Economic Outlook for the Asia Pacific Region and the

Global Financial Crisis

Reza BaqirIMF Resident Representative

22nd CACCI ConferenceManila Hotel, October 23, 2008

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Overview The bad news

The world economy is entering a major downturn in the face of the most dangerous financial shock in mature financial markets since the 1930s.

Risks may still be tilted to the downside

The good news To date, Emerging Asia has led global growth Nevertheless, Asia is also exposed to global

economic conditions, and perhaps more so now than before

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An extraordinary, banking-sector shock is striking advanced economies

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1.0

2.0

3.0

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Interbank Markets(3-month LIBOR minus T-bill rate; in percent)

UnitedStates

Japan

Euroarea

Q1 Q2 Q3 Q4 2006

Q1 Q2 Q3 Q4 2007

Q1 Q2 Oct. 2008

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100

150

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300

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400

United States

Euro area

Bank CDS Spreads(10-years; median; in basis points)

2007 Oct.08

08

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Overnight developments Markets sold off sharply and on a broad basis today,

including equities, emerging market assets and commodities.

Global recession fears continue to grip markets while deleveraging pressures appear to be becoming broader

The selloff in emerging market debt is gaining pace, with the EMBIG selling off 5.5% amid spread widening of 69 bps to 783 bps, the highest level since 2002. Selling is across the board in the most liquid names, with the exception of the highest-rated sovereigns.

Emerging market equities also plunged, with major bourses in the EMEA region off 3 to 9%, and Latin stock markets losing 5 to 10%, except Argentina’s Merval, which has lost over 14%.

Emerging market currencies are selling off sharply virtually across the board against the dollar, and even more against the yen.

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The financial sector shock comes on the heels of, until recently, a major commodity price shock

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800

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1400

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Real Oil, Metals and Food Prices(1970 = 100)

1970 75 Q308

Food (LHS)

Metals (LHS)

Oil (RHS)

80 85 90 95 2000 05

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As a result, advanced economies to As a result, advanced economies to come close to or move into recessioncome close to or move into recession

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Growth

Potential

April 2008 WEO

July 2008 WEO

2007 08 09 102007 08 09 10 United StatesUnited States

2007 08 09 102007 08 09 10 Euro areaEuro area

2007 08 09 102007 08 09 10 JapanJapan

Real GDP Growth Rates(percent change)

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Outlook for advanced economies

Source: IMF World Economic Outlook, October 2008, available at www.imf.org

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Emerging economies have so far provided support to global growth

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……and Asia has led growth in emerging and Asia has led growth in emerging economieseconomies

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10Growth

HP Trend Growth

April 2008 WEO

July 2008 WEO

07 08 09 1007 08 09 10 AfricaAfrica

07 08 09 1007 08 09 10 EmergingEmerging AsiaAsia

07 08 09 1007 08 09 10Latin AmericaLatin America

07 08 09 1007 08 09 10 Middle EastMiddle East

07 08 09 1007 08 09 10 EmergingEmerging

Europe & CISEurope & CIS

Real GDP Growth Rates(percent change)

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A note on country groupings Emerging Asia:

Newly Industrialized Asian Economies: Hong Kong SAR, Korea, Singapore, Taiwan Province of China

Developing Asia: Afghanistan, Rep. of, Bangladesh, Bhutan, Brunei Darussalam2, Cambodia, China, Fiji, India, Indonesia, Kiribati, Lao PDR, Malaysia, Maldives, Myanmar, Nepal, Pakistan, Papua New Guinea, Philippines, Samoa, Solomon Islands, Sri Lanka, Thailand, Timor-Leste, Dem. Rep. of, Tonga, Vanuatu, Vietnam.

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Emerging economies account for a rising share of global growth

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Other Developing

India

China

Advanced economies

Contributions to Global Growth(percent change)

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In general, the resilience in emerging and developing economies has grown, notably since the Asia crisis...Emerging and Developing Economy External Indicators

(percent of total GDP)

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-2

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1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 200715

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Change inreserves

External Debt

(left scale)

Current account

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...but countries with vulnerabilities are feeling the pressure

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Countries with current account deficits > 5%

Countries with current account surpluses (or smalldeficits)

Emerging Economies: Credit Default Swap Spreads, 2004–08(In basis points, July 2007 = 100)

2004 Sep.08

070605

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Risks to global growth are to the downside

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90% Confidence interval

70% Confidence interval50% Confidence interval

Global GDP Growth(percent change, ppp-GDP weighted

average)

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According to one indicator, a global recession is more likely than not

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Major down side factors include potential further deterioration in financial conditions and domestic demand in the US.

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Outlook for Asia

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Outlook for Asia

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Trade exposure to the US has risen

1994 2006 1994 2006

Japan 2.5 3.4 3.0 4.4Australia 0.9 1.1 1.6 2.1New Zealand 2.8 3.0 3.7 4.0

China 5.6 9.6 7.6 12.2India 1.7 2.4 2.0 3.1

Hong Kong SAR 16.7 14.8 20.0 21.8Korea 4.9 5.1 6.1 8.7Singapore 23.9 17.3 31.9 30.8Taiwan POC 10.4 9.9 12.9 15.5

Indonesia 3.3 3.5 4.5 5.6Malaysia 18.0 22.7 25.0 31.7Philippines 8.8 8.0 9.8 12.0Thailand 7.0 10.5 8.9 15.1Vietnam 1.4 15.2 2.8 18.5

Asia 7.7 9.0 10.0 13.3Industrial Asia 2.1 2.5 2.8 3.5Emerging Asia 9.2 10.8 12.0 15.9

Sources: UN COMTRADE Database; and IMF staff calculations.

