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Economic Recovery and Policy Challenges in Asia Asia Economic Forum
Phnom Penh, July 31, 2011
Faisal AhmedIMF Resident Representative, Cambodia
The views expressed in this presentation are those of the author, and not necessarily those of the IMF, its Executive Board or Management
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On the theme of the 2011 Asia Economic Forum:
Is it the “rise” or “resurgence” of Asia?(During the Khmer empire era, Asia produced three-fourths of
world GDP)
0 1000 1500 1600 1700 1820 1870 1913 1950 1973 20000
20
40
60
80
100
Asian Share of World GDP during the Past 2000 Years(In percent)
Source: Angus Maddison
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Plan of the presentation• The global recovery has continued in 2011-Q1• The slowdown in Q2 is only a bump on the
road• But downside risks have intensified since April
Global Recovery
• Strong growth outlook in Asia• Concerns on quality of growth• Main risks are from volatile capital inflows and
global slowdown
APEC: Growth Outlook
• Inflationary pressures in many APEC EMs have extended from food and energy prices to other prices, and expectations
• A few signs of overheating in asset markets
Overheating: How Serious
Are the Risks?• Macro policy stances should be tightened
further in APEC EMs facing inflationary pressures
• Macro prudential measures a useful complement, not a substitute
• Beyond the short-term: need to rebalance demand, and make growth more inclusive
Policy Challenges:
Engineering a Smooth Landing
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Global Recovery
5
The global economy has continued to advance in Q1
despite some negative surprisesGlobal GDP Growth
(q/q, in percent; SAAR)Selected Economies: GDP Growth in
2011:Q1(q/q, in percent; SAAR)
Global Recovery
-8
-6
-4
-2
0
2
4
6
8
2006
:Q1
2006
:Q3
2007
:Q1
2007
:Q3
2008
:Q1
2008
:Q3
2009
:Q1
2009
:Q3
2010
:Q1
2010
:Q3
2011
:Q1
April 2011 WEO forecast
-4-202468
10
U.S.
Euro
area
U.K.
Japa
n
Latin
Am
eric
a
EM A
sia
EM E
urop
e
April 2011 WEO
Actual
Output
A sluggish recovery so far, as expected
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AE recessions following financial crises
Source: IMF staff calculations.
House Prices
Unemployment Rate(normalized at 0) Equity Prices
Other AE recessions Current U.S. path
Global Recovery
(indices; quarters after peak in real GDP on x-axis)
94
96
98
100
102
104
106
0 1 2 3 4 5 6 7 8 9 10 11 1280
85
90
95
100
105
0 1 2 3 4 5 6 7 8 9 10 11 12
0
1
2
3
4
5
0 1 2 3 4 5 6 7 8 9 10 11 1250
60
70
80
90
100
110
120
0 1 2 3 4 5 6 7 8 9 10 11 12
7
Risks remain from slow progress in reducing unemployment
and insufficient fiscal and financial adjustment in AE
EU Banks: Core Tier-1 Ratios
(In percent; end-2010)
Global Recovery
Required Fiscal Adjustment
(In percent of GDP)
Note: Cyclically adjusted primary balance adjustment needed to bring the debt ratio to 60 percent in 2030, except for Japan.
Unemployment Rate (Percent)
Source: GFSR, April 2011.Note: Includes 84 EU banks.
Japa
nU.
S.U.
K.Sp
ain
Fran
ceCa
nada
Ital
yGe
rman
y
0
2
4
6
8
10
12
14Projected Adjustments 2010–15
02468
101214161820
456789
101112
2005
:Q1
2007
:Q1
2009
:Q1
May
-11
U.S.U.K.GermanyEuro areaG-20 advanced
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Commodity prices have declined since Apriland supply disruptions from Japan should
soon fade
Global Recovery
Commodity Price Indices(January 2010 = 100)
Japan: Restoration of Capacity in Different Sectors
(Percent of firms with restored capacity)
0
20
40
60
80
100
120
Mar Apr
May Jun
Jul
Aug
Sep
Oct
Nov
Dec
Auto industryMaterial industryProcessing industry
(After earthquake)Source: METI and IHS Automotive.Note: The chart is from April and restoration plans have been moved up by 1-2 months, but no new comprehensive survey data are available.
