Developing Asia 2004-2005: Is the Boom Sustainable ?

Developing Asia 2004-2005: Developing Asia 2004-2005: Is the Boom Sustainable ?Is the Boom Sustainable ?

Ifzal AliIfzal AliChief EconomistChief Economist

Asian Development BankAsian Development Bank

Economic CongressEconomic CongressCasa Asia, Barcelona, SpainCasa Asia, Barcelona, Spain

22 November 200422 November 2004

The Global Context for 2004-The Global Context for 2004-2005 – and a glimpse beyond2005 – and a glimpse beyond

• Synchronized robust growth in main industrial countries in 2004, leveling off moderately in 2005 baseline assumptions

• Oil prices to stay high baseline assumptions

• But inflation rising moderately• Monetary policies returning

progressively to neutral stance/some tightening

The Global Context …The Global Context …

• 2004 Growth built on large imbalances (US fiscal and current account deficits, fiscal situation in Japan and Euro zone)

• Imbalances could start to weigh on outlook end of 2005 and onwards: – Increases in dollar interest rates– Volatility in exchange rates– Steep decline in US aggregate demand and

inputs

• Will the specter of stagflation return?

Developing Asia Booming Developing Asia Booming in 2004-2005in 2004-2005• GDP Growth much stronger than

expected in 1H 2004 GDP growth: Developing Asia

• Expansion broad based• Return of strong investment adds

to export rebound and sustained consumer spending

• Inflation remains generally low despite high oil prices Inflation: Developing Asia

Developing Asia…Developing Asia…

• Regional current account surplus narrowing but still 2.9% GDPCA/GDP: Developing Asia

• GDP Growth to climb to 7.2% in 2004; still strong 6.2% in 2005, 0.5 percentage points below ADO 2004 forecast GDP Growth:Developing Asia

East Asia: Upward Growth East Asia: Upward Growth Trend Continues since Trend Continues since 2000…2000…• PRC Economy at near full throttle in 2004

GDP table

• Hong Kong, China and Taipei,China recovering strongly in 2004 and remaining on track in 2005 due to buoyant exports and recovering domestic demand Hong Kong Taipei,China

• Korea lagging as consumption still depressed and low growth continuing 2005 Korea

• PRC micro soft landing in 2005 CA/GDP:East Asia

GDP Growth, East AsiaGDP Growth, East Asiaback to East Asiaback to East Asia CA/GDP: East AsiaCA/GDP: East Asia

GDP Growth (%)

2003 2004 2005

East AsiaEast Asia 6.66.6 7.67.6 6.66.6

PRCPRC 9.39.3 9.29.2 8.38.3

Hong Kong, Hong Kong, ChinaChina

3.23.2 7.57.5 6.06.0

Korea, Rep. ofKorea, Rep. of 3.13.1 4.44.4 3.63.6

Taipei,ChinaTaipei,China 3.33.3 6.56.5 4.84.8

Southeast Asia: at long Southeast Asia: at long last awaited revival in last awaited revival in business investment…business investment…• Strong growth momentum, now broad-

based• In a first since Asian crisis, business

investment doing well• Welcome response of exports to

buoyant world economy• But imports surging also:contribution of

net exports to GDP growth down Malaysia

• Contribution of consumer expenditure remaining robust Philippines

Southeast Asia… Southeast Asia…

• Growth in 2004 revised upward to 6.2% and 5.6% in 2005

• Outlook improving for Indonesia and the Philippines, but deteriorating for Cambodia

GDP Growth, Southeast Asia GDP Growth, Southeast Asia CA/GDP:SEAsiaCA/GDP:SEAsia

GDP Growth (%)

2003 2004 2005

Southeast Southeast AsiaAsia

4.84.8 6.26.2 5.65.6

CambodiaCambodia 5.25.2 4.54.5 2.32.3 IndonesiaIndonesia 4.54.5 4.84.8 5.25.2 Lao PDRLao PDR 5.85.8 6.56.5 7.07.0 MalaysiaMalaysia 5.35.3 6.86.8 5.65.6 PhilippinesPhilippines 4.74.7 5.55.5 5.55.5 SingaporeSingapore 1.11.1 8.18.1 4.24.2 ThailandThailand 6.86.8 6.46.4 6.66.6 Viet NamViet Nam 7.17.1 7.57.5 7.67.6

