4. 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. 4
5. 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.
5
6. 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.
6
7. The multispeed recovery is set to continue with Asia
increasingly propelling global growth
World GDP Growth Projection Contributions to Global Growth
(Year-on-year, in percent; Jan. WEO update) (In percentage points)
2010
2011
2012
Advanced economies
Emerging Asia
Other EM and developing countries
6 Global growth (3-year moving average)
5
World 5.0 4.4 4.5
4
3
Advanced economies 3.0 2.5 2.5
2
Emerging and 1
Developing 7.1 6.5 6.5
economies 0
-1
Asia 8.2 6.8 6.8
1988
1973
1976
1979
1982
1985
1991
1994
1997
2000
2003
2006
2009
2012
7
Source: IMF
8. Asia is expected to continue leading the global
recovery, but at a more moderate pace
Asia: Real GDP Growth
(y/y; percent); as of the January 2011 WEO update
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 9.5
India 5.7 9.7 8.4 8.0
NIEs -0.9 8.3 4.7 4.3
Korea 0.2 6.1 4.5 4.2
Singapore -1.3 15.0 4.7 4.4
Taiwan Province of China -1.9 10.2 4.9 4.6
ASEAN-5 1.7 6.7 5.5 5.7
Indonesia 4.5 6.0 6.2 6.5
Malaysia -1.7 6.7 5.3 5.2
Philippines 1.1 7.0 5.0 5.0
Thailand -2.2 7.5 4.0 4.5
Vietnam 5.3 6.8 6.8 7.0
Other ASEAN
Brunei -1.8 1.0 1.5 1.9
Cambodia 0.1 6.0 6.0 6.5
Lao PDR 7.6 7.7 7.5 7.3
Source: IMF 8
Myanmar 4.9 5.3 5.0 5.0
9. II. Downside Risks to Asia’s
Recovery
1. Rising commodity and food prices
2. Inflation
3. Capital inflows led to exchange rate appreciation and
asset bubbles.
4. Balancing growth is a challenge. 9
10. Risk 1: Navigating opposing risks will be challenging:
Weaker global recovery and stronger commodity prices…
Asia: GDP Growth Food Price: Global versus EM Asia
(Central forecast and 50, 70, and 90 percent
confidence intervals; in percent) (Year-on-year percent change)
Global food price (LHS)
50 20
EM Asia food price (RHS)
10
40 16
9 Central forecast
30 12
8
7 20 8
6 10 4
5 0 0
4
-10 -4
3
-20 -8
2 50 percent confidence interval
70 percent confidence interval -30 -12
1
90 percent confidence interval
2006:Q1
2007:Q1
2008:Q1
2009:Q1
2010:Q1
0
2007 2008 2009 2010 2011 2012 10
Source: IMF
11. 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
12. Risk 1: Food dominates region’s CPIs
Food Weights in Consumer Price Index
(%)
Economy Share
Cambodia1 44.8
China, People’s Rep. of2 30.2
Hong Kong, China 26.7
Indonesia 3 36.2
Korea, Rep. of 1 14.0
Malaysia1 31.4
Philippines 46.6
Singapore1 22.1
Thailand1 33.0
Viet Nam 39.9
1Includesnon-alcoholic beverages. 2Includes beverages. 3Includes beverages
and tobacco.
Source: Asian Development Bank. March 2011. "Global Food Price Inflation and
Developing Asia" (Forthcoming).
Source: ADB 12
13. Risk 1: larger than anticipated rise
in oil prices
Global Commodity Prices Oil Price Prospects
(January 2005 = 100) (In U.S. dollars per barrel)
Food 95% confidence interval
Metal
350 86% confidence interval
Energy 250
Agricultural raw materials 68% confidence interval
300 Futures
200
250
150
200
100
150
50
100
50 0 2008
2013
2007
2009
2010
2011
2012
Jan-06
Jan-07
Jan-11
Jan-05
Jan-08
Jan-09
Jan-10
Source: IMF 13 Note: West Texas Intermediate (WTI) oil price
futures information used.
15. Risk 2: Inflation is on the rise
Figure XX: Regional Headline Inflation (y-o-y, %)
12 11.8
People's Republic of China
9 8.7
ASEAN-4 plus Viet Nam
5.3
6 6.0 4.9
3 4.5
NIE-3 2.3
0.9
0 0.0
Japan
-2.2
-3
Jan- Apr- Jul- Oct- Jan- Apr- Jul- Oct- Jan- Apr- Jul- Oct- Jan- Apr- Jul- Oct- Feb-
Jan-
07 07 07 07 08 08 08 08 09 09 09 09 10 10 10 10 11
ASEAN-4 = Indonesia, Malaysia, Philippines, and Thailand; NIE-3 = Hong Kong, China; Republic of Korea; and Singapore; y-o-y = year-on-year.
