J U Z H O N G Z H U A N G

Deputy Chief Economist and Deputy Director General

Economic Research and Regional Cooperation Department

Asian Development Bank

1

Debt Management in a Dynamic World: Coping with Capital Flows and Hidden Risks

Session 1: The Global Economic Environment: Policy Challenges

The views expressed in this document are those of the author and do not necessarily reflect the views and policies of the Asian Development Bank or its Board of Governors or the governments they represent.

Asian Economic Outlook, Risks, and Policy Issues

Outline2

Global economic outlook

Asian economic outlook

Risks to the regional outlook

Capital flows to and debt in Asia

Policy issues

Growth momentum continues to strengthenin advanced economies…

GDP growth (%) 2013 2014 2015f 2016f

Major industrial economies

1.2 1.6 2.2 2.4

United States 2.2 2.4 3.2 3.0

Euro area –0.4 0.9 1.1 1.4

Japan 1.6 0.0 1.1 1.7

3

f: forecastSource: Asian Development Outlook (ADO) 2015, ADB

… supporting developing Asia’s steady growth

4

9.3

7.36.2 6.5 6.3 6.3 6.3

0

2

4

6

8

10

2010 2011 2012 2013 2014 2015f 2016f

GDP growth (%)

f: forecastSource: ADO 2015, ADB

5-year average: 7.1

10-year average: 7.6Key drivers of growth

• Reforms at home

• Recovery in advanced countries

• Lower commodity prices

High overall growth, but divergence across countries

6.66.9

4.45.1

6.16.5

7.2

4.9

3.5

10.7

6.3

7.6

5.3

4.5 4.5

0

2

4

6

8

10

12

East Asia South Asia Southeast Asia Central Asia The Pacific

2014 2015f 2016f

5

f: forecastSource: ADO 2015, ADB

Falling commodity prices…

40

60

80

100

120

140

160

180

2010 2011 2012 2013 2014 2015 2016

Commodity price indexes2010=100

Beverage

Food

Brent crude

Gold

Natural gas

Copper

6

Sources: World Bank Pinksheets; Bloomberg

Futures

… ease inflation pressures

7

4.46.0

4.1 3.8 3.1 2.6 3.0

0

2

4

6

8

2010 2011 2012 2013 2014 2015f 2016f

Inflation (%)

f: forecastSource: ADO 2015

5-year average: 4.310-year average: 4.1

Risk factors8

External

Capital outflow due to impending increase in US interest rates

Global consequences of deeper Greek debt crisis

Oil price reversal due to factors such as geopolitical tensions

Local

Lower than expected growth in PRC and India

Rising debt levels by households, corporates, and sovereigns

FDI most stable among financial inflows9

-400

-300

-200

-100

0

100

200

300

20

05

Q1

20

05

Q3

20

06

Q1

20

06

Q3

20

07

Q1

20

07

Q3

20

08

Q1

20

08

Q3

20

09

Q1

20

09

Q3

20

10Q

1

20

10Q

3

20

11Q

1

20

11Q

3

20

12Q

1

20

12Q

3

20

13Q

1

20

13Q

3

20

14Q

1

20

14Q

3

Net inflows to developing Asia ($ billion)

FDI Portfolio Investment Other Investment

-15

-10

-5

0

5

10

20

05

Q1

20

05

Q3

20

06

Q1

20

06

Q3

20

07

Q1

20

07

Q3

20

08

Q1

20

08

Q3

20

09

Q1

20

09

Q3

20

10Q

1

20

10Q

3

20

11Q

1

20

11Q

3

20

12Q

1

20

12Q

3

20

13Q

1

20

13Q

3

20

14Q

1

20

14Q

3

Net inflows to developing Asia (% of GDP)

FDI Portfolio Investment Other Investment

Note: Other investment covers short- and long-term trade credits; loans (including use of Fund credit, loans from the Fund, and loans associated with financial leases); currency and deposits (transferable and other—such as savings and term deposits, savings and loan shares, shares in credit unions, etc.); and other accounts receivable and payable.

Inflows during 2010–2014:FDI - $2,437.4 bnPortfolio investment - $744.0 bnOther investment - $1,375.4 bn

A large portion of non-FDI inflows originate from the US and euro area

10

73

196

152

542

242

64

3

6

91

35

54

84

70

97

188

365

0% 20% 40% 60% 80% 100%

Equity

Bonds

BankLending

FDI

Sources of Financial Inflows to ASEAN+3 (2011 to 2013, $ billion)

ASEAN+3 US euro area ROW

ROW = rest of the world;

Source: ADB staff estimate using ASEAN, BIS, CPIS, OECD and UNCTAD

997

397

392

476

Bank loans and local currency bonds outstanding ($ tn)

Bank loans and local currency bonds outstanding (% of GDP)

11

Domestic debt has grown in developing Asia

Rising debt accompanied by higher property prices

12

Note: Data refer to 2009–2013.