South Asia: Gathering South Asia: Gathering strength despite strength despite uncertainties…uncertainties…• Weather dampens growth in India and

Bangladesh• Growth momentum remains strong but

policy choices are crucial• Trade continues to grow at double digit rates• End of MFA quotas – India and Pakistan

better prepared than Bangladesh• Insurgency in Nepal continues to stifle

growth

GDP Growth, South Asia GDP Growth, South Asia CA/GDP:South AsiaCA/GDP:South Asia

GDP Growth (%)

2003 2004 2005

South AsiaSouth Asia 7.67.6 6.46.4 5.95.9 BangladeshBangladesh 5.35.3 5.55.5 5.05.0 BhutanBhutan 6.56.5 7.07.0 8.08.0 IndiaIndia 8.28.2 6.56.5 6.06.0 MaldivesMaldives 8.58.5 5.45.4 5.05.0 NepalNepal 2.72.7 3.63.6 3.73.7 PakistanPakistan 5.15.1 6.46.4 6.56.5 Sri LankaSri Lanka 5.95.9 5.05.0 5.55.5

Central Asia: Bright Central Asia: Bright horizon for energy horizon for energy exporters…exporters…• Oil/gas investments and higher

prices boost oil-exporting economies• Higher commodity prices benefiting

non-oil export-led economies• Economic diversification urgently

needed, especially to boost employment, but structural reforms and finding an effective strategy difficult

Pacific: Doing better than Pacific: Doing better than expected…expected…• 2003 turned out better than

expected at 4.3%• Second largest economy Fiji

continuing on recovery road• Fiscal governance issues

remaining major problem

Risks to Developing Asia: Risks to Developing Asia: Clouds gathering beyond Clouds gathering beyond the clear skies … Global the clear skies … Global RisksRisks• Surging oil prices could create havoc

for world economy– Aggravate existing global imbalances

Effects of Oil Price Inc

– Duration of oil price increase more important than the level of increase

Oil price simulation

– Higher oil price environment calls for medium to long-term structural adjustments (e.g., improving energy efficiency)

… … Global RisksGlobal Risks

• Japan and EU highly vulnerable to a downturn in US

• Widening US fiscal and current account deficits exacerbating vulnerability of world economy

• No leeway left for macroeconomic policy support in industrial countries

……Global RisksGlobal Risks

• Uncertain sustainability of growth momentum in major industrial countries, rising inflation, rising interest rates and persistent slide in dollar. The specter of stagflation beyond 2005?

Risks to Developing Asia… Risks to Developing Asia… Regional RisksRegional Risks• Hard landing in PRC still a possibility

PRC Slowdown

• With exports a main driver of growth, region vulnerable to world economic slowdown beyond 2005

• Weakness in financial sector regulation and supervision could hurt domestic demand (e.g., Korea)

...Regional Risks...Regional Risks

• Employment generation still lagging in spite of strong growth:risk to social stability

• Epidemics and security threats:real danger in the region

Developing Asia must be resilient in the face of turbulence resulting from global and regional risks

Making Developing Asia’s Making Developing Asia’s robust growth sustainable robust growth sustainable over the medium term?over the medium term?• Consolidate fiscal situations to

allow for future anti-cyclical policies

• Implement policies to bolster domestic demand:deepen financial sector reforms and supervision(consumer credit, long-term mortgage lending, etc.)

Making Developing Asia…Making Developing Asia…• Address investment climate problems

(from infrastructure to governance to legal systems)

• Review labor market policies to share benefits of growth

• Adopt more flexible exchange rate policies and ensure the productive use of foreign exchange reserves

Growing importance of domestic demand and increased competitiveness will ensure resilience in the face of turbulence

Making Developing Asia’s Making Developing Asia’s robust growth sustainable robust growth sustainable over the long term?over the long term?• Developing Asia is in catch-up mode and

there is still a large scope for efficiency improvement through reforms and adoption of new technology, leading to a potential increase in productivity

• Demographic outlook is positive, dependency ratio will come down in most economies, savings rate will stay high or increase leading to higher investment rate

Making Developing Asia…Making Developing Asia…

• Over the long term 7-8% growth rate of GDP is feasible:a tri-polar Asia could emerge by 2020

