Front Matter

Front Matter

Author(s):
International Monetary Fund. Asia and Pacific Dept
Published Date:
October 2010
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    © 2010 International Monetary Fund

    Cataloging-in-Publication Data

    Regional economic outlook: Asia and Pacific: consolidating the recovery and building sustainable growth. — Washington, D.C. : International Monetary Fund, 2010.

    • p. ; cm. — (World economic and financial surveys, 0258-7440)

    “Oct. 10.”

    Includes bibliographical references.

    ISBN 978-1-58906-950-3

    1. Economic forecasting — Asia. 2. Economic forecasting — Pacific Area. 3. Economic development — Asia. 4. Economic development — Pacific Area. 5. Inflation (Finance) — Asia. 6. Inflation (Finance) — Pacific Area. 7. Investments — Asia. 8. Investments — Pacific Area. I. International Monetary Fund. II. Series: World economic and financial surveys.

    HC412.R445 2010

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    Contents

    Definitions

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

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

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

    • “Asia” refers to emerging Asia plus industrial Asia.1

    • “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.

    • “EU-15” refers to Austria, Belgium, Denmark, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, the Netherlands, Portugal, Spain, Sweden, and the United Kingdom.

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

    • “G-7” refers to Canada, France, Germany, Italy, Japan, the United Kingdom, and the United States.

    • “G-20” refers to Argentina, Australia, Brazil, Canada, China, the European Union, France, Germany, India, Indonesia, Italy, Japan, Korea, Mexico, Russia, Saudi Arabia, South Africa, Turkey, the United Kingdom, and the United States.

    The following abbreviations are used:

    AER

    average effective rate

    APRA

    Australian Prudential Regulation Authority

    AsDB

    Asian Development Bank

    ASEAN

    Association of Southeast Asian Nations

    BoJ

    Bank of Japan

    BVAR

    Bayesian variance autoregression

    CFR

    core-funding ratio

    CPI

    consumer price index

    EM

    emerging markets

    FDI

    foreign direct investment

    FY

    fiscal year

    GARCH

    generalized autoregressive conditional heteroscedasticity

    GDP

    gross domestic product

    GMM

    generalized method of moments

    GVAR

    global vector autoregression

    IRD

    inland revenue department

    IT

    information technology

    LAR

    largest autoregressive root

    LIC

    low-income countries

    MER

    marginal effective rate

    NIE

    newly industrialized economy

    NKPC

    New Keynesian Phillips Curve

    NPL

    nonperforming loan

    OECD

    Organisation for Economic Co-operation and Development

    PFM

    public financial management

    PICs

    Pacific Island countries

    PPP

    purchasing power parity

    REER

    real effective exchange rate

    RBNZ

    Reserve Bank of New Zealand

    REO

    Regional Economic Outlook

    SAAR

    seasonally adjusted at an annual rate

    SARC

    sum of autoregressive coefficients

    SIFI

    systemically important financial institutions

    SMEs

    small and medium-sized enterprises

    SOEs

    state-owned enterprises

    SVAR

    structural vector autoregression

    VAR

    vector autoregression

    VAT

    value-added tax

    WEO

    World Economic Outlook

    WPI

    wholesale price index

    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, FY2010).

    • 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 Vivek Arora and Roberto Cardarelli of the IMF’s Asia and Pacific Department, under the overall direction of Anoop Singh. Contributors included Ashvin Ahuja, Brian Aitken, Steve Barnett, Pelin Berkmen, Julia Bersch, Ran Bi, Carlos Caceres, Stephan Danninger, Leif Lybecker Eskesen, Roberto Guimaraes, Byung Kyoon Jang, Sanjay Kalra, Svitlana Maslova, Malhar Nabar, Carolina Osorio Buitron, Runchana Pongsaparn, Nathan Porter, Yasuhisa Ojima, Mousa Shamouilian, Murtaza Syed, Kiichi Tokuoka, Patrizia Tumbarello, D. Filiz Unsal, Olaf Unteroberdoerster, Shengzu Wang, and James Walsh. Souvik Gupta, Adil Mohommad, and Yiqun Wu provided research assistance; Antoinette Kanyabutembo and Lesa Yee provided production assistance. Martha Bonilla and Joanne Blake of the IMF’s External Relations Department edited the volume and coordinated its publication and release. This report includes comments from other departments and some Executive Directors.

