Upload
asian-development-bank
View
220
Download
0
Embed Size (px)
Citation preview
8/7/2019 Asian Development Outlook 2009 Update: Broadening openness for a resilient Asia
http://slidepdf.com/reader/full/asian-development-outlook-2009-update-broadening-openness-for-a-resilient 1/188
Asian Development Bank
Broadening openness
or a resilient Asia
Update
ASIAN DEVELOPMENT
Outlook2009
8/7/2019 Asian Development Outlook 2009 Update: Broadening openness for a resilient Asia
http://slidepdf.com/reader/full/asian-development-outlook-2009-update-broadening-openness-for-a-resilient 2/188
© Asian Development Bank
All rights reserved. Published .
Printed in the Philippines.
ISSN -
Publication Stock No. FLS
Cataloging-in-Publication Data
Asian Development Bank.
Asian Development Outlook 2009 Update.
Mandaluyong City, Philippines: Asian Development Bank, 2009.
. Economics. . Finance. . Asia. I. Asian Development Bank.
Te annual Asian Development Outlook provides a comprehensive economic analysis o economies in
developing Asia and the Pacic.
Te views expressed in this book are those o the authors and do not necessarily reect the views and policies o
the Asian Development Bank (ADB) or its Board o Governors or the governments they represent.
ADB does not guarantee the accuracy o the data included in this publication and accepts no responsibility or
any consequence o their use.
By making any designation o or reerence to a particular territory or geographic area, or by using the term“country” in this document, ADB does not intend to make any judgments as to the legal or other status o any
territory or area.
ADB encourages printing or copying inormation exclusively or personal and noncommercial use with proper
acknowledgment o ADB. Users are restricted rom reselling, redistributing, or creating derivative works or
commercial purposes without the express, written consent o ADB.
ADB Avenue, Mandaluyong City
Metro Manila, Philippines
el +
Fax +
www.adb.org
For orders, please contact:
Department o External Relations
Fax +
8/7/2019 Asian Development Outlook 2009 Update: Broadening openness for a resilient Asia
http://slidepdf.com/reader/full/asian-development-outlook-2009-update-broadening-openness-for-a-resilient 3/188
Foreword
Developing Asia as a whole is proving to be more resilient to the global
economic slowdown than was expected when Asian Development
Outlook 2009 (ADO 2009) was published in March this year.
Consequently, this Update sees somewhat stronger growth or both this
year and next than was earlier orecast. Te region’s economic expansion
or 2009 is projected to come in at 3.9%, up slightly rom the March
orecast o 3.4%, on the back o much stronger growth in East Asia and
South Asia. Te growth projection or 2010 is likewise upgraded to 6.4%
rom 6.0% in March.
Te global economy is experiencing its worst peace-time slump ineight decades. World trade and industrial production are set to decline
sharply this year, leading to a contraction o the world economy.
Unavorable events originating in the major industrial economies
have cascaded on to developing Asia. Te region’s more open economies
were hit the hardest, mainly rom alling global demand or their exports.
Double-digit declines in exports were common since the last quarter o
2008 through the rst hal o this year.
As in the major industrial economies, governments and central
banks in the region were quick to remedy the growth slack, providing
the necessary scal and monetary stimuli. Economic activity in the
large developing Asian economies rebounded and output looks set or a
V-shaped comeback.But even with a nascent recovery, the region should not be
complacent. Downside risks to the outlook remain. A prolonged global
recession will reduce the speed at which developing Asia can return to its
potential rate o growth. Hasty removal o scal and monetary stimuli
can likewise degrade the ongoing recovery.
Policy measures to broaden openness need to be adopted to support
economic resilience and sustained development. In the last 60 years,
the multilateral trading system has underpinned global growth and
prosperity. Globalization and openness must continue, but their scope
and structure need to be reviewed i the region is to soen some o the
economic jolts that hit it every ew years.
Beore both the 1997–98 Asian nancial crisis and the current global
downturn, developing Asia enjoyed years o rapid economic growth,
reaping the benets o its nancial and trade openness. Te onset o both
periods o turmoil, however, brought to the ore the perils o excessive
and unbalanced openness.
A major lesson rom the 1997–98 crisis is that openness must be
matched with well-entrenched institutions and regulatory systems
that can eectively manage nancial globalization. Developing Asia
successully reormed its nancial systems in the wake o the 1997–98
crisis, boosting its resilience to nancial shocks, which helped shield it
rom the adverse eects o the current global economic downturn.
8/7/2019 Asian Development Outlook 2009 Update: Broadening openness for a resilient Asia
http://slidepdf.com/reader/full/asian-development-outlook-2009-update-broadening-openness-for-a-resilient 4/188
iv Asian Development Outlook 2009Update
Yet the recovery rom the 1997–98 crisis carried the seeds o the next
dangerous harvest, coming as it did rom an overreliance on external
demand rom the major industrial economies. Te ongoing global
turmoil has thereore battered the region through plummeting export
demand, evaporating capital inows, and stalling remittance growth. ostrengthen its resilience and reduce its vulnerability to external shocks,
developing Asia needs to address the geographically unbalanced structure
o its trade, capital ows, and movement o workers by promoting closer
economic linkages within the region. Such moves, together with a more
balanced economy in which domestic demand plays a bigger role, can
help the region’s economies achieve rapid yet stable growth.
As developing Asia emerges rom the global downturn, its ootprint
on the world economy is becoming more pronounced. So, although
the longer-term uture looks promising, the region’s greatest challenge
in the medium term is to live up to the demands o this heightened
responsibility.
HARUHIKO KURODA
President
8/7/2019 Asian Development Outlook 2009 Update: Broadening openness for a resilient Asia
http://slidepdf.com/reader/full/asian-development-outlook-2009-update-broadening-openness-for-a-resilient 5/188
Acknowledgments
Te Asian Development Outlook 2009 Update was prepared by the sta o
the Asian Development Bank rom the Central and West Asia Department,
East Asia Department, Pacic Department, South Asia Department,
Southeast Asia Department, Economics and Research Department, as well
as the resident missions. Representatives rom these departments and the
Ofce o Regional Economic Integration constituted a Regional Economic
Outlook ask Force, which met regularly and coordinated closely to
develop consistent orecasts or the region.
Te economists who contributed the sections are bylined in each
chapter. Te subregional coordinators were Sadar Parvez and Kiyoshi
aniguchi or Central and West Asia; V.B. ulasidhar or East Asia;
adateru Hayashi or South Asia; Puran Rajapakse or Southeast Asia;and Craig Sugden or the Pacic.
A team o economists rom the Economics and Research Department,
led by Joseph E. Zveglich, Jr., Assistant Chie Economist, Macroeconomics
and Finance Research Division, assisted by Editha Laviña, coordinated
the overall production o the publication. echnical and research
support was provided by Shiela Camingue, Gemma Esther Estrada,
Nedelyn Magtibay-Ramos, Maria Cynthia Petalcorin, Pilipinas Quising,
Aleli Rosario, Eric Suan, Lea Sumulong, and Raquel abanao. Richard
Niebuhr and Anthony Patrick as the economic editors made substantive
contributions to the country chapters and other parts o the book.
Charles Adams provided helpul guidance on the development o the
theme chapter.Jonathan Aspin did the style and copy editing. Elizabeth E. Leuterio
was responsible or typesetting and data linking, as well as graphics
generation in which she was assisted by Maria Susan orres. Te cover
was designed by Joe Mark Ganaban. Zenaida Acacio and Lagrimas
Cuevas provided administrative and secretarial support. Te publication
would not have been possible without the cooperation o the Publishing,
Ino and Web Unit o the Department o External Relations and the
Logistics Management Unit o the Ofce o Administrative Services.
Ann Quon and Andrew Perrin o the Department o External
Relations planned and coordinated the dissemination o the Update.
JONG-WHA LEE
Chie Economist
Economics and Research Department
8/7/2019 Asian Development Outlook 2009 Update: Broadening openness for a resilient Asia
http://slidepdf.com/reader/full/asian-development-outlook-2009-update-broadening-openness-for-a-resilient 6/188
HighlightsADO 2009 Update
Part Coping with the global recession Long recession avoided?
Recovery at hand?
Developing Asia’s response to the turmoil
Developing Asia’s prospects
A new approach to openness or developing Asia?
Part Broadening openness or a resilient Asia Enhancing intraregional trade
Managing nancial globalization
Maximizing the benets o labor ows
Policies to achieve more balanced openness
Part Economic trends and prospects in developing Asia 8Subregional summaries
Bangladesh
People’s Republic o China
India Indonesia
Malaysia
Pakistan
Philippines
Tailand
Viet Nam
Statistical appendix 67Statistical notes and tables
Contents
8/7/2019 Asian Development Outlook 2009 Update: Broadening openness for a resilient Asia
http://slidepdf.com/reader/full/asian-development-outlook-2009-update-broadening-openness-for-a-resilient 7/188
Denitions
Te economies discussed in Asian Development Outlook 2009 (ADO 2009) Update are classied by major
analytic or geographic groupings. For purposes o ADO 2009 Update, the ollowing apply:
• Association o Southeast Asian Nations (ASEAN) comprises Brunei Darussalam, Cambodia, Indonesia,Lao People’s Democratic Republic, Malaysia, Myanmar, Philippines, Singapore, Tailand, and Viet Nam.
• Developing Asia reers to the 44 developing member countries o the Asian Development Bank and to
Brunei Darussalam, an unclassied regional member.
• Central Asia comprises Armenia, Azerbaijan, Georgia, Kazakhstan, Kyrgyz Republic, ajikistan,
urkmenistan, and Uzbekistan.
• East Asia comprises People’s Republic o China; Hong Kong, China; Republic o Korea; Mongolia; and
aipei,China.
• South Asia comprises Islamic Republic o Aghanistan, Bangladesh, Bhutan, India, Maldives, Nepal,
Pakistan, and Sri Lanka.
• Southeast Asia comprises Brunei Darussalam, Cambodia, Indonesia, Lao People’s Democratic Republic,
Malaysia, Myanmar, Philippines, Singapore, Tailand, and Viet Nam.• Te Pacifc comprises Cook Islands, Fiji Islands, Kiribati, Republic o the Marshall Islands, Federated
States o Micronesia, Nauru, Republic o Palau, Papua New Guinea, Samoa, Solomon Islands, Democratic
Republic o imor-Leste, onga, uvalu, and Vanuatu.
• Unlessotherwisespecied,thesymbol“$”andtheword“dollar”refertoUSdollars.
ADO 2009 Update is generally based on data available up to 31 August 2009.
Acronyms and abbreviations
ADB Asian Development Bank
ASEAN Association o Southeast Asian Nations
bpd barrels per day
CPI consumer price index
EU European Union
FDI oreign direct investment
FY scal year
GDP gross domestic product
IMF International Monetary Fund
OECD Organisation or Economic Co-operation and Development
PRC People’s Republic o China
US United States
VAR vector autoregression
VA value-added tax
WO World rade Organization
8/7/2019 Asian Development Outlook 2009 Update: Broadening openness for a resilient Asia
http://slidepdf.com/reader/full/asian-development-outlook-2009-update-broadening-openness-for-a-resilient 8/188
8/7/2019 Asian Development Outlook 2009 Update: Broadening openness for a resilient Asia
http://slidepdf.com/reader/full/asian-development-outlook-2009-update-broadening-openness-for-a-resilient 9/188
HighlightsADO 2009 Update
Despite a notable slowdown in its economic expansion relative to
potential, developing Asia is leading the recovery rom the global
downturn. Its growth is underpinned by the relatively healthy state
o its fnancial systems prior to the fnancial crisis; by the fscal and
monetary stimuli that have been quickly provided by governments
and central banks across the region; and by the rapid turnaround in
its larger, less export-dependent economies.
However, risks remain on the downside: hasty withdrawal o the fscal
and monetary measures supporting aggregate demand would stunt
developing Asia’s nascent recovery, and any slippage in the major
industrial economies’ recovery would delay the region’s return to itslong-term growth path.
To develop more resilient economies, developing Asia should broaden
the scope and structure o openness. Reducing its vulnerability to
external shocks requires policy makers to tackle the geographically
unbalanced structure o its trade, capital lows, and movement o
workers. By promoting closer economic linkages within the region
and a more balanced internal economic structure with a bigger role
or domestic demand, policy makers in developing Asia will be able to
achieve rapid yet stable growth or the region.
8/7/2019 Asian Development Outlook 2009 Update: Broadening openness for a resilient Asia
http://slidepdf.com/reader/full/asian-development-outlook-2009-update-broadening-openness-for-a-resilient 10/188
2 Asian Development Outlook 2009 Update
Key MessagesT z he global economy may just be coming out o its worst peace-time downturn
since the Great Depression o the 1930s. Part 1 o this Update to the Asian
Development Outlook 2009 (ADO 2009) that was released in March, envisages a
global economic contraction this year on account o steep declines in world tradeand industrial production. While scal stimulus packages and easy monetary
policies have averted a collapse o the global nancial system and limited the
depth o the recession, conditions or a sustainable world economic recovery
are still uncertain.
The main channel by which the global nancial crisis and economic slump z
spread to developing Asia was the collapse o demand in major global markets,
hitting the region’s exports. With a large proportion o regional trade in parts
and components supporting supply chains, imports also buckled. The more
open economies o East Asia and Southeast Asiasuch as Hong Kong, China;
Republic o Korea (henceorth Korea); Malaysia; Singapore; Taipei,China; andThailandwere hardest hit, and their economies contracted signicantly rom
the second hal o 2008 until well into the rst hal o 2009.
But many regional governments’ quick and decisive response to the weak global z
environment prevented a reeall in developing Asia’s economic growth. Tax cuts,
greater public spending, targeted assistance, and easy monetary policies boosted
consumption and investment. The regional economy is now poised to achieve
a V-shaped rebound. The larger economies provided much o the impetus or
the region’s transition to recovery. In addition, stronger nancial systems in
the region than elsewhere at the onset o the nancial crisis underpinned the
region’s resilience to the global downturn.
Nevertheless, there is no room or complacency, and the region’s nascent z
recovery aces downside risks. Externally, a lengthier global downturn than
currently orecast would retard the region’s ull recovery, and without a revival
o the global economy, the region’s long-term growth potential would remain
unattainable. Internally, in its current economic structure, developing Asia cannot
be the sole driver o its own growth. Likewise, mistimed exit strategies or scal
and monetary stimuli would imperil the region’s rebound; and pulling away the
carpet o scal and monetary support beore the recovery has a rm oothold
may lead to a double-dip decline instead o the expected V-shaped rebound.
To strengthen its economic resilience and sustain its development, developing zAsia must adopt policies to broaden the scope and structure o its openness
to trade, capital ows, and movement o workers. Part 2 o this Update calls or
promoting intraregional economic links while maintaining vital existing links with
the rest o the world. Success in this twin-track approach will enable the region
to exploit the potentially vast but largely neglected gains rom closer relations
with its neighbors. Combined with a stronger domestic economy, broader
openness can help regional economies achieve rapid yet stable growth.
8/7/2019 Asian Development Outlook 2009 Update: Broadening openness for a resilient Asia
http://slidepdf.com/reader/full/asian-development-outlook-2009-update-broadening-openness-for-a-resilient 11/188
Highlights 3
Outlook or and Since the publication o z ADO 2009 in March, global economic conditions have
worsened, requiring an update o orecasts or the G3 economies o the United
States, eurozone, and Japan. A deeper contraction o 3.7% in 2009 is now seen in
the G3, ollowed by a modest recovery o 1.1% in 2010 as ination remains quiescent.The volume o world trade is set to decline more sharply this year but rebound
more quickly next year, both relative to ADO 2009.
Oil prices have been rising steadily since March 2009, but have stayed well below z
July 2008’s peak. Global demand remains subdued and inventory levels high. In
addition, production capacity o members o the Organization o the Petroleum
Exporting Countries is projected to increase substantially. Together these actors
should damp the scope or urther price increases in the short term. Nonenergy
prices have been less volatile, increasing only subtly since the beginning o this year.
The nonenergy price trajectory in the next 2 years depends on a host o actors,
including a recovery in demand, weather conditions, and supply setbacks.
While some signs o worldwide economic stabilization are beginning to emerge, z
risks to the global outlook remain tilted to the downside. Governments around
the world slashed interest rates and taxes and raised spending to boost sagging
aggregate demand. Yet exiting these measures too early may lead to a protracted
slowdown and derailment o the global recovery, and correct timing is key to
avoiding a double-dip downturn. Increased resort to protectionist measures and
the persistent stalemate in global trade negotiations is likewise threatening the
ragile trade rebound. In addition, the continued weakness in housing markets
could also cloud prospects or the world economy, while cost-push ination may
return with resurgence in global oil prices. Finally, the risk o a global emergency
rom H1N1 u may have diminished, but the virus could still mutate into a more
virulent strain, with ar more serious public health consequences.
Despite the notable slowdown in growth this year in most economies across z
developing Asia, the region has proved to be more resilient than earlier eared.
Part 3 o this Update projects economic expansion o developing Asia to come in
at 3.9%, revised up by 0.5 percentage points rom the ADO 2009 orecast o 3.4%,
on the back o much stronger growth in East Asia and South Asia. The growth
projection or 2010 is likewise upgraded to 6.4% rom 6.0% in March.
This resumption o growth has taken place amid a low to mild ination environment z
across the region. Coming o last year’s peak, ination in developing Asia is orecast
to come in at just 1.5% in 2009, down rom the March projection o 2.4%. More
robust growth is likely to push prices up aster in 2010, raising the orecast to 3.4%.Central bankers in the region will thereore want to put a tight watch on monetary
policies so as not to encourage asset bubbles that would inate prices to levels that
are no longer justied by undamentals.
8/7/2019 Asian Development Outlook 2009 Update: Broadening openness for a resilient Asia
http://slidepdf.com/reader/full/asian-development-outlook-2009-update-broadening-openness-for-a-resilient 12/188
4 Asian Development Outlook 2009 Update
Slower growth in industrial countries has resulted in a weak recovery in developing z
Asia’s exports. But imports were even more sluggish as demand or intermediate
goods waned. Overall, the region’s current account is expected to register a surplus
o 5.0% o GDP in 2009. With developing Asian economies increasingly relying on
domestic demand to boost growth, their current account surplus is projected to
all urther to 4.3% o GDP in 2010.
There are notable divergences in the outlook across subregions and economies. z
In particular, the Update upgrades projections or East Asia and South Asia, while
downgrading those or other subregions. Likewise, it has raised orecasts or the
larger regional economies, such as the People’s Republic o China (PRC), Korea,
India, and Indonesia, while lowering those or the smaller, generally more open
economies.
Economic expansion in East Asia is now projected to reach 4.4% in 2009, supported z
by stronger growth in the PRC and a shallower contraction in Korea, than oreseen
in ADO 2009. The PRC’s massive scal stimulus package announced last year and the
aggressive monetary easing in 2009 bolstered economic growth in that country.
The Government’s 8.0% growth target set at the start o the year now looks within
reach, with the Update projecting the economy to expand by 8.2%. Similarly, Korea’s
scal stimulus has been eective, and the economy is orecast to shrink by just 2.0%
this year, compared with March’s 3.0% orecast.
Subregional ination is set to decline to 0.2% in 2009, largely because the PRC and z
Taipei,China will see deation. In 2010, consumer prices are expected to rise to 2.6%
on account o a gradually strengthening subregional recovery. Current account
projections are slightly downgraded or the next 2 years, relative to March.
Prospects or growth this year in South Asia have improved to 5.6%, up rom the z
ADO 2009 orecast o 4.8%, with the Update shiting up the outlook or ve o the
eight subregional economies. India’s economic expansion, in particular, has been
upgraded by 1 percentage point to 6% due to the expected positive eects o a
continued large scal stimulus announced in its July 2009 budget and the emerging
signs o recovery in private business condence. Subregional ination has been
contained ollowing the drop in oil prices in the second hal o last year, with some
economies starting to record deation in recent months. Consumer prices are thus
orecast to increase at 4.7% in 2009, below the 5.6% expected in March.
In 2010, subregional growth is likewise upgraded to 6.4% rom 6.1% in z ADO 2009.
Stronger growth is projected to lit prices, raising the ination orecast to 4.9% rom
4.4% in March. In current-account terms, the drop in global oil prices rom last year’speak provided much relie or South Asia’s economies, curtailing the projected
subregional decit to 1.7% and 2.2% o GDP in 2009 and 2010, respectively.
Aggregate growth in the 10 Southeast Asian economies is now expected to slow z
to 0.1% in 2009 compared with the March growth orecast o 0.7%. More positive
prospects or Indonesia and Viet Nam ailed to counterbalance the deterioration
among the more open, as well as the smaller, economies in the subregion. Next
year, overall growth is put at 4.3%, similar to the March orecast.
8/7/2019 Asian Development Outlook 2009 Update: Broadening openness for a resilient Asia
http://slidepdf.com/reader/full/asian-development-outlook-2009-update-broadening-openness-for-a-resilient 13/188
Highlights 5
Considerably weaker domestic demand and lower oil and ood prices are expected z
to lead to a sharper than earlier expected decline in ination across the subregion.
In 2009, the orecast is revised downward to 2.5% rom 3.3% in ADO 2009. The
ination projection or 2010 is maintained at 4.1%. As a precipitous decline in exports
is likely to be more than oset by a steeper decline in imports, the subregion’s
current account surplus in 2009 is now expected to be 5.4% o GDP, against the4.4% predicted in March. Next year, the surplus is orecast to come in at 4.6% o
GDP owing to a mild recovery in demand or the subregion’s exports rom industrial
countries and a pickup in imports.
Across Central Asia, projections or economic growth are now much bleaker than z
in ADO 2009 due to lower commodity prices; a deeper downturn in the Russian
Federation (the subregion’s main trade and nancial partner); and weaker capital
inows, investments, and remittances. Subregional growth is orecast to slow to
0.5% in 2009 and 3.6% in 2010, compared with 3.9% and 4.8% projected in March.
The largest Central Asian economy, Kazakhstan, is seen contracting by 1.0% in 2009,
a reversal rom the 2.0% growth earlier expected in ADO 2009, as it grapples withthe allout rom a banking crisis and lower oil prices.
Ination pressures in the subregion have been curbed by sharp drops in domestic z
demand and lower commodity prices. As a result, the Update revises downward the
ination orecasts or 2009 and 2010 to 7.6% and 7.3%. The overall current account
position o the subregion is also very likely to deteriorate, as hydrocarbon exporters
labor under lower oil prices and hydrocarbon importers suer rom greatly reduced
remittance inows.
Economic growth in the Pacic in 2009 is slightly downgraded to 2.8% rom 3.0% z
expected in March, largely as a result o a less optimistic growth orecast or the
Democratic Republic o Timor-Leste (the subregion’s third-largest economy). Onlythree o the 14 subregional economies are likely to expand by more than 1.0% this
year. Weaker prospects stem rom alling incomes rom tourism and remittances
brought by the global slowdown. The Update pencils in minor adjustments or
subregional ination and the current account.
Overall, developing Asia is set to emerge rom the global slump ahead o the rest o z
the world. Progress in rehabilitation eorts ater the Asian crisis in 1997–98 ensured
that the region’s nancial systems were relatively healthy when the global nancial
crisis erupted, and allowed the region to manage, in the main, a sot landing. Fiscal
stimulus measures and easy monetary policies also proved to be highly eective
in bolstering regional growth.
8/7/2019 Asian Development Outlook 2009 Update: Broadening openness for a resilient Asia
http://slidepdf.com/reader/full/asian-development-outlook-2009-update-broadening-openness-for-a-resilient 14/188
6 Asian Development Outlook 2009 Update
Broadening openness or a resilient AsiaOpenness to oreign trade and capital ows has underpinned world economic z
growth in the last 60 years, and will continue to do so in the uture. Developing
Asia’s economic success, including robust growth that raised per capita incomes
and lowered poverty levels, likewise depended on its outward orientation. But the1997–98 Asian nancial crisis and the latest global slump have exposed the risks that
the region aces rom a narrow application o openness. Broadening the scope and
structure o openness is needed to support developing Asia’s economic resilience
and sustained development.
During the Asian crisis, the massive reversal o oreign capital inows underlined z
the risk o excessive nancial openness. A key lesson learned rom that crisis was
the need or strong domestic institutional capacitythat is, sound and efcient
nancial systemsto eectively manage nancial globalization. In the atermath
o the crisis, developing Asia reormed its nancial systems, boosting its resilience
to nancial shocks, and to a large degree shielding itsel rom the eects o the
recent tumult.
However, the region’s recovery rom the 1997–98 crisis came at the expense o z
overreliance on extraregional demand, a dependency that, in the last year or so,
has battered the region’s exports, reduced capital inows, and slashed remittance
growth. A key lesson is that regional policy makers need to address the geographically
unbalanced structure o the ows o its trade, capital, and workers.
Mechanisms need to be put in place to saeguard domestic economies against z
excessive and unbalanced openness. Policies to build up domestic capacity and
enhance regional cooperation are required to bolster the resilience o regional
economies and reduce their vulnerability to external shocks.
Strengthening intraregional trade (especially or nal goods) can help reduce z
developing Asia’s overdependence on exports to industrial countries and can
provide an additional engine o short-run recovery and long-run growth. Achieving
this entails boosting domestic economies through a wide range o rebalancing
policies as outlined in ADO 2009; removing barriers to intraregional trade, particularly
behind-the-border obstacles to reer trade in goods and services; and promoting
regional cooperation to institutionalize concrete and specic eorts toward
acilitating intraregional trade.
Eectively managing nancial globalization can ensure that capital ows are z
less destabilizing to regional economies. This requires encouraging a shit in the
composition o oreign capital to less volatile longer-term inows by improvingthe investment climate; strengthening domestic nancial markets with requisite
oversight mechanisms, and keeping appropriate levels o oreign exchange reserves
(especially those economies with managed exchange rate systems); and supporting
the establishment o regional capital markets, to be able to successully tap and
mobilize the regional savings pool.
8/7/2019 Asian Development Outlook 2009 Update: Broadening openness for a resilient Asia
http://slidepdf.com/reader/full/asian-development-outlook-2009-update-broadening-openness-for-a-resilient 15/188
Highlights 7
Migration is increasingly important in the global landscape, and Asian countries are z
well known labor exporters. Also, remittances are a more stable source o oreign
currency than many other nontrade sources. Developing Asia’s governments should
thereore maximize the benets o labor ows by ensuring that the migrationchannel is kept open, enhancing the saety and security o ormal systems or unds
transers, and providing an environment that encourages households to invest more
o the unds that they receive. Regional cooperation to avoid protectionist policies
would also enhance the interests o both home and host countries.
8/7/2019 Asian Development Outlook 2009 Update: Broadening openness for a resilient Asia
http://slidepdf.com/reader/full/asian-development-outlook-2009-update-broadening-openness-for-a-resilient 16/188
8 Asian Development Outlook 2009 Update
Table 1 Growth rate of GDP (% per year) Table 2 Inflation (% per year)
Subregion/Economy 2008 2009 2010 2008 2009 2010
ADO
2009
Update ADO
2009
Update ADO
2009
Update ADO
2009
Update
Central Asia . . . . . . . . . .
Azerbaijan . . . . . . . . . .
Kazakhstan . . -. . . . . . . .
East Asia . . . . . . . . . .
China, People’s Rep. o . . . . . . . -. . .
Hong Kong, China . -. -. . . . . . . .
Korea, Rep. o . -. -. . . . . . . .
Taipei,China . -. -. . . . . -. . .
South Asia . . . . . . . . . .
Bangladesh . . . . . . . . . .
India . . . . . . . . . .
Pakistan . . . . . . . . . .
Sri Lanka . . . . . . . . . .
Southeast Asia . . . . . . . . . .
Indonesia . . . . . . . . . .
Malaysia . -. -. . . . . . . .
Philippines . . . . . . . . . .
Singapore . -. -. . . . . . . .
Thailand . -. -. . . . . -. . .
Viet Nam . . . . . . . . . .
The Pacific . . . . . . . . . .
Fiji Islands . -. -. . . . . . . .
Papua New Guinea . . . . . . . . . .
Developing Asia . . . . . . . . . .
Notes: Developing Asia reers to developing member countries o the Asian Development Bank and Brunei Darussalam, an unclassiied regional
member; East Asia comprises People’s Republic o China; Hong Kong, China; Republic o Korea; Mongolia; and Taipei,China; Southeast Asia comprises
Brunei Darussalam, Cambodia, Indonesia, Lao People’s Democratic Republic, Malaysia, Myanmar, Philippines, Singapore, Thailand, and Viet Nam; South
Asia comprises Islamic Republic o Aghanistan, Bangladesh, Bhutan, India, Maldives, Nepal, Pakistan, and Sri Lanka; Central Asia comprises Armenia,
Azerbaijan, Georgia, Kazakhstan, Kyrgyz Republic, Tajikistan, Turkmenistan, and Uzbekistan; and The Paciic comprises Cook Islands, Fiji Islands, Kiribati,
Republic o the Marshall Islands, Federated States o Micronesia, Nauru, Papua New Guinea, Republic o Palau, Samoa, Solomon Islands, Democratic
Republic o Timor-Leste, Tonga, Tuvalu, and Vanuatu.
Data or Bangladesh, India, and Pakistan are recorded on a iscal year basis. For India, the iscal year spans the current year’s April through the next
year’s March. For Bangladesh and Pakistan, the iscal year spans the previous year’s July through the current year’s June.
8/7/2019 Asian Development Outlook 2009 Update: Broadening openness for a resilient Asia
http://slidepdf.com/reader/full/asian-development-outlook-2009-update-broadening-openness-for-a-resilient 17/188
Part 1Coping with the
global recession
8/7/2019 Asian Development Outlook 2009 Update: Broadening openness for a resilient Asia
http://slidepdf.com/reader/full/asian-development-outlook-2009-update-broadening-openness-for-a-resilient 18/188
8/7/2019 Asian Development Outlook 2009 Update: Broadening openness for a resilient Asia
http://slidepdf.com/reader/full/asian-development-outlook-2009-update-broadening-openness-for-a-resilient 19/188
Coping with the global recession
A year has passed since the collapse o Lehman Brothers in September
2008a watershed event or the world economy. Global nancial markets
had been sputtering or more than a year up to that pointwith exposure
to low-quality mortgage-backed securities leading to several high-prolenancial ailures in the United States (US) and United Kingdom (UK).
Although many major industrial economies had already slipped into
recession by mid-2008, the month o September still stands out. Te de
acto nationalization o mortgage lenders Fannie Mae and Freddie Mac,
ollowed in quick succession by the closure o Lehman Brothers and the
bailout o insurer AIG, sent world nancial markets reeling. With global
nance seizing upand risk premiums on new lending spikingthe
weaknesses that were dragging down the US and UK nancial sectors
urther undermined real economic activity, and spread globally.
Tis impact is clearly seen in the two gures at right. For the rst
time since the end o World War II and its aermath, in 2009 global
gross domestic product (GDP) will contract, by an estimated 1.4%(Figure 1.1.1). Te collapse in world trade has been even more dramatic
(Figure 1.1.2). Merchandise trade will decline by a magnitude that has not
been matched in peace time since the Great Depression. No part o the
world has been spared. Yet within the tumult, developing Asia’s growth
has been surprisingly buoyant.
Authorities across the globe responded quickly and decisively to
the threat o a potential replay o the Great Depression. Tey took
extraordinary steps to shore up the tottering international nancial
system and restore condence, opening wide the taps on money supply
to combat the credit drought, while boosting public spending plans and
slashing taxes to prop up economic activity. In some cases, they adopted
unprecedented methods to stave o disaster.
Now, in September 2009, there are signs o an emerging global
recovery, though it is still too early to say i the momentum has ully
shied or the major industrial economies. Tis raises a critical question
or developing Asia: Will the region manage to keep its buoyancy until a
sustained global recovery takes hold?
This chapter was written by Benno Ferrarini, William James, Juthathip Jongwanich,
Donghyun Park, and Akiko Terada-Hagiwara o the Economics and Research
Department, ADB, Manila.
1.1.1 Long-run world GDP growth
-10
-8
-6
-4
-2
0
2
4
6
8
092000908070605040301922
%
Forecast
World War II
The Great Depression
Sources: Sta calculations based on A. Maddison, 2009,Historical Statistics o the World Economy: 1–2006 AD,available: http://www.ggdc.net/maddison/; InternationalMonetary Fund, World Economic Outlook database, April2009.
Click here or fgure data
1.1.2 Long-run world merchandise trade
growth
-40
-30
-20
-10
0
10
20
30
40
50
092000908070605038301923
%
Forecast
World War II
The Great Depression
Note: There are no data rom 1939 to 1947 due to World
War II and its atermath.
Sources: World Development Indicators online database;
United Nations Statistics Division, International Merchandise
Trade Statistics, available: ht tp://unstats.un.org/unsd/deault.htm; World Trade Organization, Short-term TradeStatistics database, available: http://www.wto.org; alldownloaded 9 September 2009; sta estimates.
Click here or fgure data
8/7/2019 Asian Development Outlook 2009 Update: Broadening openness for a resilient Asia
http://slidepdf.com/reader/full/asian-development-outlook-2009-update-broadening-openness-for-a-resilient 20/188
Long recession avoided?
Te recession in many o the major industrial economies has already
set several records. In the case o the US, this recession is the longest
since the Great Depression. Te continuing housing crisis, rising
unemployment, and crippling o major industries as consumers retrench
has made it very difcult to ascertain whether the trough has been
reached.
Across the major industrial economies, there is reason or cautious
optimism regarding recovery, as GDP growth in the second quarter o
2009, industrial production, and trade have distinctly improved relative
to previous quarters (Figure 1.1.3), but it is still too early to declare an end
to the recession. Even i one could, the outlook is or a weaker than usual
recovery and there are even those who predict a double-dip recession asthe impact o scal stimulus wears o and governments ace the realities
o managing huge increases in public debt and revenue losses. Te
nancial sector remains ragile as many banks in the US, UK, and some
eurozone countries retain loan portolios tainted with nonperorming
assetsincluding toxic residential and commercial mortgage-backed
securitiesand ace increasing delinquency on credit card debt and
automobile loans.
Coherent policies or recovery and
growth rebalancing
Policy actions by central banks and governments to prevent a complete
collapse o the nancial system and to provide stimulus to demand
were enacted in a timely ashion. Monetary policy adopted “quantitative
easing” to provide banks with additional reserves and cash in addition to
the slashing o policy rates to historic lows. Expansionary scal policy in
the orm o tax rebates and massive government expenditure programs,
together with the normal operation o automatic stabilizers such as
unemployment insurance and reduced income tax witholdings, added
to the stimulus. Tese bold policies were successul in pulling the world
economy back rom the brink o a second great depression.
Discretionary scal stimulus and automatic stabilizers may have
cushioned the rate o decline in economic activity and the loss o
employment, and are likely pushing growth into positive territory in the
second hal o 2009, or at least stabilizing it.
Te share o the US, Japan, and European Union (EU) in world imports
as well as other important western economies has been declining since
the turn o the century, and it is apparent that the share o developing
Asia and other emerging economies has been rising, but rom a low base
(Figure 1.1.4). Te industrial economies are losing their sway over global
trade relative to developing economies. Tus it is imperative that both
industrial and developing economies seek to boost growth in world trade
together in order to spur recovery in global industrial production and
1.1.3 Economic indicators,
selected major industrial economies
United StatesUnited KingdomSpain
JapanGermanyFrance
-30
-20
-10
0
10
Q2Q1
09
Q4Q3Q2Q1
08
Q4Q3Q2Q1
2007
%, quarter on quarter, seasonally adjusted
Industrial production growth
-15
-10
-5
0
5
10
Q2Q1
09
Q4Q3Q2Q1
08
Q4Q3Q2Q1
2007
%, quarter on quarter, saar
GDP growth
-40
-20
0
20
Q2Q1
09
Q4Q3Q2Q1
08
Q4Q3Q2Q1
2007
%, quarter on quarter
Merchandise trade growth
saar = seasonally adjusted annualized rate.
Sources: CEIC Data Company Ltd.; US Department o
Commerce, Bureau o Economic Analysis, available http://bea.gov; Economic and Social Research Institute, CabinetOce, Government o Japan, available http://www.esri.cao.go.jp/en; World Trade Organization, Short-term TradeStatistics database, available: http://www.wto.org, alldownloaded 10 September 2009.
Click here or fgure data
8/7/2019 Asian Development Outlook 2009 Update: Broadening openness for a resilient Asia
http://slidepdf.com/reader/full/asian-development-outlook-2009-update-broadening-openness-for-a-resilient 21/188
Coping with the global recession 5
growth. I either or both instead resort to protectionist measures, this will
make it more difcult to achieve a robust global recovery.
Households in the US and much o the eurozone and the UK are
heavily indebted and much less wealthy than beore the nancial crisis,
and so it is not going to be possible to return to the precrisis imbalancesbetween income and expenditure, and investment and savings. In
particular, households in decit countries such as the US and UK will
have to consume less out o their disposable income and save more.
With the US budget now in decit by over 10% o GDP and with
virtually all the eurozone economies having scal decits well above the
3% stability and growth pact limit (Ireland, or example, has a decit o
7% o GDP), other sources o demandparticularly private investment
and net exportswill need to drive growth. Tis means that high-surplus
economies such as People’s Republic o China (PRC), Germany, Japan,
and the Gul States will have to save less, and consume and import more.
Signs are there that this process is beginning to take rootor example,
the trade decit o the US has narrowed while the trade surplus o thePRC has allen.
Still, better international coordination o policies will be required to
ensure that recovery does not relapse into stagnation or even double-dip
recession, so as to reduce imbalances between spending and income;
to minimize the opportunities or regulatory arbitrage, which may
prompt adverse nancial ows; and to undertake specic actions or
strengthening global economic institutions and governance. Te decision
by G20 nance ministers at the September meeting in London to
continue to enact scal stimulus measures until a robust recovery was
evident is an important step in this direction.
In the current situation it is imperative that major industrial
economies maintain coherent policies aimed at strengthening demandin order to avoid a prolonged recession and a weak and ragile recovery.
One lesson to draw rom previous deep global downturns, including the
Great Depression, is that central banks must avoid tightening monetary
policy prematurely and taking steps that undermine banking system
stability. As Japan’s experience in 1997 demonstrated, governments must
also avoid premature increases in taxation and maintain scal stimuli
until sustained output growth is clear. Once private demand recovers,
monetary and scal stimulus can be withdrawn, gradually.
Te outlook or recovery rom the economic slump has been greatly
improved by the decisive policy actions in the major G3 economies (US,
eurozone, Japan) to ease monetary conditions and to provide a strong
scal stimulus. Moreover, the agreement o the G3 to work closely with
developing countries in the G20 to maintain scal stimulus policies
and to keep economies open to oreign investment bodes well or the
global outlook. Tis combination o policies plus the avoidance o blatant
beggar-thy-neighbor trade actions has kindled hopes or a V-shaped
rebound in global output.
However, there are still major policy issues causing concern over
the medium-term prospects or a robust return to sustained growth,
especially as regards consolidating nancial market recovery, preserving
trade openness, timing exit strategies rom unsustainable scal stimulus
and money creation, and resolving global imbalances, as discussed below.
1.1.4 Share in world imports
0
10
20
30
40
50
CanadaFranceUnited Kingdom
United StatesJapanGermany
08 05 2002 99 96 93 1990
%
Selected industrialized countries
0
5
10
15
Rep. of KoreaIndiaPeople's Rep. of China
08 05 2002 99 96 93 1990
%
Selected developing Asian economies
Note: 2009 data as o April.
Sources: International Monetary Fund, Direction o TradeStatistics online database; CEIC Data Company Ltd.; bothdownloaded 10 September 2009.
Click here or fgure data
8/7/2019 Asian Development Outlook 2009 Update: Broadening openness for a resilient Asia
http://slidepdf.com/reader/full/asian-development-outlook-2009-update-broadening-openness-for-a-resilient 22/188
6 Asian Development Outlook 2009Update
Financial market recovery in the cradle o the crisis
Te outbreak and rapid spread o the nancial market turmoil rom the
US and the UK to the rest o the world, as well as a general collapse o
condence in nancial markets, nearly led to catastrophe. Early measures
were eective in avoiding deeper problems (Box 1.1.1).Normalization slowly began to return in early 2009, but concerns
remained. Positive signs included reduced spreads between overnight
lending rates o the commercial banks and reasuries in both the US and
UK (Figure 1.1.5). Lower risk premiums are indicative o the restoration
o some measure o nancial stability. In addition, equity market
capitalization had also begun to recover by the second quarter o 2009
(Figure 1.1.6).
However, there are still indications that housing market problems
in the US will continue to put a damper on bank balance sheets and to
depress household expenditure as the number o oreclosures mounts
(Figure 1.1.7). Similarly in the UK, banks’ write-os o household
dwellings have been on the rise (Figure 1.1.8).Te continuing problems in the US housing market and the difcult
circumstances that many households are experiencing in a context o
sharply rising unemployment are leading to increases in deault rates
on consumer loans, credit card debts, student loans, and automobile
loans. Te problem is maniested in an increased number o ailures
among the smaller commercial banks, as reported by the Federal
Deposit Insurance Corporation. Te number o banking ailures in 2009
compared with 2008 has yet to level o (Figure 1.1.9), even though the
size o the institutions ailing is much smaller in terms o assets and
liabilities.
In the UK, banks’ unding difculties remain. Te Bank o
England has expressed concern about the marked all in bank lendingto nonnancial corporations in the second quarter, which may
pose difculties or companies that need to renance existing loans
(Figure 1.1.10). Similarly, household lending remains subdued, and lending
1.1.5 TED spreads
0
1
2
3
4
5
United KingdomUnited States
1 Jul 1 Jan
09
1 Jul 1 Jan
08
1 Jul
1 Jan
2007
Basis points
Note: The TED spread is the dierence between 3-monthLIBOR and the yield on 3-month Treasuries.
Source: Bloomberg, downloaded 3 September 2009.
Click here or fgure data
Only massive injections o liquidity into nancial marketsand institutions in the aected economies and the extensiono direct swap lines between central banks in the G andelsewhere, including developing Asia, prevented the collapseo the payments system and widespread ailure o commercial
banks and other nancial institutions.Te reduction o policy rates to historic lows in the Gin late was accompanied by a swathe o innovativeprograms and actions to put huge quantities o new money into the nancial markets.
In the US, providing liquidity support through new centralbank lending vehicles, paying interest on bank reserves,and extending the maturity o short-term loans through thediscount window were helpul in providing commercial bankswith resh unds but were insufcient in themselves to restorenancial stability.
Also needed to stem the panic were direct balance sheet
support through outright purchases o assets and directinjections o new capital into ailing nancial institutions andthrough the de acto nationalization o the large mortgagelenders Fannie Mae and Freddie Mac as well as other nancialentities judged “too big to ail.”
In the UK, measures included a program to provide bankswith a credit guarantee scheme and a liquidity programallowing institutions to swap their assets or reasury bills.
As long as the potential or inationary consequencesis kept in check and long-term interest rates stay low, it islikely that the Federal Reserve and the Bank o England willmaintain low (near zero) policy interest rates and provideother support to strengthen their still-ragile nancial sectors.
As o the third quarter o , some o the largercommercial banks in both countries seem to be recovering asprots begin to rise, enabling them to repay loans and buildstronger capital bases.
.. Measures to stave o meltdown
1.1.6 Equity market capitaliz ation, United
States and United Kingdom
0
7
14
21
0.0
1.5
3.0
4.5
United KingdomUnited States
JulAprJan
09
OctJulAprJan
2008
$ trillion $ trillion
Note: The data pertain to the Bloomberg-calculated totalmarket value o exchanges covering all indexes traded andcompanies listed in each country’s exchanges.
Source: Bloomberg, downloaded 15 September 2009.
Click here or fgure data
8/7/2019 Asian Development Outlook 2009 Update: Broadening openness for a resilient Asia
http://slidepdf.com/reader/full/asian-development-outlook-2009-update-broadening-openness-for-a-resilient 23/188
Coping with the global recession 7
rates continue to be high and largely inelastic to cuts in the ofcial rate by
the Bank o England. Partly as a result, UK housing market activity has
improved only slightly rom the very low levels seen around the turn o
the year, and increases in housing prices have been tenuous so ar.
Preserving trade openness
Te rst major policy issue causing concern is that o preserving and
strengthening the world trading system. Te severe contraction in world
trade is raying the consensus against protectionism. Governments are
tempted to cave in, both to domestic lobbies seeking protection and
to those opposing oreign companies and immigrants (particularly
immigrants entering occupations traditionally lled by the domestic labor
orce). Government procurement bias in scal stimulus measures is also a
bone o contention. Nearly every domestic sector that is suering losses o
prots and jobs rom automobiles to arms is demanding help in the orm
o protectionand policies are oen shaped to appease such important
constituencies.In North America, or example, trade relations among partners in the
North American Free rade Agreement (NAFA) have deteriorated, with
preerential trade suering as a result. Te US tightened border restrictions
on intra-NAFA overland transportation, and Mexico retaliated by placing
penalty duties on 80 US export items. Mexico has seen its GDP contract
sharply, as has Canada to a lesser degree. In the EU, there is mounting
pressure rom those less aected by the economic malaise objecting to
bailouts o those who have been hit, and trade within the EU has been
severely reduced as incomes and employment have allen.
Te temptation to raise legal trade barriers in the orm o saeguards,
antidumping measures, and export restrictions (Box 1.1.2) is also cause or
concern. Te World rade Organization (WO) reported that 24 o itsmembers and the EU introduced 83 new trade-restricting measures in the
rst 3 months o 2009, more than twice the number o measures aimed
at easing barriers to trade during the same period (WO 2009). Nor do
these new restrictive measures include “gray area” restrictions such as
those on pork imports rom suppliers in countries with human cases o
swine u (H1N1).
Te multilateral trading system has underpinned global growth and
prosperity or the past six decades. But whether the Doha round o global
trade talks, currently in deadlock, can be jump-started will be a key test
or governments around the globe. Failure to do this will have serious
implications or developing countries, not least those in Asia.
Timing o exit strategy
A second major concern is the appropriate implementation o exit
strategies. Getting their timing right will be crucial to avoid a double-dip
recession and to move the G3 economies back toward trend growth by
reducing the dierence between actual and potential GDPthe output
gapwithout igniting ination. Te massive expansion o central bank
balance sheets has enormously boosted commercial banks’ lending
capacity. Tis has potential inationary consequences, even though at
present prices are ebbing with the collapse in consumer spending, in
private investment, and in international trade. And, although deation
1.1.9 Bank ailures, United States
0
350
700
1,050
1,400
0
10
20
30
40
Failed banksTotal assets
Total deposits
Q3Q2Q1
09
Q4Q3Q2Q1
2008
$ billion Number
Note: Data or Q3 2009 reer to 1 July–21 August.
Source: Federal Deposit Insurance Corporation, available:http://www.dic.gov, downloaded 31 August 2009.
Click here or fgure data
1.1.8 Bank write-os and loan revaluations
on household dwellings, United Kingdom
-100
0
100
200
300
Q1
08
Q1
06
Q1
04
Q1
02
Q1
2000
£ million
Source: CEIC Data Company Ltd., downloaded 31 August 2009.
Click here or fgure data
1.1.7 Housing mortgage oreclosures,
United States
0
5
10
15
20
PrimeSubprimeAll
JulJan
09
JulJan
08
JulJan
07
JulJan
2006
% of total delinquent accounts
Source: Bloomberg, downloaded 31 August 2009.
Click here or fgure data
1.1.10 Contribution to growth in loans to
private nonnancial corporations over past
3 months, United Kingdom
-10
0
10
20
30
Jan
2006
Jul Jan
07
Jul Jan
08
Jul Jan
09
Percentage points, annualized
Other lendersMajor banks Total
Notes: Includes sterling and oreign currency loans. Themajor banks consist o Banco Santander, Barclays, HSBC,Lloyds Banking Group, and Royal Bank o Scotland. Otherlenders computed as a residual.
Source: Bank o England, available: http://www.bankoengland.co.uk, downloaded 2 September 2009.
Click here or fgure data
8/7/2019 Asian Development Outlook 2009 Update: Broadening openness for a resilient Asia
http://slidepdf.com/reader/full/asian-development-outlook-2009-update-broadening-openness-for-a-resilient 24/188
8 Asian Development Outlook 2009Update
Increased use o legal protectionist instruments mighttemporarily boost domestic production and consumption incertain sectors, but overall, they could have adverse eects,
especially on resource allocation. Still, protectionist pressuresglobally have seen a marked increase, but those seen duringthe second hal o through the rst hal o tendedto dier rom traditional approaches, which mostly ocusedon tari barriers.
Tese nontari approaches include use o antidumpinginvestigations and measures, global saeguards, countervailingduties, and PRC-specic saeguards (as well as restrictionson government procurement). Tey are costly (in terms o scarce human resources in international trade negotiationsand jurisprudence) and tend to undermine competitionand reduce trade volume. Teir eects could be prolongedsince it takes time to le petitions and initiate investigations
aer which denitive measures then may be implemented.In addition, once in place, they are difcult to remove,potentially creating a host o uture complications. Tey arealso likely to provoke retaliation, thereby undermining thetrading system and discouraging economic recovery.
Since late , there has been a rise in newly initiatedinvestigations o nontari barriers (Box gure ). Teir
number rose rom ewer than cases in the rst quarter o to cases in the last quarter o , beore decliningto around cases in the rst quarter o . Antidumping
contributed primarily to a rise in nontari barriers but leveledo aer the initial escalation. In contrast, global saeguardmeasures increased noticeably, which is a new and strikingeature o protectionist pressure. For the rst hal o ,initiated investigations o global saeguard measures rose to cases rom only seven in , a gure that Bown ()projects could rise to or the whole year.
Countries have taken recourse to antidumpinginvestigations as the main orm o legal protectionism, butglobal saeguard investigations have recently become moreimportant. Antidumping covered several sectors, but ironand steel dominate ( o total initiated investigations)mainly because o the global downturn’s severe eects on the
automotive industry. Next come plastics and rubber (),chemicals (), machinery (), wood (), othermetals (), and textiles (). In contrast, o initiatedinvestigations on global saeguard measures were concentratedin nonsteel products (Bown ).
Developing countries initiated most trade remedy measures during the downturn (Box gure ). (Antidumpingrom developing economies has, in act, increasedsubstantially since , that is, since well beore the globaldownturn [James ]). In the rst hal o , they launched o total investigations, with the PRC and Indiaaccounting or almost . Among industrial economies, theUS was the largest initiator while the European Union, havinglaunched investigations in launched only two in the
rst hal o . Japan has initiated no recent investigation.
.. A rise o nontari barrier protectionism
1 Newly initiated investigations
0
30
60
90
PRC-specific safeguards
Global safeguards
Countervailing duties
Antidumping
Q2Q1
09
Q4Q3Q2Q1
08
Q4Q3Q2Q1
2007
Number
Source: Global Antidumping Database, Version 5.0, July2009, available: www.brandeis.edu/~cbown/global_ad/.
Click here or fgure data
is not yet a serious threat to macroeconomic stability in the US and the
eurozone, it may well be more o a threat to Japan.
Unchecked deation rom a continuing all in aggregate demand is
also a threat, and is a threat precisely because it elevates the real value
o debt, erodes prots o businesses, and induces consumers to delay
purchases in expectation o uture price cuts. It also tends to exacerbate
unemployment when unions and workers resist cuts in nominal wages,
because a decrease in the price level results in higher real wages. However,
once the recovery begins in earnest, and unless monetary easing is
reversed, ination pressures and expectations may take hold and lead
to a rebirth o “stagation”an uncomortable combination o elevated
unemployment and price increases.
Te debate over the outlook or ination has global consequences
1 Data on initiated investigations are compiled rom C. P. Bown, 2009,“Global Antidumping Database.” Detailed raw data through the secondquarter o 2009 are or the 21 WO members that initiated 91% o allantidumping investigations launched by WO members in 1995–2008. Forcountervailing duty, detailed data through the second quarter o 2009 areor 12 o the larger members (but not the PRC). For all global saeguardsand PRC-specifc saeguards notifcations, data are rom WO.
8/7/2019 Asian Development Outlook 2009 Update: Broadening openness for a resilient Asia
http://slidepdf.com/reader/full/asian-development-outlook-2009-update-broadening-openness-for-a-resilient 25/188
Coping with the global recession 9
Developing countries, especially the PRC, were targetedby these trade remedy instruments. Developing countries
accounted or around o total targeted exporters,and almost hal o these were directed at the PRC (morethan o the newly initiated investigations in )(Box gure ). Initiated investigations o these trade remediesalso rose in other East and Southeast Asian economies. In, Indonesia; India; Malaysia; aipei,China; and Tailandwere named in o the investigations. For industrialcountries, almost hal o the instruments were targeted at theG economies, particularly the US.
All in all protectionist pressures, especially nontari barriers, have shown a marked increase since late .However, this creeping protectionism has not yet caused a
urther slowdown o global trade or created a protectionistspiral. Nevertheless, rampant protectionism still needs to beguarded against.
In addition to the nontari approaches mentioned above,“buy domestic” provisions associated with scal stimuluspackages may indirectly distort global trade and thereoreincrease concerns over protectionism. For example, inFebruary this year, the “buy American” provision that eaturedin the $ billion stimulus package requires public workssuch as inrastructure improvement to use iron, steel, andother goods made in the US, as long as the provision does notcontravene commitments to trade agreements. Te stimuluspackages introduced by the PRC and Tai governments also
contain “buy domestic” provisions.In practical terms, a “stand-still” on new protectionistmeasures should be agreed upon to promote economicrecovery. It would be preerable i countries rerained romuse o antidumping as retaliation in a time o trade stressand instead rely on the WO dispute resolution mechanism,as Japan does. In cases where temporary measuresdiscriminating against oreign products have been imposed,the appropriate review mechanism should be conducted toensure the orderly unwinding o such measures once therecovery is in train.
Reerences
Bown, C. P. . “Protectionism Continues Its Climb. A MonitorUpdate to the Global Antidumping Database.” July, available:www.brandeis.edu/~cbown/global_ad/.
James, W. E. . “Have Antidumping Measures o EU and NAFAMembers against East Asian Countries Provoked Retaliatory Responses?” ADB Economics Working Paper Series No. , AsianDevelopment Bank, Manila.
.. A rise o nontari barrier protectionism (continued )
3 New investigations by aected country
0
40
80
120
160
Against developingAgainst industrial
H1 200920082007
Number
Source: Global Antidumping Database, Version 5.0, July
2009, available: www.brandeis.edu/~cbown/global_ad/.
Click here or fgure data
(Box 1.1.3), because i authorities tighten monetary policy prematurely,
they may stop the recovery in its tracks. Yet i they allow monetary easing
or too long, long-term interest rates may rise and strangle investment,
thus dooming the economy to sub-par growth. Attempts to sustain scal
stimulus over too long a period may also backre as too much debt drives
long-term yields upward, choking private investment. Yet inertia and
political pressures are likely to prolong the period o low interest rates
and increase the danger either that asset bubbles will start to reemerge or
that ination expectations will rise.
Resolving global imbalances
As pointed out in Asian Development Outlook 2009 (ADO 2009) in March
this year (ADB 2009), the third concern relates to attaining a robust and
2 New investigations by initiating country
0
20
40
60
80
From developingFrom industrial
Q2Q1
09
Q4Q3Q2Q1
08
Q4Q3Q2Q1
2007
Number
Source: Global Antidumping Database, Version 5.0, July2009, available: www.brandeis.edu/~cbown/global_ad/.
Click here or fgure data
8/7/2019 Asian Development Outlook 2009 Update: Broadening openness for a resilient Asia
http://slidepdf.com/reader/full/asian-development-outlook-2009-update-broadening-openness-for-a-resilient 26/188
10 Asian Development Outlook 2009Update
How and when will central banks reverse monetary easing? Even though it is still too early to start exitingnow, because o the stimulus measures’ size and scope, exit
strategies need to be careully laid out.Balancing ination concerns (due to excess liquidity)
and the risk that liquidity is prematurely withdrawn is noteasy, as seen in the experience o two past exit strategies.Te dangers o tightening too early are deation and areturn to recession, as clearly evidenced by the experienceso the US in and and Japan in and (Box gure ). In both cases, the economies ell back into recession, with deation as a result. Yet the dangerso tightening too late are hyperinationand a return torecession.
Te Federal Reserve, acutely aware o these dangers,in March this year started a program to accelerateacquisitions o securities in order to keep long-terminterest rates low. It has largely replaced the liquidity acilities with securities held outright, mainly mortgage-backed securities, while keeping its balance sheet atthe expanded level o about $ trillion (Box gure ).reasuries and agency debt continued to increase.
It is now in a process o exiting rom the short-term
credit operations. Credits that had been expanded throughterm auction credits, the Commercial Paper FundingFacility, and central bank liquidity swaps have been
reduced signicantly since January this year.Yet concerns about the ability o markets to absorb
the supply o new reasuries appear evident in the rise inbond yields. While this shi indicates a sign o improvedmarket sentimenta condition necessary or a successulexitoverall nancial conditions remain tight.
Te Bank o Japan, in contrast, has not initiated anapparent exit out o the short-term operations that itintroduced aer the collapse o Lehman Brothers. Tismainly reects the continuing tight credit conditions o those hit hard by the collapse o exports, and partly thelessons learned rom the experience o and
(when policy was tightened too early).In G economies generally, growth in bank credit to theprivate sector continues to slow; debt markets (particularly those with asset-backed securities and those not supportedby the public sector) remain weak; and lower-quality borrowers have limited access to capital market unding,which suggests that any hasty exit out o short-term creditoperations would be premature.
Another concern is that the recent improvements inthe nancial markets could lead to complacency. Althoughthe risk o dipping into a deationary spiral seems to havereceded, price movements are still in negative territory.Condence remains ragile, and risks could reemerge,
especially since the improvement in the G nancialmarkets stems rom the massive public sector support.
In particular, ensuring adequate bank capitalization iscrucial, and cleaning troubled assets will take a long time.Unless the G central banks tread warily, the economicrecovery will be dragged down, as seen in the pastepisodes in the US and Japan.
.. Central bank exit strategies
1 Past experiences o exit strategies,United States and Japan
-14
-7
0
7
14
InflationGDP growth
403938373635343332311930
%
United States
-4
-2
0
2
4
InflationGDP growth
05040302012000999897961995
%
Japan
Sources: US Department o Commerce, Bureau o EconomicAnalysis, available: http://www.bea.gov; US Departmento Labor, Bureau o Labor Statistics, available: http:// www.bls.gov; Economic and Social Research Institute, CabinetOce, Government o Japan, available: http://www.esri.
cao.go.jp/en; all downloaded 11 September 2009.
