1

The Asia-Pacific Economic Outlook and Policy Challenges in an Uncertain

Global EnvironmentNaoyuki Shinohara

Deputy Managing DirectorInternational Monetary Fund

Asian Institute of ManagementManila, November 4, 2011

2

Plan of the Presentation

1. Advanced Economies: Outlook and Risks

2. Emerging Asia: Outlook, Risks, and Policies

3. The Philippines: Short and Long Term Challenges

3

Advanced Economies Outlook and Risks

4

In advanced economies, adverse feedback loops between fiscal and

financial vulnerabilities remain a key concern

Note: Current refers to data as of October 28.

Global Outlook

Bank CDS spreads(5-year, basis points)

Sovereign CDS spreads(5-year, basis points)

0

100

200

300

400

500

600

Euro area United States

Lehman Current

0

100

200

300

400

500

600

700

Euro area United States

Lehman Current

In the U.S., household balance sheet are still repairing

Global Outlook

U.S. House Price Indices(January 2006 =100)

U.S. Household Net Worth(Percent of disposable personal income;

business cycle peak = 100)

5

65

70

75

80

85

90

95

100

105

2006 2007 2008 2009 2010 2011

Case-Shiller 20-city index

CoreLogic (incl. distressed)

CoreLogic (excl. distressed)

Case-Shiller national index (2006Q1=100)

70

75

80

85

90

95

100

105

110

0 1 2 3 4 5 6 7 8 910

11

12

13

14

Current episode

Range of previous recessions, 1953-2001

6

World U.S.Euro Area Japan Brazil Russia India China

2011 (Sep

2011)4.0 1.5 1.6 -0.5 3.8 4.3 7.8 9.5

2011(Apr

2011)4.4 2.8 1.6 1.4 4.5 4.8 8.2 9.6

2012(Sep

2011)4.0 1.8 1.1 2.3 3.6 4.1 7.5 9.0

2012(Apr

2011)4.5 2.9 1.8 2.1 4.1 4.5 7.8 9.5

WEO Real GDP Growth Projections (percent change from a year earlier)

Global growth has been revised down

Global Outlook

7

Risks to the global economy are tilted to the downside

Risks to the Global Outlook(Baseline forecast and selected confidence bands)

Global Outlook

-2

-1

0

1

2

3

4

5

6

7

2007 2008 2009 2010 2011 2012

90 percent confidence interval 70 percent confidence interval

50 percent confidence interval

90 percent confidence interval (April 2011)

Central forecast

8

Emerging Asia Outlook, Risks and

Policies

Financial turbulence in advanced economies

has spilled over to Asia and activity is moderating

9

EM Asia Outlook and Risks

Stock Indices(Percent change;

as of October 31, 2011)

Exchange Rate against U.S. Dollar(Percent change, increase =

depreciation; as of October 31, 2011)

Selected Asia: Manufacturing PMI

(Seasonally adjusted; 50=neutral)

-60

-50

-40

-30

-20

-10

0

10

Thailand

Hong K

ong S

AR

Kore

aSin

gapore

Japan

Indonesi

aChin

aPhilip

pin

es

Aust

ralia

Mala

ysi

aIn

dia

New

Zeala

nd

Vie

tnam

Em

erg

ing E

uro

pe

Euro

are

aU

nited S

tate

sLa

tin A

meri

ca

Change since August 1

Largest 2-month change since January 2008

Taiw

an P

rovin

ceof C

hin

a

-10

0

10

20

30

40

50

Chin

aH

ong K

ong S

AR

Japan

Phili

ppin

esVie

tnam

Thai

land

Mal

aysi

aA

ust

ralia

Sin

gap

ore

Indones

iaK

ore

aN

ew Z

eala

nd

India

Euro

Russ

iaB

razi

lM

exic

oPola

nd

Hungar

y

Change since August 1

Largest 2-month change since January 2008

Taiw

an P

rovin

ceof C

hin

a

4042444648505254565860

Aust

ralia

Hong K

ong S

AR

Kore

a

Sin

gapore

Japan

India

New

Zeala

nd

Chin

a

end-2010 Aug-11 Latest

Tai

wan

Pro

vince

of

Chin

a

Note: latest data refer to October 2011, except for Hong Kong SAR and New Zealand (September 2011).

