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Sustaining Asia’s Economic Recovery

Asia Economic Forum

Hang Chuon Naron31st July 2011

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Table of Contents

1. Issues facing Asia’s economic recovery2. Inflation3. Policy response

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I. Issues facing Asia’s Economic Recovery

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Key issues facing Asia’s recovery

The multi-speed global recovery is set to continue. Asia is expected to continue leading the global

recovery, but at a more moderate pace. The tragic events in Japan, earthquake followed

by tsunami, add to uncertainty in Asia. The debt crisis in Greece, Ireland, Portugal and

Spain undermines growth in the Eurozone. US debt ceilings: political wrangling in

Washington. This will have negative effect on the global economy.

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Key issues facing Asia’s recovery

Navigating opposing risks will be challenging:Weaker global recovery and stronger commodity prices.

The signs of overheating are broadening. The withdrawal of fiscal stimulus has been

slow. Quantitative Easing (QE) 2 resulted in capital

inflows into Asia in the first half of 2011.

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Key issues facing Asia’s recovery

Now, foreign capital inflows have moderated, as has the growth in asset valuations.

However credit dynamics remain very strong. Over the medium-term, rebalancing growth

remains the key challenge.

The multispeed recovery is set to continue with Asia increasingly propelling global growth

Contributions to Global Growth(In percentage points)

1973

1976

1979

1982

1985

1988

1991

1994

1997

2000

2003

2006

2009

2012

-1

0

1

2

3

4

5

6

Advanced economiesEmerging AsiaOther EM and developing countriesGlobal growth (3-year moving average)

7

World GDP Growth Projection(Year-on-year, in percent; Jan. WEO update)

2010 2011 2012

World 5.0 4.4 4.5

Advanced economies 3.0 2.5 2.5

Emerging and Developing economies

7.1 6.5 6.5

Asia 8.2 6.8 6.8

Source: IMF

Asia is expected to continue leading the global recovery, but at a more moderate pace

2009 2010 2011 2012

Asia (including Australia and New Zealand) 3.5 8.2 6.8 6.8 Industrial Asia -4.9 4.0 1.9 2.0

Japan -6.3 4.3 1.6 1.8 Emerging Asia 5.9 9.4 8.1 8.0

China 9.2 10.3 9.6 9.5India 5.7 9.7 8.4 8.0NIEs -0.9 8.3 4.7 4.3

Korea 0.2 6.1 4.5 4.2Singapore -1.3 15.0 4.7 4.4Taiwan Province of China -1.9 10.2 4.9 4.6

ASEAN-5 1.7 6.7 5.5 5.7Indonesia 4.5 6.0 6.2 6.5Malaysia -1.7 6.7 5.3 5.2Philippines 1.1 7.0 5.0 5.0Thailand -2.2 7.5 4.0 4.5Vietnam 5.3 6.8 6.8 7.0

Other ASEANBrunei -1.8 1.0 1.5 1.9Cambodia 0.1 6.0 6.0 6.5Lao PDR 7.6 7.7 7.5 7.3Myanmar 4.9 5.3 5.0 5.0

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Asia: Real GDP Growth(y/y; percent); as of the January 2011 WEO update

Source: IMF

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II. Downside Risks to Asia’s Recovery

1. Rising commodity and food prices2. Inflation3. Capital inflows led to exchange rate appreciation and asset bubbles.4. Balancing growth is a challenge.

Risk 1: Navigating opposing risks will be challenging:Weaker global recovery and stronger commodity prices…

1 3-12

-8

-4

0

4

8

12

16

20

-30

-20

-10

0

10

20

30

40

50EM Asia food price (RHS)Global food price (LHS)

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Food Price: Global versus EM Asia

(Year-on-year percent change)

Asia: GDP Growth(Central forecast and 50, 70, and 90 percent confidence intervals; in percent)

0123456789

10

2007 2008 2009 2010 2011 2012

50 percent confidence interval70 percent confidence interval90 percent confidence interval

Central forecast

Source: IMF

Risk 1: Key staples pushing region’s food prices up

Region’s food price inflation Pushed by prices of rice and wheat And other domestic food items

From June 2010 to Feb 2011 International rice price rose by around 20%; while wheat prices

doubled Partly due to Thailand and Viet Nam release of ample supplies from

their stocks to mitigate price pressure

Risk 1: Food dominates region’s CPIsFood Weights in Consumer Price Index

(%)

1Includes non-alcoholic beverages. 2Includes beverages. 3Includes beverages and tobacco.Source: Asian Development Bank. March 2011. "Global Food Price Inflation and Developing Asia" (Forthcoming).

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Economy Share

Cambodia1 44.8

China, People’s Rep. of2 30.2Hong Kong, China 26.7Indonesia3 36.2

Korea, Rep. of1 14.0

Malaysia1 31.4Philippines 46.6Singapore1 22.1

Thailand1 33.0Viet Nam 39.9

Source: ADB

Risk 1: larger than anticipated rise in oil prices

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Oil Price Prospects(In U.S. dollars per barrel)

Global Commodity Prices(January 2005 = 100)

Note: West Texas Intermediate (WTI) oil price futures information used.

