- International Monetary Fund. Asia and Pacific Dept
- Published Date:
- November 2008
© 2008 International Monetary Fund
Regional economic outlook: Asia and Pacific – [Washington, D.C.]: International Monetary Fund, 2008.
p. cm. -- (World economic and financial surveys)
Includes bibliographical references.
1. Asia – Economic conditions – 1945- 2. Asia – Economic conditions – 1945- – Statistics. 3. Pacific Area – Economic conditions. 4. Pacific Area – Economic conditions – Statistics. I. International Monetary Fund. III. Series (World economic and financial surveys)
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- Executive Summary
- I. Overview
- Implications of the Global Financial Crisis for Asia’s Outlook
- The Deepening Global Financial Crisis
- Key Risks to Asia from the Deepening Global Financial Crisis
- 2009 Baseline Forecast: Continued Slowdown in the Face of a Global Financial Shock
- Policy Challenges to Safeguard Macro and Financial Stability
- II. The Globalization of Asian Inflation
- III. The Graying of Asia: Demographics, Capital Flows, and Financial Markets
- 1.1 The Widening of Basis Spreads in Asia
- 1.2 The Impact of High Food and Fuel Prices in Low-Income Asia—Implications for Inflation, Poverty, and Policies
- 1.3 Measuring Underlying Inflation Trends
- 2.1 Food and Fuel Subsidies in Asia and the World: Are They High, and Have They Affected International Prices?
- 3.1 Public Pension Funds in Asia: Maximizing Returns through Investment and Governance Reform
- 1.1 Asia: Official Reserves
- 1.2 Asia: Selected Intervention Measures on Deposit Insurance and Debt Guarantees
- 1.3 Asia: Real GDP Growth
- 1.4 Asia: Headline CPI Inflation
- 1.5 Asia: Selected Fiscal Indicators
- 2.1 Asia Inflation: Correlation with Inflation in Other Regions
- 2.2 Volatility of Inflation
- 3.1 Aging and Current Account Positions—Global Panel
- 3.2 Demography and Asset Prices and Returns
- 3.3 Demography and Financial Structure
- 1.1 Bank CDS Spreads
- 1.2 U.S. Corporate Bond Spreads
- 1.3 Cross-Currency Basis Swaps with U.S. Dollar
- 1.4 Total Assets on U.S. Federal Reserve’s Balance Sheet
- 1.5 Money Market Spreads
- 1.6 Industrial Production
- 1.7 MSCI Equity Markets
- 1.8 Emerging Market CDS Spreads
- 1.9 Asian External Financing: Bond, Equity, and Loan
- 1.10 Hong Kong SAR: Stock Market IPO
- 1.11 Emerging Asia: Amount of Maturing Corporate Debt, 2008–2018
- 1.12 Current Account Projections versus Change in NEER, 2008
- 1.13 Japan: Number of Corporate Bankruptcies
- 1.14 Overseas Lending by Japanese Banks
- 1.15 World Real GDP Growth
- 1.16 Brent Crude Oil Prices
- 1.17 Emerging Asia: Quarterly GDP Growth Forecasts
- 1.18 Selected Asia: Export Volume Growth
- 1.19 Changes in the Terms of Trade versus Growth in Domestic Demand (2007:Q2–2008:Q2)
- 1.20 Emerging Asia: Contributions to GDP Growth
- 1.21 Food’s Contribution to Inflation versus Its Weight in CPI, August 2008
- 1.22 Asia: GDP Growth
- 1.23 Risk Factors
- 1.24 CPI Inflation: Inflation-Targeting Countries versus Non-Inflation-Targeting Countries
- 1A.1 Financial Developments
- 1A.2 Trade Developments
- 1A.3 Real Sector Activity
- 1A.4 Inflation Developments
- 1A.5 Monetary Developments
- 2.1 Asia: Consumer Prices
- 2.2 Asia: Price Movements
- 2.3 Consumer Price Inflation and Contribution from Import and Domestic Prices
- 2.4 Oil: OPEC Spare Capacity
- 2.5 Expected Brent Crude Oil Price
- 2.6 Historical Decomposition of Commodity Price Inflation
- 2.7 Annual Change in Consumption of Primary Energy
