Developing Asia amidst the global slowdown Economics and Research Department Asian Development Bank 2 April 2008.

Developing Asia Developing Asia amidst the amidst the

global slowdownglobal slowdown

Economics and Research Department

Asian Development Bank2 April 2008

Key issuesKey issues

• Growth and inflation in 2007• Challenging external environment

in 2008 and 2009• Myth of uncoupling• Growth will ease but remain solid• Inflationary pressures will mount• Structural responses for long-run

growth

Growth in Developing Asia in 2007Growth in Developing Asia in 2007

• Region’s 8.7% growth in 2007 tested speed limits

• Led by PRC at 11.4%, highest in 13 years• India grew at 8.7%, marginally lower than

previous year• Philippines at 7.3%, a 30-year high

Developing Asia recorded highest Developing Asia recorded highest growth in 2 decadesgrowth in 2 decades

High growth rates were spread across many countries

Growth in Developing Asia in 2007Growth in Developing Asia in 2007

• PRC (4.8%), Mongolia (9%)• Sri Lanka (20.2%), Pakistan (7.8%), Bangladesh

(7.2%)• Viet Nam (8.3%)• Azerbaijan (16.7%)• Timor-Leste (8.9%)

Signs of overheating: rising consumer Signs of overheating: rising consumer prices, inflation hits 5-year highprices, inflation hits 5-year high

Growth in Developing Asia in 2007Growth in Developing Asia in 2007

• Subsidies: Indonesia, India• Tariff reduction: India, PRC• Export tax: PRC• Export restrictions: Viet Nam, India• Price controls: PRC, Indonesia, India

Responses to rising fuel and food Responses to rising fuel and food pricesprices

Resisting commodity price increases through administrative measures will have a high fiscal cost and will add to future inflation

Challenging external environment Challenging external environment

in 2008 and 2009in 2008 and 2009Coincident slowdown in G3Coincident slowdown in G3

Coincident nature will limit options for Asian suppliers to switch to new markets

2006 Actual

2007 Actual

2008 Projectio

n

2009 Projectio

n

GDP growth (%)

Industrial countries 2.7 2.3 1.5 1.9

United States 2.9 2.2 1.5 2.0

Eurozone 2.7 2.6 1.6 2.0

Japan 2.4 2.1 1.5 1.5

World trade volume (% change)

10.1 7.5 7.0 7.7

Challenging external environmentChallenging external environmentin 2008 and 2009in 2008 and 2009

• Oil prices: $10/barrel rise annually since 2002; $85/barrel projected in 2008

• Fertilizer (DAP) prices: $260/ton in 2006 to $768 in 2008 (Jan-Feb ave.)

• Rice prices: $185/ton (Dec 02), $378 (Dec 07), $700 (Mar 08)• Wheat prices: less than $200/ton in 2006 to $400 in 2008

(Jan-Feb ave.)• Edible oil prices: $650/ton in 2006 to $1400 in 2008 (Jan-Feb

ave.)

Fuel and food prices will test new Fuel and food prices will test new heightsheights

Myth of uncouplingMyth of uncoupling

Volume

-60

-40

-20

0

20

40

60

80

PRC MAL SIN TAP KOR PHI INO

% change

Q1 2007 Q2 2007 Q3 2007 Q4 2007

Dramatic decline of US computing Dramatic decline of US computing equipment importsequipment imports

Value

-60

-40

-20

0

20

40

60

80

PRC MAL SIN TAP KOR PHI INO

% change

Q1 2007 Q2 2007 Q3 2007 Q4 2007

Myth of uncouplingMyth of uncoupling

• Garment exports to the US from developing Asia weakened throughout 2007

• Footwear exports from Asia to the US fell sharply in successive quarters in 2007

• Toys, games, sports equipment exports to the US slowed in 2007

Asian fallout from slower US growthAsian fallout from slower US growth

Myth of uncouplingMyth of uncoupling

• Intra-Asian trade driven by vertically integrated Asian production chains

• Extra-Asian trade supported by G3 demand for final goods produced in these networks

• 61% of East and Southeast Asian exports directly meet final demand of G3

Intra-Asian trade cannot substitute for Intra-Asian trade cannot substitute for G3 slowdownG3 slowdown