10

Growth forecast have been revised down slightly,

but risks tilted decidedly to the downside Asia: GDP Growth

(Central forecast and selected confidence intervals; in percent)

Asia: Projected GDP Growth(in percent; year over year)

 

Actual data and latest projections

 Difference from April

2011

   

     2010 2011 2012  2011 2012

 Industrial Asia 3.7  0.0  2.5   -1.7  0.2  Australia 2.7 1.8 3.3 -1.2 -0.2

Japan 4.0 -0.5 2.3 -1.9 0.2

New Zealand 1.7 2.0 3.8 1.1 -0.3Emerging Asia 9.5 7.9 7.7  -0.2 -0.3

China 10.3 9.5 9.0  -0.1 -0.5 Hong Kong SAR 7.0 6.0 4.3  0.6 0.1 Korea 6.2 4.0 4.4  -0.5 0.2 Taiwan Province of China 10.9 5.2 5.0  -0.2 -0.2              India 10.1 7.8 7.5  -0.4 -0.3

              Indonesia 6.1 6.4 6.3  0.2 -0.2

Malaysia 7.2 5.2 5.1  -0.3 -0.1 Philippines 7.6 4.7 4.9   -0.3 -0.1 Singapore 14.5 5.3 4.3  0.1 -0.1

Thailand 7.8 3.5 4.8  -0.4 0.3 Vietnam 6.8 5.8 6.3  -0.5 -0.5Asia 8.3 6.3 6.7 -0.5 -0.2

EM Asia Outlook and Risks

0

1

2

3

4

5

6

7

8

9

10

2007 2008 2009 2010 2011 2012

90 percent confidence interval

70 percent confidence interval

50 percent confidence interval

Central forecast

Another global recession:Would hit emerging Asia hard through the

trade channel…

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Selected Asia: Contribution of Non-Asian Final Demand to Value Added

(In percent of GDP)

Export-Oriented Asia: Private Domestic Demand and Exports(Year over year percent change)

Note: Includes China, Hong Kong SAR, Japan, Korea, Malaysia, the Philippines, Taiwan Province of China, and Thailand.

EM Asia Outlook and Risks

0

10

20

30

40

50

60

Sin

gap

ore

Mal

aysi

a

Thai

land

Philip

pin

es

Kore

a

Indones

ia

Chin

a

1995-2000 2001-2010

OECD average(2005)

Tai

wan

Pro

vince

of Chin

a

-60-50-40-30-20-1001020304050

-12-10-8-6-4-202468

10

2000:Q

1

2002:Q

1

2004:Q

1

2006:Q

1

2008:Q

1

2010:Q

1

2011:Q

2

Private domestic demand (left scale)

Exports of goods (right scale)

12

… and the financial channelSelected Asia: Foreign Holdings in

Local Currency Government Bonds(In percent of total outstanding local

currency government bond)

Consolidated Claims of European and U.S. Banks on Selected Asia

(In percent of GDP; as of 2011:Q2)

Note: Claims are on immediate borrower basis. Uses sum of quarterly GDP in U.S. dollar between 2010:Q3 and 2011:Q2 in the denominator.

