Enhancing Potential

Sudhir Shetty Chief Economist

East Asia and PacificThe World Bank Group

RECENT TRENDS

GDP growth(year-on-year percent change)

Growth has exceeded expectations

Sources: Haver Analytics; World Development Indicators.

0%

1%

2%

3%

4%

5%

6%

7%

8%

Q4-

2014

Q1-

2015

Q2-

2015

Q3-

2015

Q4-

2015

Q1-

2016

Q2-

2016

Q3-

2016

Q4-

2016

Q1-

2017

Q2-

2017

Q3-

2017

Q4-

2017

GD

P ye

ar-o

ver-

year

gro

wth

, per

cent

ASEAN-5 and China China ASEAN-5

0%

1%

2%

3%

4%

5%

6%

7%

8%

Q4-

2014

Q1-

2015

Q2-

2015

Q3-

2015

Q4-

2015

Q1-

2016

Q2-

2016

Q3-

2016

Q4-

2016

Q1-

2017

Q2-

2017

Q3-

2017

Q4-

2017

Indonesia Malaysia Philippines

Thailand Vietnam China

Stronger exports have helped …

Export values (index of 12-month moving sum, January 2013 = 100)

Sources: Haver Analytics; World Bank staff estimates.Note: Commodity exporters in EAP include Indonesia, Lao PDR, Malaysia, Mongolia, Myanmar, Papua New Guinea, Timor-Leste, andTonga.

70

90

110

130

150

170

190

2013

M01

2013

M04

2013

M07

2013

M10

2014

M01

2014

M04

2014

M07

2014

M10

2015

M01

2015

M04

2015

M07

2015

M10

2016

M01

2016

M04

2016

M07

2016

M10

2017

M01

2017

M04

2017

M07

2017

M10

2018

M01

China Thailand Malaysia

Indonesia Philippines Vietnam

Export volumes(percent, 12-month growth rate)

-10

0

10

20

2014

M07

2014

M09

2014

M11

2015

M01

2015

M03

2015

M05

2015

M07

2015

M09

2015

M11

2016

M01

2016

M03

2016

M05

2016

M07

2016

M09

2016

M11

2017

M01

2017

M03

2017

M05

2017

M07

2017

M09

2017

M11

2018

M01

Indonesia ThailandMalaysia PhilippinesVietnam

… including exports of electronics products

0

20

40

60

80

100

120

140

160

180

200

2010 2011 2012 2013 2014 2015 2016 2017

China Vietnam Thailand Malaysia Philippines

Exports of electronics (deflated index, 2010=100)

Sources: World Bank; IMF World Economic Outlook; Philippines Statistics Authority; China General Administrationof Customs; Department of Statistics, Malaysia; ASEAN – CEIC Generate; and World Bank staff estimates.Note: Definitions of exports for electronics differ across countries.

Domestic demand remains solid

Contribution to GDP growth(percentage points, year-on-year)

Sources: Haver Analytics; World Bank staff estimates.

-10-505

1015

Q1-

14

Q3-

14

Q1-

15

Q1-

16

Q3-

16

Q1-

17

Q3-

17Q

4-17

China

Statistical discrepancyNet ExportsGross Capital FormationConsumptionGDP growth

-10

-5

0

5

10

15

Q1-

14Q

3-14

Q1-

15Q

3-15

Q1-

16Q

3-16

Q1-

17Q

3-17

Q4-

17Q

1-14

Q3-

14Q

1-15

Q3-

15Q

1-16

Q3-

16Q

1-17

Q3-

17Q

4-17

Q1-

14Q

3-14

Q1-

15Q

3-15

Q1-

16Q

3-16

Q1-

17Q

3-17

Q4-

17Q

1-14

Q3-

14Q

1-15

Q3-

15Q

1-16

Q3-

16Q

1-17

Q3-

17Q

4-17

Indonesia Malaysia Philippines Thailand

Private consumption Gross Capital Formation Government consumption

Net Exports Statistical discrepancy GDP growth

-8-7-6-5-4-3-2-10

2013 2014 2015 2016 2017

China Indonesia MalaysiaPhilippines Thailand Vietnam

-18-16-14-12-10

-8-6-4-20

2013 2014 2015 2016 2017

Cambodia Fiji Lao PDRMongolia Myanmar

General government fiscal balance(percent of GDP)

Large Economies Smaller Economies

Fiscal deficits started to stabilize

Source: World Bank staff estimates.Note: Data refer to general government fiscal balance, except for Indonesia, where data refer to central government fiscal balance; fiscaldeficits do not reflect off-budget spending items.