Myth of uncouplingMyth of uncoupling

• Developing Asia’s ties to global financial markets have tightened

• Stock of financial assets as a % of GDP in developing Asia has risen quickly

• Cross-border ownership of assets and liabilities has grown

• East Asian equity markets now track US equities more closely than before the 1997 Asian financial crisis

Financial integration and contagionFinancial integration and contagion

Myth of uncouplingMyth of uncoupling

• Credit spreads have widened in offshore markets• Equity markets in Asia have moved closely in step

with US• Financial ties to global hubs are tightening• Direct exposure of Asian financial institutions to

US subprime debt is small• Asian banks are well capitalized, profitable, and

not exposed to significant risks of leverage

Global slowdown will lead to asset Global slowdown will lead to asset market adjustments in Asiamarket adjustments in Asia

Growth will ease but remain solidGrowth will ease but remain solid

• Region has generally favorable policy conditions• Productivity growth linked to economic

modernization and structural transformation will continue

• But developing Asia still tied closely to global activity through trade and financial channels

Domestic conditions remain favorableDomestic conditions remain favorable

Growth to remain solid

Growth will ease but remain solidGrowth will ease but remain solid

0

4

8

12

2003 2004 2005 2006 2007 2008 2009

%

GDP growth 5-year moving average

Aggregate GDP growthAggregate GDP growth

Growth will ease but remain solidGrowth will ease but remain solid

0

4

8

12

DevelopingAsia

Central Asia East Asia South Asia SoutheastAsia

The Pacific

%

2007 2008 2009

All but Pacific slows in 2008All but Pacific slows in 2008

Inflationary pressures will mountInflationary pressures will mount

0

1

2

3

4

5

6

2003 2004 2005 2006 2007 2008 2009

%

Inflation 5-year moving average

Aggregate inflationAggregate inflation

Inflationary pressures will mountInflationary pressures will mount

0

4

8

12

16

DevelopingAsia

Central Asia East Asia South Asia SoutheastAsia

The Pacific

%

2006 2007 2008 2009

Inflation could hit decade-long high in Inflation could hit decade-long high in 20082008

Growth will ease but remain solid, Growth will ease but remain solid, inflationary pressures will mountinflationary pressures will mount

GDP

0

2

4

6

8

10

12

PRC HKG KOR MON TAP

%

2007 2008 2009

Inflation

0

2

4

6

8

10

12

PRC HKG KOR MON TAP

%

2007 2008 2009

East Asia’s domestic demand will East Asia’s domestic demand will compensate for slowdown of exportscompensate for slowdown of exports

Growth will ease but remain solidGrowth will ease but remain solid

• Bring down inflation• Avoid hard landing• Address large current

account surpluses and low consumption

• Strains on energy and the environment

• Rising income inequality

2007 2008 2009

GDP growth

11.4 10.0 9.8

Inflation 4.8 5.5 5.0

CAB 10.9 9.9 8.6

Opportunities for rebalancing in the PRCOpportunities for rebalancing in the PRC

Growth will ease but remain solid, Growth will ease but remain solid, inflationary pressures will mountinflationary pressures will mount

GDP

0

2

4

6

8

10

IND PAK BAN SRI

%

2007 2008 2009

Inflation

0

5

10

15

20

25

IND PAK BAN SRI

%

2007 2008 2009

South Asia less affected by G3 South Asia less affected by G3 slowdown, vulnerable to high slowdown, vulnerable to high commodities pricescommodities prices

Growth will ease but remain solid, Growth will ease but remain solid, inflationary pressures will mountinflationary pressures will mount

• Tighter monetary policies slowed growth

• Capital inflows raised reserves

• Rupee appreciation hurt some exports

• Slower growth in 2008 but chance of pick up in 2009

• High food inflation limits monetary policy options

• Fiscal consolidation that includes off-budget subsidies

2007 2008 2009

GDP growth

8.7 8.0 8.5

Inflation 4.4 4.5 5.0

CAB -1.9 -2.2 -2.6

India’s slowdown in 2008 temporaryIndia’s slowdown in 2008 temporary

Growth will ease but remain solid, Growth will ease but remain solid, inflationary pressures will mountinflationary pressures will mount