• Challenge: stay competitive in Asia and the world

• Buoyant domestic demand will trigger imports while increased competitiveness will spur exports

Making Developing Asia…Making Developing Asia…

• Increased complementarities within Asia will strengthen trade and investment integration thereby providing a buffer to global turbulence

• With the increased importance of Asia in global GDP, strengthened linkages with US and EU will lead to win-win outcomes

Key Messages: medium Key Messages: medium termterm• Developing Asia growing at fastest rate

in 2004 since 2000• Growth more broad based:investments

and exports picking up; consumption demand remaining sustained

• Moderate growth slowdown in 2005 mainly due to easing of aggregate demand

• Risks linked to imbalances in world economy increasing

• Accelerate macro and micro policy reforms to make growth sustainable

Key Messages: long termKey Messages: long term

• Strengthened inclusiveness and improved investment climate will boost aggregate demand

• Aggregate supply must be made more efficient through strengthening the microfoundations of growth thereby improving competitiveness

• Complementarities between South Asia, East Asia, and ASEAN need to be fostered to boost intraregional trade

Key Messages:…Key Messages:…

• Complementarities between Asia, US, and EU need to be strengthened to augment inter-regional trade

• Open market-oriented competitive economies will be the key to resilience and sustained growth

Baseline Assumptions on Baseline Assumptions on External Conditions External Conditions back to Global back to Global

ContextContext

2004 2005

ADO Update

ADO Update

GDP Growth (%)Industrial CountriesIndustrial Countries 3.1-3.53.1-3.5 3.5-3.93.5-3.9 2.5-2.5-

3.03.02.4-2.82.4-2.8

United StatesUnited States 4.2-4.74.2-4.7 4.1-4.54.1-4.5 3.2-3.2-3.73.7

3.1-3.53.1-3.5

Euro ZoneEuro Zone 1.7-1.91.7-1.9 1.8-2.01.8-2.0 2.1-2.1-2.42.4

1.8-2.21.8-2.2

JapanJapan 2.5-2.82.5-2.8 3.8-4.23.8-4.2 1.5-1.5-2.02.0

1.6-2.01.6-2.0

Memorandum ItemsUS Federal Funds Rate (%)US Federal Funds Rate (%) 1.1-1.31.1-1.3 1.2-1.41.2-1.4 2.5-2.5-

3.03.02.9-3.12.9-3.1

Brent Crude Oil ($/bbl)Brent Crude Oil ($/bbl) 28-3028-30 38-3938-39 24-2624-26 38-4338-43

Global Trade Volume (% Global Trade Volume (% change)change)

8.0-8.58.0-8.5 9.0-9.0-10.010.0

6.0-6.0-7.07.0

7.0-8.07.0-8.0

GDP Growth: Developing GDP Growth: Developing Asia, 2003-2005Asia, 2003-2005back to Developing Asiaback to Developing Asia back to East Asiaback to East Asia

GDP Growth (%)

2003 2004 2005

ADO Update*

ADO Update*

Developing Asia

6.56.5 6.86.8 7.27.2 6.76.7 6.36.3

East AsiaEast Asia 6.66.6 6.96.9 7.67.6 6.86.8 6.66.6

Southeast AsiaSoutheast Asia 4.84.8 5.75.7 6.26.2 5.45.4 5.65.6

South AsiaSouth Asia 7.67.6 7.07.0 6.46.4 7.27.2 5.95.9

Central AsiaCentral Asia 8.48.4 8.18.1 7.97.9 8.48.4 8.08.0

The PacificThe Pacific 4.34.3 2.92.9 2.92.9 2.42.4 2.42.4* as of Nov 10, 2004

Inflation: Developing Asia, Inflation: Developing Asia, 2003-20052003-2005 back to Developing Asiaback to Developing Asia

Inflation (%)

2003 2004 2005

ADO Update*

ADO Update*

Developing Asia

2.32.3 3.33.3 4.04.0 3.13.1 4.04.0

East AsiaEast Asia 1.21.2 2.62.6 3.43.4 2.42.4 3.03.0 Southeast AsiaSoutheast Asia 3.13.1 3.63.6 4.24.2 3.83.8 4.44.4 South AsiaSouth Asia 5.15.1 4.94.9 5.55.5 4.64.6 6.66.6 Central AsiaCentral Asia 5.45.4 8.68.6 6.96.9 8.38.3 6.46.4 The PacificThe Pacific 8.58.5 5.65.6 5.15.1 6.06.0 4.44.4

