Overheating in Emerging Markets: An Asian Perspective Carnegie Endowment For International Peace February 16, 2010 Anoop Singh Director, Asia and Pacific Department, IMF

2 Plan of the presentation Overheating in Asia: A Look at the Evidence Overheating in Asia: A Look at the Evidence Policy Challenges Policy Challenges Conclusions Conclusions

Asia continues to lead an uneven global recovery and output gaps are closing fast across the region World GDP Growth (Year-on-year; in percent) 3 Overheating in Asia World Advanced economies Emerging and Developing economies Asia Asia: Estimated Output Gap Closing Dates

Yet, macroeconomic policies are still very accommodative 4 Asia: Real Policy Rates (In percent) Asia: Cyclically Adjusted General Government Balance (In percent of GDP) Overheating in Asia

Inflationary pressures are emerging in Asia, fuelled by higher food prices… 5 Overheating in Asia Asia: Headline CPI 1 (Year-on-year percent change) 1 Wholesale prices used for India. Asia: Headline and Food Price Inflation (Year-on-year; in percent)

…but there are also growing signs of spillovers to generalized inflation 6 Overheating in Asia Asia: Core CPI 1 (3-month percent change of 3-mma) Selected Asia: Real wage/earnings (2008:Q1=100; seasonally adjusted)

Credit growth is generally brisk, and property prices are still growing fast in a few regional economies 7 Overheating in Asia Selected Asia: Property Prices (Year-on-year percent change) Asia: Credit to Private Sector (Year-on-year percent change)

Upward pressures on equities have abated and valuations are generally in line with historical norms 8 Overheating in Asia Asia: Stock Markets (October 1, 2010 = 100) Asia: 12-month Forward P/E Ratios (Relative to long-run average)

But capital flows to EM Asia will need to be managed carefully 9 Policy Challenges Emerging Markets: Net Capital Flows (In billions of U.S. dollars) Selected EM Asia: Net Portfolio Flows (In percent of GDP; 4qma)

Stronger currencies will be needed across the region Foreign Exchange Reserves (In billions of US dollars) 10 Policy Challenges REER Change (In percent; between September 2007 and December 2010; GDP weighted )

11 Macro-prudential measures can be useful if tailored to country-circumstances Policy Challenges MeasuresExample Tighter ceilings on L-T-V ratiosChina, Hong Kong SAR, Singapore, Peru, Turkey Higher stamp duties on resale of propertiesChina, Hong Kong SAR, Singapore Reserve requirements on non-resident deposits, and on FX deposits Indonesia, Peru Limits on ratio of banks FX loans and securities to FX borrowing Korea Tax on equity and bond inflowsBrazil Withholding tax on foreigners bond purchases Korea Withholding tax on state bondsThailand Minimum holding period on investment in CB bills Indonesia Asia and Other EMs: Recent Macro-Prudential Measures

Overheating pressures are also emerging in Latin America, but with important differences with Asia 12 Comparing Asia with Latin America Current Account Balance (In percent of GDP) Domestic Demand and GDP growth (In percent) Note: Latin America includes: Brazil, Chile, Colombia, Mexico, and Peru.

A longer-term view: prevent the return of global imbalances and make growth more inclusive A longer-term view: prevent the return of global imbalances and make growth more inclusive 13 Longer term challenges Global Imbalances (Percent of World GDP) Vulnerable Employment (In percent of total employment, 2008)

14 Conclusions Asia is still firmly leading the global recovery, but overheating pressures have surfaced in a few regional economies Asia is still firmly leading the global recovery, but overheating pressures have surfaced in a few regional economies Dealing with these pressures requires a quick normalization of both fiscal and monetary stances Dealing with these pressures requires a quick normalization of both fiscal and monetary stances Stronger currencies should be part of this policy mix Stronger currencies should be part of this policy mix In addition to dealing with overheating risks, policymakers need to make sure that growth will be balanced and inclusive In addition to dealing with overheating risks, policymakers need to make sure that growth will be balanced and inclusive