80
100
120
140
160
180
200
220
240
260
Jan-
10
May
-10
Sep-
10
Jan-
11
May
-11
MetalsFoodRaw MaterialsCrude Oil (APSP)
9
Overheating is a concern in many EMsOutput Gap and Inflation
(In percent)
Global Recovery
Credit to Private Sector(Year-on-year percent change)
-10
0
10
20
30
40
50
60
Jan-
08Ap
r-08
Jul-
08Oc
t-08
Jan-
09Ap
r-09
Jul-
09Oc
t-09
Jan-
10Ap
r-10
Jul-
10Oc
t-10
Jan-
11Ap
r-11
Emerging Asia (excl. China)ChinaLatin AmericaRussia
HK SAR
KORSGP
TWN
IDN
MYS
PHL
THA
IND
CLE
MEX PER
BRA
0123456789
10
-1 0 1 2
Hea
dlin
e in
flatio
n(y
ear-
on-y
ear,
April
201
1)
Estimated Output gap in 2011
10
APEC Growth Outlook
11
APEC EMs started 2011 with strong momentum
Outlook
2011:Q1 GDP Growth(q/q, in percent; SAAR)
-10
-5
0
5
10
15
20
25
AUS
JPN
MEX IDN
PER
KOR
MYS THA
PHL
CHN
HK S
AR CLE
TWN
SGP
Actual April 2011 WEO forecast
Exports of Goods(In billions of U.S. dollars, seasonally
adjusted)
2002-07 trend
200
300
400
500
600
700
800
Jan-
08Ju
l-08
Jan-
09Ju
l-09
Jan-
10Ju
l-10
Jan-
11Ja
n-08
Jul-0
8Ja
n-09
Jul-0
9Ja
n-10
Jul-1
0Ja
n-11
EM Asia Latin America
12
Growth will be driven by exports in EM Asia and domestic demand in LATAM
Outlook
Emerging Asia: Exports of Goods and Global Investment Cycle
(Year-on-year percent change)
Domestic Demand and GDP(Year-on-year percent change)
CLE
MEX
PER
HKGKOR
SGP
TWN
IDN
MYS
PHL
THA
VNM CHN
BRA
INDARG
BOL
COL
ECU
URU
VEN
23456789
101112
2 4 6 8 10 12
Real
dom
estic
dem
and
grow
th in
201
1
Real GDP growth in 2011
45 degree line
-20
-10
0
10
20
30
2000
:Q1
2002
:Q1
2004
:Q1
2006
:Q1
2008
:Q1
2010
:Q1
2011
:Q4
Emerging Asia's export (volume)Real fixed investment in advanced economies
13
Risks from capital inflows volatility…Weekly Flows into EM Equity and Bond
Funds and Global Risk Aversion
Outlook
Domestic Demand Growth in Episodes of Easy External Financing
(Difference of growth rates relative tonon-episode years)
00.010.020.030.040.050.060.070.08
-3-2-1012345
Jun-
07Se
p-07
Dec-
07M
ar-0
8Ju
n-08
Sep-
08De
c-08
Mar
-09
Jun-
09Se
p-09
Dec-
09M
ar-1
0Ju
n-10
Sep-
10De
c-10
Mar
-11
Jun-
11
Flows (12-week moving average, left scale)
CBOE VIX (inverted, right scale)
Trill
ions
of U
.S. d
olla
rs
0
1
2
3
4
5
Latin America
Asia Emerging Europe
MENA
14
…further increases in oil prices, and a global slowdown
Impact of Oil Price Shock on 2011 Growth
(Deviation from baseline; in percentage points)
Note: Impact of a 40 percent rise in oil prices from April 2011 WEO baseline assumption.
Outlook
Impact of Slowdown in U.S. Growth(In percentage points)
Note: Impact of a 1 percentage point slowdown in U.S. growth.
-0.7
-0.6
-0.5
-0.4
-0.3
-0.2
-0.1
0
Asia Latin America
-1.0
-0.5
0.0
0.5
1.0
1.5
NZL
TWN
HK S
AR CHN
KOR
VNM
PER
JPN
SGP
THA
MEX PH
LCL
EID
NAU
SM
YS RUS
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Overheating: How Serious Are the Risks?
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A key risk for EMs is overheating: higher food and energy prices have spilled over to
generalized inflation… Changes in Headline Inflation
(As of May 2011; change since minimum inflation rate in 2009, in percentage
points)
Overheating
Expectations of Annual Average Inflation
in 2011: Change since October 2010(In percentage points; as of May 2011)
-5
0
5
10
15
20
MEX RUS
AUS
KOR
NZL
PER
JPN
IDN
TWN
PHL
SGP
CLE
MYS
HK S
AR CHN
THA
VNM
Contribution from other pricesContribution from food and fuel pricesChange in headline inflation
0
1
2
3
4
5
6
MEX AUS
IDN
NZL
TWN
MYS THA
RUS
JPN
PER
PHL
KOR
CLE
HK S
AR SGP
CHN
VNM
Note: Data for Hong Kong SAR, Japan, Malaysia, and Singapore are as of April 2011; and Australia and New Zealand are as of March 2011.
