1 Sustaining Asia’s Economic Recovery Asia Economic Forum Hang Chuon Naron 31 st July 2011

2 Table of Contents 1. Issues facing Asia’s economic recovery 2. Inflation 3. Policy response

3 I. Issues facing Asia’s Economic Recovery

4 Key issues facing Asia’s recovery  The multi-speed global recovery is set to continue.  Asia is expected to continue leading the global recovery, but at a more moderate pace.  The tragic events in Japan, earthquake followed by tsunami, add to uncertainty in Asia.  The debt crisis in Greece, Ireland, Portugal and Spain undermines growth in the Eurozone.  US debt ceilings: political wrangling in Washington. This will have negative effect on the global economy.

5 Key issues facing Asia’s recovery  Navigating opposing risks will be challenging: Weaker global recovery and stronger commodity prices.  The signs of overheating are broadening.  The withdrawal of fiscal stimulus has been slow.  Quantitative Easing (QE) 2 resulted in capital inflows into Asia in the first half of 2011.

6 Key issues facing Asia’s recovery  Now, foreign capital inflows have moderated, as has the growth in asset valuations.  However credit dynamics remain very strong.  Over the medium-term, rebalancing growth remains the key challenge.

The multispeed recovery is set to continue with Asia increasingly propelling global growth Contributions to Global Growth (In percentage points) 7 World GDP Growth Projection (Year-on-year, in percent; Jan. WEO update) World Advanced economies Emerging and Developing economies Asia Source: IMF

Asia is expected to continue leading the global recovery, but at a more moderate pace Asia (including Australia and New Zealand) Industrial Asia Japan Emerging Asia China India NIEs Korea Singapore Taiwan Province of China ASEAN Indonesia Malaysia Philippines Thailand Vietnam Other ASEAN Brunei Cambodia Lao PDR Myanmar Asia: Real GDP Growth (y/y; percent); as of the January 2011 WEO update Source: IMF

9 II. Downside Risks to Asia’s Recovery 1. Rising commodity and food prices 2. Inflation 3. Capital inflows led to exchange rate appreciation and asset bubbles. 4. Balancing growth is a challenge.

Risk 1: Navigating opposing risks will be challenging: Weaker global recovery and stronger commodity prices… 10 Food Price: Global versus EM Asia (Year-on-year percent change) Asia: GDP Growth (Central forecast and 50, 70, and 90 percent confidence intervals; in percent) Source: IMF

Risk 1: Key staples pushing region’s food prices up  Region’s food price inflation  Pushed by prices of rice and wheat  And other domestic food items  From June 2010 to Feb 2011  International rice price rose by around 20%; while wheat prices doubled   Partly due to Thailand and Viet Nam release of ample supplies from their stocks to mitigate price pressure

Risk 1: Food dominates region’s CPIs Food Weights in Consumer Price Index (%) 1 Includes non-alcoholic beverages. 2 Includes beverages. 3 Includes beverages and tobacco. Source: Asian Development Bank. March "Global Food Price Inflation and Developing Asia" (Forthcoming). 12 Source: ADB

Risk 1: larger than anticipated rise in oil prices 13 Oil Price Prospects (In U.S. dollars per barrel) Global Commodity Prices (January 2005 = 100) Note: West Texas Intermediate (WTI) oil price futures information used. Source: IMF

Risk 1: Commodity price increase 14 Source: ADB

Risk 2: Inflation is on the rise Source: ADB

Risks 3: Capital inflows led to currency appreciation and importance of Europe and United States for Asia’s exports 16 Selected Asia: Exports to U.S. and Europe (In percent of total exports of goods) EM Asia: Capital Inflow and Global Risk Aversion Source: IMF

17 Asia: Pass-through from Domestic Food and Energy Prices to Core Inflation 1 (In percentage points) Risk 4: a few signs of asset market pressures 1 Impact of change in food and energy prices by 1 percent. Wholesale prices used for India. Selected Asia: Property Prices (Year-on-year change, in percent)

