Asian Development Outlook 2010Asian Development Outlook 2010Macroeconomic Policy ChallengesMacroeconomic Policy Challenges

Jong-Wha LeeChief EconomistEconomics and Research DepartmentAsian Development Bank

Washington, DCApril 19, 2010

O tliOutline

1. Economic prospectsGlobal recoveryS i d i A iSustained recovery in AsiaRisks to outlook

M i li h ll2. Macroeconomic policy challenges

3

Key Messages

fAsia’s recovery takes firm holdInflation on the rise but manageable Uncertain global recovery and volatile capital flows present risksGradually unwind stimulus and shift to private demandReaffirm commitment to prudent monetary and fiscal policies

4

E i tEconomic prospects

Global conditions improvingGlobal conditions improving2008 2009 2010 2011

Actual ActualADO 2010 projection

ADO 2010projection

GDP Growth Major industrial economies (%) 0.2 -3.5 1.7 2.0

United States (%) 0.4 -2.4 2.4 2.6

Eurozone (%) 0.6 -4.1 1.1 1.6

Japan (%) -1.2 -5.2 1.3 1.4

World tradeMerchandise exports (% change) 1.5 -12.0 7.1 8.1

Inflation Inflation (G3 average, %) 3.2 -0.2 1.4 1.3

6

Recovery takes firm holdGDP growth, developing Asia

12%

5-year moving average

8

y g g

0

4

02005 2006 2007 2008 2009 2010 2011

7

d t bi ti f f tContributions to GDP growth

P i t ti G t ti

…due to a combination of factors

15percentage points

Private consumption Government consumptionInvestment Net exportsStatistical discrepancy GDP growth

5

10

15

-5

0

5

-10SIN MAL THA INO PHI KOR PRC IND

8

SIN=Singapore; MAL=Malaysia; THA=Thailand; INO=Indonesia; PHI=Philippines; KOR=Republic of Korea; PRC=People’s Republic of China; IND=India

Fiscal balance, selected DMCs

…including substantial fiscal stimulus

24

%Average (2004-2008) 2009

6-4-20

-12-10-8-6

12PRC HKG KOR TAP IND INO MAL PHI SIN THA

PRC=People’s Republic of China; HKG=Hong Kong, China; KOR=Republic of Korea; TAP=Taipei China; IND=India; INO=Indonesia; MAL=Malaysia; PHI=Philippines;

9

TAP=Taipei,China; IND=India; INO=Indonesia; MAL=Malaysia; PHI=Philippines; SIN=Singapore; THA=Thailand

Source: Asian Development Outlook database.

V i ti b iVariation across subregions…GDP growthGDP growth

8

10% 2009 2010 2011

4

6

8

0

2

Central East Asia South Asia Southeast The Pacific DevelopingCentralAsia

East Asia South Asia SoutheastAsia

The Pacific DevelopingAsia

10

...and across economies...and across economies2008 2009 2010 2011

Central Asia 6.1 2.7 4.7 5.9Azerbaijan 10.8 9.3 9.5 9.7jKazakhstan 3.3 1.2 2.5 3.5East Asia 7.3 5.9 8.3 7.7China, People's Rep. of 9.6 8.7 9.6 9.1Hong Kong, China 2.1 -2.7 5.2 4.3Korea, Rep. of 2.3 0.2 5.2 4.6, pTaipei,China 0.7 -1.9 4.9 4.0South Asia 6.4 6.5 7.4 8.0Bangladesh 6.2 5.9 5.5 6.3India 6.7 7.2 8.2 8.7Pakistan 4.1 2.0 3.0 4.0Sri Lanka 6.0 3.5 6.0 7.0Southeast Asia 4.3 1.2 5.1 5.3Indonesia 6.0 4.5 5.5 6.0Malaysia 4.6 -1.7 5.3 5.0Philippines 3.8 0.9 3.8 4.6pp es 3 8 0 9 3 8 6Singapore 1.4 -2.0 6.3 5.0Thailand 2.5 -2.3 4.0 4.5Viet Nam 6.2 5.3 6.5 6.8The Pacific 5.4 2.3 3.7 5.0Fiji Islands -0.1 -2.5 -0.5 0.5

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Fiji Islands 0.1 2.5 0.5 0.5Papua New Guinea 6.7 4.5 5.5 7.7Vanuatu 6.3 3.8 4.6 4.0Developing Asia 6.6 5.2 7.5 7.3

Inflation pressures emerging but till blstill manageable

Inflation, developing Asia

6

8

4

65-year average

0

2

2005 2006 2007 2008 2009 2010 2011

12

Current account surplus narrowingCurrent account balance, developing Asia, p g

50

% of GDP2009 2010 2011

20

30

40

-10

0

10

10Central

AsiaEast Asia South Asia Southeast

AsiaThe Pacific Developing

Asia

13

Ri k t th tl kRisks to the outlookContinued weakness in US mortgage g gmarketsMistimed exit from policy stimulusDeteriorating fiscal positionsSharp rise in commodity pricesP i t t l b l t i b lPersistent global payments imbalancesPoor international policy coordination Asset price bubbles Asset price bubbles Volatile capital flows

14

US delinquency rates

US mortgage markets weak

1012

%Real estate commercial loans Single-family residential mortgages

468

10

024

Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3Q12005

Q3 Q12006

Q3 Q12007

Q3 Q12008

Q3 Q12009

Q3

Notes: Loans are from all commercial banks; commercial real estate loans exclude

15

farmland.

