Over the past two decades, Asian export growth has been driven by growth in intraregional trade. Intraregional exports now account for 41 percent of total emerging Asia exports, versus 23 percent in 1986. However, much of these intra-regional flows are occuring within vertically integrated supply chains aimed at final demand in industrial countries, which is why exposure to the U.S. (and EU) has increased over the last ten years despite rapid growth in intra-regional trade. See chapter’s appendix for details on how we computed measures of indirect trade exposure to the U.S. were computed.
These measures are based on data from U.S. Treasury’s International Capital System. See details in the chapter.
Note the strong correlation between a country’s trade exposure (measured by total trade exposure to the U.S.) and how correlated its GDP growth is with that of the U.S.
This is the 24-month rolling correlation between S&P 500 monthly returns and monthly returns in each country’s main stock index. Not surprisingly, correlations are highest in the two regional financial centers (and in Australia).
On the second bullet, long-sample estimates of spillovers (expressed here as ratio of percentage slowdown in the country to percentage slowdown in the U.S.) range from zero in China/India to about one in Singapore or Taiwan POC. In general, there’s a strong correlation throughout our study between the estimated spillover for a country and its trade/financial exposure to the U.S.
Estimates on the left column come from our country-specific regressions, and on the right from our vector auto-regressions, both estimated over the full sample period (see chapter’s appendix for details on each method). Note how close the estimates from the two methods are despite them being substantially different. Note the small spillovers for China and India, when the models are estimated over the full sample period. Because of the large weight of these two countries, the regional estimate obtained is also small.
On the second arrow, we simulate financial turbulence in GEM by assuming that consumption and investment decline globally in excess of the decline engendered by the U.S. slowdown. Such additional declines are caused by global declines in confidence, and can be seen to be proxying for current financial stress. (See chapter for how global declines in confidence were calibrated in the model). On the third arrow, note that while many commentators have pointed to the fact that the 2001 recession was concentrated on electronics, a key export for the region, and hence should be seen as an upper-bound estimate of spillovers, it is worth noting that the current slowdown in the United States is expected to be deeper and more prolonged than the 2001 recession, and is accompanied by substantial stress in money and credit markets.
The reasons why the 2001 recession had such a large impact on Asia have been discussed at length, and include the facts that the shock was concentrated on electronics, which is a key export for Asia; that Europe and Japan were not providing support for the global economy before and during the recession; and that domestic demand in Asia was still recovering from the 1997–98 financial crisis. While these facts may suggest that the 2001 recession provides an upper-bound estimate of spillovers, it is worth noting that the current U.S. slowdown is expected to be deeper and more protracted and, unlike the 2001 recession, is being accompanied by significant stress in money and credit markets around the world.
Reza baqir 22ndcacci conference
Economic Outlook for theAsia Pacific Region and the Global Financial Crisis Reza Baqir IMF Resident Representative 22nd CACCI Conference Manila Hotel, October 23, 2008
Overview The bad news The world economy is entering a major downturn in the face of the most dangerous financial shock in mature financial markets since the 1930s. Risks may still be tilted to the downside The good news To date, Emerging Asia has led global growth Nevertheless, Asia is also exposed to global economic conditions, and perhaps more so now than before 2
An extraordinary, banking-sector shock is striking advanced economies Interbank Markets Bank CDS Spreads (3-month LIBOR minus T-bill rate; in percent) (10-years; median; in basis points)4.0 400 3503.0 300 United States 250 United States Euro area2.0 Euro 200 area 150 Japan1.0 100 500.0 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Oct. 0 3 2007 08 Oct. 2006 2007 2008 08