Click here or fgure data
2 Assets o the Federal Reserve
0
1
2
3
Central bank liquidity swaps
Commercial Paper Funding Facility
Term auction credit
Securities held outright
JulAprJan
09
OctJulAprJan
08
OctAug
2007
$ trillion
Source: Federal Reserve, available: https://www.ederalreserve.gov, downloaded 2 September 2009.
Click here or fgure data
8/7/2019 Asian Development Outlook 2009 Update: Broadening openness for a resilient Asia
http://slidepdf.com/reader/full/asian-development-outlook-2009-update-broadening-openness-for-a-resilient 27/188
Coping with the global recession 11
sustainable global recovery, which will require major adjustments to the
composition o GDP growth. Tese changes will have serious implications
or developing Asia. Te US trade decit has already allen by almost
52% in the rst hal o 2009 compared with the same period in 2008, but
only because imports have allen aster than exports. For GDP growthto recover sustainably, trade will have to return to growth and US net
exports will have to become a major contributor, along with private xed
capital ormation.
As the US cuts spending relative to income and consumes less out o
current income (hence saving more), the rest o the worldin particular
the high-surplus economies mentioned abovewill also have to switch to
new, chiey domestic, growth engines and to import more. Longer term,
the US will also have to curb its growing dependence on imported oil and
energy through efciency, conservation, and development o clean and
competitive energy sources, thereby reducing its decit with oil-exporting
countries.
Te US output gap is already approaching 5% (Figure 1.1.11). TeOrganisation or Economic Co-operation and Development (OECD) has
orecast that it will reach 5.4% in 2010, while its estimates or Japan and
the eurozone are around 6%implying a 5.8% output gap or the major
industrial economies. Tis has implications or exit strategies rom the
current massive scal stimulus and easy monetary policies in industrial
countries. Te nancial crisis may exacerbate the alling growth trend as
investment slumps, decits grow, and debt burdens increase. However,
there may be mitigating actors because households will have incentives to
work longer hours so as to rebuild wealth and reduce their indebtedness.
Policies, too, will aect outcomes. Eorts to keep nonviable banks
and inefcient industries alive would do much to scuttle growth, as seen
in Japan’s “lost decade” o the 1990s. In the US case, eorts to reormhealth care, social security, and other entitlements as well as the act that
many enterprises have cut costs to the bone will work in the direction
o restoring some growth potential during the recovery by reeing up
resources or more efcient uses. Clearly, hard choices are ahead or
policy makers worldwide.
1.1.11 Output gap, major industrial
economies
-8
-4
0
4
JapanEurozoneUS
10090807062005
% of potential GDP
Projection
Source: OECD Economic Outlook No. 85, June 2009, available:http://www.oecd.org, downloaded 10 September 2009.
Click here or fgure data
8/7/2019 Asian Development Outlook 2009 Update: Broadening openness for a resilient Asia
http://slidepdf.com/reader/full/asian-development-outlook-2009-update-broadening-openness-for-a-resilient 28/188
Recovery at hand?
Te assumptions regarding global economic conditions underlying
the regional outlook, which this Update revises, have changed since
ADO 2009 was published in March this year (able 1.2.1). In particular,
actual growth in 2008 in the G3 economies was much slower than
orecast in ADO 2009. Tis Update also substantially reduces estimates
o world trade growth. With ination subdued, it assumes that central
banks will maintain low interest rates or the oreseeable uture and that
this will encourage a mild recovery in 2010 in the G3 and a rebound in
world trade.
Financial indicators have begun to improve as authorities have
managed to avert nancial disaster through massive interventions that
increased liquidity and helped reduce the cost o unds or major banks
and insurance providers. Banks and other nancial institutions that
were in deep trouble in the wake o the collapse o Lehman Brothers in
September 2008 are now liquid and most have been able to raise capital.
Fears o imminent breakdown o the payments system have clearly
subsided. Spreads between interbank lending rates and reasuries have
consequently narrowed (Figure 1.1.5 above) and short-term rates are now
below long-term reasury yields due to aggressive easing o monetary
policy. Yield curves have steepened, indicating that recovery may be in
the ofng.
.. Baseline assumptions or external conditions
Actual Actual ADO
2009
Up date ADO
2009
Update
GDP growth (%)
Major industrial economiesa . . -. -. . .
United States . . -. -. . .
Eurozone . . -. - . . .
Japan . -. -. -. . .
Memorandum items
US Federal unds rate
(average, )
. . . . . .
EU renancing rate (average, ) . . . . . .
Japan interest rate (average, ) . . . . . .
Brent crude spot prices (average, per barrel)
. . . . . .
Nonuel commodity prices
( increase)
. . -. -. . .
CPI infationa (G average, ) . . -. -. . .
World trade volumeb
( increase)
. . -. -. . .
a Average growth rates are weighted by GNI, Atlas method. b Merchandise exports.
Sources: US Department o Commerce, Bureau o Economic Analysis, available: www.bea.gov; Eurostat,available: http:// epp.eurostat.ec.europa.eu; Economic and Social Research Institute o Japan, available:
www.esri.cao.go.jp; Consensus Forecasts; Bloomberg; International Monetary Fund, World Economic
Prospects Update July 2009; World Bank, Global Economic Prospects 2009 and Commodity Price Data (Pink
Sheet), available: www.worldbank.org; sta estimates.
8/7/2019 Asian Development Outlook 2009 Update: Broadening openness for a resilient Asia
http://slidepdf.com/reader/full/asian-development-outlook-2009-update-broadening-openness-for-a-resilient 29/188
Coping with the global recession 13
Other indications o nancial stabilization are seen in rallies in
major stock indexes (the Dow Jones Industrial Average has risen above
9,000 and the S&P 500 above 1,000 in recent months). Although stock
prices are still considerably below pre-September 2008 peaks, the
recovery in equities may be a leading indicator that the worst o thedownturn is now over.
Job losses have moderated in the US and the eurozone although not
yet in Japan. Preliminary estimates o GDP growth or the second quarter
o 2009 in the G3 and some other OECD economies are stronger than in
the rst quarter, indicating that the degree o contraction is moderating
and that the trough o the recession may be at hand in the last 2 quarters
o 2009. For example, in its July World Economic Outlook, IMF modied
its 2009 orecast or G3 GDP contraction to be less severe (3.8%) than
it initially orecast in April (4.2%). Other real indicators such as retail
sales growth, housing starts, as well as indexes o consumer and business
sentiment began to show signs o improvement, or at least o stabilization,
toward the end o the second quarter.
United StatesDuring the rst quarter o 2009, GDP contracted at an annualized rate
o 6.4%, as industrial production plummeted at rates not seen since the
Great Depression. Te preliminary estimate o GDP in the second quarter
o 2009 was better than expected at just a 1.0% (annualized) contraction,
due largely to government expenditure and partly to a modest boost in
net export growth. Consumption and investment continued to pull back
overall economic growth during the second quarter (Figure 1.2.1).
Job losses mounted persistently, with June’s losses o 463,000 up
sharply rom the May decline o 303,000. Since the recession ofcially started in December 2007, 6.7 million workers have lost their jobs and
unemployment has spiraled to 9.7% in August 2009. Job losses moderated
to 216,000 in August, providing a glimmer o hope that the worst is over.
In addition, US households have borne a loss o wealth equivalent to more
thanayear’sGDP(around$14trillion).
In the ace o such massive losses o employment and wealth,
highly leveraged US households are reducing spending aster than their
disposable income is alling, marking a gain in the personal saving rate
rom near zero at the start o the downturn to 5% in the second quarter
o 2009, the highest rate in over a decade (Figure 1.2.2). Tese moves are,
however, being counterbalanced by a huge increase in the government
budget decit, which will likely hit 11–13% o GDP (Figure 1.2.3) or
the ull scal year ending 30 September. For the rst 11 months o the
scal year, the Congressional Budget Ofce reports that government
expenditure was already up by 19% and revenue down by 16% relative to
the same period o the previous year.
Overall, with households increasing their saving and the economic
slowdown reducing investment, the US external imbalances have been
tempered somewhat as less oreign borrowing has been required. Te
US current account decit has allen by hal rom peak levels in 2006
(6% o GDP) to 2.9% in the year to the second quarter (Figure 1.2.4). Te
unwinding o unsustainable current account imbalances, coupled with
1.2.4 Current account balance, United States
-8
-6
-4
-2
0
Q1
09
Q3Q1
08
Q3Q1
07
Q3Q1
06
Q3Q1
2005
% of GDP
Source: US Department o Commerce, Bureau o EconomicAnalysis, available: http://www.bea.gov, downloaded 17September 2009.
Click here or fgure data
1.2.2 Personal saving rates, United States
0
2
4
6
Q1
08
Q1
06
Q1
04
Q1
02
Q1
2000
% of disposable personal income
Source: US Department o Commerce, Bureau o EconomicAnalysis, available: http://www.bea.gov, downloaded28 August 2009.
Click here or fgure data
1.2.1 Contributions to GDP growth,
United States
-12
-6
0
6
Q1
2007
Q2 Q3 Q4 Q1
08
Q2 Q3 Q4 Q1
09
Q2
Percentage points, saar
GDP growth
Government consumption
Personal consumption
Net exports
Gross fixed capital formationChange in inventories
saar = seasonally adjusted annualized rate.
Source: US Department o Commerce, Bureau o EconomicAnalysis, available: http://www.bea.gov, downloaded 28August 2009.
Click here or fgure data
1.2.3 Government budget balance,United States
-15
-10
-5
0
09080706052004
% of GDP
Projection
Sources: Actual data: CEIC Data Company Ltd., downloaded18 August 2009; The Budget and Economic Outlook: AnUpdate, Congressional Budget Oce, August 2009,available: http://www.cbo.gov.
Click here or fgure data
8/7/2019 Asian Development Outlook 2009 Update: Broadening openness for a resilient Asia
http://slidepdf.com/reader/full/asian-development-outlook-2009-update-broadening-openness-for-a-resilient 30/188
8/7/2019 Asian Development Outlook 2009 Update: Broadening openness for a resilient Asia
http://slidepdf.com/reader/full/asian-development-outlook-2009-update-broadening-openness-for-a-resilient 31/188
Coping with the global recession 15
United States (US) imports under preerential ree tradeagreements (FAs) started to contract earlier than importsas a whole when examined quarter on quarter; measuredyear on year, they contracted aster than world imports.
Quarter-on-quarter imports under the North AmericanFree rade Agreement (NAFA) began to slide in thethird quarter o even as overall imports continuedto rise. Imports rom Canada and Mexico under NAFApreerences started to contract in the third quarter o compared with the previous quarter, and the rate o
decline then accelerated (Box gure).
NAFA preerential imports o the US cumulatively collapsed by almost in the rst months o compared with the same period in a more rapidrate o contraction than imports rom all sources, whichell by about one third. US domestic exports to NAFApartners (down ) also ell more sharply than exports tothe rest o the world (down ) over the same period.
Te reason or the relatively rapid contraction o preerential imports appears to be that trade is highly concentrated in automobiles and textiles with Canada andMexico. Hence the collapse reects the ailure o largecorporations such as General Motors and the sharp declinein consumer demand in those sectors.
A lesson to draw rom this experience is that in sectorswhere applied most-avored-nation taris are high, suchas automobiles and textiles, trade is likely to be divertedto preerential partners on a large scale, and production
may become excessive within the FA concerned (in thiscase, NAFA). Tus when demand collapsed, such tradeand production were particularly vulnerable. ime will telli special programs such as “cash-or-clunkers” will helprevive intra-NAFA automotive trade.
Quarter-on-quarter imports rom all US bilateralFAs in orce in the third quarter o show a similarpattern o accelerating contraction rom . in theourth quarter o relative to the third, and urtherdeclining to . in the rst quarter o relative tothe previous quarter. Cumulatively, imports rom US FApartners ell more sharply than imports rom US non-FApartners in the rst months o .
US exports have also contracted more steeply withFA partners than globally, whether measured in nominalor real terms. For all FA partners, the collapses inUS exports were in the rst quarter o (realprices), or all destinations, and around ornonpreerential destinations.
Bibliography
William E. James. Forthcoming. “US International rade and theGlobal Economic Crisis.” ADB Economics Working Paper Series, AsianDevelopment Bank, Manila.
.. Preerential ree trade agreements
investors shiing their portolios to riskier assets, will be sources o
weakness or the dollar in the near term (Box 1.2.1).
Te impact o the recession on US international trade has been
severe (and interestingly, greater on preerential than nonpreerential
tradeBox 1.2.2). International trade was initially propping up USgrowth during 2008 as exports continued to rise in both nominal
and real terms even as imports slowed. In real terms, imports in 2008
contracted by 3.5% even as exports grew by 5.4% year on year, thus
boosting net exports. Te growth o trade, however, began to slow
sharply in the third quarter o 2008 and the contractions in the nal
quarter o 2008 and the rst quarter o 2009 were very sharp indeed.
Preliminary data or the second quarter o 2009 show that imports and
exports probably bottomed in the rst quarter o 2009 (Figure 1.2.5).
However, year on year, both imports (down 20.7%) and exports (down
22.9%) continued to contract sharply.
1.2.5 Real exports and imports,
United States
-600
-300
0
300
600
-24
-12
0
12
24
Exports, q-o-q change
Imports, q-o-q change
Exports
Imports
Q2Q1
09
Q4Q3Q2Q1
2008
$ trillion %
Note: Real values are derived using export and import priceindexes.
Sources: United States International Trade CommissionInteractive Tari and Trade DataWeb, Version 3.1.0,available: http://dataweb.usitc.gov; US Bureau o LaborStatistics, available: http://www.bls.gov; both downloaded
14 August 2009.
Click here or fgure data
Growth in imports rom NAFTA,
United States
-50
-25
0
25
Total Mexico Canada
Q2Q1
09
Q4Q3Q2Q1
08
Q4Q3Q2Q1
2007
%
NAFTA = North American Free Trade Agreement.
Source: United States International Trade CommissionInteractive Tari and Trade DataWeb, Version 3.1.0,available: http://dataweb.usitc.gov/, downloaded1 September 2009.
Click here or fgure data
8/7/2019 Asian Development Outlook 2009 Update: Broadening openness for a resilient Asia
http://slidepdf.com/reader/full/asian-development-outlook-2009-update-broadening-openness-for-a-resilient 32/188
16 Asian Development Outlook 2009Update
Te improvement in the US trade balance (goods and services)
resulted rom a sharper all in imports than exports but in May 2009,
exports actually grew by 1.4% compared with April while imports
continued to contract (by 0.7%) bringing the monthly decit to just
$26.4billionthelowestamountsinceNovember1999.However,USimports rebounded in July over June, perhaps reecting the scal
stimulus and improved retail sales. US exports did not grow as rapidly as
imports, slightly widening the monthly trade imbalance.
Signs that the trough in the downturn had been reached were
becoming clearer at the beginning o the third quarter o 2009.
First, the Conerence Board’s Leading Economic Index had risen
or three consecutive months (April–June 2009) with seven o the 10
components showing improvementthe rst upturn in the index since July
2007 (Figure 1.2.6). Second, housing prices stopped alling in May 2009
and showed the rst monthly rise in 36 months (Figure 1.2.7). Tird, retail
sales have begun to rebound with automobile sales jumping under the
Government’s “cash-or-clunkers” program, although consumer sentimentremainsunsettled(Figure1.2.8).ebiggestpartofthe$787billionscal
stimulus package is expected to be elt in the last 2 quarters o 2009 and
may well propel GDP gures into the positive range by year-end.
Despite these signs o recovery, the orecast or US GDP growth is
unchanged rom ADO 2009: a contraction o 2.4% in 2009, with a weak
recovery o 1.6% growth in 2010.
EurozoneEconomic activity in the eurozone decelerated urther during the rst
quarter o 2009, with GDP contracting by 9.2% (q-o-q, annualized).
However, the contraction slowed to 0.5% during the second quarter,ueling hopes that the nadir has passed and that the economy is pulling
out o a recession. Eurozone GDP is currently expected to shrink by 4.3%
in 2009, and to resume anemic growth o 0.5% in 2010.
Te GDP contraction in the rst quarter o 2009 was driven
primarily by declines in gross xed capital ormation and in net
exports (Figure 1.2.9). Second-quarter investment spending continued
to retrench against a backdrop o excess capacity and low investor
condence; government consumption remained essentially unchanged.
Te eurozone’s trade balance turned positive in March 2009 and recorded
a more robust increase in June. ogether with a slight rebound in
private consumption, this switch has lied GDP growth rom its severe
contraction the previous quarter.
Industrial production during the rst hal o 2009 continued to
decline, by more than 20% year on year, and reected low industrial
condence, despite some timid signs o recovery in condence rom April
2009. Production remains weak across the eurozone as a whole, with
those countries depending strongly on export demand generally aring
the worst.
Germany is a case in point: the country started acing a sudden and
dramatic plunge in export demand around the second hal o 2008,
pushing the economy into recession and causing companies to cut down
investment plans drastically through the rst quarter o 2009. Weak
1.2.6 Conerence Board Leading Economic
Index, United States
96
100
104
108
Jan
09
Jan
08
Jan
07
Jan
06
Jan
05
Jan
2004
2004 = 100
Note: The index is a composite average o 10 individualleading indicators constructed to summarize and revealcommon turning point patterns in economic activity.
Source: Bloomberg, downloaded 2 September 2009.
Click here or fgure data
1.2.7 House price increases, United States
-30
-15
0
15
30
Jan
09
Jan
08
Jan
07
Jan
06
Jan
2005
%, year on year, seasonally adjusted
Note: Data refect the S&P/Case-Shiller Composite-10Home Price Index.
Source: Standard & Poor’s, available: http://www2.
standardandpoors.com, downloaded 10 August 2009.Click here or fgure data
1.2.8 University o MichiganConsumer Sentiment Index
50
70
90
110
Jan
09
Jan
08
Jan
07
Jan
06
Jan
05
Jan
04
Jan
2003
Q1 1966 = 100
Source: Federal Reserve Bank o St. Louis, available: http://
research.stlouised.org/, downloaded 3 September 2009.
Click here or fgure data
8/7/2019 Asian Development Outlook 2009 Update: Broadening openness for a resilient Asia
http://slidepdf.com/reader/full/asian-development-outlook-2009-update-broadening-openness-for-a-resilient 33/188
Coping with the global recession 17
exports, depressed consumption, and an investment slowdown in the
ace o substantial inventories have taken their toll. Te prospects or
recovery hinge mainly on a sustained improvement in export ordersand
encouragingly, the rst signs o a substantial rebound in orders and
industrial production appeared in the country statistics o June 2009.For the eurozone, data on industrial orders or June 2009 show
a rebound in total manuacturing orders, with a hike in capital and
nondurable consumer goods more than outweighing a continuing decline
in durable consumer goods orders (Figure 1.2.10).
Unemployment continued climbing, averaging 9.5% in July 2009
(Figure 1.2.11), and is expected to exceed 11% by 2010. Te labor market
situation tends to be worse or countries recovering rom burst domestic
asset bubbles, where the collapse o the domestic construction sectors
caused huge job losses. In Ireland and Spain, or example, unemployment
reached 12.5% and 18.5%, respectively, in July.
Growing unemployment and underutilized capacity are exerting
downward pressure on nominal wage growth within the currency bloc,nurturing ears o consumer price deation. Consumer prices ell by an
annual rate o 0.2% in August 2009, rom a 0.7% decline in the previous
month. Tis is in stark contrast to the 3.8% ination rate a year earlier.
Although deation is likely to persist over the coming months, the
European Central Bank (ECB) expects ination to reappear by end-2009,
particularly once the ull eects o its expansionary policy stance have
passed through, and the base eect rom the steep all in global energy
prices has moved out o the comparison period. Moreover, wage growth is
expected to remain positive.
o support its ailing banking sector and stimulate lending to the
nonnancial sector, ECB urther lowered its policy rate, the last time in
May 2009 by 25 basis points, to 1.0%. Tis brings the reduction in theECB key interest rate to a total o 325 basis points since October last
year. Moreover, ECB surprised nancial markets in June 2009 with a
massive allotment o €442 billion to banks over 12 months at a 1.0% xed
interest rate, in an eort to counter the sharp deceleration in monetary
aggregates and bank lending in the eurozone since early 2008. Te
move had the immediate eect o driving down overnight and longer-
term market interest rates, as well as temporarily weakening the euro.
However, it is too early to assess its ull eectiveness in restoring credit
channels and lending to the nonnancial sector, and in jump-starting
the process o recovery.
Public nances across the eurozone have deteriorated markedly, with
the aggregate budget decit expected to exceed 5% o GDP in 2010, more
than twice its rate in 2008. Out o 27 EU member states, at end-2008 21 had
a worsening government balance while 12 were in breach o the 3% stability
and growth pact decit limit. Te deterioration o government decits and
public debt is likely to continue all this year, largely driven by the impact o
automatic stabilizers and the boost in scal stimulus packages through the
European Economic Recovery Plan, launched in December 2008. Te plan
aims to boost demand and stimulate condence through budgetary outlays
o €200 billion, equivalent to about 1.5% o the EU’s GDP.
Te rst signs o a turnaround came into view in August 2009, as
the eurozone’s two largest economies, France and Germany, reported
1.2.10 Growth in industrial orders, eurozone
-6
-3
0
3
6
Nondurable consumer
Durable consumer
Capital
Intermediate
Total manufacturing orders
JunMayAprMarFebJan
2009
%, month on month
Source: Eurostat, available: http://epp.eurostat.ec.europa.eu, downloaded 4 September 2009.
Click here or fgure data
1.2.11 Harmonized unemployment rate,
eurozone
5
10
15
20
Spain IrelandGermanyEurozone
JulAprJan
09
OctJul
2008
%, seasonally adjusted
Source: Eurostat, available: http://epp.eurostat.ec.europa.eu, downloaded 18 August 2009.
Click here or fgure data
1.2.9 Contributions to GDP growth,
eurozone
-12
-6
0
6
Q1
2007
Q2 Q3 Q4 Q1
08
Q2 Q3 Q4 Q1
09
Q2
Percentage points, saar
GDP growth
Net exports
Government consumption
Statistical discrepancy
Private consumptionGross capital formation
saar = seasonally adjusted annualized rate.
Source: CEIC Data Company Ltd., downloaded 3 September2009.
Click here or fgure data
8/7/2019 Asian Development Outlook 2009 Update: Broadening openness for a resilient Asia
http://slidepdf.com/reader/full/asian-development-outlook-2009-update-broadening-openness-for-a-resilient 34/188
18 Asian Development Outlook 2009Update
surprisingly strong annualized preliminary second-quarter growth rates
o 1.4% and 1.3%, respectively. Te latest data show Germany’s exports
to have rebounded by 11.9% in June and 3.9% in July rom their previous
levels a month earlier.
Improving private sector condence across the eurozone providesa urther indication that the bottom might have been reached: or over
ve consecutive months, the monthly Eurostat surveys o condence in
the industry, services, consumer, retail, and construction sectors have
moved upward, reversing the long and proound decline in condence
that lasted rom June 2007 to March 2009 (Figure 1.2.12).
Individual countries’ quarter-on-quarter growth perormances vary
substantially, however (Figure 1.2.13). Apart rom France and Germany,
only Greece managed to return to positive second-quarter output
growth, while Italy and Spain continued contracting, at 1.9% and 4.2%,
respectively. Outside the eurozone, the UK recorded a 2.6% shrinkage o
its GDP, substantially worse than the EU27 average o 0.9% contraction.
Dierences among eurozone economies’ growth rates are somewhatless pronounced when measured in the year to the second quarter.
Among the larger economies, only France recorded a milder decline
in its year-on-year growth perormance, mainly because o its stronger
insulation rom the nancial channel o crisis contagion. However, the
contraction in all the core European economies, including France and
Germany, points to the importance both o a rebound in exports or their
GDP growth to recover, and their governments’ capacity to maintain or
even expand scal stimulus.
o the extent that eurozone economies vary substantially with
regard both to their export dependence and to their scal constraints,
divergences or even reversals in quarter-on-quarter growth perormances
are likely to persist throughout the rest o 2009.
JapanTe prole o economic perormance in Japan in the rst 6 months
o 2009 was similar to that in many other industrial countries, with a
severe rst-quarter contraction in GDP ollowed by a recovery in the
second. Public investment (aside rom the statistical discrepancy) was the
only positive contributor in the rst quarter, but the rebound reected
a signicant strengthening in exports and private consumption, which
together brought the economy back to growth o 2.3% in the second
quarter (Figure 1.2.14). Private investment, however, continued to decline
during the rst 2 quarters.
Exports began to grow again in February, but remained well below
levels o the same period a year earlier (Figure 1.2.15). Shipments to all
major trading partnersUS, EU, and developing Asiarebounded,
especially the pickup in intermediate goods to the rest o Asia. However,
the sustainability o developing Asia’s import demand is uncertain as
rising demand reects temporary scal stimuli. For Japan, import growth
remained sluggish due to weak domestic and external demand. Te
trade and current balances turned to surplus in February aer recording
decits in January, but or the rst hal o 2009, the current account
balance was 46% below that in the year-earlier period.
1.2.13 Growth perormance, Q2 2009,
European Union
-6 -3 0 3
France
Germany
Greece
Italy
United Kingdom
Spain
Eurozone
EU27
%, quarter on quarter, saar
(-4.8)
(-2.6)
(-5.9)
(-0.2)
(-6.0)
(-5.5)
(-4.2)
(-4.7)
saar = seasonally adjusted annualized rate.
Note: Figures in parentheses reer to year-on-year
percentage change.
Source: CEIC Data Company Ltd., downloaded 2 September2009.
Click here or fgure data
1.2.12 Condence indexes, eurozone
-45
-30
-15
0
15
30
Building
Retail Consumer
Services Industry
JulJan
09
JulJan
08
JulJan
07
JulJan
2006
%, seasonally adjusted
Source: European Commission, available: http://ec.europa.
eu, downloaded 31 August 2009.
Click here or fgure data
1.2.14 Contributions to GDP growth, Japan
-20
-10
0
10
Q1
2007
Q2 Q 3 Q 4 Q1
08
Q2 Q 3 Q 4 Q1
09
Q2
Percentage points, saar
GDP growth
Public investment
Government consumption
Private investment
ResidualNet exports
Private consumption
saar = seasonally adjusted annualized rate.
Source: Economic and Social Research Institute, CabinetOce, Government o Japan, available: http://www.esri.
cao.go.jp/en, downloaded 11 September 2009.
Click here or fgure data
8/7/2019 Asian Development Outlook 2009 Update: Broadening openness for a resilient Asia
http://slidepdf.com/reader/full/asian-development-outlook-2009-update-broadening-openness-for-a-resilient 35/188
Coping with the global recession 19
1.2.15 Trade balance, Japan
-6
-3
0
3
6
9
Q1
2007
Q2 Q3 Q4 Q 1
08
Q2 Q3 Q4 Q1
09
Q2
% of GDP
-2
-1
0
1
2
3
¥ trillion
Trade balanceRest of the world
Developing Asia
North America
Central and Eastern Europe
Middle East
Western Europe
Sources: Trade Statistics o Japan, Ministry o Finance,
available: http://www.customs.go.jp; Economic and SocialResearch Institute, Cabinet Oce, Government o Japan,available: http://www.esri.cao.go.jp/en; both downloaded11 September 2009.
Click here or fgure data
A soening o import prices driven largely by the decline in the
oil price improved Japan’s terms o trade. In July 2009, import prices
were 30.4% lower than prior-year levels, while export prices were 12.8%
down. Weakness in consumption and external demand is worrisome
because it is pinching corporate prots, which ell by 53% year on yearin the second quarter with expectations that they will remain weak.
Consequently, capital spending in the next ew quarters will likely be in
the doldrums. Moreover, while uncertainty about the economic recovery
persists, rms remain reluctant to hire: the unemployment rate climbed
to 5.7% in July, exceeding the previous worst rate o 5.5% (seasonally
adjusted) in April 2003. In addition, salary income has contracted or
13 consecutive months, and at a worsening rate. General pessimism over
short-run business conditions and employment persists.
Machinery orders registered a sharp contraction o 42.6% in the rst
hal o 2009 relative to the same period in 2008, and capacity utilization
stayed low. Manuacturing production, however, began to recover in
March, albeit sluggishly. In addition, the ankan survey (o both largemanuacturers and nonmanuacturing industries) or the second quarter
showed little improvement in its negative sentiment (Figure 1.2.16).
Wholesale prices were o 8.5% year on year in August, the sharpest all
on record, due to weak domestic demand and the steep all in oil prices.
Against this gloomy backdrop, supplementary budget unding o
about¥14trillion($147billion)waspassedinMaythisyearasastimulus
that is set to help consumers and rms cope with a ading labor market
and weak external demand. Since mid-May, this package has centered
on giving incentives in the orm o “eco-points” to purchase eco-riendly
home electronic appliances, and on subsidizing consumers trading in
their old cars or more uel-efcient ones. Positive impacts are appearing,
with the measures boosting consumption demand and helping rms’inventory adjustments.
Household real consumption expenditure leveled o in May aer
alling or 14 consecutive months, but then ell by 2% year on year in July.
Consumption expenditure is likely to be weak in the coming months
because o deteriorating incomewages slumped by 9.7% year on year in
June, the sharpest drop on record. Tese alls are largely related to cuts in
bonuses and overtime pay, which, in turn, are hurting retail sales.
Te consumer price index (excluding resh ood) saw a record decline
o 2.2% year on year in July, in part due to lower uel prices than in 2008.
Falling equity prices have been taking a toll on rms and consumers.
Nonetheless, rom its end-year 2008 close, the Nikkei average showed
a gain o 14.5% by end-July (Figure 1.2.17) amid expectations o some
improvement in corporate protability (Figure 1.2.16 above). Tis gain
may help rms attract new unding, yet it will take time to be elt in
consumers’ pockets or to aect domestic spending.
Te Democratic Party o Japan, which came to power at end-August,
hopes to boost the domestic economy by encouraging consumer spending
directly through households via, or example, subsidies to amilies with
children.
Japan’s growth outlook remains ragile on concerns about the
sustained impact o the current scal package and rising oil prices. Te
new Government plans to reprioritize the measures in the package,
1.2.16 Corporate prots and Tankan survey
-160
-120
-80
-40
0
40
-48
-36
-24
-12
0
12
Tankan survey
Manufacturing
All sectors
Q1
09
Q3Q1
08
Q3Q1
07
Q3Q1
2006
%, year-on-year
profit growth
Percentage points,
diffusion index
Note: The diusion index is the dierence between thepercentage share o enterprises perceiving businessconditions as avorable or unavorable.
Sources: Policy Research Institute, Ministry o Finance,Government o Japan, available: http://www.mo.go.jp;Bank o Japan, available: http://www.boj.or.jp/en/; bothdownloaded 3 September 2009.
Click here or fgure data
1.2.17 Nikkei index, Japan
5,000
10,000
15,000
20,000
JulJan
09
JulJan
08
JulJan
2007
Source: Nikkei.com, available: http://www.nni.nikkei.co.jp,
downloaded 3 September 2009.
Click here or fgure data
8/7/2019 Asian Development Outlook 2009 Update: Broadening openness for a resilient Asia
http://slidepdf.com/reader/full/asian-development-outlook-2009-update-broadening-openness-for-a-resilient 36/188
20 Asian Development Outlook 2009Update
and suspend implementation o the unused portion o supplementary
budgets, particularly o inrastructure projects, which might put the
economy on hold until the impact o a second supplementary budget to
be passed later this year is elt. rade growth is expected to pick up, but
sluggishly.Downside risks to growth are set to persist through 2009 and
are likely to overshadow deation concerns. Te economy in 2009 is
expected to contract by 5.8% with a weak recovery to 1.1% growth in 2010.
Consequently, no monetary tightening by the Bank o Japan is expected
either this year or next.
Commodity pricesGlobal commodity pricesenergy and nonenergysaw extraordinary
volatility in 2008. In the rst 7 months and led by crude oil, they scaled
near-record highs. Tey then collapsed (Figure 1.2.18) as the nancial
crisis and slump hit. During the rst quarter o 2009, they stabilized andin the second began to rise moderately, primed by brightening global
economic prospects.
Energy
Te index o energy commodity prices (oil, coal, and natural gas) closely
mirrors global oil prices (Figure 1.2.19). Te recent surge in crude oil
prices appears to be inuenced by the beginnings o a modest recovery
that may increase transport demand as world trade begins to pick
up. Production cuts by the Organization o the Petroleum Exporting
Countries (OPEC), oil-inventory adjustments, a weakening o the US
dollar, and expectations o urther economic recovery are also seen as
playing a role. Oil prices have rebounded strongly over the rst 8 monthso 2009 as global oil demand has begun to rm, but they are not expected
to rise much urther as long as global demand growth remains subdued
(Box 1.2.3).
Te actors aecting oil have also impacted on other energy
commodity prices, coal in particular. Coal prices, which ell precipitously
rom the peak reached in mid-2008, have begun to turn up. Teir pickup
also reects strong PRC import demand in the rst hal o the year.
However, since the PRC has built up large inventories, it is expected that
coal prices will remain stable in the rest o 2009.
Nonenergy
Nonenergy commodity prices, including metals and minerals and
agricultural commodities, have been less volatile than those or energy.
Aer alling about one third rom peaks reached in mid-2008, they
gained 13% in the rst 2 quarters o 2009. Metals and minerals recovered,
largely as a result o restocking and high import demand in the PRC;
with recovery in global prices, mining activity may pick up and limit any
urther rise in prices.
Agricultural commodity prices have been sensitive to economic
conditions but also to the weather. Te balance o orces o supply
and demand has kept agricultural prices relatively stable this year
(Figure 1.2.20), though some supply setbacks may be caused by drought
1.2.18 Indexes or agriculture, energy, and
metals and minerals
0
100
200
300
Metals and mineralsAgriculture Energy
Jun
09
DecJun
08
DecJun
2007
2005 = 100
Source: World Bank, Commodity Price Data (Pink Sheet),available: http://econ.worldbank.org/, downloaded
14 August 2009.Click here or fgure data
1.2.19 Energy and oil indexes
0
100
200
300
Crude oilEnergy
Jun
09
DecJun
08
DecJun
2007
2005 = 100
Note: Crude oil is the average spot price o Brent, Dubai,and West Texas Intermediate, equally weighted.
Source: World Bank, Commodity Price Data (Pink Sheet),
available: http://econ.worldbank.org, downloaded14 August 2009.
Click here or fgure data
8/7/2019 Asian Development Outlook 2009 Update: Broadening openness for a resilient Asia
http://slidepdf.com/reader/full/asian-development-outlook-2009-update-broadening-openness-for-a-resilient 37/188
Coping with the global recession 21
and other adverse conditions in major producing countries. However,
recent bumper harvests have led to large stocks and these will cushion
any shortall in 2009’s harvests.
Te reduced volatility in ood prices reects the absence o speculative
and hoarding behavior that drove prices sharply higher rom 2007 tomid-2008. Some ood commodities may be vulnerable to price increases,
particularly those in demand as biouels. Sugar prices are also expected
to rise as the largest producer, India, aces adverse weather and a sharp
reduction in supply. Raw materials prices are expected to remain at
this year but may rebound next year as the global recovery gathers
momentum.
Hence, nonenergy commodity prices seem likely to enter a period
o greater stability and more moderate prices, compared with the
exceptional volatility and high prices seen rom 2007 to mid-2008.
Risks to the global economic outlook Some o the risks that conronted the world economy just a ew months
ago have attenuated as the global outlook has improved. For example,
the threat o deation, which was brought on by collapsing aggregate
demand, has aded as demand has begun to rebound. Still, the signs o an
improving outlook should not be mistaken or a ull-edged recovery, and
risks remain. Foremost among these are a misjudged exit rom stimulus
packages; a continued weak housing market in the US; resurgent global
oil prices; and greater virulence o the u pandemic.
Misjudged exit rom stimulus
Above all, policy makers around the world are aced with the delicate
issue o a correctly timed and appropriate exit strategy, or when and howto withdraw the huge scal and monetary stimuli administered to revive
ree-alling economies at the depth o the global slump. How eectively
they manage this and other risks will determine how soon, and how
securely, the world economy regains its ooting. For, although the huge
expansionary macroeconomic policies had their desired eect in helping
turn around global prospects, retaining such expansionary stances or too
long can undermine uture macroeconomic stability.
In the short term, the expansion o liquidity arising rom excessively
loose monetary policy can uel ination, especially when aggregate
demand is picking up and reducing the economy’s spare capacity.
Although it is probably too early to worry about ination, keeping
interest rates too low or too long will eventually lead to inationary
consequences or a return o asset bubbles. Te risk is not negligible since
the eect o monetary policy is elt only aer a long lag, which means that
the earlier interest rate cuts may urther stoke aggregate demand.
In the long term, higher spending and lower taxes will store up scal
problems or the uture as public debt-to-GDP ratios rise to unhealthy
levels. It may take years or governments to repay the debts incurred in
a ew months. Tis not only implies higher taxes in the uture but it also
limits the capacity o governments to pursue countercyclical scal policy
when the next downturn threatens.
No less important than the issue o when to exit is how. For
1.2.20 Food, beverage, and raw materials
indexes
50
85
120
155
190
225
Raw materialsBeveragesFood
Jun
09
DecJun
08
DecJun
2007
2005 = 100
Source: World Bank, Commodity Price Data (Pink Sheet),available: http://econ.worldbank.org, downloaded14 August 2009.
Click here or fgure data
8/7/2019 Asian Development Outlook 2009 Update: Broadening openness for a resilient Asia
http://slidepdf.com/reader/full/asian-development-outlook-2009-update-broadening-openness-for-a-resilient 38/188
22 Asian Development Outlook 2009Update
Risk rom rising oil prices to global recovery
Global oil prices are reecting the global business cycle.Having tumbled as the global economic downturn
intensied during the ourth quarter o and the rstquarter o , they have since begun a tul recovery. Teincipient recovery o the world economy is liing them,and as developing Asia is a signicant net importer o oil,it stands to suer terms-o-trade losses. More worryingly, arebound in oil prices may contribute to ination pressuresthat are likely to reassert themselves as the region’s recovery takes hold. For this reason, rising oil prices are one o thebiggest downside risks to developing Asia’s recovery.
Tandem recovery o oil price and global economy
Te trajectory o global oil prices has closely trackedthe state o the world economy since the second hal o (Box gure ). Aer a breathtaking climb rom $per barrel in January to $ in July , they ellsharply to $ by end-, reecting the slump in theworld economy and global trade. Te global slowdown o late and early had a sizable adverse eect onglobal oil demand, which ell by a staggering . millionbarrels per day (bpd) in the rst quarter o relative toa year earlier.
Te recovery o oil prices in the rst months o has been much gentler than the decline during the secondhal o . o some extent, this is because the globalrecovery, unlike the global slowdown, has so ar beenuneven.
Support rom resurgent Asian demand
Developing Asia seems to be recovering aster and strongerthan other regions. Even beore the global nancial crisis,growing demand rom the People’s Republic o China(PRC) and India was a key driver o rising global oil prices.In , the revival o demand rom the region is helpingprop up global oil prices. Tere has been signicant growtho oil demand in PRC, India, and Republic o Korea inrecent months, reecting the resilience o those economies(Box gure ).
In contrast, oil demand has continued to contract in theUnited States (US), Japan, and European Union (EU), albeitat a slower pace. Te net result is that or as a wholeoil demand will most probably all, by around millionbpd (Box gure ). Still, recovering global oil demandueled largely by recovering Asian demand is tightening thegap between supply and demand, and contributing to risingglobal oil prices. Global oil prices are also beneting romthe current mood o optimism engulng global equity and
commodity markets.
Short term: Still-high inventory stocks
Global oil prices have paralleled the global business cyclesince July , and demand has been the dominant driver.However, high levels o inventories are one supply-sideundamental that will damp upward price pressures in theshort run. A key measure o inventory levelstotal OECDcompany stocks on landis expected to remain above its level through December this year, and comortably
.. Recent oil price trends and implications or the world economy
1 Brent crude oil prices
30
60
90
120
150
Jan
09
Jan
08
Jan
07
Jan
06
Jan
2005
$/barrel
Source: Bloomberg, downloaded 31 August 2009.
Click here or fgure data
2 Oil demand growth in selected major
markets
-20
-10
0
10
20
June 2009May 2009
April 2009Q1 20092008
IndiaPeople's
Rep. of
China
OECD
Europe
Rep. of
Korea
JapanUS
%
Note: OECD Europe consists o Austria, Belgium, Canada,Czech Republic, Denmark, Finland, France, Germany,Greece, Hungary, Iceland, Ireland, Italy, Luxembourg,Netherlands, Norway, Poland, Portugal, Slovakia, Spain,Sweden, Switzerland, Turkey, and United Kingdom.
Source: Energy Market Consultants (UK) Ltd., “World Oil
Market Report,” 7 August 2009.
Click here or fgure data
3 Growth in world oil demand
-6
-3
0
3
2010Q3Q1
09
Q3Q1
08
Q3Q1
07
Q3Q1
06
Q3Q1
2005
%
Forecast
Source: Energy Market Consultants (UK) Ltd., “World Oil
Market Report,” 7 August 2009.Click here or fgure data
8/7/2019 Asian Development Outlook 2009 Update: Broadening openness for a resilient Asia
http://slidepdf.com/reader/full/asian-development-outlook-2009-update-broadening-openness-for-a-resilient 39/188
Coping with the global recession 23
above the “unofcial” target o the Organization o thePetroleum Exporting Countries (OPEC) o – days(Box gure ). Te buildup o OECD stocks averaged
around , bpd in as a whole and is expected tobe smaller, but still positive, this year.
On the demand side, it would take an improbably robustglobal recovery to make a signicant dent in inventories.On the supply side, i OPEC leaves output unchanged,inventories will reach even higher levels. Even i OPECmanages to agree on signicant production cuts, say o up to million bpd, inventory stocks should remain highenough to limit the scope or price increases.
Medium term: Spare OPEC capacity
OPEC’s production capacity is projected to increasesubstantially, by about million bpd, during –.Tis increase translates into higher spare capacity that willdamp the scope or price increases, even in the ace o rising demand rom the PRC and India, until around themiddle o next decade.
Further reinorcing the moderation o price pressures inthe medium term is an increase in non-OPEC productioncapacity in the short term. Although non-OPECproduction ell by about , bpd in , it is expectedto rise by about the same amount this year (Box gure ).
New elds coming online in the Gul o Mexico and Brazilwill raise non-OPEC production capacity until .
Long term: Reemergence o price pressures
As argued in Asian Development Outlook (ADB ),the global nancial crisis and subsequent slump havedone nothing to alter the long-term undamentals o theoil market. Against the backdrop o a structural increasein demand rom the PRC and India, both OPEC andnon-OPEC production capacity are expected to peak by themiddle o next decade. Te combination o demand growth
and supply constraints will become the primary driver o prices. In particular, the reduction o OPEC’s spare capacity means that a rerun o the price surge o – cannot
be ruled out. However, precisely when prices will begin toclimb again on a sustained basis remains highly uncertain.
Remote risk o short-run oil price surge
In principle, the incipient world economic recovery entailsa substantial risk o an oil price surge. A pronounced surgemay even derail or at least seriously impede the recovery.In practice, there are two undamental actors that suggestthat any increase in global oil prices will be moderate inthe short run.
First, global recovery itsel is uncertain and ragile,especially in the G. Second, high inventory levels, whichare likely to persist in the short run, will limit the scopeor price increases. However, the prospect o relatively moderate oil price rises should not lull policy makersinto complacency. Even moderate increases in oil pricescan help trigger ination, especially since the regionhas recently pursued expansionary monetary policy.Governments should also continue to phase out costly uelsubsidies and, more generally, encourage more efcient useo oil beore the next big surge o oil prices arrives.
Bibliography
Asian Development Bank (ADB). 2009. Asian Development Outlook. Manila.
Energy Market Consultants (UK) Ltd., 2009. “World Oil MarketReport.” 7 August 2009.
Facts Global Energy. 2009. “Oil Price Outlook: Updated Analysiso Critical Factors Driving the Oil Market.” Background paperprepared or Asian Development Outlook . Asian DevelopmentBank, Manila.
.. Recent oil price trends and implications or the world economy (continued )
4 OECD commercial inventories
40
50
60
70
2009200820032007
Nov Sep Jul May MarJan
Number of days’
supply at end-month
OECD = Organisation or Economic Co-operation andDevelopment.
Source: Energy Market Consultants (UK) Ltd., “World OilMarket Report,” 7 August 2009.
Click here or fgure data
5 Change in supply o selected non-OPEC
producers
-600 -300 0 300 600
20092008
United States
United Kingdom
Russian Federation
Norway
Mexico
Kazakhstan
Canada
Brazil
Azerbaijan
Total
Thousand barrels/day
Note: Total reers to all non-OPEC oil producers.
Source: FACTS Global Energy (2009).
Click here or fgure data
8/7/2019 Asian Development Outlook 2009 Update: Broadening openness for a resilient Asia
http://slidepdf.com/reader/full/asian-development-outlook-2009-update-broadening-openness-for-a-resilient 40/188
24 Asian Development Outlook 2009Update
example, sharp reversals o the scal stance or hikes in interest rates
may undermine business and consumer condence. Policy makers
should withdraw the monetary and scal stimulus in a way that does not
jeopardize the nascent recovery. Yet, too much caution in reversing the
expansionary policies may be ineective in preventing overheating andination pressures.
Te optimal speed and strength o stimulus withdrawal is inevitably
a tricky decision that requires a great deal o sound judgment on the part
o policy makers. Further complicating their calculations is the risk that
recovery is neither sustainable nor robust enough to withstand a huge
stimulus cut. Tat is, i the recovery has been driven by expansionary
macroeconomic policies, reversal o policies may slow or even derail it.
Continued weak US housing market
Te global nancial crisis and economic slump are rooted in the bursting
o the US housing bubble. Many key indicators, in particular GDP growth
trends, suggest that the US economy has bottomed and is beginning topick up. However, one enduring source o concern is the US housing
market (Figure 1.1.7 above). More specically, oreclosures are continuing
to rise as workers lose their jobs and wages remain at. Since pickup
in employment tends to lag an economic recovery, the labor market is
unlikely to pick up soon and support the housing market.
Te value o US mortgages oen exceeds the value o homes, which
implies negative net worth or equity in homes. In act, more than
15.2 million mortgages, or 32.2% o all mortgaged properties, were in
negative equity as o 30 June 2009. Furthermore, the aggregate property
valueformortgageswithnegativenetworthwas$3.4trillion,which
represents the total property value at risk o deault. (Te baseline
scenario used in able 1.2.1 implicitly assumes that this risk will not berealized on a widespread scale.)
One solution is to restructure these mortgages, but restructuring
is not in the nancial sel-interest o the mortgage servicers who
administer the mortgages. So ar the Government has ailed to take
any action to eectively alter the incentives o the mortgage servicers.
Just as rising home values spurred US private consumption prior to the
crisis, oreclosures and negative equity in homes will constrain private
consumption, in turn delaying the onset o a ull-edged recovery.
Similarly, weak housing markets will also curtail the recovery o the EU
economies that experienced housing bubbles o their own.
Resurgent global oil pricesTe one bright spot o the nancial crisis and economic downturn was
that together they stopped the astonishing escalation o global oil prices,
which reached record levels in July 2008. By helping hold down overall
prices, cheaper oil enabled monetary authorities to pursue expansionary
policies without their having to worry about ination. Although global
oil prices plunged as the turmoil intensied in the ourth quarter o
2008, they have made a tul recovery this year. Tey may gain urther
momentum when the global recovery gains traction.
Supply and demand undamentals, in particular large inventories,
suggest that a sharp runup in prices, such as that seen beore the nancial
8/7/2019 Asian Development Outlook 2009 Update: Broadening openness for a resilient Asia
http://slidepdf.com/reader/full/asian-development-outlook-2009-update-broadening-openness-for-a-resilient 41/188
Coping with the global recession 25
crisis, is unlikely (Box 1.2.3, above). Nevertheless, i global consumption
grows more rapidly than currently orecast because o a aster than
expected global recovery and i geopolitical events create major supply
disruptions, a much steeper price ascent cannot be ruled out. In this
case, the specter o cost-push ination, which had dissipated along withthe collapse o oil prices, may rematerialize to cast its gloom over global
recovery.
Even i, as is more likely, oil prices remain at or rise only slowly,
they may combine with strengthening aggregate demand and loose
monetary conditions to lay the oundation or another bout o ination.
Tat is, higher oil prices can contribute to ination pressures in an overall
environment that is conducive or a revival o ination.
Flu pandemic
Te initial global scare over H1N1 u (swine u) seems to have subsided,
although H1N1 can still mutate and become more dangerous in the
northern hemisphere’s winter. Yet in light o the pandemic’s ease o transmission, lowering the guard in any part o the world will have
spillover eects elsewhere. Indeed, with H5N1 (avian u) entrenched
in several Asian countries (PRC, Indonesia, Viet Nam, and probably
some parts o northern India and Bangladesh), developing Asia needs
to strengthen surveillance. As East Asia’s experience with the SARS
epidemic showed, a pandemic can have dire economic repercussions.
8/7/2019 Asian Development Outlook 2009 Update: Broadening openness for a resilient Asia
http://slidepdf.com/reader/full/asian-development-outlook-2009-update-broadening-openness-for-a-resilient 42/188
8/7/2019 Asian Development Outlook 2009 Update: Broadening openness for a resilient Asia
http://slidepdf.com/reader/full/asian-development-outlook-2009-update-broadening-openness-for-a-resilient 43/188
Coping with the global recession 27
1.3.4 Industrial production growth,
newly industrialized economies
-40
-20
0
20
40Taipei,ChinaSingaporeRep. of KoreaHong Kong, China
Q1
09
Q3Q1
08
Q3Q1
07
Q3Q1
2006
%
Source: CEIC Data Company Ltd., downloaded 11 September2009.
Click here or fgure data
contracting in Singapore and Tailand and are rebounding in Malaysia
and Viet Nam. Sales o durables such as motor vehicles remain depressed
in much o the region, but have begun to rebound somewhat in some
countries. ourism throughout the region continues to suer the eects
o the global recession, although Malaysia and aipei,China are showingsome growth.
Unemployment in much o the region has risen, particularly in the
more export-dependent economies o Hong Kong, China; Singapore;
and aipei,China (Figure 1.3.7). However, the prospects or labor market
improvement seem avorable as industrial production continues to
accelerate.
Despite the relatively strong dependence on exports and investment
in the region, in the second quarter o this year most Asian developing
economies were seeing both a rapid rebound in economic growth, driven
by recovery in industrial production, and rallies in equities and other
assets (see below). Developing Asia last aced a debilitating nancial
crisis and regional recession in 1997–98, which originated within theregion. But it emerged rapidly as a result o avorable global economic
conditions.
Tis time around, quite dierent circumstances prevail. First, the
nancial crisis originated in the western industrial economies and spread
to Asia largely through a collapse in world trade. Second, while Asian
nancial systems are robust, the collapse in external demand has hit
the region hard as industrial production contracted sharply with a all
in exports. Tird, extreme volatility in global commodity markets has
created additional uncertainty. Te question is: Will developing Asia be
able to escape the slump rapidly and by what means? Clearly, it will have
to generate new demand through sources other than exports to the G3
economies.
Fiscal and monetary actionsAlmost every large economy in developing Asia has implemented
measures to stimulate aggregate demand through scal and monetary
expansion. In turn, households were relatively quick to spend scal
windalls that came in the orm o tax cuts and income support, giving a
llip to consumption that began to boost GDP by the second quarter o
2009.
Fiscal stimuli in 11 Asian developing economies averaged 7.1% o
nominal 2008 GDP. Te emphasis o governments’ eorts to boost
demand through discretionary scal measures diered, but the boost
rom the stimulus was strong enough to arrest the decline in GDP
growth, even though automatic stabilizers are airly weak across most
countries in the region. For example, almost all the PRC’s CNY4 trillion
package was invested in inrastructure projects or other types o
construction activities. In contrast, the authorities in Hong Kong, China
emphasized tax cuts, public-housing rent reductions, and other orms
o household income support. Korea opted or a mix o tax cuts and
expenditure measures.
Monetary authorities have reduced interest rates (Figure 1.3.8) to
provide liquidity so as to boost investment and expenditure on durable
1.3.5 Export growth,
newly industrialized economies
-50
-25
0
25
50
Taipei,ChinaSingaporeRep. of KoreaHong Kong, China
Jan
09
Jan
08
Jan
07
Jan
06
Jan
05
Jan
2004
%, 3-month moving average
Source: CEIC Data Company Ltd., downloaded 11 September2009.
Click here or fgure data
1.3.6 Change in retail sales in selected Asian
economies, Q3 2008 vs latest
-10 0 10 20
Malaysia
Viet Nam
Rep. of Korea
Taipei,China
People's Rep. of China
Hong Kong, China
Singapore
Thailand
%
Note: Latest data or Hong Kong, China; Rep. o Korea; andTaipei,China (May–July 2009); People’s Rep. o China andViet Nam (June–August 2009); Thailand and Singapore(April–June 2009); and Malaysia (Q2 2009).
Source: CEIC Data Company Ltd., downloaded 2 September2009.
Click here or fgure data
1.3.7 Change in unemployment rates in
selected Asian economies, Q3 2008 vs latest
0.0
0.5
1.0
1.5
2.0
2.5
SINHKGTAPMALKORSRITHAPHI
Percentage points
Abbreviations: As Figure 1.3.1 plus SRI = Sri Lanka; and
TAP = Taipei,China.
Note: Latest data or Philippines and Singapore (Q2 2009);Thailand (April–June 2009); Sri Lanka and Malaysia(Q1 2009); and Hong Kong, China; Rep. o Korea; andTaipei,China (May–July 2009).
Source: CEIC Data Company Ltd., downloaded 2 September2009.
Click here or fgure data
8/7/2019 Asian Development Outlook 2009 Update: Broadening openness for a resilient Asia
http://slidepdf.com/reader/full/asian-development-outlook-2009-update-broadening-openness-for-a-resilient 44/188
8/7/2019 Asian Development Outlook 2009 Update: Broadening openness for a resilient Asia
http://slidepdf.com/reader/full/asian-development-outlook-2009-update-broadening-openness-for-a-resilient 45/188
Developing Asia’s prospects
Developing Asia is leading the global economic recovery with a
strong rebound in GDP growth that began in the second quarter o
this year. Underpinning the resurgence was the impetus to demand
rom expansionary scal and monetary actions (Figure 1.4.1) taken
by governments throughout the region, especially the PRC and India.
Indonesia and Viet Nam also saw solid economic growth.
Te Update raises the orecasts or GDP growth or developing Asia
as a whole rom those given in ADO 2009. Te region is now projected to
grow by 3.9% in 2009 and 6.4% in 2010 (Figure 1.4.2), up rom 3.4% and
6.0%. O course, individual perormance in 2009 is likely to vary, with
some subregions deteriorating relative to the earlier orecasts (Central Asia,
Southeast Asia, Pacic) and others gaining (East Asia and South Asia).Similarly or 2010, the Update upgrades orecasts or East Asia and
South Asia as a result o aster than expected growth in the two largest
economies. Pacic growth is also expected to be better than earlier
orecast, and Southeast Asia is virtually unchanged. For Central Asia,
the orecast is lowered rom ADO 2009. But in short, the 2010 outlook
is or growth in all subregions to come back strongly relative to 2009,
giving a V-shaped trajectory to developing Asia’s recovery rom the world
recession (Figure 1.4.3).
One reason that developing Asia has recovered aster than the rest o
the world is the relative robustness o its nancial sector. Tis provided
a buer against the global nancial turmoil. Te strong scal position
o most large economies in developing Asia also enabled them to pursueexpansionary scal policies. Existing high saving rates and low levels o
household debt made consumers in developing Asia more amenable to
spending the additions to income rom the scal stimulus. In contrast,
the outlook or the industrial countries is or a more modest recovery,
with growth in 2010 still much slower than in 2007 and only slightly
aster than in 2008.
With external demand rom the main industrial countries still
relatively weak, it will be difcult or developing Asia to return to the
high growth rates achieved in 2006–2007. Growth in 2010 will only
return to about 6–7% rather than the 9–10% rates that were recorded prior
to the crisis.
Te resumption o growth has taken place against a backdrop o low
ination or even mild deation (Figure 1.4.4). Te region as a whole has
beneted rom the steep slide in oil prices and rom improved supply o
ood and raw materials. Despite the sharp reduction in short-term interest
rates engineered by central banks and the pumping o liquidity into
nancial markets, the threat o ination remains muted.
ight global credit conditions during the depth o the nancial
crisis led to a substantially slower net inow o oreign investment into
emerging markets, including developing Asia. More recently, there has
been apparent recovery o portolio capital owing into the region as
equities markets have rallied (Figure 1.3.9, above). Less oreign direct
1.4.1 Money supply growth, selected
economies
6
12
18
24
30
Indonesia
People's Rep. of ChinaIndia
Rep. of Korea
AprJan
09
OctJulAprJan
08
OctJulAprJan
2007
%
Source: CEIC Data Company Ltd., downloaded 31 August2009.
Click here or fgure data
1.4.2 Five-year average and orecasts o
GDP growth, developing Asia
0 3 6 9 12
201020092004−2008
The Pacific
Southeast Asia
South Asia
East Asia
Central Asia
Developing Asia
%
Sources: Asian Development Outlook database; sta estimates.
Click here or fgure data
1.4.3 GDP growth, developing Asia and
G3 economies
-8
-4
0
4
8
12
Eurozone
JapanUnited States
Developing Asia
1009082007
%
Forecast
Sources: Asian Development Outlook database; sta
estimates.
Click here or fgure data
8/7/2019 Asian Development Outlook 2009 Update: Broadening openness for a resilient Asia
http://slidepdf.com/reader/full/asian-development-outlook-2009-update-broadening-openness-for-a-resilient 46/188
30 Asian Development Outlook 2009Update
1.4.4 Infation, selected developing Asian
economies
-3
0
3
6
9
Rep. of Korea
Taipei,China
People's Rep. of China
JulAprJan
09
OctJulAprJan
08
OctJulAprJan
2007
%
East Asia
-15
0
15
30
Bangladesh India Pakistan
JulAprJan
09
OctJulAprJan
08
OctJulAprJan
2007
%
South Asia
-10
0
10
20
30
Viet NamThailand
PhilippinesMalaysiaIndonesia
JulAprJan
09
OctJulAprJan
08
OctJulAprJan
2007
%
Southeast Asia
Source: CEIC Data Company Ltd., downloaded 11 September
2009.
