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

Naoyuki Shinohara

Deputy Managing Director

International Monetary Fund

Asian Institute of Management

Manila, November 4, 2011 1

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

2

Advanced Economies

Outlook and Risks

3

In advanced economies, adverse feedback loops

between fiscal and financial vulnerabilities remain a

key concern

4Note: 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 9

10

11

12

13

14

Current episode

Range of previous

recessions, 1953-2001

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

6

Risks to the global economy are tilted to the

downside

7

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

Emerging Asia

Outlook, Risks and Policies

8

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

Th

ail

an

d

Ho

ng

Ko

ng

SA

RK

ore

aS

ing

ap

ore

Ja

pa

nIn

do

ne

sia

Ch

ina

Ph

ilip

pin

es

Au

str

ali

aM

ala

ysia

Ind

iaN

ew

Ze

ala

nd

Vie

tna

m

Em

erg

ing

Eu

rop

eE

uro

are

aU

nit

ed

Sta

tes

La

tin

Am

eri

ca

Change since August 1

Largest 2-month change since January 2008

Ta

iwa

n P

rov

ince

of

Ch

ina

-10

0

10

20

30

40

50

Ch

ina

Ho

ng

Ko

ng

SA

RJap

an

Ph

ilip

pin

es

Vie

tnam

Th

ailan

d

Mala

ysia

Au

str

alia

Sin

gap

ore

In

do

nesia

Ko

rea

New

Zeala

nd

In

dia

Eu

roR

ussia

Bra

zil

Mex

ico

Po

lan

dH

un

gary

Change since August 1

Largest 2-month change since January 2008

Ta

iwa

n P

rov

ince

of

Ch

ina

40

42

44

46

48

50

52

54

56

58

60

Au

str

ali

a

Ho

ng

Ko

ng

SA

R

Ko

rea

Sin

ga

po

re

Ja

pa

n

Ind

ia

Ne

w Z

ea

lan

d

Ch

ina

end-2010 Aug-11 Latest

Taiw

an

Pro

vin

ce o

f C

hin

a

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

Growth forecast have been revised down slightly,

but risks tilted decidedly to the downside

10

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 -0.3

Emerging 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 -0.5

Asia 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…

11

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

Mala

ysia

Th

ail

an

d

Ph

ilip

pin

es

Ko

rea

Ind

on

esia

Ch

ina

1995-2000 2001-2010

OECD average(2005)

Taiw

an

Pro

vin

ce

of

Ch

ina

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

-12-10

-8-6-4-202468

10

20

00

:Q1

20

02

:Q1

20

04

:Q1

20

06

:Q1

20

08

:Q1

20

10

:Q1

20

11

:Q2

Private domestic demand (left scale)

Exports of goods (right scale)

… and the financial channel

12

Selected 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

20

00

:Q1

20

01

:Q1

20

02

:Q1

20

03

:Q1

20

04

:Q1

20

05

:Q1

20

06

:Q1

20

07

:Q1

20

08

:Q1

20

09

:Q1

20

10

:Q1

20

11

:Q3

Indonesia Korea Malaysia Thailand

0

5

10

15

20

25

Mala

ysia

Au

str

ali

a

Ko

rea

New

Zeala

nd

Ph

ilip

pin

es

Ind

ia

Jap

an

Th

ail

an

d

Ind

on

esia

Ch

ina

Other European banks

U.K. banks

Euro area (excl. France) banks

French banks

U.S. banks

Taiw

an

Pro

vin

ce

of C

hin

a

Downside risks may warrant a pause in monetary tightening

Fiscal normalization should be allowed to stay the course

13

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

rhe

ati

ng

ind

ex

(20

11

:Q2

)

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.

Incre

asin

go

ve

rhe

ati

ng

p

ressu

re

Increasing vulnerabilityto slowdown in G–2

-4

-3

-2

-1

0

1

2

New

Zeala

nd

Sin

gap

ore

Au

str

ali

a

Th

ail

an

d

Jap

an

Ind

on

esia

Mala

ysia

Ind

ia

Ho

ng

Ko

ng

SA

R

Ch

ina

Ph

ilip

pin

es

Ko

rea

Ta

iwa

n P

rovin

ce

of

Ch

ina

Exchange rates:

room for further appreciation

14

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

-90

Jan

-91

Jan

-92

Jan

-93

Jan

-94

Jan

-95

Jan

-96

Jan

-97

Jan

-98

Jan

-99

Jan

-00

Jan

-01

Jan

-02

Jan

-03

Jan

-04

Jan

-05

Jan

-06

Jan

-07

Jan

-08

Jan

-09

Jan

-10

Jan

-11

Korea Indonesia Philippines

Thailand China

Se

p-1

1

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

0

200

400

600

800

1000

AS

EA

N

Ind

ia

Ch

ina

EM

Lati

n

Am

eri

ca

East

Asia

(e

xcl.

Ch

ina)

EM

Easte

rn

Eu

rop

e

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

15

Policies

Advancing rebalancing would reduce the vulnerability to

external shocks, and help make growth more inclusive

16

Global 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

20

00

20

01

20

02

20

03

20

04

20

05

20

06

20

07

20

08

20

09

20

10

20

11

20

12

20

13

20

14

20

15

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

Global discrepancy

Projections

The Philippines: Short and Long

Term Challenges

17

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

20

08

Q1

20

08

Q2

20

08

Q3

20

08

Q4

20

09

Q1

20

09

Q2

20

09

Q3

20

09

Q4

20

10

Q1

20

10

Q2

20

10

Q3

20

10

Q4

20

11

Q1

20

11

Q2

Private consumptionPublic consumptionFixed investmentChange in stocksNet exports

-4

-2

0

2

4

6

8

10

12

14

Ma

r-0

7Ju

n-0

7S

ep

-07

De

c-0

7M

ar-

08

Ju

n-0

8S

ep

-08

De

c-0

8M

ar-

09

Ju

n-0

9S

ep

-09

De

c-0

9M

ar-

10

Ju

n-1

0S

ep

-10

De

c-1

0M

ar-

11

Ju

n-1

1S

ep

-11

Indonesia Malaysia

Philippines Thailand

0

5

10

15

20

25

30

35

40

Ma

r-0

7Ju

n-0

7S

ep

-07

De

c-0

7M

ar-

08

Ju

n-0

8S

ep

-08

De

c-0

8M

ar-

09

Ju

n-0

9S

ep

-09

De

c-0

9M

ar-

10

Ju

n-1

0S

ep

-10

De

c-1

0M

ar-

11

Ju

n-1

1S

ep

-11

Indonesia Malaysia

Philippines 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)

0

20

40

60

80

100

120

140

160

180

200

0

10

20

30

40

50

60

19

95

20

05

Late

st

19

95

20

05

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

ctr

icit

y

Tele

ph

on

es

Cell

ph

on

es

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

Conclusions

Asia 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.22

THANK YOU.

23