRC at 11.4%, highest in 13 years• India grew at 8.7%, marginally lower than
previous year• Philippines at 7.3%, a 30-year high
Developing Asia recorded highest Developing Asia recorded highest growth in 2 decadesgrowth in 2 decades
High growth rates were spread across many countries
Growth in Developing Asia in 2007Growth in Developing Asia in 2007
• PRC (4.8%), Mongolia (9%)• Sri Lanka (20.2%), Pakistan (7.8%), Bangladesh
(7.2%)• Viet Nam (8.3%)• Azerbaijan (16.7%)• Timor-Leste (8.9%)
Signs of overheating: rising consumer Signs of overheating: rising consumer prices, inflation hits 5-year highprices, inflation hits 5-year high
Growth in Developing Asia in 2007Growth in Developing Asia in 2007
• Subsidies: Indonesia, India• Tariff reduction: India, PRC• Export tax: PRC• Export restrictions: Viet Nam, India• Price controls: PRC, Indonesia, India
Responses to rising fuel and food Responses to rising fuel and food pricesprices
Resisting commodity price increases through administrative measures will have a high fiscal cost and will add to future inflation
Challenging external environment Challenging external environment
in 2008 and 2009in 2008 and 2009Coincident slowdown in G3Coincident slowdown in G3
Coincident nature will limit options for Asian suppliers to switch to new markets
2006 Actual
2007 Actual
2008 Projectio
n
2009 Projectio
n
GDP growth (%)
Industrial countries 2.7 2.3 1.5 1.9
United States 2.9 2.2 1.5 2.0
Eurozone 2.7 2.6 1.6 2.0
Japan 2.4 2.1 1.5 1.5
World trade volume (% change)
10.1 7.5 7.0 7.7
Challenging external environmentChallenging external environmentin 2008 and 2009in 2008 and 2009
• Oil prices: $10/barrel rise annually since 2002; $85/barrel projected in 2008
• Fertilizer (DAP) prices: $260/ton in 2006 to $768 in 2008 (Jan-Feb ave.)
• Rice prices: $185/ton (Dec 02), $378 (Dec 07), $700 (Mar 08)• Wheat prices: less than $200/ton in 2006 to $400 in 2008
(Jan-Feb ave.)• Edible oil prices: $650/ton in 2006 to $1400 in 2008 (Jan-Feb
ave.)
Fuel and food prices will test new Fuel and food prices will test new heightsheights
Myth of uncouplingMyth of uncoupling
Volume
-60
-40
-20
0
20
40
60
80
PRC MAL SIN TAP KOR PHI INO
% change
Q1 2007 Q2 2007 Q3 2007 Q4 2007
Dramatic decline of US computing Dramatic decline of US computing equipment importsequipment imports
Value
-60
-40
-20
0
20
40
60
80
PRC MAL SIN TAP KOR PHI INO
% change
Q1 2007 Q2 2007 Q3 2007 Q4 2007
Myth of uncouplingMyth of uncoupling
• Garment exports to the US from developing Asia weakened throughout 2007
• Footwear exports from Asia to the US fell sharply in successive quarters in 2007
• Toys, games, sports equipment exports to the US slowed in 2007
Asian fallout from slower US growthAsian fallout from slower US growth
Myth of uncouplingMyth of uncoupling
• Intra-Asian trade driven by vertically integrated Asian production chains
• Extra-Asian trade supported by G3 demand for final goods produced in these networks
• 61% of East and Southeast Asian exports directly meet final demand of G3
Intra-Asian trade cannot substitute for Intra-Asian trade cannot substitute for G3 slowdownG3 slowdown
Myth of uncouplingMyth of uncoupling
• Developing Asia’s ties to global financial markets have tightened
• Stock of financial assets as a % of GDP in developing Asia has risen quickly
• Cross-border ownership of assets and liabilities has grown
• East Asian equity markets now track US equities more closely than before the 1997 Asian financial crisis
Financial integration and contagionFinancial integration and contagion
Myth of uncouplingMyth of uncoupling
• Credit spreads have widened in offshore markets• Equity markets in Asia have moved closely in step
with US• Financial ties to global hubs are tightening• Direct exposure of Asian financial institutions to
US subprime debt is small• Asian banks are well capitalized, profitable, and
