Front Matter

Front Matter

Author(s):
International Monetary Fund. Asia and Pacific Dept
Published Date:
November 2008
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    © 2008 International Monetary Fund

    Cataloging-in-Publication Data

    Regional economic outlook: Asia and Pacific – [Washington, D.C.]: International Monetary Fund, 2008.

    p. cm. -- (World economic and financial surveys)

    NOV 08.

    Includes bibliographical references.

    ISBN 9781589067615

    1. Asia – Economic conditions – 1945- 2. Asia – Economic conditions – 1945- – Statistics. 3. Pacific Area – Economic conditions. 4. Pacific Area – Economic conditions – Statistics. I. International Monetary Fund. III. Series (World economic and financial surveys)

    HC412.R445 2008

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    Contents

    Definitions

    In this Regional Economic Outlook: Asia and Pacific, the following groupings are employed:

    • “Emerging Asia” refers to China, India, Hong Kong SAR, Korea, Singapore, Taiwan Province of China, Indonesia, Malaysia, the Philippines, Thailand, and Vietnam.

    • “Industrial Asia” refers to Japan, Australia, and New Zealand.

    • “Asia” refers to emerging Asia plus industrial Asia.

    • “Newly industrialized economies” (NIEs) refers to Hong Kong SAR, Korea, Singapore, and Taiwan Province of China.

    • “ASEAN-5” refers to Indonesia, Malaysia, the Philippines, Thailand, and Vietnam.

    The following abbreviations are used:

    ABCP

    Asset-backed commercial paper

    AIG

    American International Group

    CD

    Certificate of deposit

    CDO

    Collateralized debt obligation

    CDS

    Credit default swap

    CLO

    Collateralized loan obligation

    CPI

    Consumer price index

    FILP

    Fiscal Investment and Loan Program (Japan)

    forex

    Foreign exchange

    FSF

    Financial Stability Forum

    GFSR

    Global Financial Stability Report

    GPIF

    Government Pension Investment Fund (Japan)

    GSE

    Government-sponsored enterprise

    HIBOR

    Hong Kong Interbank Offered Rate

    IPO

    Initial public offering

    LDC

    Less-developed country

    LIBOR

    London Interbank Offered Rate

    NPF

    National Pension Fund (Korea)

    NEER

    Nominal effective exchange rate

    NIE

    Newly industrialized economy

    NPL

    Nonperforming loan

    OECD

    Organization for Economic Cooperation and Development

    OIS

    Overnight index swap

    PDCF

    Primary Dealer Credit Facility

    P/E

    Price-earnings

    q/q

    Quarter-on-quarter

    REO

    Regional Economic Outlook

    SAAR

    Seasonally adjusted at an annual rate

    SIBOR

    Singapore Interbank Offered Rate

    SIV

    Structured investment vehicle

    TAF

    Term Auction Facility

    VAR

    Vector autoregression

    WEO

    World Economic Outlook

    WPI

    Wholesale price index

    y/y

    year-on-year

    The following conventions are used:

    • In tables, a blank cell indicates “not applicable,” ellipsis points (…) indicate “not available,” and 0 or 0.0 indicates “zero” or “negligible.” Minor discrepancies between sums of constituent figures and totals are due to rounding.

    • An en dash (–) between years or months (for example, 2007–08 or January–June) indicates the years or months covered, including the beginning and ending years or months; a slash or virgule (/) between years or months (for example, 2007/08) indicates a fiscal or financial year, as does the abbreviation FY (for example, FY2008).

    • An em dash (—) indicates the figure is zero or less than half the final digit shown.

    • “Billion” means a thousand million; “trillion” means a thousand billion.

    • “Basis points” refer to hundredths of 1 percentage point (for example, 25 basis points are equivalent to ¼ of 1 percentage point).

    As used in this report, the term “country” does not in all cases refer to a territorial entity that is a state as understood by international law and practice. As used here, the term also covers some territorial entities that are not states but for which statistical data are maintained on a separate and independent basis.