Click here or fgure data
investment is owing into the region but there are early signs that
multinational enterprises have sharply reduced unwanted inventories
and are now in a position to ramp up production. In addition, industrial
output is now on the rise in PRC, Korea, and Singapore aer the deep
plunges in the ourth quarter o 2008 and the rst quarter o this year.Banking systems have not buckled under the strain o the crisis o
condence and there are signs that lending is reviving. Much o the
lending is going into domestic demand–driven sectors such as consumer
credit or purchases o durable goods, but much o it may also be going
into stock and real estate markets. Authorities will thereore have to
monitor the situation careully when making credit available or large-
ticket items, so as to avoid new asset surges in those markets. Fortunately,
commodity prices have been moderate and show ew signs o the
volatility seen in the past year.
Once the impetus rom scal stimulus packages wears o, it will be
essential that domestic consumption and private investment take over
as the drivers o growth. Rebalancing Asian growth through increasinginvestment and consumption expenditures relative to income (and thereby
saving less out o income) will help keep momentum behind the global
recovery. In some instances, structural reorms need to be stepped up to
rekindle growth. Fortunately though, most developing Asian economies
have relatively low debt-to-GDP ratios and are on a sound scal ooting,
such that prolonged stimulus will not undermine uture growth.
Tis is not the time or an exit rom expansionary policiesthe
recovery remains ragile and subject to serious downside risks. Global
trade is a case in pointeven though the trough in world trade volume
may have been reached in the rst quarter o 2009, both imports
and exports are still well below levels attained a year earlier. Hence,
continuing the expansionary stance is warranted until global markets anddemand are on a rm recovery path.
o ensure a robust revival o world trade in coming years, large
Asian economies could take up the mantle o the Doha Round. An
example is India’s hosting o the meeting o trade ministers in New
Delhi in September, aiding the G20’s goal o reaching agreement on the
Doha Round by end–2010. Eorts to head o protectionist tendencies
are still important as governments continue to implement stimulus
packages that involve procurement o tradable goods and services. Te
G20 consultations provide an excellent opportunity or developing Asia
to push the trade talks orward. Tere are opportunities or successul
agricultural negotiations as the G3 economies have proposed to step up
assistance or agricultural development.
Te outlook or developing Asia’s recovery is encouraging, but it is
likely that growth will remain well below attainments o recent years.
Developing Asia will only be able to regain a high-growth trajectory i the
global economy is growing closer to its potential. A major challenge in
this context is whether Asia can adjust to changing global conditions by
striking an appropriate balance between openness and increased reliance
on domestic demand–driven growth.
8/7/2019 Asian Development Outlook 2009 Update: Broadening openness for a resilient Asia
http://slidepdf.com/reader/full/asian-development-outlook-2009-update-broadening-openness-for-a-resilient 47/188
A new approach to openness or
developing Asia?
Developing Asia’s rising prosperity is closely associated with its openness to
oreign trade. Indeed, many developing countries outside the region have
attempted to emulate the successul export-led structural transormation
that was earlier made by the newly industrialized economies o Hong Kong,
China; Korea; Singapore; and aipei,China. From the late 1960s to 2008,
per capita incomes in those our economies had risen on average by a actor
o nine (Figure 1.5.1), nearly eliminating poverty or their residents. Te
region’s economies on the next rung o the development ladderthe rapidly
growing economies in Southeast Asia as well as the PRChave also had a
measure o success in applying the open-economy approach.Although trade openness became the hallmark o the Asian model,
openness to cross-border ows o capital and labor also played an
important part in the region’s success. Yet openness is not without risks
or the region, as is especially evident during episodes o crisis.
Te 1997–98 Asian nancial crisis had its roots in the sudden
reversal o capital inows. It exposed weaknesses in the region’s nancial
institutions, which were overexposed to oreign borrowinga strategy
that hinged on maintenance o stable exchange rate pegs. Because the
major industrial economies remained strong, the region was able to export
its way out o the downturn. However, the export-led mode o recovery
became the weak point or developing Asia during the recent crisis.
More specically, the region’s heightened reliance on externaldemand or growth hindered consumption and catalyzed reserves
accumulation, which was widely viewed as insurance against a repeat o
the 1997–98 devastation. Tis heavy reliance le the region vulnerable
to the synchronized collapse o the major industrial economies. rade
within Asia, which largely reects cross-border production networks
manuacturing goods or sale outside the region, collapsed in turn. As a
result, the most open, trade-dependent economies were hit the hardest by
the global downturn.
For merchandise trade, a broader customer base or nal goods is
needed. Strengthening intraregional trade can help reduce developing
Asia’s overdependence on the major industrial economies and support
the shi away rom unsustainable current account imbalances. Financial
globalization needs to be eectively managed so that capital ows do not
become a source o instability. Tis requires policy changes and domestic
nancial market development to create an environment that both osters
Asian intermediation or its savings and that attracts long-term oreign
investment. Labor mobility has provided oreign exchange ows that have
proven to be reliable even in times o crisis. Policies and institutional
changes to ease the transer o remittances can enhance the benets o
tapping into the international labor market.
For policy makers, the decision to open the economy urther
to international exchanges o goods and services, capital, and labor
1.5.1 Real per capita income, selected
developing Asian economies
0
10
20
30
40
Taipei,ChinaSingapore
Rep. of KoreaHong Kong, China
0805200095908580751970
Thousand
Newly industrialized economies
0
2
4
6
People's Rep. of China
Malaysia
Philippines
Thailand
Indonesia
0805200095908580751970
Thousand
Southeast Asia a nd People’s Rep. of China
Note: Data are in constant 2000 dollars.
Sources: World Development Indicators online database,
downloaded 16 September 2009; Asian Development Outlook database; sta estimates.
Click here or fgure data
8/7/2019 Asian Development Outlook 2009 Update: Broadening openness for a resilient Asia
http://slidepdf.com/reader/full/asian-development-outlook-2009-update-broadening-openness-for-a-resilient 48/188
32 Asian Development Outlook 2009Update
must be seen as a means to enhance economic resilience through
diversication o markets.
Te human toll rom economic crises cannot be exaggerated, yet the
efciency-augmenting, growth-enhancing aspects o openness lie at the
very heart o developing Asia’s economic achievements. No alternativedevelopment model has rivaled the success o the open, Asian approach.
At the same time, developing Asia’s experience in the recent crisis
underscores the risk o a narrow openness. Part 2 o the Update takes a
closer look at the role o openness in developing Asia, outlining a broader,
more resilient approach that would deliver rapid, yet stable, growth or
the region.
Reerences
Asian Development Bank (ADB). . Asian Development Outlook :
Rebalancing Asia’s Growt h. Manila, pp. –.World Bank. . “Prospects or the Global Economy.” June. Available: http://go.worldbank.org/PFVWYXS.
World rade Organization (WO). . “Global Crisis Requires GlobalSolutions.” News Item Report on Recent Development. July. Available:http://www.wto.org/english/news_e/news_e/tpr_jul_e.htm.
8/7/2019 Asian Development Outlook 2009 Update: Broadening openness for a resilient Asia
http://slidepdf.com/reader/full/asian-development-outlook-2009-update-broadening-openness-for-a-resilient 49/188
Part 2
Broadening
openness or a
resilient Asia
8/7/2019 Asian Development Outlook 2009 Update: Broadening openness for a resilient Asia
http://slidepdf.com/reader/full/asian-development-outlook-2009-update-broadening-openness-for-a-resilient 50/188
8/7/2019 Asian Development Outlook 2009 Update: Broadening openness for a resilient Asia
http://slidepdf.com/reader/full/asian-development-outlook-2009-update-broadening-openness-for-a-resilient 51/188
Broadening openness or a
resilient Asia
This chapter was written by Shikha Jha, Juthathip Jongwanich, Donghyun Park, Guntur
Sugiyarto, and Akiko Terada-Hagiwara o the Economics and Research Department,
ADB, Manila. It draws on background papers that they prepared with Vaqar Ahmed,
Alvin Ang, Hiro Ito, Selim Raihan, Kwanho Shin, and Carlos Vargas-Silva, consultants.
Te global nancial crisis and the economic slump have togetherhighlighted issues surrounding “openness” in three areasinternational
trade, nancial globalization, and remittances. Although the impact on
developing Asia has been elt primarily through the trade channel, this
part o Asian Development Outlook 2009 (ADO 2009) Update takes stock
o the region’s level and structure o openness in all three interconnected
areas, as uture external shocks could aect the region through nancial
or other channels rather than trade, including remittances.
Now is an opportune time to revisit the issue o openness in
developing Asia. Te recent turmoil exposed the substantial risks o
openness to a region long accustomed to eectively leveraging it to
achieve economic success. In contrast to the Asian nancial crisis o
1997–98, which was precipitated by reversal o oreign capital inows,the slowdown o economic activity in 2008 and 2009 was caused by the
collapse o exports to the industrial economies, in particular the United
States (US). Despite the nancial origins o the downturn, developing
Asia’s nancial systems did not suer severe disruptions. It was only when
the nancial crisis spread to the real economies o the industrial world,
crimping their appetite or imports, that the region’s real economies
were battered. From developing Asia’s perspective, the global tumult
maniested itsel as a trade crisis rather than a nancial crisis.
Although the Asian crisis, unlike recently, was nancial in nature,
it nevertheless helps explain why developing Asia’s economies were hit
so hard by the recent global turmoil. Prior to 1997, developing Asia as
a whole ran current account decits, but since then it has run large
and persistent surpluses. Tis reversal was motivated partly by regional
policy makers’ desire to build up an ample war chest o oreign exchange
reserves. Te reversal implied a higher level o dependence on exports
to the US and other industrial economies as a source o demand and
growth. Te region’s desire to protect itsel rom one type o risk rom
openness and globalizationnancial instability due to volatile capital
8/7/2019 Asian Development Outlook 2009 Update: Broadening openness for a resilient Asia
http://slidepdf.com/reader/full/asian-development-outlook-2009-update-broadening-openness-for-a-resilient 52/188
36 Asian Development Outlook 2009Update
owsinadvertently magnied its exposure to another type o risk
excessive dependence on exports. Te deceleration o exports and growth
in 2008 and 2009 was largely a realization o this risk.
From the viewpoint o developing Asia, the global maelstrom
originated outside the region while the Asian crisis was partly homegrown. In contrast to the ormer period, the undamentals o
developing Asian economies have recently been in relatively good shape,
as reected in generally healthy current account and scal positions,
adequate oreign exchange reserves, rapid growth, macroeconomic
stability, and sound macroeconomic policies. Still, the region has suered
or its openness recently, despite strong undamentals.
Te most open, most export-dependent economies have been hit
the hardest (Figures 2.1.1 and 2.1.2). Since those same economies have
outperormed their less open neighbors, regional policy makers ace a
trade-o between the returns o openness (aster output growth) versus
the risk o openness (greater volatility in output growth). Te recent
shock has brought this trade-o into sharp relie and added a new senseo urgency to improving its terms.
With respect to trade, evidence suggests that developing Asia’s level
o openness may be less than optimal, in the broad sense that demand is
geared excessively toward external demand (ADB 2009). More specically,
the region may be consuming too little and saving too much, and
consequently relying disproportionately on oreign markets to purchase
its output. Rebalancing domestic economies will move the region
toward a level o openness where exports continue to make signicant
contributions to growth but a more vibrant domestic economy provides a
measure o resilience against external shocks.
Te nancial crisis and slump have underscored some important
eatures or policy makers. For example, the costs o openness are likely to be high or an economy that has no internal dynamism and that
alls apart whenever the global business cycle turns down. In addition,
the appropriate level o openness and the capacity to reduce the costs
o openness through rebalancing will dier rom country to country.
Finally, developing Asia suers rom a skewed trade structure that
depends disproportionately on demand rom the US and other industrial
economies. Tis is especially true or nal goods, which is why the region
has been hit so hard, despite the healthy growth o intra-Asian trade in
recent years.
Although the nancial impact o the crisis was weaker than the
trade impact, some signs o nancial stress were clearly evident. For
example, in many countries borrowers with weaker credit ratings aced
more difcult access to credit, while pullbacks o capital ows and sharp
currency depreciations in some countries urther highlighted the risks o
nancial globalization (Figure 2.1.3). Coordinated policy responses, such
as US dollar swap lines, were introduced.
Nonetheless, these economies seem to have withstood the eects
o instability, and this success points to the importance o their solid
macroeconomic undamentals and sound nancial systems. In particular,
sound and efcient nancial markets and institutions are indispensable.
In addition to trade and nancial linkages, migration and remittances
are a third area hit by the nancial crisis and economic downturn. Tese
2.1.1 Merchandise exports , selected
economies
0
50
100
150
200
20082007
THATAPSINMALKORHKG
% of GDP
HKG = Hong Kong, China; KOR = Rep. o Korea;MAL = Malaysia; SIN = Singapore; TAP = Taipei,China;
THA = Thailand.
Source: CEIC Data Company Ltd., downloaded 31 August2009.
Click here or fgure data
2.1.2 GDP growth, selected economies
-12
-6
0
6
12
ThailandTaipei,ChinaSingapore
MalaysiaRep. of KoreaHong Kong, China
Q2Q1
09
Q4Q3Q2Q1
08
Q4Q3Q2Q1
2007
%
Source: CEIC Data Company Ltd., downloaded 31 August2009.
Click here or fgure data
2.1.3 Capital fows to and rom
developing Asia
-1,000
-500
0
500
1,000
OutflowsInflows Net flows
080604022000989694921990
$ billion
Sources: CEIC Data Company Ltd.; International MonetaryFund, International Financial Statistics online; both
downloaded 12 August 2009.
Click here or fgure data
8/7/2019 Asian Development Outlook 2009 Update: Broadening openness for a resilient Asia
http://slidepdf.com/reader/full/asian-development-outlook-2009-update-broadening-openness-for-a-resilient 53/188
Broadening openness or a resilient Asia 37
events have orced employers to lay o workers, including oreigners,
threatening remittance ows to some countries that send workers abroad.
Tese migrant-sending countries are also acing increasing protectionist
policies rom migrant-receiving countries. Since the economic downturn,
increasing unemployment has pitted the interests o receiving-country nationals against oreigners, as host-country governments tighten
immigration policies to protect jobs or their nationals.
In the past remittances have proven to be a relatively stable source o
oreign currency inows to developing countries (Figure 2.1.4). Although
remittances entail economic and social costs, they can contribute
substantially to growth and poverty reduction, and they provide credit-
constrained households means to smooth consumption. Te key question
or policy makers is how to capitalize on migration and remittances
or growth, poverty reduction, and consumption smoothing while
successully managing potential costs.
Returning to the core issue o trade, the lopsided role o extraregional
trade in the region’s growth creates a serious risk that the gains romgreater trade with neighbors will not be ully exploited. Given the region’s
rapid growth in recent years and the consequent emergence o a large
middle class with growing purchasing power, the gains rom greater
intra-Asian trade in nal goods is potentially large. Te People’s Republic
o China (PRC) and India are reaching income levels where millions o
consumers are buying their rst car or making their rst trip abroad.
Tere are also large potential gains rom greater ows o capital and
remittances among developing Asian economies. Closer integration o
regional nancial markets will create more opportunities or investing
developing Asia’s ample pool o savings within the region. In addition,
measures to acilitate migration and remittances will benet both young
labor-abundant countries and aging labor-scarce countries.However, addressing the geographically unbalanced structure o
trade, capital ows, and remittances through the promotion o closer
intraregional economic links need notindeed, should notcome at
the expense o vital longstanding links with industrial economies. Te
choice acing developing Asia is not between intra- and extra-Asian trade.
Te challenge is to strengthen intraregional trade up to a level that is
commensurate with the rising prosperity o the region.
Intuitively, in light o its ast-growing income and purchasing power,
the excessive dependence o developing Asia on extraregional demand is
somewhat puzzling. Te dependence is both structural and strategic, and
the consequence o a decades-old growth strategy based on exports to
industrial economies. As the region continues to grow and become even
richer, more robust intraregional trade will naturally evolve alongside
stronger domestic demand. Strategic policy measures to rebalance the
economy will accelerate the emergence o sel-sustaining domestic
economies (ADB 2009). As experience o the European Union (EU) and
North American Free rade Agreement shows, vibrant intraregional and
interregional trade can coexist.
Developing Asia’s governments should not just sit back and wait
or strong domestic economies to emerge, but should instead make
real eorts to create a more conducive environment or intraregional
integration. Te resultant policies would speed up developing Asia’s move
2.1.4 Remittances and capital fows to
developing countries
-150
0
150
300
450
600
Private nonguaranteed external debt
Official development assistancePortfolio equity
Foreign direct investmentRemittances
080604022000989694921990
$ billion
Sources: World Bank, Migration and Remittance data, July2009, available: econ.worldbank.org; World Development Indicators online database; Global Development Finance online database; and Organisation or Economic Co-operation and Development, Ofcial and Private Flows
data, available: http://stats.oecd.org, all downloaded17 September 2009.
Click here or fgure data
8/7/2019 Asian Development Outlook 2009 Update: Broadening openness for a resilient Asia
http://slidepdf.com/reader/full/asian-development-outlook-2009-update-broadening-openness-for-a-resilient 54/188
38 Asian Development Outlook 2009Update
toward a broader openness, which would enable it to reap the gains rom
more intra-Asian trade, capital, and remittances.
Developing Asia has beneted enormously rom its interaction with
the rest o the world and will continue to do so in the uture. However,
its rapid growth and rising living standards imply large and growingpotential gains rom greater intraregional integration. But i the region
ails to ully exploit these gains, it will be depriving itsel o a valuable
tool, both to protect itsel rom external shocks in the short run and to
build up an additional source o economic dynamism in the long run.
Unlike growth and stability, the level and structure o openness do
not constitute a policy objective in their own right. Instead, openness
is the outcome o a set o policies and conditions that support growth
and stability. Nevertheless, over time, various distortions may have
contributed to overdependence on exports, to unbalanced trade patterns
that avor trade with countries outside the region, to high dependence
on extraregional nancial markets and institutions, and to obstacles to
migration and remittance ows within the region. Tose distortions notonly aect the level and structure o openness but can also adversely
aect the trade-o between growth and stability, and so removing them
may have a positive impact on this critical trade-o.
Te implication is that a stronger domestic economy and more
linkages within the region can help countries achieve rapid, yet
stable, growth. Te combination o rebalancing and intraregional
integration will give to developing Asia greater resilience in the ace o
extraregional shocks.
8/7/2019 Asian Development Outlook 2009 Update: Broadening openness for a resilient Asia
http://slidepdf.com/reader/full/asian-development-outlook-2009-update-broadening-openness-for-a-resilient 55/188
Enhancing intraregional trade
The role o intraregional trade in developing AsiaTe global nancial crisis and economic slump together have hit hard
developing Asia’s exports and growth. Although the slump was nancial
in its origins, trade has been the dominant channel through which the
nancial crisis has been transmitted rom the US to developing Asia.
Given that the root cause o developing Asia’s slowdown is the contraction
o aggregate demand due to the contraction o external demand, the
logical solution to short-run recovery and long-term growth is to nd
alternative sources o demand.
In the short run, the only realistic policy option is or governmentsto cut taxes and increase spending, serving as consumer o last resort,
as they in act did throughout the region. In the long run, as discussed
in ADO 2009 ( ADB 2009), one strategy is to strengthen domestic
demand so that countries in the region consume more o what they
produce. However, building up a more vibrant domestic economy is
a long-term structural process that involves removing deep-seated
structural impediments, such as weak nancial and inadequate social
protection systems.
Tis section explores another long-run potential source o demand
and growth or developing Asia, namely intraregional trade, which is
intimately related to domestic demand. More robust domestic demand
within the countries o the region will enable them to buy more o each other’s goods, as is the case among EU countries. Stylized acts
suggest that while trade among developing Asian economies has grown
impressively in recent years, much o the trade reects trade in parts and
components as opposed to trade in nal goods. In particular, the PRC’s
role as the workshop o the world means that economies around the
region ship parts and components to the PRC, which assembles them into
nal goods and exports them to the US and other industrial economies.
Consequently, the growth o intra-Asian trade remains heavily
inuenced by growth o demand in the rest o the world. Tis is especially
so or trade among East Asian and Southeast Asian economies, which
trade extensively with each other. Upon closer analysis, lack o more
substantive intraregional trade based on nal goods, along the lines o the
EU, is a direct result o weak domestic demand in regional economies. By
the same token, the strengthening o domestic economies will stimulate
more substantive intraregional trade.
Te central objective o this section is, thereore, to empirically
investigate whether intraregional trade can serve as an engine o recovery
and growth or developing Asia. More specically, it examines the issue o
whether the PRC can serve as that engine.
Te next subsection will make it clear why the PRC has a unique
potential to drive regional growth through trade. Te empirical analysis
concentrates on manuactured goods rather than commodities since
8/7/2019 Asian Development Outlook 2009 Update: Broadening openness for a resilient Asia
http://slidepdf.com/reader/full/asian-development-outlook-2009-update-broadening-openness-for-a-resilient 56/188
40 Asian Development Outlook 2009Update
.. Geographic scope
“Asia” reers to Asia excluding Japan.
“East Asia” comprises People’s Republic
o China (PRC); Hong Kong, China;Republic o Korea; and aipei,China.
“Southeast Asia” comprises BruneiDarussalam, Cambodia, Indonesia,Lao People’s Democratic Republic(Lao PDR), Malaysia, Mongolia,Myanmar, Philippines, Singapore,Tailand, and Viet Nam.
“East and Southeast Asia” excludesJapan.
“High-income” economies compriseHong Kong, China; Korea; Singapore;and aipei,China; the rest are “others”.
“Non-East and Southeast Asia”includes most developing Asianeconomies outside these twosubregions.
“Intra-Asian” trade reers to tradeamong Asian economies other thanJapan.
manuactured goods account or a majority o intraregional trade. More
signicantly, the analysis is largely limited to the economies o the two
subregions o East Asia and Southeast Asia, which have reached a airly
high degree o trade integration with each other.
While the analysis looks primarily at East and Southeast Asia, theresults have implications or other parts o developing Asia as well.
For example, although intra-South Asian trade is still relatively low,
Bangladesh, Pakistan, Sri Lanka and other subregional economies are
likely to reap increased benets as trade integration among South Asian
countries progresses urther in the uture.
In particular, just as East and Southeast Asia stand to benet rom
the PRC’s rapid growth, South Asia stands to benet rom India’s ast
growth. More generally, any evidence that trade integration in East Asia
and Southeast Asia is contributing to the two subregions’ recovery and
growth will provide some grounds or optimism about the prospects o
intraregional trade to do the same or other parts o developing Asia.
Growth o intra-Asian trade and the rise o the
People’s Republic o China
Tis section is motivated by the hopes and optimism surrounding a new
potential source o demand and growth that may compensate or the
weakening o an existing source o demand and growth. Tose hopes
and optimism are predicated on two stylized actsthe rapid growth o
intra-Asian trade and the rise o the PRC as an economic orce o global
signicance.
In purely quantitative terms, intra-Asian trade, especially among
East and Southeast Asian economies, has increased notably in recentyears. Although much o this trade is currently in parts and components
rather than in nal goods, the very act that Asian economies are trading
increasingly with each other provides some grounds or optimism about
the uture emergence o more substantive intraregional trade in which
nal goods play a bigger role. In other words, the quantitative growth o
intra-Asian trade holds the promise that it may someday become a source
o demand and growth in the region, as it is in the EU.
Te stunning rise o the PRC as a global economic heavyweight
potentially means the rise o a large and growing market or Asian
exports. Although the PRC tends to be stereotyped as the workshop o
the world, the country’s sheer size and growth mean that it is also an
importer o global inuence. For example, the PRC’s voracious appetite
or raw materials has had a perceptible eect on global commodity
markets.
More generally, the PRC is not only growing at a very rapid and
sustained pace, but it is also a huge country that is home to more than a
quarter o humanity. Tereore, in contrast to, say Malaysia, Singapore,
or even Korea, the PRC is seen as a continental economy where both
domestic demand and the economy are vibrant. Tis vigor is apparent
in the act that the PRC’s growth rate slowed to “only” 9.0% in 2008
and a projected 8.2% in 2009 while the rest o East and Southeast Asia
is barely managing to grow at all. In act, Hong Kong, China; Korea;
8/7/2019 Asian Development Outlook 2009 Update: Broadening openness for a resilient Asia
http://slidepdf.com/reader/full/asian-development-outlook-2009-update-broadening-openness-for-a-resilient 57/188
Broadening openness or a resilient Asia 41
Malaysia; Singapore; aipei,China; and Tailand are all projected to
contract in 2009.
Te combination o the two stylized acts has breathed lie into
the “PRC-as-an-engine-o-recovery-and-growth” hypothesis (in short,
the “PRC-as-engine” hypothesis). Tis is a special variant o the intra-Asian “trade-as-an-engine-o-recovery-and-growth” hypothesis, which
recognizes the special role o the PRC as the dynamic center o the
growing trade-based integration o the region’s real economies. Te
remarkable resilience o the PRC in the ace o the nancial crisis and
economic slump has given urther impetus to the notion that the PRC
can supplement the US as a new growth center or developing Asia.
o be sure, the rise o the PRC not only presents opportunities but
also challenges. Above all, the PRC’s rise as a global manuacturing center
poses a serious competitive threat to the third-country exports o regional
countries. However, there is a growing tendency to view the PRC as a
large and growing market rather than a competitor in other markets. Te
rethinking among the PRC’s neighbors is born o urgent necessitytond a new source o growth; and rooted in cold hard realitythe
remarkable transormation o the PRC.
Growth o intraregional trade in East and Southeast Asia
Despite the multidimensional origins o developing Asia’s economic
success, the one common theme that stands out is its trade dependence.
East and Southeast Asian economies in particular have successully
integrated themselves into the global real economy by trading extensively
with the outside world. Between 1990 and 2008, their exports grew rom
$424.6billionto$3.6trillioninnominaltermsandfrom$559.6billion
to$2.8trillioninrealterms,andimportsgrewfrom$429.0billionto
$3.3trillioninnominaltermsandfrom$565.4billionto$2.6trillioninreal terms (Figure 2.2.1).
Furthermore, the share o those economies’ exports in global exports
rose rom 12.3% in 1990 to 21.9% in 2008, and the share o their imports
in global imports rose rom 12.0% to 19.4% during the same period
(Figure 2.2.2). Mirroring the rise in East and Southeast Asia’s share o
global trade, the region’s share o global GDP increased rom 5.5% in 1990
to 12.3% in 2008.
In short, developing Asia is a highly trade-dependent region that has
exported and traded its way out o all-too-typical developing-country
poverty to become one o the centers o gravity in the world economy.
In recent years, the region’s countries have been trading increasingly
with each other rather than with countries outside the region.
Supercially, this suggests that intraregional trade has already become
a major source o demand and growth. Supercial or not, aggregate
bilateral trade data unambiguously point to a rise in the relative share
o intra-Asian trade. Again, this trend is particularly evident or East
and Southeast Asian economies. For this group o countries as a whole,
the share o intraregional trade has risen rom 31.7% in 1990 to 42.0% in
2008 (Figure 2.2.3). For each member o this group, the unmistakably
clear overall pattern is one o an increase in the relative importance o
intraregional trade at the expense o extraregional trade (Figure 2.2.4).
Tis pattern is also evident or all subgroups o countries within
2.2.1 Merchandise trade, East and
Southeast Asia
0
1,000
2,000
3,000
4,000
Real importsNominal imports
Real exportsNominal exports
080604022000989694921990
$ billion
Notes: For composition o East and Southeast Asia, seeBox 2.2.1. The base year or real exports and imports is 2000.
Sources: Sta estimates based on data rom CEIC Data
Company Ltd., downloaded 4 August 2009; InternationalMonetary Fund, Direction o Trade Statistics, May 2009.
Click here or fgure data
2.2.2 Global shares o output, exports, and
imports, East and Southeast Asia
0
5
10
15
20
25
GDP, current PPP $
GDP, current $ Imports
Exports
080604022000989694921990
%
PPP = purchasing power parity.
Note: For composition o East and Southeast Asia, seeBox 2.2.1.
Sources: Sta estimates based on data rom CEIC DataCompany Ltd., downloaded 4 August 2009; InternationalMonetary Fund, Direction o Trade Statistics, May 2009.
Click here or fgure data
2.2.3 Intraregional trade, East and
Southeast Asia
0
9
18
27
36
45
080604022000989694921990
% of total trade
Note: For composition o East and Southeast Asia, seeBox 2.2.1.
Sources: Sta estimates based on data rom CEIC DataCompany Ltd., downloaded 4 August 2009; International
Monetary Fund, Direction o Trade Statistics, May 2009.
Click here or fgure data
8/7/2019 Asian Development Outlook 2009 Update: Broadening openness for a resilient Asia
http://slidepdf.com/reader/full/asian-development-outlook-2009-update-broadening-openness-for-a-resilient 58/188
42 Asian Development Outlook 2009Update
the regionthe PRC, the newly industrialized economies (NIEs), as
well as the major ASEAN economies. Te implication is that in purely
quantitative terms, East and Southeast Asian economies are trading more
with each other and less with the rest o the world. Tereore, not only is
trade important or the region; in addition, the geographic prole o theregion’s trade is shiing toward trade with neighbors.
Tis quantitative shi has been used as the primary supportive
evidence o the decoupling hypothesis, according to which the dependence
o Asian growth on the US business cycle has allen markedly. Te
underlying idea was that increasingly rich Asian countries were now
selling more o their goods to each other rather than the US, so that a US
recession would have a smaller impact on their economic perormance
than beore. Te story was plausible but it suered rom a critical awit
ailed to look at the structure o growing intra-Asian trade.
In act, according to the overall balance o evidence, a large part
o intra-Asian trade reects intra-Asian production ragmentation,
in which dierent stages o the production process are carried out indierent Asian economies.1 More specically, the PRC has emerged as
the preerred location or assembling parts and components produced
in other East and Southeast Asian economies. International production
ragmentation is, in eect, international vertical specialization in which
each country specializes in a dierent stage o the production process.
As such, East and Southeast Asian economies are likely to enjoy gains
rom the intraregional specialization and division o labor. Nevertheless,
the production ragmentation-oriented nature o intra-Asian trade casts
serious doubts on the validity o the regional trade-as-an-engine-o-
recovery-and-growth-hypothesis.
Surge o the People’s Republic o China and implications ordeveloping Asia
One o the most signicant developments in the global economic
landscape over the last 30 years has been the integration o the PRC
into the world economy and its stunning growth. What makes the
PRC’s rise so special is the sheer size o the country and hence its global
and regional clout. Te transormation o the PRC, which began 30
years ago, has accelerated in recent years. Between 1990 and 2008 or
example, the share o the PRC GDP in world GDP rose sharply rom
1.7% to 7.3% (Figure 2.2.5). Given the central role o trade and openness
in the relentless expansion o the country’s economy, its trade has also
experienced similarly rapid growth. Te share o PRC exports in total
world exports rose rom 1.8% in 1990 to 9.1% in 2008, and its share o
world imports rose rom 1.5% to 7.0% during the same period. Te PRC’s
emergence as a global economic power thus closely parallels its emergence
as a global trading power.
In the context o East and Southeast Asia, the rise o the PRC
signals the arrival o a neighborhood heavyweight with ar-reaching
ramications. Te PRC’s share o developing Asia’s GDP rose rom 23.4%
in 1990 to 47.6% in 2008. During the same period, its share o East and
Southeast Asian GDP rose rom 31.0% to 58.9% (Figure 2.2.6). Similarly,
the PRC’s exports are accounting or a larger share o East and Southeast
Asian exports, and the same holds true or its imports (Figure 2.2.7).
2.2.4 Intraregional trade, selected East and
Southeast Asian economies
0
24
48
72
Thailand
Taipei,ChinaSingapore
PhilippinesMalaysia
Rep. of KoreaIndonesia
Hong Kong, ChinaPeople's Rep. of China
080604022000989694921990
% of total trade
Sources: Sta estimates based on data rom CEIC DataCompany Ltd., downloaded 4 August 2009; InternationalMonetary Fund, Direction o Trade Statistics, May 2009.
Click here or fgure data
2.2.5 Global shares o output, exports, and
imports, People’s Republic o China
0
4
8
12Imports
ExportsGDP, current PPP $
GDP, current $
080604022000989694921990
%
Sources: Sta estimates based on data rom CEIC DataCompany Ltd., downloaded 4 August 2009; InternationalMonetary Fund, Direction o Trade Statistics, May 2009;
International Monetary Fund, World Economic Outlook database, April 2009.
Click here or fgure data
2.2.6 Share o gross domestic product in
selected regions, People’s Republic o China
0
13
26
39
52
65
East and Southeast Asia GDP, current PPP $
East and Southeast Asia GDP, current $
Developing Asia GDP, current PPP $
Developing Asia GDP, current $
080604022000989694921990
%
Note: For composition o East and Southeast Asia, see
Box 2.2.1.
Source: International Monetary Fund, World Economic Outlook database, April 2009.
Click here or fgure data
8/7/2019 Asian Development Outlook 2009 Update: Broadening openness for a resilient Asia
http://slidepdf.com/reader/full/asian-development-outlook-2009-update-broadening-openness-for-a-resilient 59/188
8/7/2019 Asian Development Outlook 2009 Update: Broadening openness for a resilient Asia
http://slidepdf.com/reader/full/asian-development-outlook-2009-update-broadening-openness-for-a-resilient 60/188
44 Asian Development Outlook 2009Update
the center o a regional production network rather than an independent
source o demand or the region.
Te sheer size and dynamism o the PRC means that even aside rom
its central role in intra-Asian production ragmentation, it has a unique
role to play. Even though, say, Singapore (or Hong Kong, China) may trade extensively with other Asian countries and is highly integrated into
the regional economy, it is a small, open economy with no perceptible
impact on regional trade and growth. Te same can be said or even
larger regional economies, such as Korea.
In illustrating the presence or absence o a robust domestic economy,
the exact share o domestic demand in total GDP matters much less than
resilience in the ace o a severe external shock. In a sense, the recent
crisis is a stress test o the highest order or the domestic economy.
Te PRC’s growth perormance in 2008 and so ar in 2009, despite
decelerating rom 2003–2007, means that the PRC has passed the stress
test with ying colors. Te perception o the PRC as a continental
economy with a sustainable, resilient domestic economy has thus ounda great deal o support. Te big question is this: How likely is it that the
promise o the PRC-as-engine hypothesis will become reality? Te next
two sections attempt to answer it.
Impact o demand rom the People’s Republic o
China or imports on developing Asian GDP
Te PRC-as-engine hypothesis is a theory about the PRC’s GDP exerting
an independent and positive eect on the GDP o other countries in East
and Southeast Asia. Te reason or largely limiting the analysis to those
two subregions is that the general level o regional economic integration,and in particular integration with the PRC, is more advanced there
than in other parts o developing Asia. A key tangible result should be a
positive relationship between the PRC’s imports rom, and output levels
in, the rest o the region.
Te main interests are the relative magnitude o the impact o the
PRC’s imports on the GDP o its neighbors and the evolution o this
magnitude over time. In particular, an impact that is not visibly smaller
than the impact o US imports would support the emergence o a second
engine o growth in the region. Furthermore, an impact that is growing
over time, especially relative to the US impact, would also support a twin-
engine growth paradigm.
A vector autoregression (VAR) was used to identiy the US and
PRC import demand shocks, which are export demand shocks rom the
viewpoint o East and Southeast Asia. Te VAR model is based on that
o Haltmaier et al. (2007), who analyze macroeconomic data rom the
third quarter o 1993 to the ourth quarter o 2006, to assess the impact
o PRC and US demand on GDP growth in Indonesia; Korea; Malaysia;
Philippines; Singapore; aipei,China; and Tailand. Teir two major
ndings are that external shocks have played a major role in the domestic
output uctuations o their sample o developing Asian economies, and
that PRC demand shocks have been as important as US demand shocks in
explaining the domestic growth uctuations o many regional economies.
2.2.10 Trade with East and Southeast Asia,
People’s Republic o China
10
20
30
40
50
60
Imports
Exports
080604022000989694921990
% of total exports or imports
Note: For composition o East and Southeast Asia, see
Box 2.2.1.
Sources: Sta estimates based on data rom CEIC Data
Company Ltd., downloaded 4 August 2009; InternationalMonetary Fund, Direction o Trade Statistics, May 2009.
Click here or fgure data
8/7/2019 Asian Development Outlook 2009 Update: Broadening openness for a resilient Asia
http://slidepdf.com/reader/full/asian-development-outlook-2009-update-broadening-openness-for-a-resilient 61/188
Broadening openness or a resilient Asia 45
Tese major ndings remain largely valid even when the authors account
or the possibility that PRC demand or Asian exports is a derived
demand based on US demand or nal goods.
Trough the VAR model, it was attempted to assess the relative
contributions o shocks to US import demand and shocks to PRC importdemand to GDP in nine regional economies rom the rst quarter o 1990
to the ourth quarter o 2008. Te sample o economies consists o the
our NIEs (Korea; Hong Kong, China; Singapore; and aipei,China); the
ASEAN-4 (Indonesia, Malaysia, Philippines, and Tailand); plus India.
India is included in the sample in light o its large and growing economic
weight. A high PRC contribution would support the PRC-as-engine
hypothesis, and a growing contribution would suggest that the PRC is
becoming more o an engine over time.
A three-variable structural VAR was estimated or each country
in the sample. Using Malaysia as an example, the VAR model includes
the three ollowing variables: domestic real GDP, US real imports rom
Malaysia (that is, Malaysia’s real exports to the US), and the PRC’s realimports rom Malaysia (that is, Malaysia’s real exports to the PRC). For
ull technical details o the VAR analysis, including impulse response
unctions and variance decomposition results, reer to Park and Shin
(2009a).
Te most signicant result is that PRC demand has become a more
important source o GDP uctuations in ve out o the nine sample
economiesHong Kong, China; Indonesia; Philippines; aipei,China;
and Tailand. In and o itsel, this would lend support to the PRC-as-
engine hypothesis. Another somewhat predictable nding is that the role
o PRC demand as a source o GDP uctuations diers a lot across the
sample economies. For example, the PRC does not matter at all or India
but matters hugely or Singapore. Overall, the three-variable VAR resultsindicate that the PRC’s import demand already has a big impact on the
output o economies in the region, not noticeably smaller than the impact
o US import demand. Furthermore, its role has strengthened appreciably
since the Asian crisis.
While such results bode well or the PRC-as-engine hypothesis, there
is a serious risk that they overestimate the extent to which the PRC serves
as an independent source o demand and growth or the region. Tis
pertains to the basic structure o intra-Asian trade alluded to earlier.
More specically, that structure suggests that the PRC’s demand or
imports rom its neighbors is a derived demand that is based on nal
demand in the US and elsewhere. What is driving the PRC’s demand or
imports rom, say, Malaysia is not the PRC’s own demand but US demand
or nal goods rom Asia. o control or this possibility, the three-variable
VAR model was expanded to our variables. Te additional variable is US
real imports rom the PRC, which contains large inputs o intermediate
goods (parts and components) rom the rest o the region.
Te clear overall pattern that emerges is that the PRC’s exports to the
US emerge as a new signicant source o GDP uctuations. Critically,
once one controls or the possibility that the PRC’s demand or Asian
exports is largely demand derived rom US demand, exports to the PRC
are no longer a signicant determinant o GDP in Asian countries. Te
results are most pronounced or the our NIEs. Te only three countries
8/7/2019 Asian Development Outlook 2009 Update: Broadening openness for a resilient Asia
http://slidepdf.com/reader/full/asian-development-outlook-2009-update-broadening-openness-for-a-resilient 62/188
46 Asian Development Outlook 2009Update
where exports to the PRC remain signicant even aer controlling or
derived demand are Korea, Philippines, and Tailand.
In short, the evidence rom the regressions casts doubt on the validity
o the PRC-as-engine-o-growth hypothesis. Te results o the three-
variable model indicate that exports to the PRC have a positive andsignicant eect on the GDP o East and Southeast Asian economies.
However, the results o the our-variable model suggest that the PRC’s
apparently positive impact reects US demand or Asian goods, rather
than independent demand rom the PRC.
Still, the evidence rom the regressions provides only indirect
evidence or the hypothesis that PRC demand or Asian goods is
primarily derived rather than direct demand. It is thereore necessary to
turn to an analysis o trade data to obtain direct inormation about the
structure o intra-Asian trade.
Relative importance o parts and componentsversus nal goods
One must analyze the trade data or two main reasons. First, the derived
demand hypothesis is undamentally a hypothesis about the structure
o intra-Asian trade. Second, the PRC-as-engine hypothesis is also
ultimately a trade-based story that relates how growing demand or
imports rom a ast-rising PRC lis the rest o the region to a plateau o
reduced vulnerability to extraregional shocks and a higher sustainable
growth rate.
At a conceptual level, the key issue is whether the share o parts and
components in the PRC’s imports rom the rest o the region is rising,
alling, or stable. A rising share would support the notion that the PRC’srole in intra-Asian trade is primarily that o an assembler o parts and
components, and thus lend support to the derived demand hypothesis. A
alling share would indicate that the PRC’s role as an assembler or the
region is weakening, which can be interpreted as indirect evidence o the
emergence o a more substantive trade between the PRC and the rest o
Asia based on demand or nal goods rom the PRC.
A vast literature based on standard trade data analysis unambiguously
points to a secular increase in intraregional trade among East Asian
economies since the early 1980s. Examples o this literature include Kwan
(2001), Drysdale and Garnaut (1997), and Frankel and Wei (1997). Te
standard trade data analysis used in this literature implicitly assumes
trade based on horizontal specialization, that is, exchange o goods
which are produced rom start to nish in one country. International
production ragmentationcarrying out dierent production activities
in dierent countrieshas become an increasingly signicant structural
characteristic o economic globalization in recent decades.3 In particular,
trade based on ragmentation or vertical specialization is playing a key
role in trade among East and Southeast Asian economies. 4
Various studies have examined the structure o the PRC’s trade
with its Asian neighbors to gauge the extent to which such trade is
driven by demand rom the US and other economies outside the region.
Decomposing trade into basic products, parts and components, and nal
8/7/2019 Asian Development Outlook 2009 Update: Broadening openness for a resilient Asia
http://slidepdf.com/reader/full/asian-development-outlook-2009-update-broadening-openness-for-a-resilient 63/188
Broadening openness or a resilient Asia 47
goods, Haltmaier et al. (2007) nd a large role or parts and components
in intra-Asian trade, in particular between the PRC and the rest o Asia.
Tey conclude that this evidence supports the conventional wisdom that
the PRC is the endpoint o a giant Asian assembly line or exports to the
US and elsewheremeaning that the PRC serves as a conduit rather thanengine o growth or the region.
Similarly, Athukorala and Yamashita (2009) nd that the PRC is the
nal assembly center in global production networks based in East and
Southeast Asia. Athukorala and Yamashita (2008), Ng and Yeats (2001),
Athukorala (2005), and Pula and Peltonen (2008) all reconrm the central
role o vertical specialization in intra-Asian trade and conclude that
extraregional trade is likely to remain the region’s engine o growth in the
oreseeable uture.
Description o disaggregated trade data
Te data or the analysis are o monthly requency and derived rom
ofcial PRC customs agencies’ merchandise trade export and importstatistics. Tese are the ofcial international trade statistics released by
the PRC Government. Te data rom January 1996 to December 2005
are held by radeData International. Te data cover trade in goods or
merchandise, and exclude trade in services. Merchandise trade statistics
only record goods that add to or subtract rom the stock o material
resources o a country by entering (imports) or leaving (exports) its
territory.5
Following Haltmaier et al. (2007), a comprehensive decomposition
o trade into our categories is adopted: basic goods, construction
materials, parts and components, and nal goods. Te critical
distinction is between parts and components on the one hand and
nal goods on the other. Parts and components are manuacturedintermediate goods that are combined with other inputs to produce
nal goods. With ew exceptions, parts and components cannot be used
as nal goods. In contrast, nal goods are goods that can be directly
consumed with little or no processing.
Te two other categories o goods are basic goods (ood and
beverages, natural resources, and raw materials) and construction
materials (cement). As Haltmaier et al. (2007) point out, classiying the
goods into parts and components as against nal goods necessarily
involves some room or subjective discretion and judgment. It is also
impossible to know how a good was used as a part or component or a
nal good once it has been imported.
Haltmaier et al. (2007), as well as most o the other studies that
examined the structure o intra-Asian trade, classied goods according to
Standard International rade Classication Revision 3. However, the data
or this analysis is collected on the basis o the International Harmonized
Customs Classications.6
Shares o parts and components versus nal goods: Key ndings
Te PRC-as-engine hypothesis is predicated on the assumption o a
dynamic domestic economy rooted in robust domestic demand. Te
underlying idea is that o a large and ast-growing PRC absorbing more
imports rom its neighbors, and thus speeding up their recovery in the
8/7/2019 Asian Development Outlook 2009 Update: Broadening openness for a resilient Asia
http://slidepdf.com/reader/full/asian-development-outlook-2009-update-broadening-openness-for-a-resilient 64/188
48 Asian Development Outlook 2009Update
short run and enabling more rapid growth in the long run. Te validity o
this hypothesis depends crucially on whether the PRC directly consumes
the imports or processes the imports or export to other countries. Other
things equal, nal goods are more likely to end up being consumed
domestically while parts and components are more likely to end upbeing consumed abroad. O course, it is entirely possible that parts
and components are used as inputs in producing nal goods that are
consumed domestically while nal goods such as capital goods are used
to produce goods that are exported to other countries. Tereore, the
relative share o parts and components versus nal goods is an imperect
measure o the relative importance o derived demand versus direct
demand in a country’s demand or imports.
Nevertheless, because trade data cannot state the nal use o imports,
the decomposition o imports into parts and components versus nal
goods is probably the best measure available or making inerences
about nal use. A smaller share o parts and components in the PRC’s
imports would indicate a lower relative importance o derived demand,which would weaken the derived demand hypothesis and thus indirectly
support the PRC-as-engine hypothesis. Furthermore, a alling share o
parts and components over time would suggest that the PRC’s role as an
assembler is diminishing, with a corresponding increase in its role as a
consumer. Tis is true with respect to the world as a whole but especially
with respect to East and Southeast Asia, given the extensive intraregional
production ragmentation discussed earlier.
Beore a review o the share o parts and components, the PRC’s
importance in world trade, as well as East and Southeast Asia’s
importance in the PRC’s trade, is examined. Te PRC’s share in global
trade has been continuously increasing (Figure 2.2.5 above). Its share
o global exports has shot up rom a little less than 1.9% to 9.3% and itsshare o global imports has risen rom 1.5% to 7.1%. Although the PRC
tends to be stereotyped as an export machine, the growth o its imports
has been almost as impressive. However, a notable gap between the
export and import shares opens up around 2003, in line with the large
current account surplus experienced by the PRC in recent years. East
and Southeast Asia’s relative importance as a trading partner seems to
have decreased somewhat during 1996–2008 (Figures 2.2.11 and 2.2.12).
However, the decline is much more pronounced or East Asia’s share o
PRC exports, rom 35.5% to 27.2%, than it is or PRC imports, rom 34.2%
to 32.9%. o a large extent, the alling share o East Asia in the PRC’s
trade reects the PRC’s successul integration into the world economy, in
particular its growing success in exporting to more distant markets.
Between 1996 and 2008, as shown in Figures 2.2.13 and 2.2.14, the
share o parts and components in the PRC’s total imports is much higher
(averaging 32.8%) than in its total exports (averaging 17.9%). Te share
o nal goods in the PRC’s imports (averaging 45.2%) is correspondingly
much lower than the share o nal goods in its exports (averaging 70.0%).
Tis can be viewed as evidence o the PRC’s global role as a net importer
o intermediate goods or assembly and reexport to the rest o the world.
However, the share o parts and components in imports has been alling
while that in exports has been rising. Te share o nal goods in exports
has been alling throughout the sample period. Te pattern or the share
2.2.11 Exports by economy or region,
People’s Republic o China
0
20
40
60
80
100
Others
EU27
United States
Japan
East and Southeast Asia
080604022000981996
% of total exports
Note: For composition o East and Southeast Asia, seeBox 2.2.1.
Source: Sta estimates based on data rom CEIC DataCompany Ltd., downloaded 4 August 2009.
Click here or fgure data
2.2.12 Imports by economy or region,
People’s Republic o China
020
40
60
80
100
Others
EU27
United States
Japan
East and Southeast Asia
080604022000981996
% of total imports
Note: For composition o East and Southeast Asia, seeBox 2.2.1.
Source: Sta estimates based on data rom CEIC DataCompany Ltd., downloaded 4 August 2009.
Click here or fgure data
2.2.13 Exports by commodity classication,
People’s Republic o China
0
20
40
60
80
100
Final goods
Basic products
Construction materials
Parts and components
080604022000981996
%
Source: Sta estimates based on data rom TradeData
International Pty. Ltd.
Click here or fgure data
8/7/2019 Asian Development Outlook 2009 Update: Broadening openness for a resilient Asia
http://slidepdf.com/reader/full/asian-development-outlook-2009-update-broadening-openness-for-a-resilient 65/188
Broadening openness or a resilient Asia 49
o nal goods in imports is more mixed. Although the share was rising
until about 2003, it has allen sharply since then.
Te most interesting and signicant part o the analysis o the
PRC’s trade structure pertains to the structure o its trade with East and
Southeast Asia. As was the case or the world as a whole, as shown inFigures 2.2.15 and 2.2.16 or East and Southeast Asia the share o parts and
components in the PRC’s imports (averaging 38.8%) is substantially higher
than in the PRC’s exports (averaging 21.2%).
Similarly, or the most part, or East and Southeast Asia the share o
nal goods in the PRC’s exports (averaging 62.0%) exceeded the share in
its imports (averaging 51.0%). Tis suggests that part o the nal goods
assembled in the PRC is exported to the rest o developing Asia, which
is consistent with the plethora o “made-in-China” manuactured goods
ound in markets throughout developing Asia. More important, the
shares o parts and components and o nal goods in the PRC’s imports
rom East and Southeast Asia average 38.8% and 51.0% or the whole
sample period, respectively.Tereore, while trade in parts and components is indeed a key element
o intra-Asian trade, so too is trade in nal goods. Both derived demand
and direct demand may be important drivers o the PRC’s demand or
Asian imports, and there is no reason why a ourishing trade based
on production ragmentation cannot coexist alongside a ourishing
trade based on PRC domestic demand. Crucially, the share o parts and
components in the PRC’s imports rom East and Southeast Asia decreased
substantially rom 43.6% to 33.8% rom 1996 to 2008, and the share o nal
goods increased appreciably rom 43.6% to 54.7% during the same period.
Tese changes can be viewed as a weakening o the PRC’s regional
role as an assembler and a corresponding strengthening o its role
as a consumer. Equivalently, the declining import share o parts andcomponents suggests that direct demand may be playing an increasing
role in PRC demand or imports rom its neighbors, and thereore the
PRC’s prospects to act as an engine o recovery and growth seem to have
improved in recent years. Overall, the recent pattern o trade between
the PRC and East and Southeast Asia indicates that the PRC may be
becoming more o a consumer and less o an assembler in the region.
An important caveat in the declining share o parts and components
in the PRC’s imports is the possibility that the PRC is moving up the
technological and skills ladder to domestically produce more previously
imported sophisticated parts and components. o the extent that this is
happening, the alling share o parts and components reects not so much
the diminishing role o the PRC as the end point o the intraregional
Asian production network as the intensication o PRC competitive
pressures or the rest o Asia.
Furthermore, as said, the share o nal goods in the PRC’s imports
is at best an imperect measure o the share o imported goods
that are consumed in the PRC rather than reexported. Ditto parts
and components. Tereore, while the declining share o parts and
components in imports is signicant and interesting, one must exercise a
great deal o caution in interpreting this trend as evidence o a decline in
the importance o derived demand relative to direct demand.
Within East and Southeast Asia, the decline in the share o parts
2.2.14 Imports by commodity classication,
People’s Republic o China
0
20
40
60
80
100
Final goods
Basic products
Construction materials
Parts and components
080604022000981996
%
Sources: Sta estimates based on data rom TradeData
International Pty. Ltd.
Click here or fgure data
2.2.15 Exports to East and Southeast Asia bycommodity classication, People’s Republic
o China
0
20
40
60
80
100
Final goods
Basic products
Construction materials
Parts and components
080604022000981996
%
Note: For composition o East and Southeast Asia, seeBox 2.2.1.
Source: Sta estimates based on data rom TradeDataInternational Pty. Ltd.
Click here or fgure data
2.2.16 Imports rom East and Southeast
Asia by commodity classication, People’s
Republic o China
0
20
40
60
80
100
Final goods
Basic products
Construction materialsParts and components
080604022000981996
%
Note: For composition o East and Southeast Asia, seeBox 2.2.1.
Source: Sta estimates based on data rom TradeDataInternational Pty. Ltd.
Click here or fgure data
8/7/2019 Asian Development Outlook 2009 Update: Broadening openness for a resilient Asia
http://slidepdf.com/reader/full/asian-development-outlook-2009-update-broadening-openness-for-a-resilient 66/188
50 Asian Development Outlook 2009Update
and components in the PRC’s imports is most pronounced or the our
high-income East and Southeast Asian economies (Figure 2.2.17). Te
share ell sharply rom 50.2% in 1996 to 34.5% in 2008 or that group.
Tis is signicant because intra-Asian trade based on derived demand
is most relevant or those countries. Tese countries as a group aretechnologically more advanced than the PRC and hence capable o
producing high-tech parts and components that the PRC is not yet
capable o producing. At the same time, their high labor costs render
relocating the assembly stage o the production process most protable.
Tis explains why the share o parts and components is visibly higher in
the PRC’s imports rom the our high-income economies than it is or
imports rom other East and Southeast Asian economies.
Tereore, the act that the decline in the share o parts and
components is most visible or East Asian economies that are most likely
to engage in vertical specialization with the PRC can be viewed as urther
evidence o a weakening o the PRC’s regional role as an assembler.
But again, one must exercise caution in making such an interpretationto the extent that the decline in parts and components may be driven
by the PRC’s closing o the technological gap with its more developed
neighbors and producing more sophisticated parts and components. Te
share o parts and components in the PRC’s imports rom other East and
Southeast Asia has also declined (Figure 2.2.18) rom 23.1% to 19.5% during
1996–2008, although not as sharply as or imports rom high-income East
and Southeast Asia.
Finally, despite East and Southeast Asia’s dominant role in developing
Asia’s production ragmentation, the share o parts and components in
the PRC’s imports rom regional economies outside those two subregions
is also quite highaveraging 33.2%. However, the share o nal goods
is ar loweraveraging 10.6%and the share o basic products is arhigheraveraging 54.3% (Figure 2.2.19).
Trade balance between the People’s Republic o China and the rest o developing Asia
Another key trade indicator that can give inormation on the impact o
trade with the PRC on the growth o other Asian countries is the trade
balance. In an accounting sense, it is net exports rather than exports that
capture the positive impact o trade on a country’s aggregate demand.
Although trade is in and o itsel benecial, unbalanced tradewhere one
side exports disproportionately more to and imports disproportionately
less rom the other sideraises questions about the distribution o
benets. Tere are widespread concerns that the PRC’s massive trade
surplus represents a large stimulus to the PRC’s own aggregate demand
and hence growth but an equally large leakage o demand rom the rest
o the world. In act, such concerns underlie the calls or protectionism
against the PRC in the US and elsewhere. In short, trade balance with the
PRC matters much to the rest o Asia in terms o the magnitude o the
stimulus to demand and growth provided by trade with the PRC.
able 2.2.1 shows that the PRC runs a trade surplus with East Asia.
However, this surplus is mainly due to the surplus rom its trade with
Hong Kong, China, reecting the special administrative region’s role
as a major transshipment center or the Pearl River delta, which is the
2.2.18 Imports rom other economies by
commodity classication, People’s Republic
o China
0
20
40
60
80
100
Final goods
Basic products
Construction materials
Parts and components
080604022000981996
%
Note: For composition o East and Southeast Asia, seeBox 2.2.1.
Source: Sta estimates based on data rom TradeDataInternational Pty. Ltd.
Click here or fgure data
2.2.19 Imports rom Non-East and
Southeast Asian economies by commodity
classication, People’s Republic o China
0
20
40
60
80
100
Final goods
Basic products
Construction materials
Parts and components
08 06 04 02 2000 98 1996
%
Note: Non-East and Southeast Asian developing economiescomprise Aghanistan, Armenia, Azerbaijan, Bangladesh,
Bhutan, Cook Islands, Fiji Islands, Georgia, India,Kazakhstan, Kyrgyz Republic, Maldives, Nepal, Pakistan,Sri Lanka, Tajikistan, Turkmenistan, and Uzbekistan.
Source: Sta estimates based on data rom TradeDataInternational Pty. Ltd.
Click here or fgure data
2.2.17 Imports rom high-income economies
by commodity classication, People’s
Republic o China
0
20
40
60
80
100
Final goods
Basic products
Construction materials
Parts and components
080604022000981996
%
Note: For composition o East and Southeast Asia, seeBox 2.2.1.
Source: Sta estimates based on data rom TradeDataInternational Pty. Ltd.
Click here or fgure data
8/7/2019 Asian Development Outlook 2009 Update: Broadening openness for a resilient Asia
http://slidepdf.com/reader/full/asian-development-outlook-2009-update-broadening-openness-for-a-resilient 67/188
Broadening openness or a resilient Asia 51
.. Trade balance with developing Asian economies, People’s Republic o China, $ billion, and
Total trade Basi c products Cons truction
materials
Parts and
components
Final goods
East and Southeast Asia . . . -. . . -. -. . .High-income East and Southeast Asia . . . . . . -. -. . .
Hong Kong, China . . . . . . . . . .
Singapore . . -. . . . . -. . .
Rep. o Korea -. -. . . . . -. -. -. -.
Taipei,China -. -. . -. . . -. -. -. -.
Other East and Southeast Asia -. -. -. -. . . . . . -.
Brunei Darussalam . -. . -. . . . . . .
Cambodia . . . . . . . . . .
Indonesia -. . -. -. . . . . . .
Lao PDR . . . -. . . . . . .
Malaysia -. -. -. -. . . -. -. . -.
Mongolia -. - . -. -. . . . . . .
Myanmar . . - . - . . . . . . .
Philippines . -. -. -. . . . -. . -.
Thailand -. -. -. -. . . . -. . -.
Viet Nam . . -. -. . . . . . .
Non-East and Southeast Asia . . -. -. . . . . . .
Source: Sta estimates based on data rom TradeData International Pty. Ltd.
hub o the PRC’s export-oriented manuacturing. I one excludes Hong
Kong, China, the PRC runs a trade decit with East and Southeast Asia.