Corporate external borrowing has increased13

Share of foreign-currency bonds in all bonds in developing Asia, 2009–2014

Countries with weaker fundamentals more vulnerable to shocks

-15.4

-12.5

1.7

-7.7-6.4 -7.0

-3.9-2.7

3.5 3.72.7

0.0

-20

-15

-10

-5

0

5

IND INO KOR MAL PHI THA

%

Exchange rate depreciation (-) or appreciation (+) (23 May-30 Aug 2013)

Current account balance (% of GDP, 2013 Q1)

14

IND=India; INO=Indonesia; KOR=Rep. of Korea; MAL=Malaysia; PHI=Philippines; THA=Thailand

Source: ADO 2014

While less vulnerable now compared to the Asian financial crisis period, countries must remain vigilant

15

Fiscal Balance/

GDP (2014)1

Current Account/ GDP

(latest available)

External Debt/GDP2

(2014)

Short-Term External

Debt/Reserves3

(latest available)

Import Cover(latest available)4

Bangladesh -4.4 1.4▲ (2013) 16.1▼ 8.3▼ (2013) 6.6▲ (Feb2015)

Cambodia -4.1 -10.5▼ (2013) 42.2▼ 27.3▼ (2013) 4.4▼ (Dec2014)

China, People's Rep. of -1.8 2.0▼ (4Q2014) 9.1▼ 18.2▼ (3Q2014) 24.0▲ Mar2015)

India -5.9 -2.1 (3Q2014) 31.5▲ 28.2▲ (4Q2014) 8.5▼ (Feb2015)

Indonesia -2.3 -2.9 (4Q2014) 34.4▼ 43.7▲ (4Q2014) 7.6 Mar2015)

Kazakhstan -3.0 -2.7▲ (3Q2014) 109.4▲ 46.1▼ (4Q2014) 6.4▲ (Feb2015)

Korea, Republic of -1.8 7.7▲ (4Q2014) 30.1▲ 32.1▼ (4Q2014) 8.4▼ (Feb2015)

Lao PDR -4.2 -28.5 (2014) 77.0▼ 111.4▲ (2013) 1.3▼ (Dec2014)

Malaysia -3.5 2.2▼ (4Q2014) 65.2 90.1 (4Q2014) 6.1▼ Mar2015)

Myanmar -4.3 -3.8 (2014) 0.1▼ 17.3▼ (2012) 9.2▲ (Jan2013)

Pakistan -6.3 -1.0▲ (2013) 22.6▼ 37.3▲ (2013) 3.2▼ Mar2015)

Philippines -0.6 5.9▲ (4Q2014) 21.5▼ 13.2▼ (3Q2014) 13.5▲ (Feb2015)

Sri Lanka -5.2 -5.0▼ (3Q2014) 47.9▼ 75.8▲ (2012) 3.9▲ (Jan2015)

Thailand -2.5 9.2▲ (4Q2014) 37.7 37.8 (4Q2014) 8.0▲ Mar2015)Viet Nam -4.4 9.2▲ (1Q2014) 38.3▲ 40.8▲ (2013) 2.7▼ (Dec2014)Note: The latest figure is compared to the indicator's pre-GFC average (2001-2006), inclusive of dates with available data. Arrows indicate above/below pre-GFC average. Basic data for external debt measures contained in this table are sourced from national agencies and are not comparable to the figures reported previously which were calculated using the data from the Joint External Debt Hub.GDP = gross domestic product, Lao PDR = Lao People's Democratic Republic, y-o-y = year-on-year, – = unavailable.1Difference between central government revenues and expenditures and computed as a share of GDP at current prices. For Thailand, it is a cash balance composed of the budgetary and

nonbudgetary balances. For Brunei Darussalam, data is for year 2013.22011 for Myanmar. 2012 for Sri Lanka. 2013 for Bangladesh; Cambodia; China, People's Rep. of; Lao PDR; Pakistan; the Philippines; and Viet Nam.

3New external debt series for Malaysia and Pakistan (national source).

4Refers to number of months of import that can be covered by official reserves; computed as reserves (excluding gold) divided by 12-month moving average of imports (cost of insurance,

freight). Latest month when reserves data is available. Import data may be earlier, the same, or later than period indicated.

Policy measures for greater financial resiliency and stability

16

Asia’s financial systems have become much healthier, but weaknesses remain, and countries should be vigilant against any risks and take necessary actions when needed.

Effective regulation is the first line of defense against financial shocks; macroprudentialpolicy can help mitigate the build-up of systemic vulnerabilities.

Housing-related macroprudential measures such as loan-to-value and debt-to-income ratios, and higher risk weight requirements on mortgage loans have been used extensively in Asia, helping to curb excessive credit growth in Asia.

Prudential regulations on capital flows can help address the risks from volatile capital flows and swings in foreign monetary policy; resilience to external financial shocks can be reinforced by policies mixing some capital controls with exchange rate flexibility.

Greater financial resiliency and stability can be achieved through continued improvement in economic fundamentals, which requires structural reform to address supply- and demand-side constraints.

Regional financial cooperation plays an important role in strengthening financial resiliency and stability, complementing domestic reforms.