Developing Asia 20042005: Is the Boom Sustainable

1
Developing Asia 2004-2005 Is the Boom
Sustainable ?

• Ifzal Ali
• Chief Economist
• Asian Development Bank
• Economic Congress
• Casa Asia, Barcelona, Spain
• 22 November 2004

2
The Global Context for 2004-2005 and a glimpse
beyond

• Synchronized robust growth in main industrial
  countries in 2004, leveling off moderately in
  2005 baseline assumptions
• Oil prices to stay high baseline assumptions
• But inflation rising moderately
• Monetary policies returning progressively to
  neutral stance/some tightening

3
The Global Context

• 2004 Growth built on large imbalances (US fiscal
  and current account deficits, fiscal situation in
  Japan and Euro zone)
• Imbalances could start to weigh on outlook end of
  2005 and onwards
• Increases in dollar interest rates
• Volatility in exchange rates
• Steep decline in US aggregate demand and inputs
• Will the specter of stagflation return?

4
Developing Asia Booming in 2004-2005

• GDP Growth much stronger than expected in 1H
  2004 GDP growth Developing Asia
• Expansion broad based
• Return of strong investment adds to export
  rebound and sustained consumer spending
• Inflation remains generally low despite high oil
  prices Inflation Developing Asia

5
Developing Asia

• Regional current account surplus narrowing but
  still 2.9 GDPCA/GDP Developing Asia
• GDP Growth to climb to 7.2 in 2004 still strong
  6.2 in 2005, 0.5 percentage points below ADO
  2004 forecast GDP GrowthDeveloping Asia

6
East Asia Upward Growth Trend Continues since
2000

• PRC Economy at near full throttle in 2004 GDP
  table
• Hong Kong, China and Taipei,China recovering
  strongly in 2004 and remaining on track in 2005
  due to buoyant exports and recovering domestic
  demand Hong Kong Taipei,China
• Korea lagging as consumption still depressed and
  low growth continuing 2005 Korea
• PRC micro soft landing in 2005 CA/GDPEast
  Asia

7
GDP Growth, East Asia back to East Asia CA/GDP
East Asia
8
Southeast Asia at long last awaited revival in
business investment

• Strong growth momentum, now broad-based
• In a first since Asian crisis, business
  investment doing well
• Welcome response of exports to buoyant world
  economy
• But imports surging alsocontribution of net
  exports to GDP growth down Malaysia
• Contribution of consumer expenditure remaining
  robust Philippines

9
Southeast Asia

• Growth in 2004 revised upward to 6.2 and 5.6
  in 2005
• Outlook improving for Indonesia and the
  Philippines, but deteriorating for Cambodia

10
GDP Growth, Southeast Asia CA/GDPSEAsia
11
South Asia Gathering strength despite
uncertainties

• Weather dampens growth in India and Bangladesh
• Growth momentum remains strong but policy choices
  are crucial
• Trade continues to grow at double digit rates
• End of MFA quotas India and Pakistan better
  prepared than Bangladesh
• Insurgency in Nepal continues to stifle growth

12
GDP Growth, South Asia CA/GDPSouth Asia
13
Central Asia Bright horizon for energy exporters

• Oil/gas investments and higher prices boost
  oil-exporting economies
• Higher commodity prices benefiting non-oil
  export-led economies
• Economic diversification urgently needed,
  especially to boost employment, but structural
  reforms and finding an effective strategy
  difficult

14
Pacific Doing better than expected

• 2003 turned out better than expected at 4.3
• Second largest economy Fiji continuing on
  recovery road
• Fiscal governance issues remaining major problem

15
Risks to Developing Asia Clouds gathering beyond
the clear skies Global Risks

• Surging oil prices could create havoc for world
  economy
• Aggravate existing global imbalances
• Effects of Oil Price Inc
• Duration of oil price increase more important
  than the level of increase
• Oil price simulation
• Higher oil price environment calls for medium to
  long-term structural adjustments (e.g., improving
  energy efficiency)

16
Global Risks

• Japan and EU highly vulnerable to a downturn in
  US
• Widening US fiscal and current account deficits
  exacerbating vulnerability of world economy
• No leeway left for macroeconomic policy support
  in industrial countries

17
Global Risks

• Uncertain sustainability of growth momentum in
  major industrial countries, rising inflation,
  rising interest rates and persistent slide in
  dollar. The specter of stagflation beyond 2005?

18
Risks to Developing Asia Regional Risks

• Hard landing in PRC still a possibility PRC
  Slowdown
• With exports a main driver of growth, region
  vulnerable to world economic slowdown beyond 2005
• Weakness in financial sector regulation and
  supervision could hurt domestic demand (e.g.,
  Korea)

19
...Regional Risks

• Employment generation still lagging in spite of
  strong growthrisk to social stability
• Epidemics and security threatsreal danger in the
  region

Developing Asia must be resilient in the face of
turbulence resulting from global and regional
risks
20
Making Developing Asias robust growth
sustainable over the medium term?

• Consolidate fiscal situations to allow for future
  anti-cyclical policies
• Implement policies to bolster domestic
  demanddeepen financial sector reforms and
  supervision(consumer credit, long-term mortgage
  lending, etc.)