Tis decit is primarily due to trade decits with more developed East
Asian economies such as Korea and aipei,China. Te PRC’s trade decit
with more developed East Asian economies, in particular Korea and
aipei,China, has been steadily increasing. However, whereas in 1996 most
o the PRC’s trade decit with Korea and aipei,China occurred in the
parts and components trade, by 2007, the nal goods trade accounted ormore o the decit.
Tis change closely mirrors and is consistent with the declining share
o parts and components in the PRC’s imports rom the our high-income
economies. Te PRC has continued to run trade decits with these
economies in 2008 and 2009, but the projected decits or 2009 are lower
than or 2008 (able 2.2.2). Te PRC also runs a trade decit with other
East and Southeast Asian economies, but this is primarily due to trade in
basic goods, especially in 2008 and 2009. Te PRC runs a trade surplus in
parts and components with other East and Southeast Asia and non-East
and Southeast Asia, which supports the earlier argument that the PRC’s
role as a regional assembler pertains primarily to high-income East and
Southeast Asia. Te PRC runs a trade surplus in nal goods vis-à-vis
these our economies. (Once again, however, this is mainly due to its
trade surplus with Hong Kong, China. Excluding that economy, the PRC
runs a large trade decit in nal goods with them.) Te PRC’s nal goods
trade with other East and Southeast Asia is more or less balanced, and
posts a surplus in nal goods trade with non-East and Southeast Asia.
Te overall pattern that emerges rom the trade balance data is that,
in striking contrast to its trade with the rest o the world, in particular
with the US and EU, the PRC does not run a large and persistent trade
surplus with developing Asia. In act, once the PRC’s large trade surplus
with Hong Kong, China is excluded (which reects that economy’s role
8/7/2019 Asian Development Outlook 2009 Update: Broadening openness for a resilient Asia
http://slidepdf.com/reader/full/asian-development-outlook-2009-update-broadening-openness-for-a-resilient 68/188
8/7/2019 Asian Development Outlook 2009 Update: Broadening openness for a resilient Asia
http://slidepdf.com/reader/full/asian-development-outlook-2009-update-broadening-openness-for-a-resilient 69/188
Broadening openness or a resilient Asia 53
fact,thePRC’simportssurgedby85%from$51.3billionto$94.8billion
rom January to July this year. Developing Asia and the rest o the world
stand to benet rom the PRC’s reinvigorated appetite or imports.
More direct evidence about the PRC’s role as a regional engine o
recovery rom the global crisis can be ound in data on trade between thePRC and East and Southeast Asia. Te PRC’s imports rom that group
fellfrom$49.9billioninJuly2008to$19.9billioninJanuary2009inline
withtheintensicationofthecrisisbeforereboundingto$37.4billionby
June 2009. PRC exports to East and Southeast Asia have also ollowed a
similar pattern o decline and recovery but, signicantly, the magnitude
o the recovery in the rst hal o 2009 was much more limited, rising
from$29.1billionto$35.0billion.
In this way, the PRC has been a signicant source o additional net
demand or the region in 2009. Te pattern o import revival is similar
in every grouping in Asiahigh-income East and Southeast Asia, other
East and Southeast Asia, and non-East and Southeast Asia. Te biggest
beneciary o the PRC’s renewed appetite or imports between January and June 2009 was high-income East and Southeast Asia, which saw
exportsrisefrom$9.9billionto$17.9billion.OtherEastandSoutheast
Asia and non-East and Southeast Asia experienced more modest gains
intheirexportstothePRC$3.5billionand$0.4billion,respectively
during the same period. Overall, Asian countries seem to have beneted
substantially rom the revival o PRC imports in the rst hal o 2009,
which can be viewed as evidence that the PRC is leading the region out o
the global crisis.
Overall, the analysis o the PRC’s trade patterns lends some support
to the PRC-as-engine hypothesis. In particular, the share o nal goods in
the PRC’s imports rom East and Southeast Asia has grown recently, and
the share o parts and components has correspondingly declined. Tissuggests that the PRC’s direct demand or imports is growing relative to
its demand derived rom nal demand in the industrial economies.
Toward a broader trade opennessTe empirical evidence suggests that the PRC is not yet an independent
source o demand and growth or East and Southeast Asia, but that it is
beginning to become one. Te VAR analysis indicates that, in the past,
the supercially positive impact o the PRC’s imports on its neighbors’
output largely reected the role o the PRC as an assembler o Asian parts
and components or exports to the US. While such intraregional trade
benets the region by allowing or specialization and division o labor,
it casts doubt on the PRC’s capacity to serve as an independent regional
engine o recovery in the short run and o growth in the long run.
Te analysis o more recent trade patterns between the PRC and its
neighbors, howeverin particular a secular shi in the composition
o the PRC’s imports rom parts and components toward nal goods
suggests that the PRC is becoming more o a consumer and less o an
assembler. Tis gives some hope that demand rom the PRC can help
oset the impact o extraregional shocks (such as the recent crisis) and
provide its neighbors with an additional independent source o growth.
Te rest o developing Asia could also benet rom greater
2.2.20 Global imports
0
50
100
150
200
250
AustraliaRep. of KoreaJapan
People's Rep. of ChinaEU-27 US
JulJan
09
JulJan
08
JulJan
07
JulJan
2006
$ billion
Source: CEIC Data Company Ltd., downloaded 2 September2009.
Click here or fgure data
8/7/2019 Asian Development Outlook 2009 Update: Broadening openness for a resilient Asia
http://slidepdf.com/reader/full/asian-development-outlook-2009-update-broadening-openness-for-a-resilient 70/188
54 Asian Development Outlook 2009Update
intraregional trade. Tis is especially true or South Asia where a large
and ast-growing Indian economy has the potential to li the entire
subregion to a higher plateau through more intraregional trade.
Te impact o the global economic slump on developing Asia’s
growth is partly a result o two structural imbalances: in regional trade(overdependence on a ew extraregional markets, especially the US);
and in aggregate demand (excessive dependence on external rather than
domestic demand). Te resolution o one imbalance is bound up with the
other. Te emergence o a stronger and dynamic sel-sustaining domestic
economy will acilitate the growth o a more substantive intraregional
trade based on nal goods.
Regional policy makers can speed up intraregional trade in nal
goods by removing barriers to trade and taking other measures such
as improving the transportation inrastructure. Te Greater Mekong
Subregion and Central Asia Regional Economic Cooperation are two
examples o regional cooperation programs that are creating a conducive
environment or intraregional trade.7
An even better strategy would be toliberalize trade with both intraregional and extraregional partners.
Whether the region continues to rely on an unreormed export-led
growth strategy that is predicated on ever-rising extraregional demand
or the region’s exports, or whether it moves toward a broader openness
that relies more on domestic demand and intraregional trade, matters
enormously or the welare o the region.
Following the old strategy implies doing nothing and waiting or
the US economy to ully regain its vitality, and points to a continued
vulnerability to the US business cycle. It also implies a decline in the
region’s long-term growth i the US appetite or imports shows a secular
decline.
Adjusting toward a broader openness implies the sel-enlightenedpursuit o a more balanced growth strategy that enables domestic demand
and intraregional trade to become more signicant sources o demand
and growth. Tis requires the removal o a wide range o deep-seated
structural distortions on domestic demand and intraregional trade.
Whether the region succeeds in its quest or a broader and more resilient
trade openness will have a big inuence on the success o its more
undamental quest or rapid yet stable growth.
Developing Asia is vulnerable to external shocks transmitted through
the nancial channel, as well as through international trade. On this
ront, too, there are ways to shield economies rom such external blows.
8/7/2019 Asian Development Outlook 2009 Update: Broadening openness for a resilient Asia
http://slidepdf.com/reader/full/asian-development-outlook-2009-update-broadening-openness-for-a-resilient 71/188
Managing nancial globalization
Te recent pullbacks o capital inows to developing Asia and sharp
currency uctuations in some o the region’s more nancially integrated
economies have brought renewed attention to the role and benets o
nancial globalization. Although the adverse eects through the nancial
channel have been slight in developing Asia compared with those seen
through the trade channel, nancial stress was clear. Its spillover eects
to domestic nancial markets, however, have been limited and, or the
most part, successully managed.
In order to draw out critical elements o
nancial openness, the analysis here categorizes all
developing economies into subgroups dened along
two dimensions (Box 2.3.1). Te rst dimensionhas a nancial globalization ocus: How well is the
economy integrated into international nancial
markets in terms o actual capital ows? Te second
dimension has a geographic ocus: Is the economy
in Asia?
Te main group o interest is developing Asia’s
highly integrated economies (Box 2.3.2). Tese
12 developing Asian economies have been the major
recipients o capital ows to the region. Over the
past two decades, nearly 90% o total regional capital
inows have been directed to them. In particular,
they have been the dominant players in receivingFDI inows, accounting or nearly 95% o the total.
In addition, these 12 economies account or the vast
majority o developing Asia’s GDP and oreign trade.
Drivers o capital fowsTe highly integrated developing Asian economies have successully
attracted considerable oreign capital, both short-term unds and longer-
term direct investment. However, year-to-year ows have uctuated
considerablyparticularly in response to nancial crises. Understanding
the drivers o capital ows will help governments manage them better.
Capital fows during crises
Inows and outows. In developing Asia, capital inows into the highly
integrated economies8 were interrupted in 2008 as the global nancial
crisis deepened, resulting in a net capital outow rom the region
(Figure 2.1.3 above). Portolio and other investment ows, including bank
loans, accounted or the decline, which was particularly notable in Hong
Kong, China; India; Korea; and aipei,China (Figure 2.3.1).
Nevertheless, total FDI inows into developing Asia’s highly
integrated economies increased in 2008, mainly because o the continued
high rates o oreign investment in the PRC, but at a declining pace
.. Twelve highly integrated
developing Asian economies
Cambodia; People’s Republic o China;
Hong Kong, China; India; Indonesia;Republic o Korea; Malaysia;Philippines; Singapore; aipei,China;Tailand; and Viet Nam.
.. Country groups
TotalHighly integrated Less integrated
Financial integration dimension
Asia
Non-Asia
Geographic dimension 33
111
12 21
32 79
Total
44 100 144
Note: Figures indicate the number o economies in each group in the largest sample.Actual sample sizes vary depending on data availability.
8/7/2019 Asian Development Outlook 2009 Update: Broadening openness for a resilient Asia
http://slidepdf.com/reader/full/asian-development-outlook-2009-update-broadening-openness-for-a-resilient 72/188
56 Asian Development Outlook 2009Update
(Figure 2.3.2). Te slowdown o inward FDI continued in the rst quarter
o 2009especially in Korea; Philippines; Singapore; and aipei,China,
where electronics manuacturing and exports in general were hit hard.
Direct investment abroadoutowsin 2008 rose sharply rom the
group as a whole, dominated by investments made by the PRC. However,or those economies where contagion eects rom the global slowdown
were more pronounced, investment abroad eased. Tis continued into
the rst quarter o 2009. A similar pattern was also seen in cross-border
mergers and acquisitions.
Comparing the crises. When one compares the global nancial crisis
and the Asian crisis, one key similarity that emerges is that FDI (both
inows and outows) is more resilient to shocks than other orms o
capital ows. Portolio investment and bank loans saw sharper declines
than FDI during the two crises, as well as higher volatility. Such resilience
is shown by the coefcient o variation (the standard deviation divided
by the mean). Te coefcient o variation associated with FDI was by ar
lower than that or other orms o capital ows, especially during the twocrisis periods (Figure 2.3.3).
Yet several clear dierences between the two crises stand out. First,
the breadth o the eect across economies in the region has been much
wider in the recent global turmoil than in the 1997–98 crisis, though
countries that have been hit hardest by the global economic downturn
were also the most aected by nancial tightening. Te deteriorating
external nancing environment has halted much oreign investment, and
is also aecting cross-border mergers and acquisitions.
Second, the response o FDI ows is quite divergent. In the earlier
crisis, investors rom outside developing Asia swooped in to buy assets or
which prices had imploded, to the extent that FDI inows to the region as
a whole continued to increase.9 In contrast, in the latter crisis, developingAsia’s investors seized the opportunity to acquire cheap assets outside the
region. Tis increased outward investment can be seen or PRC, India,
and Tailand.
Tird, even though the collapse o capital ows rom the global
turmoil has been more widespread than during the Asian crisis, strong
nancial institutions have served to shield the region rom much o the
damage. With solid indicators or nonperorming loans, risk-weighted
capital adequacy, and ratio o loans to domestic deposits (Figures 1.3.1–1.3.3
in Part 1), nancial institutions have remained resilient to the recent
stress. Moreover, the region’s huge holdings o oreign reserves have
helped protect its exchange rates rom speculative attacks.
Finally, quick policy responses during the turmoil helped minimize
the adverse impact on the region’s economies. Many central banks
expanded local currency liquidity support, guaranteed nancial
institutions’ liabilities, and injected capital into some banks. Current
account surpluses, high sovereign ratings, and expanded deposit
insurance also acted as buers by supporting repatriation o capital
and by allowing domestic lending to substitute or external lending.
Moreover, central banks established dollar swap arrangements
bilaterally with the Federal Reserve as well as cooperative swap
arrangements within the region,10 which helped bolster condence in
local currencies.
2.3.2 Foreign direct investment fows
Q2 2009Q1 20092008
200307199799199096
0
50
100
150
HKGPRCHKGPRC
Inflows Outflows
$ billion
-15
0
15
30
45
THATAPSINPHIMALI ND I NO KOR
$ billionInflows
0
5
10
15
20
THATAPSINPHIMALIND INO KOR
$ billion
Outflows
PRC = People’s Rep. o China; HKG = Hong Kong, China;IND = India; INO = Indonesia; KOR = Rep. o Korea;
MAL = Malaysia; PHI = Philippines; SIN = Singapore;TAP = Taipei,China; THA = Thailand.
Sources: CEIC Data Company Ltd.; International MonetaryFund, International Financial Statistics online; bothdownloaded 1 September 2009.
Click here or fgure data
2.3.1 Portolio and other investment infows
Q1 20092008
200307199799199096
-100
-50
0
50
100
TAPSINKORHKGPRC
$ billion
-20
0
20
40
THAPHIMALIND INO
$ billion
PRC = People’s Rep. o China; HKG = Hong Kong, China;IND = India; INO = Indonesia; KOR = Rep. o Korea;MAL = Malaysia; PHI = Philippines; SIN = Singapore;TAP = Taipei,China; THA = Thailand.
Sources: CEIC Data Company Ltd.; International MonetaryFund, International Financial Statistics online; bothdownloaded 1 September 2009.
Click here or fgure data
8/7/2019 Asian Development Outlook 2009 Update: Broadening openness for a resilient Asia
http://slidepdf.com/reader/full/asian-development-outlook-2009-update-broadening-openness-for-a-resilient 73/188
Broadening openness or a resilient Asia 57
2.3.3 Volatility o capital fows in selected
Asian economies
0
1
2
3
4
5
OutflowsInflows
CBACBACBACBA
Coefficient of variation
199096 200708200006199799
A = FDI; B = Portolio; C = Others.
Note: Coecient o variation is measured by dividing the
standard deviation by the mean.
Source: Authors’ estimates.
Click here or fgure data
2.3.4 Responsiveness o capital fows to
G3 growth
0
3
6
9
Bank loans
(outflows)
Portfolio
outflows
Bank loans
(inflows)
Portfolio
inflows
Foreign
direct
investment
%
1.5
5.2
8.6
5.75.4
Note: The dependent variables are defated by GDP in the
corresponding economy.
Source: Authors’ estimates.
Click here or fgure data
Some conclusions. Te trends mentioned above seem to underscore
the importance o the ollowing conditions in a country’s resilience to
volatile capital ows in a nancially globalized world: solid domestic
institutions, especially in the nancial sector; swi policy responses; and
a sound macroeconomic environment with adequate reserves.
External versus internal actors
o what extent are capital ows determined by global events and to
what extent do domestic policies matter? Both actors play a role, but
i external eventsthe global actorsdominate, policy makers can
do little to inuence the ows o oreign capital. However, i internal
conditionsthe country-specic actorsdrive capital ows, putting
sound macroeconomic policies in place has heightened importance. Te
recent collapse o capital inows to developing Asia raises the question o
the relative importance o external and internal actors or the region.
In the analysis,11 external actors are proxied by growth prospects
in the G3 economies as well as investment returns there. Te internalactors include growth prospects; labor costs; level o human capital
development; the business environment (including trade and nancial
openness); and adequacy o inrastructure in the highly integrated
developing Asian economies.
Foreign direct investment. An estimation was carried out or FDI
using bilateral data rom the UNCAD/ransnational Corporations
database or 1994–2007. Te sample comprises eight12 highly integrated
developing Asian economies and 61 other countries, both industrial and
developing.
In terms o attracting FDI inows, the estimation results show that
internal actors dominate. Yet external actors are still relevant. In the
estimation period, a 1% increase in real income o G3 economies ledto a 1.5% rise in FDI inows in the highly integrated developing Asian
economies (Figure 2.3.4), and this relationship held true even during the
Asian crisis period. FDI inows or this group come rom G3 economies
(around 30% o the total inows into the eight countries); rom developing
Asia (around 35%); and rom other countries, including oshore nancial
centers (the balance). Te importance o the international production
network reinorces the link between oreign investment returns and the
growth outlook o the G3 economies.
In terms o outward FDI, growth prospects o the FDI home country
(highly integrated developing Asian economies) generally play a key
role. Although G3 markets have become a more important investment
destination as investors rom the region acquire strategic assets,13 around
our hs o total outward investment is invested within developing Asia.
Over the past two decades, the PRC has emerged as a key destination or
many developing Asian economies’ FDI, mainly because o its relatively
low labor costs. Cambodia and Viet Nam have also emerged as new
destinations or the same reason. Te important consequence is that the
relatively small proportion o strategic asset–augmenting investment
results in a limited role or the G3 economies as a destination or
developing Asia’s FDI.
Other orms o capital ows. Balance-o-payments data or the capital
and nancial account (specically portolio investment and bank loans)
8/7/2019 Asian Development Outlook 2009 Update: Broadening openness for a resilient Asia
http://slidepdf.com/reader/full/asian-development-outlook-2009-update-broadening-openness-for-a-resilient 74/188
58 Asian Development Outlook 2009Update
were analyzed or the highly integrated developing Asian economies14
during 1990–2008. Te growth prospects in the G3 economies and key
regional trading partners are clearly separate in the estimation model.
Te model also includes the internal actors mentioned earlier.
In contrast to FDI, the estimation results show that G3 economies’growth prospects signicantly inuence movements o portolio inows
and bank loans. A 1% increase in G3 GDP leads to a 5.7% rise in bank
loan inows and a 5.4% increase in portolio inows. Te relationship
is stable beore and aer the Asian crisis. An increasing number o
institutional investors, including insurance companies, pension unds,
and hedge unds rom the major industrial economies, ensure that
the economic prospects o these economies aect portolio and bank
inows. O the internal actors, the country’s growth prospects, nancial
openness, the investment–saving situation, and risks and returns on
investment are also important in aecting portolio investment and bank
loans, although the coefcients corresponding to these variables tend to
be lower than those or G3 GDP growth prospects.As regards outows, a 1% increase in G3 GDP stimulates portolio and
bank loan outows by 8.6% and 5.2%, respectively. Economic prospects
o the home country as well as government policy, especially on nancial
liberalization, are also crucial.
Some conclusions. Te results show that external actorsgrowth
prospects in the G3 economiesare generally still crucial in determining
movements o short-term capital inows (portolio investment and
bank loans) into developing Asia but their impacts on long-term capital
(FDI) are relatively limitedas seen in the recent nancial crisis. Te
importance o such external actors may suggest that global and regional
policy eorts could become more important or developing Asia to
reap the benets o nancial globalization. Nevertheless, the estimationresults point to the importance o internal actors, especially or longer-
term capital, suggesting that country-specic actors are still crucial or
attracting such capital ows.
Policy considerations or managing fnancial
globalization
Establishing a governing ramework that would allow greater nancial
openness cannot be made independently rom other macroeconomic
policy objectives. Te extent o capital account openness needs to be
considered in light o the government’s objectives or exchange rate
and monetary policy. Tis interdependencethe so-called policy
“trilemma”sets up an inherent trade-o among policy choices. Te
policy choices that authorities make among the three elements also have
implications or exchange rate management.
The policy trilemma
Te idea o the trilemma posits that a country cannot have independent
monetary policy, maintain a xed exchange rate regime, and
simultaneously remain open to oreign capital ows (Figure 2.3.5). I
policy makers opt or xed exchange rates and nancial openness,
2.3.5 The “trilemma”
E x c h
a n g e r a t e
s t a b i l i t y
Mon
etary
inde
pend
ence
Closed financial markets and
pegged exchange rate e.g.,
Bretton Woods system
Capital account openness
Monetary union or
currency board,
e.g., euro system
Floating
exchangerate
8/7/2019 Asian Development Outlook 2009 Update: Broadening openness for a resilient Asia
http://slidepdf.com/reader/full/asian-development-outlook-2009-update-broadening-openness-for-a-resilient 75/188
Broadening openness or a resilient Asia 59
monetary policy must be sacriced to maintain the peg. A nancially
open economy can pursue independent monetary policy, but the
exchange rate will have to bear the brunt o adjustment. And
independent monetary policy can only be pursued under a xed
exchange rate regime i the country erects barriers to insulate itsel romoreign capital markets.
Policy choices are rarely absolute. For example, central banks that
actively manage money supply to achieve ination objectives may
occasionally intervene in oreign exchange markets to manage the level o
the exchange rateessentially shiing between two sides o the triangle.
Tere are two approaches to measuring a country’s openness to
nancial globalization. One approach looks at actual cross-border
nancial movements, which were the main criteria used to identiy the
highly integrated economies in this analysis. Tis “de acto” approach
looks at the quantity o oreign capital ows as well as the accumulation
o external assets and liabilities. Te other approach considers the
country’s policy ramework governing cross-border capital owsinits essence. Tis “de jure” approach relies on an analysis o the capital
account restrictions in place.
Te two measures can give divergent views o a country’s openness
to nancial globalization. De acto openness indicators can uctuate due
to price and exchange rate changes, while de jure openness indicators
do not reect the degree o enorcement o the legal ramework. With its
ocus on policy, the trilemma discussion below is anchored in the de jure
approach.
Tree trilemma indexes are constructed to illustrate the extent to
which each policy is used in developing Asia (Aizenman et al. 2008).
Te monetary independence index considers how closely a country’s
interest rates are correlated with a base country, that is, the country or which its monetary policy is most closely linked. Te exchange rate
stability index uses annual standard deviations o monthly exchange
rates between the country’s currency and that o the base country.
Finally, the capital account openness index is a composite measure
encompassing the presence o multiple exchange rates, restrictions on
current account transactions, restrictions on capital account transactions,
and requirements to surrender export proceeds (Chinn and Ito 2008). All
indexes range between 0 and 1, and higher values indicate greater use o a
particular policy.
For highly integrated developing Asian economies, all three policies
are pursued to a certain degree. Aer the late 1980s, convergence o
these three indexes illustrates that progress in opening up the capital
account went hand in hand with exchange rate stability and more
monetary independence (Figure 2.3.6). In the immediate aermath o
the Asian nancial crisis, monetary independence was sacriced in avor
o greater exchange rate stability. Tis shi in emphasis rom monetary
independence continued well aer the economies had recovered, with the
policies again converging in recent years.
Given that these highly integrated developing Asian economies take
the middle ground, combining these policies is crucial, since each o
them has merits and demerits. Monetary independence allows monetary
authorities to have autonomy over macroeconomic management,
2.3.6 Capital account openness, exchange
rate stability, and monetary independence
Monetary independence
Exchange rate stability
Capital account openness
0.2
0.4
0.6
0.8
1.0
0805200095908580751970
Index
Highly integrated developing Asian economies
Index
Less integrated developing Asian economies
0.0
0.2
0.4
0.6
0.8
1.0
0805200095908580751970
Source: H. Ito, J. Jongwanich, and A. Terada-Hagiwara.Forthcoming. “What Makes Developing Asia Resilient ina Financially Globalized World?” ADB Economics WorkingPaper Series. Asian Development Bank, Manila.
Click here or fgure data
8/7/2019 Asian Development Outlook 2009 Update: Broadening openness for a resilient Asia
http://slidepdf.com/reader/full/asian-development-outlook-2009-update-broadening-openness-for-a-resilient 76/188
60 Asian Development Outlook 2009Update
potentially leading to sustainable economic growth. Exchange rate
stability can lead to price stability by providing an anchor, and lessen risk
premiums by mitigating uncertainty, thereby ostering investment and
international trade. However, greater levels o exchange rate exibility
could allow policy makers to use the exchange rate as a tool to absorbexternal shocks (Prasad 2008).
Financial liberalization is probably the most contentious policy among
the three in having clear benets or goals. Teory predicts that more open
nancial markets should lead to economic growth, and that economies
with greater nancial openness should be able to stabilize themselves
through risk sharing and portolio diversication. However, as nancial
liberalization increased its pace over the last two decades, nancial
openness was blamed or economic instability, particularly during crises.
Financial globalization and output volatility
How does nancial globalization aect macroeconomic stability? On
the ace o it, there seems to be a positive relationship (Figure 2.3.7).Te industrial economies and the highly integrated developing Asian
economies have had much less volatile output than the rest o the world
in the last 35 years. Volatility clearly jumps or the highly integrated Asian
economies during the 1997–98 crisis, and yet the recent global nancial
crisis, with the drying up o liquidity in oreign capital markets, did not
translate into a nancial crisis within the region. Tis suggests a complex
underlying relationship between nancial globalization and stability.
Moreover, nancial openness must be considered in tandem with
the other policy elements o the trilemma: monetary independence and
exchange rate stability. Regression estimates show the eect that the
various pairwise combinations o the trilemma policies have on output
volatility (able 2.3.1).15 Te model controls or other macroeconomicvariables. Actual capital inows (the de acto measures) are also included
to test or the impacts on output stability. Estimates or two dierent
country samplesall developing countries and highly integrated
countries onlyhighlight the dierent way that the nancial openness–
output volatility link operates in the economies that receive most o the
global capital ows rom the developing world.
Te estimates or all developing economies show that greater de jure
openness tends to be associated with lower output volatility. Exchange
rate stability by itsel is ound to have a destabilizing eect on output
stability, that is, a statistically positive coefcient corresponding to
exchange rate stability is revealed. However, the interaction term o this
variable with oreign reserves is ound to have a statistically negative
eect, suggesting that countries can mitigate the destabilizing eect o
pursuing greater exchange rate stability i they hold levels o oreign
reserves o about 20% o GDP.
In terms o composition o capital ows, which are accounted or
by the de acto variables, bank lending (part o other capital ows) and
net portolio investment have a statistically negative impact on output
volatility. In other words, increases in net “other” capital inows or net
portolio inows destabilize output, reecting the “hot money” argument
regarding cross-border bank lending and portolio investment. FDI ows
do not necessarily destabilize the economy, though stabilizing eects do
2.3.7 Output volatility by region
0.00
0.02
0.04
0.06
0.08
Non-Asian developing economies
Less integrated developing Asian economies
Highly integrated developing Asian economies
Industrial countries
200206
19972001
199296
198791
198286
197781
197276
5-year standard deviation
of per capita output growth
Note: Output volatility is measured by 5-year standarddeviation o per capita output growth.
Sources: Alan Heston, Robert Summers, and Bettina Aten,Penn World Table Version 6.2, Center or International
Comparisons o Production, Income and Prices at theUniversity o Pennsylvania, S eptember 2006; authors’calculations.
Click here or fgure data
8/7/2019 Asian Development Outlook 2009 Update: Broadening openness for a resilient Asia
http://slidepdf.com/reader/full/asian-development-outlook-2009-update-broadening-openness-for-a-resilient 77/188
Broadening openness or a resilient Asia 61
.. Explaining output volatility with trilemma variables
Developing economies Highly integrated developing economies
Output volatility Output volatility
() () () () () ()
Currency crisis . . . . . .[.]* [.]* [.]* [.] [.]** [.]
Private credit creation -. -. -. . -. .
[.] [.] [.] [.] [.] [.]
Total reserves (as o GDP) . -. . . -. .
[.] [.] [.]* [.] [.] [.]***
Monetary independence (MI) -. -. -. -.
[.] [.]** [.] [.]**
MI x reserves . . . .
[.] [.] [.] [.]
Exchange rate stability (ERS) . . . .
[.] [.]* [.]** [.]***
ERS x reserves -. -. -. -.
[.]* [.]** [.]** [.]***
Capital Account Openness (KAOPEN) -. -. -. -.
[.]** [.]* [.] [.]
KAOPEN x reserves . . . .
[.]* [.] [.] [.]
Net FDI infows/GDP . . . -. -. -.
[.] [.] [.] [.] [.] [.]
Net portolio infows/GDP . . . -. -. -.
[.]** [.]** [.]** [.] [.] [.]
Net ‘other’ infows/GDP . . . . . .
[.]** [.]** [.]** [.] [.] [.]
Short-term debt -. -. -. -. -. -.
(as o total external debt) [.] [.] [.] [.] [.] [.]
Total debt service . . . . . .
(as o GNI) [.]* [.]** [.]** [.] [.] [.]
Observations
Adjusted R-squared . . . . . .
ERS = exchange rate stability; FDI = oreign direct investment; GDP = gross domestic product; GNI = gross national income; KAOPEN = capital account openness;
MI = monetary independence.
Note: Robust regressions are implemented on combinations o trilemma variables dened as: (1) MI and ERS, (2) MI and KAOPEN, (3) ERS and KAOPEN; * signicant at
10%; ** signicant at 5%; *** signicant at 1%.
Source: H. Ito, J. Jongwanich, and A. Terada-Hagiwara. Forthcoming. “What Makes Developing Asia Resilient in a Financially Globalized World?” ADB Economics
Working Paper Series. Asian Development Bank, Manila.
not seem to be signicant either. However, this eect is not present when
the sample o highly integrated economies is considered.
Role o domestic nancial markets
One hypothesis suggests that a country needs to have certain minimum
conditions in place to reap the benets o nancial globalization. In
particular, Kose et al. (2009) nd that the structure o the domestic
nancial sector matters greatly in harnessing the benets o nancial
globalization. A country needs to pass a threshold level o nancial
institutional development beore it can derive the indirect benets
and reduce the risks o volatile ows. Mendoza et al. (2007) also nd
that countries with less developed nancial markets may experience
8/7/2019 Asian Development Outlook 2009 Update: Broadening openness for a resilient Asia
http://slidepdf.com/reader/full/asian-development-outlook-2009-update-broadening-openness-for-a-resilient 78/188
62 Asian Development Outlook 2009Update
welare losses by liberalizing capital markets unless the liberalization is
accompanied by other benets such as the transer o technology, speedier
nancial market development, and risk sharing, which take time to be
realized. Tis evidence is supported by Kim et al. (2008) and Fujiki and
erada-Hagiwara (2007), particularly on the issue o risk-sharing benetssuch as consumption smoothing, o which very little has been seen in
developing countries.
o test this hypothesis, indicators o domestic nancial market
development were incorporated into the model. Among highly integrated
economies, lower levels o nancial market development were associated
with higher volatility when capital account openness was pursued.
Tis result held whether this openness was paired with monetary
independence or exchange rate stability in the regression analyses.
A similar exercise was conducted using de acto measures or three
dierent components o capital ows. Te results generally support the
main ndings previously discussed: an underdeveloped nancial market
combined with a more open capital account tends to destabilize theeconomy.
Tese results indicate that highly integrated developing economies
need to be equipped with deep credit markets i they want to see the
benets o nancial liberalization on their output volatility. Having a
higher level o capital account openness and a deep credit market can
yield a synergistic impact to damp output volatility, presumably by
acilitating allocation o capital and ameliorating inormation asymmetry,
thereby reducing the cost o capital. Te worst and more signicant
case is that a country with shallow credit markets can exacerbate output
volatility caused by nancial liberalization.
Where do developing Asia’s economies stand in terms o nancial
development? Figure 2.3.8 compares the level o nancial development,measured by dierent aspects o the nancial markets, across dierent
groups o economies. In the banking sector or stock markets, the
nancial development o the highly integrated developing Asian
economies is quite comparable to that in industrial economies, but among
less integrated Asian countries it lags behind. Tis implies that the highly
integrated developing Asian economies could liberalize their nancial
markets and reap the benets, especially in terms o reducing output
volatility, while gains rom opening up the nancial market or the less
integrated developing Asian economies could be limited.
Yet the picture is completely dierent in terms o bond markets.
Underdevelopment o bond markets is ound in both highly and less
integrated economies in developing Asia. Clearly, in both private and
public bond markets, there is still room or developing Asia’s economies
to catch up with industrial economies.
Managing oreign reservesProgress in nancial globalization has maniested itsel on the asset
side o developing Asia in the past several years as accumulated oreign
reserves. Te region’s reserves are held primarily in the orm o assets
denominated in US dollars; the US dollar has been the dominant reserve
currency in the region. Tis section revisits how oreign reserves have so
2.3.8 Measuring nancial development
Non-Asian developing economies
Less integrated developing Asian economies
Highly integrated developing Asian economies
Industrial countries
0.0
0.5
1.0
1.5
2002−06
1997−2001
1992−96
1987−91
1982−86
1977−81
1972−76
Private credit creation
% of GDP
0.0
0.5
1.0
1.5
2002−06
1997−2001
1992−96
1987−91
1982−86
1977−81
1972−76
Stock market capitalization
% of GDP
0.0
0.5
1.0
1.5
2002−06
1997−2001
1992−96
1987−91
1982−86
1977−81
1972−76
% of GDP
Private bond market capitalization
Source: H. Ito, J. Jongwanich, and A. Terada-Hagiwara.Forthcoming. “What Makes Developing Asia Resilient ina Financially Globalized World?” ADB Economics WorkingPaper Series. Asian Development Bank, Manila.
Click here or fgure data
8/7/2019 Asian Development Outlook 2009 Update: Broadening openness for a resilient Asia
http://slidepdf.com/reader/full/asian-development-outlook-2009-update-broadening-openness-for-a-resilient 79/188
Broadening openness or a resilient Asia 63
ar been managed, and reviews underlying issues in improving the way
they are used.
Obsteld et al. (2008) argue that reserves accumulation is a key tool
or dealing with domestic nancial instability as well as exchange rate
variability under a managed oating plus policy regime. In other words,a primary reason or a central bank to hold reserves is to protect the
domestic banking sector, and domestic credit markets more broadly,
while limiting external currency depreciation.
Te same paper also points out that the need or such protection
is much greater in countries with a ragile nancial system and a
currency mismatch. As most developing countries are orced to hold
external liabilities in oreign currencies, the currency mismatch problem
o external assets and liabilities is more serious than in industrial
economies. With underdeveloped local currency bond markets,
developing Asia is no exception.
One measure o reserves adequacy is the ratio o reserves to broad
money (Figure 2.3.9). By this criterion, the picture is still mixed withmost economies having less ull coverage. Yet other traditional measures
o reserves adequacyshort-term debt cover and import covershow
that developing Asia now has high levels o oreign exchange reserves
(Figure 2.3.10).
While the high level o reserves was crucial to cushion against
external shocks during the recent nancial crisis, carrying excessive
reserves entails costs due to its poor management (Bird and Rajan 2003).
Regional central banks have made eorts to reduce the need or
holding excessive oreign reserves. In particular, extensive banking
sector reorms, with strict enorcement o regulation and supervision,
have proven to be a crucial actor to shield against the volatile ows
seen over the last year or so. Meanwhile, development o local currency–denominated bond markets has been promoted, mainly to mitigate the
risk o currency mismatch.
Recent approaches
In developing Asia, a combination o a strong current account surplus
and (to a lesser extent) capital inows has resulted in a large expansion
in oreign reserves holdings. In reserves management, holdings can
be categorized into two portionsone that prioritizes liquidity or
precautionary needs, and one that ocuses on earning returns over a
medium- to long-term investment horizon in less liquid markets.
In act, most economies in highly integrated developing Asia already
meet the adequacy criteria suggested by conventional measures in terms
o precautionary needs. Tese indicators include whether a country has
sufcient liquid oreign exchange reserves to cover oreign currency debts
payable within 1 year and whether reserves are sufcient in relation to
import needs.
For the portion o reserves held or precautionary needs, holding
highly liquid assets is appropriate. For this reason, the practice has been
to hold US securities (such as dollars and reasury securities) as these
markets are the most liquid. In 2008, US dollar assets made up 64% o
world reserves, although there has been some shi toward more diverse
holdings. While the country breakdown o the currency denomination
2.3.9 Reserves adequacy, broad money
cover, end-2008
0 22 44 66 88 110
Pakistan
BangladeshRep. of Korea
Hong Kong, China
Indonesia
People's Rep. of China
Taipei,China
Mongolia
Malaysia
Thailand
Philippines
Singapore
India
% of M2
Source: CEIC Data Company Ltd., downloaded 31 August2009.
Click here or fgure data
2.3.10 Reserves adequacy, short-term debt
and import cover, end-2008
0
5
10
15
20
25
0
5
10
15
20
25
Import coverShort-term debt cover
PRC TAPIND KOR
HKG SIN THAMAL
PHI
% of short-term debt Months of imports
INO
PRC = People’s Rep. o China; HKG = Hong Kong, China;IND = India; INO = Indonesia; KOR = Rep. o Korea;MAL = Malaysia; PHI = Philippines; SIN = Singapore;TAP = Taipei,China; THA = Thailand.
Source: CEIC Data Company Ltd., downloaded 25 August
2009.
Click here or fgure data
8/7/2019 Asian Development Outlook 2009 Update: Broadening openness for a resilient Asia
http://slidepdf.com/reader/full/asian-development-outlook-2009-update-broadening-openness-for-a-resilient 80/188
64 Asian Development Outlook 2009Update
o oreign reserves is not available, the share o US reasury security
holdings as a share o total reserves does indicate that developing Asia’s
reserves are largely in dollar-denominated assets. Tis level is more than
what is warranted by precautionary needs. Consequently, either liquidity
considerations are overemphasized in the region or alternative nancialinstruments are not available.
For the portion where liquidity considerations are less important,
any asset class consistent with their risk and return objectives are
potentially appropriate. Tis portion might be managed on the balance
sheet o the monetary authority or through a separate entity, such as a
sovereign wealth und. Such unds have been set up as a natural reaction
to increasing concerns over returns orgone when central banks keep
their oreign reserves in sae and liquid but low-yielding assets. Except
or Singapore and Hong Kong, China, where sovereign wealth unds have
established histories, most o the unds in the region have been created in
the last decade, the period that coincides with the rapid accumulation o
oreign reserves in these economies (able 2.3.2). Assets o these unds aretranserred rom oreign reserves with the aim o making more strategic
longer-term investments and o securing higher returns. However, the
role and portolio size o such sovereign wealth unds have been limited
so ar.
Te bulk o developing Asia’s reserves thereore appear to be managed
very conservatively. Given the current medium- to long-term concerns
over the US scal position, this is beginning to worry policy makers. How
might reserves be more efciently managed?
Issues or better reserves management
Demand or US reasuries rom developing Asia remains strong
(Figure 2.3.11). Especially in view o the devastation o the Asian crisis,this conservative stance makes sense because the US dollar remains
the centerpiece o any reserves management policy in which liquidity
is a principal determinant. But with the worrisome US scal outlook,
i liquidity is gained at the expense both o possible overexposure to a
.. Sovereign wealth unds in developing Asia
Economy Name o und Year o
inception
Singapore Temasek Holdings
Singapore Gover nment o Singapore Investment Corporation
Brunei Darussalam Brunei Investment Agency Malaysia Khazanah Nasional Bhd.
Hong Kong, China Investment Portolio (Hong Kong Monetary Authority)
Azerbaijan State Oil Fund
Kazakhstan National Oil Fund
Taipei,China National Stabilization Fund
Korea, Rep. o Korea Investment Corporation
Timor-Leste Petroleum Fund
Uzbekistan Fund or Reconstruction and Development
China, People’s Rep. o China Investment Corporation
Source: Donghyun Park. 2007. “Beyond Liquidity: New Uses or Developing Asia’s Foreign Exchange
Reserves”. ADB Economics Working Paper Series No. 109. Asian Development Bank, Manila.
8/7/2019 Asian Development Outlook 2009 Update: Broadening openness for a resilient Asia
http://slidepdf.com/reader/full/asian-development-outlook-2009-update-broadening-openness-for-a-resilient 81/188
Broadening openness or a resilient Asia 65
potentially depreciating dollar and o reduced reserves diversication, the
advantage o the stance becomes less clear cut.
Indeed, current debates reect these concerns, and the global
nancial crisis has created incentives or central banks to reshape reserves
management. For example, some analysts advocate greater use o specialdrawing rights to promote greater diversication.
One major mechanism or the region to manage its reserves more
efciently is regional reserves pooling. In particular, multilateralization
o the Chiang Mai Initiative (CMI) is designed to create a single
regional reserves pool among CMI members, that is, ASEAN+3.
CMI multilateralization received a big boost in May 2009 when CMI
members reached agreement on the size o the pool, respective member
contributions, borrowing conditions, surveillance mechanism, and other
key details. Te agreement will be implemented beore the end o this
year.Givenitssubstantialsizeat$120billion,theregionalreservespool
may help discourage CMI members rom building up excess reserves.
Asian local currency bond markets could also play a bigger role i central banks insisted less on liquidity, particularly or their medium- to
long-term investments. Tere are eorts in train to help develop Asia’s
bond markets, or example the Asian Bond Market Initiative under the
aegis o ASEAN+3 and the Asian Development Bank, as well the Asian
Bond Fund initiative under the EMEAP (Executives’ Meeting o East
Asia and Pacic Central Banks group, an organization or central banks
in the region).
Nonetheless, the limited size o the region’s local currency bond
markets is preventing intraregional trade in nancial assets rom
becoming more comparable to extraregional trade. Te share o portolio
investments to neighboring countries more than doubled rom 2000 to
2007, but only to 13% o total investments (Figure 2.3.12). Several practicalimplementation issues remain, which include the difculty o access to
markets such as the PRC, and the difculty o reserves reallocation to
increase Asian bond exposure.
Further development o local currency bond markets, both in size
and accessibility, is crucial or three main reasons. First, it would provide
additional nancial instruments to diversiy risks. Second, it would help
reduce the risk o currency mismatch by allowing countries to issue
debts in their own currency, which in turn would reduce the need to
accumulate excess oreign reserves. Tird, it would generate additional
nancial channels that would oster Asian intermediation o its savings,
and make Asia more attractive to outsiders.
Concluding remarks and policy implicationsDeveloping Asia is now a very dierent economic entity in terms o
nancial ows rom what it was little more than a decade ago. Tis is
seen clearly in the dierent eects o the Asian nancial crisis o 1997–98
and the recent global nancial crisis and slump. Inward FDI, or example,
declined in the recent turmoil but increased in the earlier period as
non-Asian investors took advantage o “re-sale” assets in the region. Te
boot may now be on the other oot: cheap assets worldwide present an
2.3.11 Change in US Treasury holdings,
August 2008 to June 2009
-40 -20 0 20 40 60 80 100
Rep. of Korea
Philippines
Thailand
Malaysia
Taipei,China
Singapore
People's Rep. of China
Hong Kong, China
India
Foreign official 18.0
%
-13.8
-5.7
-2.3
15.8
16.3
27.9
35.3
51.7
94.6
Note: Foreign ocial pertains to holdings o US Treasuriesby oreign ocials and institutions.
Sources: Treasury International Capital System, available:
http://www.treas.gov/tic/mh.txt, downloaded 31 August2009; authors’ calculations.
Click here or fgure data
2.3.12 Intraregional portolio investments
0.0
0.2
0.4
0.6
20072001
THASIN
PHIPAK
MALKOR
KAZJAP
INOIND
HKG
% of total portfolio investments
HKG = Hong Kong, China; IND = India; INO = Indonesia;JAP = Japan; KAZ = Kazakhstan; KOR = Rep. o Korea;MAL = Malaysia; PAK = Pakistan; PHI = Philippines;SIN = Singapore; THA = Thailand.
Source: International Monetary Fund, Coordinated PortolioInvestment Survey data, available: http://www.im.org,
downloaded 31 August 2009.Click here or fgure data
8/7/2019 Asian Development Outlook 2009 Update: Broadening openness for a resilient Asia
http://slidepdf.com/reader/full/asian-development-outlook-2009-update-broadening-openness-for-a-resilient 82/188
66 Asian Development Outlook 2009Update
opportunity or Asian economies to undertake outward FDI, and some
Asian countries seem to be seizing it.
Despite the steeper collapse o capital inows than during the Asian
crisis, strong economic undamentals in developing Asia, especially
among its nancial institutions, helped its economies successully managemost o the adverse eects. Greater exchange rate exibility and huge
oreign reserves played a major role, as did quick policy responses.
Gaining access to external nancing by opening up the capital
market can be benecial i it is advanced in a cautious manner, and
i it moves hand in hand with the development o domestic nancial
markets. However, bond market development, in particular, has been
playing only a limited role so ar. Better management o oreign reserves
requires urther development o local currency bond markets both in
size and terms o accessibility. Such a move is crucial or three main
reasons: it would provide additional nancial instruments to diversiy
risks; it would help reduce the risk o currency mismatch; and it would
create a pool o unds and additional nancial channels to nanceinvestments in the region.
8/7/2019 Asian Development Outlook 2009 Update: Broadening openness for a resilient Asia
http://slidepdf.com/reader/full/asian-development-outlook-2009-update-broadening-openness-for-a-resilient 83/188
Maximizing the benets o
labor fows
IntroductionDeveloping Asia is a major provider o oreign workers and beneciary o
remittances. Te region received more remittances than any other part
o the world in 2008, and remittance ows to the region have become an
increasingly important source o oreign exchange. According to ofcial
estimates, international remittances to developing Asia multiplied about
18timesinatwo-decadespanfrom$9.3billionin1988(about1%of
regionalGDP)to$162billionin2008(about2%ofGDP).Partofthisincrease reects greater use o ofcial channels to remit unds and the
improved ability o central banks to record these ows.
Te region has evolved into both a source o, and a host to, migrant
workers. Recent trends reveal that Asian migrants are no longer
restricting themselves to industrial-country jobs, and intra-Asian
migration has become more pronounced (ADB 2008).
As with cross-border ows o goods and capital, the allout rom
the global economic turmoil has undermined international migration.
Declining employment in the major industrial economies, the Middle
East, and the Russian Federation is tempering the demand or migrant
workers rom developing Asia. Unskilled and semiskilled workers in
highly cyclical sectors such as construction, nance, manuacturing,retail, and tourism are being hit particularly hard.
Te global recession is slowing remittance ows to the developing
world. Remittances to all developing countries grew by only an estimated
15% in 2008, compared with 25% in 2007 and 15% on average annually in
the decade beore that. Te World Bank orecasts a decline o 7–10% in
remittances in 2009 (Ratha et al. 2009).
Developing Asia has not been immune to the slowdown in
remittances since the onset o the tumult, and the deceleration is
aecting most subregions (Figure 2.4.1). Countries in Central, South, and
Southeast Asiawhere remittances contribute substantially to economic
activityare particularly exposed. Yet developing Asia has not suered as
severely rom decelerating international labor migration and remittance
ows as it has rom the collapse in trade and the slowing o nancial
ows. But there has been a decline in the new deployment o migrants
rom most Asian countries, a act that may undermine remittance growth
in the near term.
Te recession has lied international migration high on the agenda o
governments in host countries, which are trying to protect employment
opportunities or their own nationals. In this environment, migrant
workers are acing increasing discrimination and rising hostility, since
they are seen as depriving local workers o jobs. Teir problems are
compounded by the tightening o immigration rules in some host
2.4.1 Annual growth in remittances
-15
0
15
30
45
60
PacificSoutheast Asia
South AsiaEast AsiaCentral Asia
0807062005
%
Note: Pacic excludes Cook Islands, Nauru, and Tuvalu.
Source: World Bank, Migration and Remittance data,July 2009, available: w ww.worldbank.org, downloaded31 August 2009.
Click here or fgure data
8/7/2019 Asian Development Outlook 2009 Update: Broadening openness for a resilient Asia
http://slidepdf.com/reader/full/asian-development-outlook-2009-update-broadening-openness-for-a-resilient 84/188
68 Asian Development Outlook 2009Update
countries in response to increasing unemployment due to the economic
slump. Some countries have restricted immigrants’ access to the labor
market (by, or example, cutting the numbers o migrant work permits),
while others are oering incentives or unemployed migrants to return
home (such as paying the cost o a return ight). Te restrictions arebeing imposed by host countries both outside and inside the region
(Fix et al. 2009).
Tese restrictions limit opportunities or developing Asia to benet
rom increased labor mobility and the deepening integration o labor
markets. Worsened economic conditions back home and the nancial
and social costs o returning may orce many migrants to stay in host
countries. While remitters are employing various strategies to cope with
the recession, such measures will be ineective against an extended
period o poor employment opportunities. Te uncertain conditions o
migrants are adversely aecting their amilies that rely on remittances.
Slowing remittance ows may both drag down economic growth in
countries that benet heavily rom remittances and raise the risk o greater poverty.
Remittances as an engine o growth and
poverty reduction?
As a source o nancial capital in poor regions, earnings sent home
by migrants can avorably aect the receiving country’s growth
prospects. Remittances have been shown to oster economic growth by
spurring entrepreneurial activity, improving labor productivity, and
stimulating consumption and investment. Such receipts also help smooth
consumption and promote human capital development by increasingthe capacity o households to spend on education, health, and nutrition.
Furthermore, i they raise incomes o poorer households, these ows may
well reduce poverty and income inequality.
Using data rom 29 developing Asian economies or the period
1998–2007, Vargas-Silva et al. (orthcoming) examine the link between
remittances and growth as well as the link between remittances and
poverty. Te results indicate that a 1% increase in the ratio o remittances
to GDP leads to about 0.03% increase in the per capita GDP growth rate
(Figure 2.4.2).16
Further analysis o the data or developing Asia showed signicant
poverty-reducing benets o remittances, in terms o decreasing the
poverty gap (the income by which amilies all short o the poverty line,
expressed as a percentage o the poverty line). For example, a 1% increase
in remittances as a share o GDP decreases the poverty gap in developing
Asian economies by about 0.05%.17
Analysis o household survey data in Bangladesh, Philippines, and
Pakistanthree Asian economies that rely heavily on remittances
support the cross-country regression ndings (Ahmed et al. 2009; Ang
et al. 2009; Raihan et al. 2009). Te three country studies consistently
revealed positive eects o international remittances on household
income, consumption, investment, and poverty reduction. However, the
studies also showed that the poorest o the poor households (the bottom
2.4.2 Eect o remittances on growth and
poverty
-0.08
-0.04
0.00
0.04
Random
effects
Fixed
effects
Random
effects
Fixed
effects
%
0.03
-0.04-0.07
0.02
GDP growth Pover ty gap
Notes: Growth reers to the annual GDP per capita growthrate (%). The poverty gap is calculated at the $1.25 perday poverty line, purchasing power parity (% o povertyline). The elasticities are taken with respect to theremittance-to-GDP ratio, evaluated at the mean.
Source: C. Vargas-Silva, S. Jha, and G. Sugiyarto.Forthcoming. “Remittances in Asia: Implications or theFight against Poverty and the Pursuit o Economic Growth.”
ADB Economics Working Paper Series. Asian DevelopmentBank, Manila.
Click here or fgure data
8/7/2019 Asian Development Outlook 2009 Update: Broadening openness for a resilient Asia
http://slidepdf.com/reader/full/asian-development-outlook-2009-update-broadening-openness-for-a-resilient 85/188
Broadening openness or a resilient Asia 69
20%) benet least rom remittances. Tis stems rom such actors as the
relatively high cost o migration and the specic requirements or migrant
workers (or example, the need or host-country language competency or
required job skills).
In light o the slower growth in remittance ows, the links discussedabove suggest that poor households are more likely to remain mired in
poverty as a result o the recent global downturn. Moving on rom a
household perspective, what is the impact o remittances on economies
more widely, especially in terms o smoothing out shocks?
Remittances as a source o stability in oreign
currency infows?
Recorded remittances are in general less volatile than other nontrade
oreign currency inows, and oen shore up macroeconomic stability
(Figure 2.1.4 above). Te three country studies show that remittancesoster macroeconomic stability by supporting domestic demand.
Migrants’ remittances have been particularly responsive to major
crises in their home countries. For instance, Sri Lanka reported a
substantial increase in migrant transers ollowing the 2004 tsunami. Tis
jump occurred despite poorly unctioning nancial channels at the time
(as many important money transer agencies and banks were closed or a
long period in some areas because o the tsunami). Remittances played a
similarly supportive role aer the 2005 earthquake in northern Pakistan.
Similarly, remittances to the Philippines generally respond to rainall-
related shocks or disasters.
Remittances are by ar the most stable source o private oreign
currency receipts. From 1990 to 2008, the coefcient o variation o remittance ows to developing countries was 0.77 as against 0.80 or
oreign direct investment, 1.34 or private debt, and 1.17 or portolio
equity ows (lower values indicating more stable ows).18
Te stability o remittance ows can counter the eects o alling FDI,
debt, and equity ows during an economic downturn in the recipient
country. Figure 2.4.3 compares remittances with other private capital
ows in the Philippines. Te relative stability o remittance ows stands
out in the gure, even when the global turmoil began in earnest.
While remittances are less volatile than other ows, can the stronger
claim be made that they can help smooth oreign currency ows over
the business cycle? Here, the evidence is mixed. Studies such as Chami
et al. (2005) nd strong evidence in cross-country data that remittances
are countercyclical.19 However, the behavior o remittances depends
partly on the motives or remitting. For example, Lueth and Ruiz-Arranz
(2007) nd that remittances in Sri Lanka are procyclical, increasing when
economic activity in the home country accelerates.
Te recent global turmoil has led to a synchronous recession o the
major industrial economies, which has led to a slowing in growth in
most economies in the world. In such extreme circumstances, it is not
surprising that remittances, too, have suered. As with employment
generally, the eect o the global downturn on remittances may be most
severe aer a lag. For example, remittances to ajikistan, the world’s
2.4.3 Recent trends in remittances and
other private fows, Philippines
-800
0
800
1,600
2,400
Foreign portfolio inflows
Foreign direct investment
Remittances
AprJan
09
OctJulAprJan
08
OctJulAprJan
2007
$ million
Note: The oreign direct investment series representsnonresidents’ investments in the Philippines, as taken romthe balance o payments.
Source: CEIC Data Company Ltd., downloaded 10 September2009.
Click here or fgure data
8/7/2019 Asian Development Outlook 2009 Update: Broadening openness for a resilient Asia
http://slidepdf.com/reader/full/asian-development-outlook-2009-update-broadening-openness-for-a-resilient 86/188
70 Asian Development Outlook 2009Update
largest recipient in terms o GDP, are projected to all by 35% in 2009,
equivalent to a huge 15% o GDP. In contrast, Bangladesh, Philippines,
and Pakistan experienced sudden spurts in remittance receipts in
mid-2009. However, this may reect repatriation o the savings o
returning migrants. I this turns out to be the case, this upward blip may be a harbinger o slower growth o remittances in the near uture as their
source shrinks.
During the past two decades, the only noticeable period o sluggish
growth in remittances was during the aermath o the 1997–98 Asian
nancial crisis. Nonetheless, they were quick to recover and returned
to their long-term growth path in a year. Since 1997, there has not been
a single year in which aggregate remittances to the region decreased
in comparison with the previous year. While there may be a drop
in the immigrant population in industrial economies due to return
migration (as a result o lack o good employment opportunities there),
these migrants are likely to return to the host country once the global
economy stabilizes (Papademitrou and errazas 2009; Fix et al. 2009).Estimates o the impact o the crisis on remittances (or example, Ratha
and Mohapatra 2009; Calì and Dell’Erba 2009) point to a airly ast
resurgence o these ows.
Overall, although migrants are being aected by the global downturn,
remittances have held up so ar. Even i migration ows were to stop at
some point, remittances would continue to ow or many years, though
their growth would likely stagnate (Funkhouser 1995). Based on past
crises, growth in remittances is likely to bounce back quickly during the
ensuing recovery.
Maximizing the benets o labor fowsEconomic migration has become an increasingly important element
o the global landscape, and Asian countries are well known net
exporters o labor. In act, the six main emigration countries in the
region have over 100 million o their citizens living abroad. Moreover,
remittances are a more stable source o oreign currency than many
other nontrade sources.
In this light, developing Asia’s governments should maximize the
benets o labor ows by ensuring that the migration channel is kept
open, by enhancing the saety and security o unds transers to home
countries (through strengthening ormal transer systems), and by
providing an environment that encourages households to create assets
through investing more o their remittance income.
Keeping open the migration channel
Te global turmoil has led to rising unemployment in host countries,
which are now showing increasing preerence or employing their own
nationals. Tese countries are also discriminating against oreign workers,
who in some places are suering rom tighter immigration rules. Some
migrants will see out the current downturn in their host country without
a proper job, while those migrants who have already returned home are
likely to go back once the global economy stabilizes. Until then, what can
developing countries do to make the most o migration’s benets?
8/7/2019 Asian Development Outlook 2009 Update: Broadening openness for a resilient Asia
http://slidepdf.com/reader/full/asian-development-outlook-2009-update-broadening-openness-for-a-resilient 87/188
Broadening openness or a resilient Asia 71
One o the reasons or the relatively quick recovery o remittances
aer the 1997–98 crisis was the wide diversity o countries hosting
migrants rom developing Asia. Tose regional countries that send their
workers to a wide diversity o destinations will likely see remittance ows
bounce back aster than other sending countries. Governments shouldthereore work to keep the channels or oreign workers open, which will
help preserve that diversity. In addition, regional cooperation to avoid
protectionist policies would enhance the mutual interests o both home
and host countries.
Governments o countries such as Bangladesh, Philippines, and
Pakistan have initiated policy actions to help migrant amilies cope
with the adverse impact o the global downturn. Notable among these
are online transers to ease the remittance ows and public–private
partnerships or skills development projects in Bangladesh; nancial
assistance, investment, and education support in Pakistan; and alternative
livelihood programs or economically displaced returning workers in the
Philippines. Other countries could consider similar moves.
Boosting ormal remittance fows
Faster, cheaper, and more secure ways o sending remittances can acilitate
greater remittance ows through ormal channels. Te evidence on the
large volume o remittances worldwide and the impact o these ows on
receiving countries has encouraged many receiving-country governments
to closely ollow the patterns o these transers. Tis increased supervision
and tighter enorcement is also a reaction to concerns regarding money
laundering and the nancing o terrorism groups.
In the past, ofcial channels or remitting in Asia ailed to meet the
needs o many migrants and households. Te advantage o unofcial
channels is ease o accessibility or migrants in the host country and theirability to reach remote areas o the home country. Ofcial channels, in
contrast, are usually concentrated in large metropolitan areas.