Overnight developments Markets sold off sharply and on a broad basis today, including equities, emerging market assets and commodities. Global recession fears continue to grip markets while deleveraging pressures appear to be becoming broader The selloff in emerging market debt is gaining pace, with the EMBIG selling off 5.5% amid spread widening of 69 bps to 783 bps, the highest level since 2002. Selling is across the board in the most liquid names, with the exception of the highest-rated sovereigns. Emerging market equities also plunged, with major bourses in the EMEA region off 3 to 9%, and Latin stock markets losing 5 to 10%, except Argentina’s Merval, which has lost over 14%. Emerging market currencies are selling off sharply virtually across the board against the dollar, and even more against the yen. 4
The financial sector shock comes on the heelsof, until recently, a major commodity price shock Real Oil, Metals and Food Prices (1970 = 100) 250 1400 Food (LHS) 1200 200 Oil (RHS) 1000 150 800 600 100 400 50 Metals (LHS) 200 0 0 5 1970 75 80 85 90 95 2000 05 Q3 08
As a result, advanced economies tocome close to or move into recession Real GDP Growth Rates (percent change) 4 Growth Potential April 2008 WEO 3 July 2008 WEO 2 1 02007 08 09 10 2007 08 09 10 2007 08 09 10 United States Euro area Japan 6
Outlook for advanced economiesSource: IMF World Economic Outlook, October 2008, available at 7www.imf.org
Emerging economies have so farprovided support to global growth 8
…and Asia has led growth in emergingeconomies Real GDP Growth Rates (percent change) 10 Growth HP Trend Growth April 2008 WEO 8 July 2008 WEO 6 4 2 0 07 08 09 10 07 08 09 10 07 08 09 10 07 08 09 10 07 08 09 10 9 Africa Emerging Latin America Middle East Emerging Asia Europe & CIS
A note on country groupings Emerging Asia: Newly Industrialized Asian Economies: Hong Kong SAR, Korea, Singapore, Taiwan Province of China Developing Asia: Afghanistan, Rep. of, Bangladesh, Bhutan, Brunei Darussalam2, Cambodia, China, Fiji, India, Indonesia, Kiribati, Lao PDR, Malaysia, Maldives, Myanmar, Nepal, Pakistan, Papua New Guinea, Philippines, Samoa, Solomon Islands, Sri Lanka, Thailand, Timor-Leste, Dem. Rep. of, Tonga, Vanuatu, Vietnam. 10
Emerging economies account for a rising share of global growth14 Contributions to Global Growth (percent change)121086420-2 Other Developing India-4 China Advanced economies 11-6
In general, the resilience in emerging and developing economies has grown, notably since the Asia crisis... Emerging and Developing Economy External Indicators (percent of total GDP)45 8 External Debt40 (left scale) 635 4 Change in30 reserves 225 020 -2 Current account 1215 -4 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007
...but countries with vulnerabilities are feeling the pressure Emerging Economies: Credit Default Swap Spreads, 2004–08 (In basis points, July 2007 = 100)160014001200 Countries with current account deficits > 5% Countries with current account surpluses (or small1000 deficits)800600400200 0 13 Sep. 2004 05 06 07 08
Risks to global growth are to the downside Global GDP Growth 6.0 (percent change, ppp-GDP weighted average) 5.5 5.0 4.5 4.0 3.5 3.0 90% Confidence interval 2.5 70% Confidence interval 50% Confidence interval 2.0 1.5 1.0 142005 2006 2007 2008 2009
According to one indicator, a globalrecession is more likely than not 15
Major down side factors include potential furtherdeterioration in financial conditions and domesticdemand in the US. 16
Trade exposure to the US has risenExport Exposure to the United States(In percent of GDP) Direct Tot al 1994 2006 1994 2006Japan 2.5 3.4 3.0 4.4Aust ralia 0.9 1.1 1.6 2.1New Zealand 2.8 3.0 3.7 4.0China 5.6 9.6 7.6 12.2India 1.7 2.4 2.0 3.1Hong Kong SAR 16.7 14.8 20.0 21.8Korea 4.9 5.1 6.1 8.7Singapore 23.9 17.3 31.9 30.8Taiwan PO C 10.4 9.9 12.9 15.5Indonesia 3.3 3.5 4.5 5.6Malaysia 18.0 22.7 25.0 31.7Philippines 8.8 8.0 9.8 12.0Thailand 7.0 10.5 8.9 15.1Viet nam 1.4 15.2 2.8 18.5Asia 7.7 9.0 10.0 13.3 Industrial Asia 2.1 2.5 2.8 3.5 Emerging Asia 9.2 10.8 12.0 15.9 19 Sources: UN COMTRADE Dat abase; and IMF st af f calculat ions.
…as has exposure to financial assets Financial Exposure to the United States(In percent of GDP) U.S. Holdings of Asian Asian Holdings of U.S. Port f olio Securit ies Port f olio Securit ies Dec-94 Dec-06 Dec-94 Jun-06Japan 2.5 13.0 4.4 25.0Aust ralia 6.8 20.4 2.6 15.0New Zealand 10.5 9.3 2.9 12.7China 0.3 2.2 2.3 28.8India … 5.5 … 2.5Hong Kong SAR 12.6 42.2 14.8 61.3Korea 1.4 12.4 1.2 14.2Singapore 8.6 35.8 42.9 129.2Taiwan PO C 0.2 19.4 13.1 39.8Indonesia 1.2 3.7 1.0 3.4Malaysia 11.5 9.2 6.8 10.5Philippines 3.1 7.9 3.3 7.9Thailand 3.1 5.7 4.4 8.2Viet nam … 0.1 … 4.1Asia 5.1 13.3 8.3 25.9 Industrial Asia 6.6 14.2 3.3 17.6 Emerging Asia 4.6 13.1 10.0 28.2 Sources: U.S. Depart ment of t he Treasury, Treasury Int ernat ional Capit alSyst em; CE Dat a Company Lt d.; Haver Analyt ics; and IMF, Inf ormat ion IC 20Not ice Syst em, and st af f calculat ions.