21
Making Developing Asia

• Address investment climate problems (from
  infrastructure to governance to legal systems)
• Review labor market policies to share benefits of
  growth
• Adopt more flexible exchange rate policies and
  ensure the productive use of foreign exchange
  reserves

Growing importance of domestic demand and
increased competitiveness will ensure resilience
in the face of turbulence
22
Making Developing Asias robust growth
sustainable over the long term?

• Developing Asia is in catch-up mode and there is
  still a large scope for efficiency improvement
  through reforms and adoption of new technology,
  leading to a potential increase in productivity
• Demographic outlook is positive, dependency ratio
  will come down in most economies, savings rate
  will stay high or increase leading to higher
  investment rate

23
Making Developing Asia

• Over the long term 7-8 growth rate of GDP is
  feasiblea tri-polar Asia could emerge by 2020
• Challenge stay competitive in Asia and the world
• Buoyant domestic demand will trigger imports
  while increased competitiveness will spur exports

24
Making Developing Asia

• Increased complementarities within Asia will
  strengthen trade and investment integration
  thereby providing a buffer to global turbulence
• With the increased importance of Asia in global
  GDP, strengthened linkages with US and EU will
  lead to win-win outcomes

25
Key Messages medium term

• Developing Asia growing at fastest rate in 2004
  since 2000
• Growth more broad basedinvestments and exports
  picking up consumption demand remaining
  sustained
• Moderate growth slowdown in 2005 mainly due to
  easing of aggregate demand
• Risks linked to imbalances in world economy
  increasing
• Accelerate macro and micro policy reforms to make
  growth sustainable

26
Key Messages long term

• Strengthened inclusiveness and improved
  investment climate will boost aggregate demand
• Aggregate supply must be made more efficient
  through strengthening the microfoundations of
  growth thereby improving competitiveness
• Complementarities between South Asia, East Asia,
  and ASEAN need to be fostered to boost
  intraregional trade

27
Key Messages

• Complementarities between Asia, US, and EU need
  to be strengthened to augment inter-regional
  trade
• Open market-oriented competitive economies will
  be the key to resilience and sustained growth

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Baseline Assumptions on External Conditions
back to Global Context
29
GDP Growth Developing Asia, 2003-2005 back to
Developing Asia back to East Asia
as of Nov 10, 2004
30
Inflation Developing Asia, 2003-2005 back to
Developing Asia
31
CA/GDP Developing Asia, 2003-2005 back to
Developing Asia
32
CA/GDP, East Asia go to East Asia go to
GDPEast Asia
33
CA/GDP, Southeast Asia go to SEAsia go to
GDPSEAsia
34
CA/GDP, South Asia go to SAsia go to
GDPSAsia
35
Contribution to Growth, Hong Kong, China (
points) back to East Asia Taipei,China
36
Contribution to Growth, Taipei,China ( points)
back to East Asia
37
Contribution to Growth, Korea ( points) back
to East Asia
38
Contribution to Growth, Indonesia ( points)
back to Southeast Asia Malaysia
39
Contribution to Growth, Malaysia ( points)
Philippines back to Southeast Asia
40
Contribution to Growth, Philippines ( points)
back to Southeast Asia Singapore
41
Contribution to Growth, Singapore ( points)
back to Southeast Asia Thailand
42
Contribution to Growth, Thailand ( points)
back to Southeast Asia
43
back to Global Risks
Sustained high oil price
Inflationary pressures
Interest rate hikes
Reversal of Savings and Consumption Behavior
Rise in HH Credit Default Rates
Reduction of attractiveness of Asian financial
Markets
Investment Setback
SLOWDOWN OF ECONOMIC ACTIVITY IN ASIA
44
Impact in 2005 of Sustained Increase Scenario I
vs. Scenario II next
Until end of 2005 from a baseline of 35/bbl
brent crude
45
Impact of a Sustained Increasecont. back to
global risks
46
Key stylized facts

• The slowdown in PRC is mainly investment-induced
• Despite rapid growth, PRC remains a relatively
  small trading partner of most Asia developing
  economies, compared to the US, Japan and EU
• A large part of Asia's exports to the PRC
  involves intermediate goods that are processed
  and reexported.

47
Weakening fixed investment in some selected
sectors is the main component of the slowdown of
PRC
48
Regional Distribution of Trade in Developing
Asia, 2003 ()
49
The regional production chain is dependent on
final demand from industrial countries
50
Effects of a PRC Slowdown

• The simulations using a global CGE model show
  that PRCs slowdown would have a moderate impact
  on Asian economies
• A two pts reduction in PRCs growth would slow
  GDP growth by 0.5 ppts for NIEs, 0.24 ppts for
  ASEAN and 0.1 ppts for South Asia

51
Effects on GDP Growth in Selected Regions(2
pts reduction in PRCs GDP growth, 2005)
52
Sectoral Impacts

• In Japan, the textile sector is most hit due to
  strong dependence on PRC market.
• NIEs are expected to experience some production
  losses in their chemicals, metals, services, and
  textiles sectors.
• In ASEAN, electronics and chemical industry would
  be major losers from PRCs back to Regional
  Risks.