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2018/FDM1/004 Session 2.1

Asia and the Pacific: Economic Outlook and Drivers

Purpose: Information Submitted by: International Monetary Fund

Finance and Central Bank Deputies’ Meeting

Port Moresby, Papua New Guinea15-16 March 2018

Asia and the Pacific:

Economic Outlook and Drivers

1

Asia’s growth pickup remains on track

2

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

World U.S.

Euro

Area Japan

Emerging

and Developing

Asia China India* ASEAN-5* Russia

Latin

America

and the Caribbean APEC*

2016 3.2 1.5 1.8 0.9 6.4 6.7 7.1 4.9 -0.2 -0.7 3.0

2017 3.7 2.3 2.4 1.8 6.5 6.8 6.7 5.3 1.8 1.3 3.9

2018 3.9 2.7 2.2 1.2 6.5 6.6 7.4 5.3 1.7 1.9 4.2

Revision

from

Oct. 20170.2 0.4 0.3 0.5 0.0 0.1 0.0 0.1 0.1 0.0 N/A

2019 3.9 2.5 1.9 0.9 6.6 6.4 7.8 5.3 1.5 2.6 4.0

Revision

from

Oct. 20170.2 0.6 0.2 0.1 0.1 0.1 0.0 0.0 0.0 0.2 N/A

Source: World Economic Outlook Update, January 2018 except for APEC.

Note: Figures for India are on a fiscal year basis. ASEAN-5 includes Indonesia, Malaysia, Philippines, Thailand and Vietnam. APEC countries’ growth forecast consists

of January 2018 forecast and October 2017 forecast.

Asia’s growth pickup remains on track

as other regions are accounting for more

3

Contribution to Growth and Growth Rate

(percent, PPP-adjusted)IMF Projection

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2013 2014 2015 2016 2017 2018 2019 2020

Asia Western hemisphere Europe

Middle East & Central Asia Africa Growth rate - Global (RHS)

Growth rate - Asia (RHS)

Source: IMF Staff estimates.

Certain population in Asia is not benefiting

from the economic growth

Source: World Bank

4

Some countries need more investment in

human capitals such as health and education

Under-Five Mortality Rate in ASEAN Member States

(per 1,000 births)

5

10

181

97

170

17

130

80

813

58

79

10

3526

86

8

52

31

39

22 26

3

60

32

57

6

43

27

3 4

1926

0

20

40

60

80

100

120

140

160

180

200

1990 2015 Target

Source: ASEAN Secretariat

Asia’s exports are still growing due to

other region’s upswing

6

Exports to Major Destinations(in percent; year-over-year growth)

-20

-15

-10

-5

0

5

10

15

20

25

30

Ja

n-1

2

Ju

l-1

2

Ja

n-1

3

Ju

l-1

3

Ja

n-1

4

Ju

l-1

4

Ja

n-1

5

Ju

l-1

5

Ja

n-1

6

Ju

l-1

6

Ja

n-1

7

Ju

l-1

7

to U.S. to Euro area

-20

-10

0

10

20

30

40

Ja

n-1

2

Ju

l-1

2

Ja

n-1

3

Ju

l-1

3

Ja

n-1

4

Ju

l-1

4

Ja

n-1

5

Ju

l-1

5

Ja

n-1

6

Ju

l-1

6

Ja

n-1

7

Ju

l-1

7

to Japan to China

Source: Haver Analytics

Asia’s domestic demand is strong,

boosting imports...

7

-2-10123456789

2016

2017

2018

2016

2017

2018

2016

2017

2018

2016

2017

2018

2016

2017

2018

2016

2017

2018

Asia Australia, Japan,New Zealand

China East Asia(excluding

China)

India ASEAN

Net exports Investment Consumption Growth

1

Contributions to Projected Growth(Year-over-year; percentage points)

Sources: IMF, World Economic Outlook database; and IMF staff calculations.1 ASEAN includes Indonesia, Malaysia, the Philippines, Singapore, Thailand, and Vietnam.

…and contributing to the reduction in current

account balances

8

-4

-2

0

2

4

6

8

10

Australia, Japan,New Zealand

East Asia(excluding China)

ASEAN China India Indonesia

2015 2016 2017 (Estimate) 2018 (Projection)

1

Asia: Current Account Balances

(Percent of GDP)

Sources: IMF, World Economic Outlook database; and IMF staff calculations.1 ASEAN includes Malaysia, the Philippines, Singapore, Thailand, and Vietnam.