Source: ADB staff calculations based on CEIC data.
Source: OREI
16. Risks 3: Capital inflows led to currency appreciation
and importance of Europe and United States for
Asia’s exports
EM Asia: Capital Inflow and Selected Asia: Exports to U.S. and Europe
Global Risk Aversion (In percent of total exports of goods)
25 Europe
100 Risk aversion (VIX)
United States
Capital inflows to EM Asia (billions of 20
80 U.S. dollars)
60 15
40
10
20
0 5
-20
0
Malaysia
Indonesia
Philippines
Korea
China
Singapore
Thailand
Japan
-40
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
Source: IMF 16
17. Risk 4: a few signs of asset market pressures
Asia: Pass-through from Domestic Food and Selected Asia: Property Prices
Energy Prices to Core Inflation 1 (Year-on-year change, in percent)
(In percentage points)
40
0.4
Food Energy 30
0.3 20
10
0.2 0
-10
0.1
-20 China
Hong Kong SAR
0.0 -30 Singapore
Philippines
New Zealand
Vietnam
Malaysia
Australia
Indonesia
Japan
India
Thailand
Korea
Province of China
Singapore
Hong Kong SAR
China
Taiwan
Taiwan Province of China
-40
Korea
-50
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
1 Impact of change in food and energy prices by 1 percent. 17
Wholesale prices used for India.
18. Risk 4: Rebalancing of demand remains a
challenge
Selected Asia: Current Account Balances Global Current Account Balances
(In percent of GDP) (In percent of world GDP)
2002-07 2010 2011 (Proj.) 2012 (Proj.) Rest of the world Emerging Asia
Japan and Germany Oil exporters
8 China United States
3
Projections
7
2
6
5 1
4 0
3 -1
2
-2
1 Global discrepancy
-3
0
2000
2004
2005
2009
2010
2014
2015
2001
2002
2003
2006
2007
2008
2011
2012
2013
Source: IMF
Japan NIEs ASEAN-5 China 18
20. Policy response 1: Increasing policy rates
Figure XX: Policy Rates 1—Selected Economies
Policy Rates1—Selected Economies (% per annum)
(% per annum)
10 9.5
Indonesia
8 7.5
6.75
6 Philippines
5.00
Republic of Korea 4.25
4
3.00
Thailand Malaysia 2.75
2
0.5 2.50
Japan
0
1-Jan- 2-Jun- 1-Nov- 1-Apr- 31-Aug- 30-Jan- 1-Jul-09 30-Nov- 1-May- 30-Sep- 1-Mar-
1-Jul- 4-Apr-
07 07 07 08 08 09 09 09 10 10 1111
1
BI 1rate (Indonesia); unsecured overnight call rate rate (Japan); Korea base rate (Republic of Korea); overnight policy(Malaysia); reverse repurchase rate
BI rate (Indonesia); unsecured overnight call (Japan); Korea base rate (Republic of Korea); overnight policy rate rate (Malaysia); reverse
(Philippines); and 1-day repo rate and 1-day repo rate (Thailand).
repurchase rate (Philippines); (Thailand).
20
Source: Bloomberg andand Datastream.
Source: Bloomberg Datastream. Source: ADB
21. Policy response 1: Rate increase is smaller than
the cut during the crisis
Policy Rate Movements1
(percentage1 points)
Figure XX: Policy Rate Movements (percentage points)
8
Cuts in 2008—2009
7
Hikes in 2010—2011
6
5
4
3
2
1
0
2
Viet Nam Korea, Rep. of Indonesia Thailand China, Philippines Malaysia Japan
People's Rep.
1One year lending rate (People's Republic of China); BI Rate (Indonesia); prime rate (Viet Nam); unsecured overnight call rate (Japan); Korea base rate
of
(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.
1 Source: ADB
One year lending rate (People's Republic of China); BI Rate (Indonesia); prime rate (Viet Nam); unsecured overnight call rate (Japan); Korea base rate
Source: Bloomberg and Datastream. 21
(Republic of Korea); overnight policy rate (Malaysia); reverse repurchase (repo) rate (Philippines); and one-day repo rate (Thailand).