- 2.8 Annual Change in Consumption of Aluminum
- 2.9 Asia: Dynamic Correlation between Monetary Policy and Inflation
- 2.10 Asia: Difference between Headline and Core Inflation
- 2.11 Asia: Worsening Inflation/Output Stabilization Trade-Off
- 3.1 Global Demographic Trends
- 3.2 Asia’s Impending Demographic Transformation
- 3.3 Age Structure
- 3.4 Asia: Impact of Aging on Current Account Balances
- 3.5 Current Account Impact from Relative Changes in Age Cohorts
- 3.6 Aggregate Impact of Aging on Current Account
- 3.7 Impact of Aging on Current Account Balances Outside Asia
- 3.8 Demographics and Asset Prices in the United States
- 3.9 Age-Related Pressures on Real Bond Yields
- 3.10 Age-Related Pressures on Real Stock Returns
- 3.11 Financial Market Structures in Asia, 2005
- 3.12 Age-Related Pressures on Representative Market Structures
In this Regional Economic Outlook: Asia and Pacific, the following groupings are employed:
- “Emerging Asia” refers to China, India, Hong Kong SAR, Korea, Singapore, Taiwan Province of China, Indonesia, Malaysia, the Philippines, Thailand, and Vietnam.
- “Industrial Asia” refers to Japan, Australia, and New Zealand.
- “Asia” refers to emerging Asia plus industrial Asia.
- “Newly industrialized economies” (NIEs) refers to Hong Kong SAR, Korea, Singapore, and Taiwan Province of China.
- “ASEAN-5” refers to Indonesia, Malaysia, the Philippines, Thailand, and Vietnam.
The following abbreviations are used:
Asset-backed commercial paper
American International Group
Certificate of deposit
Collateralized debt obligation
Credit default swap
Collateralized loan obligation
Consumer price index
Fiscal Investment and Loan Program (Japan)
Financial Stability Forum
Global Financial Stability Report
Government Pension Investment Fund (Japan)
Hong Kong Interbank Offered Rate
Initial public offering
London Interbank Offered Rate
National Pension Fund (Korea)
Nominal effective exchange rate
Newly industrialized economy
Organization for Economic Cooperation and Development
Overnight index swap
Primary Dealer Credit Facility
Regional Economic Outlook
Seasonally adjusted at an annual rate
Singapore Interbank Offered Rate
Structured investment vehicle
Term Auction Facility
World Economic Outlook
Wholesale price index
The following conventions are used:
- In tables, a blank cell indicates “not applicable,” ellipsis points (…) indicate “not available,” and 0 or 0.0 indicates “zero” or “negligible.” Minor discrepancies between sums of constituent figures and totals are due to rounding.
- An en dash (–) between years or months (for example, 2007–08 or January–June) indicates the years or months covered, including the beginning and ending years or months; a slash or virgule (/) between years or months (for example, 2007/08) indicates a fiscal or financial year, as does the abbreviation FY (for example, FY2008).
- An em dash (—) indicates the figure is zero or less than half the final digit shown.
- “Billion” means a thousand million; “trillion” means a thousand billion.
- “Basis points” refer to hundredths of 1 percentage point (for example, 25 basis points are equivalent to ¼ of 1 percentage point).
As used in this report, the term “country” does not in all cases refer to a territorial entity that is a state as understood by international law and practice. As used here, the term also covers some territorial entities that are not states but for which statistical data are maintained on a separate and independent basis.
