2018 Asia and Pacific Regional Economic Outlook

Good Times, Uncertain Times: A Time to Prepare

Asia and Pacific Department

May 9, 2018

PoliciesOutlook Uncertainties

1. The short-term outlook for Asia is strong, in line with expectations.

2. But the outlook is subject to considerable uncertainty.

3. In such a moment, policymaking should be conservative and aimed at building buffers and

increasing resilience.

2

Key Messages

Outlook

4

Asia remains the world’s fastest growing region...

Growth Projections: Selected Asia(Percent change from a year earlier)

Source: IMF staff.

Note: Figures for India are on a fiscal year basis.

World Asia China Japan India Korea

Australia

and New

Zealand ASEAN

APD

Small

States

2017 3.8 5.7 6.9 1.7 6.7 3.1 2.4 5.3 3.0

2018 3.9 5.6 6.6 1.2 7.4 3.0 3.0 5.3 3.7

Revision from

Oct. 20170.2 0.1 0.1 0.6 0.0 0.1 0.1 0.1 -0.7

2019 3.9 5.6 6.4 0.9 7.8 2.9 3.1 5.3 3.9

Revision from

Oct. 20170.2 0.1 0.1 0.1 0.0 0.0 0.2 0.1 -0.8

5

…and inflation has been rising but subdued.

-1

0

1

2

3

4

5

6

7

Japa

n

Kor

ea

New

Zea

land

Aus

tral

ia

AE

s

Tha

iland

Chi

na

Phi

lippi

nes

Indo

nesi

a

Indi

a

Vie

tnam

EM

DE

s

Advanced Economies Emerging Markets

Target range

Headline inflation 2017

Inflation target

Headline inflation 2016

2017 Inflation Target versus Headline Inflation(Percent)

Sources: Haver Analytics; and IMF staff calculations. Note: Australia and New Zealand are based on quarterly data as of 2017:Q3.

Uncertainties

1. Monetary policy normalization

2. Prospects for trade

3. Spillovers from US tax reform

4. Other risks

7

A moment of considerable uncertainty

Monetary Policies

9

0.0

0.5

1.0

1.5

2.0

2.5

3.0

Jan-

15

Jul-1

5

Jan-

16

Jul-1

6

Jan-

17

Jul-1

7

Jan-

18

Jul-1

8

Federal funds rate

Federal funds rate: market expectation (current)

Federal funds rate: market expectation (March 2016)

Federal funds rate: market expectation (March 2017)

FOMC December Median Projections

United States: Interest Rates

Forecast horizon

Source: Bloomberg L.P.

Note: FOMC = Federal Open Market Committee.

Mar 2017 gap: 0.2

Current gap: 0.0

Mar 2016 gap: 0.3

The market is catching up to the dot plot, suggesting less risk of surprises…

10

Latin

American

debt crisis

Scandinavian

banking crises

1997 AFC

1998

RussiaDot-com

bubble 2007-08

GFC

…but historically, market turmoil has often followed monetary normalization…

11

…and Asia could be materially affected given its high household and corporate leverage…

0

50

100

150

200

250

Hon

g K

ong

SA

R

Irel

and

Chi

na

Sw

eden

Fra

nce

Sin

gapo

re

Can

ada

Por

tuga

l

Japa

n

Kor

ea

Spa

in

Uni

ted

Kin

gdom

New

Zea

land

Aus

tral

ia

Uni

ted

Sta

tes

Hun

gary

Tur

key

Mal

aysi

a

Ger

man

y

Rus

sia

Tha

iland

Indi

a

Bra

zil

Col

ombi

a

Indo

nesi

a

Arg

entin

a

2017Q3 2007Q4

Source: Bank of International Settlements.

Non-Financial Corporate Debt(Percent of GDP)

0

20

40

60

80

100

120

140

Sw

itzer

land

Aus

tral

ia

Den

mar

k

Can

ada

Kor

ea

New

Zea

land

Uni

ted

Kin

gdom

Uni

ted

Sta

tes

Hon

g K

ong

SA

R

Tha

iland

Mal

aysi

a

Fin

land

Spa

in

Fra

nce

Sin

gapo

re

Japa

n

Ger

man

y

Chi

na

Chi

le

Col

ombi

a

Bra

zil

Indo

nesi

a

Rus

sia

Indi

a

Arg

entin

a

2017Q3 2007Q4

Source: Bank of International Settlements.