22. Policy response 2: Currency appreciation, except
Vietnamese dong
Figure XX: Change Exchange Rate against US dollar (%)1 (%)
Change in in Exchange Rate against US dollar 1
Indonesian rupiah 2010
Singapore dollar 2011 YTD
Malaysian ringgit
Japanese yen
Philippine peso
2
PRC renminbi
Korean won
Hong Kong dollar
Thai baht
Vietnamese dong
-8 -4 0 4 8 12 16
1
Year-to-date (YTD) figures based on 21 Mar 2011closing. Negative values indicate depreciation.
1Year-to-date (YTD) figures based on 21 Mar 2011 closing. Negative values indicate depreciation.
2
PRC = People's Republic of China.
2PRC = People's Republic of China.
Source: OREI staff calculations based on Reuters data. 22
Source: OREI staff calculations based on Reuters data. Source: ADB
23. Policy Response 3: Accumulating
International Reserves
International Reserves (billion USD)
2.9
2.7
2.4
2.1
1.6
1.1
0.9
0.8
0.7 0.7
0.5 0.5
International reserves increased from 0.5 billion in 2000 to USD1
billion in 2006, then reached USD2.9 billion in May 2011.
24. Policy Response 4: Macro-prudential measures
Measures Implemented in
Rein in short-term foreign currency borrowing by Korea
commercial banks
Lengthen maturity structure of central bank’s external Indonesia
liabilities and make one-month certificate less liquid
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 Thailand, Korea
government bonds
Rules to reduce risks of bank funding strains New Zealand, Korea
Reserve requirements on foreign currency and Indonesia, Taiwan Province
nonresident accounts of China
24
25. Policy Response 5: Structural policies to
be long-term solutions
• 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
25
26. Policy Response 5: Longer-term policy
responses
Increase Food and Energy Cushioning the social
Supply implications
• Increase agricultural • Strengthening social
productivity (investment safety nets
in technology, land
development, and
irrigation
• Investments in energy
efficiency and a
concerted switch to
renewable sources of
power
26
27. 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. 27
28. 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.
28
29. 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 29
Let me begin with the global picture.Thus far, economic recovery is proceeding broadly as we expected at the time of the October WEO—actually slightly better. Global activity is forecast to expand by 5 percent in 2010 and 4½ percent in 2011 (left chart), about 0.2 percentage points above our October forecasts for both years, and again at 4½ percent in 2012. Large differences are expected to persist between advanced economies and emerging and developing economies. As the chart on the middle shows, the recovery has been especially sluggish in advanced economies, compared with recoveries from previous synchronized slowdowns, and considering that these economies are emerging from the deepest recession since World War II. We expect the recovery there to remain weak, with growth projected to be 3 percent in 2010 and 2½ percent in both 2011 and 2012.At the same time, the output of emerging and developing economies is projected to expand at strong rates. Emerging economies, particularly in Asia, are expected to contribute to global growth more this time than during the recoveries from the synchronized slowdowns of previous decades (right chart).
While the near-term outlook for Asia’s growth is strong, navigating emerging overheating pressures, will be challenging in light of two opposing risks.On one side, if financial system or fiscal pressures in advanced economies intensify and spill over to the real economy, Asia is likely to be greatly affected via the trade channel.Indeed, Asia’s dependence on demand from outside the region has increased over time (LHS). In particular, a weaker than expected investment cycle in the US and other advanced economies could hurt Asian high tech exports. Financial spillovers from advanced countries to Asian banks, firms, and sovereigns are also a source of concern, although they appear to be generally manageable.On the other side, further increases in global commodity prices, especially of food, could exert stronger pressures on domestic food prices than already experienced in Asia (RHS). In addition to the direct impact on the poorest segment of the population, higher commodity prices could feed through other prices as well. This could force a stronger than expected reaction from policy makers, in order to prevent an excessive and more persistent rise in generalized inflation.
……along with increased prices of key staples, domestic food price inflation increasedInternational prices of rice and wheat— two key staples produced and consumed in developing Asia—together with increases in other domestic food items, have translated to the region’s domestic food price inflation in January 2011 of about 10%June 2010-Feb 2011: International rice price rose by 16.8%; while wheat prices almost doubled partly due to Thailand and Viet Nam release of ample supplies from their stocks to mitigate price pressure
Source: IMFOutlook in different perspectives
Increasing international reserves are good for stability. But what is an optimum level in the dollarized economy? What are other options to manage international reserves in the current context?