Front Matter

Front Matter

Author(s):
International Monetary Fund. Asia and Pacific Dept
Published Date:
May 2009
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    Regional Economi c Out look Asia and Pacific Global Crisis: The Asian Context

    May 2009

    © 2009 International Monetary Fund

    Cataloging-in-Publication Data

    Regional economic outlook : Asia and Pacific. -- Washington, D.C. : International

    Monetary Fund, 2009. – (World economic and financial surveys, 0258-7440)

    p.; cm.

    ISBN 978-1-58906-840-7

    “Global crisis : the Asian context.”

    Includes bibliographical references.

    1. Economic forecasting – Asia. 2. Economic forecasting – Pacific Area. 3. Asia – Economic conditions, 1945- . 4. Asia – Economic conditions, 1945-– Statistics. 5. Pacific Area – Economic conditions, 1945- . 6. Pacific Area – Economic conditions, 1945- – Statistics. I. International Monetary Fund. II. Series: World economic and financial surveys.

    HC412.R445 2009

    Please send orders to:

    International Monetary Fund, Publication Services

    700 19th St. N.W., Washington, D.C. 20431, U.S.A.

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    Internet: www.imf.org

    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-4” refers to Indonesia, Malaysia, the Philippines, and Thailand

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

    • “G-2” refers to the euro area and the United States

    • “G-3” refers to the euro area, Japan, and the United States

    • “TED Spreads” refers to the difference between the interest rates on interbank loans and short-term government debt.

    The following abbreviations are used:

    ABCP

    Asset-backed commercial paper

    ABS

    Asset-backed securities

    AIG

    American International Group

    ASEAN

    Association of Southeast Asian Nations

    BIS

    Bank for International Settlements

    BoJ

    Bank of Japan

    bps

    basis points

    CCA

    contingent claims analysis

    CDS

    credit default swap

    CPI

    consumer price index

    CVU

    Corporate Vulnerability Utility

    EICDS

    Expected Default Frequency Implied Corporate Debt Spread

    FCI

    Financial Conditions Index

    FDI

    foreign direct investment

    FSA

    Financial Services Agency

    GDP

    gross domestic product

    GFSR

    Global Financial Stability Report

    GIMF model

    Global Integrated Monetary and Fiscal model

    HIPC

    heavily indebted poor country

    ICR

    interest coverage ratio

    IT

    information technology

    JGBs

    Japanese Government Bonds

    LIBOR

    London Interbank Offered Rate

    LIC

    low-income countries

    MDRI

    Multilateral Debt Relief Initiative

    MoF

    ministry of finance

    MSCI

    Morgan Stanley Capital International

    NIE

    newly industrialized economy

    NPL

    nonperforming loan

    OECD

    Organization for Economic Cooperation and Development

    OLS

    ordinary least squares

    P/E

    Price-Earnings

    PPP

    purchasing power parity

    q/q

    quarter-on-quarter

    REO

    Regional Economic Outlook

    SAAR

    seasonally adjusted at an annual rate

    SME

    Small and medium-sized enterprise

    UNIDO

    United Nations Industrial Development Organization

    VAR

    vector autoregression

    WEO

    World Economic Outlook

    WPI

    wholesale price index

    y/y

    year-on-year

    ZIRP

    zero interest rate policy

    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 Joshua Felman and Roberto Cardarelli of the IMF’s Asia and Pacific Department. The team included Vivek Arora, Carol Baker, Tarhan Feyzioğlu, Kristian Hartelius, Mark Horton, Anna Ivanova, Sonali Jain-Chandra, Kenneth Kang, Jacques Miniane, Papa N’Diaye, Dan Nyberg, Hiroko Oura, Romuald Semblat, Martin Sommer, Murtaza Syed, Kiichi Tokuoka, Olaf Unteroberdoerster, Xu Wei, and Harm Zebregs. Souvik Gupta, Ioana Hussiada, Shuda Li, Adil Mohommad, and Fritz Pierre-Louis provided research assistance; and Yuko Kobayashi, Ranee Sirihorachai, Livia Tolentino, and Lesa Yee provided production assistance.

    Executive Summary

    The spillovers from the global crisis have affected Asia with considerable speed and force. GDP in emerging Asia excluding China and India plummeted by no less than 15 percent on a seasonally adjusted annualized basis in the last quarter of 2008, and a further decline is expected for the first quarter of 2009.

    In many ways, this severe impact was unexpected. Asia is far from the epicenter of the crisis, not just geographically but also in the sense that it did not indulge in the financial practices that led to serious problems in advanced economies’ banking systems. Moreover, before the crisis the region was in sound macroeconomic shape, and thus in a strong position to resist the pressures emanating from advanced economies. In the event, however, the impact on Asia has been even swifter and sharper than in other regions.

    What explains this outcome? As Chapter 1 explains, the answer lies in Asia’s exceptional integration with the global economy. Much of Asia relies heavily on technologically sophisticated manufacturing exports, products for which demand has collapsed. At the same time, Asia’s financial ties with the rest of the world have deepened over the past decade, exposing the region to the forces of global deleveraging.

    Looking ahead, Asia’s growth path will continue to run parallel to the global economy. For the rest of 2009, the external shock is expected to continue to spill over into private investment and consumption, causing many countries to register negative growth rates. Then, as the global economy revives in 2010, so too will Asia. But the recovery is likely to be tepid—and not only because the global economy will remain weak. As Chapter 2 argues, historical experience shows that investment tends to recover slowly from downturns, especially those that involve financial stress.

    The risks to this baseline scenario are skewed to the downside. In particular, a delayed global recovery may trigger more insidious feedback loops between the real and financial sectors in Asia. As discussed in Chapter 3, continued weak demand and tighter financial conditions could lead to a surge in corporate distress that could feed back into Asian banks, making them even less able or willing to extend credit to the private sector. At the same time, a surge in corporate bankruptcies could spill over to domestic demand, with a sharper-than-anticipated increase in unemployment rates putting a dent in consumption.

    Over the longer horizon, Asian economies are at risk of a structural decline in demand from advanced economies. Households in advanced economies have started repairing their over-leveraged balance sheets, as the era of easy credit to finance purchases of consumer durables could well be over. In that case, the growth rate of Asian manufacturing and exports could be structurally lower for many years, and Asia’s export-led growth strategy may no longer pay the same dividends as in the past.

    In this context, the challenge for Asia’s policymakers is twofold:

    • First, forceful countercyclical policies need to be sustained, to help Asia come out of the recession more quickly and vigorously, and to provide insurance against downside risks. On the fiscal policy side, it will be important to sustain the stimulus injected in 2009 into next year, not least as an insurance policy against risks that have yet to reveal themselves. At the same time, it will be critical to preserve fiscal credibility by signaling that such stimulus packages are extraordinary and will be unwound once the recovery is firmly established. On the monetary policy side, many central banks still have scope to reduce policy rates, while some may need to support credit to the private sector through unconventional measures. Japan’s experiences with the crisis of the 1990s, examined in Chapter 4, suggest however that these measures may need to be accompanied by timely steps to address any underlying stress in the financial system as well as in household and corporate balance sheets.

    • Second, Asia may need to rebalance growth away from exports and toward domestic demand in order to return to precrisis growth rates. China is already trying to catalyze private consumption, which has been falling for a decade relative to GDP. In principle, there should be scope to do this in many other Asian countries, particularly by building stronger social protection systems that will reduce the need for precautionary savings to meet necessities related to health, education, and retirement. Over the longer term, exchange rate appreciation also might help—by providing price incentives to shift resources toward production for domestic use and by raising real household income, thereby spurring consumption.

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