Te situation is improving. Te cost o remitting through ormal
channels has been decreasing and, as a consequence, wire transers now
account or a larger share o transers. Te reasons or the reduction in
the cost o remitting include increased efciency and a larger network o
ormal channels that involve both state-owned and private banks. Te
latter have been attracted by the prospect o revenue rom the transers
themselves and the possibility o providing banking services to migrants
and their amilies.
Central banks can record these ormal channel transers much more
easily than the sums that individuals carry. Governments need to take
care not to create disincentives to using the ormal nancial system or
transerring unds. Policies that raise the cost o remitting, such as heavy
taxes, mandatory remittance schemes, or xed exchange rate policies,
encourage remittance black markets resulting in unrecorded ows.
Improving investment rom remittances
Policies that encourage remittances or productive use require an
improved investment climate that allows markets to work efciently. A
well-organized nancial system would also allow remittance-receiving
amilies to leverage remittances so as to access small loans or investment.
8/7/2019 Asian Development Outlook 2009 Update: Broadening openness for a resilient Asia
http://slidepdf.com/reader/full/asian-development-outlook-2009-update-broadening-openness-for-a-resilient 88/188
72 Asian Development Outlook 2009Update
Longer term, a avorable investment environment would help direct
remittances to productive investments such as smaller businesses.
Improving legal aspects to lessen the nancial cost o international
migration and to provide access to potential migrants rom the
lower income groups can also increase the equity-enhancing eect o remittances.
Millions o dollars o remittances to households in Asia can make a
signicant dent in poverty. Encouraging the use o remittances not only
or consumption but also or investment in areas such as health and
education can enhance domestic demand and boost economic growth,
as well as develop human capital, contributing to long-term growth. In
addition, remittance-boosted household consumption will generate extra
demand in the receiving economy.
8/7/2019 Asian Development Outlook 2009 Update: Broadening openness for a resilient Asia
http://slidepdf.com/reader/full/asian-development-outlook-2009-update-broadening-openness-for-a-resilient 89/188
Policies to achieve more
balanced openness
Enhancing intraregional tradeStrengthening intraregional trade can help reduce developing Asia’s
excessive dependence on exports to the US and other industrial
economies, and so provide an additional engine o recovery and growth.
rade in parts and components seems to have accounted or much o the
intra-Asian trade in the past, though more recent trends indicate trade in
nal goods beginning to play a more important role.
In particular, the PRC has seen an increase in the share o nal goodsand a corresponding decline in the share o parts and components in its
imports. Tus it may well be starting to show some signs o promise as an
independent engine o growth or the region. Given this budding promise,
developing Asian economies should take the initiative to speed up its
realization. Some o these measures will be purely national while others will
require a degree o regional coordination. Tree specic steps are as ollows.
Strengthening domestic economies. National governments should
aim or this through a wide range o rebalancing policies (ADB 2009).
Tis objective involves demand-side policies that encourage households
to spend more and save less, as well as supply-side policies that promote
smaller companies and service industries catering to domestic demand.
A dynamic and vibrant domestic economy in each regional country willnaturally lead to more intraregional trade based on nal goods.
Stronger domestic economies and more vigorous intraregional
trade can then orm a virtuous circle. Te result will be a more resilient
regional economy that is less vulnerable to the vicissitudes o the
global business cycle. But without robust domestic economies that have
strong demand or nal goods, there will be a limit to the capacity o
intraregional trade to serve as an engine o growth.
Creating a more conducive trade environment. Intraregional trade
liberalization has been under way or some time in Asia, as evident in
relatively low tari and nontari trade barriers, and a growing number o
regional trade agreements. However, a wide range o border and behind-
the-border obstacles to trade still prevents the region rom ully realizing
the potentially large gains rom intraregional trade. For example, complex
rules-o-origin requirements and burdensome customs procedures may
discourage countries rom trading with each other.
Te ailure o the multilateral Doha talks gives an even greater sense
o urgency to removing behind-the-border obstacles to trade. Tereore,
governments must take additional supportive and complementary trade-
acilitation measures, such as simplication and harmonization o customs
procedures, to convert the growing intraregional trade liberalization
moves into an overall trade-acilitating environment. Furthermore,
regional governments should improve the transportation inrastructure
8/7/2019 Asian Development Outlook 2009 Update: Broadening openness for a resilient Asia
http://slidepdf.com/reader/full/asian-development-outlook-2009-update-broadening-openness-for-a-resilient 90/188
8/7/2019 Asian Development Outlook 2009 Update: Broadening openness for a resilient Asia
http://slidepdf.com/reader/full/asian-development-outlook-2009-update-broadening-openness-for-a-resilient 91/188
Broadening openness or a resilient Asia 75
such as establishment o bilateral swap arrangements with the Federal
Reserve and cooperative initiatives or bilateral swaps among Asian
countries, proved useul recently. Formalizing regional and international
cooperation would help improve access to liquidity when immediate needs
arise. Creating a multilateral reserves pool under the Chiang Mai Initiativecould also mitigate US dollar shortages, and would reduce the need or
excess reserves. Tis policy would allow a country to gradually pursue a
more exible exchange rate with less concern or external shocks.
Developing a local currency bond market. Foreign reserves
management has been conservative in developing Asia largely because o
the limited development o national and regional securities markets, and
partly because liquidity needs are overemphasized.
A local currency bond market in particular needs to be developed
urther, both in size and accessibility, so that developing Asia can
diversiy the region’s assets and avoid overexposure to dollar-
denominated assets. A ully developed local currency bond market would
also address the currency mismatch problem o developing Asia that has,arguably, caused the excessive holding o oreign reserves.
Maximizing the benets o labor fowsWith economic migration an increasingly important element o the
global landscape and remittances a more stable source o oreign
currency than many other nontrade sources, it is in the interests o both
home and host countries to maximize the benets o labor migration.
It is vital, especially now, that the migration channel is kept open. In
addition, the saety and security o unds transers must be enhanced.
And an environment that encourages households to create assets through
investing more o their remittance income needs to be encouraged.Keeping open the migration channel. With rising unemployment in
host countries, some o them are discriminating against oreign workers,
and developing countries need to work assiduously to keep the migration
channel or workers open. In addition, regional cooperation to avoid
protectionist policies would enhance the interests o both home and host
countries. Policy actions to help migrant amilies cope with the adverse
impact o the global downturn should be expanded to more countries.
Boosting ormal remittance ows. Faster, cheaper, and more secure
ways o sending remittances can acilitate greater remittance ows
through ormal channels. Indeed, the situation is getting better in this
regard: costs o remitting through such channels have been alling. But
governments need to take care not to disincentivize use o the ormal
nancial system or transerring unds (by imposing, or example, high
ees). Policies that raise the cost o remitting encourage black markets,
leading to higher volumes o unrecorded ows.
Improving investment rom remittances. Te millions o dollars that
households in Asia receive in the orm o remittances can help reduce
poverty. Encouraging the use o remittances or investment in areas
such as health and education can enhance domestic demand and boost
economic growth, as well as develop human capital. Efcient nancial
systems in remittance-receiving countries would also allow amilies to
leverage the remittance income so as to access small loans or investment.
8/7/2019 Asian Development Outlook 2009 Update: Broadening openness for a resilient Asia
http://slidepdf.com/reader/full/asian-development-outlook-2009-update-broadening-openness-for-a-resilient 92/188
76 Asian Development Outlook 2009Update
Endnotes
A large and growing number o studies have used disaggregated trade data to examine the
structure o intra-Asian trade. See, or example, Athukorala and Kohpaiboon () and
Athukorala and Yamashita ().
Eichengreen et al. (), and Greenaway et al. (), or example. For example, Brown and Linden (), Brown et al. (), and Sturgeon ().
As discussed in, among others, Kimura and Ando (), Ng and Yeats (),
McKendrick et al. (), Borrus (), and Dobson and Chia ().
Park and Shin (b) give details about the data used in the empirical analysis.
Te reconciliation between the two sets o SIC codes and HS codes is explained in detail
in Park and Shin (b).
www.adb.org/gms and www.adb.org/carec provide more inormation.
Cambodia and Viet Nam are excluded rom this group in this analysis because o data
limitations. For example, FDI data or Viet Nam rom IMF and the CEIC database began in
, while portolio investment began in .
Apart rom Malaysia and Indonesia. In the ormer, FDI inows were relatively at during
the crisis while in the latter they declined. Te multilateralization o the Chiang Mai Initiative, which is expected to be in operation
by end-, will allow ASEAN countries plus PRC, Japan, and Korea to draw rom
(large countries) to (small countries) o their contribution to a $ billion
multilateral reserves pooling arrangement.
Details o the estimation methodology and a uller discussion o the determinants o
capital ows are ound in Jongwanich (orthcoming).
Cambodia; Indonesia; aipei,China; and Viet Nam are excluded rom this group in this
analysis because o data limitations or bilateral FDI.
Firms undertake strategic asset–augmenting FDI to create or strengthen their competitive
position by acquiring the proprietary assets o another oreign company, oen in industrial
economies.
Cambodia and Viet Nam are excluded rom this group in this analysis because o data
limitations.
Te data and estimations are detailed in Ito et al. (orthcoming).
Te evidence o the remittances-growth link using larger samples o countries is mixed.
Barajas et al. (), or example, using similar estimation techniques to Vargas-Silva et al.
(orthcoming), examined a dataset or more than countries worldwide, and nd no growth
eects. However, Giuliano and Ruiz-Arranz (), analyzing data or about developing
countries, note that remittances promote growth in less nancially developed countries and
thus present another way o nancing investment. Catrinescu et al. () use a dynamic panel
estimation to show that remittances exercise a weak positive eect on long-term macroeconomic
growth, and the impact increases in the presence o sound economic policies and institutions.
Adams and Page () nd that there is a link between remittances and poverty reduction,
but that remittances reduce the depth o poverty more than poverty headcounts. In a similar
study using data or developing Asian economies or –, Jongwanich () nds
that remittances have a signicant impact on poverty reduction by raising income, smoothing
consumption, and reducing the capital constraints o the poor. Similarly, Brown (), using
counteractual experiments, suggests that remittances are important in reducing poverty in
the Kyrgyz Republic and ajikistan, but less so in Armenia and Azerbaijan.
Ofcial development assistance ows have, in act, the lowest coefcient (.), but are not
really comparable because they include expenditure planned sometimes years in advance.
Sayan () shows that remittances to Bangladesh and India are countercyclical, though
with a -year lag or India. Frankel (), using several multicountry datasets, notes that
remittances respond negatively to the cyclical position o the receiving country.
8/7/2019 Asian Development Outlook 2009 Update: Broadening openness for a resilient Asia
http://slidepdf.com/reader/full/asian-development-outlook-2009-update-broadening-openness-for-a-resilient 93/188
Broadening openness or a resilient Asia 77
Reerences
Adams, R. and J. Page. . “Do International Migration and RemittancesReduce Poverty in Developing Countries?” World Development , ():–.
Ahmed, V., G. Sugiyarto, and S. Jha. Forthcoming. “Remittances and Household
Welare: A Case Study o Pakistan.” ADB Economics Working Paper Series.Asian Development Bank, Manila.
Aizenman, J., M. D. Chinn, and H. Ito. . “Assessing the Emerging GlobalFinancial Architecture: Measuring the rilemma’s Congurations overime.” NBER Working Paper . National Bureau o EconomicResearch, Cambridge, Massachusetts.
Ang, A., G. Sugiyarto, and S. Jha. Forthcoming. “Remittances and HouseholdBehaviour: Philippines.” ADB Economics Working Paper Series. AsianDevelopment Bank, Manila.
Asian Development Bank (ADB). . Asian Development Outlook 8.Hong Kong, China.
_____. . Asian Development Outlook . Manila.Athukorala, P. . “Product Fragmentation and rade Patterns in East Asia.”
Asian Economic Paper , (): –.Athukorala, P. and A. Kohpaiboon, . “Intra-Regional rade in East Asia:
Te Decoupling Fallacy, Crisis, and Policy Challenges.” Paper presentedat the conerence on Global Financial and Economic Crisis: Impacts,Lessons and Growth Rebalancing. Asian Development Bank Institute,okyo, Japan. – April.
Athukorala, P. and N. Yamashita. . “Production Fragmentation and radeIntegration: East Asia in a Global Context.” North American Journal o Economics and Finance, (): –.
_____. . “Patterns and Determinants o Production Fragmentation inWorld Manuacturing rade.” In F. di Mauro, S. Dees and W. McKibbin(eds.), Globalization, Regionalism and Economic Interdependence.
Cambridge: Cambridge University Press, pp. –._____. . “Global Production Sharing and Sino-US rade Relations.” China
& World Economy, (): –.Barajas, A., R. Chami, C. Fullenkamp, M. Gapen, and P. Montiel. . “Do
Workers’ Remittances Promote Economic Growth?” IMF Working Paper WP//. International Monetary Fund, Washington, DC. Available:www.im.org/external/pubs//wp//wp.pd.
Bird, G. and R. S. Rajan. . “oo Much o a Good Ting? Te Adequacy o International Reserves in the Aermath o Crises.” World Economy, ():–.
Borrus, M. . “Le or Dead: Asian Production Networks and the Revivalo US Electronics.” In B. Naughton (ed.). Te China Circle: Economicsand echnology in the PRC, aiwan and Hong Kong. Washington, DC:
Brookings Institution Press, pp. –.Brown, C. and G. Linden. . “Oshoring in the Semiconductor Industry:
A Historical Perspective.” In S.M. Collins and L. Brainard (eds.), TeBrookings rade Forum 5: Oshoring White-collar Work. Washington,DC: Brookings Institution Press, pp. –.
Brown, D. K., A. V. Deardor, and R. M. Stern. . “Te Eect o Multinational Production on Wages and Working Conditions inDeveloping Countries.” In R. E. Baldwin and L. A. Winters (eds.),Challenges to Globalization: Analyzing the Economics. Chicago: TeUniversity o Chicago Press, pp. –.
8/7/2019 Asian Development Outlook 2009 Update: Broadening openness for a resilient Asia
http://slidepdf.com/reader/full/asian-development-outlook-2009-update-broadening-openness-for-a-resilient 94/188
8/7/2019 Asian Development Outlook 2009 Update: Broadening openness for a resilient Asia
http://slidepdf.com/reader/full/asian-development-outlook-2009-update-broadening-openness-for-a-resilient 95/188
Broadening openness or a resilient Asia 79
Haltmaier, J., S. Ahmed, B. Coulibaly, R. W. Knippenberg, S. Leduc, M. Marazzi,and B. A. Wilson. . “Te Role o China in Asia: Engine, Conduit, orSteamroller?” International Finance Discussion Paper No. , Board o Governors o the Federal Reserve Board, Washington, DC.
Ito, H., J. Jongwanich, and A. erada-Hagiwara. Forthcoming. “What Makes
Developing Asia Resilient in a Financially Globalized World?” ADBEconomics Working Paper Series. Asian Development Bank, Manila.
Jongwanich, J. . “Workers’ Remittances, Economic Growth and Poverty inDeveloping Asia and the Pacic Countries.” UNESCAP Working Paper,WP/7/1.
_____. Forthcoming. “Foreign Direct Investment in Developing Asia:Implications o International Production Network.” ADB EconomicsWorking Paper Series. Asian Development Bank, Manila.
Kim S., J. W. Lee, and K. Shin. . “Regional and Global Financial Integrationin East Asia.” In B. Eichengreen, C. Wyplosz, and Y. C. Park (eds.), China,Asia and the New World Economy. New York: Oxord University Press,pp. –.
Kimura, F. and M. Ando. . “wo-dimensional Fragmentation in East Asia:
Conceptual Framework and Empirics.” International Review o Economics& Finance, (): –.
Kose, M. A., E. S. Prasad, and A. D. aylor. . “Treshold in the Process o International Financial Integration.” Brookings Global Working Paper No.. Brookings Institution Press, Washington, DC.
Kwan, C. H. . Yen Bloc: oward Economic Integration in Asia. Washington,DC: Brookings Institution Press.
Lueth, E. and M. Ruiz-Arranz. . “A Gravity Model o Workers’Remittances.” IMF Working Paper WP//. International Monetary Fund, Washington, DC.
McKendrick, D. G., R. F. Doner, and S. Haggard. . From Silicon Valley toSingapore: Location and Competitive Advantage in the Hard Disk DriveIndustry. Stanord, CA: Stanord University Press.
Mendoza, E. G., V. Quadrini, and J.-V. Rios-Rull. . “Financial Integration,Financial Deepness and Global Imbalances.” NBER Working Paper W. National Bureau o Economic Research, Cambridge,Massachusetts.
Ng, F. and A. Yeats. . “Production Sharing in East Asia: Who Does Whator Whom, and Why?” In L. K. Cheng and H. Kierzkowski (eds.), Global Production and rade in East Asia. Boston, Massachusetts: KluwerAcademic Publishers, pp. –.
_____. . “Major rade rends in East Asia: What are their Implications orRegional Cooperation and Growth?” Policy Research Working Paper Series. World Bank, Washington, DC.
Obsteld, M., J. C. Shambaugh, and A. M. aylor. . “Financial Stability,
the rilemma, and International Reserves.” NBER Working Paper .National Bureau o Economic Research, Cambridge, Massachusetts.Papademetriou, D. G. and A. errazas. . Immigrants and the Current
Economic Crisis: Research Evidence, Policy Challenges, and Implications.Washington, DC: Migration Policy Institute. Available: http://www.migrationpolicy.org/pubs/lmi_recessionJan.pd.
Park, D. and K. Shin. a. “China as an Engine o Growth or DevelopingAsia: Evidence rom VAR.” Paper prepared or the ADB EconomicsWorking Paper Series, Asian Development Bank, Manila.
_____. b. “Can rade with China be an Engine o Growth or DevelopingAsia?” Paper prepared or the ADB Economics Working Paper Series, AsianDevelopment Bank, Manila.
8/7/2019 Asian Development Outlook 2009 Update: Broadening openness for a resilient Asia
http://slidepdf.com/reader/full/asian-development-outlook-2009-update-broadening-openness-for-a-resilient 96/188
80 Asian Development Outlook 2009Update
Prasad, E. S. . “Monetary Policy Independence, the Currency Regime,and the Capital Account in China. In M. Goldstein and N. R. Lardy,(eds.), Debating China’s Exchange Rate Policy. Washington, DC: PetersonInstitute or International Economics.
Pula, G. and . Peltonen. . “Has Emerging Asia Decoupled? An Analysis
o Production and rade Linkages Using the Asian International Input-Output able.” Working Paper Series No. . European Central Bank.
Raihan, S., B. H. Khondker, G. Sugiyarto, and S. Jha. Forthcoming. “Te Roleo Remittances in Supporting Household Consumption and Investmentin Asia.” ADB Economics Working Paper Series. Asian Development Bank,Manila.
Ratha, D. and S. Mohapatra. . “Revised Outlook or Remittance Flows–: Remittances Expected to Fall by to Percent in .”Migration and Development Brie . Development Prospects Group. WorldBank.
Ratha, D., S. Mohapatra, and A. Silwal. . “Outlook or Remittance Flows–: Remittances Expected to Fall by to Percent in .”Migration and Development Brie 1. Development Prospects Group.
World Bank.Sayan, S. . “Business Cycles and Workers’ Remittances: How Do Migrant
Workers Respond to Cyclical Movements o GDP at Home?” IMF Working Papers /. International Monetary Fund, Washington, DC.
Sturgeon, . J. . ‘“What Really Goes on in Silicon Valley? Spatial Clusteringand Dispersal in Modular Production Networks.” Journal o EconomicGeography, (): –.
Vargas-Silva, C., S. Jha, and G. Sugiyarto. Forthcoming. “Remittances in Asia:Implications or the Fight against Poverty and the Pursuit o EconomicGrowth.” ADB Economics Working Paper Series. Asian Development Bank,Manila.
8/7/2019 Asian Development Outlook 2009 Update: Broadening openness for a resilient Asia
http://slidepdf.com/reader/full/asian-development-outlook-2009-update-broadening-openness-for-a-resilient 97/188
Part 3Economic trend
and prospects in
developing Asia
Subregional summarie
Central As
East As
South As
Southeast As
The Paci
Banglades
People’s Republic o Chin
Indi
Indonesi
MalaysiPakista
Philippine
Thailan
Viet Nam
8/7/2019 Asian Development Outlook 2009 Update: Broadening openness for a resilient Asia
http://slidepdf.com/reader/full/asian-development-outlook-2009-update-broadening-openness-for-a-resilient 98/188
8/7/2019 Asian Development Outlook 2009 Update: Broadening openness for a resilient Asia
http://slidepdf.com/reader/full/asian-development-outlook-2009-update-broadening-openness-for-a-resilient 99/188
Economic trends and prospects in
developing Asia
Subregional summaries
Central Asia
Subregional assessment and prospects
Te global downturn is having asymmetric impacts on the eight countries
o Central Asia. Growth in the countries with more open economies and
greater links to international nancial markets in general is slowing. For
these countries, lower oil and other commodity prices, marked reductions
in workers’ remittances and investment inows, and difculties in the
banking sector have undermined growth. But hydrocarbon-exporting
countries with relatively closed economies and capital markets (primarily
urkmenistan and Uzbekistan) have been more insulated rom the
deterioration in the global economy (Figure 3.1.1).Monetary authorities in many countries in the subregion have allowed
their currencies to depreciate because their major trading partners
externally the Russian Federation and internally Kazakhstandevalued
their currencies early in 2009. Economic circumstances aced by the
subregion in 2009 are bleaker than anticipated in the Asian Development
Outlook 2009 (ADO 2009) in March, and the Update revises down the
earlier projections. In 2009, growth is now expected to be only 0.5%, rom
3.9% earlier, and in 2010 a 3.6% expansion is now orecast, rom 4.8%.
Trough trade and nancial linkages, the Russian Federation’s deep
recession this year has severely crimped trade, investment, and workers’
remittances to countries in the subregion, oen with a substantial
depressing impact. According to that country’s central bank, remittances
to the eight countries ell by about 25.5% year on year during the rst
hal o 2009. Since remittances are a major source o income or some
subregional countries, lower ows adversely aect domestic demand and
are deteriorating current account balances.
Furthermore, even though no ofcial statistics are available, many o
the migrant workers rom Kyrgyz Republic, ajikistan, and Uzbekistan
who are employed in the Russian Federation (and in Kazakhstan) have
3.1.1 GDP growth, Central Asia
-12 -6 0 6 12
201020092008
Uzbekistan
Turkmenistan
Tajikistan
Kyrgyz Republic
Kazakhstan
Georgia
Azerbaijan
Armenia
Central Asia
%
Sources: Asian Development Outlook database; sta estimates.
Click here or fgure data
This chapter was written by Kiyoshi Taniguchi or Central Asia, Anthony Patrick or
East Asia, Tadateru Hayashi or South Asia, Purnima Rajapakse and Benno Ferrarini or
Southeast Asia, and Craig Sugden or the Pacic, with contributions rom various ADB
Resident Mission sta.
8/7/2019 Asian Development Outlook 2009 Update: Broadening openness for a resilient Asia
http://slidepdf.com/reader/full/asian-development-outlook-2009-update-broadening-openness-for-a-resilient 100/188
8/7/2019 Asian Development Outlook 2009 Update: Broadening openness for a resilient Asia
http://slidepdf.com/reader/full/asian-development-outlook-2009-update-broadening-openness-for-a-resilient 101/188
Subregional summaries 85
pulled down industrial output by 10.5%, mainly because o decreased
output in the export-oriented mining and chemical industries, as well
as construction materials. Given the severity o these developments,
Armenia’s projected GDP in 2009 is now revised to a 9.9% contraction
rom the marginal 0.5% expansion orecast in ADO 2009. For 2010,growth o 0.9% is penciled in, down rom 3.0% projected earlier.
Te dram depreciated by about 20% aer the 3 March announcement
by the authorities that they were returning to a exible exchange rate
regime, limiting intervention to countering extreme volatility. Ination
spiked but ell back to low single digits, reecting very weak domestic
demand conditions. Projected ination is now revised down, to 3.0%
rom 7.5% in 2009 and to 3.5% rom 7.5% in 2010, owing to a much weaker
economy than ADO 2009 expected.
Exports shrank by 48.2% year on year in the rst quarter, with sharp
reductions in mining, metals, and processed-ood exports. During this
period, imports contracted by 22.9%, primarily due to decreases in
prices o intermediate goods and oil products, as well as lower domesticdemand. Te services trade decit widened and private remittances
dropped heavily, mainly attributable to the downturn o the Russian
economy, bringing the current account decit to 18% o GDP in the rst
quarter. Given the major impact o external developments, the Update
revises its orecast or the current account decit to about 13% o GDP in
2009 and 2010, rom about 9% in ADO 2009.
Azerbaijan
Azerbaijan has been experiencing repercussions rom the global economic
turmoil through continuing weaker oil prices and declining oreign and
private domestic investment. GDP growth ell to 3.6% year on year in the
rst hal o 2009 as growth in industrial output declined to 1.0% and xedcapital investment contracted by 7.1%. Te public investment program and
social spending remain key sources o economic growth and employment,
but budget resources are under pressure rom the lower oil prices. Despite
a marked reduction in the central bank’s renancing rate, credit to the
economy is being constrained by commercial banks’ difculties in raising
unding rom abroad. Largely in view o these problems, the GDP growth
orecast or 2009 has been taken down rom 8.0% in ADO 2009 to 3.0% in
the Update; or 2010, expansion in GDP is revised to 4.5% rom 6.7%.
Consumer prices ell in the rst hal o 2009. Weak domestic
demand presents a risk o deation pressures, though these will likely
be countered by higher public expenditure or salaries and pensions.
With a weaker economic expansion now expected, ull-year ination is
also adjusted rom 12.0% to 4.0% or 2009; or 2010 the projection is le
unchanged at 7.0%.
Hydrocarbon export volume is expected to rise in 2009 and 2010,
partly because the Russian state gas monopoly, Gazprom, agreed to
purchase Azerbaijan gas rom 2010. However, since global oil prices
are much lower than in 2008, revenues rom hydrocarbon exports
are alling sharply, and the trade and current account surpluses
have deteriorated, despite decreased spending on imports because
o shrinking public inrastructure investments and delays in capital
expenditure by non-oil investors. Te Update lowers the current
3.1.3 Current account balance, Central Asia
-30 -15 0 15 30 45
201020092008
Uzbekistan
Turkmenistan
Tajikistan
Kyrgyz Republic
Kazakhstan
Georgia
Azerbaijan
Armenia
Central Asia
% of GDP
Sources: Asian Development Outlook database; sta
estimates.
Click here or fgure data
8/7/2019 Asian Development Outlook 2009 Update: Broadening openness for a resilient Asia
http://slidepdf.com/reader/full/asian-development-outlook-2009-update-broadening-openness-for-a-resilient 102/188
86 Asian Development Outlook 2009Update
account surplus projections rom 25.5% to 15.0% o GDP in 2009, while
maintaining the 2010 orecast at 17.7%.
Georgia
Te Update revises the GDP projection or 2009 rom a 2.5% expansion toa 4.0% contraction and or 2010, growth rom 6.0% to 2.5%. Te economy
was hit hard by the simultaneous shocks o the conict with the Russian
Federation in August and the global slump. Te revisions reect the
5.9% all in GDP in the rst quarter o 2009 and continued weakness in
the second. Damaged inrastructure, alling exports, lower remittance
inows, a drop in capital inows, and reductions in bank lending are
major contributing actors.
Fiscal revenue is alling sharply due to the weakening economy.
Even with some reallocation rom less prioritized items to social and
capital spending, the scal decit in 2009 is projected at 9.4% o GDP.
It is expected that the budget decit will be supported by external
assistance; IMF in August augmented unding available under its standby arrangement.
Due to weak domestic demand as well as lower ood and energy
prices, ination trended lower to 2.3% year on year in June. Reecting
depressed economic conditions, the Update lowers the ination
projection in 2009 rom 7.0% to 1.8% and maintains the previous orecast
o 7.5% in 2010.
Weak demand rom the United States (US) and Europe has resulted
in a large all in Georgia’s major exports, including errous metals
and copper, while depressed economic activity has caused imports to
shrink. Tese developments are in line with ADO 2009’s projections. Te
Update maintains the orecasts or the current account decit at 18.8% o
GDP in 2009 and 20.0% in 2010.
Kazakhstan
GDP contracted by 2.3% in the rst hal o 2009. Te major actors were
a sharp drop in manuacturing output and a weakening o domestic
and external demand. Retail sales plunged and unemployment climbed.
However, industrial production rebounded sharply in June to grow by
7.0% year on year and, on the basis o improvements in manuacturing
and mining, the contraction appears to have bottomed. ADO 2009 GDP
projections are now revised to a 1.0% contraction in 2009 rom a 2.0%
expansion earlier, and expected growth in 2010 is downgraded to 2.5%
rom 3.3%.
Despite capital injections early in 2009 rom the state, distress in
the banking sector has intensied, and three large banks are negotiating
with external creditors to restructure their debts. Te Government
responded to macroeconomic difculties (that at rst stemmed rom
excessive oshore borrowing by banks to und domestic lending and that
intensiedin2008withloweroilprices)witha$10billionanticrisisplan,
nanced by the National Oil Fund.
Te tenge was devalued by about 20% in February 2009, matching
a January adjustment by the Russian Federation. Subsequently, the
monetary authorities have successully maintained a de acto peg to the
US dollar at 150 tenge per dollar without major loss o oreign reserves.
8/7/2019 Asian Development Outlook 2009 Update: Broadening openness for a resilient Asia
http://slidepdf.com/reader/full/asian-development-outlook-2009-update-broadening-openness-for-a-resilient 103/188
Subregional summaries 87
Te viability o the banking system is playing a critical role in helping
the economy recover rom the current downturn as well as maintaining
a stable exchange rate. Fiscal policy in 2009 is expected to remain
expansionary in view o the downturn in the economy.
Weak domestic demand oset price pressures rom the devaluation,and year-on-year ination ell to 6.9% in July rom 9.5% at end-2008. In
view o a much weaker economy than oreseen earlier, the Update eases
the ination projection or 2009 rom 10.0% to 8.0%, but retains the 2010
rate o 6.4%.
Even though oil prices have advanced rom their December 2008 low
and oil export volume has increased, a much sharper drop in exports
than imports reduced the trade surplus in the rst 5 months o 2009 to
$3.1billion,comparedwith$14.4billionforthesameperiodin2008.
Because these developments are consistent with the prognosis outlined in
ADO 2009, the orecasts or the current account decit o 2.0% o GDP in
2009 and 0.5% in 2010 are maintained.
Kyrgyz Republic
Te Update revises down the GDP growth projections, rom 4.0% to 1.0%
in 2009 and rom 6.0% to 2.0% in 2010. During the rst hal o 2009,
GDP grew by only 0.3% and industrial production ell by 18.9%, year on
year. Tis slowdown reected a power supply shortage in winter and
adverse spillover eects rom Kazakhstan and the Russian Federation
through the trade, investment, and remittance channels. In particular,
Kazakhstan’s nancial sector difculties had detrimental eects through
the large Kazakh bank branches in the Kyrgyz Republic.
Grantassistanceof$150millionfromtheRussianFederationallowed
the Government to conduct a countercyclical scal policy by increasing
government expenditure, mainly on social saety net programs.Due to lower oil, commodity, and ood prices as well as a general
slowdown in economic activity, ination has trended down. Te Update
revises its ination orecasts, rom 15.0% to 7.5% in 2009 and rom 12.0%
to 9.0% in 2010.
Te local currency, the som, depreciated by around 9.4% in the rst
hal o the year. o prevent excessive depreciation, the central bank
intervened extensively, mainly by selling US dollars. Nevertheless, oreign
exchangereservesrosebyaboutonethirdto$1.6billionduringthe
rsthalfof2009.IMFhasapproveddisbursementof$25.5millionofa
$100millionfacility.
Even though exports ell in the rst hal o 2009, imports dropped by
even more and the current account decit narrowed. Te Update lowers
the projected current account decit or 2009 rom 10.0% to 8.5% o GDP
and that or 2010 rom 10.0% to 9.5%. Tis revision reects the expected
slower growth o the economy.
ajikistan
Te global downturn has straed this economy, largely because remittances
plunged by about 50% in the rst hal o 2009 relative to the same period
in 2008. Industrial output ell by about 13% in the rst hal o 2009 with
the drop mainly attributable to demand or the country’s major export
aluminum. Agriculture has been an engine o growth this year due to good
8/7/2019 Asian Development Outlook 2009 Update: Broadening openness for a resilient Asia
http://slidepdf.com/reader/full/asian-development-outlook-2009-update-broadening-openness-for-a-resilient 104/188
8/7/2019 Asian Development Outlook 2009 Update: Broadening openness for a resilient Asia
http://slidepdf.com/reader/full/asian-development-outlook-2009-update-broadening-openness-for-a-resilient 105/188
Subregional summaries 89
Investment contributed to 9.9% growth in industrial output and 142%
growth in construction services in the rst hal o 2009.
Ofcial statistics indicate that ination in the rst 5 months o
2009 was 4.5%, below the Government’s annual orecast o 7.9%. Global
disination in consumer goods prices and a state-imposed cap onincreases in utility taris helped alleviate price pressures. Te Update
maintains its 2009 orecast at 12.5%, while revising down the 2010 orecast
rom 13.0% to 11.0%.
Te trade surplus narrowed as a result o a 4.8% decline in exports
and a 24.1% increase in imports during the rst 5 months o 2009. Imports
rose due to higher demand or capital goods caused by intensied public
and private inrastructure development. However, it is expected that
rising demand or gas in Europe and a continuing high gold price will
boost exports in the second hal o 2009, allowing the country to sustain
a strong trade surplus. Te Update maintains the ADO 2009 current
account surplus orecasts o about 11.0% o GDP or 2009 and 2010.
East Asia
Subregional assessment and prospects
Subregional economic growth will slow in 2009, but not as much as
was orecast in ADO 2009. Te biggest o the ve economies in East
AsiaPRC and Republic o Korea (hereaer Korea)are perorming
better than was expected in March. Consequently, subregional GDP is
now orecast to increase by 4.4% (Figure 3.1.4), revised up rom 3.6%.
Nevertheless, the global nancial crisis and slump in world trade have
seriously dented growth in this subregion, which relies on export-oriented
manuacturing to drive much o its expansion. Te growth orecast orthis year is less than hal the rate o 2006–2007. Indeed, the orecasts or
the three other East Asian economiesHong Kong, China; Mongolia; and
aipei,Chinaare downgraded rom ADO 2009. Economies will contract
relative to 2008 in Hong Kong, China; Korea; and aipei,China. GDP is
expected to increase only a touch in Mongolia. Subregional growth this
year is attributable to the PRC.
When world trade dwindled in late 2008–early 2009, merchandise
exports plunged in all ve economies. In aipei,China, or example,
exports dropped by 34.2% in the rst hal o 2009, and in Korea they ell
by 22.7%. In reaction, manuacturers cut production, laid o sta, and
delayed expansion plans. All these actions depressed investment and
consumption, particularly in the rst 3 months o 2009.
Te PRC and Korea implemented particularly eective scal
stimulus packages that kick-started domestic demand. Strong scal and
debt positions in both countries enabled them to boost government
spending and reduce some taxes. Te PRC coupled scal stimulus with
a very aggressive monetary stance, ooding the banking system with
liquidity.
aipei,China and Hong Kong, China also rolled out scal stimulus
measures to varying degrees. However, Mongolia, which had run a
procyclical scal policy during the commodity boom in recent years,
aced a severe scal squeeze when global prices o commodities dived,
3.1.4 GDP growth, East Asia
-5 0 5 10
201020092008
Taipei,China
Mongolia
Rep. of Korea
Hong Kong, China
People's Rep. of China
East Asia
%
Sources: Asian Development Outlook database; sta estimates.
Click here or fgure data
8/7/2019 Asian Development Outlook 2009 Update: Broadening openness for a resilient Asia
http://slidepdf.com/reader/full/asian-development-outlook-2009-update-broadening-openness-for-a-resilient 106/188
90 Asian Development Outlook 2009Update
slashing its government revenue. Te bigger economies also lowered
interest rates as the economic downturn deepened. Partly as a result
o these actions, there were indications that the downturn in East Asia
reached a trough early in 2009.
Aggregate GDP growth in the subregion is orecast to speed upconsiderably next year, to 7.1% (raised rom 6.5% in ADO 2009), based on
the expected pickup in global trade, improvement in nancial markets,
and stronger domestic demand. Fiscal and monetary stances are expected
to be expansionary, although not to the same extent as in 2009.
All ve economies are projected to grow in 2010, with the PRC’s
expansion rate now orecast at a vigorous 8.9%, supported by the
continuation o its large scal stimulus. Growth in other economies
will likely be suppressed by the projected modest recovery in industrial-
country export markets. Te Korean economy is orecast to expand by
4.0% next year, while growth in Hong Kong, China is put at about 3%
and in aipei,China at 2.4%, modest rates given that these economies will
shrink in 2009, setting low bases rom which to recover.External accounts in East Asia are in surplus, except in Mongolia,
where the drop in prices or its commodity exports will contribute to a
current account decit o 6–7% o GDP in the orecast period. In some
economies, imports ell more sharply than exports in the rst hal o
2009, mainly a result o much lower prices or oil and commodities
than in 2008 and a reduced need to import inputs or manuacturing
industries. A substantial subregional current account surplus equivalent
to 7.0% o GDP is projected or 2009, easing to 6.0% in 2010 as import
growth picks up (Figure 3.1.5).
Ination has aded this year: the subregional rate is orecast at just
0.2% (Figure 3.1.6), revised down rom March. Consumer price indexes
will all a little rom 2008 levels in the PRC and aipei,China. (Again,Mongolia is an anomaly: its ination has decelerated rom over 20% in
2008, but is expected to remain in double digits.) Te orecast or East
Asian ination next year is raised to 2.6%, mainly because PRC ination
is revised up to 3.0% in view o its highly expansionary monetary policy
in 2008 and aster GDP growth than previously anticipated.
Country highlights
People’s Republic o China
Expansionary scal and monetary policies spurred a li in economic
growth to 7.9% in the second quarter o 2009 rom a two-decade low o
6.1% in the rst quarter. Growth or the rst hal was 7.1%. Investment
in xed assets soared in the second quarter, reecting the impact o the
large scal stimulus and rapid credit expansion. Industrial production
picked up in that period too, as rms rebuilt inventories aer a signicant
destocking that stemmed rom the impact o the global economic slump.
Consumption also rose, underpinned by rising household incomes and
government subsidies, particularly or rural areas. However, a decline in
net exports acted as a drag on growth through the rst hal.
Te aggressive monetary stance adopted in late 2008 sparked a
huge surge in new lending, equivalent to around 50% o GDP or the
rst 6 months o 2009. State-owned enterprises and large businesses
3.1.5 Current account balance, East Asia
-10 -5 0 5 10 15
201020092008
Taipei,China
Mongolia
Rep. of Korea
Hong Kong, China
People's Rep. of China
East Asia
% of GDP
Sources: Asian Development Outlook database; sta estimates.
Click here or fgure data
8/7/2019 Asian Development Outlook 2009 Update: Broadening openness for a resilient Asia
http://slidepdf.com/reader/full/asian-development-outlook-2009-update-broadening-openness-for-a-resilient 107/188
Subregional summaries 91
tapped most o the new lending. Te scal stimulus measures, valued
at CNY4 trillion, include extensive public investment and subsidies to
armers and some industries.
Public investment is expected to remain at high levels under the scal
stimulus that runs through 2010. Private investment, though, may remainsubdued, particularly in manuacturing, until external demand improves
signicantly. Te Government proposes to increase access to credit
or small and medium-sized enterprises, which should boost private
investment. A recovery under way in the property market is sparking
growth in construction. Robust growth is seen or consumption now that
the labor market is recovering aer rounds o layos seen late in 2008
and early 2009.
aking these inuences into account, the GDP growth orecast or
2009 is upgraded to 8.2%, rom 7.0% in ADO 2009. Maintenance o the
scal stimulus and a likely moderate recovery in the global economy
in 2010 is seen liing the PRC’s growth rate next year to 8.9% (revised
rom 8.0%).Te authorities ne-tuned monetary policy rom July 2009, and
growth in new lending eased in July and August. It is assumed that policy
will be tightened somewhat when ination returns and economic growth
can be sustained without such a highly stimulatory monetary stance. I
the monetary stimulus were to be pulled back aster than assumed, there
would be a risk o an unintended abrupt slowing in growth. Te challenge
is to balance the need to maintain the monetary stimulus against the
risks o the ood o bank lending, i extended or too long, becoming
diverted into unproductive purposes, such as speculation in stocks and
property and a misallocation o resources that erodes bank asset quality.
Merchandise exports ell by about 22% in the rst 7 months o
2009, and imports dropped by about 23%, but the pace o the monthly declines bottomed by midyear. rade surpluses look likely to be smaller
than expected in March, and the orecasts or the current account are
revised down slightly to a surplus o 7.1% o GDP this year and 6.5% in
2010. Nevertheless, oreign exchange reserves are expected to rise to
$2.6trillionbyend-2010.
Lower ood prices and increases in ood production were largely
behind a 1.2% year-on-year all in the consumer price index during the
rst 7 months o 2009. For the whole year, the index is orecast to decline
by 0.5% (revised rom a rise o 0.8% in ADO 2009). Considering the
pickup in growth, low-base eect rom a deceleration in ination late in
2008, and large monetary stimulus, the index is expected to turn upward
by the end o 2009, and to rise by about 3.0% during 2010 (this orecast is
also revised up).
Hong Kong, China
Bueted by the global nancial crisis and the slump in world trade, this
economy, which is based on trade in goods and services (particularly
trade, travel, and nancially oriented services), contracted or three
consecutive quarters, year on year. Te pace o contraction eased
considerably in the second quarter o 2009 rom the rst, to 3.8% rom
7.8%. For the January–June period, GDP ell by 5.8%, with private
consumption and xed investment both declining.
3.1.6 Infation, East Asia
-7 0 7 14 21 28
201020092008
Taipei,China
Mongolia
Rep. of Korea
Hong Kong, China
People's Rep. of China
East Asia
%
Sources: Asian Development Outlook database; sta estimates.
Click here or fgure data
8/7/2019 Asian Development Outlook 2009 Update: Broadening openness for a resilient Asia
http://slidepdf.com/reader/full/asian-development-outlook-2009-update-broadening-openness-for-a-resilient 108/188
92 Asian Development Outlook 2009Update
Employment stabilized in the second quarter, slowing the pace o
increase in the seasonally adjusted unemployment rate (it was 5.4% in the
second quarter compared with 3.3% a year earlier). Wages remained under
downward pressure through the rst hal.
Te better second-quarter perormance (GDP rose by 3.3% on asequential basis) was attributed to a quickening o growth in the PRC and
was assisted by scal stimulation measures taken in Hong Kong, China.
Public sector investment is expected to pick up in the second hal to
provide some oset to slack private investment. Te stock market rose by
37.1% in the rst 8 months o 2009 and the market or residential property
is strengthening, supported by low interest rates.
However, the sharper than expected GDP decline in the rst hal has
led to a revision in the orecast or the ull-year GDP contraction to 4.0%,
rom 2.0% in ADO 2009. Modest growth o about 3.0% is projected or
2010, when world trade in goods and services will likely be much more
robust.
Ination decelerated to 0.5% in the rst 7 months o 2009, a result o lower prices or imported oil and ood, muted domestic demand, and a
temporary subsidy or household electricity bills. For the whole o 2009,
ination is expected to be about 1.0%, edging up to about 2.0% in 2010.
Substantial current account surpluses o about 10% o GDP are projected
or both years.
Republic o Korea
GDP declined or three consecutive quarters, year on year, through
mid-2009. However, the pace o contraction slowed considerably in the
second quarter o 2009, to 2.2% rom 4.2% in the rst. For the rst hal o
the year, the economy contracted by 3.2%.
Recession in major industrial economies and a consequent allin Korea’s exports was the immediate cause o the downturn. Tis
external shock spread to already sluggish private consumption and xed
investment: in the rst hal o 2009 the ormer ell by 2.6% and the latter
by 5.1%. In contrast, government consumption spending rose by 7.2% as
budget disbursements were stepped up. Also, the Government rolled out a
substantial scal stimulus package to temper the economic downturn.
Exports o goods and services in volume terms slid by about 7% in the
rst hal, but imports shrank at double that rate, boosting net exports.
Exports received some support rom a signicant depreciation o the won
against the US dollar in 2008.
Among signs that a rebound is under way, private consumption, xed
investment, imports, and exports all increased in the second quarter
relative to the rst. In July, the index o industrial production broke
through its prior-year level or the rst time this year, and the seasonally
adjusted unemployment rate eased to 3.8% rom 4.0% in June (although it
was still 0.6 percentage points higher than its year-earlier rate). Indexes o
business and consumer condence also turned up early this year.
Tese indicators point to a stronger recovery than was previously
anticipated, and the GDP orecast or 2009 is revised to a shallower
contraction o 2.0% rom 3.0%. Growth is expected to resume in 2010 at
about 4.0%, reecting a likely recovery in both external and domestic
demand.
8/7/2019 Asian Development Outlook 2009 Update: Broadening openness for a resilient Asia
http://slidepdf.com/reader/full/asian-development-outlook-2009-update-broadening-openness-for-a-resilient 109/188
8/7/2019 Asian Development Outlook 2009 Update: Broadening openness for a resilient Asia
http://slidepdf.com/reader/full/asian-development-outlook-2009-update-broadening-openness-for-a-resilient 110/188
94 Asian Development Outlook 2009Update
aipei,China
Tis economy, which depends heavily on exports o machinery and
electronic products, contracted year on year or our consecutive quarters
through mid-2009. GDP went down by 8.8% in the rst hal o 2009
rom the same period o 2008, the steepest contraction or this periodin East and Southeast Asia. Exports and imports both ell by more than
20% in volume terms in the rst 6 months, and xed investment plunged
by about 28%. Private consumption was weak, hurt by a deterioration in
the labor market (the unemployment rate rose by 2 percentage points to
6.1% in July 2009 rom a year earlier). Only public consumption recorded
growth on the demand side.
Te downturn reached a trough in the rst quarter, when GDP
plunged by 10.1%. In the second quarter, private consumption stabilized
and the pace o decline in trade and investment eased, moderating the
GDP contraction to 7.5%. yphoon Morakot, which hit the island in early
August, le more than 700 people dead or missing and inicted damage
to agriculture, inrastructure, and tourism. Its impact on GDP in 2009will depend on how ast reconstruction eorts get under way.
Fiscal stimulus measures have been implemented to support both
consumers and businesses, and the monetary authorities cut the policy
interest rate by a total o 238 basis points to 1.25% rom September 2008 to
February 2009. Te economic perormance began improving in the second
hal o 2009, but in view o the steeper than expected rst-hal decline,
the ull-year outcome is expected to be a contraction o 4.9%, worse than
was projected in ADO 2009. Growth is orecast to resume in 2010 at 2.4%,
based on a pickup in global demand and supported by strengthening
business links with the robustly expanding economy o the PRC.
While merchandise exports slumped by 34.2% in the rst 6 months
o 2009, imports crashed by 42.3% as demand shrank or importedintermediate goods or the export industries and as prices ell or imported
oil and commodities. Te trade surplus nearly doubled rom the year-
earlier period. Te orecast or the current account surplus is revised up to
9.1% o GDP or this year, easing to 7.9% in 2010 as imports bounce back.
Weak domestic demand and lower prices or imported oil and
commodities pulled the consumer price index below prior-year levels
rom February to August this year. Te index is orecast to all by 0.7% in
2009, and to rise by only 0.2% in 2010.
South Asia
Subregional assessment and prospects
Although South Asia is less integrated in the global economy than
East Asia and Southeast Asia, the global nancial crisis and economic
downturn have still had an impact on the subregion, via two main
channels: capital outows and limited access to nancing; and weak
external demand. Capital began to ow out right aer the nancial crisis
intensied in September 2008, particularly rom India and Sri Lanka.
Regional economies aced a sudden reversal o portolio investment
associated with the sharp drop in equity prices in the major stock
markets in the region, particularly India and Sri Lanka, which have
8/7/2019 Asian Development Outlook 2009 Update: Broadening openness for a resilient Asia
http://slidepdf.com/reader/full/asian-development-outlook-2009-update-broadening-openness-for-a-resilient 111/188
Subregional summaries 95
relatively more advanced nancial systems and substantial international
investments. Many o them also had difculties in accessing normal
trade nance. Moreover, cross-border bank lending ell, reecting the
deleveraging process by major international banks.
Quarterly balance-o-payments data show that both India and SriLankasueredfromanetoutowintheirnancialaccounts$4.3billion
and$5.3billionforIndia,and$1.1billionand$0.3billionforSriLanka,
during the ourth quarter o 2008 and the rst quarter o 2009,
respectively. As a consequence, many investment projects in these two
countries were suspended due to lack o private unding. Many ongoing
projects nanced by short-term unding have also been put on hold as
such unding has not been rolled over. Since March 2009, stock indexes
in India and Sri Lanka have rallied along with most markets worldwide.
Tere has been some recovery in portolio investment, reecting a
recovering risk appetite among global investors. However overall,
capital inows have not marked a substantial recovery, and cross-border
commercial bank lending remains restricted. Bangladesh and Nepal, incontrast, did not experience signicant capital outows.
Weak external demand exerted its impact on South Asian economies
as industrial economies ell into recession. Merchandise exports
contracted in India, Nepal, Pakistan, and Sri Lanka, while Bangladesh
export growth slowed substantially over the year through June 2009. Te
Maldives saw a drop in tourism.
Workers’ remittances, which play a major role in Nepal, Bangladesh,
Sri Lanka, and Pakistan (accounting or 20%, 11%, 7%, and 5% o GDP,
respectively), have shown considerable resilience to date compared with
exports, supporting domestic consumption demand and the current
account. Remittance growth slowed but has maintained double-digit
growth in Bangladesh and Nepal, although in Sri Lanka, remittancesexpanded by about 5%. Weak external demand (together with a power
supply decit in some countries) is reected in regional countries’
manuacturing indexes, with year-on-year growth turning negative in
Pakistan, while in India and Sri Lanka industrial production decelerated,
almost reaching zero growth in early 2009.
Reecting the downward trend in industrial production in the
year through March, GDP growth slowed to 2.5% in Sri Lanka during
its rst quarter o 2009, while India maintained 5.8% growth during
the January–March quarter and saw an improvement to 6.1% in the
April–June quarter, although demand-side indicators showed slowing
private consumption and investment. In all countries except Aghanistan,
statistical indicators show a marked decline in economic activity rom
2008 levels.
While the global economic difculties had a signicant adverse
impact on India, Maldives, Pakistan, and Sri Lanka, it was somewhat
less on Aghanistan, Bhutan, Bangladesh, and Nepal. Central banks in
South Asia generally adopted more accommodative monetary policy and
lowered policy rates to promote private investment and boost growth, the
decline in ination pressures rom alling commodity prices bolstering
their room or action. Countries with a currency peg to the Indian rupee
(Bhutan and Nepal) have been able to benet rom the accommodative
monetary policy stance ollowed by the Reserve Bank o India.
8/7/2019 Asian Development Outlook 2009 Update: Broadening openness for a resilient Asia
http://slidepdf.com/reader/full/asian-development-outlook-2009-update-broadening-openness-for-a-resilient 112/188
96 Asian Development Outlook 2009Update
Some countries adopted scal stimulus measures to complement
monetary policy. Bangladesh announced a stimulus package in April
2009 (worth 0.6% o GDP). Measures include increased subsidies in
agriculture; enhanced cash incentives or recession-aected sectors
such as jute, leather, and rozen ood; and higher allocations or socialsaety net programs. Te budget or FY2010 continued these measures,
expanding their size by 0.8% o GDP.
India’s three stimulus packages (announced in December 2008, and
January and February 2009) have general interventions with policy
measures that include a substantial cut in their value-added, service, and
excises taxes; additional inrastructure and social saety net expenditure;
measures to support an inrastructure nancing institution; and an
increase in the state government borrowing limit. India’s revised ederal
budget or FY2009 announced in July 2009 continued its expenditure-led
growth strategy.
Pakistan announced a large increase in its public sector development
program (PSDP) in its FY2010 budget, about 62% over the actual PSDPin the previous scal year. Sri Lanka also announced two stimulus
packages: one in December 2008 and the other in May 2009 (worth
0.2% and 0.4% o GDP, respectively), which targeted the agging tea,
rubber, cinnamon, and garments export sectors or incentives (as well
as including a ertilizer subsidy), and boosted rewards under an export
development program.
South Asian economies suering rom structural constraints prior to
the global turmoil and weak macroeconomic undamentals have proven
to be more vulnerable to external shocks and have more limited policy
options to counter the global economic downdra. In early 2008, many
countries used scal measures to mitigate the pass-through o higher
international commodity prices (especially or oil, ertilizer, and basicood) at substantial cost.
Large scal decits in Maldives, Pakistan, and Sri Lanka have led to
acute external imbalances and large losses o international reserves. In
August 2009, IMF announced a sta-level agreement with the Maldives
forastandbyarrangement.InNovember2008,IMFprovideda$7.6billion
emergency nancing package to Pakistan (which was augmented to
$11.3billioninAugust2009).SriLankaalsosoughtIMFassistanceanda
$2.6billionstandbyarrangementwasapprovedinJuly2009.
Te South Asian GDP growth projection is revised upward to 5.6%
in this Update rom 4.8% in ADO 2009 (Figure 3.1.7). Tis reects the
improved growth prospects in India (which accounts or 80% o GDP
in South Asia), as India’s growth projection was raised to 6.0% rom
5.0%. Growth projections were revised down or Maldives, Pakistan, and
Sri Lanka, while the outlooks or Aghanistan, Bangladesh, Bhutan, and
Nepal were upgraded, though generally by small amounts.
Ination pressures were markedly reduced except in Nepal and
Pakistan ollowing the drop o international oil prices in the second hal
in 2008. Te Update revises down the ination projection or South Asia
to 4.7% or 2009 (Figure 3.1.8) rom 5.6% in ADO 2009 despite the upward
growth revisions on account o lower international commodity prices in
2009; the estimate or 2010 is slightly changed to 4.9% (rom 4.4%).
Nevertheless, concern over ination should not be completely o the
3.1.7 GDP growth, South Asia
-4 0 4 8 12 16
201020092008
Sri Lanka
Pakistan
Nepal
Maldives
India
Bhutan
Bangladesh
Afghanistan
South Asia
%
Sources: Asian Development Outlook database; sta estimates.
Click here or fgure data
8/7/2019 Asian Development Outlook 2009 Update: Broadening openness for a resilient Asia
http://slidepdf.com/reader/full/asian-development-outlook-2009-update-broadening-openness-for-a-resilient 113/188
Subregional summaries 97
radar as year-on-year monthly ination rates are bottoming (as the high
base passes) and oil prices have moved up. Te outlook or price stability
will thereore crucially depend on the authorities’ ability to withdraw
scal stimuli and central banks’ highly expansionary monetary policies in
a timely manner, as economic activity revives.Despite lower exports, the decline in oil prices provided substantial
import relie (supplemented by weak domestic demand), and trade decits
o South Asian countries have shrunk in Bangladesh, India, Pakistan, and
Sri Lanka. Moreover, while growth in workers’ remittances has slowed,
amounts remain substantial and have grown in relative importance
with respect to the large drop in the trade decit. In India, inormation
technology and business processing sales have been resilient.
Reecting these developments, the current account decit or South
Asia is now projected at 1.7% o GDP or 2009, slightly improved rom
2.0% orecast in ADO 2009 (Figure 3.1.9). Te projected current account
decit or 2010 is now estimated at 2.2% o GDP, marginally lower than
orecast earlier.
Country highlights
Aghanistan
Te best harvest o the decade is likely to be achieved in FY2009
(started on 21 March 2009) due to good rainall and partly improved
irrigation. Tis, along with continued external assistance, will bring
GDP growth to 15.7% in FY2009 compared with the projection o 9.0%
in ADO 2009. Te average annual change in the consumer price index
will likely show deation, which is now estimated at 8.9% as a result
o the large drop in global ood prices, while end-period ination or
FY2009 is estimated at 6.0%.Te current account decit (including grants) is now estimated at
1.7% o GDP or FY2009, slightly improved rom the earlier estimate. Te
large trade decitassociated with donor-nanced activities and security
spending as well as oreign currency expenditure on development projects
and consumer importsis oset by inows o donor grants.
Since Aghanistan’s nancial system and economy are small and
weakly integrated with global markets, external economic impacts are
slight. Te amount o donor assistance available or the country, however,
might be aected by the recessionary conditions in donor countries.
In FY2010, assuming good weather and urther improvements in
irrigation systems, GDP growth is likely to be 8.5%, higher than the 7.5%
orecast in ADO 2009. Ination will stabilize at around end-FY2009 levels,
averaging 6.5% during FY2010, and the current account decit (including
grants) is now estimated at 2.7% o GDP. Both these revised orecasts
represent slight improvements in perormance rom earlier projections.
Political uncertainty stemming rom the presidential election in August
2009 could have an adverse impact on the Government’s reorm agenda
and on growth. However, this point is not expected to be a signicant
drag on growth in the current scal year. Creating a base or sustainable
economic growth, dealing with insecurity, improving weak governance,
suppressing the opium trade, overcoming inrastructure bottlenecks, as
3.1.8 Infation, South Asia
-10 0 10 20 30
201020092008
Sri Lanka
Pakistan
Nepal
Maldives
India
Bhutan
Bangladesh
Afghanistan
South Asia
%
Sources: Asian Development Outlook database; sta
estimates.
Click here or fgure data
8/7/2019 Asian Development Outlook 2009 Update: Broadening openness for a resilient Asia
http://slidepdf.com/reader/full/asian-development-outlook-2009-update-broadening-openness-for-a-resilient 114/188
98 Asian Development Outlook 2009Update
well as improving overall aid management and its eectiveness, remain key
challenges or the economy.
Bangladesh
GDP growth or FY2009 (ended June 2009) is estimated at 5.9%.Agriculture perormed better than expected, beneting rom avorable
weather conditions and strong policy support rom the Government,
which enabled armers to access inputs and credit. Industrial growth
was aected by slower export growth because o the global slowdown
and damped investor sentiment. Expansion in services was hindered by
slowing export and import activities.
Te growth in the import bill decelerated aster than that or export
receipts, narrowing the trade decit. Still, strong remittance growth oset
the smaller trade decit and raised the current account surplus (to 2.8%
o GDP). Ination eased, averaging 6.7% in FY2009, down rom 9.9% in
FY2008. Te sharp decline in import prices, the rise in domestic ood
production, and the successive cuts in domestic uel prices led to the dropin ination.