Risk 4: Rebalancing of demand remains a challenge 18 Global Current Account Balances (In percent of world GDP) Selected Asia: Current Account Balances (In percent of GDP) Source: IMF

19 III. Policy Response

Policy response 1: Increasing policy rates Policy Rates 1 —Selected Economies (% per annum) 1 BI rate (Indonesia); unsecured overnight call rate (Japan); Korea base rate (Republic of Korea); overnight policy rate (Malaysia); reverse repurchase rate (Philippines); and 1-day repo rate (Thailand). Source: Bloomberg and Datastream. 20 Source: ADB

Policy response 1: Rate increase is smaller than the cut during the crisis Policy Rate Movements 1 (percentage points) 1 One year lending rate (People's Republic of China); BI Rate (Indonesia); prime rate (Viet Nam); unsecured overnight call rate (Japan); Korea base rate (Republic of Korea); overnight policy rate (Malaysia); reverse repurchase (repo) rate (Philippines); and one-day repo rate (Thailand). 2 Policy rate hikes started in December Source: Bloomberg and Datastream. 21 Source: ADB

Policy response 2: Currency appreciation, except Vietnamese dong Change in Exchange Rate against US dollar 1 (%) 1 Year-to-date (YTD) figures based on 21 Mar 2011 closing. Negative values indicate depreciation. 2 PRC = People's Republic of China. Source: OREI staff calculations based on Reuters data. 22 Source: ADB

Policy Response 3: Accumulating International Reserves  International reserves increased from 0.5 billion in 2000 to USD1 billion in 2006, then reached USD2.9 billion in May 2011.

Policy Response 4: Macro-prudential measures 24 MeasuresImplemented in Rein in short-term foreign currency borrowing by commercial banks Korea Lengthen maturity structure of central bank’s external liabilities and make one-month certificate less liquid Indonesia Limits placed on foreign investors’ access to time depositsTaiwan Province of China Liberalization of capital outflowsThailand, Philippines, Malaysia Removal of tax exemptions for foreign investment in government bonds Thailand, Korea Rules to reduce risks of bank funding strainsNew Zealand, Korea Reserve requirements on foreign currency and nonresident accounts Indonesia, Taiwan Province of China

Policy Response 5: Structural policies to be long-term solutions 25 Enhance productivity and competitiveness to reduce supply bottlenecks Reform labor and goods markets to increase flexibility when responding to aggregate supply shocks Remove policy distortions―such as general subsidies & tariffs—to better reflect supply and demand Improve market integration

Policy Response 5: Longer-term policy responses 26 Increase Food and Energy Supply Increase agricultural productivity (investment in technology, land development, and irrigation Investments in energy efficiency and a concerted switch to renewable sources of power Cushioning the social implications Strengthening social safety nets

27 Conclusion 1: Asia: Overheating or Smooth Landing?  Inflation: Accelerating headline inflation and spilling over to core inflation.  Credit Growth and Capital Flows: Credit growth accelerating; capital inflows moderating; domestic overheating pressures.  Monetary Policy: Low real rates, closed or positive output gaps; need to tighten policy.  Fiscal and Exchange Rate Policies: Pace of fiscal withdrawal can be quickened; exchange rate appreciation.

28 Conclusions 2  Asia’s growth outlook remains strong but overheating pressures have surfaced in a number of regional economies.  Dealing with these pressures requires tightening fiscal stances and stronger currencies. Higher policy interest rates should also be part of the policy mix.  In addition to dealing with overheating risks, policymakers need to make sure that growth will be balanced and inclusive.

29 Conclusion 3  The multi-speed global recovery is set to continue, and Asian economies will remain in the lead  As old risks recede, new ones are on the horizon  Nevertheless, overheating pressures imply further tightening of macroeconomic policies  Capital inflows need to be managed carefully, but pressures have moderated in recent months  Over the medium-term, rebalancing growth remains the key challenge

30 Thank You