not exposed to significant risks of leverage
Global slowdown will lead to asset Global slowdown will lead to asset market adjustments in Asiamarket adjustments in Asia
Growth will ease but remain solidGrowth will ease but remain solid
• Region has generally favorable policy conditions• Productivity growth linked to economic
modernization and structural transformation will continue
• But developing Asia still tied closely to global activity through trade and financial channels
Domestic conditions remain favorableDomestic conditions remain favorable
Growth to remain solid
Growth will ease but remain solidGrowth will ease but remain solid
0
4
8
12
2003 2004 2005 2006 2007 2008 2009
%
GDP growth 5-year moving average
Aggregate GDP growthAggregate GDP growth
Growth will ease but remain solidGrowth will ease but remain solid
0
4
8
12
DevelopingAsia
Central Asia East Asia South Asia SoutheastAsia
The Pacific
%
2007 2008 2009
All but Pacific slows in 2008All but Pacific slows in 2008
Inflationary pressures will mountInflationary pressures will mount
0
1
2
3
4
5
6
2003 2004 2005 2006 2007 2008 2009
%
Inflation 5-year moving average
Aggregate inflationAggregate inflation
Inflationary pressures will mountInflationary pressures will mount
0
4
8
12
16
DevelopingAsia
Central Asia East Asia South Asia SoutheastAsia
The Pacific
%
2006 2007 2008 2009
Inflation could hit decade-long high in Inflation could hit decade-long high in 20082008
Growth will ease but remain solid, Growth will ease but remain solid, inflationary pressures will mountinflationary pressures will mount
GDP
0
2
4
6
8
10
12
PRC HKG KOR MON TAP
%
2007 2008 2009
Inflation
0
2
4
6
8
10
12
PRC HKG KOR MON TAP
%
2007 2008 2009
East Asia’s domestic demand will East Asia’s domestic demand will compensate for slowdown of exportscompensate for slowdown of exports
Growth will ease but remain solidGrowth will ease but remain solid
• Bring down inflation• Avoid hard landing• Address large current
account surpluses and low consumption
• Strains on energy and the environment
• Rising income inequality
2007 2008 2009
GDP growth
11.4 10.0 9.8
Inflation 4.8 5.5 5.0
CAB 10.9 9.9 8.6
Opportunities for rebalancing in the PRCOpportunities for rebalancing in the PRC
Growth will ease but remain solid, Growth will ease but remain solid, inflationary pressures will mountinflationary pressures will mount
GDP
0
2
4
6
8
10
IND PAK BAN SRI
%
2007 2008 2009
Inflation
0
5
10
15
20
25
IND PAK BAN SRI
%
2007 2008 2009
South Asia less affected by G3 South Asia less affected by G3 slowdown, vulnerable to high slowdown, vulnerable to high commodities pricescommodities prices
Growth will ease but remain solid, Growth will ease but remain solid, inflationary pressures will mountinflationary pressures will mount
• Tighter monetary policies slowed growth
• Capital inflows raised reserves
• Rupee appreciation hurt some exports
• Slower growth in 2008 but chance of pick up in 2009
• High food inflation limits monetary policy options
• Fiscal consolidation that includes off-budget subsidies
2007 2008 2009
GDP growth
8.7 8.0 8.5
Inflation 4.4 4.5 5.0
CAB -1.9 -2.2 -2.6
India’s slowdown in 2008 temporaryIndia’s slowdown in 2008 temporary
Growth will ease but remain solid, Growth will ease but remain solid, inflationary pressures will mountinflationary pressures will mount
GDP
0
2
4
6
8
10
INO MAL PHI THA VIE
%
2007 2008 2009
Inflation
0
4
8
12
16
20
INO MAL PHI THA VIE
%
2007 2008 2009
Southeast Asia returns to trend, Southeast Asia returns to trend, inflation picks upinflation picks up
Growth will ease but remain solid, Growth will ease but remain solid, inflationary pressures will mountinflationary pressures will mount
• Bring down inflation through a policy mix of monetary and fiscal tightening, exchange rate flexibility
• Avoid banking system instability
• Need to ratchet up growth again
