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Reza baqir 22ndcacci conference
- 1. Economic Outlook forthe Asia Pacific Region and the Global Financial Crisis Reza Baqir IMF Resident Representative 22nd CACCI Conference Manila Hotel, October 23, 2008
- 2. 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
- 3. An extraordinary, banking-sectorshock is striking advanced economies Interbank Markets Bank CDS Spreads (3-month LIBOR minus T-bill rate; in percent) (10-years; median; in basis points) 4.0 400 350 3.0 300 United States 250 United States Euro area 2.0 Euro 200 area 150 Japan 1.0 100 50 0.0 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Oct. 0 3 2007 08 Oct. 2006 2007 2008 08
- 4. 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
- 5. The financial sectorshock comes on the heels of, 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
- 6. As a result,advanced economies to come close to or move into recession Real GDP Growth Rates (percent change) 4 Growth Potential April 2008 WEO 3 July 2008 WEO 2 1 0 2007 08 09 10 2007 08 09 10 2007 08 09 10 United States Euro area Japan 6
- 7. Outlook for advancedeconomies Source: IMF World Economic Outlook, October 2008, available at 7 www.imf.org
- 8. Emerging economies haveso far provided support to global growth 8
- 9. …and Asia hasled growth in emerging economies 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
- 10. A note oncountry 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
- 11. Emerging economies accountfor a rising share of global growth 14 Contributions to Global Growth (percent change) 12 10 8 6 4 2 0 -2 Other Developing India -4 China Advanced economies 11 -6
- 12. In general, theresilience 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 Debt 40 (left scale) 6 35 4 Change in 30 reserves 2 25 0 20 -2 Current account 12 15 -4 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007
- 13. ...but countries withvulnerabilities are feeling the pressure Emerging Economies: Credit Default Swap Spreads, 2004–08 (In basis points, July 2007 = 100) 1600 1400 1200 Countries with current account deficits > 5% Countries with current account surpluses (or small 1000 deficits) 800 600 400 200 0 13 Sep. 2004 05 06 07 08
- 14. Risks to globalgrowth 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 14 2005 2006 2007 2008 2009
- 15. According to oneindicator, a global recession is more likely than not 15
- 16. Major down sidefactors include potential further deterioration in financial conditions and domestic demand in the US. 16
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- 19. Trade exposure tothe US has risen Export Exposure to the United States (In percent of GDP) Direct Tot al 1994 2006 1994 2006 Japan 2.5 3.4 3.0 4.4 Aust ralia 0.9 1.1 1.6 2.1 New Zealand 2.8 3.0 3.7 4.0 China 5.6 9.6 7.6 12.2 India 1.7 2.4 2.0 3.1 Hong Kong SAR 16.7 14.8 20.0 21.8 Korea 4.9 5.1 6.1 8.7 Singapore 23.9 17.3 31.9 30.8 Taiwan PO C 10.4 9.9 12.9 15.5 Indonesia 3.3 3.5 4.5 5.6 Malaysia 18.0 22.7 25.0 31.7 Philippines 8.8 8.0 9.8 12.0 Thailand 7.0 10.5 8.9 15.1 Viet nam 1.4 15.2 2.8 18.5 Asia 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.
- 20. …as has exposureto 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-06 Japan 2.5 13.0 4.4 25.0 Aust ralia 6.8 20.4 2.6 15.0 New Zealand 10.5 9.3 2.9 12.7 China 0.3 2.2 2.3 28.8 India … 5.5 … 2.5 Hong Kong SAR 12.6 42.2 14.8 61.3 Korea 1.4 12.4 1.2 14.2 Singapore 8.6 35.8 42.9 129.2 Taiwan PO C 0.2 19.4 13.1 39.8 Indonesia 1.2 3.7 1.0 3.4 Malaysia 11.5 9.2 6.8 10.5 Philippines 3.1 7.9 3.3 7.9 Thailand 3.1 5.7 4.4 8.2 Viet nam … 0.1 … 4.1 Asia 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 al Syst em; CE Dat a Company Lt d.; Haver Analyt ics; and IMF, Inf ormat ion IC 20 Not ice Syst em, and st af f calculat ions.
- 21. Perhaps due tohigher exposure, growth in Asia is now more correlated with U.S. growth than in the 1990s. Growth Correlation with the United States 1990-96 2000-07 Japan -0.06 0.41 Australia 0.74 0.38 New Zealand 0.28 0.23 China … 0.08 India … 0.14 Hong Kong SAR 0.16 0.61 Korea -0.32 0.30 Singapore 0.31 0.62 Taiwan POC 0.24 0.61 Indonesia 0.06 0.05 Malaysia -0.26 0.52 Philippines 0.28 0.47 Thailand -0.20 0.47 Vietnam … 0.20 21 Sources: CEIC Data Company Ltd.; and IMF staff calculations.
- 22. Financial correlations havealso increased over time Correlations in Stock Market Returns 1990-96 2000-07 Japan 0.26 0.52 Australia 0.52 0.71 New Zealand … 0.49 China … 0.08 India -0.01 0.45 Hong Kong SAR 0.35 0.69 Korea 0.12 0.59 Singapore 0.49 0.61 Taiwan POC 0.16 0.49 Indonesia 0.26 0.43 Malaysia 0.37 0.30 Philippines 0.34 0.45 Thailand 0.38 0.43 Vietnam … 0.10 Asia 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.
- 23. Key results frominvestigating spillovers from 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
- 24. Estimated spillovers showlarge variations within the region Summary of Results: Impact of one percentage point U.S. Slowdown (In percentage points) Cross-Country VAR with Financial Regressions Variables Japan 0.3 0.2 Australia 0.7 0.5 New Zealand 0.9 0.3 China 0.1 0.0 India -0.2 0.0 Hong Kong SAR 1.0 0.8 Korea 0.1 0.1 Singapore 1.1 0.9 Tawan POC 1.2 0.9 Indonesia 0.2 0.4 Malaysia 0.5 0.7 Philippines 0.6 0.4 Thailand 1.0 0.5 Asia 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.
- 25. 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
- 26. Finally, U.S. slowdownscan have very large impacts on Asia, 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.
- 27. To conclude Theworld 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
- 28. Thank you REZA BAQIR IMF Office Manila (02) 536 0785, 400 4985 28
Editor's Notes
- #6 Source: CC Oct 2008.xls : Sheet [52]
- #7 CC Oct 2008.xls : Sheet [3]
- #10 CC Oct 2008.xls : Sheet [4]
- #12 Source: CC Oct 2008.xls: Sheets [25]
- #13 Source: CC Oct 2008.xls: Sheet [16]
- #20 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.
- #21 These measures are based on data from U.S. Treasury’s International Capital System. See details in the chapter.
- #22 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.
- #23 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).
- #24 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.
- #25 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.
- #26 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.
- #27 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.