- International Monetary Fund. Asia and Pacific Dept
- Published Date:
- November 2008
© 2008 International Monetary Fund
Regional economic outlook: Asia and Pacific – [Washington, D.C.]: International Monetary Fund, 2008.
p. cm. -- (World economic and financial surveys)
Includes bibliographical references.
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)
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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 paperAIG
American International GroupCD
Certificate of depositCDO
Collateralized debt obligationCDS
Credit default swapCLO
Collateralized loan obligationCPI
Consumer price indexFILP
Fiscal Investment and Loan Program (Japan)forex
Financial Stability ForumGFSR
Global Financial Stability ReportGPIF
Government Pension Investment Fund (Japan)GSE
Hong Kong Interbank Offered RateIPO
Initial public offeringLDC
London Interbank Offered RateNPF
National Pension Fund (Korea)NEER
Nominal effective exchange rateNIE
Newly industrialized economyNPL
Organization for Economic Cooperation and DevelopmentOIS
Overnight index swapPDCF
Primary Dealer Credit FacilityP/E
Regional Economic OutlookSAAR
Seasonally adjusted at an annual rateSIBOR
Singapore Interbank Offered RateSIV
Structured investment vehicleTAF
Term Auction FacilityVAR
World Economic OutlookWPI
Wholesale price indexy/y
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.
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.