• Remove infrastructure bottlenecks
• Continue market-based reforms
2007 2008 2009
GDP growth
8.5 7.0 8.1
Inflation 8.3 18.3 10.2
CAB -8.0 -10.3 -9.4
Viet Nam’s inflation must be reined inViet Nam’s inflation must be reined in
Structural responses for long-run Structural responses for long-run growthgrowth
• Rising agricultural productivity must accompany the increase in the share of output and employment in industry and services
• Modernization, technological improvements, and productivity increases in manufacturing and services are essential
• Demographic dividend is an enormous potential for many countries
Asia’s longer-run growth trajectory Asia’s longer-run growth trajectory dependent on structural and supply-side dependent on structural and supply-side dynamicsdynamics
Structural responses for long-run Structural responses for long-run growthgrowth
• “Youth bulge” provides great potential for Asia
• Unemployment and joblessness on the rise• Poor education and training pushing poor,
young workers to informal jobs• Education and training systems are failing
Asia and redirection required to ensure relevance
Young Asians: a squandered talentYoung Asians: a squandered talent
Structural responses for long-run Structural responses for long-run growthgrowth
Young Asians: a squandered talentYoung Asians: a squandered talent
Developing Asia
Youth unemployment rates
0
5
10
15
20
25
30
35
India (2004-05) Indonesia (2006) Philippines (2006) Thailand (2005)
%
Male Female 15-19 years old 20-24 years old
World
Industrial countries
Structural responses for long-run Structural responses for long-run growthgrowth
• Developing Asia suffering from dearth of professional skills
• Higher incomes have fueled demand for skills-intensive services
• Measures needed to stem brain drain and relax occupational restrictions
• Investment in appropriate education systems required
Asia’s skills crisisAsia’s skills crisis
Structural responses for long-run Structural responses for long-run growthgrowth
Asia’s skills crisisAsia’s skills crisis
Shortage of qualified staff as an issue, Southeast Asia, Dec. 2006 - Jan. 2007
0 1 2 3 4 5
Other industrial services
Chemicals/ pharmaceuticals
Other services
Electronics/ engineering
Professional services
ICT services
Financial services
1=not an issue; 5=serious issue
Structural responses for long-run Structural responses for long-run growthgrowth
• Intraregional migration is surging• Yet current policies remain restrictive• Greater labor migration presents
opportunities for both sending and receiving economies
• Efforts to promote regional cooperation and liberalization of migration needed
Asian workers on the moveAsian workers on the move
Structural responses for long-run Structural responses for long-run growthgrowth
Per capita income in Thailand and selected labor-sending neighbors
0 1000 2000 3000 4000
Thailand
Sri Lanka
Viet Nam
Lao PDR
Cambodia
Nepal
Current $
Asian workers on the moveAsian workers on the move
Per capita income in Malaysia and selected labor-sending neighbors
0 2000 4000 6000
Malaysia
Indonesia
Philippines
Sri Lanka
Pakistan
Bangladesh
Current $
RisksRisks
• Inflation will accelerate and could hit a decade-long regional high Tackle inflation at root
• Fiscal balances at risk Exit strategies for subsidies and administered prices needed
• Trade and investment protectionism is a clear and present danger Liberalize internal markets and trade
What is there to worry about:What is there to worry about:
Key messagesKey messages
• Coincident slowdown in G3 and rising fuel and food prices pose major challenges
• Developing Asia’s favorable policy climate, structural transformation, and productivity growth provide forward momentum
• Developing Asia will post solid growth in 2008
Asia not immune to global Asia not immune to global slowdown; neither is it a hostageslowdown; neither is it a hostage