Asia’s inflation has been revised down along

with other regions

9

0

1

2

3

4

5

6

7

8

9

Asia Euro area Latin America andthe Caribbean

Middle East andNorth Africa

United States

April 2017 WEO October 2017 WEO

2017 Inflation Forecast(Percent)

Source: IMF World Economic Outlook.

Capital inflows to emerging countries

remained positive

10

-40

-30

-20

-10

0

10

20

30

40

50

60

Sep 15 Jan 16 May 16 Sep 16 Jan 17 May 17 Sep 17 Jan 18

Africa & Middle East Emerging Europe Latin America Emerging Asia

Sources: National Sources; Bloomberg Finance L.P.; and Institute of International Finance.

Total Portfolio Flows(Billions of U.S. dollars)

High credit growth widespread in Asia

has raised downside risks

11

0

50

100

150

200

250

300

350

1986 1989 1992 1995 1998 2001 2004 2007 2010 2013 2016

Fast Credit Growth and Wide Credit Gap (Percent of GDP)

Notes: Total credit to the private nonfinancial sector.Sources: Bank for International Settlements; and IMF staff estimates.

China

Hong Kong SAR

Indonesia

Korea

Thailand

Malaysia

Vietnam

Mongolia

Cambodia

Singapore

Market participants expect US accommodative

monetary policy to sustain cyclical growth

12

US: Contribution to Growth

(percent, q/q seasonally adjusted, annualized)

-4

-3

-2

-1

0

1

2

3

4

5

6

Private ConsumptionPrivate InvestmentResidential InvestmentGovernment ExpendituresInventories

US FOMC participants expect a faster

tightening than market participants

(percent, FF rate projections)

Source: CME

Note: Blue dots indicate the median projection. Red dots indicate

the effective rate implied by the year-end Fed Fund future price.

Source: Haver Analytics

2018 2019 2020

0.0

1.0

2.0

3.0

4.0

5.0

China’s growth is rebalancing, however,

the country still faces a large credit gap

13

Source: IMF Staff estimates.

Japan’s recent growth momentum is positive.

1414

IMF Projection

-10.0

-8.0

-6.0

-4.0

-2.0

0.0

2.0

4.0

Japan's Primary Balance(percent of GDP)

Primary Balance (% of GDP)

Primary Balance (% of GDP, Cyclically Adjusted)

IMF Projection

50

100

150

200

250

Japan's Debt-to-GDP Ratio(percent of GDP) IMF Projection

15

Growth remain broadly stable in ASEAN,

but countries face infrastructure gap

IMF Projection

Real Growth Projection(in percent)

Source: World Economic Outlook Update, January 2018.

Note: ASEAN-5 includes Indonesia, Malaysia, Philippines, Thailand and Vietnam.

Developing Asian countries require more infrastructure

investment: Selected ADB countries*, 2016-2020

(annual averages, USD billion in 2015 prices)

Source: Asian Development Bank

Note: Developing member countries include 24 countries (China is not included),

future public investments are based on the 50 percent fiscal space assumption.

Numbers in brackets indicate percentage of GDP.

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

2014 2015 2016 2017 2018 2019

ASEAN-5 Emerging and Developing Asia Global

The favorable position provides an

opportunity to implement ambitious

structural reforms.

16

Key structural policy recommendationsMain Challenge

ChinaGrowth targets should be de-emphasized and the focus

should be more on the quality and sustainability of growth. Credit growth

JapanA comprehensive policy package of structural reforms

combined with income and demand policies should help to

reflate the economy and lift potential growth.

Reflation and fiscal

sustainability

IndiaAddressing corporate and banking sector balance sheet

weaknesses is key to safeguard financial stability and

support credit growth and private investment.

Corporate and banking sector

strains

AUS and

NZL

Promote housing affordability and supply through planning-

zoning reforms and infrastructure push. Recalibrate tax

incentives.

Housing affordability and re-

calibrating investment incentives

ASEANTackle structural constraints to growth such as the low

quality of infrastructure. Infrastructure gaps and quality

KoreaEnhance the role of women in the economy, and emphasize

innovation, especially in SMEs.

Declining productivity growth

and demographic headwinds

Small

StatesRestore fiscal discipline to build buffers.Natural disasters/climate change

Key messages and roadmap

17

• Asia is in a favorable position: growth is revised up.

• However, the sustainability of the pickup is still not clear.

• While Asia is more resilient, medium-term vulnerabilities

have increased.

• The “window for reforms” is now.

LONG-TERM CHALLENGES

– IMPACT OF AGING

18

Asia is aging much faster compared to the

experience of other advanced economies

19

Many parts of Asia are at risk of growing

old before becoming rich

20