This Regional Economic Outlook: Asia and Pacific was prepared by a team coordinated by Jerald Schiff and Kenneth Kang, under the direction of David Burton of the IMF’s Asia and Pacific Department. Kay Chung, Xiangming Fang, and Fritz Pierre-Louis provided research assistance, and Corinne Danklou, Yuko Kobayashi, Ranee Sirihorachai, Livia Tolentino, and Lesa Yee provided production assistance.
With the global economy entering a major downturn amid a deepening financial crisis, Asia is confronting the likelihood of sharply slowing growth and increased vulnerabilities. In particular, global financial stresses and the process of deleveraging by financial institutions are expected to continue beyond next year. This will dampen economic prospects in the region via a number of potential channels, notably lower demand for Asia’s exports, tighter funding conditions, more volatile capital flows, depressed equity prices and confidence, and deteriorating loan quality.
As outlined in Chapter 1, our baseline scenario sees growth in Asia slowing substantially before beginning a recovery in late 2009. With the global slowdown dampening exports, growth in Asia is projected to come primarily from domestic demand, which is nonetheless expected to slow. With commodity prices easing and growth declining below potential, inflation should decline. In fact, there are signs that headline inflation—and to a lesser extent, core inflation—have already peaked.
Risks to the outlook are considerable and tilted firmly to the downside. A severe global recession, combined with a deeper-than-expected credit squeeze, would have significant spillovers to the region, through both exports—Asia’s trade integration with the rest of the world has increased over the last decade—and a range of financial channels. In particular, it remains unclear how domestic demand would stand up to a sharp decline in export growth and tighter financial conditions.
In this volatile economic environment, policymakers in Asia need to be ready to react decisively to maintain financial stability and support growth:
- Policies to safeguard financial systems and maintain orderly credit conditions will be key. While the precise measures will vary across countries, efforts should include strengthening of crisis management systems and contingency planning, enhancing oversight of banks’ liquidity management, and improving risk management to address the likely rise in nonperforming loans. Temporary credit guarantees may be necessary to ensure the normal flow of credit, and authorities have to stand ready to recapitalize banking systems if needed.
- In most Asian countries—where domestic demand is easing, financial conditions have tightened, and second-round price effects are modest—monetary easing would be appropriate. But with inflation still above targets or comfort levels in many of these countries, effective communication by central banks will be key to ensuring that inflation expectations remain well anchored. Beyond considerations of inflation, monetary policy will have to ensure sufficient provision of liquidity for orderly market functioning.
- Many countries would appear to have room for additional fiscal stimulus, which may prove necessary in particular should the current financial environment limit the effectiveness of monetary policy. Some countries have in fact already announced fiscal stimulus packages, in some cases sizable ones.
While attention now is rightly focused on near-term risks, longer-term issues will inevitably return to the fore when the worst of the crisis has passed. In this context, Chapter 2 examines the rising contribution of commodity prices in Asia’s inflationary process and its potential implications for monetary policy. In the near term, sharply falling commodity prices may exert deflationary pressures on Asia. At the same time, commodity prices are tentatively expected to return to a high and volatile medium-term equilibrium, the result of underlying imbalances in commodity markets. Such gyrations in commodity prices may exacerbate already high inflation volatility, entrench wedges—both positive and negative—between core and headline inflation, and worsen output/inflation volatility trade-offs faced by central banks. Such an environment will require a careful consideration of policy frameworks and place a premium on effective central bank communication.
Looking further ahead, a number of countries in the region are set to age dramatically over the next 50 years, and for some the process has already begun. As discussed in Chapter 3, vastly differential rates of aging across Asia and globally can have potentially large effects on current accounts and capital flows—with capital tending to flow “uphill” from younger to older countries—as well as on financial markets and asset prices. Despite the longer-term nature of the challenge, governments can ease the potentially costly transition by beginning to take steps now. For aging countries this may involve an emphasis on pension and labor force reform, while for younger countries requiring substantial capital, enhancing financial intermediation and boosting productivity will take center stage.