Front Matter

Author(s):
International Monetary Fund. Asia and Pacific Dept
Published Date:
April 2011
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    ©2011 International Monetary Fund

    Cataloging-in-Publication Data

    Regional economic outlook. Asia and Pacific. – Washington, D.C. : International Monetary Fund, 2005-

    v. ; cm. – (World economic and financial surveys, 0258-7440)

    Twice a year.

    Began in 2005.

    Some issues have also thematic titles.

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

    HC412.R445

    ISBN-13 978-1-61635-062-8

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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.

    • “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.

    • “E.U.” refers to the European Union

    • “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:

    AIO

    Asian input output

    AREAER

    Annual Report on Exchange Arrangements and Exchange Restrictions

    ASEAN

    Association of Southeast Asian Nations

    BEC

    Broad Economic Categories

    BIS

    Bank for International Settlements

    CPI

    consumer price index

    CSD

    Central Securities Depositories

    DSGE model

    Dynamic Stochastic General Equilibrium model

    ETF

    exchange-traded fund

    FDI

    foreign direct investment

    G-20 MAP

    G-20 Mutual Assessment Process

    GDFM

    Global Dynamic Factor Model

    GDP

    gross domestic product

    GEM

    Global Economic Model

    GMM

    generalized method of moments

    GTAP

    Global Trade Analysis Project

    IEER

    integrated effective exchange rate

    IPO

    initial public offering

    J-REIT

    Japanese real estate trust funds

    JETRO

    Japan External Trade Organization

    JGB

    Japanese government bonds

    LICs

    low-income countries

    MSCI

    Morgan Stanley Capital International

    NIE

    newly industrialized economy

    NPL

    nonperforming loan

    OECD

    Organisation for Economic Cooperation and Development

    P/E

    price-earnings

    PICs

    Pacific Island countries

    PMI

    purchasing managers’ index

    REER

    real effective exchange rate

    REIT

    real estate investment trusts

    SAAR

    seasonally adjusted at an annual rate

    SBI

    Bank Indonesia Certificate

    SITC

    Standard International Trade Classification

    SMEs

    small and medium-sized enterprises

    SVAR

    Structural Vector Autoregression

    TOPIX

    Tokyo stock price index

    VAR

    vector autoregression

    VAT

    value-added tax

    VIX

    Chicago Board Options Exchange market volatility index

    VZIRP

    virtually zero interest rate policy

    WEO

    World Economic Outlook

    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, FY2009).

    • 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, Ravi Balakrishnan, Sergei Dodzin, Jonathan Dunn, Nan Geng, Sonali Jain-Chandra, W. Raphael Lam, Cheng Hoon Lim, Adil Mohommad, Sylwia Nowak, Ceyda Oner, Akira Otani, Sanjaya Panth, Alexander Pitt, Yan Sun, D. Filiz Unsal, Olaf Unteroberdoerster, Jade Vichyanond, Xiaoyong Wu, Yiqun Wu, and Jie Yang. Souvik Gupta provided research assistance; Kessia De Leo, Antoinette Kanyabutembo, and Lesa Yee provided production assistance. Joanne Blake and Martha Bonilla of the IMF’s External Relations Department edited the volume and coordinated its publication and release. This report is based on data available as of April 12, 2011 and includes comments from other departments and some Executive Directors.

    Executive Summary

    The earthquake-related tragedy in Japan in mid-March 2011 resulted in terrible losses of life and property. The early and decisive actions by the Japanese government and the Bank of Japan have helped to contain the initial damage from the earthquake, but its aftermath continues to cast a pall over the region and indeed the world. The relatively limited negative impact of the tragedy on Japanese production and regional spillovers to the rest of Asia masks the scale of the humanitarian disaster and damage to the country’s infrastructure and capital stock.

    Meanwhile, in Asia as a whole, the recovery has matured as both exports and domestic demand have fueled rapid economic growth, which reached 8.3 percent in 2010. Exports have benefited from the global investment cycle as well as strong final demand from emerging economies in both Asia and other regions. Domestic demand has also been robust, reflecting still-expansionary fiscal policies as well as growing private demand. Private demand has been broad-based across both investment and consumption. Investment is being driven by the need in many Asian countries to overcome capacity constraints and to build infrastructure. Consumption, meanwhile, is being propelled by rising employment, wages, and productivity.