Inflation remains subdued

Headline inflation (year-over-year, percent change)

Sources: Haver Analytics; Central Bank News; People’s Bank of China.

0

1

2

3

4

5

6

7

8

Jan-

15M

ar-1

5M

ay-1

5Ju

l-15

Sep-

15N

ov-1

5Ja

n-16

Mar

-16

May

-16

Jul-1

6Se

p-16

Nov

-16

Jan-

17M

ar-1

7M

ay-1

7Ju

l-17

Sep-

17N

ov-1

7Ja

n-18

Mar

-18

China Indonesia Malaysia

Philippines Thailand Vietnam

Policy rate(percentage points)

-3

0

3

6

9

Indo

nesia

Mal

aysia

Viet

nam

Phili

ppin

es

Chin

a

Thai

land

Commodity exporters Commodity importers

2015 2016 2017 Inflation target

Poverty rate (vertical axis, percent) and number of poor (size of bubble, million), for poverty lines:US$1.90 per day (2011 PPP), US$3.20 per day (2011 PPP), and US$5.50 per day (2011 PPP)

Poverty continues to decline

Sources: World Bank East Asia and Pacific Team for Statistical Development; PovCalNet.

138

70 58 50 44 38

455

338295

261233 209

0

10

20

30

40

50

60

70

2011 2012 2013 2014 2015 2016 2017

Pove

rty

rate

(%)

Developing EAP

1

941

757714

827

6

4

33

33

657608

309

303

51 44 39 35 33 29

183174

165148

141 135

0

10

20

30

40

50

60

70

2011 2012 2013 2014 2015 2016 2017

Pove

rty

rate

(%)

Developing EAP excluding China

1

7

6

4

319

342333

327306

300

International Poverty Line ($1.90/day 2011PPP) Lower Middle Income Class Poverty Line ($3.20/day 2011PPP)

Upper Middle Income Class Poverty Line ($5.50/day 2011PPP)

0

10

20

30

40

50

60

70

80

90

100

Not economically secure(less than PPP $5.5-a day)

Economically secure and middle-class (over $5.50/day 2011PPP)

Developing EAP Developing EAP excluding China

0

10

20

30

40

50

60

70

80

90

100

Not economically secure(less than PPP $5.5-a day)

Economically secure and middle-class(over $5.50/day 2011PPP)

Source: World Bank staff estimates.

The economically secure and middle class continue to grow

Percentage of total population

FAVORABLE EXTERNAL ENVIRONMENT

Global growth is picking up

Global GDP growth(Year-on-year growth)

Sources: Haver Analytics; World Bank.Notes: f = forecasts. Data for 2018 are working assumptions. The updated data and forecasts will be published in the June 2018 issue of the World Bank’s Global Economic Prospects.

-4

-2

0

2

4

6

8

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

e

World Advanced economies Emerging and developing economies

World trade is continuing to recover

Global trade growth (Percent)

Source: Netherlands Bureau for Economic Policy Analysis.

-20

-5

10

25

2006

M01

2006

M05

2006

M09

2007

M01

2007

M05

2007

M09

2008

M01

2008

M05

2008

M09

2009

M01

2009

M05

2009

M09

2010

M01

2010

M05

2010

M09

2011

M01

2011

M05

2011

M09

2012

M01

2012

M05

2012

M09

2013

M01

2013

M05

2013

M09

2014

M01

2014

M05

2014

M09

2015

M01

2015

M05

2015

M09

2016

M01

2016

M05

2016

M09

2017

M1

2017

M5

2017

M9

Volume Value

Commodity prices are rising … gradually

Sources: Netherlands Bureau for Economic Policy Analysis; World Bank.