50

100

150

200

250

300

350

Jan-

05

Jan-

06

Jan-

07

Jan-

08

Jan-

09

Jan-

10

Jan-

11

FoodMetalEnergyAgricultural raw materials

0

50

100

150

200

250

2007

2008

2009

2010

2011

2012

2013

95% confidence interval86% confidence interval68% confidence intervalFutures

Source: IMF

Risk 1: Commodity price increase

14

168

87

139

194

169

137

75

149

120 112128

177

165

244

152

50

100

150

200

250

Jan-07

Apr-07

Aug-07

Dec-07

Apr-08

Aug-08

Nov-08

Mar-09

Jul-09

Nov-09

Mar-10

Jun-10

Oct-10

Feb-11

All primary commodities

Metals2

Food and beverage3

Agriculture materials4

Energy1

1 Crude oil, natural gas, coal. 2 Copper, aluminum, iron ore, tin, nickel, zinc, lead, uranium. 3 Cereal, vegetable oils, meat, seafood, sugar, bananas, oranges, coffee, tea, cocoa. 4 Timber, cotton, wool, rubber, hides. Source: OREI staff calculations based on data from IMF Primary Commodity Prices , International Monetary Fund.

Figure xx: Primary Commodity Price Indexes (Jan 2007 = 100)

Source: ADB

Risk 2: Inflation is on the rise

8.7

4.9

11.8

5.36.0

0.9

4.52.3

-2.2

0.0

-3

0

3

6

9

12

Jan-07

Apr-07

Jul-07

Oct-07

Jan-08

Apr-08

Jul-08

Oct-08

Jan-09

Apr-09

Jul-09

Oct-09

Jan-10

Apr-10

Jul-10

Oct-10

Jan-11

People's Republic of China

ASEAN-4 plus Viet Nam

NIE-3

Figure XX: Regional Headline Inflation (y-o-y, %)

Japan

Feb-11

Source: ADB

Risks 3: Capital inflows led to currency appreciation and importance of Europe and United States for

Asia’s exports

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Selected Asia: Exports to U.S. and Europe

(In percent of total exports of goods)

EM Asia: Capital Inflow and Global Risk Aversion

-40

-20

0

20

40

60

80

100

2007

:Q4

2008

:Q1

2008

:Q2

2008

:Q3

2008

:Q4

2009

:Q1

2009

:Q2

2009

:Q3

2009

:Q4

2010

:Q1

2010

:Q2

2010

:Q3

2010

:Q4

Risk aversion (VIX)

Capital inflows to EM Asia (billions of U.S. dollars)

0

5

10

15

20

25

Sing

apor

e

Indo

nesi

a

Thai

land

Mal

aysi

a

Kore

a

Japa

n

Phili

ppin

es

Chin

a

Europe

United States

Source: IMF

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Asia: Pass-through from Domestic Food and Energy Prices to Core Inflation 1

(In percentage points)

Risk 4: a few signs of asset market pressures

1 Impact of change in food and energy prices by 1 percent. Wholesale prices used for India.

Selected Asia: Property Prices(Year-on-year change, in percent)

0.0

0.1

0.2

0.3

0.4

Japa

nAu

stra

liaNe

w Z

eala

ndHo

ng K

ong

SAR

Kore

aSi

ngap

ore

Indo

nesi

aM

alay

sia

Phili

ppin

esTh

aila

ndVi

etna

mCh

ina

Indi

a

Food Energy

Taiw

an

Prov

ince

of C

hina

-50

-40

-30

-20

-10

0

10

20

30

40

2007

:Q1

2007

:Q2

2007

:Q3

2007

:Q4

2008

:Q1

2008

:Q2

2008

:Q3

2008

:Q4

2009

:Q1

2009

:Q2

2009

:Q3

2009

:Q4

2010

:Q1

2010

:Q2

2010

:Q3

2010

:Q4

ChinaHong Kong SARSingaporeTaiwan Province of ChinaKorea

Risk 4: Rebalancing of demand remains a challenge

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Global Current Account Balances(In percent of world GDP)

Selected Asia: Current Account Balances

(In percent of GDP)

012345678

Japan NIEs ASEAN-5 China

2002-07 2010 2011 (Proj.) 2012 (Proj.)