    Near-term prospects are favorable, with growth in the Asia and Pacific region projected to average nearly 7 percent in both 2011 and 2012. Growth is expected to be led by China and India, whose economies are presumed to expand by 9½ percent and 8 percent, respectively, in the next two years. Their growth will have important spillovers for other countries in the region (and the world), particularly through demand for commodities. In Australia, for example, growth is expected to pick up to 3 percent and 3½ percent, respectively, in 2011 and 2012, as emerging Asia’s demand for commodities increases and as private investment in mining emerges as the main driver of growth.

    Risks to the growth outlook are evenly balanced. The prospects for sustained global growth have strengthened in recent quarters as uncertainties over private domestic demand in advanced economies have lessened. Meanwhile, new downside risks have emerged such as the turmoil in the Middle East and North Africa region—which could disrupt global growth and inflation—and spillovers from the earthquake-related tragedy in Japan. Meanwhile, fiscal and financial vulnerabilities continue to cloud the outlook for advanced economies, which are important trading partners for Asia.

    Asia’s rapid growth is accompanied by the emergence of pockets of overheating across the region in both goods and asset prices. Asset price pressures are reflected in strong credit dynamics as well as in certain segments of property markets in a few economies. Headline consumer price index (CPI) inflation has accelerated since October 2010, owing mainly to higher commodity prices; these prices, however, are also spilling over into core inflation. Core inflation is being further driven by still-accommodative financial conditions across the region that owe in part to procyclical monetary policy stances. Interest rates remain below levels that are consistent with stable growth and low inflation and in many cases are still negative in real terms. Inflation is expected to increase further in 2011, before decelerating modestly in 2012 as global commodity prices stabilize and central banks across the region make further progress with tightening macroeconomic conditions.

    The task of policy tightening has been complicated by capital inflows, which surged in the first three quarters of 2010. Policymakers have sometimes feared that higher policy rates could attract even more inflows. Inflows have generally moderated since October 2010, although they have still been extraordinarily large in a few Asian economies and remain a key concern of policymakers. Capital is expected to continue flowing into Asia in 2011 and 2012, attracted by the region’s strong growth prospects and fueled by abundant global liquidity and risk appetite. In this context, policymakers’ concerns have shifted to the instability associated with potential capital flow volatility should these inflows come to a “sudden stop” or even reverse. Several economies have introduced macroprudential measures targeted at reducing the risk of overheating in asset prices, and of subsequent busts if capital flows reverse. Chapter II argues that although these measures have been helpful, they are best seen as complements and not as substitutes for macroeconomic policy adjustment.

    Further monetary tightening is necessary in economies that face generalized inflation pressures. In addition to higher policy rates, exchange rate flexibility is a key line of defense against overheating pressures. Exchange rate appreciation would result in a tightening of monetary conditions and reduce the burden to be borne by higher policy rates. Several economies also have scope for more fiscal consolidation, which will help to expand the fiscal space that would allow governments to respond more effectively to future shocks.

    Looking beyond the near-term macroeconomic policy challenges, Asia faces a need to strengthen the platform for sustained strong growth over the medium term. Such a platform would depend on reducing inequality; raising employment prospects, which would also guard against risks to social stability; and continued efforts to rebalance growth by strengthening private domestic demand. Intra-Asian exports are a growing source of demand for many Asian economies, including exports of intermediate inputs to China in the context of the Asian “supply chain,” as Chapter III shows, but Asia is still reliant on demand from the rest of the world. In the absence of further measures to increase domestic demand, the region’s external balances would reemerge as the global economy recovers and demand from advanced economies picks up. As discussed in Chapter IV, policymakers in many Asian LICs and Pacific Island economies will also face the challenge of managing the social impact of higher commodity prices, and of maintaining sound financial systems in the face of rising and volatile capital inflows.

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