Household Debt(Percent of GDP)

12

…as well as the large capital flows it has attracted.

(15.6)(23.5)

(27.6)

(14.9)(22.5)

(27.7)

(18.1)(27.2)

(28.6)

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

Emerging Europe, theMiddle East, & Africa

Latin America & theCaribbean

Asia

Bill

ions

of U

SD

Total Portfolio Investment Liabilities(Percent of GDP in parentheses)

2010 2013 2016

Sources: IMF IFS database, and staff calculations.

Recent yield and dollar movements underscore the uncertainty.

13

2.7

2.75

2.8

2.85

2.9

2.95

3

3.05

US 10-Year Bond Yield (Percent)

Source: Thomson Reuters Datastream.

April 2 April 9 April 16 April 23 April 300.80

0.80

0.81

0.81

0.82

0.82

0.83

0.83

89

89.5

90

90.5

91

91.5

92

92.5

93

April 2 April 9 April 16 April 23 April 30

DXY US Dollar Currency Index

Euro per USD

US dollar and Euro Exchange Rate

Source: Thomson Reuters Datastream, and Haver Analytics..

Recent yield and dollar movements underscore the uncertainty.

14

0.80

0.82

0.84

0.86

0.88

0.90

0.92

0.94

0.96

0.98

88

90

92

94

96

98

100

102

104

Jan-

17

Feb

-17

Mar

-17

Apr

-17

May

-17

Jun-

17

Jul-1

7

Aug

-17

Sep

-17

Oct

-17

Nov

-17

Dec

-17

Jan-

18

Feb

-18

Mar

-18

Apr

-18

DXY US Dollar Currency Index

Euro per USD (RHS)

US dollar and Euro Exchange Rate

Source: Thomson Reuters Datastream, and Haver Analytics..

2

2.2

2.4

2.6

2.8

3

3.2

Jan-

17

Feb

-17

Mar

-17

Apr

-17

May

-17

Jun-

17

Jul-1

7

Aug

-17

Sep

-17

Oct

-17

Nov

-17

Dec

-17

Jan-

18

Feb

-18

Mar

-18

Apr

-18

US 10-Year Bond Yield(Percent)

Source: Haver Analytics.

Trade

16

The US has made several recent tariff announcements.

17

China, in turn, has announced new tariffs…

0

100

200

300

400

500

600

USA China

Total imports from the other country

Imports from the other country affected by recentannouncements

Source: PIIE.

(Billions of US dollars)

0

20

40

60

80

100

0

50

100

150

200

250

Agr

icul

ture

Min

ing

Foo

d

Tex

tile

Lea

ther

Woo

d

Pap

er

Pet

role

um

Che

mic

als

Pla

stic

Min

eral

s

Bas

ic m

etal

s

Mac

hine

ry n

ec

Ele

ctric

al e

q.

Tra

nspo

rt

Oth

er

Total imports

Imports affected by 301 actions

Share affected (RHS, in percent)

US Imports from China(Billions of US dollars)

Sources: PIIE, Staff estimates.

0

20

40

60

80

100

0

50

100

150

200

250

Agr

icul

ture

Min

ing

Foo

d

Tex

tile

Lea

ther

Woo

d

Pap

er

Pet

role

um

Che

mic

als

Pla

stic

Min

eral

s

Bas

ic m

etal

s

Mac

hine

ry n

ec

Ele

ctric

al e

q.

Tra

nspo

rt

Oth

er

Total exports

Exports affected by China response

Share affected (RHS, in percent)

US Exports to China(Billions of US dollars)

Sources: PIIE, Staff estimates.

18

…which are concentrated in a few sectors.

19

Other countries are also exposed given their supply chain linkages to China.

69.2

30.8China Other countries

Value Added by Origins in China's Exports to the US(Percent, in 2011)

Sources: WIOD, and IMF staff calculations.

A move toward protectionism would be damaging.

20

-2.0

-1.5

-1.0

-0.5

0.0

0 1 2 3 4 5

Long-term outcome Short-term effects

-5

-4

-3

-2

-1

0

0 1 2 3 4 5-18

-16

-14

-12

-10

-8

-6

-4

-2

0

0 1 2 3 4 5

Sources: IMF, World Economic Outlook; and IMF staff calculations.