GDP

0

2

4

6

8

10

INO MAL PHI THA VIE

%

2007 2008 2009

Inflation

0

4

8

12

16

20

INO MAL PHI THA VIE

%

2007 2008 2009

Southeast Asia returns to trend, Southeast Asia returns to trend, inflation picks upinflation picks up

Growth will ease but remain solid, Growth will ease but remain solid, inflationary pressures will mountinflationary pressures will mount

• Bring down inflation through a policy mix of monetary and fiscal tightening, exchange rate flexibility

• Avoid banking system instability

• Need to ratchet up growth again

• Remove infrastructure bottlenecks

• Continue market-based reforms

2007 2008 2009

GDP growth

8.5 7.0 8.1

Inflation 8.3 18.3 10.2

CAB -8.0 -10.3 -9.4

Viet Nam’s inflation must be reined inViet Nam’s inflation must be reined in

Structural responses for long-run Structural responses for long-run growthgrowth

• Rising agricultural productivity must accompany the increase in the share of output and employment in industry and services

• Modernization, technological improvements, and productivity increases in manufacturing and services are essential

• Demographic dividend is an enormous potential for many countries

Asia’s longer-run growth trajectory Asia’s longer-run growth trajectory dependent on structural and supply-side dependent on structural and supply-side dynamicsdynamics

Structural responses for long-run Structural responses for long-run growthgrowth

• “Youth bulge” provides great potential for Asia

• Unemployment and joblessness on the rise• Poor education and training pushing poor,

young workers to informal jobs• Education and training systems are failing

Asia and redirection required to ensure relevance

Young Asians: a squandered talentYoung Asians: a squandered talent

Structural responses for long-run Structural responses for long-run growthgrowth

Young Asians: a squandered talentYoung Asians: a squandered talent

Developing Asia

Youth unemployment rates

0

5

10

15

20

25

30

35

India (2004-05) Indonesia (2006) Philippines (2006) Thailand (2005)

%

Male Female 15-19 years old 20-24 years old

World

Industrial countries

Structural responses for long-run Structural responses for long-run growthgrowth

• Developing Asia suffering from dearth of professional skills

• Higher incomes have fueled demand for skills-intensive services

• Measures needed to stem brain drain and relax occupational restrictions

• Investment in appropriate education systems required

Asia’s skills crisisAsia’s skills crisis

Structural responses for long-run Structural responses for long-run growthgrowth

Asia’s skills crisisAsia’s skills crisis

Shortage of qualified staff as an issue, Southeast Asia, Dec. 2006 - Jan. 2007

0 1 2 3 4 5

Other industrial services

Chemicals/ pharmaceuticals

Other services

Electronics/ engineering

Professional services

ICT services

Financial services

1=not an issue; 5=serious issue

Structural responses for long-run Structural responses for long-run growthgrowth

• Intraregional migration is surging• Yet current policies remain restrictive• Greater labor migration presents

opportunities for both sending and receiving economies

• Efforts to promote regional cooperation and liberalization of migration needed

Asian workers on the moveAsian workers on the move

Structural responses for long-run Structural responses for long-run growthgrowth

Per capita income in Thailand and selected labor-sending neighbors

0 1000 2000 3000 4000

Thailand

Sri Lanka

Viet Nam

Lao PDR

Cambodia

Nepal

Current $

Asian workers on the moveAsian workers on the move

Per capita income in Malaysia and selected labor-sending neighbors

0 2000 4000 6000

Malaysia

Indonesia

Philippines

Sri Lanka

Pakistan

Bangladesh

Current $

RisksRisks

• Inflation will accelerate and could hit a decade-long regional high Tackle inflation at root

• Fiscal balances at risk Exit strategies for subsidies and administered prices needed

• Trade and investment protectionism is a clear and present danger Liberalize internal markets and trade

What is there to worry about:What is there to worry about:

Key messagesKey messages

• Coincident slowdown in G3 and rising fuel and food prices pose major challenges

• Developing Asia’s favorable policy climate, structural transformation, and productivity growth provide forward momentum

• Developing Asia will post solid growth in 2008

Asia not immune to global Asia not immune to global slowdown; neither is it a hostageslowdown; neither is it a hostage