- International Monetary Fund. Asia and Pacific Dept
- Published Date:
- October 2007
Regional Economic Out look Asia and Pacific
© 2007 International Monetary Fund
Regional economic outlook: Asia and Pacific – [Washington, D.C.] : International
Monetary Fund, 2007.
p. cm. -- (World economic and financial surveys)
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. 6. Pacific Area – Economic conditions – Statistics. I. International Monetary Fund. III. Series (World economic and financial surveys)
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- Executive Summary
- I. Overview
- II. Ten Years After the Crisis: How Much Stronger Is Asia?
- III. Sterilized Intervention in Emerging Asia: Is It Effective?
- IV. The Evolution of Trade in Emerging Asia
- 1.1. Asian Electronics Exports: Recent Trends and the Outlook
- 1.2. “Other Investment” Flows in Asia: Why the Large Changes?
- 1.3. Sovereign Wealth Funds
- 1.4. Growth in the Asset Management Industry in Hong Kong SAR and Singapore
- 2.1. A Selection of Recent Asia Critiques
- 3.1. The Mechanics of Intervention
- 3.2. The Effectiveness of Intervention: Additional Tests
- 1.1. Asia: Current Account Balances
- 1.2. Asia: Official Reserves
- 1.3. Asia: Real GDP Growth
- 1.4. Asia: Real Export Growth
- 1.5. Asia: Investment Growth
- 1.6. Asia: Private Consumption Growth
- 1.7. Asia: Selected Fiscal Indicators
- 3.1. Cumulative Foreign Exchange Flows and Reserve Accumulation
- 3.2. Reserve Adequacy Ratios
- 3.3. Foreign Exchange Turnover
- 3.4. Sterilization Coefficient
- 3.5. Change in Reserves and Level of the Exchange Rate
- 3.6. Change in Reserves and Change in the Exchange Rate
- 3.7. Change in Reserves and Volatility of the Exchange Rate
- 4.1. Direction of Exports, 2006
- 4.2. Source of Imports, 2006
- 4.3. Direction of Exports in Asia, 2006
- 4.4. Source of Imports in Asia, 2006
- 4.5. Direction of Manufactured Goods Exports in Asia, 2005
- 1.1. Emerging Asia: GDP Growth
- 1.2. NIEs: Contributions to GDP Growth
- 1.3. ASEAN-5: Contributions to GDP Growth
- 1.4. Asia: Industrial Production
- 1.5. Emerging Asia: Retail Sales Volume
- 1.6. Emerging Asia: Exports of Goods
- 1.7. Asia: Electronics Exports
- 1.8. Emerging Asia: Core CPI
- 1.9. Emerging Asia: Food CPI
- 1.10. Emerging Asia: Consumer and Producer Prices
- 1.11. Selected Asia: Nominal Effective Exchange Rates
- 1.12. NIEs: Nominal Effective Exchange Rates
- 1.13. ASEAN-5: Nominal Effective Exchange Rates
- 1.14. Emerging Asia: Net Equity Inflows
- 1.15. Sharpe Ratios
- 1.16. Yen Trading Positions
- 1.17. Yen Carry Trade Return (Short JPY, Long Listed Currency) (July 19, 2007–August 17, 2007)
- 1.18. Yen Carry Trade Return (Short JPY, Long Listed Currency) (August. 17, 2007–September. 28, 2007)
- 1.19. Credit Default Swaps: 5-Year Sovereign Spreads
- 1.20. EMBI Global Sovereign Spreads
- 1.21. Hedge Funds: Total Return
- 1.22. Private Sector Inflation Forecasts
- 2.1. Crisis-Affected Countries: Nominal Exchange Rates, 1994–97
- 2.2. Crisis-Affected Countries: Nominal Exchange Rates, 1999–2007
- 2.3. Crisis-Affected Countries: Corporate Debt-Equity Ratio
- 2.4 Selected Asia: Household Assets-Liabilities Ratio
- 2.5. Foreign Currency Loans
- 2.6. Nonperforming Loans Ratio
- 2.7. Emerging Asia: Corporate Governance Ratings
- 2.8. Emerging Asia: Governance Indicators
- 2.9. Emerging Asia Excluding India: Real GDP and Real Export Growth
- 2.10. Real GDP and Electronics Exports Growth
- 2.11. Credit to Private Sector
- 2.12. Real House Prices and Real Income, 1999–2007
- 2.13. Stock Market Indices
- 2.14. Price-Earnings Ratio
- 2.15. China: GDP Components
- 3.1. India: Intervention and Change in Reserves
- 3.2. Selected Asia: Foreign Exchange Intervention
- 4.1. Asia’s Share in World Trade Flows
- 4.2. Exposure to Exports
- 4.3. Trade among Industrial Asia, Emerging Asia, NAFTA, and EU-15
- 4.4. Trade among Industrial Asia, China, NIEs, and ASEAN-5
- 4.5. Intraregional Trade in Emerging Asia: China-Related vs. Other
- 4.6. Intra-Industry Trade Index by Region
- 4.7. Intermediate Goods among Manufactured Goods Trade Flows
- 4.8. Emerging Asia’s Exports by Level of Commodity Sophistication
- 4.9. Patterns of Exports to Emerging Asia
- 4.10. Patterns of Exports to Developed Economies
- 4.11. Competition between Economy A and B: Export Overlap Measure
- 4.12. Two-Dimensional Charts of Competition Measures: Competition from Other Subregions in Asia
- 4.13. Comparison of Unit Prices by Exporters
- 4.14. Developed Economies’ Share of Consumer Goods Exports from Emerging Asia
- 4.15. Breakdown of Exposure to Exports
This Regional Economic Outlook: Asia and Pacific was prepared by a team coordinated by Jerald Schiff and Paul Gruenwald, under the direction of David Burton of the IMF’s Asia and Pacific Department. Kay Chung, Xiangming Fang, Janice Lee, and Fritz Pierre-Louis provided research assistance and Corinne Danklou, Claudia Isern, Yuko Kobayashi, and Livia Tolentino provided production assistance.