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…as output gaps have closed and macroeconomic policies remained
accommodativeReal Lending Rates
(In percent) Estimated Output Gap Closing Dates
Overheating
2009 2011 2013 2015 2017JPNNZLRUSMEXAUSCLE
HK SARIDNMYSPERTHAKORPHLSGP
TWN
0123456789
10
TWN
RUS
HKG
MEX JPN
PHL
KOR
CHN
SGP
MYS THA
PER
AUS
CLE
IDN
NZL
VNM
2011:Q2 Average (2000-10)
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Inflation is expected to generally peak in 2011
but to remain highConsumer Price Inflation(Year –on-year; in percent)
Overheating
Note: Core inflation targets for Indonesia and Thailand.
-202468
1012141618
JPN
TWN
PER
MYS SGP
AUS
CLE
MEX THA
NZL
KOR
CHN
PHL
HK S
AR IDN
RUS
VNM
2011 (Proj.) 2012 (Proj.) Mid point of target (or average over 2005-10)
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Policy Challenges: Engineering A Smooth Landing
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Both monetary and fiscal policy tightening is warranted
in economies facing generalized inflationary pressures
Policy Challenges
Policy Interest Rates(In percent)
Cyclically Adjusted Fiscal Balances(In percent of GDP)
-5-4-3-2-10123456
Indu
stria
l Asi
a
NIEs
ASEA
N-5
Chin
a
Chile
Mex
ico
Peru
Russ
ia
2002-07 (average) 2011 (Proj.) 2012 (Proj.)
0
1
2
3
4
5
6
7
8
9
AUS
NZL
MYS
KOR
THA
PHL
PER
CLE
IDN
Policy rate (as of June 14)
Taylor rule implied rate (2011)
21
There is also room for further exchange rates appreciation, especially for a number
of Asian economiesReal Effective Exchange Rates
(Percent change between peak during 2007-08 and April 2011; increase = appreciation)
Policy Challenges
-25
-20
-15
-10
-5
0
5
10
15
KOR
VNM
HK S
AR MEX JPN
NZL
TWN
PER
CLE
CHN
PHL
THA
MYS IDN
RUS
SGP
AUS
22
Asian economies have generally reacted to large capital inflows by accumulating
reservesSources of Change in Stock of FX
Reserves(In percent of GDP)
Stock of FX Reserves(In billions of U.S. dollars)
Policy Challenges
0
1000
2000
3000
4000
5000
6000
Emerging Asia
Latin America
Emerging Europe
Sep-07Apr-11
-4-202468
10
2008
2009
2010
2008
2009
2010
2008
2009
2010
EmergingAsia
LatinAmerica
EmergingEurope
OtherValuation effectFinancial account flowsCurrent account flowsChanges in stock of FX reserves
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More exchange flexibility and fiscal prudence would also provide a buffer
against risks from volatile capital inflows
Note: Average response of quarter-on-quarter seasonally adjusted growth rate to an increase in portfolio and other investment flows by 1 percentage point of GDP. Emerging Asia includes ASEAN-4, India, Korea, and Chinese Taipei.
EM Asia: Response of Private Domestic Demand to Non-FDI Net Capital Flows by Policy Regimes(In percentage points, 4-quarter cumulative response)
Policy Challenges
0.0
0.3
0.6
0.9
1.2
1.5
0.0
0.2
0.4
0.6
0.8
1.0
Private consumption expenditure
Private gross fixed capital formation
Private consumption expenditure
Private gross fixed capital formation
Less flexible ER More flexible ER Procyclical FP Countercyclical FPExchangerate regime (ER, left scale) Fiscal policy regime (FP, right scale)
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Conclusions In many EM APEC economies growth outlook
remains strong but overheating pressures have surfaced. Need to remain vigilant against the risk of credit/property prices cycles in a few regional economies.
Dealing with these pressures requires tightening fiscal stances and stronger currencies. Higher policy interest rates should be part of the policy mix.
Macro-prudential measures are a useful complement, not a substitute
In addition to dealing with overheating risks, policymakers need to make sure that growth will be balanced and inclusive.
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Thank You.