International commodity prices (Index, nominal term, 2010=100)

20

60

100

140

180

2007

M06

2008

M03

2008

M12

2009

M09

2010

M06

2011

M03

2011

M12

2012

M09

2013

M06

2014

M03

2014

M12

2015

M09

2016

M06

2017

M03

2017

M12

Energy Metals Agriculture

0

50

100

150

200

250

300

350

400

Jan-

16

Mar

-16

May

-16

Jul-1

6

Sep-

16

Nov

-16

Jan-

17

Mar

-17

May

-17

Jul-1

7

Sep-

17

Nov

-17

Jan-

18

Mar

-18

China Indonesia

Malaysia Philippines

Vietnam

Financial markets were stable in 2017, although volatility surged in early 2018

Bond spreads (EMBI index, basis points)

Sources: J.P. Morgan; IFC Global Macro & Market Research.

60

80

100

120

140

160

180

200

Jan-

16

Mar

-16

May

-16

Jul-1

6

Sep-

16

Nov

-16

Jan-

17

Mar

-17

May

-17

Jul-1

7

Sep-

17

Nov

-17

Jan-

18

Mar

-18

China IndonesiaMalaysia PhilippinesThailand Vietnam

Sources: Thomson Reuters; Datastream; IFC Global Macro &Market Research.

Stock markets(US$, index, end-2015 = 100)

OUTLOOK AND RISKS

Growth in EAP likely to remain robust

GDP growth(percent)

Source: World Bank.Note: Lines denote long-run (1990–2017) average growth. Working assumptions for 2018; forecasts for 2019–20 will be finalized and published in the June 2018 issue of the World Bank report, Global Economic Prospects. f = forecast.

-2

0

2

4

6

8

10

2015

2016

2017

2018

f20

19f

2020

f

2015

2016

2017

2018

f20

19f

2020

f

2015

2016

2017

2018

f20

19f

2020

f

2015

2016

2017

2018

f20

19f

2020

f

2015

2016

2017

2018

f20

19f

2020

f

2015

2016

2017

2018

f20

19f

2020

f

EAP SAS ECA LAC MENA SSA

Poverty will continue to fall

Source: World Bank East Asia and Pacific Team for Statistical Development.

2018 2020PPP$3.20 Per-capita per-day 9.2 7.5PPP$5.50 Per-capita per-day 27.7 23.9

2018 2020PPP$3.20 Per-capita per-day 19.6 17.5PPP$5.50 Per-capita per-day 44.6 42.2

(percent of population)Poverty incidence

Developing EAP

Developing EAP EX-China

Fiscal deficits generally expected to remain stable

Fiscal deficits (percent of GDP)

Source: World Bank staff estimates.Note: Data refer to general government fiscal deficit, except for Indonesia, where they refer to central government fiscal deficit, and Cambodia, where they refer to general government fiscal deficit before grants. Deficits are expected to increase in countries above the 45 degree line.

KHM

CHNFJI

IDN

LAO

MYSMNG

MMR

PHL

THA

VNM

0

5

10

0 5 10

Aver

age

2018

–20

Average 2015–17

• A more rapid pace of U.S. monetary policy tightening than is currently anticipated could

• increase volatility and exacerbate financial sector vulnerabilities

• Heightened trade policy uncertainty from the U.S. and retaliatory measures from its trade partners could

• dim the prospects for sustained trade growth• slow growth in major trading partners

Significant risks to this outlook

Feb-15Dec-15

Dec-15

Feb-15Feb-15

Feb-15

-2

-1

0

1

2

3

4

5

6

China Indonesia Malaysia Philippines Thailand Vietnam

Top of current cycle

Real policy rate, latest available in 2018

10-year average

Sources: Haver Analytics; World Bank staff estimates.

Real interest rates remain below the long-term average

Real policy rate(percentage points)

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

Jan-

14

May

-14

Sep-

14

Jan-

15

May

-15

Sep-

15

Jan-

16

May

-16

Sep-

16

Jan-

17

May

-17

Sep-

17

Jan-

18

May

-18

China Indonesia Malaysia

Philippines Thailand Vietnam

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

Jan-

14

Apr-1

4

Jul-1

4

Oct

-14

Jan-

15

Apr-1

5

Jul-1

5

Oct

-15

Jan-

16

Apr-1

6

Jul-1

6

Oct

-16

Jan-

17

Apr-1

7

Jul-1

7

Oct

-17

Jan-

18

Cambodia Lao PDR

Credit growth was contained in most countries

Large Economies Smaller Economies

Sources: Haver Analytics; World Bank staff estimates.Note: Nominal growth in domestic credit is deflated by the CPI. For Vietnam, we refer to total credit. For Cambodia, we refer to net credit to the private sector (loans).

