- International Monetary Fund. Asia and Pacific Dept
- Published Date:
- April 2007
© 2007 International Monetary Fund
Regional economic outlook: Asia and Pacific. -- Washington, D.C.: International
Monetary Fund, 2007. – (World economic and financial surveys, 0258-7440)
p. ; cm.
Includes bibliographical references.
1. Economic forecasting – Asia. 2. Economic forecasting – Pacific Area. 3. Asia – Economic conditions, 1945- .4. Asia – Economic conditions, 1945-– Statistics 5. Pacific Area – Economic conditions, 1945- . 6. Pacific Area – Economic conditions, 1945- – Statistics. I. International Monetary Fund. II. Series: World economic and financial surveys.
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- Executive Summary
- I. Overview
- II. The Evolving Nature of Capital Flows in Emerging Asia
- III. Housing Prices in Asia: Cause for Concern?
- IV. How Should Low-Income Resource-Rich Countries in Asia Respond to Recent Commodity Price Booms?
- 1.1. Asia’s Electronics Sector: Looking Back and Ahead
- 1.2. Assembly Platforms in Asia: Is China’s Role Changing?
- 1.3. Vietnam’s WTO Accession: What Does It Imply for Vietnam and the Rest of the Region?
- 1.4. Carry Trades: Getting Carried Away?
- 1.5. Islamic Finance in Malaysia
- 2.1. Measuring Capital Flows
- 2.2. Banking and Derivatives Flows: Hedging, Carry Trades, and Other Investments
- 2.3. Emerging Asia’s Experiences in Liberalizing Outflows
- 4.1. Managing Oil Revenues in Timor-Leste
- 1.1. Asia: Real GDP Growth
- 1.2. Asia: Real Exports Growth
- 1.3. Asia: Investment Growth
- 1.4. Asia: Private Consumption Growth
- 1.5. Asia: Current Account Balances
- 1.6. Asia: Official Reserves
- 1.7. Asia: Selected Fiscal Indicators
- 2.1. Price-Earning Ratio
- 2.2. Volatilities of Capital Flows in Asia-Pacific Countries
- 2.3. Balance of Payments and Reserve Accumulation in Emerging Asia (in billions of U.S. dollars)
- 2.4. Balance of Payments and Reserve Accumulation in Emerging Asia (in percent of GDP)
- 2.5. Balance of Payments and Reserve Accumulation in Emerging Asia
- 3.1. Summary Table on Housing Finance
- 4.1. Indicators for Spending Consideration
- 4.2. Country Sample and Size of the Resource Sector
- 4.3. Summary Institutional Frameworks for Resource Management
- 1.1. NIEs: Contributions to GDP Growth
- 1.2. ASEAN-5: Contributions to GDP Growth
- 1.3. China and India: Exports of Goods
- 1.4. Emerging Asia: Exports of Goods
- 1.5. Emerging Asia: Consumer Confidence
- 1.6. Emerging Asia: Consumer Prices
- 1.7. Emerging Asia: Producer Prices
- 1.8. Emerging Asia: Growth in Real Wages
- 1.9. Emerging Asia: Food CPI
- 1.10. China: Twelve-Month Trade Surplus
- 1.11. Emerging Asia: Equity Inflows
- 1.12. Emerging Asia: Equity Performance
- 1.13. Emerging Asia: Exchange Market Pressure Index
- 1.14. Net Private Capital Flows to Emerging Asia
- 1.15. Emerging Asia: Net FDI Flows
- 1.16. Cumulative Increases in Policy Rates
- 1.17. Emerging Asia: Real Policy Rates
- 1.18. Asia: Private Sector Credit Growth
- 1.19. Change in Fiscal Revenue, 2002 and 2006
- 2.1. Net Private Capital Flows into Emerging Market and Developing Countries
- 2.2. Emerging Asia: Gross Capital Inflows
- 2.3. International Banks’ Claims on and Liabilities to Asia
- 2.4. Geographic Breakdown of Capital Inflows 2005–2006
- 2.5. Emerging Asia: Gross Capital Outflows
- 2.6. Geographic Breakdown of Capital Outflows–2006
- 2.7. Net Capital Inflows
- 2.8. Emerging Asia: Net Portfolio Investments
- 2.9. Emerging Asia: Exchange Market Pressure Index
- 2.10. Balance of Payments and Reserve Accumulation
- 2.11. Emerging Asia: Pre-crisis Vs. Post-Crisis
- 2.12. Equity Investment Inflows into Asia and Pacific Economies
- 2.13. Selected Asia: Standard Deviation of Quarterly Changes in Portfolio and Other Investment Inflows
