2. Developing Asia 2004-2005: Is the Boom Sustainable ? Ifzal Ali Chief Economist Asian Development Bank Economic Congress Casa Asia, Barcelona, Spain 22 November 2004

3. 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 baseline assumptions Oil prices to stay high baseline assumptions baseline assumptions But inflation rising moderately Monetary policies returning progressively to neutral stance/some tightening

4. 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?

5. Developing Asia Booming in 2004-2005 GDP Growth much stronger than expected in 1H 2004 GDP growth: Developing Asia 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 Inflation: Developing Asia

6. Developing Asia… Regional current account surplus narrowing but still 2.9% GDP CA/GDP: Developing Asia CA/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 Growth:Developing Asia GDP Growth:Developing Asia

7. East Asia: Upward Growth Trend Continues since 2000… PRC Economy at near full throttle in 2004 GDP table 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 Hong Kong Taipei,China Korea lagging as consumption still depressed and low growth continuing 2005 Korea Korea PRC micro soft landing in 2005 CA/GDP:East Asia CA/GDP:East Asia

8. GDP Growth, East Asia back to East AsiaCA/GDP: East Asia back to East AsiaCA/GDP: East Asia back to East AsiaCA/GDP: East Asia GDP Growth (%) 200320042005 East Asia 6.67.66.6 PRC PRC9.39.28.3 Hong Kong, China Hong Kong, China3.27.56.0 Korea, Rep. of Korea, Rep. of3.14.43.6 Taipei,China Taipei,China3.36.54.8

9. 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 also:contribution of net exports to GDP growth down Malaysia Malaysia Contribution of consumer expenditure remaining robust Philippines Philippines

10. 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

11. GDP Growth, Southeast Asia CA/GDP:SEAsia CA/GDP:SEAsia GDP Growth (%) 200320042005 Southeast Asia 4.86.25.6 Cambodia Cambodia5.24.52.3 Indonesia Indonesia4.54.85.2 Lao PDR Lao PDR5.86.57.0 Malaysia Malaysia5.36.85.6 Philippines Philippines4.75.55.5 Singapore Singapore1.18.14.2 Thailand Thailand6.86.46.6 Viet Nam Viet Nam7.17.57.6

12. 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

13. GDP Growth, South Asia CA/GDP:South Asia CA/GDP:South Asia CA/GDP:South Asia GDP Growth (%) 200320042005 South Asia 7.66.45.9 Bangladesh Bangladesh5.35.55.0 Bhutan Bhutan6.57.08.0 India India8.26.56.0 Maldives Maldives8.55.45.0 Nepal Nepal2.73.63.7 Pakistan Pakistan5.16.46.5 Sri Lanka Sri Lanka5.95.05.5

14. 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

15. 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

16. 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)

17. … 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

18. …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?

19. Risks to Developing Asia… Regional Risks Hard landing in PRC still a possibility PRC Slowdown 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)

20. ...Regional Risks Employment generation still lagging in spite of strong growth:risk to social stability Epidemics and security threats:real danger in the region Developing Asia must be resilient in the face of turbulence resulting from global and regional risks

21. Making Developing Asia’s robust growth sustainable over the medium term? Consolidate fiscal situations to allow for future anti-cyclical policies Implement policies to bolster domestic demand:deepen financial sector reforms and supervision(consumer credit, long- term mortgage lending, etc.)

22. 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

23. Making Developing Asia’s 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

24. Making Developing Asia… Over the long term 7-8% growth rate of GDP is feasible:a 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

25. 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

26. Key Messages: medium term Developing Asia growing at fastest rate in 2004 since 2000 Growth more broad based:investments 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

27. 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

28. 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

29. Baseline Assumptions on External Conditions back to Global Context back to Global Context back to Global Context 20042005 ADOUpdateADOUpdate GDP Growth (%) Industrial Countries 3.1-3.53.5-3.92.5-3.02.4-2.8 United States 4.2-4.74.1-4.53.2-3.73.1-3.5 Euro Zone 1.7-1.91.8-2.02.1-2.41.8-2.2 Japan2.5-2.83.8-4.21.5-2.01.6-2.0 Memorandum Items US Federal Funds Rate (%) 1.1-1.31.2-1.42.5-3.02.9-3.1 Brent Crude Oil ($/bbl) 28-3038-3924-2638-43 Global Trade Volume (% change) 8.0-8.59.0-10.06.0-7.07.0-8.0