EM Asia Outlook and Risks

0

5

10

15

20

25

30

35

40

2000:Q

1

2001:Q

1

2002:Q

1

2003:Q

1

2004:Q

1

2005:Q

1

2006:Q

1

2007:Q

1

2008:Q

1

2009:Q

1

2010:Q

1

2011:Q

3

Indonesia Korea Malaysia Thailand

0

5

10

15

20

25

Mal

aysi

a

Aust

ralia

Kore

a

New

Zea

land

Philip

pin

es

India

Japan

Thai

land

Indones

ia

Chin

a

Other European banksU.K. banksEuro area (excl. France) banksFrench banksU.S. banks

Tai

wan

Pro

vince

of C

hin

a

13

Downside risks may warrant a pause in monetary tightening

Fiscal normalization should be allowed to stay the course

Emerging Asia: Overheating Index and Vulnerability to

a Slowdown in G2 Growth

Policies

Asia: Cyclically Adjusted Fiscal Balances in 2012

(Deviation from 2002-07 average, percent of GDP)

IDN

CHN

IND

PHL

KORMYS

THA

TWN

SGP

0.0

0.5

1.0

1.5

2.0

2.5

0.00 1.00 2.00

Ove

rheati

ng in

dex

(2011:Q

2)

Change (in percentage point) inGDP growth following a

slowdown in growth in G–2 by 1 percentage point

Note: Responses to a slowdown in G–2 growth are based on regression estimates, and include effects of discretionary policy measures.

Incr

easi

ng

overh

eating

pre

ssure

Increasing vulnerabilityto slowdown in G–2

-4

-3

-2

-1

0

1

2

New

Zea

land

Sin

gap

ore

Aust

ralia

Thai

land

Japan

Indones

ia

Mal

aysi

a

India

Hong K

ong S

AR

Chin

a

Philip

pin

es

Kore

a

Taiw

an P

rovi

nce

of Chin

a

14

Exchange rates: room for further appreciation

Selected Asia: REER(index, 2007=100)

FX Reserves to Short Term Debt(end of 2010, in remaining maturity basis)

Policies

40

60

80

100

120

140

160

Jan-9

0Ja

n-9

1Ja

n-9

2Ja

n-9

3Ja

n-9

4Ja

n-9

5Ja

n-9

6Ja

n-9

7Ja

n-9

8Ja

n-9

9Ja

n-0

0Ja

n-0

1Ja

n-0

2Ja

n-0

3Ja

n-0

4Ja

n-0

5Ja

n-0

6Ja

n-0

7Ja

n-0

8Ja

n-0

9Ja

n-1

0Ja

n-1

1

Korea Indonesia PhilippinesThailand China

Sep-1

1

ASEAN includes Indonesia, Malaysia, the Philippines, Thailand, and Vietnam.

0

200

400

600

800

1000

ASEAN

India

Chin

a

EM

Lat

in

Am

eric

a

Eas

t Asi

a (e

xcl

.Chin

a)

EM

Eas

tern

Euro

pe

15

What if there is another global crisis/recession?

Asia has ample room to respond: Draw on abundant FX reserves or regional reserve pooling arrangements Shift aggressively to ease monetary policy Reverse fiscal consolidation (for those with fiscal space) Guarantees bank liabilities Deploy extraordinary measures (such as expansion of central bank balance sheets or exceptional liquidity provision) should rates approach the zero bound

Policies

16

Advancing rebalancing would reduce the vulnerability to external shocks, and help

make growth more inclusiveGlobal Current Account Balances

(in percent of world GDP)

Policies

-4 -2 0 2 4 6 8 10 12

CEE

Lat AM

MENA

SSA

ASEAN

NIEs

Industrial Asia

South Asia

Other Asia

Population-weighted average

Simple Average

EMs: Change in Gini Index, Last Two Decades

(In Gini points, since 1990)

-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

17

The Philippines: Short and Long Term

Challenges

Philippines: Growth has slowed,but inflation has remained elevated

18

Philippines: Contributions to Growth

(In percentage points; y/y)

Headline CPI Inflation(In percent; y/y)

Private Credit Growth(In percent; y/y)

