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?
S5 h.e. hang choun naron- presentation
Sustaining Asia’s Economic Recovery Asia Economic Forum Hang Chuon Naron 1 31st July 2011
Key issues facing Asia’s recoveryThe multi-speed global recovery is set to continue.Asia is expected to continue leading the globalrecovery, but at a more moderate pace.The tragic events in Japan, earthquake followed bytsunami, add to uncertainty in Asia.The debt crisis in Greece, Ireland, Portugal andSpain undermines growth in the Eurozone.US debt ceilings: political wrangling inWashington. This will have negative effect on theglobal economy. 4
Key issues facing Asia’s recoveryNavigating opposing risks will be challenging:Weaker global recovery and strongercommodity prices.The signs of overheating are broadening.The withdrawal of fiscal stimulus has beenslow.Quantitative Easing (QE) 2 resulted in capitalinflows into Asia in the first half of 2011. 5
Key issues facing Asia’s recoveryNow, foreign capital inflows have moderated, ashas the growth in asset valuations.However credit dynamics remain very strong.Over the medium-term, rebalancing growthremains the key challenge. 6
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 3Advanced 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
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 7.3Source: IMF 8 Myanmar 4.9 5.3 5.0 5.0
II. Downside Risks to Asia’s Recovery1. Rising commodity and food prices2. Inflation3. Capital inflows led to exchange rate appreciation andasset bubbles.4. Balancing growth is a challenge. 9
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 10Source: IMF
Risk 1: Key staples pushing region’s food prices upRegion’s food price inflation Pushed by prices of rice and wheat And other domestic food itemsFrom 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
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
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-10Source: IMF 13 Note: West Texas Intermediate (WTI) oil price futures information used.
Risk 2: Inflation is on the rise Figure XX: Regional Headline Inflation (y-o-y, %) 12 11.8 Peoples 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
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 Europe100 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:Q4Source: IMF 16
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) 400.4 Food Energy 300.3 20 100.2 0 -100.1 -20 China Hong Kong SAR0.0 -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.
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 exporters8 China United States 3 Projections7 265 14 03 -12 -21 Global discrepancy -30 2000 2004 2005 2009 2010 2014 2015 2001 2002 2003 2006 2007 2008 2011 2012 2013Source: IMF Japan NIEs ASEAN-5 China 18
Policy response 1: Increasing policy ratesFigure 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 11111 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). 20Source: Bloomberg andand Datastream. Source: Bloomberg Datastream. Source: ADB
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—20097 Hikes in 2010—20116543210 2 Viet Nam Korea, Rep. of Indonesia Thailand China, Philippines Malaysia Japan Peoples Rep.1One year lending rate (Peoples 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 (Peoples Republic of China); BI Rate (Indonesia); prime rate (Viet Nam); unsecured overnight call rate (Japan); Korea base rateSource: Bloomberg and Datastream. 21(Republic of Korea); overnight policy rate (Malaysia); reverse repurchase (repo) rate (Philippines); and one-day repo rate (Thailand).
Policy response 2: Currency appreciation, except Vietnamese dongFigure 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 12 161 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 = Peoples Republic of China. 2PRC = Peoples Republic of China.Source: OREI staff calculations based on Reuters data. 22 Source: OREI staff calculations based on Reuters data. Source: ADB
Policy Response 3: Accumulating International ReservesInternational 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 0.5International reserves increased from 0.5 billion in 2000 to USD1billion in 2006, then reached USD2.9 billion in May 2011.
Policy Response 4: Macro-prudential measuresMeasures Implemented inRein in short-term foreign currency borrowing by Koreacommercial banksLengthen maturity structure of central bank’s external Indonesialiabilities and make one-month certificate less liquidLimits placed on foreign investors’ access to time deposits Taiwan Province of ChinaLiberalization of capital outflows Thailand, Philippines, MalaysiaRemoval of tax exemptions for foreign investment in Thailand, Koreagovernment bondsRules to reduce risks of bank funding strains New Zealand, KoreaReserve requirements on foreign currency and Indonesia, Taiwan Provincenonresident accounts of China 24
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
Policy Response 5: Longer-term policy responsesIncrease 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
Conclusion 1: Asia: Overheating or Smooth Landing?Inflation: Accelerating headline inflation andspilling over to core inflation.Credit Growth and Capital Flows: Creditgrowth accelerating; capital inflowsmoderating; domestic overheating pressures.Monetary Policy: Low real rates, closed orpositive output gaps; need to tighten policy.Fiscal and Exchange Rate Policies: Pace offiscal withdrawal can be quickened; exchangerate appreciation. 27
Conclusions 2Asia’s growth outlook remains strong but overheatingpressures have surfaced in a number of regionaleconomies.Dealing with these pressures requires tightening fiscalstances and stronger currencies. Higher policy interestrates should also be part of the policy mix.In addition to dealing with overheatingrisks, policymakers need to make sure that growth will bebalanced and inclusive. 28
Conclusion 3The multi-speed global recovery is set to continue, andAsian economies will remain in the leadAs old risks recede, new ones are on the horizonNevertheless, overheating pressures imply furthertightening of macroeconomic policiesCapital inflows need to be managed carefully, butpressures have moderated in recent monthsOver the medium-term, rebalancing growth remains thekey challenge 29