30. GDP Growth: Developing Asia, 2003-2005 back to Developing Asia back to East Asia back to Developing Asiaback to East Asia back to Developing Asiaback to East Asia GDP Growth (%) 200320042005 ADOUpdate*ADOUpdate* Developing Asia6.56.87.26.76.3 East Asia East Asia6.66.97.66.86.6 Southeast Asia Southeast Asia4.85.76.25.45.6 South Asia South Asia7.67.06.47.25.9 Central Asia Central Asia8.48.17.98.48.0 The Pacific The Pacific4.32.92.92.42.4 * as of Nov 10, 2004

31. Inflation: Developing Asia, 2003-2005 back to Developing Asia back to Developing Asia back to Developing Asia Inflation (%) 200320042005 ADOUpdate*ADOUpdate* Developing Asia2.33.34.03.14.0 East Asia East Asia1.22.63.42.43.0 Southeast Asia Southeast Asia3.13.64.23.84.4 South Asia South Asia5.14.95.54.66.6 Central Asia Central Asia5.48.66.98.36.4 The Pacific The Pacific8.55.65.16.04.4

32. CA/GDP: Developing Asia, 2003-2005 back to Developing Asia back to Developing Asia back to Developing Asia Current Account Balance/GDP 200320042005 ADOUpdate*ADOUpdate* Developing Asia4.63.23.32.92.8 East Asia East Asia4.52.83.12.62.6 Southeast Asia Southeast Asia9.08.27.37.66.7 South Asia South Asia1.60.41.30.20.6 Central Asia Central Asia-2.3-3.6-3.9-4.3-2.1 The Pacific The Pacific-0.60.90.8-1.3-1.7

33. CA/GDP, East Asia go to East Asia go to GDP:East Asia go to East Asiago to GDP:East Asia go to East Asiago to GDP:East Asia Current Account Balance/GDP 200320042005 East Asia 4.53.12.6 PRC PRC3.21.20.7 Hong Kong, China Hong Kong, China10.26.88.5 Korea, Rep. of Korea, Rep. of2.04.13.2 Taipei,China Taipei,China10.26.86.0

34. CA/GDP, Southeast Asia go to SEAsia go to GDP:SEAsia go to SEAsia go to GDP:SEAsia go to SEAsia go to GDP:SEAsia Current Account Balance/GDP 20032004 Southeast Asia 9.07.36.7 Cambodia Cambodia-10.2-10.0-11.2 Indonesia Indonesia3.63.43.1 Lao PDR Lao PDR-0.3-2.0-1.6 Malaysia Malaysia12.97.87.0 Philippines Philippines4.23.02.8 Singapore Singapore30.927.025.0 Thailand Thailand5.64.54.5 Viet Nam Viet Nam-5.8-4.1-4.1

35. CA/GDP, South Asia go to SAsia go to GDP:SAsia go to SAsiago to GDP:SAsia go to SAsiago to GDP:SAsia Current Account Balance/GDP 200320042005 South Asia 1.61.30.6 Bangladesh Bangladesh0.30.3-1.5 Bhutan Bhutan10.6-- India India1.41.41.1 Maldives Maldives-4.3-9.1- Nepal Nepal2.63.54.0 Pakistan Pakistan4.91.9-1.7 Sri Lanka Sri Lanka-0.6-3.0-3.5

36. Contribution to Growth, Hong Kong, China (% points) back to East Asia Taipei,China back to East AsiaTaipei,China back to East AsiaTaipei,China 20032004 Q1Q2Q3Q4Q1Q2 GDP4.4-0.64.04.97.012.1 Consumption-1.9-2.50.12.64.06.4 Investment2.8-1.4-1.21.32.95.6 Net Exports 3.53.35.11.00.00.1

37. Contribution to Growth, Taipei,China (% points) back to East Asia back to East Asia back to East Asia 20032004 Q1Q2Q3Q4Q1Q2 GDP3.5-0.24.05.76.77.7 Consumption0.5-1.21.31.52.32.4 Investment1.8-1.2-2.91.53.93.4 Net Exports 1.22.25.62.70.51.8

38. Contribution to Growth, Korea (% points) back to East Asia back to East Asia back to East Asia 20032004 Q1Q2Q3Q4Q1Q2 GDP3.72.22.43.95.35.5 Consumption0.7-0.5-0.6-0.7-0.40.2 Investment2.1-0.1-0.30.3-0.11.9 Net Exports 1.11.53.15.07.24.0