    This Regional Economic Outlook: Asia and Pacific was prepared by a team coordinated by Jerald Schiff and Kenneth Kang, under the direction of David Burton of the IMF’s Asia and Pacific Department. Kay Chung, Xiangming Fang, and Fritz Pierre-Louis provided research assistance, and Corinne Danklou, Yuko Kobayashi, Ranee Sirihorachai, Livia Tolentino, and Lesa Yee provided production assistance.

    Executive Summary

    With the global economy entering a major downturn amid a deepening financial crisis, Asia is confronting the likelihood of sharply slowing growth and increased vulnerabilities. In particular, global financial stresses and the process of deleveraging by financial institutions are expected to continue beyond next year. This will dampen economic prospects in the region via a number of potential channels, notably lower demand for Asia’s exports, tighter funding conditions, more volatile capital flows, depressed equity prices and confidence, and deteriorating loan quality.

    As outlined in Chapter 1, our baseline scenario sees growth in Asia slowing substantially before beginning a recovery in late 2009. With the global slowdown dampening exports, growth in Asia is projected to come primarily from domestic demand, which is nonetheless expected to slow. With commodity prices easing and growth declining below potential, inflation should decline. In fact, there are signs that headline inflation—and to a lesser extent, core inflation—have already peaked.

    Risks to the outlook are considerable and tilted firmly to the downside. A severe global recession, combined with a deeper-than-expected credit squeeze, would have significant spillovers to the region, through both exports—Asia’s trade integration with the rest of the world has increased over the last decade—and a range of financial channels. In particular, it remains unclear how domestic demand would stand up to a sharp decline in export growth and tighter financial conditions.

    In this volatile economic environment, policymakers in Asia need to be ready to react decisively to maintain financial stability and support growth:

    • Policies to safeguard financial systems and maintain orderly credit conditions will be key. While the precise measures will vary across countries, efforts should include strengthening of crisis management systems and contingency planning, enhancing oversight of banks’ liquidity management, and improving risk management to address the likely rise in nonperforming loans. Temporary credit guarantees may be necessary to ensure the normal flow of credit, and authorities have to stand ready to recapitalize banking systems if needed.

    • In most Asian countries—where domestic demand is easing, financial conditions have tightened, and second-round price effects are modest—monetary easing would be appropriate. But with inflation still above targets or comfort levels in many of these countries, effective communication by central banks will be key to ensuring that inflation expectations remain well anchored. Beyond considerations of inflation, monetary policy will have to ensure sufficient provision of liquidity for orderly market functioning.

    • Many countries would appear to have room for additional fiscal stimulus, which may prove necessary in particular should the current financial environment limit the effectiveness of monetary policy. Some countries have in fact already announced fiscal stimulus packages, in some cases sizable ones.

    While attention now is rightly focused on near-term risks, longer-term issues will inevitably return to the fore when the worst of the crisis has passed. In this context, Chapter 2 examines the rising contribution of commodity prices in Asia’s inflationary process and its potential implications for monetary policy. In the near term, sharply falling commodity prices may exert deflationary pressures on Asia. At the same time, commodity prices are tentatively expected to return to a high and volatile medium-term equilibrium, the result of underlying imbalances in commodity markets. Such gyrations in commodity prices may exacerbate already high inflation volatility, entrench wedges—both positive and negative—between core and headline inflation, and worsen output/inflation volatility trade-offs faced by central banks. Such an environment will require a careful consideration of policy frameworks and place a premium on effective central bank communication.

    Looking further ahead, a number of countries in the region are set to age dramatically over the next 50 years, and for some the process has already begun. As discussed in Chapter 3, vastly differential rates of aging across Asia and globally can have potentially large effects on current accounts and capital flows—with capital tending to flow “uphill” from younger to older countries—as well as on financial markets and asset prices. Despite the longer-term nature of the challenge, governments can ease the potentially costly transition by beginning to take steps now. For aging countries this may involve an emphasis on pension and labor force reform, while for younger countries requiring substantial capital, enhancing financial intermediation and boosting productivity will take center stage.

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