Global GDP(percent difference from baseline)

Global investment(percent difference from baseline)

Global real exports(percent difference from baseline)

• Financial markets

• Business and consumer confidence

• FDI and domestic investment

• Other channels

21

Effects through non-trade channels could be even more damaging.

-5.0 -4.5 -4.0 -3.5 -3.0 -2.5 -2.0 -1.5 -1.0 -0.5 0.0

ThailandMalaysiaIndonesiaNew ZealandIndiaVietnamTaiwan Province of ChinaAustraliaPhilippinesSingaporeHong Kong SARKoreaChinaJapan

Dow JonesS&P 500

United KingdomBrazilEuro areaSouth AfricaMexico

Stock Market Index March 23, 2018(Percent change; in local currency)

Sources: Bloomberg L.P.; Haver Analytics; and IMF staff calculations.

Taxes

The Tax Cuts and Jobs Act could affect Asia in many different ways.

Key elements of the corporate tax reform:

1. Rate cut from 35 to 21 (or even 13) percent

2. Expensing for 5 years (investment fully deductible for income tax purposes)

3. Shift from Worldwide to Territorial taxation

Many possible spillover channels:

1. Higher US investment / growth positive spillovers to Asia

2. Tax competition loss of US investment in Asia? fiscal loss?

3. Deemed repatriation capital flows out of Asia?23

24

The direct spillovers from higher US growth are positive but likely to be modest.

Impact on Real GDP Growth(Deviation from scenario without U.S. Tax Reform; Cumulative 2018-2020)

Source: IMF staff calculations

Asia

Impact on Real GDP Growth

(2018-2020)

Cambodia 0.5

Vietnam 0.4

Pacific Islands 0.2

Thailand 0.2

Singapore 0.2

Hong Kong SAR 0.2

Malaysia 0.2

Sri Lanka 0.2

Philippines 0.2

Bangladesh 0.1

Korea 0.1

New Zealand 0.1

Mongolia 0.0

Japan 0.2

Indonesia 0.1

China 0.1

India 0.1

Australia 0.0

Other Countries & Regional Aggregates

Canada 0.5

Mexico 0.4

Asia (average) 0.2

Latin America 0.3

Euro Area 0.2

Other Advanced Economies 0.2

Other Countries 0.1

25

But how will Asia be affected by the international tax competition that may arise?

0

5

10

15

20

25

30

35

40

Hon

g K

ong

SA

R

Sin

gapo

re

Tai

wan

PO

C

Tha

iland

Vie

tnam

Mal

aysi

a

Indo

nesi

a

Chi

na

Kor

ea

New

Zea

land

Aus

tral

ia

Phi

lippi

nes

Japa

n

Indi

a

Former US statutory rate New US rate for certain activities New US statutory rate

Source: IMF Fiscal Affairs Department, Tax Policy Rates.

Selected Economies: Corporate Income Tax Rates(Percent)

26

Asian countries receive substantial FDI from the US…

Canada7%

Europe59%

Latin America and Other Western

Hemisphere16%

Africa1%

Middle East1% Asia and

Pacific16%

U.S. Direct Investment Position Abroad (Millions of dollars, 2016)

Note: On a historical cost basis; Source: Bureau of Economic Analysis

0

10

20

30

40

50

60

70

80

90

0

50,000

100,000

150,000

200,000

250,000

300,000

Sin

gapo

re

Aus

tral

ia

Japa

n

Chi

na

Hon

g K

ong

SA

R

Kor

ea

Indi

a

Tai

wan

Pro

vinc

e of

Chi

na

Indo

nesi

a

Mal

aysi

a

Tha

iland

New

Zea

land

Phi

lippi

nes

Vie

tnam

USD Millions

Percent of GDP

U.S. Direct Investment Position Abroad (USD Millions & Percent of GDP, 2016)

Note: On a historical cost basis; Source: Bureau of Economic Analysis

0

2

4

6

8

10

12

14

16

Sin

gapo

re

Hon

g K

ong

SA

R

Mal

aysi

a

Tha

iland

Aus

tral

ia

Indo

nesi

a

Phi

lippi

nes

Tai

wan

Pro

vinc

e of

Chi

na

New

Zea

land

Kor

ea

Indi

a

Japa

n

Chi

na

Foreign Pre-Tax Income Reported by US MNEs(Percent of domestic GDP; 2010–13)

Sources: US Bureau of Economic Analysis; IMF World Economic Outlook; and staff calculations.