CA/GDP: Developing Asia, CA/GDP: Developing Asia, 2003-20052003-2005 back to Developing Asiaback to Developing Asia

Current Account

Balance/GDP

2003 2004 2005

ADO Update*

ADO Update*

Developing Asia

4.64.6 3.23.2 3.33.3 2.92.9 2.82.8

East AsiaEast Asia 4.54.5 2.82.8 3.13.1 2.62.6 2.62.6 Southeast AsiaSoutheast Asia 9.09.0 8.28.2 7.37.3 7.67.6 6.76.7 South AsiaSouth Asia 1.61.6 0.40.4 1.31.3 0.20.2 0.60.6 Central AsiaCentral Asia -2.3-2.3 -3.6-3.6 -3.9-3.9 -4.3-4.3 -2.1-2.1 The PacificThe Pacific -0.6-0.6 0.90.9 0.80.8 -1.3-1.3 -1.7-1.7

CA/GDP, East Asia CA/GDP, East Asia go to East Asiago to East Asia go to GDP:East Asia go to GDP:East Asia

Current Account

Balance/GDP

2003 2004 2005

East AsiaEast Asia 4.54.5 3.13.1 2.62.6

PRCPRC 3.23.2 1.21.2 0.70.7 Hong Kong, Hong Kong, ChinaChina

10.210.2 6.86.8 8.58.5

Korea, Rep. ofKorea, Rep. of 2.02.0 4.14.1 3.23.2

Taipei,ChinaTaipei,China 10.210.2 6.86.8 6.06.0

CA/GDP, Southeast Asia CA/GDP, Southeast Asia go to SEAsiago to SEAsia go to GDP:SEAsia go to GDP:SEAsia

Current Account

Balance/GDP

2003 2004 2004

Southeast Southeast AsiaAsia

9.09.0 7.37.3 6.76.7

CambodiaCambodia -10.2-10.2 -10.0-10.0 -11.2-11.2 IndonesiaIndonesia 3.63.6 3.43.4 3.13.1 Lao PDRLao PDR -0.3-0.3 -2.0-2.0 -1.6-1.6 MalaysiaMalaysia 12.912.9 7.87.8 7.07.0 PhilippinesPhilippines 4.24.2 3.03.0 2.82.8 SingaporeSingapore 30.930.9 27.027.0 25.025.0 ThailandThailand 5.65.6 4.54.5 4.54.5 Viet NamViet Nam -5.8-5.8 -4.1-4.1 -4.1-4.1

CA/GDP, South Asia CA/GDP, South Asia go to SAsiago to SAsia

go to GDP:SAsiago to GDP:SAsia

Current Account

Balance/GDP

2003 2004 2005

South AsiaSouth Asia 1.61.6 1.31.3 0.60.6 BangladeshBangladesh 0.30.3 0.30.3 -1.5-1.5 BhutanBhutan 10.610.6 -- -- IndiaIndia 1.41.4 1.41.4 1.11.1 MaldivesMaldives -4.3-4.3 -9.1-9.1 -- NepalNepal 2.62.6 3.53.5 4.04.0 PakistanPakistan 4.94.9 1.91.9 -1.7-1.7 Sri LankaSri Lanka -0.6-0.6 -3.0-3.0 -3.5-3.5

Contribution to Growth, Contribution to Growth, Hong Kong, China (% Hong Kong, China (% points) points) back to East Asia Taipei,China back to East Asia Taipei,China

20032003 20042004

Q1Q1 Q2Q2 Q3Q3 Q4Q4 Q1Q1 Q2Q2

GDPGDP 4.44.4 -0.6-0.6 4.04.0 4.94.9 7.07.0 12.12.11

ConsumptionConsumption -1.9-1.9 -2.5-2.5 0.10.1 2.62.6 4.04.0 6.46.4

InvestmentInvestment 2.82.8 -1.4-1.4 -1.2-1.2 1.31.3 2.92.9 5.65.6

Net ExportsNet Exports 3.53.5 3.33.3 5.15.1 1.01.0 0.00.0 0.10.1

Contribution to Growth, Contribution to Growth, Taipei,China (% points) Taipei,China (% points) back to East Asiaback to East Asia