For FY2010, the Update maintains the earlier GDP growth projection
o 5.2%. Industry and services are unlikely to pickup in the rst hal o
the scal year, and remittance growth is expected to slow, which will
contain consumer spending. Te Update also retains the earlier ination
projection o 6.5%, as increases in import prices are moderate and the
crop outlook remains healthy. Growth in exports will slide urther and
the import bill will rise, but remittances will eliminate the trade decit,
to enable the current account to post a small surplus (0.8% o GDP) rather
than a decit (0.5% o GDP) as projected in ADO 2009.
BhutanTe global nancial crisis and economic downturn have had a limited
impact on Bhutan as the economy is driven largely by construction o
hydropower stations and power production exported to India. Power
exports grew by 9% during July 2008–May 2009 compared with the same
period the previous year. Given power hunger in India, it is unlikely that
these exports will be aected by the global slump.
Te budget estimate or FY2009 (ended June 2009) included
additional grants rom the Government o India triple the original
budgeted amount. As a result, the scal decit was contained at 3.0% o
GDP rom the original estimate o 11.0%. Te budget or FY2010 ocuses
on achieving core objectives related to poverty reduction. It plans higher
expenditure than in the FY2009 estimate, while maintaining the scal
decit at 5.0% o GDP.
Against this backdrop, the Update adjusts the projection o GDP
growth to 6.0% rom the earlier orecast o 5.5%. Te current account
decit or FY2009 is unchanged rom that given in ADO 2009 (5.5% o
GDP), while average ination is now expected to be around 7%, reecting
the impact o ination in India. No change is made in projections or
FY2010: the economy will grow by 6.5%, with a current account decit
o around 9% o GDP as imports rise, reecting a gradual increase in
domestic demand and international oil prices, while ination will ease to
4%, marking price developments in India.
3.1.9 Current account balance, South Asia
-60 -40 -20 0 20
201020092008
Sri Lanka
Pakistan
Nepal
Maldives
India
Bhutan
Bangladesh
Afghanistan
South Asia
% of GDP
Sources: Asian Development Outlook database; sta estimates.
Click here or fgure data
8/7/2019 Asian Development Outlook 2009 Update: Broadening openness for a resilient Asia
http://slidepdf.com/reader/full/asian-development-outlook-2009-update-broadening-openness-for-a-resilient 115/188
Subregional summaries 99
Although Bhutan is largely immune to global economic events, it
has a concentration risk in power production and exports to India. Any
disruption to operations due to technical problems, natural disasters, or
rainall shortages could have a large impact on overall growth.
India
Macroeconomic management continues to remain pivotal in India against
the backdrop o an uncertain global economic situation. With slow
transmission o policy-rate cuts to lending rates, India’s countercyclical
policy options ocused on a public expenditure–led growth strategy. Te
central Government provided scal stimulus to boost growth over and
above the monetary accommodation provided by the central bank. Tere
are clear signs o a recovery in the economy and in business condence.
External unding constraints have also eased notably.
Tese developments have led to an upward revision in growth to 6.0%
in FY2009 (started in April 2009). Exports are running substantially
below prior-year levels because o recession in industrial economies,though a larger all in imports is expected to keep the current account
decit in check at 1.5% o GDP as projected in ADO 2009. For FY2010,
the Update upgrades projected growth to reect a greater strengthening
o the recovery than earlier oreseen. It makes no change in the ination
orecast.
Although the growth strategy is appropriate given global economic
weakness, it could prove counterproductive i the large scal decits
are not reined in over the next ew years (as the Government intends
to do). Apart rom global uncertainty, the key downside risk to the
outlook emerges rom nancial crowding out o private investment. Tis
issue is most likely to arise in FY2010 and underscores the need or the
Government to concretize its plans to consolidate scal policy.Ination in FY2009 is now orecast to be 2.5%, slightly below the
orecast in ADO 2009; however, year-on-year ination is expected to be
4–5% by March 2010, and ination pressures are likely to persist, driven
by high ood prices and expansionary monetary and scal policies.
Monetary management needs to strike the right balance between
providing adequate liquidity to support economic recovery yet keep
ination at bay. Tere is a risk that domestic ood price ination may
create a dilemma or monetary management in FY2009, but late rains
appear to be lling water reservoirs to an adequate level to ensure a
reasonable winter crop. A return to sustained high growth will require
the Government to address the country’s inrastructure decit and
implement structural reorms.
Maldives
Te economy has suered rom expansionary scal policy aer the
tsunami in 2004. Rising public sector wages and power subsidies in Malé
pushed up current spending, resulting in a deterioration in the scal
balance, which is exerting signicant pressure on the balance o payments.
Te economy is particularly vulnerable to the global slowdown because
tourism accounts or more than a quarter o the country’s GDP and
has signicant knock-on eects on aggregate demand. Notably, tourist
bednights contracted by 10% during the rst seven months in 2009.
8/7/2019 Asian Development Outlook 2009 Update: Broadening openness for a resilient Asia
http://slidepdf.com/reader/full/asian-development-outlook-2009-update-broadening-openness-for-a-resilient 116/188
8/7/2019 Asian Development Outlook 2009 Update: Broadening openness for a resilient Asia
http://slidepdf.com/reader/full/asian-development-outlook-2009-update-broadening-openness-for-a-resilient 117/188
Subregional summaries 101
Pakistan
Macroeconomic stress was mitigated in FY2009 (ended June 2009) as the
IMF-backed stabilization program took eect in November 2008. Fiscal
and external imbalances improvedthe scal decit ell to 5.2% o GDP
rom 7.6% in the previous scal year, and the current account decitdeclined to 5.3% o GDP rom 8.4%. Te exchange rate stabilized and
oreign reserves revived. However, ination remained stubbornly high
and averaged 21% in FY2009, even as year-on-year ination started to see
a trend decline rom March 2009.
Te growth rate ell precipitously, and at 2.0% was less than the
ADO 2009 projection o 2.8%. Te impact o large power outages, tight
domestic demand management, and global recession contributed. Te
reduction in imbalances itsel was largely a consequence o the slowdown
o the domestic economy and expenditure cutting rather than an
improvement in economic undamentals. Otherwise, domestic revenue
generation and export perormance remained weak.
A modest rebound in growth to 3.0% is expected in FY2010, supportedby a planned larger public expenditure program and an anticipated
urther easing o monetary policy. Agriculture is expected to continue
robust growth but it will not be as high as the previous year. Growth in
industry is expected to turn marginally positive and the services sector is
also expected to record modest growth.
Ination is expected to decline to 10.0%, and the current account
decit to shrink to 4.8% o GDP, in FY2010. Te economy, however,
remains vulnerable to the impact o expected higher international
oil prices, its signicant energy supply–demand gap, and lagging
competitiveness o its exports, which are also aected by weakness in
global economic conditions. Structural reorms at the macroeconomic
and sector levels need to be consistently implemented and accelerated toput the economy on a sustainable growth path.
Sri Lanka
Although the economy remains under severe strain, partly because
o the global nancial crisis and recession, the outlook has improved
with the end to a quarter-century o civil war in May 2009. Still, the
current economic situation remains raught with large scal and external
imbalances that have accumulated over the years. In addition, the country
aces the costs o postconict relie and reconstruction eorts.
Following a marked all in oreign exchange reserves, in July 2009
IMFapproveda$2.6billionstandbyarrangementandreleasedthe
rsttrancheof$332millioninsupportoftheGovernment’sambitious
program o scal, monetary, and exchange rate reorms. With movement
toward economic stability envisaged in the program, potential investors
will receive a positive signal or undertaking the investment needed or
recovery and rapid economic growth.
First-quarter GDP growth slowed to 1.5%, with all sectors experiencing
a downdra. Falling global prices and weakening demand pulled down
Sri Lanka’s high ination signicantly during the rst hal o 2009,
with point-to-point ination alling to 0.9% in June 2009 rom 14.4% in
December 2008. Tis allowed the central bank to reduce policy interest
rates three times during the period.
8/7/2019 Asian Development Outlook 2009 Update: Broadening openness for a resilient Asia
http://slidepdf.com/reader/full/asian-development-outlook-2009-update-broadening-openness-for-a-resilient 118/188
102 Asian Development Outlook 2009Update
Preliminary estimates indicate that second-quarter growth improved.
Economic activity is expected to gradually pick up over the rest o the
year to bring ull-year expansion to 4.0%, a shortall rom the 4.5%
projected in ADO 2009. With strong economic management and an
improving global economy, GDP growth is expected to reach 6.0% in 2010as projected earlier.
With price pressures abating aster than expected, average ination is
now estimated to be 5.0% in 2009 rather than 8.0% projected in ADO 2009;
the orecast o 6.0% in 2010 is maintained. Reecting weak investment,
lower oil prices and reduced demand or inputs or plummeting export
activity, imports have dropped rapidly and the trade decit contracted
sharply through the rst hal o 2009. Given the deterioration in economic
conditions, the current account decit is now estimated to be 3.0% o GDP
in 2009; expanding to 5.0% in 2010 as the economic growth revives (rom
7.5% and 7.0% o GDP, respectively, in ADO 2009).
Southeast Asia
Subregional assessment and prospects
Economic output in this subregion is now expected to be virtually at in
2009, its weakest perormance since the Asian nancial crisis in 1997–98
when subregional GDP ell. Growth has decelerated rom 4.1% in 2008,
and this year is projected at just 0.1% (Figure 3.1.10), a result o the global
slump in demand or manuactures and commodity exports, as well as
the nancial crisis. Hal the Southeast Asian economies are projected
to shrink this year, with those most exposed to international trade
Malaysia, Singapore, and Tailandcontracting the most.
Te aggregate growth orecast is revised down rom the ADO 2009 orecast given in March, o 0.7%. However, Indonesiathe largest
economy in Southeast Asiaand Viet Nam are perorming better than
ADO 2009 oresaw.
Te collapse in external demand in late 2008 and early 2009 led to
double-digit contractions in exports across the region. Lower exports
prompted cutbacks in manuacturing production that, in turn, sparked
layos that eroded consumption spending. As businesses delayed their
expansion plans, investment dived. Lower commodity prices damped
production and incomes in rural areas, while inward remittances
decelerated or actually declined, depending on the country.
Some oset to the long list o negative actors has been provided by
increased government spending (most countries rolled out scal stimulus
programs), and by a plunge in imports that in several cases outpaced the
export all, generating higher net exports. Interest rates have been cut
across the subregion, but with limited economic impact given generally
depressed domestic demand.
Te Southeast Asian economies that are expected to shrink this
year are the three larger trade-oriented ones listed above, plus Brunei
Darussalam, which relies on energy exports, and Cambodia, which
is vulnerable to slowdowns in tourism, clothing exports, and FDI.
Downturns relative to 2008 are more moderate in Indonesia, Lao PDR,
Philippines, and Viet Nam, which are generally less dependent on
3.1.10 GDP growth, Southeast Asia
-6 -4 -2 0 2 4 6 8
201020092008
Viet Nam
Thailand
Singapore
Philippines
Malaysia
Lao People's Dem. Rep.
Indonesia
Cambodia
Brunei Darussalam
Southeast Asia
%
Sources: Asian Development Outlook database; sta
estimates.
Click here or fgure data
8/7/2019 Asian Development Outlook 2009 Update: Broadening openness for a resilient Asia
http://slidepdf.com/reader/full/asian-development-outlook-2009-update-broadening-openness-for-a-resilient 119/188
8/7/2019 Asian Development Outlook 2009 Update: Broadening openness for a resilient Asia
http://slidepdf.com/reader/full/asian-development-outlook-2009-update-broadening-openness-for-a-resilient 120/188
8/7/2019 Asian Development Outlook 2009 Update: Broadening openness for a resilient Asia
http://slidepdf.com/reader/full/asian-development-outlook-2009-update-broadening-openness-for-a-resilient 121/188
Subregional summaries 105
Ination has been lower than expected, brought down rom double-
digit levels last year by alls in global commodity prices, good domestic
harvests, and a rm rupiah. Forecasts or ination are revised down to
5.0% this year and 6.0% next.
Malaysia
Te economy contracted by 5.1% in the rst hal o 2009, more sharply
than expected, as the impact o a plunge in exports spread to xed
investment and private consumption. Exports in volume terms ell by
16.3%, reecting much weaker global demand or Malaysia’s exports
o manuactures and commodities. Private consumption declined
marginally and xed investment ell by about 10%. On the production
side, only services grew (even then, only just), while manuacturing
output, which is dominated by export-oriented industries, contracted
sharply and agricultural production declined.
Te pace o GDP contraction slowed in the second quarter relative
to the rst, partly owing to increased public spending. Te Governmentlaunched two scal stimulus packages (although some measures got o
to a slow start), and interest rates were lowered to spur the economy.
However, GDP is expected to shrink by 3.1% in 2009, revised rom a
contraction o 0.2% in ADO 2009. Year-on-year GDP growth is likely to
return toward end-2009 and gradually pick up to average 4.2% in 2010.
Te better outlook is underpinned by the scal stimulus and the expected
recovery in world trade and commodity prices.
A declining trade surplus will likely trim the current account
surpluses to a still-substantial 14.0% o GDP this year and 12.5% in 2010.
Ination decelerated to just 1.7% in the rst 7 months o 2009 owing
to lower global commodity prices and slack domestic demand. While the
consumer price index has declined year on year in some months, it ispicking up on a monthly sequential basis. Ination or the whole year is
pegged at 1.1% (a touch lower than ADO 2009) and is projected to gather
pace to 2.6% in 2010, in tandem with higher domestic demand and global
commodity prices.
Philippines
GDP growth o 1.0% in the rst hal o 2009 was weaker than expected.
Private consumption growth pulled back abruptly rom a year earlier as
concerns over job security eroded consumer condence. Remittances,
a major prop or this economy, continued to grow in US dollar terms,
but at a much reduced pace. Government spending grew, supported
by a scal stimulus package, but xed capital investment ell and net
exports acted as a drag on GDP growth. By sector, services constituted
the main contributor to growth. Agriculture and public construction also
expanded, but industrial production and private construction contracted.
A somewhat better perormance is projected or the second hal
o 2009. Consumer condence has turned upward because o low
ination, an easing in interest rates by the central bank, and an improved
international economic outlook. Public investment is gaining impetus
under the scal stimulus. GDP growth or the whole year is projected at
1.6%, about 1 percentage point below the ADO 2009 orecast.
In 2010, the modest rebound in global trade and rmer domestic
8/7/2019 Asian Development Outlook 2009 Update: Broadening openness for a resilient Asia
http://slidepdf.com/reader/full/asian-development-outlook-2009-update-broadening-openness-for-a-resilient 122/188
106 Asian Development Outlook 2009Update
demand are expected to raise growth to 3.3%. Business condence should
improve aer national elections in May 2010, on the assumption that the
election process and transition in government go smoothly. Given scal
and debt constraints, the Government plans to rein in its budget decit in
2010, which may mean that scal support or the economy will not be asstrong as in 2009.
Merchandise exports slumped by just over 30% in the rst 6 months
o 2009led by a sharp drop in shipments o electronic productsand
imports ell by a similar degree. As in other subregional economies,
the contraction in trade appears to have bottomed early in 2009. Te
ull-year merchandise trade decit will likely be narrower than expected
in March. rade in services is projected to be in surplus, largely reecting
earnings rom business process outsourcing. Combined with growth in
remittances, these inuences are expected to produce a current account
surplus o 2.8% o GDP this year and close to this level in 2010.
In view o a steep deceleration in ination in the rst 8 months o
2009, the ination orecast is revised down to 3.2% or this year, pickingup to 4.5% in 2010.
Singapore
As a nancial center and manuacturing hub, this economy was
particularly hard hit by the global nancial crisis and slump in world
trade. GDP plunged by 9.5% year on year in the rst quarter o 2009 and
by 3.5% in the second. Te relatively better perormance in the second
quarter (GDP expanded by 20.7% on a seasonally adjusted annualized
basis rom the very weak rst 3 months) was driven by a pickup in
production o pharmaceutical products and by inventory restocking. For
the rst hal o the year, GDP contracted by 6.5%.
A better perormance is expected in the second hal. Manuacturingproduction rose in July rom the prior-year level and the slide in exports
moderated. A large scal stimulus is working its way through the
economy. GDP is expected to contract by about 5% or the whole year,
unchanged rom ADO 2009. In 2010, the orecast global upturn, coupled
with the scal stimulus, is expected to return the economy to growth, o
about 3.5%.
Ination slowed sharply to just 0.6% in the rst 7 months o 2009,
suppressed by lower global oil prices and weaker domestic demand. Te
consumer price index ell year on year or several months around midyear
and is now orecast to be at on average in 2009 (revised rom 0.5%
ination projected in ADO 2009). Next year, higher average oil prices and
rmer domestic demand are seen liing ination to about 2%.
ecurrentaccountsurplusfellto$9.0billioninthersthalfof
2009,from$14.7billionayearearlier,aresultofreducedsurplusesin
both goods and services trade. For the whole year, a still-large current
account surplus equivalent to 10.0% o GDP is expected, rising to 14.0% in
2010 in tandem with the improvement in trade in goods and services.
Tailand
Te onset o the global trade slump sparked a steep decline in Tailand’s
exports, which drove down industrial production and investment in
the rst hal o 2009. Business and consumer sentiment was urther
8/7/2019 Asian Development Outlook 2009 Update: Broadening openness for a resilient Asia
http://slidepdf.com/reader/full/asian-development-outlook-2009-update-broadening-openness-for-a-resilient 123/188
Subregional summaries 107
undermined by political uncertainty: private consumption and private
xed investment both contracted. Reecting these actors, GDP ell by
6.0% in January–June, a sharper all than was orecast in March.
o moderate the decline, the Government quickened the pace o
budget disbursements and raised wages or its employees, which boostedgovernment spending. From March, the Government also rolled out the
rst o two scal stimulus packages. By production sector in the rst hal,
output o services and industry ell, while agriculture was virtually at.
As elsewhere in the subregion, the slump in trade and manuacturing
reached a trough early in the year. Te scal stimulus, plus interest-rate
reductions by the Bank o Tailand and the improved global outlook,
will likely stabilize GDP in the second hal o 2009. Te ull-year orecast
is or a contraction in GDP o 3.2%, still a deeper decline than expected
in ADO 2009. Te economy is expected to grow by about 3% in 2010,
a very modest rate given the low base set in 2009. Te Government
plans a substantial public investment program rom October 2009 to
underpin the recovery. However, that program would be at risk i politicalturbulence disrupts policy making and scal disbursement.
Merchandise exports ell by about 23% in the January–June period
o 2009 as external demand dwindled. Imports tumbled by just over
35%, reecting reduced purchases o imported inputs or manuacturing
industries, lower oil prices, and so domestic demand. Te trade surplus
ballooned and the current account surplus was more than three times the
prior-year level. A current account surplus o about 6% o GDP is orecast
or this year, narrowing to about 1% in 2010 in the context o rising costs
or imports both o capital goods or investment projects and o oil.
Te consumer price index ell by 1.9% in the rst 7 months o this
year, rom high levels in 2008 when global ood and oil prices surged.
Prices are expected to turn upward by year-end. Still, the consumer priceindex is now orecast to all by 0.5% in 2009, revised rom March when
slight ination seemed likely. Next year, ination is put at around 2%, on
the basis o higher oil and commodity prices and a gradual recovery in
domestic demand.
Viet Nam
Expansionary scal and monetary policies supported growth o 3.9%
in the rst hal o 2009. Fiscal stimulus measures bolstered public
consumption and domestically nanced investment. Import volumes ell
more steeply than exports, so that net exports contributed to GDP growth.
Furthermore, oil production turned up, aer several years o decline. Te
impact o the global turbulence was reected in a all in merchandise
exports and in remittances, layos, and weaker inows o FDI.
Growth accelerated in the second quarter rom the rst, suggesting
that the economy bottomed early in the year. Given that the scal
stimulus, net exports, and oil output outstripped expectations, the 2009
GDP growth orecast is bumped up to 4.7% rom 4.5% in ADO 2009.
Next year, growth is seen stepping up to 6.5%. Investment is likely to
strengthen in view o the scal and monetary stimuli put in place in 2009
and an expected revival in FDI as the global economy improves. A pickup
in hiring and incomes will stimulate consumption.
Imports dropped much aster than exports in the rst hal, reecting
8/7/2019 Asian Development Outlook 2009 Update: Broadening openness for a resilient Asia
http://slidepdf.com/reader/full/asian-development-outlook-2009-update-broadening-openness-for-a-resilient 124/188
108 Asian Development Outlook 2009Update
the slowdown in economic activity, lower import prices, reduced
availability o trade credit, and a shortage o oreign exchange in the
ormal market. Te current account decit or 2009 is now projected at
about 7% o GDP, narrower than projected in March. It will likely widen
to about 9% in 2010 because growth in imports is expected to outstripthat in exports as the economic expansion picks up pace.
Ination decelerated to 8.3% in January–August 2009 rom 23.0% in
all 2008 owing to lower world oil and ood prices and soer domestic
demand. Still, the high-ination inertia was stronger than expected. Te
2009 ination orecast is raised rom that given in ADO 2009 to 6.8%,
and the 2010 orecast revised up to 8.5%, in part owing to rapid growth in
money supply this year.
Other economies
Brunei Darussalam
Tis economy, which relies on exports o oil and natural gas or abouthal its GDP, is expected to contract by 1.2% in 2009 owing to lower world
demand or energy and the all in energy prices rom last year. Tat
would be a more moderate decline than the 1.9% all in GDP estimated
or 2008. Government spending is tempering the contraction and the
nonenergy sector is expected to perorm better in 2009.
Growth is set to resume in 2010 at just over 2%, supported by higher
global energy demand and prices and by the start o exports rom a
$450millionmethanolplant.eGovernmentissteppingupitseorts
to diversiy the economy: one result will be an increase in the number o
Brunei Halal Brand products exported next year.
Ination is expected to stay subdued in view o lower prices this year
or imported commodities and the Government’s policy to subsidizea broad range o products and services. Te ination projections are
maintained at 1.5% or 2009 and 1.2% or 2010. Large current account
surpluses based on exports o energy are expected to moderate in the
orecast period as a result o lower oil prices and reduced income ows
rom investment abroad.
Cambodia
A sharper than expected downturn in clothing exports, construction
activity, and tourist arrivals has prompted a downward revision in the
GDP orecast. Te economy is now expected to contract by 1.5% in 2009,
rather than record slight growth as anticipated in ADO 2009.
US Department o Commerce data show that Cambodian clothing
exports to the USthe leading marketdropped by 27% in the rst
5 months o 2009 rom the corresponding period o 2008, and order
books or clothing in May were signicantly lower than a year earlier.
Construction activity declined as a consequence o alling FDI, notably
rom Korea. ourist arrivals ell by 3% in the rst 4 months o 2009.
Growth is projected to resume in 2010 at about 3.5%, as a gradual
recovery in the global economy stimulates clothing exports and tourism.
Tat should provide support or growth in incomes and consumption.
Ination has decelerated aster than expected, owing to lower
international oil and ood prices and weaker domestic demand as the
8/7/2019 Asian Development Outlook 2009 Update: Broadening openness for a resilient Asia
http://slidepdf.com/reader/full/asian-development-outlook-2009-update-broadening-openness-for-a-resilient 125/188
Subregional summaries 109
economy contracts. Te ination rate or 2009 is now orecast at just
0.8%, revised down rom ADO 2009. It is expected to quicken to about 5%
in 2010, reecting higher prices or imported oil and the improvement in
domestic demand.
In the external accounts, imports ell by 18.1% in the rst hal o 2009,a sharper decline than that recorded or exports (10.3%). ourism arrivals
are expected to pick up in the second hal o 2009 and the rate o decline
in exports may well slow. Te current account decit will be narrower
than orecast in March, at about 5.0% o GDP this year and 7.0% in 2010.
Grossinternationalreservesedgedupto$2.18billionatmidyear,from
$2.16billionatend-2008.
Lao People’s Democratic Republic
Economic growth is easing in 2009 rom rates in excess o 7%, driven
by expansion o mining and hydropower, seen over recent years. Lower
global mineral prices have damped mining activity and construction has
been dented by reduced ows o FDI. Te global economic downturn hasalso hurt clothing exports and tourism earnings.
Government spending, including outlays on inrastructure or the
Southeast Asian Games scheduled to be held in Vientiane later this year,
is helping moderate the slowdown. Te budget decit target has been
widened to 5.0% rom an original target o 3.4%. Economic growth is
orecast at 5.5% in 2009, in line with the ADO 2009 projection, picking up
to 5.7% in 2010 as world commodity prices recover and investor sentiment
improves.
Lower ood and uel prices caused ination to slow to 0.2% in the rst
hal o 2009. Ination orecasts are revised down to 0.7% or 2009 and
4.5% in 2010.
Te current account decit is now projected to narrow to 14.6%in 2009, reecting a aster all in imports than in exports owing to
lower uel and commodity prices and reduced imports o construction
materials and machinery. A narrower trade decit will be partly oset
by a smaller surplus in services due to lower tourism receipts. Te
current account decit is expected to remain at around 14% next year.
Externalreservesof$583millioninMay2009represented3.5monthsof
nonresource import cover.
The Pacic
Subregional assessment and prospectsTe aggregate growth projection or 2009 is edged down to 2.8%
(Figure 3.1.13) rom the 3.0% that was orecast in March’s ADO 2009. Tis
year’s likely outcome represents a sharp slowdown rom 5.2% growth in
2008, when resource exporters in the Pacic beneted rom high global
oil and commodity prices. Only the region’s mining and hydrocarbon
exporters (Papua New Guinea and imor-Leste) and a key reormer
(Vanuatu) are expected to grow at a reasonable rate in 2009.
Five economies (Cook Islands, Fiji Islands, Palau, Samoa, and onga)
are projected to contract, primarily because the global economic slump
has eroded income rom tourism and remittances. Solomon Islands is
3.1.13 GDP growth, the Pacic
-4 0 4 8 12 16
201020092008
Vanuatu
Tuvalu
Tonga
Timor-Leste, Dem. Rep. of a
Solomon Islands
Samoa
Papua New Guinea
Rep. of Palau
Fed. States of Micronesia
Rep. of Marshall Islands
Kiribati
Fiji Islands
Cook Islands
The Pacic
%
a Non-oil, non-United Nations GDP.
Sources: Asian Development Outlook database; sta estimates.
Click here or fgure data
8/7/2019 Asian Development Outlook 2009 Update: Broadening openness for a resilient Asia
http://slidepdf.com/reader/full/asian-development-outlook-2009-update-broadening-openness-for-a-resilient 126/188
110 Asian Development Outlook 2009Update
now expected to record no growth because its log exports have dropped
sharply. Te growth outlook or Papua New Guinea has improved since
March in tandem with the pickup in global prices or mineral and
petroleum products. imor-Leste also is set to grow signicantly, based
on its income rom hydrocarbons.Governments in the Pacic have generally been overoptimistic this
year in their revenue projections and slow to counter the deterioration in
the economic outlook. Weaker tax and other revenues are hampering the
ability o some o them to meet budget commitments. Most governments
have made across-the-board cuts to unding or goods and services and
maintenance as revenue weakened. Tis nonprioritized approach to
adjustment is expected to impair the delivery o basic services and damp
economic recovery. While restraint has generally been achieved on public
sector pay, thereby avoiding a urther source o scal pressure, in some
cases unsustainable increases have been made. Only a ew governments
have been able to increase needed capital expenditure in order to support
investment and aggregate demand.In 2010, the subregion is expected to post aggregate growth o 3.1%,
a slightly higher outturn than projected in ADO 2009. Forecasts or
the three biggest Pacic economiesFiji Islands, Papua New Guinea,
and imor-Lesteare raised rom March. Higher average global oil
and commodity prices assumed or 2010 in the Update are behind the
improved outlook or Papua New Guinea and imor-Leste, while Fiji
Islands is expected to resume growth aer this year’s contraction in GDP.
Average growth or the Pacic islands (the countries excluding Papua
New Guinea and imor-Leste) is projected to remain low at 0.8% in 2010
in the context o a slow, gradual pickup in earnings rom tourism and
remittances. Te speed o recovery will also depend on urther policy
responses to this year’s slowdown.Lower prices this year or imported uel and ood have trimmed
ination rom the high average level o 9.5% seen in 2008 (although
ination has increased in Fiji Islands this year because o devaluation).
Subregional ination is projected to slow to 6.1% in 2009 (Figure 3.1.14),
slightly below that anticipated in ADO 2009. Te higher average global
oil and commodity prices assumed or 2010 have bumped up the 2010
aggregate orecast rom March to 5.2%.
Te decline in prices this year or ood and other essentials is
providing some relie to vulnerable groups that were seriously hurt by
high prices o these items in 2008. Such groups include people living in
squatter settlements, those lacking their own ertile land, and those living
in the most remote areas.
Country highlights
Fiji Islands
Te economy is expected to contract in 2009, weakened by a decline in
earnings rom tourism and exports partly a result o the global economic
slowdown. Political uncertainties have hurt the economy since a military
coup in 2006 installed an interim government. Lack o progress toward
a government commitment to holding elections since then has led donor
countries to hold back economic assistance and has damaged investor
8/7/2019 Asian Development Outlook 2009 Update: Broadening openness for a resilient Asia
http://slidepdf.com/reader/full/asian-development-outlook-2009-update-broadening-openness-for-a-resilient 127/188
8/7/2019 Asian Development Outlook 2009 Update: Broadening openness for a resilient Asia
http://slidepdf.com/reader/full/asian-development-outlook-2009-update-broadening-openness-for-a-resilient 128/188
112 Asian Development Outlook 2009Update
caused by technical problems at the mines, but that will in part be oset
by higher than expected output rom the Lihir mine.
Reecting the global slowdown and commodity price declines, the
value o exports ell by an estimated 33% in the rst hal o 2009 rom
the prior-year period, suppressing incomes and government revenueand lowering GDP growth rom the pace set in 2008. Growth in private
sector credit slowed to about 25% year on year in June 2009 (rom 40%
in June 2008) and growth in employment moderated to about 6% in the
12 months to March 2009 (rom 10% in the 12 months to June 2008).
Te Government, aced with lower than expected income rom
commodities, widened its targeted budget decit to 3.3% in 2009, unded
by additional drawdowns rom public trust und savings generated
during the commodity boom. It has broadly maintained its operating
expenditure, but cut development spending by about 3%.
Next year, GDP is orecast to grow by 3.9%, raised a touch rom
ADO 2009 on the basis o the Update’s assumptions o higher average
global oil prices.Ination has decelerated in step with the all in global ood and uel
prices, and the 2009 orecast is maintained at 7.0%. Monetary and credit
growth rates remain high, but have decelerated rom late-2008 levels. In
2010, ination is orecast to ease to 5.5% as the economy slows.
Te current account ell into decit in the rst quarter o 2009 as
export values dropped. A decit is still projected or the whole year,
although the pickup in prices o exports, coupled with weaker than
expected imports, has prompted a revision to 6.0% o GDP (rom 7.0%
in March, Figure 3.1.15). Te external decit is orecast to stay at around
thatlevelin2010.Foreignreservesroseto$2.2billion(about14months
o nonmineral imports) at end-May, supported by central bank buying o
oreign currencies in the market to moderate an appreciation o the kina.
Democratic Republic o imor-Leste
Te preerred measure o this economy, that is, excluding petroleum
production and the operations o the United Nations, was revised up
or 2008 rom the preliminary estimate o 10.0% to 13.0%. Development
is based on high levels o public spending that is unded mainly by the
Government’s revenue rom hydrocarbon production. In view o eorts to
trim public spending to more sustainable levels since the easing o world
oil prices, economic growth is expected to slow to about 8% in 2009,
lowered rom the ADO 2009 orecast.
Tis still-robust rate is supported by increases in public sector salaries
and gradual improvements in agriculture, which accounts or about 85%
o employment. Economic growth is expected to edge higher to about 9%
in 2010.
Ination has subsided at a much aster rate than orecast in
ADO 2009, driven by sharp alls in international prices o ood and uel.
(Te use o the US dollar as the national currency has helped in this
regard.) Te consumer price index ell by 1.3% on a year-on-year basis in
the second quarter o 2009. For the ull year, ination is now orecast at
1.5%, revised down sharply rom ADO 2009, and or 2010 the orecast is
lowered to 3.1%.
Withdrawals this year rom the Petroleum Fund, which holds national
3.1.15 Current account balance, the Pacic
-50 -25 0 25
201020092008
Vanuatu
Tonga
Solomon Islands
Samoa
Papua New Guinea
Fed. States of Micronesia
Rep. of Marshall Islands
Kiribati
Fiji Islands
Cook Islands
The Pacic
% of GDP
Sources: Asian Development Outlook database; sta estimates.
Click here or fgure data
8/7/2019 Asian Development Outlook 2009 Update: Broadening openness for a resilient Asia
http://slidepdf.com/reader/full/asian-development-outlook-2009-update-broadening-openness-for-a-resilient 129/188
Subregional summaries 113
savingsexceeding$4billionfromoshorehydrocarbonproduction,are
budgeted to exceed estimated sustainable income. Te key challenge is
to use these withdrawals or broad-based development to reduce poverty,
while ensuring that adequate savings are retained to und the budget or
uture generations. Agriculture will likely be the main source o incomeor most o the population or some decades and urther investment is
required in this sector. However, current government intervention in
the market as a buyer and seller o agricultural produce may not be as
productive as conventional policies to invest in agricultural extension
services, improvements to access to markets, and human capital.
Other Pacic economies
Samoa
Te outcome or 2008 has been revised down to show a contraction o
3.4%. Several negative inuences had a more severe impact than had been
estimated. Tese included job losses at the Yazaki plant that assemblesautomobile parts or export, a all in remittances, weakness in tourism,
and the erosion o purchasing power due to high ination.
Tis year, tourism has beneted rom Fiji Islands’ problems o
ooding and political uncertainty, as well as rom increased airline
services and recent hotel developments in Samoa. Tese eects, combined
with the lming in Samoa o the television series “Survivor,” are expected
to raise tourism receipts. However, the real value o remittances ell by
about 9% in the 12 months to June.
Te economic contraction is projected to extend through this year
and next, although the pace is projected to moderate to 0.8% in 2009 and
0.6% in 2010. Government spending on inrastructure will avert a sharper
contraction.Ination eased to 9.2% year on year at June 2009, hal last year’s
peak. Te ull-year orecast is revised down to 5.7%. Ination is expected
to decline urther to 3.2% in 2010 (but raised rom the March orecast
because o the higher oil price assumption in the Update). International
reserves increased to the equivalent o 5.1 months o imports as o
June 2009, above the target o 4.0 months. However, the outlook or
the current account is o concern. Te Government’s macroeconomic
ramework suggests current account decits o 14–16% o GDP in the next
2 years. Tat would put extra pressure on debt levels and so requires a
plan to prioritize capital investment and strengthen revenue.
Solomon IslandsTe economy has been hit by the global downturn as well as by bad
weather in 2009. Exports (mainly logs), sh, palm oil, and copra ell by
11% in value in the rst quarter o this year. Logging volumes dropped
sharply in the rst hal and look likely to all by about 30% to 1.1 million
cubic meters in 2009. GDP is expected to be at in 2009, revised rom an
expansion o 2.2% projected in ADO 2009.
Growth is now seen resuming in 2010 at 2.6%, a slightly aster pace
than previously orecast, provided there is a determined response rom
the Government to the economic slowdown. Agricultural production is
expected to pick up and the decline in logging in 2010 might not be as
8/7/2019 Asian Development Outlook 2009 Update: Broadening openness for a resilient Asia
http://slidepdf.com/reader/full/asian-development-outlook-2009-update-broadening-openness-for-a-resilient 130/188
114 Asian Development Outlook 2009Update
severe as in 2009. Still, high population growth implies no per capita
GDP growth in the orecast period. Prospects or overall economic
growth remain modest thereaer given a long-term decline o native
orest resources caused by overlogging.
Te weakness in exports suggests that current account decits willbe worse than oreseen in March, now projected at 10.6% o GDP this
year and 18.6% in 2010. Foreign reserves stabilized at about 3 months o
import cover in July 2009, aer alling to 2.5 months earlier in 2009, in
part a result o substantial aid disbursements. Tese eects will wane
as the aid unds are spent, and oreign reserves may again come under
pressure.
Flooding in Guadalcanal caused ination to surge to 16.5% in the rst
quarter o 2009, beore it decelerated to 9.3% in June. Te year-average
orecast or this year is lowered a shade to 8.3% in the context o the
slack economy. However, the orecast or 2010 is revised up to 6.9% on
the basis o assumed increases in global prices o oil and other imported
commodities.Government revenue ell short o expectations by 11% in the rst
quarter o 2009, the result o an erosion o tax income caused by the
slowing economy and drop in oil prices, coupled with the sharp decline
in logging revenue. Te Government is committed to avoid borrowing,
so will need to consider a combination o trimming expenditure, raising
additional revenue, and reocusing public resources to prioritize basic
needs such as health and education.
onga
Remittances ell by 14% in the 12 months to June 2009, reecting
recessions in two main source markets, the US and New Zealand, and
soening demand or seasonal workers in Australia. Furthermore, bank lending is constrained because commercial banks tightened credit policies
aer a rapid increase in bad loans. Te economy probably contracted by
about 0.5% in FY2009 (ended 30 June 2009), but by less than was orecast
in March.
Growth is expected to resume in FY2010 at about 0.5%, a revision
rom the ADO 2009 orecast or a continued contraction. Te domestic
content o capital works that are being supported by concessionary
unding rom the People’s Republic o China is now expected to be
higher than originally thought, raising its contribution to GDP. However,
the economy remains highly vulnerable to external conditions, notably
changes in remittance inows.
Ination in FY2009 is estimated at 6.2%. Te ination orecast or
FY2010 is raised to 3.1%, given the increase in global oil prices over
recent months.
Government revenue and grants received at the end o the rst
quarter were about 20% under budget. otal expenditure was also below
budget, resulting in a scal surplus at end-May 2009. Te surplus appears
to reect controls on spending or operation and maintenance, which
could reduce delivery o public services, rather than controls on the
Government’s wage bill. In the external accounts, the level o oreign
reserves rose to 4.7 months o import cover in the rst hal o 2009.
8/7/2019 Asian Development Outlook 2009 Update: Broadening openness for a resilient Asia
http://slidepdf.com/reader/full/asian-development-outlook-2009-update-broadening-openness-for-a-resilient 131/188
Subregional summaries 115
Vanuatu
ourist arrivals rose in the rst 5 months o 2009: those on cruise ships
by 58% and those via air travel by 18%, partly a result o the problems
experienced in Fiji Islands. Te strength in tourism and signs o a rming
in domestic demand suggest that GDP growth will be about 4% in 2009and 3.5% next year, both revised up rom ADO 2009.
Te economy expanded by an average o 6.5% in the 5 years to 2008,
driven largely by private-sector investment in tourism and construction
and underpinned by policy reorms that included the opening o the
telecommunications and aviation markets.
However, the pace o credit growth is worrisome. Credit to the private
sector grew by 35.3% over the 12 months to May 2009, slowing only
slightly rom 44.0% earlier this year. Entry o new banks in the economy
has contributed to this surge in credit. Tere is a risk that the level o
nonperorming loans will rise as economic growth pulls back.
Fiscal surpluses and strong economic growth have reduced the ratio
o public debt to GDP by more than hal over the past 7 years to 18.4%.Tis gives the Government room to take countercyclical scal measures i
the economy slows more sharply than expected.
Ination remained quite high at 6.1% year on year in the rst quarter
o 2009, despite lower global prices or ood and uel. Te orecast is
revised up to 4.3% or this year and to 3.0% in 2010, based on upward
revisions to GDP as well as to international oil prices.
Foreign reserves, equivalent to 5.0 months o import cover in June
2009, were down rom 5.8 months at end-2008 but above the central
bank’s minimum target o 4 months.
Others
For Cook Islands, the outcome or 2008 and outlook or 2009 are reviseddown. Economic data or last year, when tourist arrivals ell, has been
revised to show a GDP contraction o 1.2%, rather than a slight expansion
as previously estimated. Low investment and the erosion o real incomes
rom high ination point to the contraction extending into 2009. But the
extent o the decline is expected to moderate to about 0.1%, with tourism
getting some support rom subregional sporting events and conerences
held in the Cook Islands. Growth is orecast to return in 2010 at the low
rate o 0.8%. Te Update raises the ination orecast to 6.5% or 2009, but
still oresees a deceleration o price pressures next year.
Updated GDP estimates or Federated States o Micronesia in FY2008
(ended 30 September 2008) now show a sharper GDP contraction o 2.9%,
compared with a 1.0% decline in ADO 2009. Nevertheless, the outlook
has improved because o a pickup in externally unded inrastructure
projects. ourism and remittance inows are sluggish, largely owing to
recessions in the US and Japan. GDP is now expected to grow by about
0.5% in FY2009, revised rom a March orecast or a slight contraction,
and also expand by about 0.5% in FY2010.
Te growth estimate or Nauru is downgraded to 1.0% in FY2009
(ended 30 June 2009) and its GDP in FY2010 is orecast to be at.
Downward revisions (rom 1.5% growth in both years in ADO 2009) stem
rom a slowdown in external demand or Nauru’s phosphate, particularly
rom Australia, and the consequent decline in phosphate prices. In line
8/7/2019 Asian Development Outlook 2009 Update: Broadening openness for a resilient Asia
http://slidepdf.com/reader/full/asian-development-outlook-2009-update-broadening-openness-for-a-resilient 132/188
8/7/2019 Asian Development Outlook 2009 Update: Broadening openness for a resilient Asia
http://slidepdf.com/reader/full/asian-development-outlook-2009-update-broadening-openness-for-a-resilient 133/188
Bangladesh
Bangladesh experienced adverse eects rom the global downturn, primarily through slower growth o
exports and workers’ remittances, and damped investment sentiment. Still, it has maintained relatively
strong expansion, reduced infation, and kept a current account surplus. For FY, this Update maintains
the projections made in March or moderately slower growth and infation relative to FY, but now
orecasts a small current account surplus rather than a decit. The medium-term trajectory will depend
heavily on the Government’s ability to implement reorms, which include substantially boosting budget
revenue and raising inrastructure investment.
Updated assessmentGDP growth o 5.9% is estimated or FY2009 (ended June 2009), below
the perormance o the previous year but somewhat higher than the
projection o 5.6% made in the Asian Development Outlook (ADO 2009)
released in March this year (Figure 3.2.1).
Tis stronger outturn is due to better than expected agricultural
expansion, at 4.6%. Te output o aman, the second rice crop (harvested
in November–January), rose to 11.6 million tons, a 19.6% rise over the
previous scal year and reecting a strong recovery rom the severely
damaged FY2008 crop. Boro, the major rice crop (harvested in April–
May), is estimated at 17.8 million tons, marginally exceeding FY2008’s
record output. Crop production beneted rom avorable weatherconditions as well as strong support rom the Government that enabled
armers to access inputs and credit. Services sector growth (at 6.3%, down
rom 6.5% in FY2008) moderated, largely as a result o slower export and
import activity.
Industrial growth o 5.9% ell below both the ADO 2009 projection o
6.6% and the 6.8% outturn o FY2008, as export production in the second
hal o the scal year slowed more sharply than expected. Weakening
construction activity and power outages pulled back manuacturing
growth. Slow implementation o energy projects continued to restrict
industry’s expansion, although the new Government (elected in January
2009) has given power generation and gas development a high priority, as
outlined in the ruling party’s election maniesto and reected in a new
public–private partnership (PPP) scheme.
GDP growth in FY2009 was again driven by consumption
expenditure (Figure 3.2.2). Accounting or about our hs o GDP,
it grew by 5.8%, up rom the previous year’s 5.4%. Growth in private
consumption, which constitutes about three quarters o GDP, was, at
6.0%, stronger than FY2008’s 5.5%. Public consumption as a share o GDP
declined or the third consecutive year.
Private investment, growing by 7.2%, lied its share rom 19.3% o GDP
3.2.1 GDP growth by sector
0
2
4
6
8
10
0908072006
%
6.65.96.26.4
GDP growth
Services
Agriculture
Industry
Source: Bangladesh Bureau o Statistics, National Accounts
Statistics , May 2009.
Click here or fgure data
This chapter was written by Mohammad Zahid Hossain, Md. Golam Mortaza, and
Shamsur Rahman o the Bangladesh Resident Mission, ADB, Dhaka.
3.2.2 Contributions to growth (demand)
2005 06 07 08 09
Percentage points
-2
0
2
4
6
8
GDP growth
Statistical discrepancy
Consumption
Net exports
Investment
Source: Bangladesh Bureau o Statistics, National AccountsStatistics, May 2009.
Click here or fgure data
8/7/2019 Asian Development Outlook 2009 Update: Broadening openness for a resilient Asia
http://slidepdf.com/reader/full/asian-development-outlook-2009-update-broadening-openness-for-a-resilient 134/188
118 Asian Development Outlook 2009Update
in FY2008 to 19.6% in FY2009, reecting improved business condence
ollowing the orderly return to elected government. Public investment,
in contrast, declined urther, sliding rom 5.0% o GDP to 4.6%, as
implementation o the annual development program (ADP) remained
weak. Overall investment remained unchanged at 24.2% o GDP.I Bangladesh is to attract greater investment, particularly rom
abroad, it will need to address some increasingly binding constraints.
Tese are elt especially in inrastructure and the business environment,
and include acute power shortages, transportation bottlenecks, inadequate
and inefcient port acilities, high business startup costs, and slow
institutional reorms.
Ination ell steadily through the scal year, rom 10.8% year on year
in July 2008 to 2.3% in June 2009 (Figure 3.2.3). Annual average ination
declined to 6.7% in FY2009 (slightly lower than the ADO 2009 projection
o 7.0%), rom 9.9% in FY2008. Te sharp decline in import prices
and the rise in domestic ood production were the main actors. Te
successive cuts in domestic uel prices in October and December 2008and in January 2009, in line with the all in global oil prices, also helped
(though the xed administrative prices o uel have not since been raised
as oil prices rose subsequently). Although ood ination has declined
sharply, nonood ination has edged up since January 2009, reecting the
accommodative monetary policy o Bangladesh Bank, the central bank.
Reaching 24.0% in June 2009, the growth o net credit to government
was high throughout FY2009, reecting lower availability o external
nancing. Te 19.2% growth in money supply (M2) in June 2009 was
higher than the central bank’s annual program target o 17.5%. Private
sector credit rose by 14.6% in June 2009; this was less than the annual
program target o 18.5% and was largely on account o the slowdown in
credit demand as the global recession damped domestic economic activity (Figure 3.2.4).
Yields on reasury bills rose marginally during the year to March
2009, but then ell sharply along with commercial banks’ call money rates
as bank liquidity surged (Figure 3.2.5). Banks’ weighted average lending
rate remained unchanged at 12.3% rom the beginning o the scal year.
o bolster credit conditions and the economy, Bangladesh Bank cut
both the reverse repo and repo rates (1–2-day maturity) by 25 basis points
in March 2009 to 6.5% and 8.5%, respectively. Moreover, in the March–
June quarter, it adjusted its open-market operations to allow a marked
runup in reserve money, which immediately ed through to much lower
short-term money market rates. However, with no corresponding decline
in commercial lending rates, Bangladesh Bank decided to use mandatory
measures and directed banks to lower their maximum lending rate to
13% in a urther eort to lower the rate structure and boost credit to the
private sector. (Until that decision, the maximum rate had been 16% on
agricultural loans.)
Te weighted average deposit rate rose to 7.5% in March 2009 rom
7.0% in June 2008. Te interest spread o the banking system narrowed
to 4.8 percentage points in March 2009 rom 5.7 percentage points in
March 2008.
Revenue collection in FY2009 is estimated at 11.2% o GDP, similar to
FY2008 (Figure 3.2.6). Revenue growth missed its target because o a all
3.2.3 Change in consumer price index and
components
0
2
4
6
810
12
14
AprJan
09
OctJulAprJan
08
OctJulAprJan
2007
%
NonfoodbFoodbOverallbOveralla
a Year on year. b 12-month moving average.
Source: Bangladesh Bank, Economic Trends, June 2009,available: http://www.bangladesh-bank.org, downloaded24 August 2009.
Click here or fgure data
3.2.4 Growth o monetary indicators
5
11
17
23
29
35
Credit to private sector
Credit to government
Broad money
MayFeb
09
NovAugMayFeb
08
NovAugMay
2007
%
Source: Bangladesh Bank, Economic Trends, July 2009,available: http://www.bangladesh-bank.org, downloaded28 August 2009.
Click here or fgure data
3.2.5 Interest rates
0
4
8
12
16
20
LendingCall money
12 day reverse repo12 day repo
Q2
09
Q4Q2
08
Q4Q2
07
Q4Q2
06
Q4Q2
2005
%
Sources: Bangladesh Bank, Economic Trends, June 2009;
Major Economic Indicators: Monthly Update, July 2009,available: http://www.bangladesh-bank.org, both
downloaded 24 August 2009.
Click here or fgure data
8/7/2019 Asian Development Outlook 2009 Update: Broadening openness for a resilient Asia
http://slidepdf.com/reader/full/asian-development-outlook-2009-update-broadening-openness-for-a-resilient 135/188
South Asia Bangladesh 119
in import prices that eroded the import-stage tax base, which accounts
or over 40% o tax receipts. Domestic indirect taxes also perormed
below target as economic activity decelerated in response to the global
economic downturn. Te revenue outturn is low compared with countries
at a similar stage o development and limits essential public spendingon inrastructure and human development. Te poor perormance
stems rom the narrow tax base, excessive exemptions, and weak tax
administration.
Te new Government announced several tax measures in the FY2010
budget, among others expanding the tax base, withdrawing exemptions
and exclusions, simpliying procedures, amending laws, and streamlining
tax administration. As a step toward eliminating tax holidays, it
introduced a system o reduced corporate tax rates or certain sectors in
lieu o existing tax holiday schemes. In an eort to expand the tax base,
the Government will also conduct surveys covering cities, districts, and
subdistricts to identiy those who have avoided tax (by not ling). It also
announced a tax amnesty program or FY2010: a modest 10% tax is leviedon the declared amounts i they are invested in areas specied by the
authorities, such as the stock market.
Savings on ood, uel, and ertilizer subsidies enabled by the all
in international commodity prices and by underspending in the ADP
saw FY2009’s public spending come in at 15.3% o GDP, lower than the
budget target o 16.3%. As savings on public spending were larger than the
shortall in revenue, the scal decit o 4.1% o GDP was narrower than
the budget target o 5.0%. O the total decit, 2.3% o GDP was nanced
domestically and 1.8% externally.
In FY2009, the net losses o the 44 nonnancial state-owned
enterprisesshranksharplyfrom$1.5billiontoonly$22.5million.A
high prot earned by the Bangladesh elecommunication Regulatory Commission (rom auctioning licenses to telecoms utilities) and higher
earnings by Bangladesh Oil, Gas and Mineral Resources Corporation
(rom international oil companies aer cost recovery was completed)
largely oset the combined losses o all other enterprises (Figure 3.2.7).
Bangladesh Petroleum Corporation generated a prot or part o
the year when international oil prices were low, but incurred losses
again when these prices rose but administered domestic prices were le
unchanged.ItsoveralllossinFY2009wasabout$520million,compared
withabout$1.4billionayearearlier.ecorporationisexpectedto
record large losses in FY2010 i oil prices remain high and administered
prices unadjusted. Bangladesh Power Development Board also registered
sizable losses in FY2009.
Te trade decit narrowed markedly in FY2009 (by 1.4% o GDP
rom a year earlier) as import payments grew more slowly than export
earnings. Export growth decelerated steadily as FY2009 unolded due to
weak global demand and declining prices, rom 42.4% in the rst quarter
to 19.4% in the rst hal and urther to 10.3% or all FY2009 (Figure 3.2.8).
Weak retail sales in industrial economies caused a slowdown in garment
export orders over the year. Moreover, as product prices ell by more
than raw material prices, exporters’ prot margins shrank, retarding
sales o some products. Earnings rom “other” exports ell rom a year
earlier, largely due to a sharp drop in demand or processed leather,
3.2.6 Government revenue
0
3
6
9
12
NontaxTaxTotal
09080706052004
% of GDP
10.111.211.1
10.210.710.5
Source: Asian Development Outlook database.
Click here or fgure data
3.2.7 Prots and losses at selectedstate-owned enterprises
-1,500
-1,000
-500
0
500
Bangladesh Petroleum Corporation
Bangladesh Telecommunication Regulatory Commission
Bangladesh Power Development Board
Bangladesh Oil, Gas and Mineral Resources Corporation
09080706052004
$ million
Note: Data or 2009 are up to 29 April only.
Source: Ministry o Finance, Bangladesh Economic Review
2009.
Click here or fgure data
3.2.8 Growth in exports and components
-10
0
10
20
30
40
Total
OthersWoven garments
Knitwear products
09080706052004
%
Sources: Bangladesh Bank, Annual Report 2007–08 and
Major Economic Indicators: Monthly Update, July 2009,available: http://www.bangladesh-bank.org, downloaded
13 July 2009.
Click here or fgure data
8/7/2019 Asian Development Outlook 2009 Update: Broadening openness for a resilient Asia
http://slidepdf.com/reader/full/asian-development-outlook-2009-update-broadening-openness-for-a-resilient 136/188
120 Asian Development Outlook 2009Update
and or rozen ood, which is an item with a high income elasticity o
demand.
Imports rose by only 4.1% in FY2009 because o alling commodity
prices, particularly or oil, and a sharp decline in rice imports attributable
to the excellent domestic crop harvests (Figure 3.2.9). Although growthin remittances slowed, inows rom that source still climbed by 22.4%
to$9.7billioninFY2009(Figure3.2.10),inviewofthejumpinworkers
who went abroad in 2007 and 2008 (and who are sending money back
home). Given the substantial improvement in the trade decit and the
continued increase in remittances, the current account surplus ballooned
to$2.5billion(2.8%ofGDP),from$680millioninFY2008.
Te combined capital and nancial account switched to a decit
of$357millioninFY2009fromasurplusof$119millioninFY2008,
reecting a net outow in portolio investment, a decrease in net inows
o medium- and long-term loans, and an increase in net outows o
short-term loans, trade credit, and other assets, despite the rise in net
oreign direct investment. Net o errors and omissions and valuationchanges,grossforeignexchangereservesroseto$7.5billionatend-June
2009,about$1.3billionabovethelevelayearearlier(Figure3.2.11).
Te exchange rate remained largely stable against the US dollar in
FY2009, with the taka depreciating by about 0.8%. Te real eective
exchange rate appreciated by around 8%, in part reecting relatively
higher domestic ination and implying some erosion in export
competitiveness.
Te Dhaka Stock Exchange general index experienced ups and downs
in FY2009, though its end-June level was essentially unchanged rom a
year earlier (Figure 3.2.12). As at end-July 2009, the index had registered
a gain o 4.3% in 7 months. Te expected listing o GrameenPhone, the
country’s largest mobile phone company, in October 2009 will deepenthe market, encourage other large companies to list, and boost investor
condence. Lower corporate tax rates in FY2010 or mobile phone
operators, provided that they list on the stock exchange, should encourage
other mobile phone companies to ollow. Market capitalization rose by
36.1%duringFY2009toreach$19.0billioninJune2009(orover21.0%of
GDP), reecting the listing o companies and declaration o bonus shares
in lieu o cash dividends.
ProspectsTe orecasts or FY2010 depend on some key assumptions. It is assumed
that political stability will prevail, and that the Government will be able
to move orward in ullling its development priorities, sustain its ocus
on prudent macroeconomic management, and deepen economic reorms.
It is also assumed that the measures outlined in the FY2010 budget to
accelerate ADP utilization (streamlining project approval processes and
raising institutional capacities in key line ministries) will be implemented,
and that the private sector will invest more in inrastructure through the
new PPP scheme.
It is urther assumed that the Government will be able to mobilize
adequate external assistance and improve revenue mobilization, and
3.2.10 Workers’ remittances
0
3
6
9
12
0
3
6
9
12
% of GDPValue
09080706050403022001
$ billion %
Source: Bangladesh Bank, Annual Report 2007–08, available:http://www.bangladesh-bank.org, downloaded 13 July2009.
Click here or fgure data
3.2.11 Gross oreign exchange reserves
0
2
4
6
8
JunFeb
09
OctJunFeb
08
OctJunFeb
07
OctJun
2006
$ billion
Source: Bangladesh Bank, Economic Trends, June 2009,available: http://www.bangladesh-bank.org, downloaded
24 August 2009.
Click here or fgure data
3.2.9 Growth in imports and components
-50
0
50
100
150
200
Total
Others
Fertilizer
Crude and refined petroleum
Other food items
Foodgrains
09080706052004
%
Sources: Bangladesh Bank, Annual Report 2007–08 and
Major Economic Indicators: Monthly Update, August 2009,available: http://www.bangladesh-bank.org, downloaded
29 August 2009.
Click here or fgure data
8/7/2019 Asian Development Outlook 2009 Update: Broadening openness for a resilient Asia
http://slidepdf.com/reader/full/asian-development-outlook-2009-update-broadening-openness-for-a-resilient 137/188
8/7/2019 Asian Development Outlook 2009 Update: Broadening openness for a resilient Asia
http://slidepdf.com/reader/full/asian-development-outlook-2009-update-broadening-openness-for-a-resilient 138/188
122 Asian Development Outlook 2009Update
or concealing normal income so as to take advantage o the much
lower tax rate applied, and could urther undermine compliance as
taxpayers underpay current tax in anticipation o uture amnesties. Te
new revenue-enhancing measures in the budget may also take time to
yield results.Because o the substantially higher public expenditure (16.6% o
GDP), the overall decit will rise to 5.0% o GDP rom 4.1% in FY2009
(Figure 3.2.13). Foreign nancing is 2.0% and domestic nancing 3.0% o
GDP, with over our hs coming rom the banking system. Te absence
o an active secondary bond market limits nonbank investors’ interest in
this source o noninationary nancing. Stunted tax receipts are proving
costly as borrowing shrinks the scal space through high budgetary
allocations or interest payments, which amount to 18.2% o revenue in
FY2010. In the event o shortalls in revenue and external nancing,
the Government would either have to borrow more heavily rom
bankssqueezing private investment and ueling inationor cut public
spending, which would aect its growth and poverty reduction programs.For FY2010, this Update retains the ADO 2009 average ination
projection o 6.5% (slightly lower than FY2009’s actual 6.7%), as import
price increases are expected to be moderate and the projected growth
in crop output, though decelerating rom FY2009, will remain healthy.