0

10

20

30

40

50

60

Europe Latin America Asia Africa Middle East

Foreign Pre-Tax Income Reported by US MNEs (Percent of total foreign pre-tax income; 2010–13)

Sources: US Bureau of Economic Analysis; and IMF staff calculations.

US corporations earn substantial profits in some Asian countries.

27

Other Uncertainties

1. North Korea tensions

2. Many elections coming

up in 2018-19

29

Asia also faces geopolitical risks…

30

…and many economies—particularly the PICs—are highly vulnerable to natural disasters.

Note: The size of circle denotes the probability that each country is hit by a severe (above 75th percentile) natural disaster.

Probability of a severe natural disaster during a given year

Policies

1. Fiscal policy should generally

focus more on building buffers

2. Monetary policy should be vigilant

3. Macroprudential tools are part of

the toolkit

4. Structural policies: fix the roof

32

Policymaking—a premium on prudence

1. Global factors have kept inflation low this could reverse

2. Inflation has become more backward looking once it rises, it may persist

3. The Phillips Curve has flattened reducing inflation may imply large output costs

33

Monetary policymakers must be vigilant and decisive.

Global factors have kept inflation subdued, but could reverse.

60

75 75

55

41

60

0

10

20

30

40

50

60

70

80

90

100

AE

Asi

a av

erag

e

Eur

o A

rea

aver

age

Uni

ted

Sta

tes

EM

Asi

a av

erag

e

LAC

ave

rage

EE

ave

rage

Inflation Explained by Global Factors(Percent)

Source: IMF staff estimates. 34

The inflation process has also become more backward-looking.

35

0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

AE Asia AE others EM Asia EM others

2017 2008

Inflation Expectations Coefficient(Percent)

Source: IMF staff estimates.

36

The Phillips Curve has flattened.

0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

AE Asia AE others EM Asia EM others

2017 2008

Unemployment Gap Coefficient(Percent)

Source: IMF staff estimates.

37

The Phillips Curve has flattened.

-2

-1

0

1

2

3

4

5

6

7

-1 -0.5 0 0.5 1 1.5 2

1990-99 2000-09 2010-17

Advanced Asia: Headline Inflation and Cyclical

Unemployment Gap(Percent; average across economies)

Source: IMF staff calculations.

Cyclical unemployment

Hea

dlin

e in

flatio

n

-4

-2

0

2

4

6

8

10

12

14

16

-1.5 -1 -0.5 0 0.5 1 1.5

1990-99 2000-09 2010-17

Emerging Asia: Headline Inflation and Cyclical

Unemployment Gap(Percent; average across economies)

Source: IMF staff calculations.

Cyclical unemployment

Hea

dlin

e in

flatio

n

A flatter Phillips curve means a larger sacrifice ratio.

38

0

1

2

3

4

5

6

7

8

0 0.5 1 1.5 2 2.5 3 3.5

Infl

atio

n

Unemployment gap

Slope of Phillips Curve and Disinflation

Sources: Staff estimates

Steeper PC1

Flatter PC2

cost in terms of unemployment

cost in terms of unemployment

Desired change in

inflation

Desired change in

inflation

Sacrifice ratio under

PC2

Sacrifice ratio under

PC1

>

39

Macroprudential policies appear to be effective in controlling credit without dampening output.

MPP impact on business cycle

MPP impact on financial cycle

Thank you!

Additional Slides

42

3439

5860 61 63

0

10

20

30

40

50

60

70

80

90

100

Japa

n

Indo

nesi

a

Mal

aysi

a

Phi

lippi

nes

Hon

g K

ong

SA

R

Tha

iland

Inflation Explained by Global Factors(Percent)

Source: IMF staff estimates.

0

0.2

0.4

0.6

0.8

1

1.2

Thailand Philippines Japan Indonesia Hong KongSAR

Malaysia

2017 2008

Inflation Expectations Coefficient(Percent)

Source: IMF staff estimates.

0

0.2

0.4

0.6

0.8

1

1.2

Thailand Malaysia Philippines Indonesia Japan Hong KongSAR

2017 2008

Unemployment Gap Coefficient(Percent)

Source: IMF staff estimates.