20032003 20042004


GDPGDP 3.53.5 -0.2-0.2 4.04.0 5.75.7 6.76.7 7.77.7

ConsumptionConsumption 0.50.5 -1.2-1.2 1.31.3 1.51.5 2.32.3 2.42.4

InvestmentInvestment 1.81.8 -1.2-1.2 -2.9-2.9 1.51.5 3.93.9 3.43.4


Contribution to Growth, Contribution to Growth, Korea (% points) Korea (% points) back to East Asiaback to East Asia

20032003 20042004


GDPGDP 3.73.7 2.22.2 2.42.4 3.93.9 5.35.3 5.55.5

ConsumptionConsumption 0.70.7 -0.5-0.5 -0.6-0.6 -0.7-0.7 -0.4-0.4 0.20.2

InvestmentInvestment 2.12.1 -0.1-0.1 -0.3-0.3 0.30.3 -0.1-0.1 1.91.9


Contribution to Growth, Contribution to Growth, Indonesia (% points) Indonesia (% points) back to Southeast Asia back to Southeast Asia Malaysia Malaysia

20032003 20042004


GDPGDP 4.44.4 3.63.6 4.04.0 4.44.4 5.05.0 4.34.3

ConsumptionConsumption 3.23.2 3.63.6 3.63.6 4.14.1 4.24.2 3.63.6

InvestmentInvestment 1.71.7 -1.0-1.0 -0.2-0.2 -1.1-1.1 1.61.6 1.61.6

Net ExportsNet Exports -0.5-0.5 1.11.1 0.60.6 1.41.4 -1.9-1.9 -1.2-1.2

Contribution to Growth, Contribution to Growth, Malaysia (% points) Malaysia (% points) PhilippinesPhilippines back to Southeast Asiaback to Southeast Asia

20032003 20042004


GDPGDP 4.64.6 4.84.8 5.55.5 7.67.6 7.67.6 8.08.0


InvestmentInvestment -3.6-3.6 -3.8-3.8 -1.4-1.4 1.81.8 3.93.9 5.15.1

Net ExportsNet Exports 3.23.2 5.25.2 3.33.3 -0.5-0.5 -1.6-1.6 -3.3-3.3

Contribution to Growth, Contribution to Growth, Philippines (% points) Philippines (% points) back to Southeast Asiaback to Southeast Asia SingaporeSingapore

20032003 20042004


GDPGDP 4.84.8 4.24.2 4.84.8 5.05.0 6.56.5 6.26.2


InvestmentInvestment 4.44.4 -0.2-0.2 -0.7-0.7 -2.9-2.9 2.52.5 1.61.6

Net ExportsNet Exports -9.8-9.8 -3.4-3.4 0.00.0 -0.9-0.9 2.32.3 2.22.2

Contribution to Growth, Contribution to Growth, Singapore (% points) Singapore (% points) back to Southeast Asia back to Southeast Asia ThailandThailand

20032003 20042004


GDPGDP 1.71.7 -3.9-3.9 1.71.7 4.94.9 7.57.5 12.512.5

ConsumptionConsumption -0.8-0.8 -0.6-0.6 -0.9-0.9 1.41.4 3.93.9 4.44.4

InvestmentInvestment -8.8-8.8 -12.3-12.3 -5.9-5.9 -2.1-2.1 8.48.4 5.15.1

Net ExportsNet Exports 11.511.5 9.09.0 8.68.6 5.85.8 -4.3-4.3 3.33.3

Contribution to Growth, Contribution to Growth, Thailand (% points) Thailand (% points) back to Southeast Asiaback to Southeast Asia

20032003 20042004


GDPGDP 6.76.7 5.85.8 6.66.6 7.87.8 6.66.6 6.36.3


InvestmentInvestment 2.22.2 0.50.5 3.13.1 4.54.5 4.94.9 4.44.4

Net ExportsNet Exports 1.61.6 1.71.7 0.60.6 -1.7-1.7 -2.3-2.3 -1.7-1.7

Sustained high oil price

Inflationary pressures

Interest rate hikes

Reversal of Savings and Consumption Behavior

Rise in HH Credit Default Rates

Investment Setback

Reduction of attractiveness of Asian financial Markets

SLOWDOWN OF ECONOMIC ACTIVITY IN ASIA

back to Global Risks

Impact in 2005 of Sustained Impact in 2005 of Sustained Increase*: Scenario I vs. Scenario II Increase*: Scenario I vs. Scenario II

nextnext

Scenario I ($10/bbl increase)