In addition, moderation in domestic demand growth due to slower
remittance inows will soen price pressures. Tis projection does not,
however, take into account the possibility o an adjustment to domestic
uel prices or the eects o any excessive government borrowing rom the
banking system.
In its hal-yearly Monetary Policy Statement or July–December 2009,
the central bank sought to continue its accommodative policy: supporting
the Government’s borrowing needs to nance its countercyclicaldevelopment program while ensuring an adequate ow o credit to
the private sector. Its monetary program is aimed at 6.0% growth with
ination projected at 6.5% by June 2010, largely on continuation o the
lowered policy rates, open-market operations, and the banks’ ceiling
lending rate. Te statement indicated that the monetary policy stance
would be modied i ination or growth prospects were to substantially
deviate rom program goals.
Imports in FY2010 are expected to grow by 10.0%, in part reecting
increased global commodity prices. Export growth is projected to be
sluggish at 8.0% because o alling garment export orders and the lower
prices oered by buyers, as well as the declines in most other export
categories. Growth in workers’ remittances is expected to slow to 12.5%
because o increasing numbers o overseas workers returning home and
because o the marked slowdown in the outow o migrant workers. Yet,
because o the likely moderate trade decit, a current account surplus o
0.8% o GDP is still orecast.
Bangladesh aces several risks that could result in the economy
ailing to achieve the projections: a delay in the global economic
recovery; shortal ls in revenue collections and mobilization o external
nancing, especially given the high targets set on each; political turmoil;
and natural disasters.
.. Public–private partnerships
Te new Government in its electionmaniesto stated that it wants to seethe country growing at by FY
and at by FY. It estimatesthat investment o $ billion abovecurrent levels will be needed orinrastructure investment by FY toachieve these high growth rates.
Te Government realizes that thisgreater investment will not be made i it continues to rely on the traditionalannual development program (ADP)approach o public sector–led projects.Te public–private partnership (PPP)scheme included in the FY budgetis designed to address weaknesses inthe ADP-based approach or deliveringinrastructure, which is characterizedby complex project-clearanceprocedures, inadequate implementationcapacity, and lack o monitoring. Teseweaknesses have resulted in substantialshortalls in ADP spending and theailure o inrastructure to grow in linewith the economy’s needs.
Based on encouraging experiencewith PPPs in various other countries,the Government has taken threespecial measures in the FY budgetto involve the private sector alongside
itsel in the PPP initiative. It eelsthat successul implementation o thePPP concept will open opportunitiesor higher ows o local and oreigninvestment in inrastructure,particularly in transport and power.
Te three measures are PPPechnical Assistance to provide nanceor easibility studies; a Viability GapFund to provide subsidies or certainsocially benecial projects such ashospitals, schools, and roads; and anInrastructure Investment Fund to
provide equity or loan nancing toprivate investors in PPP projects.Yet setting up a sound PPP
initiative will be a challenge. Tecapacity problems that have bedeviledthe ADP approach will need to beaddressed in PPPs as well, particularly in regard to the high level o technicaland analytic capacity that will beneeded to examine PPP projects.
8/7/2019 Asian Development Outlook 2009 Update: Broadening openness for a resilient Asia
http://slidepdf.com/reader/full/asian-development-outlook-2009-update-broadening-openness-for-a-resilient 139/188
8/7/2019 Asian Development Outlook 2009 Update: Broadening openness for a resilient Asia
http://slidepdf.com/reader/full/asian-development-outlook-2009-update-broadening-openness-for-a-resilient 140/188
124 Asian Development Outlook 2009Update
the rst hal and real rural incomes by 8.7%, both above GDP growth.
Retail sales grew by 16.2% in real terms in the rst hal (Figure 3.3.4),
supported by these income gains and by government incentives to buy
household appliances and, in rural areas, motorcycles. Automobile
sales rose by 28.5% in nominal terms in the rst 8 months o 2009. TeGovernment cut the purchase tax on smaller passenger cars and oered
subsidies in cities to replace older cars.
Residential property sales jumped by 57.1% in value terms during
January–June (though the prior-year base gure was airly low, a result
o policy tightening through 2007 and early 2008 to damp a surge in
housing prices). Tis recovery was spurred by low interest rates, abundant
credit, tax breaks, and lower down-payment requirements. Residential
construction starts, as measured by oor space, increased by 11.4%, as a
result o strong demand.
Te global trade slump hit external trade: merchandise exports started
to all rom prior-year levels in November 2008, and dived by about
22% year on year in the rst 7 months o 2009. Te pace o contractionbottomed in May (Figure 3.3.5). Merchandise imports also dropped, but
by June the decline in import values, too, had slowed, a result o the
pickup in industrial production. Te decline in import volumes was more
moderate than their values, reecting the slump in world prices or raw
materials.At$34.9billion,thetradesurplusinthesecondquarterwasthe
smallest in 3 years.
Foreign direct investment (FDI) inows were also aected by the
global nancial crisis and economic downturn. FDI declined year on
yeareachmonth,forafallof20.3%to$48billionintherst7months
of2009.Foreignexchangereserves,climbingby$185.6billionto
$2.13trillionintherst6months,grewfasterthanthetradesurplusand
FDI, prompting concerns about rising speculative capital inows. Tenominal yuan exchange rate was virtually pegged to the US dollar in the
rst 7 months, while the real eective exchange rate depreciated by 4.5%
(Figure 3.3.6).
With global prices or commodities and uels well below year-earlier
levels, both the producer price index and the consumer price index
(CPI) ell, by 6.2% and 1.2%, respectively, in the rst 7 months o 2009
(Figure 3.3.7). Te CPI decline largely reected lower ood prices and
higher ood production than in the previous year. Prices o residential
property, aer several months o declines, rose by an average o about 1%
year on year in July in 70 big cities as demand gained momentum.
Te expansionary monetary stance adopted in late 2008 sparked a
huge surge in lending in the rst 6 months o 2009 (Figure 3.3.8). New
lendingjumpedtoCNY7.37trillion,or$1.08trillioninJanuary–June
rom CNY2.45 trillion in the year-earlier period, ar exceeding the
Government’s ull-year target o CNY5 trillion. Indeed, new lending was
equivalent to around 50% o GDP or the 6 months, double the average
levels o the previous 2 years.
State-owned enterprises and large private businesses were the major
borrowers, particularly those involved in inrastructure, business services,
and real estate development. Te Government approved a large number
o investment projects as part o its scal stimulus and it reduced the
minimum equity requirements or xed-asset investment projects.
3.3.3 Fixed asset investment growth
9
18
27
36
45
Q2Q1
09
Q4Q3Q2Q1
08
Q4Q3Q2Q1
2007
%
Real
Nominal
Sources: CEIC Data Company Ltd., downloaded 31 August2009; sta estimates.
Click here or fgure data
3.3.4 Retail sales growth
5
10
15
20
25
RealNominal
JulAprJan
09
OctJulAprJan
2008
%
Sources: CEIC Data Company Ltd., downloaded 31 August2009; sta estimates.
Click here or fgure data
3.3.5 Trade indicators
-60
-30
0
30
60
-44
-22
0
22
44
Trade balanceImport growthExport growth
JulAprJan
09
OctJulAprJan
2008
% $ billion
Sources: CEIC Data Company Ltd., downloaded 31 August2009; sta estimates.
Click here or fgure data
3.3.6 Exchange rates
6.7
6.9
7.1
7.3
100
110
120
130
Real effectiveNominal
JulAprJan
09
OctJulAprJan
2008
CNY/$ 2005 = 100
Source: CEIC Data Company Ltd., downloaded 31 August
2009.
Click here or fgure data
8/7/2019 Asian Development Outlook 2009 Update: Broadening openness for a resilient Asia
http://slidepdf.com/reader/full/asian-development-outlook-2009-update-broadening-openness-for-a-resilient 141/188
East Asia People’s Republic o China 125
Growth in broad money supply (M2) accelerated to 28.4% in July,
exceeding the Government’s annual target o 17%, and M1 rose by 26.4%
(Figure 3.3.9). Rapid growth in money supply and bank lending supported
increases in stock and property prices. Shanghai’s Composite Index o
stocks rose by about 47% in the rst 8 months o this year. Te strongermarket prompted the authorities in June to li a ban on initial public
share oerings that was imposed in October 2008 in an eort to support
a weak market at that time.
Te ood o credit also raised concerns about its potential to inate
asset bubbles and to raise the nonperorming loan ratio at banks. In July,
the China Banking Regulatory Commission asked lenders to li reserves
to 150% o their nonperorming loans by end-2009 rom 135% at midyear
and urged banks to ensure that loans or investment in xed assets are
not diverted to speculative activities. Te People’s Bank o China, the
central bank, drained excess liquidity rom the money market and guided
money market interest rates higher in July.
Te pace o growth in new lending slowed in July and August romthe torrid rate set in the rst 6 months. Data rom the central bank
show new lending o CNY355.9 billion in July and CNY410.4 billion
in August, compared with a monthly average o CNY1.23 trillion in
January–June.
Fiscal stimulus measures being rolled out rom November 2008
through end-2010, costing about CNY4 trillion (13% o 2008 GDP),
include social and inrastructure spending, reconstruction o public
acilities damaged by the May 2008 Sichuan earthquake, and subsidies
to armers and some industries. Te Government has committed
CNY1.18 trillion; the rest comes rom local governments, banks, and state-
owned enterprises. According to the Ministry o Finance’s disbursement
schedule, about hal the central Government’s contribution will be spentby end-2009 and the other hal in 2010.
About 24 million new jobseekers will enter the labor market in
2009, at a time when millions o workers have lost their jobs as a result
o the economic slowdown. Te Government estimated in February that
about 20 million migrant workers were unemployed at that time. Te
labor market started to pick up in the second quarter; about 6.7 million
jobs were created in the rst 7 months. Many o the migrant workers
who lost their jobs have been rehired since February, although some o
the new jobs are in lower-wage positions or involve reduced working
hours. Out-o-work migrant workers have been at risk o alling into
poverty because they are ineligible or social protection programs
(Box 3.3.1).
Te PRC has taken steps in 2009 to gradually increase the role o
the yuan in international nance and trade. In September, the Ministry
o Finance disclosed plans to sell yuan-denominated government bonds
in Hong Kong, China or the rst time. Tat ollowed the granting o
permission or banks there to issue yuan bonds. Te People’s Bank o
China established bilateral currency swap agreements with several other
central banks, mainly in Asia, that will enable oreign rms to pay or
imports rom the PRC in yuan. It has also allowed the yuan to be used in
certain trade settlements.
3.3.7 Monthly infation
-10
-5
0
5
10
15
Producer prices
Consumer prices
JulJan
09
JulJan
08
JulJan
2007
%
Source: CEIC Data Company Ltd., downloaded 31 August2009.
Click here or fgure data
3.3.8 Bank lending
16
21
26
31
36
41
6
12
18
24
30
36
GrowthLevel
JulAprJan
09
OctJulAprJan
2008
CNY trillion %
Source: CEIC Data Company Ltd., downloaded 31 August2009.
Click here or fgure data
3.3.9 Money supply growth
0
10
20
30
M1
M2
JulAprJan
09
OctJulAprJan
2008
%
Source: CEIC Data Company Ltd., downloaded 31 August2009.
Click here or fgure data
8/7/2019 Asian Development Outlook 2009 Update: Broadening openness for a resilient Asia
http://slidepdf.com/reader/full/asian-development-outlook-2009-update-broadening-openness-for-a-resilient 142/188
126 Asian Development Outlook 2009Update
.. Selected economic indicators (%)
ADO
Update ADO
Update
GDP growth . . . .
Infation . -. . .
Current acct. bal.
(share o GDP)
. . . .
Source: Sta estimates.
ProspectsTe orecasts assume that the scal stimulus will be maintained through
2009 and 2010. It is also assumed that monetary policy, aer some ne
tuning, will be kept at highly stimulatory levels until ination returns
and economic growth can be sustained without such strong monetary stimulus, when policy will be tightened somewhat.
Public investment will remain at high levels under the scal stimulus
package. Furthermore, as part o a program to improve the efciency
o industries including steel and textiles, the Government plans to
contribute CNY600 billion toward research and technical innovation in
these industries. Expansionary monetary policy is expected to provide
ample unding or state-owned enterprises, especially those engaged in
inrastructure development.
Private sector investment may remain subdued, particularly in
manuacturing, until external demand improves signicantly. Ofcial
proposals to widen access to credit or small and medium-sized
enterprises, i realized, should stimulate private investment. So will the
rebuilding o inventories. In real estate, recoveries in sales and prices o
residential property are encouraging developers to invest in new projects,
and the outlook or commercial property is also improving.
Drawing these strings together and taking into account that
government-led investment in the rst hal o 2009 was stronger than was
anticipated in ADO 2009, investment growth this year will rise aster than
oreseen in March.
Solid growth is expected in private consumption. Rural incomes are
beneting rom government subsidies or agriculture and or purchases o
Te scal stimulus package includes measures to preserveemployment, assist city-registered residents who arejobless, and provide reemployment services. However,migrant workers, who are more likely than others to losetheir jobs during a downturn, are oen excluded romsuch programs in both labor-receiving cities and labor-exporting rural areas.
For example, most migrant workers are ineligible orvocational training allowances. Also, as many are youngadults, their children are oen too young to qualiy orree primary school education.
Tose most at risk o alling into poverty are joblessmigrant workers who either stay in cities and lack accessboth to government support programs and to their amily networks, or those who return to the countryside but do
not have suitable arming land or a means o livelihood.Limited data make it difcult to estimate the magnitude
o these two groups, but they are clearly sizable. Asenior ofcial at the National People’s Congress in Marchestimated that a quarter to a third o migrant workers wereunemployed in some regions. According to a survey by
the National Bureau o Statistics, the total number o ruralmigrant workers was million at end-, o whom million had moved outside their counties to seek jobsin cities while million had moved to work in village andtownship enterprises within their counties.
Te Government has the capacity to tackle the mosturgent vulnerabilities by building on existing programs.Some measures the Government could consider include:
Providing migrant workers without incomes access to•temporary income assistance programs;Providing assistance or the education and nutrition o •their children;Allowing migrant workers access to vocational training•and reemployment services; andCoordinating social assistance programs provided by •
dierent levels o government to ensure that migrantworkers are covered.Tese interventions could complement existing
employment initiatives, such as support or labor-intensivesmall and medium-sized enterprises and provision o public service jobs.
.. Social assistance or migrant workers
8/7/2019 Asian Development Outlook 2009 Update: Broadening openness for a resilient Asia
http://slidepdf.com/reader/full/asian-development-outlook-2009-update-broadening-openness-for-a-resilient 143/188
8/7/2019 Asian Development Outlook 2009 Update: Broadening openness for a resilient Asia
http://slidepdf.com/reader/full/asian-development-outlook-2009-update-broadening-openness-for-a-resilient 144/188
128 Asian Development Outlook 2009Update
3.3.13 Monetar y policy indicators
5
10
15
20
4
6
8
10
Base lending rateBank reserve requirement
JulAprJan
09
OctJulAprJan
2008
% %
Sources: People’s Bank o China; CEIC Data Company Ltd.,downloaded 31 August 2009.
Click here or fgure data
were signicantly weaker than currently oreseen, PRC exports and
industrial production would be lower than anticipated, as would GDP
growth.
Te scal stimulus package looks likely to be maintained through
2010. Tere seems little risk o an earlier than expected withdrawal, whichwould damp growth. As or the monetary expansion, some moderation
in the aggressive stance is assumed. Policy ne tuning was seen rom July
2009 and ofcials have said that they are considering a range o policy
tools to adjust bank lending.
At some point, the authorities will also likely reconsider the cuts
made in late 2008 in the bank reserve requirement ratio and in the base
lending rate (Figure 3.3.13), implemented when the global nancial crisis
and economic slump intensied. I the monetary stimulus is withdrawn at
a aster pace than assumed, and beore economic growth can be sustained
at high levels without the stimulus, an unintended abrupt slowing in
economic growth becomes a risk.
he authorities ace the challenge o balancing the need tomaintain the monetary stimulus against the risk that the lood
o bank lending, i extended or too long, may be diverted into
unproductive purposesspeculation in stocks and real estate and
a misallocation o resources that erodes bank asset quality and
eventually causes inlation pressures. Such a scenario might trigger a
round o severe monetary policy tightening in the medium term that
would pull growth down again.
Te response to the global economic slumpratcheting up investment
through highly stimulatory scal and monetary policieshas interrupted
the longer-term eort to restructure the economy away rom investment
and export-led growth toward more private consumption. Indeed,
investment in 2009 will contribute a much higher proportion o GDPgrowth than in recent years (Figure 3.3.14).
Regression is likely this year in some other rebalancing goals as well,
such as energy saving and environmental protection. (Te slump in
global demand has at least temporarily reduced the economy’s reliance
on exports or growth, and the trade surplus will decline this year.)
Te Government’s midterm evaluation last year o its 11th Five-Year
Plan (2006–2010), which set goals or restructuring, already showed
that progress lagged in several areas. A challenge is, thereore, or the
Government to swing attention back to the restructuring eorts aer the
economy is weaned o the scal stimulus.
3.3.14 Contributions to growth (demand)
-25
0
25
50
75
100
2005 06 07 08 09
%
Forecast
Net exportsInvestment
Government consumptionPrivate consumption
Sources: National Bureau o Statistics o China; sta estimates.
Click here or fgure data
8/7/2019 Asian Development Outlook 2009 Update: Broadening openness for a resilient Asia
http://slidepdf.com/reader/full/asian-development-outlook-2009-update-broadening-openness-for-a-resilient 145/188
8/7/2019 Asian Development Outlook 2009 Update: Broadening openness for a resilient Asia
http://slidepdf.com/reader/full/asian-development-outlook-2009-update-broadening-openness-for-a-resilient 146/188
130 Asian Development Outlook 2009Update
July, according to preliminary reports (Figure 3.4.3). However, subdued
perormance in April and May restricted growth in the index to only 3.9%
in the rst quarter, though the consumer durable goods sector recorded
robust expansion. Signicantly, the upturn in the index was broad-based
with basic, capital, and intermediate goods registering impressive growth,indicating a general revival in activity.
A preliminary analysis based on 3,126 companies shows that their
net prots climbed by 19.9% in the rst quarter o FY2009 rom a 2.5%
increase in the same period o FY2008, apparently mainly due to cost
savings. Te quarter also marked a return o ready access to international
capitalmarkets.Nearly$4billionwasraisedbyIndiancompanies
throughqualiedinstitutionalplacementsandmorethan$2billion
through global and American depository receipts in June–July 2009.
Externalcommercialborrowingroseby19%to$1.92billioninJune2009,
the highest since September 2008.
Year-on-year wholesale price ination turned negative (1.6%) in June
2009, a rate largely unchanged in July (Figure 3.4.4). Te latter month’sdeation reected lower uel prices than a year earlier, even though
the Government increased domestic prices o gasoline and diesel by
almost 10% in June. Te impact o the uel hikes was oset by a all in
manuactured goods prices to below year-earlier levels. By the October–
December quarter o FY2009, the upward pressure on prices will likely
exceed the downward pull rom the high base o a year earlier. Indeed,
the authorities expect year-on-year ination to be 4–5% by March 2010.
A worrying eature o the price structure is that primary commodity
ood ination remains high at around 7.1%. In addition, a weak monsoon
(likely to be the worst in 7 years) and droughts in many parts o India
are stunting ood production and so will exert upward pressure on ood
prices in the coming months. Te Government expects to cushion theweather impact by using its large oodgrain stocks (at 53 million metric
tons, well above the buer stock norm) and by importing essential
commodities. High ood prices (with a heavy eect on the poor) in an
economy operating well below capacity urther complicates the monetary
management required to keep ination expectations in check.
From October 2008 through April 2009, the Reserve Bank o India
(RBI) cut its main lending rate, the repo rate, by 425 basis points to 4.75%
(when it made its last adjustment). It cut the rate or reverse reposthe
RBI acility that absorbs bank reservesto 3.25% and lowered the cash-
reserve ratio during this period (Figure 3.4.5). It made no change in policy
instruments in the July monetary policy review, signaling an end to
monetary easing.
Te policy measures had a discernible eect on the call money
market rate, which ell rom 10.6% in September 2008 to 3.2% by April
2009 (a rate maintained through August), and term deposit rates, which
declined by up to 375 basis points. However, the ve largest banks reduced
benchmark prime lending rates by only 200–225 basis points, rom 13.25–
14.0% to 11.0–12.0%, over the same period.
Te RBI has expressed dissatisaction about the sluggish transmission
o the changes in policy rates to the changes in the benchmark prime
lending rates. Bank credit increased by only 1.0% in the rst 5 months o
FY2009, compared with about 3.3% in the year-earlier period. While RBI
3.4.4 Contributions to infation
Jan2007
Jul Jan08
Jul Jan09
Jul
Percentage points
-5
0
5
10
15
Manufactured products
Fuel group Primary articles
Overall
Source: Ministry o Industry and Commerce, available:http://eaindustry.nic.in, downloaded 11 September 2009.
Click here or fgure data
3.4.3 Growth o industrial production index
-5
0
5
10
15
20
Jan
09
JulJan
08
JulJan
07
JulJan
2006
%, year on year
Source: CEIC Data Company Ltd., downloaded 2 September2009.
Click here or fgure data
3.4.5 Policy rates
2
4
6
8
10
Cash-reserve ratio
Repo rate
Reverse repo rate
JulJan
09
JulJan
08
JulJan
07
JulJan
2006
%
Source: CEIC Data Company Ltd., downloaded 2 September
2009.
Click here or fgure data
8/7/2019 Asian Development Outlook 2009 Update: Broadening openness for a resilient Asia
http://slidepdf.com/reader/full/asian-development-outlook-2009-update-broadening-openness-for-a-resilient 147/188
South Asia India 131
open market operations have been highly expansionary, banks have used
the reverse repo acility to park (rather than lend) much o the unding
that was provided. Tis situation is indicative o weak demand or credit
and illustrates a limit on the eectiveness o monetary policy during a
slowdown in activity.Reecting high commodity prices, the budget decit ballooned in
FY2008 under the weight o large subsidies or oil, ertilizer, and ood early
in the period, while shortalls in revenue and the need or scal stimulus
were elt later on as economic growth slowed (Figure 3.4.6). Apart rom
initial payments rom a large hike in wages or civil servants stemming
rom the Sixth Central Pay Commission award, the scal stimulus
eort (about 1.5% o GDP) ocused on a substantial reduction in indirect
taxation, social security programs, and rural inrastructure spending.
Te revised central government budget or FY2009, presented on
6 July (ollowing parliamentary elections in May) was prepared against
the background o a marked slowdown in the domestic economy and the
global recession. Te budget, however, envisaged a recovery in growth to7.0% or the scal year rom 5.8% recorded in the second hal o FY2008.
Te central government scal decit is targeted to increase to 6.8% in
FY2009 rom 6.0% in FY2008 and rom 2.7% in FY2007. otal expenditure
is planned to rise by 16.1% (to 17.5% o GDP), including large increases
or public investment in inrastructure, the National Rural Employment
Guarantee Scheme (which provides 100 days o employment or a member
o a rural household below the poverty line), and Bharat Nirmana
program or rural inrastructure (Figure 3.4.7). Spending priorities
reect the Government’s goal to support the rural poor and to accelerate
inrastructure development while continuing the scal stimulus. O-budget
outlays are expected to amount 0.2% o GDP in FY2009 compared with
1.8% a year earlier, as lower commodity prices allow a sharp reduction inthe cost o support or uel and ertilizer price subsidies.
Te revised budget projects revenue to grow by 12.8%, to 10.5% o
GDP, but proposes no new major tax changes. Yet a revamp is under way:
the Government plans to introduce a national goods and services tax on
1 April 2010 (to replace the multiplicity o central and state indirect taxes
and rate structures) in eorts to move toward a unied national market
and to strengthen the revenue base. Separately, the Ministry o Finance
has proposed or public discussion a signicant reorm o the direct tax
system, which would markedly lower corporate and personal tax rates
while ending a complex web o special exemptions and exclusions. Te
new system is expected to be in eect rom 1 April 2011.
Te central government decit (including o-budget nancing o
subsidy programs) is targeted at 7.0% o GDP or FY2009, a decline
rom 8.0% a year earlier and reecting the all in o-budget nancing.
Including the state governments, the overall decit or FY2009 would
likely be about 10–11% o GDP. While India’s decits are no wider than in
some other major economies that have mounted strong countercyclical
eorts, the Government recognizes that they cannot be sustained as the
combined ederal and state public debt amounted to nearly 73% o GDP at
end-FY2008. It has announced plans to reduce the ederal decit to 5.5%
o GDP in FY2010 and to 4.0% o GDP in FY2011, relying on the mooted
tax changes and a strengthening economy.
3.4.6 Central government decit
0
2
4
6
8
Off-budgetBudget
1110090807062005
% of GDP
Note: Figures or 2009 are budget estimates; 2010 and 2011data are planned decits.
Source: Ministry o Finance, available: http://indiabudget.nic.in, downloaded 2 September 2009.
Click here or fgure data
3.4.7 Central government scal indicators
8
12
16
20
Expenditure
Revenue
0908070605042003
% of GDP
Source: Ministry o Finance, available: http://indiabudget.nic.in, downloaded 2 September 2009.
Click here or fgure data
8/7/2019 Asian Development Outlook 2009 Update: Broadening openness for a resilient Asia
http://slidepdf.com/reader/full/asian-development-outlook-2009-update-broadening-openness-for-a-resilient 148/188
132 Asian Development Outlook 2009Update
An expert group “to advise on a viable and sustainable system o
pricing oil products” was announced at the presentation o the FY2009
budget. In view o large swings in global oil prices, reorm in the present
administered pricing o petroleum products is essential or control o
the decit, sound macroeconomic policies, and the long-term healtho the domestic petroleum industry. Difculties in the present system
were evident in FY2008: o-budget bond issues to und subsidies to
oil-marketing companies amounted to 1.3% o GDP in FY2008; and
state-run upstream companies’ price discounts (or which they were not
compensated by the Government) amounted to 0.6% o GDP.
Te global nancial crisis and economic slowdown caused a marked
deterioration in the external position in FY2008. Monthly exports
dropped sharply rom October 2008 depressing their growth or the
scal year to only 5.4%, while net capital inows plummeted to about
$10billionfromnearly$110billionayearearlier.Adropinimports,
in part owing to lower oil prices, held the current account decit to
$29.8billionor2.6%ofGDP(1.4%inFY2007).Nevertheless,foreignexchangereservesfellsharplyby$58billion(includinglargevaluation
losses).
Balance-o-payments estimates or the rst quarter o FY2009 are not
yet available. Monthly customs data indicate a bottoming in the allo
in trade ows and marked improvements in both net capital inows and
oreign exchange reserves. Unlike some other Asian countries, India
saw little improvement in export perormance in the rst quarter o
FY2009.Exportsduringtherst4monthsaveraged$12.0billion,little
dierent rom the average o the previous 4 months and still about 30%
below levels seen a year earlier (Figures 3.4.8 and 3.4.9). Still, a steady
improvementwasrecordedfromtheAprillowof$10.7billiontoJuly’s
$13.6billion.Imports weakened aer July 2008 with alling oil prices and slower
economicgrowth,totouchalowinMarch2009of$15.6billion.ey
subsequentlyreboundedto$19.6billioninJuly2009,thoughtheyremain
substantially below year-earlier levels (Figure 3.4.10).
Portolio investment has recorded a sharp turnaround with a net
inowof$8.3billionintheApril–Junequartercomparedwithnet
quarterlyoutowsinFY2008thataveraged$3.5billion.Foreigndirect
investmentat$7.1billioninthesamequarteressentiallymaintainedthe
previous year’s solid perormance. Nonresident Indian deposits have
been boosted by RBI’s upward adjustments in interest rates or such
savings.Foreignexchangereservesincreasedby$12.6billionintherst
quarterandto$19.5billionintherst5monthsofFY2009(compared
witha$13billionfallinthesameperiodthepreviousyear),indicating
a substantial improvement in the overall balance o payments to date in
FY2009 (Figure 3.4.11).
Following a downward dri in the rupee during the previous scal
year against the US dollar, the local currency appreciated by about 4.4%
duringtherst5monthsofFY2009toRs48.8/$1(Figure3.4.12).isgain
reected renewed capital inows and the Government’s reelection. As o
August, in real eective terms the exchange rate was roughly 8% below
that o a year earlier. While the increase in global investor risk appetite
augurs well or continued capital inows, the authorities are likely to
3.4.10 Import indicators
-40
0
40
80
-200
0
200
400
Value, 12-month moving averageYear-on-year growth
JulJan
09
JulJan
08
JulJan
2007
% $ billion
Source: CEIC Data Company Ltd., downloaded 2 September
2009.
Click here or fgure data
3.4.9 Trade indicators
Jan2007
Jul Jan08
Jul Jan09
Jul
$ billion
-40
-20
0
20
Exports
Non-oil imports Oil imports
Trade balance
Note: Total exports and imports based on customs data.
Sources: CEIC Data Company Ltd., Ministry o Commerce,available: http://commerce.nic.in/index.asp, both
downloaded 2 September 2009.
Click here or fgure data
3.4.8 Export indicators
-40
-20
0
20
40
60
-200
-100
0
100
200
300
Value, 12-month moving average
Year-on-year growth
JulJan
09
JulJan
08
JulJan
2007
% $ billion
Source: CEIC Data Company Ltd., downloaded 2 September
2009.
Click here or fgure data
8/7/2019 Asian Development Outlook 2009 Update: Broadening openness for a resilient Asia
http://slidepdf.com/reader/full/asian-development-outlook-2009-update-broadening-openness-for-a-resilient 149/188
South Asia India 133
resist urther strengthening in the domestic currency given the continued
weakness in exports.
Following substantial gains over several years, the Sensex, the main
index o the Bombay Stock Exchange, lost about 60% o its value rom
its all-time high in early January 2008 through about mid-March 2009.Subsequently through end-August, the Sensex (and Asian stock markets
in general) participated in a worldwide rally in equities, and was up by
about 63% or the year (Figure 3.4.13). Apart rom a reduction in risk
aversion by global investors and an upturn in portolio investment,
the market has beneted rom a general renewal o Indian investors’
condence based on the country’s ability to handle the global turmoil
with minimal dislocation (to post the second-highest growth rate or
a major economy in 2009), a strong consensus on improved domestic
growth prospects, and nascent signs o recovery in the world economy.
ProspectsADO 2009 Update’s orecasts or FY2009 and FY2010 are based on ve key
assumptions: monetary conditions will continue to be accommodative;
agricultural output will be stunted in FY2009 but the domestic ood
supplywillremainadequate;oilpriceswillaverageabout$63perbarrel
in2009and$73in2010;nonfuelcommoditypriceswilldeclinein
2009 but rise in 2010; and industrial economies will show a moderate
growth recovery in 2010. Te main dierences in assumptions between
this Update and ADO 2009 are a sharper contraction in 2009 or major
industrial economies; higher than expected oil prices in both 2009 and
2010; and a steeper decline in world trade volume in 2009 and a sharper
rebound in 2010.
Te positive response to monetary policy adjustments and scalstimulus as well as a quicker than expected return o capital inows
have provided a li to the domestic economic environment. Tis rising
optimism has been reected in numerous business sentiment surveys
as well as the Industrial Outlook Survey that the RBI conducted in
April–May 2009 (Figure 3.4.14). Moreover, the Purchasing Managers
Index in April changed its signal to expansion aer indicating contraction
in the previous 5 months.
Improved business condence is primarily attributed to reduced stress
in nancial markets with easing o credit availability; the large scal
stimulus; strong nancial perormance o the corporate sector in the rst
quarter o FY2009; and expectations o strengthened economic policies
based on an enlarged and more cohesive coalition majority in Parliament.
Te combination o countercyclical scal policies and renewed investor
condence is expected to sustain growth in private consumption and
investment in FY2009. Te impact o the poor monsoon and drought on
rural incomes and consumption will be partly oset by various programs
to aid rural households in the budget and, possibly, by supplementary
assistance or armers, which is under study by the Government.
Growth will continue to be driven by government spending but its
impact in FY2009 will be less than in FY2008 when expenditure and
the decit ballooned. GDP growth in the second and third quarters is
expected to all below the 6.1% rst-quarter expansion because o weak
3.4.12 Exchange rates
55
50
45
40
35
90
95
100
105
110
Nominal Real effective
JulJan
09
JulJan
08
JulJan
07
JulJan
06
Jul
2005
Rs/$ Index, 2005 = 100
Sources: Reserve Bank o India, available: http://www.rbi.
org.in; Bank or International Settlements, available: http://www.bis.org, both downloaded 2 September 2009.
Click here or fgure data
3.4.13 Stock price indexes
5,000
10,000
15,000
20,000
25,000
0
200
400
600
800
Developing AsiaSensex
1 Jan
09
1 Jan
08
1 Jan
07
1 Jan
2006
1979 = 100 1987 = 100
Note: The index or developing Asia is represented by theMorgan Stanley Capital International All Country Asia,excluding Japan, price index.
Source: Bloomberg, downloaded 1 September 2009.
Click here or fgure data
3.4.11 Foreign exchange reserves
125
175
225
275
325
JulJan
09
JulJan
08
JulJan
07
JulJan
06
Jul
2005
$ billion
Source: CEIC Data Company Ltd., downloaded 7 September2009.
Click here or fgure data
8/7/2019 Asian Development Outlook 2009 Update: Broadening openness for a resilient Asia
http://slidepdf.com/reader/full/asian-development-outlook-2009-update-broadening-openness-for-a-resilient 150/188
8/7/2019 Asian Development Outlook 2009 Update: Broadening openness for a resilient Asia
http://slidepdf.com/reader/full/asian-development-outlook-2009-update-broadening-openness-for-a-resilient 151/188
Indonesia
Robust growth in private consumption, underpinned by easing inlation and a surge in election-
related government spending, drove better than expected economic growth in the rst hal o .
Fiscal stimulus measures supported growth. Net exports also contributed to the expansion as imports
contracted aster than exports. Investment weakened. Relative to orecasts made in March this year, the
ull-year growth projections are revised up or and , and infation will likely be lower. Risks to
the outlook include higher than expected oil prices, which would propel infation and hurt consumption,
and dry weather, which could damage harvests.
Updated assessmentWith year-on-year GDP growth o 4.2%, Indonesia outperormed other
major economies in Southeast Asia in the rst hal o 2009, mainly
because its large domestic market and its relatively low dependence on
external trade (exports represent about 30% o nominal GDP) provided
some insulation rom the global economic turmoil. However, the impact
o the global nancial crisis and the slump in world trade took growth
to well below the 6.3% rate recorded in the rst 6 months o both 2007
and 2008.
Private consumption, accounting or almost 60% o GDP, grew by
5.4% in the rst hal o 2009, only slightly below the year-earlier rate,
and made the biggest contribution to GDP growth on the demand side.Consumption received a li rom slowing ination, good harvests that
supported arm incomes, and election-related spending (parliamentary
elections were held in April and presidential elections in July). Also, the
Government provided cash transers to 18.5 million poor households
in January and February and lowered some taxes as part o a scal
stimulus package aimed at mitigating the impact o the global downturn.
Nevertheless, tighter credit hurt sales o consumer durables such as
motor vehicles.
Government consumption soared by 18.0% during the rst hal
(Figure 3.5.1), or our times as ast as a year earlier, a result o pay
increases or civil servants, the election-related spending, and an
improvement in the disbursement rate o budgeted outlays. Imports o
goods and services contracted aster than exports, thereby generating
positive net exports, which also contributed to GDP growth. Tis was
in contrast to the rst hal o 2008, when a all in net exports acted as a
drag on growth.
But investment, aer growing by double-digit rates since mid-2007,
edged up by a meager 0.9% in the rst hal o this year. Fixed investment
rose by only 3.0%: investment in buildings increased by 6.3% but
investment in machinery and equipment ell by 10.1%. Borrowing
3.5.1 Growth o GDP components (demand)
-27
-18
-9
0
9
18
ImportsExportsInvestment
Government consumptionPrivate consumption
H1
09
H2H1
08
H2H1
2007
%
Source: CEIC Data Company Ltd., downloaded 12 August
2009.
Click here or fgure data
This chapter was written by Jörn Brömmelhörster and Priasto Aji o the Indonesia
Resident Mission, ADB, Jakarta.
8/7/2019 Asian Development Outlook 2009 Update: Broadening openness for a resilient Asia
http://slidepdf.com/reader/full/asian-development-outlook-2009-update-broadening-openness-for-a-resilient 152/188
136 Asian Development Outlook 2009Update
or investment contracted, reecting rms’ unwillingness to expand
production and the tighter bank credit.
On the production side, the services sector grew by 5.9% in
January–June and contributed 2.6 percentage points o total growth
(Figure 3.5.2). Continued rapid expansion o the communicationssubsector oset slowing growth in some other services. Industry grew by
only 2.6%, with the important manuacturing subsector increasing output
by just 1.5%, largely a consequence o weak export demand. Mining output
(including crude oil) increased by 2.4%. Oil production rose to 957,000
barrels a day rom 846,000 barrels in the rst hal o 2008. Industry as a
whole contributed 1.1 percentage points to GDP growth.
Agriculture expanded by 3.7% in the rst hal and this added
0.5 percentage points to GDP growth. Food crops perormed well, but
production increases rom plantations (mainly natural rubber and
palm oil) decelerated because o a decline in global demand. In 2008,
agriculture expanded at the astest rate in about one and a hal decades
(by 4.8%), in response to high prices or agricultural commodities andgood weather.
Falling world prices or export commodities and the slump in global
trade pushed down merchandise exports by 27.9% in the rst 6 months
o 2009. Merchandise imports ell even more steeply, by 38.7%. Monthly
trade data suggest that the pace o decline or exports and imports
bottomed out during the rst hal (Figure 3.5.3). In particular, exports o
primary commodities including coal, copper, and crude palm oil picked
up in tandem with world demand and prices or these products.
Te trade surplus, against a backdrop o the steep slide in imports,
increased by 21% in the rst hal o 2009 rom the prior-year period and
bynearly60%fromthesecondhalfof2008,to$15.7billion(Figure3.5.4).
ecurrentaccountrecordedasurplusof$6.0billion(2.5%ofGDP),reecting the big trade surplus and narrower income and services
decits, which outweighed a decline in current transers (including
remittances).
Net oreign direct investment inows, mainly driven by investments
inoilandgasandacquisitionsintelecommunications,totaled$3.5billion,
about the same as in the rst hal o 2008. Net portolio investment
inowsof$3.3billionmarkedaturnaroundfromnetoutowsintherst
hal o 2008, a sign o improved international investor condence. Te
overallbalanceofpaymentsrecordedasurplusofabout$5billion.
Te portolio investment outows in 2008 were the main reason or a
declineinIndonesia’sinternationalreservesto$50.6billionbyOctober.
ByJune2009,thereserveshadrecoveredto$57.6billion,or5.5months
o imports o goods and services and ofcial debt service payments. Te
external situation has been urther bolstered through a memberwide
allocation by the International Monetary Fund o special drawing rights,
ofwhichIndonesiareceived$2.7billion,aswellasbycurrencyswap
arrangementstotalingmorethan$30billion.
Ination abated rom 12.1% year on year in September 2008 to 2.7%
in July 2009 (Figure 3.5.5), as global prices o uel and commodities ell.
Te Government lowered the subsidized prices o uels and reduced
some commercial electricity taris. A slowing in ood price ination,
assisted by the good harvests, was a welcome relie or the roughly hal
3.5.3 Merchandise trade growth
-60
-30
0
30
60
90
ImportsExports
AprJan
09
OctJulAprJan
2008
%
Source: CEIC Data Company Ltd., downloaded 21 August
2009.Click here or fgure data
3.5.4 Current account components
H1
2007
H2 H1
08
H2 H1
09
$ billion
-20
-10
0
10
20
Current account balance
Services trade
Current transfers
Income
Goods trade
Source: Bank Indonesia, available: www.bi.go.id,
downloaded 21 August 2009.
Click here or fgure data
3.5.2 Contributions to growth (supply)
0
2
4
6
8
Agriculture
Industry Services
GDP growth
H1
09
H2H1
08
H2H1
2007
Percentage points
6.3
4.2
5.86.36.2
Source: CEIC Data Company Ltd., downloaded 12 August2009.
Click here or fgure data
8/7/2019 Asian Development Outlook 2009 Update: Broadening openness for a resilient Asia
http://slidepdf.com/reader/full/asian-development-outlook-2009-update-broadening-openness-for-a-resilient 153/188
Southeast Asia Indonesia 137
ofthepopulationwholiveonlessthan$2aday.epovertyincidence
measured by the national poverty line declined to 14.1% in March 2009
rom 15.4% in March 2008, reecting the January–February cash transers,
easing ood price ination, and cuts in uel prices.
Domestic scal stimulus measures and other government spendinghelped support the labor market, at least early in the year. Te
unemployment rate ell to 8.1% in February 2009 rom 8.4% in August
2008. Te inormal sector accounts or about 70% o the workorce and
usually absorbs most layos rom the ormal sector.
In the context o the slowing in economic activity and ination, Bank
Indonesia cut its policy interest rate by a total o 300 basis points rom
December 2008 to August 2009, to 6.5%. Commercial banks lagged in
lowering lending rates, so that rom February to May rates charged or
working capital and investment declined by less than 60 basis points, and
lending rates or consumption increased slightly during that time.
Year-on-year growth in lending to businesses and individuals slowed
during November 2008 to May 2009 rom 45% and 30%, respectively, to16% and 22%. Tis deceleration reected both lower demand or credit
in the ace o a slowing economy and still-high bank interest rates,
and banks’ greater caution. Commercial banks’ nonperorming loans
increased rom 3.8% o the total in December 2008 to 4.5% in June 2009
(Figure 3.5.6). Year-on-year broad money supply growth picked up rom
14.9% to 16.1% over the same period (Figure 3.5.7).
otaling Rp73.3 trillion or about 1.4% o GDP in 2009, the scal
stimulus package consists mainly (83.7%) o tax breaks and subsidies
that could be implemented quickly to support private consumption and
businesses. Within the rst quarter o 2009, most o this ast-disbursing
stimulus had been implemented. Te measures included waivers o
income and value-added taxes, subsidies or cooking oil and genericmedicines, waived import duties, a diesel subsidy, electricity discounts,
and a credit acility or small and medium-sized enterprises.
Nearly all the rest o the stimulus package (15.5%), is or labor-intensive
inrastructure works involving water supply projects, low-cost housing,
roads, and ports. It is intended that most o this part will be disbursed in
the second hal o 2009. Eorts by the Government to accelerate capital
spending raised the disbursement rate slightly in the rst hal o this year
to 23.2% o budgeted spending rom 20.9% a year earlier.
Stimulus package unds (0.8%) were also allocated to extend
a community empowerment program, which encourages village
participation in planning and carrying out inrastructure, education, and
health projects.
Te Government is sourcing unding or the additional expenditure,
as well as or debt-amortization payments, rom debt markets and rom
budgeted unds that were not spent in 2008. By mid-August, it had
raised more than 80% o this year’s gross nancing needs. Moreover, it
insured itsel against a worsening nancing climate by securing access to
contingency nancing rom development partners, which can be drawn i
nancial markets become restrictive again.
Budget revenue in the rst hal o 2009 was about 14% below
prior-year levels, mainly because o lower receipts rom oil and gas, the
tax breaks, and reduced income rom value-added tax and rom import
3.5.6 Nonperorming loan ratio o
commercial banks
2
4
6
8
AprJan
09
OctJulAprJan
08
OctJulAprJan
2007
%
Source: Bank Indonesia, available: www.bi.go.id,
downloaded 2 September 2009.Click here or fgure data
3.5.7 Broad money supply growth
0
7
14
21
AprJan
09
OctJulAprJan
08
OctJulAprJan
2007
%
Source: Bank Indonesia, available: www.bi.go.id,
downloaded 2 September 2009.
Click here or fgure data
3.5.5 Monthly infation
0
3
6
9
12
15
JulAprJan
09
OctJulAprJan
2008
%
Sources: Asian Development Outlook database; CEIC DataCompany Ltd., downloaded 14 August 2009.
Click here or fgure data
8/7/2019 Asian Development Outlook 2009 Update: Broadening openness for a resilient Asia
http://slidepdf.com/reader/full/asian-development-outlook-2009-update-broadening-openness-for-a-resilient 154/188
138 Asian Development Outlook 2009Update
and export duties. Te scal decit in 2009 is expected to widen to a
still-manageable 2.6% o GDP.
In line with global trends, Indonesia’s nancial markets started to
recover in March 2009. Te stock market index, which dropped by 50% in
2008 as investors moved out o emerging markets, surged by more than70% in the rst 8 months o 2009 (Figure 3.5.8). Te rupiah depreciated
by about 15% against the US dollar in the last 3 months o 2008, then
appreciated by 12% in the rst 8 months o 2009, partly bolstered by
condence in macroeconomic management.
Yields on government bonds have allen signicantly since March
and credit deault swaps are almost back to levels seen beore the
global nancial crisis that erupted late last year (Figure 3.5.9). Moody’s
raised Indonesia’s oreign and local-currency sovereign debt ratings in
September 2009 to Ba2 rom Ba3.
ProspectsProjections or 2009 and 2010 assume that the Government will
implement major policies outlined during the election campaign, such
as ostering inrastructure development and reorming the bureaucracy.
Te Government plans to support development o inrastructure in
2010 through new tax incentives and expenditure o Rp93.9 trillion
($9.4billion).Anadditionalscalstimuluspackagefor2010isnot
planned, but the proposed 2010 budget provides space or urther growth-
stimulating measures i required.
As or monetary policy, the policy interest rate is assumed to remain
around current levels until ination picks up together with the global
recovery, so that the authorities will likely need to start tightening
monetary policy during 2010. Te orecasts urther assume that planningor a likely El Niño weather pattern, which could cause drier than usual
weather and damage harvests, succeeds in preventing ood prices rom
rising rapidly and in maintaining ood sufciency.
Private consumption growth is expected to be maintained, supported
by the easing o ination. Condence indexes were showing upturns at
midyear (Figure 3.5.10). Te rollout o projects under the inrastructure
part o the stimulus package will bolster public investment. Private
investment is expected to pick up rom low levels given the solid
economic growth, successul completion o the elections, and the
rebound in the stock market. Banks are expected to lower their lending
rates, too.
Prices o several important export commodities, such as coal,
copper, oil, and palm oil, have turned up and, as noted, the pace o
decline in monthly exports has bottomed out. Tis improved outlook
should stimulate commodity production. Furthermore, the index
o manuacturing production has been rising since early this year
(Figure 3.5.11).
aking these actors into consideration, GDP growth is orecast to
edge up to 4.4% in the second hal o 2009 relative to the rst. Given that
the economic perormance has been stronger than expected in Asian
Development Outlook 2009 (ADO 2009) in March, the ull-year orecast is
raised rom 3.6% to 4.3% (Figure 3.5.12).
3.5.9 Credit deault swaps
0
300
600
900
1,200
1,500
JulAprJan
09
OctJulAprJan
2008
Basis points
Source: Bloomberg, downloaded 1 September 2009.
Click here or fgure data
3.5.8 Stock market perormance
750
1,500
2,250
3,000
JulAprJan
09
OctJulAprJan
2008
Index
Source: Bloomberg, downloaded 1 September 2009.
Click here or fgure data
.. Selected economic indicators (%)
ADO
Update ADO
Update
GDP growth . . . .
Infation . . . .
Current acct. bal.
(share o GDP)
-. . . .
Source: Sta estimates.
3.5.10 Consumer and business indexes
75
85
95
105
115
125
0
6
12
18
24
30
Business activity expectationsConsumer confidence
JulAprJan
09
OctJulAprJan
2008
Index %
Source: CEIC Data Company Ltd., downloaded 26 August
2009.
Click here or fgure data
8/7/2019 Asian Development Outlook 2009 Update: Broadening openness for a resilient Asia
http://slidepdf.com/reader/full/asian-development-outlook-2009-update-broadening-openness-for-a-resilient 155/188
Southeast Asia Indonesia 139
In 2010, the expected modest rebound in global economic growth
and stronger world nancial markets are seen underpinning expansion
in external and domestic demand (particularly some urther recovery
in investment), liing GDP growth to 5.4%, which is also above the
ADO 2009 orecast. Te corporate tax rate is scheduled to be loweredby 3 percentage points to 25% next year, which should also support
investment. GDP growth could exceed this projection i the Government
manages to accelerate its rollout o inrastructure investment by
addressing constraints such as legal uncertainties and land acquisition or
projects.
rade surpluses are orecast to remain high, although they will
decline in 2010 as imports pick up in tandem with economic growth. Te
income account decit is seen widening as oreign rms that benet rom
rising commodity prices repatriate prots. Remittances rom Indonesian
workers abroad are expected to decline moderately in 2009, but to recover
in 2010. Tese actors are projected to leave the current account in surplus
at around 2% o GDP this year and next, revised up rom ADO 2009.Te overall balance o payments is orecast to remain in surplus, partly
a consequence o the return o portolio inows since global nancial
markets stabilized.
Lower than expected ination in the rst hal o 2009, coupled
with the rm rupiah and good harvests (July’s rice stocks, or example,
stood at 2.6 million tons, or 9 months o consumption) have prompted
a downward revision in the ination orecast or 2009 to a year-average
5.0%, which would be the lowest rate since 2000. Ination is projected to
edge up next year to about 6.0%, reecting rming economic growth and
higher global commodity prices.
While the Government aims to rein in its budget decit to 1.6% o
GDP in 2010, a more expansionary scal position could be accommodatedi the global economic recovery alls short o expectations. Central
government debt (oreign and domestic) is estimated to decline rom 33%
o GDP in 2008 to about 31% in 2009 and to just above 30% in 2010.
One risk to the orecasts is a much higher than expected world oil
price. Tis outturn would add to the cost o the Government’s energy
subsidies, leading to cuts in other public spending (on development and
social support), a wider scal decit, or a mixture o the two.
Te rupiah is sensitive to investor sentiment, as shown by its sharp
depreciation in October 2008. Another bout o global risk aversion would
undermine the currency, hurting investment and raising ination.
A urther risk relates to the expected El Niño conditions and
associated dry weather. An El Niño event in 1997 caused serious damage
to crops that sent up the price o rice by 30%. Given that rice, as the
country’s staple ood, has a signicant weight in the consumer price
index, such a price rise would li ination and push more people into
poverty. A serious El Niño event would also hurt rural incomes and
spending. Finally, security issues and natural disasters are continuing
risks.
3.5.12 GDP growth
0
2
4
6
8
1009080706052004
%
Forecast
Sources: CEIC Data Company Ltd., downloaded 22 August2008; sta estimates.
Click here or fgure data
3.5.11 Manuacturing production index
116
120
124
128
132
AprJan
09
OctJulAprJan
2008
2000 = 100
Source: CEIC Data Company Ltd., downloaded 26 August2009.
Click here or fgure data
8/7/2019 Asian Development Outlook 2009 Update: Broadening openness for a resilient Asia
http://slidepdf.com/reader/full/asian-development-outlook-2009-update-broadening-openness-for-a-resilient 156/188
Malaysia
The economy contracted more sharply than expected in the rst hal o , the result o a plunge
in exports that spread to domestic demand such that both xed investment and private consumption
ell. Government action to mitigate the decline included two scal stimulus packages (though a ew
o the measures got o to a slow start), an easing o monetary policy, and a relaxation o local-equity
requirements or some oreign investment. The GDP contraction orecast or in this Update is steeper
than anticipated in March, and the recovery in a shade slower than was then projected. Infation is
predicted to remain low and current account surpluses high in both years.
Updated assessmentAgainst the backdrop o the severe slump in global trade, GDP contracted
by a steep 6.2% year on year in the rst quarter o 2009. (Te economy is
particularly sensitive to changes in world trade: exports and imports o
goods and services are equivalent to more than 100% o GDP.) Te output
decline eased to 3.9% in the second quarter (Figure 3.6.1). During the
rst 6 months o this year, the economy contracted by 5.1% in a broad-
based downturn that saw weakness spread rom exports to investment
and private consumption (Figure 3.6.2). Only a decline in imports and
increased government consumption provided some oset.
Exports in volume terms ell by 16.3% in the rst hal o 2009 rom the
prior-year period, reecting dwindling demand rom most o Malaysia’simportant export markets. Tis was, however, oset by a 21.5% all in
import volumes, and thus net exports registered growth or the period.
Fixed investment contracted by 10.3%, a sign that many rms deerred
or canceled proposed investments, seeking to saeguard their balance
sheets. Private consumption, which accounts or around one hal o GDP,
declined by 0.1% on account o a all in disposable incomes in several
sectors o the economy.
Manuacturing, which is dominated by the export-oriented electrical
and electronics subsector, contracted by 16.2% in the January–June period
in tandem with the downturn in external demand. Falling global prices
or palm oil and other agricultural commodities led to reductions in
production, such that agricultural output ell by 2.0%. In contrast, the
services sector grew by a marginal 0.7%.
Te more moderate pace o GDP contraction during the second
quarter owed much to increased public expenditure and growth in
private consumption. Public consumption rose by 1.0% in the quarter
as the Government implemented two scal stimulus packages, the rst
drawn up in November 2008 and a second, larger set o measures in
March 2009. Te higher public spending, together with some stabilization
in the labor market and lower consumer prices, improved consumer
3.6.1 Contributions to growth (supply)
Q12006
Q3 Q107
Q3 Q108
Q3 Q109
Percentage points
-8
-4
0
4
8
Agriculture Industry ServicesGDP
Source: CEIC Data Company Ltd., downloaded 19 August2009.
Click here or fgure data
This chapter was written by Purnima Rajapakse o the Southeast Asia Department,
ADB, Manila.
3.6.2 Contributions to growth (demand)
H1
2006
H2 H1
07
H2 H1
08
H2 H1
09
-10
-5
0
5
10
15
Percentage points
GDP growth
Government consumption
Private consumption
Investment
Net exports
Source: CEIC Data Company Ltd., downloaded 19 August2009.
Click here or fgure data
8/7/2019 Asian Development Outlook 2009 Update: Broadening openness for a resilient Asia
http://slidepdf.com/reader/full/asian-development-outlook-2009-update-broadening-openness-for-a-resilient 157/188
Southeast Asia Malaysia 141
sentiment and led to a 0.5% increase in private consumption, aer a
decline o 0.7% in the rst quarter.
All production sectors perormed better in the second quarter than
the rst. Services recorded slight growth due to a pickup in nance and
insurance activity. Te rate o decline in mining moderated because o smaller cuts in output o crude oil and natural gas. Construction activity
expanded by 2.8%, supported by stimulus measures, and the contraction
in manuacturing eased owing to the pickup in exports and increased
inventory replenishments ollowing signicant cuts in production
and inventory drawdowns in the rst quarter. Month-on-month
manuacturing activity strengthened by 2.9% in June 2009 (Figure 3.6.3).
Reecting the economic slump, the number o people employed ell
slightly rom December 2008 to March 2009 and the unemployment rate
increased rom 3.1% to 4.0% during this period. More recent data point
to a turnaround in some labor market indicators: the number o new job
vacancies exceeded the number o jobseekers at end-June 2009. Apart
rom agriculture, where seasonal actors dominate employment patterns,all sectors recorded increased vacancies. Manuacturing, which employs
around 20% o the workorce, saw the largest upturn.
Ination has decelerated sharply rom a peak o 8.5% in July–August
2008 (year on year), so that the consumer price index rose by just 1.7%
in the rst 7 months o 2009. Indeed, the index declined by 2.4% rom
its year-earlier levels in July 2009 (Figure 3.6.4) due to alling global
commodity prices, slower domestic demand, and the base eect o an
increase in administered uel prices in June 2008. However, on a month-
on-month basis consumer prices edged up by 0.1% in July, suggesting an
easing in deation pressures.
Available data or the rst quarter o 2009 show a large current
accountsurplusof$8.6billion(20.2%ofGDP),up$1.4billionfromthecorresponding period o 2008. Tis rise was mainly due to a higher
surplus in the trade and services accounts, which reinorced a narrower
decit in the income and transer accounts. Merchandise exports ell
by 20% on account o a slowdown in global demand or electrical and
electronic products and lower prices or palm oil, liqueed natural
gas, and crude oil. Te export decline was more than oset by a 25%
contraction in merchandise imports stemming, in large measure, rom a
steeper drop in imports o intermediate goods, most o which are used in
making electrical and electronic goods.
Te improvement in the services account was mainly attributable to
lower net payments on reight and other services; tourism receipts
remained stable. Te narrower decit in the income account was due
to lower net payments on investment income, while the more moderate
decit in the transer account was due to lower remittances sent abroad
by oreign workers in Malaysia. Te higher current account surplus
was, however, partly oset by a wider decit on the nancial account as
signicantly higher net outows o portolio investment outweighed a
more modest net inow o oreign direct investment. As a result o these
developments,theoverallbalance-of-paymentssurplusfellto$895million
atend-March2009from$15.3billioninMarch2008.
rade data or the rst 6 months o 2009 show that the trade surplus
in the second quarter narrowed rom the rst quarter because the
3.6.3 Manuacturing indicators
-12
0
12
24
-45
0
45
90
MIER capacity utilizationManufacturing
JunJan
09
JulJan
08
JulJan
2007
Month-on-month growth Index
MIER = Malaysian Institute o Economic Research.
Source: CEIC Data Company Ltd., downloaded 19 August
2009.
Click here or fgure data
3.6.4 Infation
-5
0
5
10
-3
0
3
6
Month on monthYear on year
JulAprJan
09
OctJulAprJan
2008
% %
Source: CEIC Data Company Ltd., downloaded 2 September2009.
Click here or fgure data
3.6.5 Trade growth
-14
-7
0
7
14
ImportsExports
JulAprJan
09
OctJulAprJan
2008
%, month on month
Notes: Exports and imports are based on customs data;growth rates are computed using 3-month moving
averages.
Source: CEIC Data Company, Ltd., downloaded 19 August
2009.
Click here or fgure data
8/7/2019 Asian Development Outlook 2009 Update: Broadening openness for a resilient Asia
http://slidepdf.com/reader/full/asian-development-outlook-2009-update-broadening-openness-for-a-resilient 158/188
142 Asian Development Outlook 2009Update
year-on-year contraction in exports outpaced that o imports. However,
month-on-month data indicate that both exports and imports have picked
up since February (Figure 3.6.5 above), with import growth generally
outpacing that o exports. International reserves at mid-August amounted
to$91.4billion,acomfortable9monthsofretainedimportsand3.8timesshort-term external debt.