39. Contribution to Growth, Indonesia (% points) back to Southeast Asia Malaysia back to Southeast Asia Malaysia back to Southeast Asia Malaysia 20032004 Q1Q2Q3Q4Q1Q2 GDP4.43.64.04.45.04.3 Consumption3.23.63.64.14.23.6 Investment1.7-0.2-1.11.61.6 Net Exports -0.51.10.61.4-1.9-1.2

40. Contribution to Growth, Malaysia (% points) Philippinesback to Southeast Asia Philippinesback to Southeast Asia Philippinesback to Southeast Asia 20032004 Q1Q2Q3Q4Q1Q2 GDP4.64.85.57.67.68.0 Consumption4.93.33.56.35.36.2 Investment-3.6-3.8-1.41.83.95.1 Net Exports 3.25.23.3-0.5-1.6-3.3

41. Contribution to Growth, Philippines (% points) back to Southeast AsiaSingapore back to Southeast AsiaSingapore back to Southeast AsiaSingapore 20032004 Q1Q2Q3Q4Q1Q2 GDP4.84.24.85.06.56.2 Consumption4.13.74.34.54.54.9 Investment4.4-0.2-0.7-2.92.51.6 Net Exports -9.8-3.40.0-0.92.32.2

42. Contribution to Growth, Singapore (% points) back to Southeast Asia Thailand back to Southeast Asia Thailand back to Southeast Asia Thailand 20032004 Q1Q2Q3Q4Q1Q2 GDP1.7-3.91.74.97.512.5 Consumption-0.8-0.6-0.91.43.94.4 Investment-8.8-12.3-5.9-2.18.45.1 Net Exports 11.59.08.65.8-4.33.3

43. Contribution to Growth, Thailand (% points) back to Southeast Asia back to Southeast Asia back to Southeast Asia 20032004 Q1Q2Q3Q4Q1Q2 GDP6.75.86.67.86.66.3 Consumption2.73.53.44.53.83.5 Investment2.20.53.14.54.94.4 Net Exports 1.61.70.6-1.7-2.3-1.7

44. Sustained high oil price Inflationary pressures Interest rate hikes Reversal of Savings and Consumption Behavior Rise in HH Credit Default Rates Investment Setback Reduction of attractiveness of Asian financial Markets SLOWDOWN OF ECONOMIC ACTIVITY IN ASIA back to Global Risks

45. Impact in 2005 of Sustained Increase*: Scenario I vs. Scenario II next next Scenario I ($10/bbl increase)Scenario II ($20/bbl increase) GDPTrade Balance (% of GDP) Consumer Prices GDPTrade Balance (% of GDP) Consumer Prices Asia incl. Japan-0.6-0.31.0-1.2-0.71.9 Asia excl. Japan-0.8-0.41.1-1.5-0.82.0 Japan-0.5-0.30.7-0.61.3 PRC-0.8-0.10.5-1.5-0.30.9 Hong Kong, China -0.6-0.80.3-1.1-1.60.5 Korea-0.6-0.80.8-1.2-1.71.4 * Until end of 2005; from a baseline of $35/bbl; brent crude

46. Impact of a Sustained Increase…cont. back to global risks back to global risks back to global risks Scenario I ($10/bbl increase)Scenario II ($20/bbl increase) GDPTrade Balance (% of GDP) Consumer Prices GDPTrade Balance (% of GDP) Consumer Prices Indonesia 0.10.91.30.11.92.1 Malaysia -0.90.31.4-2.41.12.7 Philippines -1.9-0.91.4-3.6-1.92.8 Singapore -1.7-1.31.3-3.4-2.52.5 Thailand -2.2-1.21.5-4.1-2.52.9 India -0.8-0.71.7-1.5-1.43.3

47. 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.

48. Weakening fixed investment in some selected sectors is the main component of the slowdown of PRC

49. Regional Distribution of Trade in Developing Asia, 2003 (%)

50. The regional production chain is dependent on final demand from industrial countries

51. Effects of a PRC Slowdown The simulations using a global CGE model show that PRC’s slowdown would have a moderate impact on Asian economies A two % pts reduction in PRC’s growth would slow GDP growth by 0.5 ppts for NIEs, 0.24 ppts for ASEAN and 0.1 ppts for South Asia

52. Effects on GDP Growth in Selected Regions (2 % pts reduction in PRC’s GDP growth, 2005) US-0.11 Japan-0.24 EU-0.12 NIEs-0.50 ASEAN-0.24 South Asia-0.09 The World-0.24

53. 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 PRC’s back to Regional Risks. back to Regional Risks