The Philippines

18

-15

-10

-5

0

5

10

15

20

2008Q

12008Q

22008Q

32008Q

42009Q

12009Q

22009Q

32009Q

42010Q

12010Q

22010Q

32010Q

42011Q

12011Q

2

Private consumptionPublic consumptionFixed investmentChange in stocksNet exports

-4

-2

0

2

4

6

8

10

12

14

Mar-

07

Jun

-07

Sep

-07

Dec-

07

Mar-

08

Jun

-08

Sep

-08

Dec-

08

Mar-

09

Jun

-09

Sep

-09

Dec-

09

Mar-

10

Jun

-10

Sep

-10

Dec-

10

Mar-

11

Jun

-11

Sep

-11

Indonesia Malaysia

Philippines Thailand

0

5

10

15

20

25

30

35

40

Mar-

07

Jun-0

7Sep-0

7D

ec-

07

Mar-

08

Jun-0

8Sep-0

8D

ec-

08

Mar-

09

Jun-0

9Sep-0

9D

ec-

09

Mar-

10

Jun-1

0Sep-1

0D

ec-

10

Mar-

11

Jun-1

1Sep-1

1

Indonesia MalaysiaPhilippines Thailand

In the Philippines, poverty reduction remains a key issue

The Philippine Development Plan focuses on inclusive growth

Key measures for inclusive growth in the Philippine Development Plan:

Infrastructure investment

Governance reform Investment in

education and health Supporting the poor

19

Selected Asia: Change in Poverty Headcount

(In percentage points, since 1990; at 2005 PPP prices)

-75 -50 -25 0 25

Vietnam (2008, 13.1/ 38.5)

China (2005, 15.9/36.3)

Indonesia (2009, 18.7/ 50.6)

Lao P.D.R. (2008, 33.9/ 66.0)

Cambodia (2007, 28.3/ 56.5)

Nepal (2004. 55.1/ 77.6)

India (2005, 41.6/75.6)

Philippines (2006, 22.6/45.0)

Sri Lanka (2007, 7.0/29.1)

Thailand (2009, 10.8/ 26.5)

Bangladesh (2005, 49.6/ 81.3)

Malaysia (2009, 0.0/2.3)

Mongolia (2005, 22.4/ 49.1)

At $2 per day At $1.25 per day

The Philippines

As in other ASEAN economies, strengthening sustainable growth in the Philippines will involve

more infrastructure spending

20

Infrastructure GapEffect of Infrastructure on Private

Investment Spending(In percent of GDP: increase associated

with one percent increase in infrastructure)

020406080100120140160180200

0

10

20

30

40

50

60

1995

2005

Late

st

1995

2005

Late

st

ASEANOther Emerging MarketsNon-Asia Advanced Economies

Phones per 1,000 people(LHS)

Electricity generation (billion kilowatt hours per capita, RHS)

0.0

0.5

1.0

1.5

2.0

2.5

Ele

ctri

city

Tel

ephones

Cel

lphones

The Philippines

Summing up

Advanced Economies: Outlook and Risks

Emerging Asia: Outlook, Risks, and Policies

The Philippines: Short and Long Term Challenges

• Risks of adverse feedback loops from fiscal and financial fragilities persist

• G2 growth has slowed • Risks tilted to the downside • Healthy growth thanks to strong

domestic demand• But downside risks dominate—

does this call for a pause in tightening?

• Advancing rebalancing demand is key, and will also lead to more inclusive growth• Resilient growth and inflation

elevated• Over the medium term, need to

make growth more inclusive and increase infrastructure

21

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ConclusionsAsia is still expected to continue growing at a solid rate in 2011 and 2012. But downside risks from a weakening global economy have greatly intensified. Persistent weakness in advanced economies underscores the importance of shifting the growth model in Asia. This means advancing the policies needed for rebalancing and maintaining flexible exchange rates. This would help shift the engines for growth toward domestic demand and make growth more inclusive. In the near term, Asia should pause monetary tightening in those countries where there is room, to allow time for greater clarity on the prospects for the advanced economies. But fiscal consolidation should be allowed to run its course, and Asia has still room to respond if downside risks materialize.

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THANK YOU.