Source: The Federal Reserve Board. http://www.federalreserve.gov/ (accessed 15 March 2010).

Persistent global current t i b l

World current account balance

account imbalances

2

3% of world GDP

0

1

-2

-1

1980 1985 1990 1995 2000 2005 20101980 1985 1990 1995 2000 2005 2010United States JapanChina, People's Rep. of Russian FederationMiddle East Rest of developing AsiaOther industrial countries Rest of world

16

Other industrial countries Rest of world

Sources: International Monetary Fund. 2009. World Economic Outlook Database. October. http://www.imf.org (accessed 7 April 2010); Asian Development Outlook database.

House prices

Risk of asset bubblesHouse prices

200

220Index (2005=100)

160

180

200

100

120

140

Jan-06 Jul Jan-07 Jul Jan-08 Jul Jan-09 Jul Jan-1

People's Rep. of China Hong Kong,China

17

Source: CEIC Data Company (accessed 5 April 2010).

Capital flows in emerging Asian economies

Volatile capital flows

300$ billion

Net flows FDI inflow Portfolio inflowOther inflow FDI outflow Portfolio outflowOther outflow

150

0

-150H1

2005H2 H1

2006H2 H1

2007H2 H1

2008H2 H1

2009H2

18

Sources: ADB estimates based on data from CEIC Data Company; International Monetary Fund. International Financial Statistics online database (accessed 31 March 2010).

R l f i liRole of macroeconomic policy

Fiscal and monetary stimulus helped the region recoverA wide range of macroeconomic and structural challenges gRole of fiscal and monetary policy in addressing those policy in addressing those challenges

19

Macroeconomic Management B d h C i iBeyond the Crisis

Macroeconomic management in post-crisis Asia

ffReaffirm prudence and discipline in fiscal and monetary policy

d h llConsider challenging post-crisis environment (e.g. rebalancing, asset bubbles capital flows)asset bubbles, capital flows)Adjust fiscal, monetary, and exchange rate policies to meet exchange rate policies to meet challenges

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Lower and more stable inflationAverage and standard deviation of inflation

Lower and more stable inflation

Standard deviation %

SD (1990–2000) SD (2001–2009)

Average inf lation (1990–2000) Average inflation (2001–2009)

14

21

28

14

21

28

0

7

14

0

7

14

-7BAN HKG IND INO KAZ KOR MAL PAK PHI PRC SIN TAP THA VIE

-7

BAN = Bangladesh; HKG = Hong Kong, China; IND = India; INO = Indonesia; KAZ = Kazakhstan; KOR = Republic of Korea; MAL = Malaysia; PAK = Pakistan; PHI = Philippines; PRC = People's Republic of China; SIN =

22

Note: Based on monthly year-on-year inflation figures for each country.Source: ADB estimates based on data from CEIC Data Company.

Republic of Korea; MAL = Malaysia; PAK = Pakistan; PHI = Philippines; PRC = People s Republic of China; SIN = Singapore; TAP = Taipei,China; THA = Thailand; VIE = Viet Nam

Regional currencies have faced appreciation pressureChange in exchange rates versus US$1 % change from

S 08g g $(in percent)

Japanese yenThai baht

Malaysian ringgit

Sep08-Mar09

Apr09-Mar10

Sep08to Mar10

18.6

3 75.5

Malaysian ringgitPhilippine peso

Indonesian rupiahSingaporean dollarNew Taiwan dollar

p

0.52.22.22.33.7

Hong Kong dollarIndian rupee

PRC yuanKorean won

2

-0.20.20.30.3

-30 -20 -10 0 10 20 30

Vietnamese dong

1 Based on monthly average of $ value of local currency as of 31 March 2010.

-12.8

Depreciation Appreciation

23

Based on monthly average of $ value of local currency as of 31 March 2010.2 People's Republic of China (PRC).Source: Staff calculation from Bloomberg data.

Fiscal prudence led to low-debt burdensCentral government debt, 2007

160

200

% of GDP

80

120

160

G7 average

Asia‐7 average

0

40

PRC IND INO KOR MAL PHL THA CAN FRA GER ITA JAP UK USA

PRC = People's Republic of China; HKG = Hong Kong, China; IND = India; INO = Indonesia; MAL = Malaysia; PHI = Philippines; KOR = Republic of Korea; TAP = Taipei,China; THA = Thailand; CAN = Canada; FRA = France; GER = Germany; ITA = Italy; JAP = Japan; UK = United Kingdom; USA = United States of America

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Sources: CEIC Data Company; Indonesia Debt Management Office; IMF Article IV (for PRC); International Monetary Fund. World Economic Outlook October 2009 database. http://www.imf.org/external/pubs/ft/weo/2009/02/weodata/index.aspx (accessed 16 December 2009).

P li d tiPolicy recommendations

Coordinate monetary policy with financial regulation

d h dReduce exchange rate rigidityReaffirm fiscal disciplineFiscal and exchange rate policies for rebalancingNeed for policy coordination and regional and global cooperation

Th k

Contact:

Thank you

Contact:Asian Development Bank

6 ADB A M d l Ci6 ADB Avenue, Mandaluyong City1550 Metro Manila, Philippines

www.adb.org

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