-3

-2

-1

0

1

2

3

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

Rest of the world Emerging AsiaJapan and Germany Oil exportersChina United States

Global discrepancy

Projections

Source: IMF

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III. Policy Response

Policy response 1: Increasing policy ratesPolicy Rates1—Selected Economies (% per annum)

1BI rate (Indonesia); unsecured overnight call rate (Japan); Korea base rate (Republic of Korea); overnight policy rate (Malaysia); reverse repurchase rate (Philippines); and 1-day repo rate (Thailand).Source: Bloomberg and Datastream. 20

3.00

2.75

7.5

4.25

5.00

2.500.5

9.5

6.75

0

2

4

6

8

10

1-Jan-07

2-Jun-07

1-Nov-07

1-Apr-08

31-Aug-08

30-Jan-09

1-Jul-09 30-Nov-09

1-May-10

30-Sep-10

1-Mar-11

Indonesia

Philippines

Thailand Malaysia

Republic of Korea

Japan

Figure XX: Policy Rates1—Selected Economies(% per annum)

4-Apr-11

1-Jul-09

Source: ADB

Policy response 1: Rate increase is smaller than the cut during the crisis

Policy Rate Movements1 (percentage points)

1One year lending rate (People's Republic of China); BI Rate (Indonesia); prime rate (Viet Nam); unsecured overnight call rate (Japan); Korea base rate (Republic of Korea); overnight policy rate (Malaysia); reverse repurchase (repo) rate (Philippines); and one-day repo rate (Thailand).2Policy rate hikes started in December 2009.Source: Bloomberg and Datastream.

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0

1

2

3

4

5

6

7

8

Viet Nam Korea, Rep. of Indonesia Thailand China,People's Rep.

of

Philippines Malaysia Japan

Cuts in 2008—2009

Hikes in 2010—2011

1One year lending rate (People's Republic of China); BI Rate (Indonesia); prime rate (Viet Nam); unsecured overnight call rate (Japan); Korea base rate (Republic of Korea); overnight policy rate (Malaysia); reverse repurchase (repo) rate (Philippines); and one-day repo rate (Thailand).2Policy rate hikes started in December 2009.Source: Bloomberg and Datastream.

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Source: ADB

Policy response 2: Currency appreciation, except Vietnamese dong

Change in Exchange Rate against US dollar1 (%)

1Year-to-date (YTD) figures based on 21 Mar 2011 closing. Negative values indicate depreciation.2PRC = People's Republic of China.Source: OREI staff calculations based on Reuters data. 22

-8 -4 0 4 8 12 16

Vietnamese dong

Thai baht

Hong Kong dollar

Korean won

PRC renminbi

Philippine peso

Japanese yen

Malaysian ringgit

Singapore dollar

Indonesian rupiah 2010

2011 YTD

2

1Year-to-date (YTD) figures based on 21 Mar 2011 closing. Negative values indicate depreciation.2PRC = People's Republic of China.Source: OREI staff calculations based on Reuters data. Source: ADB

Policy Response 3: Accumulating International Reserves

International reserves increased from 0.5 billion in 2000 to USD1 billion in 2006, then reached USD2.9 billion in May 2011.

0.5 0.5

0.7 0.70.8

0.9

1.1

1.6

2.1

2.4

2.7

2.9

International Reserves (billion USD)

Policy Response 4: Macro-prudential measures

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Measures Implemented inRein in short-term foreign currency borrowing by commercial banks

Korea

Lengthen maturity structure of central bank’s external liabilities and make one-month certificate less liquid

Indonesia

Limits placed on foreign investors’ access to time deposits Taiwan Province of China

Liberalization of capital outflows Thailand, Philippines, Malaysia

Removal of tax exemptions for foreign investment in government bonds

Thailand, Korea

Rules to reduce risks of bank funding strains New Zealand, Korea

Reserve requirements on foreign currency and nonresident accounts

Indonesia, Taiwan Province of China

Policy Response 5: Structural policies to be long-term solutions

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• Enhance productivity and competitiveness to reduce supply bottlenecks

• Reform labor and goods markets to increase flexibility when responding to aggregate supply shocks

• Remove policy distortions―such as general subsidies & tariffs—to better reflect supply and demand

• Improve market integration

Policy Response 5: Longer-term policy responses

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Increase Food and Energy

Supply•Increase agricultural productivity (investment in technology, land development, and irrigation•Investments in energy efficiency and a concerted switch to renewable sources of power

Cushioning the social

implications

•Strengthening social safety nets

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Conclusion 1: Asia: Overheating or Smooth Landing?

Inflation: Accelerating headline inflation and spilling over to core inflation.

Credit Growth and Capital Flows: Credit growth accelerating; capital inflows moderating; domestic overheating pressures.

Monetary Policy: Low real rates, closed or positive output gaps; need to tighten policy.

Fiscal and Exchange Rate Policies: Pace of fiscal withdrawal can be quickened; exchange rate appreciation.

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Conclusions 2

Asia’s growth outlook remains strong but overheating pressures have surfaced in a number of regional economies.

Dealing with these pressures requires tightening fiscal stances and stronger currencies. Higher policy interest rates should also be part of the policy mix.

In addition to dealing with overheating risks, policymakers need to make sure that growth will be balanced and inclusive.

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Conclusion 3

The multi-speed global recovery is set to continue, and Asian economies will remain in the lead

As old risks recede, new ones are on the horizon Nevertheless, overheating pressures imply further

tightening of macroeconomic policies Capital inflows need to be managed carefully, but

pressures have moderated in recent months Over the medium-term, rebalancing growth remains the

key challenge

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Thank You