    Executive Summary

    Asia has entered the second year of the global economic expansion still firmly in the lead of the recovery. Growth in the first half of 2010 proceeded well above trend in almost all regional economies, as global manufacturing continued to rebound and fueled exports and investment in the region. Private consumption also remained strong, as labor conditions continued to improve and confidence remained high despite greater market volatility as a result of global financial turbulence.

    During the second half of 2010, economic activity has moderated toward a more sustainable pace, although it remains robust. In particular, industrial production and export growth rates have started to moderate. This in part reflects the maturing of the global and regional inventory cycle, particularly for the information technology products that are important for production and exports in many Asian economies.

    The short-term baseline outlook for Asia remains positive, with growth expected to settle at more sustainable but still high levels. Growth is likely to remain particularly strong in the large, domestic-demand-driven economies of China, India, and Indonesia. The continuing, albeit sluggish, recovery in advanced economies during 2010—11 that is envisaged in the October 2010 World Economic Outlook should support firm growth in Asia’s exports, although below the very high rates of 2009 and early 2010. A gradual pace of withdrawal of policy stimulus, sustained improvements in labor market conditions, and still accommodative financial conditions are expected to sustain private domestic demand. Ample global liquidity on the one hand, and the relatively robust growth and low public debt in Asia on the other hand, should continue to fuel capital flows to the region. Reflecting the slowing of export growth and strong domestic demand, Asia’s current account surplus is projected to decrease to about 3 percent of regional GDP in 2010 and 2011, from about 5 percent in 2007, making a modest contribution to the narrowing of global imbalances.

    The main risk to the outlook is the external environment. As discussed in the World Economic Outlook, while global financial conditions have improved since June 2010, underlying sovereign and banking vulnerabilities in advanced economies remain a significant challenge, and concerns linger over the strength of the global recovery. Despite Asia’s strong economic and policy fundamentals, important trade and financial linkages with advanced economies suggest that a further deterioration in global financial conditions and a slowing of the global recovery would have important repercussions for the region.

    In view of the strong economic expansion that is under way, and emerging signs of inflationary pressure in some economies, Asia has reached the threshold to normalize policy stances across the region. Many economies have started to take steps in this direction. But monetary and fiscal policies are still generally accommodative and, with output gaps closing rapidly, inflation pressures could intensify next year with the risk that policies are becoming more procyclical. In particular, tight capacity constraints could exacerbate the effect of supply shocks on inflation, as discussed in Chapter II. Continued capital inflows may also pose risks to financial stability if they are associated with excessively easy domestic financial conditions. Macroprudential measures have appropriately been taken in many regional economies to minimize these risks, but a further tightening of monetary policy conditions may be needed, including through greater exchange rate appreciation. A faster withdrawal of fiscal stimulus would also help guard against the risks of overheating and a buildup of financial imbalances. Should global conditions worsen, however, the region has the room to delay the normalization of policy stances.

    Over the medium term, sustaining robust growth in Asia will require continued progress with rebalancing growth toward domestic demand. For Asia as a whole, only limited progress has been made toward reducing external imbalances. In 2009, while China’s current account surplus narrowed as a percent of GDP, those of many other Asian economies, such as NIEs and ASEAN, increased. With external demand from advanced economies unlikely to return to precrisis trends in the foreseeable future, Asia will need stronger domestic demand to maintain robust growth. The normalization of policy conditions in Asia would, therefore, need to be accompanied by continued measures to reinforce private domestic consumption and investment. The challenge of raising private consumption was discussed in some detail in the April 2010 Asia and Pacific Regional Economic Outlook. In the present Asia and Pacific Regional Economic Outlook, Chapter III focuses on the challenge of raising investment and stresses the importance of measures to facilitate access to credit, particularly for smaller, domestically oriented, and service sector firms. The chapter also highlights the importance of reviving investment in infrastructure, which will contribute to rebalancing both directly and indirectly, by improving the environment for private sector investment.

    In Asian low-income and Pacific Island countries, policy stimulus and rising global demand for commodities and garments have driven a strong recovery in recent quarters. But these economies face significant challenges in the near and medium term, including the need for fiscal consolidation to strengthen fiscal positions and create more policy space, and the need for structural reforms to raise potential growth and reduce vulnerabilities. Chapter IV discusses these issues.

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