- 2.14. “Surges” and Exchange Market Pressure Index (EMPI)
- 2.15. Emerging Asia: Capital Flows Volatilities
- 3.1. Real House Prices (Annual percentage change)
- 3.2. House Price-Rent Ratio
- 3.3. Real House Prices and Real Stocks 1999–2006
- 3.4. Real House Prices and Real Income 1999–2006
- 3.5. Completed Housing Unites 2000–2006
- 3.6. Local Real House Prices 2002–2006
- 3.7. Real House Prices (March 1999=100)
- 3.8. Real House Prices (March 1990=100)
- 3.9. Localized Price-to-Income Ratio
- 3.10. Housing Loans in Asia
- 3.11. Nonperforming Mortgage Loans
- 3.12. Household Debt and Mortgage Growth 2002–2006
- 4.1. Commodity Prices
- 4.2. Asia: Terms of Trade of Goods and Services
- 4.3. Terms of Trade Gains by Country
- 4.4. Commodity Prices on Futures Markets
- 4.5. Low-Income Countries: Real GDP Growth
- 4.6. CPI Inflation
- 4.7. Real Effective Exchange Rates
- 4.8. Resource Exports Windfall
- 4.9. Current Account Balance
- 4.10. Resource Revenue Spending From 2002 to 2006
- 4.11. Change in Nonresource Fiscal Deficit
- 4.12. Low-Income Asia: Consumer Price Inflation
- 4.13. Real Effective Exchange Rates
- 4.14. External Public Debt
- 4.15. Ratio of Foreign Reserves to Imports
- 4.16. Indonesia: Exports Composition
- 4.17. Malaysia: Exports Composition
This Regional Economic Outlook was prepared by a team coordinated by Jerald Schiff and Paul Gruenwald, under the direction of David Burton of the Asia and Pacific Department.
Kay Chung, Janice Lee, and Fritz Pierre-Louis provided research assistance and Yuko Kobayashi and Livia Tolentino provided production assistance.
In this Regional Economic Outlook, 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:
- SAAR refers to seasonally adjusted increase at an annual rate.
- y/y refers to a year-on-year increase.
- q/q refers to a quarter-on-quarter increase.
Growth across Asia was strong again in 2006 and the outlook is for solid economic performance to continue in 2007 (Chapter I). Emerging Asia’s growth rate reached 9 percent last year, reflecting continued fast growth in China and India, and is expected to moderate only slightly to 8½ percent in 2007. Exports were buoyant in 2006, although there was a loss of momentum late in the year, particularly in technology goods, with mixed forward-looking indicators adding some uncertainty to the near-term outlook. The rotation toward domestic sources of growth was somewhat less than expected in 2006, and the outlook is for continued gradual improvement this year. Outside of China, the pick-up in consumption growth is projected to be modest. Investment in the ASEAN countries is expected to bounce back following a weak 2006 in response to lower interest rates and improved sentiment, and should also gather pace in the Newly Industrialized Economies (NIEs). In China and India, by contrast, a continued tightening of policies is expected to bring investment and credit growth down to more sustainable levels. In industrial Asia, Japan’s expansion remains solid, and growth should continue to firm in Australia and New Zealand.
Inflation pressures are contained in much—though not all—of Asia. Soft domestic demand, some appreciation of exchange rates, policy tightening and, to a lesser extent, lower oil prices, have all been factors. On the other hand, high credit growth and asset price rises remain a concern in some countries. Food prices have risen for weather-related reasons in a number of economies, but are not seen as a major concern for the region as a whole. Overall, inflation is expected to remain at around 3 percent for emerging Asia this year, with India and the ASEAN countries—where inflation came down sharply in 2006 owing to base effects—somewhat higher.