Export Exposure to the United States(In percent of GDP)

Direct Total

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…as has exposure to financial assets

Dec-94 Dec-06 Dec-94 Jun-06

Japan 2.5 13.0 4.4 25.0Australia 6.8 20.4 2.6 15.0New Zealand 10.5 9.3 2.9 12.7

China 0.3 2.2 2.3 28.8India … 5.5 … 2.5

Hong Kong SAR 12.6 42.2 14.8 61.3Korea 1.4 12.4 1.2 14.2Singapore 8.6 35.8 42.9 129.2Taiwan POC 0.2 19.4 13.1 39.8

Indonesia 1.2 3.7 1.0 3.4Malaysia 11.5 9.2 6.8 10.5Philippines 3.1 7.9 3.3 7.9Thailand 3.1 5.7 4.4 8.2Vietnam … 0.1 … 4.1

Asia 5.1 13.3 8.3 25.9Industrial Asia 6.6 14.2 3.3 17.6Emerging Asia 4.6 13.1 10.0 28.2

Financial Exposure to the United States(In percent of GDP)

U.S. Holdings of Asian Portfolio Securities

Asian Holdings of U.S. Portfolio Securities

Sources: U.S. Department of the Treasury, Treasury International Capital System; CEIC Data Company Ltd.; Haver Analytics; and IMF, Information Notice System, and staff calculations.

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Perhaps due to higher exposure, growth in Asia is now more correlated with U.S. growth than in the 1990s.

1990-96 2000-07

Japan -0.06 0.41Australia 0.74 0.38New Zealand 0.28 0.23

China … 0.08India … 0.14

Hong Kong SAR 0.16 0.61Korea -0.32 0.30Singapore 0.31 0.62Taiwan POC 0.24 0.61

Indonesia 0.06 0.05Malaysia -0.26 0.52Philippines 0.28 0.47Thailand -0.20 0.47Vietnam … 0.20

Growth Correlation with the United States

Sources: CEIC Data Company Ltd.; and IMF staff calculations.

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Financial correlations have also increased over time

1990-96 2000-07

Japan 0.26 0.52Australia 0.52 0.71New Zealand … 0.49

China … 0.08India -0.01 0.45

Hong Kong SAR 0.35 0.69Korea 0.12 0.59Singapore 0.49 0.61Taiwan POC 0.16 0.49

Indonesia 0.26 0.43Malaysia 0.37 0.30Philippines 0.34 0.45Thailand 0.38 0.43Vietnam … 0.10

Asia 0.29 0.45High financial exposure 0.35 0.57Low financial exposure 0.23 0.34

Correlations in Stock Market Returns

Sources: Bloomberg LP.; and IMF staff calculations.

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Key results from investigating spillovers from US to Asia: On average over the last fifteen years, a one

percentage point slowdown in the U.S. has led to an estimated ¼ percentage point slowdown in Japan, and a ¼-½ point slowdown in emerging Asia.

The average spillover for emerging Asia masks wide cross-country variation within the region, with particularly large spillovers for the most-trade/financially exposed countries.

These long-sample estimates of spillovers may understate current vulnerabilities.

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Estimated spillovers show large variations within the region

Cross-Country Regressions

VAR with Financial Variables

Japan 0.3 0.2Australia 0.7 0.5New Zealand 0.9 0.3

China 0.1 0.0India -0.2 0.0

Hong Kong SAR 1.0 0.8Korea 0.1 0.1Singapore 1.1 0.9Tawan POC 1.2 0.9

Indonesia 0.2 0.4Malaysia 0.5 0.7Philippines 0.6 0.4Thailand 1.0 0.5

Asia 0.3 0.2Emerging Asia 0.2 0.2Emerging Asia(excl. China and India) 0.5 0.5

(In percentage points)

Source: IMF staff estimates.

Summary of Results: Impact of one percentage point U.S. Slowdown

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Key results (cont’d) Why might long-sample estimates understate

spillovers at the current juncture?→ Reestimating our regressions over shorter samples suggests that spillovers have increased over time, not least for China, consistent with our finding of growing trade and financial integration with the United States.

→ When U.S. demand shocks are accompanied by realistic declines in global confidence, model simulations predict substantially larger spillovers (0.7 percentage point growth slowdown in Asia for a one percentage point slowdown in the U.S.)

→ Specific U.S. recessions have in the past generated large negative spillovers to Asia, as witnessed by the 2001 recession.

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Finally, U.S. slowdowns can have very large impacts on Asia, as evidenced by the 2001 recession.

Hodrick-Prescott Baxter-KingFilter Filter

United States -1.90 -1.89

Japan -1.41 -1.49Australia -0.70 -0.92New Zealand -0.04 -0.18China -0.42 -1.53India 0.16 -0.73

Hong Kong SAR -2.84 -3.39Korea -0.94 -1.01Singapore -7.80 -7.72Taiwan POC -5.54 -5.59

Indonesia 0.48 0.61Malaysia -3.41 -3.51Philippines -1.17 -1.63Thailand -0.98 -1.15Vietnam -0.60 …

Asia2 -1.80 -2.17High trade exposure2 -3.19 -3.83Low trade exposure2 -0.41 -0.75

Impact of 2001 U.S. Recession1

(In percent)

Sources: CEIC Data Company Ltd.; and IMF staff calculations.

1 Measured as the average change in the output gap during the recession relative to preceding four quarters.

2 Arithmetic nonweighted average.

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To conclude The world is facing a major economic

shock To date, Asia has held up better than the

rest of the world But Asia is exposed and the spillover

effects could be larger than expected

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Thank you

REZA BAQIRIMF Office Manila

(02) 536 0785, 400 4985