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:
- 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.
The following conventions are used:
- In tables, a blank cell indicates “not applicable” and 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, 2005–06 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, 2005/06) indicates a fiscal or financial year, as does the abbreviation FY (for example, FY2006).
- 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.
Economic developments in Asia have been positive so far in 2007 (Chapter I). Growth has been stronger than expected across much of the region, with domestic demand making an increasing contribution in a number of economies. Exports have remained an important driver of activity, notwithstanding a relatively weak performance from electronics. China and India continued to lead the way, with high growth backed by strong investment (although the contribution of net exports to growth in China continues to rise). The pace of activity in the NIEs and ASEAN-5 remained solid, with strong investment in the former and strong consumption in the latter. In industrial Asia, GDP contracted in Japan in the second quarter on lower capital expenditure, but this is likely in part to reflect data problems, while Australia and New Zealand continued to enjoy strong, broad-based growth.
Inflation pressures have remained contained across most of Asia, although food prices have added volatility to the headline numbers in a number of economies. This has been especially true in China, where headline inflation reached a decade-high of 6½ percent in August, although core inflation remains low and second-round effects from the food price spike should be minimal. In contrast, higher oil prices have not been an inflation factor so far.
Effective exchange rates have appreciated only modestly, the region’s current account surplus has remained large, and reserve growth has continued apace. While some currencies in the region have risen significantly against the U.S. dollar, effective appreciations have generally been lower. Much of the exchange rate pressure continues to stem from current account surpluses, although outside of China these are moderating as a share of GDP. Intervention in the face of sustained foreign currency inflows has pushed reserves past the $4 trillion mark for the region, with China accounting for the bulk of the increase owing to a surging trade surplus.
Financial systems in Asia appear well placed to handle the effects of the global financial market turbulence that broke out in July. Asia was not at the epicenter of the recent turmoil, and markets and financial institutions in the region have been less affected to date than those in the United States and Europe. This reflects the relatively small direct exposure to U.S. subprime mortgages and, more broadly, to leveraged and complex structured credit products, including by hedge funds. Markets have begun to normalize somewhat at the time of this writing, although much uncertainty remains.
Looking ahead, the baseline scenario remains favorable. It features a moderation of growth during the remainder of 2007 and 2008 assuming an effective policy tightening in China, and to lesser extent in India, and a slowdown in foreign demand. A pattern of slower export and investment growth is expected across much of the region with only some de-linking from the global cycle. As credit markets gradually normalize, the fallout from the global financial turmoil should be manageable.
The risks to the overall outlook for the region are broadly balanced. The possibility of financial market stress feeding into a sharper-than-expected slowdown in exports is offset by that of continued growth outperformance in China and India. That being said, for the majority of countries in the region the balance of risks is on the downside.
The confluence of strong growth momentum, the ongoing financial market turmoil, and the associated risks present policymakers in the region with a number of challenges:
- Price pressures already in the pipeline will need to be balanced against the downside risks to growth, but many countries in the region would appear to have room to ease policy settings on both the monetary and fiscal fronts, if necessary.
- Uncertainty over the size, volatility, and direction of capital flows looms large. Policymakers should continue to be pragmatic and allow for greater exchange rate flexibility in order to rebalance growth and create two-way risk in the markets.
- Finally, while the episode of financial turmoil may still play out further, a number of lessons for regulators are already apparent. These include the strengthening of reporting requirements to improve transparency; of pricing and provisioning to reduce liquidity and solvency risks; and of disclosure requirements to better inform investors.
The recent bout of financial market turbulence, whose onset coincided broadly with the tenth anniversary of the Asian crisis, naturally raises questions as to what extent countries in the region remain vulnerable. Indeed, a number of prominent commentators have asked whether Asia has “learned the right lessons” from the crisis. Chapter II looks at vulnerability across a number of measures and concludes that Asia has come a long way as a result of financial and corporate sector reforms as well as significant improvements in monetary policy frameworks. While some vulnerabilities remain in individual countries, and slower growth in response to a decline in foreign demand cannot be ruled out, the region is much more resilient today than 10 years ago. That said, challenges remain as economies in the region continue to gain sophistication and integrate into the global economy.
Asian emerging economies continue to accumulate sizable foreign currency reserves. With reserves in most countries now beyond levels that could be considered precautionary, continued exchange market intervention may reflect a desire to influence the level, rate of change, or volatility of the exchange rate. Chapter III investigates this claim and finds only limited evidence of systematic links between sterilized intervention and exchange rates, although there is some modest evidence that intervention reduces exchange rate volatility, consistent with the objectives of some monetary authorities.
Trade interdependence in Asia continues to strengthen, reflecting the ongoing development of sophisticated production networks aimed at exploiting differences in comparative advantage. Chapter IV undertakes a comprehensive analysis of Asia’s changing trade patterns and finds that (1) the importance of exports to the region has reached unprecedented levels; (2) the expanded presence of Asia in world trade comes from trade in intermediate goods as a result of vertical specialization, with China as the export platform; (3) emerging Asia has begun to move away from lower-end products to a more diversified export base; and (4) the degree of competition within Asia appears to be intensifying.