Perhaps due to higher exposure, growth in Asia is nowmore correlated with U.S. growth than in the 1990s.Growth Correlation with the United States 1990-96 2000-07Japan -0.06 0.41Australia 0.74 0.38New Zealand 0.28 0.23China … 0.08India … 0.14Hong Kong SAR 0.16 0.61Korea -0.32 0.30Singapore 0.31 0.62Taiwan POC 0.24 0.61Indonesia 0.06 0.05Malaysia -0.26 0.52Philippines 0.28 0.47Thailand -0.20 0.47Vietnam … 0.20 21 Sources: CEIC Data Company Ltd.; and IMF staff calculations.
Financial correlations have also increased over time Correlations in Stock Market Returns 1990-96 2000-07Japan 0.26 0.52Australia 0.52 0.71New Zealand … 0.49China … 0.08India -0.01 0.45Hong Kong SAR 0.35 0.69Korea 0.12 0.59Singapore 0.49 0.61Taiwan POC 0.16 0.49Indonesia 0.26 0.43Malaysia 0.37 0.30Philippines 0.34 0.45Thailand 0.38 0.43Vietnam … 0.10Asia 0.29 0.45 High financial exposure 0.35 0.57 Low financial exposure 0.23 0.34 22 Sources: Bloomberg LP.; and IMF staff calculations.
Key results from investigating spilloversfrom US to Asia: On average over the last fifteen years, a one percentage point slowdown in the U.S. has led to an estimated ¼ percentage point slowdown in Japan, and a ¼-½ point slowdown in emerging Asia. The average spillover for emerging Asia masks wide cross-country variation within the region, with particularly large spillovers for the most-trade/financially exposed countries. These long-sample estimates of spillovers may understate current vulnerabilities. 23
Estimated spillovers show large variationswithin the regionSummary of Results: Impact of one percentage point U.S. Slowdown(In percentage points) Cross-Country VAR with Financial Regressions VariablesJapan 0.3 0.2Australia 0.7 0.5New Zealand 0.9 0.3China 0.1 0.0India -0.2 0.0Hong Kong SAR 1.0 0.8Korea 0.1 0.1Singapore 1.1 0.9Tawan POC 1.2 0.9Indonesia 0.2 0.4Malaysia 0.5 0.7Philippines 0.6 0.4Thailand 1.0 0.5Asia 0.3 0.2 Emerging Asia 0.2 0.2 Emerging Asia (excl. China and India) 0.5 0.5 24 Source: IMF staff estimates.
Key results (cont’d) Why might long-sample estimates understate spillovers at the current juncture? → Reestimating our regressions over shorter samples suggests that spillovers have increased over time, not least for China, consistent with our finding of growing trade and financial integration with the United States. → When U.S. demand shocks are accompanied by realistic declines in global confidence, model simulations predict substantially larger spillovers (0.7 percentage point growth slowdown in Asia for a one percentage point slowdown in the U.S.) → Specific U.S. recessions have in the past generated large negative spillovers to Asia, as witnessed by the 2001 recession. 25
Finally, U.S. slowdowns can have very large impacts onAsia, as evidenced by the 2001 recession. Impact of 2001 U.S. Recession1 (In percent ) Hodrick-Prescot t Baxt er-King Filt er Filt er Unit ed St at es -1.90 -1.89 Japan -1.41 -1.49 Aust ralia -0.70 -0.92 New Zealand -0.04 -0.18 China -0.42 -1.53 India 0.16 -0.73 Hong Kong SAR -2.84 -3.39 Korea -0.94 -1.01 Singapore -7.80 -7.72 Taiwan POC -5.54 -5.59 Indonesia 0.48 0.61 Malaysia -3.41 -3.51 Philippines -1.17 -1.63 Thailand -0.98 -1.15 Viet nam -0.60 … Asia2 -1.80 -2.17 High trade exposure2 -3.19 -3.83 Low trade exposure2 -0.41 -0.75 Sources: CE Dat a Company Lt d.; and IMF st af f calculat ions. IC 1 Measured as t he average change in t he out put gap during t he recession 26 relat ive t o preceding f our quart ers. 2 Arit hmet ic nonweight ed average.
To conclude The world is facing a major economic shock To date, Asia has held up better than the rest of the world But Asia is exposed and the spillover effects could be larger than expected 27
Thank you REZA BAQIR IMF Office Manila(02) 536 0785, 400 4985 28