Real growth in net domestic credit (year-over-year, percent)

Debt stocks remain high in some economies

Credit by sector (percent of GDP)

Sources: Bank for International Settlements; Central Bank of the Philippines; International Financial Statistics.Note: For 2017, data refer to end-Q3, except for the Philippines, where they refer to end-2017. For the Philippines and Vietnam,disaggregated data on credit to households and nonfinancial corporations are not available. The group “emerging economies” comprises the following countries, for which data are available: Argentina, Brazil, Chile, India, Mexico, the Russian Federation, South Africa, and Turkey.

0

50

100

150

200

250

300

2010

2015

2016

2017

-Q3

2010

2015

2016

2017

-Q3

2010

2015

2016

2017

-Q3

2010

2015

2016

2017

-Q3

2010

2015

2016

2017

2010

2015

2016

2017

-Q3

2010

2015

2016

2017

-Q3

China Malaysia Vietnam Thailand Philippines Indonesia Emergingeconomies

Credit to General Government Credit to Households Credit to Non-financial corporations

POLICY IMPLICATIONS

Action needed on multiple fronts

• Address risks to macroeconomic stability

• Enhance medium-term growth potential

• Ensure economic security

Address the risks to stability in the short term

• Address macro-financial vulnerabilities– Stand ready to tighten monetary policy– Maintain exchange rate flexibility– Reduce dependence on short-term, foreign-currency-

denominated debt– Strengthen financial sector oversight

• Build fiscal buffers– Improve public debt management– Avoid tax competition

Enhance medium-term growth potential

• Improve efficiency of public spending and infrastructure provision

• Deepen regional integration and connectedness through new and existing initiatives (AEC, CPTPP, BRI, RCEP)

• Improve the business environment to boost competitiveness and productivity

• Upgrade capabilities and ensure that workers and managers have the necessary skills to respond to technological change

• Build human capital by enhancing the effectiveness of schools and education systems

Enhancing growth potential

Sources: World Bank staff estimates; World Development Indicators; International Monetary Fund, World Economic Outlook; Penn World Tables; United Nations World Population Prospects: 2017 Revision (medium-fertility scenario). Baseline assumptions and illustrative policy scenarios are described in the main text of the box.

Potential output growth(illustrative reform scenarios)

4

6

8

2013–17 2018–27 Reformimpact

2013–17 2018–27 Reformimpact

2013–17 2018–27 Reformimpact

EMDEs China EAP excl. China

Percent Baseline Fill investment needs (via capital)

Fill investment needs (via productivity) Education and health improvements

Labor market reforms

Projected changes in income from CPTPP

-3

0

3

6

9

Brun

ei

Mal

aysi

a

Japa

n

Viet

nam

Chi

na

Cam

bodi

a

Indo

nesi

a

Kore

a, R

ep.

Lao

PDR

Philip

pine

s

Thai

land

CPTPP Nonmembers

TPP CPTPP

Source: Adapted from Maliszewska, Olekseyuk, and Osorio-Rodarte (2018).

Perc

ent o

f GD

P in

bas

elin

e sc

enar

io

Competitiveness, Capabilities, and ConnectednessDeveloping East Asia and Comparators – circa 2012-14

Sources: Calculations based on Kee, Nicita, and Olarreaga (2009); Borchert, Gootiiz, and Mattoo (2014); International TelecommunicationsUnion’s ICT Indicators Database; and the following World Bank databases: World Development Indicators, Worldwide GovernanceIndicators, Global Findex, and Logistics Performance Index.

DEU

USA

HKG

JPNKOR

SGPAUS

MYS

CHNTHA

VNMIDNPHL

KHMPNG

-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

-1.5 -1.0 -0.5 0.0 0.5 1.0 1.5

Cap

abilit

ies

Connectedness

High Competitiveness Medium Competitiveness Low Competitiveness

Sixty percent of the region’s school students are in education systems with poor or unknown learning outcomes

Ensure economic security

• Broaden the focus of inclusive growth by:

– Strengthening social assistance and insurance programs to help households insure against risks

– Instituting country-level risk management mechanisms to increase resilience to systemic shocks.