Scenario II ($20/bbl increase)

GDP Trade Balance

(% of GDP)

Consumer

Prices

GDP

Trade Balance

(% of GDP)

Consumer

Prices

Asia incl. Japan -0.6 -0.3 1.0 -1.2 -0.7 1.9

Asia excl. Japan

-0.8 -0.4 1.1 -1.5 -0.8 2.0

Japan -0.5 -0.3 0.7 -1.0 -0.6 1.3

PRC -0.8 -0.1 0.5 -1.5 -0.3 0.9

Hong Kong, China

-0.6 -0.8 0.3 -1.1 -1.6 0.5

Korea -0.6 -0.8 0.8 -1.2 -1.7 1.4

* Until end of 2005; from a baseline of $35/bbl; brent crude

Impact of a Sustained Impact of a Sustained Increase…cont.Increase…cont. back to global risksback to global risks

Scenario I ($10/bbl increase) Scenario II ($20/bbl increase)

GDP Trade Balance

(% of GDP)

Consumer

Prices

GDP Trade Balance

(% of GDP)

Consumer

Prices

Indonesia 0.1 0.9 1.3 0.1 1.9 2.1

Malaysia -0.9 0.3 1.4 -2.4 1.1 2.7

Philippines -1.9 -0.9 1.4 -3.6 -1.9 2.8

Singapore -1.7 -1.3 1.3 -3.4 -2.5 2.5

Thailand -2.2 -1.2 1.5 -4.1 -2.5 2.9

India -0.8 -0.7 1.7 -1.5 -1.4 3.3

Key stylized factsKey stylized facts

• The slowdown in PRC is mainly investment-induced;

• Despite rapid growth, PRC remains a relatively small trading partner of most Asia developing economies, compared to the US, Japan and EU;

• A large part of Asia's exports to the PRC involves intermediate goods that are processed and reexported.

Weakening fixed investment in some Weakening fixed investment in some selected sectors is the main selected sectors is the main component of the slowdown of PRCcomponent of the slowdown of PRC

0

5

10

15

20

25

30

35

40

45

50

2001

Q1

2001

Q2

2001

Q3

2001

Q4

2002

Q1

2002

Q2

2002

Q3

2002

Q4

2003

Q1

2003

Q2

2003

Q3

2003

Q4

2004

Q1

2004

Q2

2004

Q3

Fixed assets investment (YTD)

Retail sales of consumption goods

Regional Distribution of Regional Distribution of Trade in Developing Asia, Trade in Developing Asia, 2003 (%)2003 (%)

0

10

20

30

40

50

60

70

NIEs excl. HongKong, China

Hong Kong, China ASEAN (exclSingapore)

South Asia

PRC

USA, EU and Japan

The regional production chain is The regional production chain is dependent on final demand from dependent on final demand from industrial countriesindustrial countries

Effects of a PRC Effects of a PRC SlowdownSlowdown• The simulations using a global CGE

model show that PRC’s slowdown would have a moderate impact on Asian economies

• A two % pts reduction in PRC’s growth would slow GDP growth by 0.5 ppts for NIEs, 0.24 ppts for ASEAN and 0.1 ppts for South Asia

Effects on GDP Growth in Effects on GDP Growth in Selected RegionsSelected Regions(2 % pts reduction in PRC’s GDP growth, (2 % pts reduction in PRC’s GDP growth, 2005)2005)

US -0.11

Japan -0.24

EU -0.12

NIEs -0.50

ASEAN -0.24

South Asia -0.09

The World -0.24

Sectoral ImpactsSectoral Impacts

• In Japan, the textile sector is most hit due to strong dependence on PRC market.

• NIEs are expected to experience some production losses in their chemicals, metals, services, and textiles sectors.

• In ASEAN, electronics and chemical industry would be major losers from PRC’s back to Regional Risks.

Documents

Developing Asia 2004-2005: Is the Boom Sustainable ?