Asia’s aggregate current account surplus widened further to 4¼ percent of GDP in 2006, but is expected to stabilize. A higher-than-expected outturn was seen nearly across the board, owing to strong export growth and lower oil prices. The bulk of the increase came from the trade balance, and China—where the current account surplus reached 9 percent of GDP and official reserves passed $1 trillion—accounted for two-thirds of the nominal rise. Moreover, China’s trade balance has again surged in early 2007 on an acceleration of exports. In light of the expected moderation in global growth as well some pick-up in domestic demand outside the region’s largest emerging economies, Asia’s current account (in terms of GDP) should stabilize in 2007.
Asian financial markets fared relatively well in the February-March bout of turbulence, and sentiment toward the region remains strong. As was the case in May-June 2006, the recent turbulence was seen as a correction. However, unlike the previous episode, it was triggered by investor nervousness about U.S. growth, rather than inflation, underscoring the market perception that the region’s fortunes are still closely linked to external conditions, particularly those in the United States. Equities were again hit harder than other asset classes, but conditions stabilized relatively quickly and investors have begun to cautiously re-engage. Looking ahead, Asia’s high growth and solid fundamentals point to continued investor interest in the region including both direct and portfolio investments.
The nature of Asian capital flows continues to evolve (Chapter II). While net flows remain close to their long-term average, gross inflows and outflows have risen rapidly in a number of economies, reflecting the ongoing attractiveness of the region to investors as well as reforms taken to liberalize financial systems and capital accounts. There is little evidence that capital inflows have played a major role in currency appreciation, inflation or macroeconomic imbalances, although the increase in their volatility points to the need to enhance the resilience of financial systems, including through improved risk management.
On balance, the risks to this largely favorable outlook remain on the downside:
- While global growth has become more balanced, the main risk remains uncertainty surrounding U.S. growth prospects. The IMF’s World Economic Outlook has marked down its U.S. growth forecast to 2.2 percent in 2007, with some moderation in the level of downside risk. That said, ongoing weakness in the housing sector, and the potential for spillovers into consumption—and Asian exports—is still a key concern.
- A repricing of financial assets in conjunction with a much lower-than-expected U.S. growth trajectory could be larger than in recent bouts of turbulence, and could have a real impact on Asia through financial sector and household balance sheets. An onset of high volatility in markets could also trigger an unwinding of yen carry trades, with potential knock-on effects on the “target” markets in Asia (and elsewhere).
- Inflation risks have subsided, aided by expected slower growth and lower world oil prices. Nevertheless, a spike in oil prices cannot be discounted given tight capacity and still-unresolved geopolitical tensions.
- Within the region, China and India present upside risks to growth given their recent outperformance and continued high productivity growth. However, positive spillovers from China to the rest of the region may be diminishing in light of the fast growing domestic, rather than imported, content of many goods it exports.
At the current juncture, the monetary policy picture across Asia is mixed. Where inflation remains under control and policy rates are close to neutral (most of the NIEs and ASEAN economies) there is some flexibility to cut rates should the downside risks to growth materialize. Elsewhere, owing to concerns about overheating and/or asset price growth, the scope for a monetary policy response to slower growth is more limited. For some countries, a particular challenge has been the recent sharp run-up in housing prices (Chapter III).
Fiscal policy has been managed prudently in recent years, creating some space for countercyclical policies if needed. Policymakers have generally taken advantage of the recent favorable environment by consolidating fiscal positions and, where applicable, undertaking liability management, including repaying the IMF. While the current, broadly neutral, fiscal stances across much of the region are appropriate, there is room to allow automatic stabilizers to operate should growth falter. On structural issues, in a number of lower income, resource-rich economies, the recent commodity price boom has resulted in a positive “fiscal shock” that has the potential to help address developmental needs as well as to improve living standards and reduce poverty (Chapter IV).