In response to the deteriorating domestic economy and slowing
ination, Bank Negara Malaysia, the central bank, reduced its policy
interest rate in steps rom 3.5% at the beginning o November 2008 to
2.0% in February 2009, and its reserve ratio or commercial banks to
a record low o 1.0% rom 3.5% in November 2008. A trade-weighted
depreciation o the currency has urther relaxed nancial conditions.
Te monetary authorities said in July that the easing o monetary policy,
coupled with the two scal stimulus packages, are sufcient to support
economic activity.
Te nancial system remains liquid: year-on-year growth in deposits
and loans stood at 6.2% and 8.4%, respectively, in July 2009. Bankingsystem capitalization is healthy: the risk-weighted capital-adequacy
ratio rose to 14.2% in July 2009 rom 12.6% in December 2008. Te net
nonperorming loan ratio ell slightly to 2.1% in June 2009 rom that at
end-2008.
Te ringgit, having depreciated by 5.2% against the United States (US)
dollar between end-2008 and end-March 2009when increased risk
aversion and deleveraging by international investors increased demand
or US dollarsthen appreciated by 3.6% up to end-August 2009. Te
strengthening o the ringgit was mainly due to an easing in risk aversion
ollowing signs o stabilization o some US economic indicators, and
growing condence that the global economic downturn had bottomed.
Having remained broadly stable during the rst quarter o 2009, theKuala Lumpur Composite Index o stock prices increased by 34.5%
through end-August 2009, reecting lower risk perceptions on emerging
market assets, a recovery in commodity prices, and a government
decision to liberalize some investment (Box 3.6.1).
Yields on government bonds, which stayed remarkably stable amid the
turmoil in global nancial markets, edged up as the Government raised
debt issuance to nance the scal decit. Spreads on credit deault swaps
ell rom 230.1 basis points at end-2008 to 97.0 basis points at end-August
2009 (Figure 3.6.6).
As or the scal stimulus, an RM7 billion package in November
2008 was ollowed in March 2009 by a larger RM60 billion (9% o GDP)
set o measures to be disbursed over 2009 and 2010. Te second package
mainly involves additional direct budget spending and guarantee unds
or corporations, especially small and medium-sized enterprises. It also
provides unding or public–private partnerships and other o-budget
projects, and includes some tax breaks.
During the rst hal o 2009, revenue collection came in at 47% o
budgeted receipts. Operational and development expenditures were 46%
and 36%, respectively, o budgeted amounts, indicating delays in rolling
out some o the scal stimulus. Te ull-year budget decit is projected to
exceed the target o 7.6% o GDP given that the economy has contracted
more severely than the Government envisaged.
.. Boosting competitiveness
In an eort to improve the efciency o the economy and promote investment,
particularly in the services sector, theGovernment made several changes toinvestment regulations in the rst hal o .
Among other moves, it relaxeda bumiputra (ethnic Malay)equity requirement or investment in services subsectors, including healthand social services, tourism, transportservices, and business services.
Te economy has in recent yearsrecorded a surplus on the externalservices account, but this stemmedlargely rom growth in tourism.Tere have been persistent decitsin the transport and other servicescategory: the latter includes all servicessubsectors not related to transport andtravel, a number o which are coveredunder the new investment policy.
In other changes, the Governmentreduced the minimum stake to bereserved or bumiputra investors ininitial public oerings to . rom, and eased rules on oreigninvestors buying stakes in Malaysiancompanies and property.
Furthermore, the central bank liberalized oreign investment innancial companies to supportnance sector growth, which hasaveraged . a year in the past years. Changes cover the issuanceo new licenses; increases in oreignequity limits; and greater operationalexibility or locally incorporatedoreign commercial banks, insurancecompanies, and takaul (Islamicinsurance) operators.
One emphasis o the reormshas been to promote Malaysia as aninternational Islamic nancial hub.Over the next years, the central bank plans to issue new licenses or twoIslamic banks, ve commercial banks,and two Islamic insurance institutions.
Islamic nance is increasingly seenas providing stability to the nancialsystem by anchoring banking practicesto underlying economic transactionsand by limiting leverage.
8/7/2019 Asian Development Outlook 2009 Update: Broadening openness for a resilient Asia
http://slidepdf.com/reader/full/asian-development-outlook-2009-update-broadening-openness-for-a-resilient 159/188
Southeast Asia Malaysia 143
Te ratio o central government debt to GDP, at 48% o GDP in June
(Figure 3.6.7), is relatively high and market concerns over the size o the
decit and an apparent lack o a scal consolidation plan led to the rst
local currency debt downgrade since the 1997–98 Asian nancial crisis.
Fitch rating agency in June 2009 lowered Malaysia’s long-term localcurrency rating rom A+ to A, citing a rise in the overall and primary
decits, alling government revenue, and slow progress in implementing
revenue reorms. Fitch maintained Malaysia’s long-term oreign currency
rating at A- with a stable outlook. Most o the public sector debt is
domestic debtonly 4% was external debt at end-June 2009.
ProspectsTe orecasts are predicated on the authorities maintaining an
expansionary scal policy during 2009 and into 2010, and the scal
stimulus gaining traction rom the second hal o 2009 (given its
generally slow start). Monetary policy is expected to remain broadly accommodative, with the policy interest rate remaining unchanged
or the remainder o 2009 in a context o muted ination and excess
production capacity. In view o the economy’s heavy reliance on global
demand, growth prospects will, to a large extent, be inuenced by
external developments.
In this regard, deep and prolonged contractions in the US, Japan,
and eurozone will suppress Malaysia’s exports because together
these economies absorb around 35% o its exports. Moreover, GDP in
Singapore, the country’s largest trading partner, will contract sharply in
2009, implying that growth in Malaysia will remain below trend during
the orecast period.
GDP now is expected to shrink by 3.1% in 2009, revised roma orecast decline o 0.2% in March’s Asian Development Outlook
2009 (ADO 2009), mainly because the deep slump in world trade and
commodity prices had a much bigger impact on Malaysia than expected.
However, the rst-quarter contraction o 6.2% was likely the bottom
o the recession, and prospects appear to have been picking up rom
the second quarter. Te Government’s index o leading and coincident
indicators showed month-on-month gains in June, while the 6-month
smoothed growth rate o both indexes also improved rom May to June
(Figure 3.6.8). Consumption growth is likely to gradually strengthen
during the rest o 2009 as a consequence o a rmer labor market and
low ination.
While exports are seen continuing to contract year on year, albeit at
a declining rate, they are expected to pick up month on month, given the
inventory buildup in the US. Imports on the latter basis are likely to rise
aster than exports in the context o Malaysia’s dependence on imported
inputs or its export industries and a pickup in consumer condence. Te
external sector is thereore likely to remain a drag on GDP. Although
business sentiment is set to gradually improve over the rest o 2009,
private investment will remain in negative territory due to excess capacity
in the economy.
Ination pressures are orecast to remain subdued through 2009,
reecting so domestic demand, excess capacity, lower imported
3.6.6 Credit deault swaps, 5-year
0
100
200
300
400
500
JulAprJan
09
OctJulAprJan
2008
Percentage points
Source: Bloomberg, downloaded 7 September 2009.
Click here or fgure data
3.6.7 Public nance indicators
-4
-2
0
2
4
-60
-30
0
30
60
Government debtFiscal deficit
Q2Q1
09
Q4Q3Q2Q1
2008
% of annual GDP % of annual GDP
Note: Figures or 2009 were computed using current GDP
orecasts or the year.
Sources: CEIC Data Company Ltd.; Ministry o Finance,available: ht tp://www.treasury.gov.my, both downloaded7 September 2009.
Click here or fgure data
3.6.8 Growth o leading and coincident
indexes
-10
-5
0
5
10Leading
Coincident
JunJan
09
JulJan
08
JulJan
07
Jul
2006
%
Note: Growth rates o indexes are computed as 6-month
moving averages.
Source: Department o Statistics Malaysia, available: http://
www.statistics.gov.my, downloaded 7 September 2009.
Click here or fgure data
8/7/2019 Asian Development Outlook 2009 Update: Broadening openness for a resilient Asia
http://slidepdf.com/reader/full/asian-development-outlook-2009-update-broadening-openness-for-a-resilient 160/188
144 Asian Development Outlook 2009Update
3.6.11 Current account balance
0
10
20
30
40
1009080706052004
% of GDP
5-year moving average
Forecast
Sources: Asian Development Outlook database; sta estimates.
Click here or fgure data
3.6.10 Annual infation
0
2
4
6
10090807062005
%5-year moving average
Forecast
Sources: Asian Development Outlook database; sta
estimates.
Click here or fgure data
3.6.9 GDP growth
-4
0
4
8
10090807062005
5-year moving average %
Forecast
Sources: Asian Development Outlook database; sta estimates.
Click here or fgure data
.. Selected economic indicators (%)
ADO
Update ADO
Update
GDP growth -. -. . .
Infation . . . .
Current acct. bal.
(share o GDP)
. . . .
Source: Sta estimates.
ination, and the base eect o high consumer prices in 2008. However,
monthly data show signs o ination picking up and, in the context o
the expansionary monetary and scal policies, the economy is unlikely to
remain in deation or long. Average ination this year is orecast at 1.1%,
a touch lower than projected in ADO 2009.Te current account surplus will decline, but in 2009 it will remain
large at about 14.0% o GDP (unchanged rom the March orecast).
Both exports and imports will contract this year, but exports by more.
Consequently, the trade surplus will all.
Year-on-year GDP growth is likely to return toward end-2009
and gradually pick up to average 4.2% or 2010 (Figure 3.6.9), slightly
lower than expected in ADO 2009. Te outlook is underpinned by the
Government’s scal stimulus and the expected recovery in world trade
and commodity prices. Domestic demand will strengthen in 2010 as
improved labor market conditions lead to higher private consumption,
while a gradual closing o the output gap will encourage some increase in
private investment toward the end o next year.Public investment will be supported by spending under the scal
stimulus packages. Investment-to-GDP ratios will, nevertheless, remain
modest compared with those o recent years as the output gap will remain
large. Te pace o recovery would have been aster were it not or the act
that the expected pickup in exports and domestic demand will lead to a
signicant increase in consumer, intermediate, and capital goods imports,
which will generate a urther deterioration in the net external balance
and continue to be a drag on GDP growth.
Ination is projected to gather pace to average 2.6% in 2010
(Figure 3.6.10), reecting higher domestic demand, a rise in global
nonuel commodity prices, and the disappearance rom the year-on-year
comparison o the steep drop in commodity prices.In the external accounts, a decline in the trade surplus ollowing
an expected rise in imports is orecast to moderate the current account
surplus to 12.5% o GDP in 2010 (Figure 3.6.11). Te services balance
should improve as a stronger global economy leads to an increase in
tourist arrivals, but the decit in the income account will likely widen i
outows o prot remittances and dividend payments increase, pacing the
economic recovery.
Te main risk to these orecasts involves the nature and duration o
the global recession. I global demand is weaker than assumed in this
Update, the prospects or Malaysia’s exports and thereore its economy
will be eroded. Te country’s high level o external reserves and its strong
banking sector would position it relatively well to deal with any renewed
bout o global nancial instability, provided that it was short.
On the domestic ront, there is a risk that slow disbursement o the
scal stimulus measures could undermine condence and demand. I
the global recovery in 2010 gains momentum and leads to stronger than
expected domestic demand, monetary policy could tighten abruptly
and interest rates could rise quickly beore the output gap begins to
close. Tis, in turn, could hurt domestic consumer condence and slow
the economic recovery.
8/7/2019 Asian Development Outlook 2009 Update: Broadening openness for a resilient Asia
http://slidepdf.com/reader/full/asian-development-outlook-2009-update-broadening-openness-for-a-resilient 161/188
Pakistan
The country’s economic crisis eased a little in FY as the Government’s stabilization program took eect.
Fiscal and external imbalances narrowed, the exchange rate stabilized, and oreign reserves rose. But infation
remained stubbornly high and growth plunged as the economy reeled rom the impact o crippling power
outages, tight domestic demand management, uncertain security, and the global recession. The reduction in
imbalances was a consequence o expenditure cutting and economic slowdown rather than improvements
in underlying economic undamentals. Military operations against extremists and spending related to the
welare o internally displaced people put additional strain on the budget. A modest improvement in growth
is expected in FY, but even that is subject to substantial risks. Major macroeconomic and structural
reorms must be decisively implemented i the economy is to climb onto a sustainable growth path.
Updated assessmentTe growth rate in FY2009 (ended 30 June 2009) plummeted, and at 2.0%
was even less than the low projection o 2.8% given in Asian Development
Outlook 2009 (ADO 2009) in March this year. (Recent data revisions have
markedly lowered FY2008 growth rom the 5.8% used in ADO 2009.) Tis
recent weak perormance comes aer an average expansion o over 7%
during FY2004–2007 (Figure 3.7.1).
Te main demand-side contributor to slower growth in FY2009 was
alling investment, which subtracted rom growth; investment’s share
in GDP declined in comparison to the previous scal year (Figure 3.7.2).Private investment as a share o GDP ell or the third consecutive
year to 13.2% o GDP; reasons or this decline include tighter demand
management policies, lower availability o domestic credit, continued
power shortages, the uncertain security situation, and the global
economic slowdown. Te impact o lower private investment on growth
was compounded by a declineor the rst time in 7 yearsin the
share o public investment in GDP, as the Government curtailed its
budget or the public sector development program (PSDP) to control the
scal decit.
Public consumption in FY2009 also declined as the ederal
Government cut subsidies and contained operating expenditure.
Consequently, the share o total consumption in GDP ell compared with
the previous scal year, even as private consumption remained strong.
Te terms o trade improved ollowing lowered oil prices, and with a
sharp compression in imports (relative to a smaller decline in exports) the
share o net exports in GDP rose.
From the production side, a large part o the decline in growth
in FY2009 was attributable to a sharp contraction in large-scale
manuacturing, which caused a 3.6% all in industrial growth
(Figure 3.7.3). Almost all major industry heads slumped, including textiles,
3.7.1 GDP growth
0
2
4
6
8
10
1009080706052004
%
Forecast
7.5
3.02.0
4.1
6.85.8
9.0
Source: Ministry o Finance, Pakistan Economic Survey 2008–09.
Click here or fgure data
This chapter was written by Sadar Parvez o the Pakistan Resident Mission, ADB,
Islamabad.
3.7.2 Expenditure components, share o GDP
-25
0
25
50
75
100
ImportsExports
Total investmentTotal consumption
09080706052004
%
Source: Ministry o Finance, Pakistan Economic Survey 2008–09.
Click here or fgure data
8/7/2019 Asian Development Outlook 2009 Update: Broadening openness for a resilient Asia
http://slidepdf.com/reader/full/asian-development-outlook-2009-update-broadening-openness-for-a-resilient 162/188
146 Asian Development Outlook 2009Update
automobiles, ood and beverages, and electronics. While some exporting
industries, such as textiles, were aected by slower or stagnant export
orders because o recession in trading partners, industrial production
catering to domestic markets also ell. Te country’s economic slowdown,
power shortages, and increased nancial costs arising rom higher interestrates aected all industries. Te large cut in the PSDP was a actor that
caused construction output to contract sharply.
Poor perormance o manuacturing overshadowed an otherwise solid
recovery in agriculture, which saw 4.7% growth in FY2009. Te recovery
was led by a bumper wheat crop o over 23 million tons, abetted by a 52%
increase in the Government’s procurement (support) price or armers.
Te rice crop set a new record at 7 million tons, allowing a strong
$1.8billioncontributiontoexports.Farmersincentivizedbyhigherprices
were able to beat the odds posed by water and ertilizer scarcity.
In FY2009, the all in manuacturing production and the contraction
in imports stunted growth in services, a sector that accounts or over 50%
o GDP. At 3.6%, it expanded at around hal the rate o the previous scalyear with decelerating growth in all subsectors. In nance, aer several
years o strong perormance, expansion slowed as the subsector absorbed
the impact o the economic downdra in the shape o lower protability,
higher nonperorming loans, and reduced deposit mobilization. Banks
became more risk averse against a backdrop o poorer lending portolio
perormance and more attractive terms that the public sector oered or
nancing the scal decit. Consequently, private sector credit stagnated
in FY2009, having grown strongly in recent years.
While nominal tax revenue grew by 15% relative to the previous scal
year, recessionary conditions in industry, coupled with the slowdown
in nance and telecommunicationsall large tax sourcesresulted
in a signicant shortall in tax collection by the Federal Board o Revenue (FBR) vis-à-vis the budgetary target. Falling imports lowered
customs duties. All major tax heads recorded shortalls in achieving
budget targets. With an ination-bloated nominal GDP (up by 27%), the
tax-to-GDP ratio or FBR taxes ell to only 8.8% in FY2009 (Figure 3.7.4).
Although part o the FBR revenue shortall was made up by proceeds
rom the petroleum development levy, the FY2009 decit target o 4.3%
o GDP was missed by 0.9 percentage points. Te decit, however, was
signicantly narrower than the 7.6% o GDP recorded a year earlier
(Figure 3.7.5). Te improvement was a result o cutting spendinglargely
on the public sector development programwhich came in at 28% below
target or the year. Expenditure on subsidies also ell as a share o GDP
compared with the previous scal year. Deense spending however,
although contained as a share o GDP, overshot the budget allocation due
to additional costs incurred in military operations against extremists in
the tribal areas and North-West Frontier Province. Moreover, provinces
showed overruns in current expenditure.
Looking ahead, the scal position needs to be strengthened
by improvements to revenue perormance and reductions to
nonproductive expenditure. Cutting development spending is not a
desirable or sustainable way to reduce the decit. Indeed, Pakistan has
to ramp up such spending i it is to upgrade basic inrastructure and
oster growth and investment. Such high development outlays are also
3.7.3 GDP growth by sector
-5
0
5
10
15
20
ServicesIndustryAgriculture
09080706052004
%
Source: Ministry o Finance, Pakistan Economic Survey 2008–09.
Click here or fgure data
3.7.4 Tax collection by Federal Board
o Revenue
600
800
1,000
1,200
8
9
10
11
Ratio to GDPLevel
0908072006
PRs billion %
Source: Ministry o Finance, Pakistan Economic Survey 2008–09.
Click here or fgure data
3.7.5 Fiscal position
-8
0
8
16
24
Fiscal balanceTotal revenueTotal expenditure
09080706052004
% of GDP
Source: Ministry o Finance, Pakistan Economic Survey 2008–09.
Click here or fgure data
8/7/2019 Asian Development Outlook 2009 Update: Broadening openness for a resilient Asia
http://slidepdf.com/reader/full/asian-development-outlook-2009-update-broadening-openness-for-a-resilient 163/188
South Asia Pakistan 147
necessary to strengthen access to, and quality o, social services (so as
to reduce poverty).
Ination pressure persisted in FY2009 despite the economic
slowdown, alling international commodity prices, a tight monetary
policy, and signicantly reduced central bank nancing o the scaldecit. Overall consumer price ination shot up to an average o 20.8%
rom 12% the previous scal year and rom only single-digit ination in
earlier years. Much o FY2009’s ination was driven by higher domestic
ood prices, which eventually seeped into core ination through upward
pressure on wages.
Tis pressure was evident in a signicant hike in the house rent index
where the cost o labor has a 40% weight. Marked depreciation in the
currency and price adjustments to reduce subsidies also contributed to
ination. Ination peaked year on year in August 2008 at 25.3% and ell
thereaer, although only at a measured pace as stabilization measures
slowly took hold (Figure 3.7.6). By July 2009, overall and core ination
rates had allen to 11.2% and 14.0%, respectively.Te State Bank o Pakistan increased the policy discount rate by
as much as 450 basis points to 15% during February–November 2008
(Figure 3.7.7) with the main objective o stemming ination. Te resulting
higher market rates made government debt attractive or commercial
banks (reducing demand on the central bank or nancing), restrained
imports, and helped build oreign exchange reserves. Te central bank
subsequently lowered the discount rate by 100 basis points in both April
and August 2009 as a countercyclical measure, even though ination
pressure persisted. Interest rate policy will have to continue balancing the
demand or price stability and the need to revive the economy.
ighter demand management policies and lower international oil
prices led to a contraction in imports in FY2009 by over 10% rom ayear earlier and an improvement in the trade account, but in the context
o a 5.9% drop in exports (Figure 3.7.8). Te power crisis and the global
economic downturn hit textile exports in particular, which account
or about hal o exports. (Te Pakistan rupee ell by 18.7% against the
dollar in FY2009, essentially osetting the impact o high ination on
competitiveness.) Te drop in exports would have been even larger had
it not been or an increase in rice exports made possible by the bumper
crop. Cement exports also surged (by 71%) on the back o strong demand
rom Aghanistan and India and rom expanding new markets in Arica
and elsewhere.
Despite expectations to the contrary, workers’ remittances showed a
21% increase in FY2009. Tis, together with the improvement in the trade
and services accounts (the latter helped by payments by the United States
or logistical support) translated into a sharp narrowing in the current
account decit to 5.3% o GDP rom 8.4% in FY2008.
However, a marked weakening in the nancial account made it
difcult to nance this narrower current account decit. Foreign direct
investment ell by a third in FY2009 and portolio investment recorded a
largenetoutowofnearly$1.1billion(Figure3.7.9).Still,creditfromthe
International Monetary Fund (IMF) under a standby arrangement agreed
to in November 2008 and increased disbursements rom multilateral and
bilateral institutions boosted oreign nancing.
3.7.7 Policy rate
8
10
12
14
16
JulAprJan
09
OctJulAprJan
08
OctJulAprJan
2007
%
Source: State Bank o Pakistan, available: http://www.sbp.org.pk, downloaded 25 August 2009.
Click here or fgure data
3.7.8 Trade indicators
-12
0
12
24
Trade balance ImportsExports
09080706052004
% of GDP
Source: State Bank o Pakistan, available: http://www.sbp.org.pk, downloaded 25 August 2009.
Click here or fgure data
3.7.6 Infation
0
10
20
30
Year on year 12-month moving average
JulAprJan
09
OctJulAprJan
2008
%
Source: State Bank o Pakistan, available: http://www.sbp.org.pk, downloaded 25 August 2009.
Click here or fgure data
8/7/2019 Asian Development Outlook 2009 Update: Broadening openness for a resilient Asia
http://slidepdf.com/reader/full/asian-development-outlook-2009-update-broadening-openness-for-a-resilient 164/188
148 Asian Development Outlook 2009Update
With the narrowing in the current account decit and the increase
in external ofcial disbursements, oreign exchange reserves, which had
fallentoalowof$6.7billioninOctober2008,recoveredto$12.3billionby
end-FY2009 (Figure 3.7.10). At this level they were sufcient to cover about
5 months o imports. By 15 August 2009, oreign reserves had increasedfurtherto$13.0billion.
ProspectsPakistan’s economic outlook in FY2010 will be shaped by both internal
policies and global economic developments. Internally, economic
outcomes will depend on the Government’s ability to achieve the desired
balance between scal consolidation and revival o growth. Externally,
the outlook will depend on the degree o improvement in major trading
partners; the consequent impact on Pakistan’s exports and on receipts o
workers’ remittances; and developments in global oil prices.
On balance, a modest revival in economic growth to about 3.0% isprojected or FY2010, predicated on the planned larger public expenditure
program announced in June 2009 in the budget or FY2010 and on some
easing o monetary policy. Agriculture is expected to continue its strong
growth on the back o higher procurement prices or the main crops and
increased public spending in the sector as announced in the budget. But
agricultural growth will not be as high as in FY2009 due to the high base
eect and continued water scarcity that will limit crop expansion.
Growth in industry is expected to turn marginally positive in
FY2010 as the commissioning o new power plants reduces electricity
outages, and as adjustments in power taris generate cash ow or power
companies to expand their operations. Te pace o growth in the main
exporting industrial subsectors, such as textiles, will depend on the extento a pickup in consumer spending in main trading partners. Te services
sector is expected to post moderate growth in FY2010 on the back o good
agricultural growth and the modest pickup in industry.
o uel expansion, the Government has set a scal decit target o
4.9% o GDP in the budget or FY2010, a level higher than the 3.4% o
GDP originally targeted under the standby arrangement. O the new
scal decit target, up to 1.2% o GDP o additional nancing is expected
to be made available under the pledges made by donors at the Friends
o Democratic Pakistan meeting in okyo in April 2009. Tis pledged
assistance is to provide the scal space necessary or implementing a
countercyclical response in the orm o higher development spending.
Consequently, a massive 54% hike is planned or the PSDP in
FY2010. (Under an augmentation o the standby arrangement approved
by the IMF Board on 7 August 2009, IMF has agreed to provide bridge
nancing o up to 0.8% o GDP to support the budget in case o delays
in the receipt o unds pledged at okyo.) Te Government in FY2010
also plans additional spending o 0.3% o GDP unded by donor grants to
support rehabilitation o internally displaced people in areas aected by
operations against militants.
Te large planned development expenditure overshadows the real
contraction in current spending envisaged in the budget and results
in an overall expansionary scal stance (Figure 3.7.11). Te budget
3.7.10 Foreign exchange reserves
0
6
12
18
Total liquid reserves
Reserves with State Bank of Pakistan
JulAprJan
09
OctJulAprJan
2008
$ billion
Sources: State Bank o Pakistan, available: http://www.sbp.org.pk, downloaded 31 August 2009.
Click here or fgure data
.. Selected economic indicators (%)
ADO
Update ADO
Update
GDP growth . . . .
Infation . . . .
Current acct. bal.
(share o GDP)
-. -. -. -.
Source: Sta estimates.
3.7.9 Net oreign investment
-2,000
0
2,000
4,000
6,000
PortfolioDirect
09080706052004
$ million
Source: State Bank o Pakistan, available: http://www.sbp.org.pk, downloaded 25 August 2009.
Click here or fgure data
8/7/2019 Asian Development Outlook 2009 Update: Broadening openness for a resilient Asia
http://slidepdf.com/reader/full/asian-development-outlook-2009-update-broadening-openness-for-a-resilient 165/188
South Asia Pakistan 149
proposals project a modest eort to generate additional tax revenue.
Development expenditure is set to increase by 1.6 percentage points o
GDP in FY2010, while additional receipts to be raised by the FBR amount
to 0.4 percentage points o GDP. Te external resource requirement
in the budget is thereore large and equivalent to about 80% o theplanned PSDP, indicating an unsustainable dependence on oreign
inows. A ailure to obtain external resources at the planned level could
consequently lead, once more, to a sharp drop in development spending.
Te increases in the consumer price index showed a trend decline
to 11.2% in July 2009, year on year. Te anticipated robust agricultural
crops, the economic program’s demand management policies, and a
high base eect rom the previous year are actors expected to lead to a
urther moderation in ination in FY2010. Conversely, planned increases
in electricity taris and government wages announced in the budget will
provide some upward pressure. On balance, ination is orecast to average
10% in FY2010, alling to about 9% (year on year) by June 2010.
Lower domestic ination and continued nominal depreciation o the exchange rate are expected to help sustain export competitiveness
(Figure 3.7.12). While some stabilization in exports is seen, they are
seen contracting by 2.5% owing to subdued demand in trading partner
countries and continued structural bottlenecks, such as power shortages
and lack o product diversication. Imports are expected to continue
shrinking (by about 2%), although that pace will slacken as the economy
recovers modestly and as international oil prices increase. Te trade
decit will narrow marginally rom a year earlier.
Te services account is projected to improve, mainly reecting
higher logistical payments. It is uncertain whether the trend increase
in workers’ remittances will be sustained (Box 3.7.1). However, based on
the continued strong growth o workers o 25% in the rst 2 months o FY2010 and evidence o strong numbers o workers proceeding abroad or
employment, workers’ remittances are assumed to hold steady in FY2010.
Te current account decit is expected to be 4.8% o GDP in FY2010,
somewhat improved rom a year earlier (Figure 3.7.13).
As non-debt-creating inows in the orm o new oreign direct and
portolio investment remain little improved in FY2010, the nancing o
the current account decit will need to continue relying on debt-creating
inows. Tese will include nancing through the standby arrangement,
augmented by disbursements rom development partners.
Te economic outlook carries downside risks and challenges.
Although Pakistan’s economic imbalances were reduced in FY2010,
structural improvements in the underlying undamentals are needed,
without which it will be difcult to sustain nancial stability and growth.
In particular, scal sustainability requires critical measures to
improve revenue mobilization through broadening the tax base and
removing exemptions, improving tax policy and administration, and
quickly adopting a ull-edged value-added tax. Meeting the scal decit
target purely by cutting development expenditure is not a viable policy
option or a country that requires large-scale spending on inrastructure
and social sectors to sustain growth and reduce poverty.
Likewise, improvement in the current account through a contraction
in imports alone is unsustainable. Te current account will be
3.7.11 Federal budget
0
600
1,200
1,800
FY2010 targetFY2009 actual
Nontax
revenue
Tax
revenue
Development
expenditure
Current
expenditure
PRs billion
Sources: Ministry o Finance, Federal Budget in Brie 2009–10
and Pakistan Fiscal Operations 2008–09.
Click here or fgure data
3.7.12 Exchange rates
70
80
90
100
110
50
60
70
80
90
Interbank Real effective
JulJan
09
JulJan
08
JulJan
07
JulJan
06
JulJan
2005
PRs/$ 2000 = 100
Sources: State Bank o Pakistan, available: http://www/sbp.org.pk; International Monetary Fund, International Financial Statistics online database; both downloaded1 September 2009.
Click here or fgure data
8/7/2019 Asian Development Outlook 2009 Update: Broadening openness for a resilient Asia
http://slidepdf.com/reader/full/asian-development-outlook-2009-update-broadening-openness-for-a-resilient 166/188
150 Asian Development Outlook 2009Update
undamentally improved only when the Government pushes through with
eective measures to build a much larger export base that is sufcient to
nance oil, machinery, and other essential imports. Tis issue is crucial in
an era o rising global oil prices.
Pakistan’s growth prospects continue to be stymied by its lingeringpower crisis. Both immediate and long-term measures are required to
address the crisis including improving governance; reducing leakages and
losses; rationalizing electricity taris to cover sector costs and eliminate
subsidies; and resolving the problem o “circular debt” (arrears that have
developed among participants in the sector), which has drained the
nances o the power companies and has orced cuts in their operations
and investments.
Multilateral development partners are supporting power sector
reorms and are nancing critical investments to improve and
augment electricity transmission, distribution, and generation systems.
However, the size and eectiveness o this assistance will depend on the
Government’s ability to implement its reorm agenda.Global recession, i prolonged, poses an obvious risk to Pakistan’s
economic recovery and stabilization through weakening exports, workers’
remittances, and inows o private capital. It is critical that the pledges
made by donors in okyo are realized to nance the PSDP in support o
Pakistan’s growth and poverty reduction strategy.
Finally, revival o higher growth is predicated on continued
improvement in the domestic security situation, which is critically
important to oster both domestic and oreign investment and to
strengthen private sector participation in key sectors o the economy.
Workers’ remittance inows have been on the rise sinceFY and have played a key role in supporting growthand reducing poverty in the country. Growing more thansixold since FY, they amounted to . o GDP inFY, up rom . in FY.
Such inows have been instrumental in boosting privateconsumption o households and have supported a property and real estate boom. Tey amounted to over o privateconsumption expenditure during FY–.
Te United States, Saudi Arabia, and the United ArabEmirates are the largest source countries o remittances,contributing almost two thirds o total inows.Remittances rom these countries increased signicantly due to reaction to the events surrounding September, when, among other actors, governments placedheavy emphasis on ofcial channels or internationalpayments (Box gure).
In particular, remittances rom the United States rosevery strongly and their share in the total more thandoubled during FY–, rising rom to o total receipts, beore alling to in FY. Te latterrelative decline was made up or by an increased share o
remittances rom the United Arab Emirates, which rose to in FY rom a year earlier.
Remittance inows have provided critical support toPakistan’s balance o payments by helping keep its currentaccount decit in check. In FY, they nanced o the trade decit and were equivalent to twice the level o oreign direct investment. In the two previous scal years,remittances on average nanced about hal the trade decitand were higher than oreign direct investment.
Workers’ remittances
0
3,000
6,000
9,000
Other countries United Arab Emirates
Saudi Arabia United Kingdom United States
090705032001991997
$ million
Source: State Bank o Pakistan, available: http://www.sbp.org.pk,
downloaded 25 August 2009.
Click here or fgure data
.. Workers’ remittances
3.7.13 Current account indicators
-12
-9
-6
-3
0
3
Trade balanceCurrent account balance
1009080706052004
% of GDP
Forecast
Sources: State Bank o Pakistan, available: http://www.sbp.
org.pk, downloaded 31 August 2009; sta estimates.
Click here or fgure data
8/7/2019 Asian Development Outlook 2009 Update: Broadening openness for a resilient Asia
http://slidepdf.com/reader/full/asian-development-outlook-2009-update-broadening-openness-for-a-resilient 167/188
Philippines
A sharper than anticipated slowdown in private consumption in the rst hal o , coupled with a
slump in exports and weakness in xed investment, cut the GDP growth rate more than expected such
that ull-year growth will be lower than orecast in March. Activity should pick up through the second hal
o and reach modest growth rates in , supported by scal stimulus measures and the gradual
global recovery. Infation has declined more steeply than was earlier expected and the orecasts or
and are revised down. Current account surpluses will be maintained or these years.
Updated assessmentGDP growth slowed to 1.0% year on year in the rst hal o 2009 rom
3.8% in ull-year 2008 (revised down rom an originally reported 4.6%).
Gross national product growth also decelerated, although at 3.8% in the
rst hal it was well above the GDP rate owing to relative strength in
net actor income rom abroad. In a sign that the slowdown may have
bottomed earlier this year, year-on-year GDP growth accelerated rom
0.6% in the rst quarter to 1.5% in the second. Te Philippines is less
reliant on external trade (the export-to-GDP ratio is about 30%) than
other economies in Southeast Asia that contracted in the rst hal o 2009
as a result o the global recession.
Private consumption growth in the rst hal pulled back to 1.8%
year on year, rom 4.6% in the rst hal o 2008. Te pace o increasein remittances rom overseas workers slowed to 2.9% in United States
(US) dollar terms, although this translated to growth o 17.1% in pesos.
Concerns over job security eroded consumer condence. Still, the
remittances plus lower ination provided the basis or the expansion in
private consumption, which remained the major contributor to rst-hal
GDP growth.
Government spending, supported by the rollout o a scal stimulus
package, grew by 7.0% in the rst hal o 2009, though this was amplied
by the low base in government outlays in the prior-year period.
Investment, however, was weak. otal xed capital investment declined
by 4.4% and investment in equipment slumped by 18.6%, illustrating the
reluctance o rms to expand capacity at a time o global recession and
slowdown in domestic demand. Net exports ell and acted as a drag on
GDP growth.
On the production side, services constituted the major contributor
to GDP growth in the January–June period, though its expansion rate o
2.5% was about hal that o the same period in 2008 (Figure 3.8.1). Tis
deceleration reected sluggish private consumption and weakness in
transport, nance, and trade-related services, partly oset by growth in
communications and business process outsourcing.
3.8.1 GDP growth by sector
-3
0
3
6
9
GDP ServicesIndustryAgriculture
H1
09
H2H1
08
H2H1
2007
%7.6
1.0
3.6
4.0
6.6
Sources: Asian Development Outlook database; NationalStatistical Coordination Board, available: www.nscb.gov.ph,downloaded 27 August 2009.
Click here or fgure data
This chapter was written by Teresa Mendoza o the Philippines Country Ofce and
Purnima Rajapakse o the Southeast Asia Department, ADB, Manila.
8/7/2019 Asian Development Outlook 2009 Update: Broadening openness for a resilient Asia
http://slidepdf.com/reader/full/asian-development-outlook-2009-update-broadening-openness-for-a-resilient 168/188
152 Asian Development Outlook 2009Update
Industrial production contracted by 1.3% in the rst hal, weighed
down by a 7.4% drop in manuacturing caused in large part by weaker
global demand or electronic goods and clothing and by much slower
expansion o ood processing. Public construction jumped by 24.1%,
spurred by the scal stimulus program, but private constructioncontracted by 1.4%.
Agriculture, accounting or about a third o employment and a h
o GDP, grew by only 1.3% in the rst hal. Rice production increased
by 3.6%, but corn output ell by 2.3% as its low price led some armers
to switch to rice and other crops. A slowdown in agricultural exports
to industrial economies, which account or nearly two thirds o total
agricultural exports, damped production o coconuts and sugar.
Labor-market data suggest that unemployment was contained, mainly
because laid-o workers moved into low-quality jobs. Te unemployment
rate ell rom 8.0% in April 2008 to 7.5% in April 2009. But close to
a million ull-time jobs were lost in that period, while 2.4 million
part-time jobs were created (the proportion o part-time workersincreased to 41% o the employed population rom 36%) (Figure 3.8.2).
Many o those made unemployed in manuacturing and services switched
to lower skilled work, and others reported working ewer hours or
becoming sel-employed. Tere were also signs that more members o
households sought work to supplement amily incomes, aer a amily
member had been laid o or had working hours cut.
Ination declined rapidly to 0.1% year on year in August 2009 (the
lowest in over two decades) rom a peak o 12.4% in August 2008. Tis
was attributable to the drop in global prices or oil and commodities and
subdued domestic demand.
On the trade ront, merchandise exports in US dollar terms slumped
by 32.8% in the rst 6 months, on a customs basis. Electronic products(57% o total exports) plunged by 35.5% as recession bit in the two largest
export markets (the US and Japan). Other exports to register double-digit
declines were agro-based products, clothing, and minerals.
Merchandise imports ell to a similar degree (31.1%), with steep
contractions in the raw materials and intermediate goods used in making
exports such as semiconductors, and weaknesses in imports o capital
goods. Te value o oil imports dropped by 69.4%, largely owing to
the all in global oil prices. Tese developments le the trade decit at
$3.1billioninthersthalf,narrowingfromayearearlier.
Te contraction in trade appears to have bottomed early in 2009
(Figure 3.8.3). Month-on-month data show exports increasing by about
10% in both May and June. Shipments o electronics on a month-on-
month basis edged up rom January to June. Imports on this basis
increased in May (by about 19%) and June (14%).
Available data or the rst quarter o 2009 show that the current
accountsurplusroseto$2.2billion.Anarrowermerchandisetradedecit
was reinorced by a larger surplus in services. Earnings increased rom
business process outsourcing (such as back-ofce accounting and payroll
support), while payments or transportation services ell in tandem with
lower trade volumes. Te surplus on net transers increased modestly, given
that remittances grew, but at a much slower rate than a year earlier. Te
higher current account surplus was partly oset by a decit in the capital
3.8.3 Merchandise trade growth
-45
-30
-15
0
15
30Imports
Exports
AprJan
09
OctJulAprJan
08
OctJulAprJan
2007
%
Source: CEIC Data Company Ltd., downloaded 31 August
2009.
Click here or fgure data
3.8.2 Labor market indicators
0
2
4
6
8
10
0
14
28
42
56
70
Full-time workers
Part-time workers
Unemployment
AprJan
09
OctJulAprJan
2008
% % of total employment
Source: CEIC Data Company Ltd., downloaded 4 September2009.
Click here or fgure data
3.8.4 Foreign investment infows
-750
-500
-250
0
250
500
750
1,000
1,250
Net portfolioDirect investment
20092008
$ million
JanMay
JanJul
JanMay
JanJul
Source: Bangko Sentral ng Pilipinas, available: ww w.bsp.
gov.ph, downloaded 4 September 2009.
Click here or fgure data
8/7/2019 Asian Development Outlook 2009 Update: Broadening openness for a resilient Asia
http://slidepdf.com/reader/full/asian-development-outlook-2009-update-broadening-openness-for-a-resilient 169/188
Southeast Asia Philippines 153
and nancial accounts caused by net outows o direct and portolio
investments,leavinganoverallbalance-of-paymentssurplusof$1.73billion.
Foreign direct investment has recovered in more recent months,
recordinganetinowof$1.0billioninJanuary–May2009,stilllow
but above the year-earlier level, while oreign portolio investment hasalsopickedup,withanetinowof$265millioninJanuary–July2009,
in contrast to an outow in the previous year (Figure 3.8.4). Gross
internationalreservesat$41.3billionasofend-Augustrepresentedahigh
7.1 months o retained imports.
In response to the weakened economic outlook, the Government in
January2009unveiledaP330billion($7billion)scalstimuluspackage.
About hal is allotted to labor-intensive inrastructure and social
welare programs, 30% to public–private partnerships or building large
inrastructure projects, and the rest to tax reductions or individuals and
businesses.
Tese additional outlays bumped up national government expenditure
by 18.1% in the rst 7 months o 2009 (relative to the same period in2008). Revenue ell by 4.1% in this period, partly a result o the economic
slowdown and the tax breaks. Te Government revised its 2009 scal
decit target rom 2.2% o GDP in March to 3.2% in June, but the actual
gap may be slightly wider than that, given weakness in revenue. Te
rst-hal scal decit was 4.3% o GDP (Figure 3.8.5) and the primary
balance, excluding interest payments, ell into decit or the rst time
since 2003. Ample liquidity should enable the nancial system to absorb
any necessary increase in the Government’s gross borrowing requirement.
Te Government projects that requirement or 2009 to be 8.5% o GDP
(P451billionindomesticnancingandabout$4billioninexternal
nancing), higher than 6.7% in 2008.
In July 2009, the Philippines tapped international capital markets orasecondtimethisyearwitha$750million,10-yearbondissuewitha
yield o 6.625%, or 332.6 basis points above comparable US reasuriesa
narrowing rom about 600 basis points above US reasuries or a January
2009 10-year bond issue. With the additional borrowings, the ratio o
public debt to GDP is seen increasing by about 1 percentage point this
year to 57.6% (but that is still well below the 78.2% level reached in 2004).
Easing ination and growth paved the way or Bangko Sentral ng
Pilipinas, the central bank, to lower its policy interest rates in steps by 200
basis points rom December 2008 to July 2009, taking the reverse repo
rate to 4.0% (Figure 3.8.6), the lowest in two decades. Te central bank
also reduced bank-reserve requirements and took other steps to support
banking system liquidity and depositor condence in late 2008, when the
global nancial crisis intensied. Te peso depreciated by 2.9% against the
US dollar in the rst 8 months o 2009, aer a 12.8% decline in 2008.
With ample liquidity in domestic markets, more rms turned to the
debt market or unding. Te private sector sold P94 billion o bonds in
the rst hal, more than double the prior-year level. Te stock market
rallied in line with many o its regional peers: the composite index o
stock prices rose by 54% in the rst 8 months o 2009 (Figure 3.8.7).
Improved investor sentiment was also shown in the narrowing o yield
spreads between US and Philippine reasuries, to 299 basis points at
end-August rom 546 basis points at end-2008 (Figure 3.8.8).
3.8.6 Infation and policy rates
0
3
6
9
12
15
Inflation Reverse repo rateRepo rate
JulAprJan
09
OctJulAprJan
2008
%
Source: CEIC Data Company Ltd., downloaded 4 September
2009.Click here or fgure data
3.8.7 Philippine Stock Exchange index
0
1,000
2,000
3,000
4,000
JulAprJan
09
OctJulAprJan
2008
30 Sep 1994 = 2,922.21
Source: Bloomberg, downloaded 1 September 2009.
Click here or fgure data
3.8.5 Fiscal perormance
-5.0
-2.5
0.0
2.5
5.0
Overall fiscal balance Primary balance
H1
09
H2H1
08
H2H1
2007
% of GDP
Source: CEIC Data Company Ltd., downloaded 31 August2009.
Click here or fgure data
8/7/2019 Asian Development Outlook 2009 Update: Broadening openness for a resilient Asia
http://slidepdf.com/reader/full/asian-development-outlook-2009-update-broadening-openness-for-a-resilient 170/188
154 Asian Development Outlook 2009Update
ProspectsTe outlook assumes that there will be a smooth political transition in
2010 ollowing national elections scheduled or May, and that the new
government pursues a credible economic program. As or monetary
policy, the central bank kept its key policy rates steady in August andnoted that the impact o the substantial monetary easing seen through
July had yet to be ully elt in the economy. Te orecasts assume that the
monetary stance will remain accommodative, and gradually tighten in
2010, with the timing depending on ination and growth trends.
Private consumption is projected to pick up in the second hal o
2009. Te consumer condence index published in September showed
an improvement in sentiment, based on low ination, easing interest
rates, and rmer international economic conditions. Illustrating this
improvement, motor vehicle sales rose by 6.8% in August year on year, the
astest pace so ar this year.
Remittances have held up better than expected, reaching a record
$1.5billioninJune(up3.3%fromayearearlierFigure3.8.9)andaggregatingto$8.5billioninthersthalfof2009.ePhilippine
Overseas Employment Administration estimated that rom October 2008
to June 2009 less than 1% o the 8.7 million Filipino workers abroad lost
their jobs. New job orders held up well in January–June, with just over
hal the available jobs intended or proessional and service workers,
generally more secure jobs than lower-skill ones.
Public investment is expected to gain impetus as scal stimulus
measures are stepped up (some aced delays in the rst hal o 2009). Te
index o business condence or the third quarter o 2009 increased or
the rst time in a year (Figure 3.8.10). Still, uncertainty leading up to the
elections, as well as the still-weak export environment, will likely keep
private investment subdued. Investment pledges reported or the rst hal o 2009 by the Board o Investments and the Philippine Economic Zone
Authority, which cover most o the investment pledges or the country,
ell by about two thirds rom prior-year levels.
From the supply perspective, services are orecast to expand by 3.0%
in 2009. Modest growth in private consumption and election spending
will support retail trade as well as transport and communications
services. Te industry association or business process outsourcing
expects23%growthinrevenuetoabout$7.5billionthisyear.
Manuacturing will recover gradually: an index o manuacturing
volume shows a slowing in the pace o decline since January. Moreover,
average capacity utilization rose rom 78.1% in January to 81.5% in June
(Figure 3.8.11). However, agriculture aces an expected El Niño weather
pattern, which can dent arm production.
aking these inuences into account, GDP growth is projected to
step up to 2.2% in the second hal o 2009. Tat would put ull-year
growth at 1.6%, below that anticipated in Asian Development Outlook
2009 (ADO 2009) in March, a consequence o the weaker than expected
rst hal perormance and the downgrading o the global trade volume
assumed in this Update.
In 2010, domestic demand will strengthen, supported by election
spending through May and some expected improvement in the labor
market resulting rom a li in business sentiment in the second hal, on
3.8.10 Overall business condence index
-30
0
30
60
Next quarterCurrent quarter
Q3Q2Q1
09
Q4Q3Q2Q1
08
Q4Q3Q2Q1
2007
Index
Source: Bangko Sentral ng Pilipinas, available: ww w.bsp.gov.ph, downloaded 4 September 2009.
Click here or fgure data
3.8.9 Growth o remittances
-8
0
8
16
24
32
Peso
Dollar
AprJan
09
OctJulAprJan
2008
%
Source: CEIC Data Company Ltd., downloaded 12 August2009.
Click here or fgure data
3.8.8 Risk sentiment indicators
0
300
600
900
Sovereign risk spreads Credit default swaps
JulAprJan
09
OctJulAprJan
08
OctJulAprJan
2007
Basis points
Source: Bloomberg, downloaded 1 September 2009.
Click here or fgure data
8/7/2019 Asian Development Outlook 2009 Update: Broadening openness for a resilient Asia
http://slidepdf.com/reader/full/asian-development-outlook-2009-update-broadening-openness-for-a-resilient 171/188
Southeast Asia Philippines 155
.. Selected economic indicators (%)
ADO
Update ADO
Update
GDP growth . . . .
Infation . . . .
Current acct. bal.
(share o GDP)
. . . .
Source: Sta estimates.
the assumption o a smooth election and transition in government. Te
modest rebound assumed or next year in global growth and world trade
will provide some impetus. Net exports are expected to make a slight
contribution to GDP growth. Due to modest unding increases in social
services and a decline in inrastructure spending under the proposed2010 budget, the level o scal support to the economy may not be as
strong as in 2009. Economic growth next year is orecast at 3.3%, still a
hal percentage point shy o the 2008 pace (Figure 3.8.12).
Merchandise exports in the ourth quarter o 2009 are projected to
edge higher as demand abroad improves. Imports will also pick up, in line
with a rming in private consumption and the restocking o inventories.
Te trade decit or ull-year 2009 will likely be narrower than was
expected in March. rade in services is projected to produce a surplus,
largely reecting the perormance o business process outsourcing. Tese
actors, coupled with remittance inows, are orecast to keep the current
account in surplus equivalent to 2.8% o GDP or 2009 (revised up rom
ADO 2009), and at a similar percentage in 2010.Ination is projected to gradually increase rom August’s 0.1% rate,
given the base eect caused by the peaking o the consumer price index
in August 2008. It is now orecast to average 3.2% this year, revised
down rom ADO 2009 because domestic demand has been weaker than
anticipated. Te ination orecast or 2010 is also lowered a touch, to 4.5%.
Te Government aims to rein in its scal decit to 2.8% o GDP in
2010, targeting an increase in tax revenue to 14.3% o GDP rom 13.9%
in 2009 (this year’s goal looks ambitious considering the tax breaks and
sluggish economic growth). Actual tax revenues were around 14% in 2007
and 2008. However, the Government has not been able to win legislative
approval or revenue-strengthening proposals (such as excise tax reorms
and changes in scal incentives to investors).Moody’s upgraded its sovereign credit rating or the Philippines in
July 2009, rom B1 to Ba3, citing the resilience o the nancial system and
external payments position in the ace o the global slump. Te rating is
nevertheless below investment grade.
A key risk to the outlook is a weaker than anticipated global economic
recovery. Tat would hurt exports, oreign investment inows, and
consumer and business sentiment which, while showing early signs
o improvement, remain ragile. On the domestic ront, maintaining
investor and consumer condence requires the elections to go smoothly.
3.8.12 GDP growth
0
2
4
6
8
1009080706052004
%
Forecast
Sources: CEIC Data Company Ltd., downloaded 27 August2007; sta estimates.
Click here or fgure data
3.8.11 Average capacity utilization rate,
manuacturing
77
79
81
83
AprJan
09
OctJulAprJan
2008
Index
Source: CEIC Data Company Ltd., downloaded 4 September2009.
Click here or fgure data
8/7/2019 Asian Development Outlook 2009 Update: Broadening openness for a resilient Asia
http://slidepdf.com/reader/full/asian-development-outlook-2009-update-broadening-openness-for-a-resilient 172/188
Thailand
A steep all in exports caused by the global trade slump drove down industrial production and investment
in the rst hal o . Business and consumer sentiment was urther undermined by political tensions.
Although there were signs the worst had passed by midyear, the economy is expected to contract by
more than was projected in March. Modest growth is seen resuming in . The tempo o recovery will
depend in large part on the Government ully implementing two scal packages, including a new public
investment program. Those plans would be at risk i political disruptions recur. The consumer price index
is now orecast to decline this year, beore low-level infation returns next year.
Updated assessmentDomestic political turbulence has aggravated the economic impact o
the global recession. On a sequential basis, GDP contracted by a steep
5.9% (seasonally adjusted) in the ourth quarter o 2008 and by a urther
1.8% in the rst quarter o 2009, beore picking up by 2.3% in the second.
Economic output or the rst hal o 2009 ell by 6.0% rom the prior-year
period, one o the sharpest declines in Southeast Asia.
Tis economic contraction was primarily caused by a drop in
industrial production (Figure 3.9.1) ollowing the slump in global demand,
and by a decline in consumer and investor condence. Te Government
adopted expansionary scal and monetary policies to temper the
contraction.Private consumption ell by 2.4% year on year in the rst hal o
2009, the result o a weakening labor market, a all in export prices
o agricultural commodities that hurt rural incomes, and eeble
consumer condence, particularly during times o political turmoil.
Antigovernment street protests in April, which ollowed an extended
period o rising political tensions, led to a temporary state o emergency
in the capital, Bangkok.
In contrast to the all in private consumption, government
consumption rose by 4.8% in the rst hal o 2009 as the Government
quickened the pace o its budget disbursement and raised wages or its
employees, and rolled out its rst scal stimulus package rom March.
However, investment slumped in the rst hal and this contributed
most to the contraction in GDP on the demand side. Private xed
capital investment dropped by 16.9%, reecting weak external demand,
the impact on business sentiment o the political uncertainty, as well as
more cautious lending by banks. Foreign direct investment applications
declined in value by 47% in the rst 7 months o 2009.
Public investment ell by 9.1% in the rst quarter, then rebounded by
9.6% in the second on aster disbursement by the Government and state
enterprises (Figure 3.9.2). A steeper all in the volume o imports than
3.9.1 GDP growth by sector
-14
-7
0
7
14
ServicesIndustryAgricultureGDP
Q1
09
Q3Q1
08
Q3Q1
07
Q3Q1
2006
%
Source: National Economic and Social Development Board,
available: http://www.nesdb.go.th, downloaded 24 August2009.
Click here or fgure data
This chapter was written by Luxmon Attapich o the Thailand Resident Mission, ADB,
Bangkok.
3.9.2 Gross xed capital investment growth
-24
-12
0
12
24
Public investment
Private investment
Gross fixed capital formation
Q1
09
Q3Q1
08
Q3Q1
07
Q3Q1
06
Q3Q1
2005
%
Source: National Economic and Social Development Board,available: http://www.nesdb.go.th, downloaded 24 August
2009.
Click here or fgure data
8/7/2019 Asian Development Outlook 2009 Update: Broadening openness for a resilient Asia
http://slidepdf.com/reader/full/asian-development-outlook-2009-update-broadening-openness-for-a-resilient 173/188
Southeast Asia Thailand 157
in exports meant that net exports o goods and services had a positive
inuence on GDP in the rst hal.
From the supply side, industrial production ell sharply as exports
dived. Te important manuacturing component o industry dropped by
11.4% in the rst hal, with motor vehicles down a precipitous 40%. Insigns that the slump was bottoming, the decline in the manuacturing
production index slowed to 18.5% in the second quarter rom 32.7% in
the rst, and the rate o industrial capacity utilization increased to 59.2%
rom 58.1% in the same period (Figure 3.9.3).
Construction activity, which declined or our consecutive quarters
through end-March, started to pick up in the second quarter when the
Government and state enterprises accelerated their investment.
Services were hampered by subdued consumer condence and a
all o about 16% in tourist arrivals in January–June. Output rom the
sector declined by 2.8%. ransportation and communications, hotels and
restaurants, and wholesale and retail trading were among the weakest
subsectors. Agricultural and sheries output, damped by the drop inworld commodity prices, grew by just 0.4% in the rst hal. Tat meager
increase was mainly attributable to an expansion o livestock and shrimp
production. Rice production in the second quarter ell rom the year-
earlier level, which was elevated as a result o high rice prices at that time.
In the external accounts, the value o merchandise exports ell
by 23.1% in the rst hal rom the corresponding period in 2008
(Figure 3.9.4). Steep alls were recorded or shipments o automobiles
and parts, electronic and electrical appliances, as well as maize, natural
rubber, rice, and tapioca. Exports ell to the main destinationsUnited
States, European Union, Japan, and Southeast Asiabut some other
markets such as Australia and the Middle East were relatively rm. For
exports, too, the pace o decline eased in the second quarter rom therst, particularly or shipments to People’s Republic o China, India, and
Republic o Korea.
Merchandise imports tumbled by 35.2% in the rst hal, mainly a
reection o reduced purchases o imported inputs used by manuacturing
export industries, much lower prices or imported oil than a year earlier,
and the slack domestic demand. Tis aster all in imports than exports
propelledthetradesurplusfrom$1.8billioninthersthalfof2008to
$11.7billioninthersthalfofthisyear.Netoutowof$5.5billioninthe
capital and nancial accounts stemmed rom a rise in Tai investment in
overseas securities and rom debt repayments.
Largely as a consequence o the ballooning trade balance, the
currentaccountsurplusof$11.4billionwasmorethanthreetimesthat
recorded a year earlier, and the overall balance o payments registered a
surplusof$8.7billion.Foreignreservesroseto$123.4billionatend-July,
equivalent to 5.6 times short-term oreign debt and 10 months o imports
(Figure 3.9.5).
Large current account surpluses contributed to a 2.7% appreciation o
the baht against the US dollar in the rst 7 months o 2009, and to a rise
o about 1.0% in the nominal eective exchange rate o the baht. Te Bank
o Tailand in August relaxed regulations on Tai investment in oreign
securities and derivatives, a move aimed at acilitating capital outows
and easing upward pressure on the baht.
3.9.3 Manuacturing indicators
-50
0
50
100
Industrial capacity utilization rate
Change in manufacturing production index
year on year
JulJan
09
JulJan
08
JulJan
07
JulJan
2006
%
Source: Bank o Thailand, available: http://www.bot.or.th,downloaded 7 September 2009.
Click here or fgure data
3.9.4 Current account indicators
-40
-20
0
20
40
-20
-10
0
10
20
Current account balance
Trade balance
Import growth
Export growth
H109
H2H108
H2H107
H2H106
H2H12005
% $ billion
Source: Bank o Thailand, available: http://www.bot.or.th,
downloaded 2 September 2008.
Click here or fgure data
3.9.5 Foreign reserves and import cover
0
50
100
150
0
5
10
15
Import coverReserves
JulJan
09
JulJan
08
JulJan
07
JulJan
2006
$ billion Months
Sources: CEIC Data Company Ltd.; Bank o Thailand,available: http://www.bot.or.th, both downloaded
7 September 2008.
Click here or fgure data
8/7/2019 Asian Development Outlook 2009 Update: Broadening openness for a resilient Asia
http://slidepdf.com/reader/full/asian-development-outlook-2009-update-broadening-openness-for-a-resilient 174/188
158 Asian Development Outlook 2009Update
Employers responded to the plunge in export orders and subsequent
weakness in domestic demand by reducing working hours and
employment, contributing to a rise in the unemployment rate to 2.1%
in the rst quarter o 2009 rom 1.3% in the preceding quarter. Te rate
eased to 1.8% in the second quarter o 2009 when hiring started to pick up, particularly in construction and some services.
Ination, which shot up to an 11-year peak in July 2008, ell away as
global prices or oil and ood slid, so that the consumer price index ell
by 1.9% in January–July 2009 year on year. Te all in July was a steep
4.4% on this basis (Figure 3.9.6). Government policies introduced in 2008
to assist those on low incomes at a time o high ination, including ree
electricity and water supply or small households and subsidies or public
transportation, were extended twice to stimulate private consumption.
Te rst scal stimulus package aimed at moderating the economic
contractioninvolvedmeasurescostingB116.7billion($3.4billion,or
about 1% o GDP). Coming into eect in March this year, it included cash
payments and subsidies or low-income people and assistance or ruralsmall enterprises. Almost hal the total amount was disbursed by July.
Te additional spending, at a time o weakness in government
revenue, is projected to widen the scal decit to about 4% o GDP in
FY2009 (ended 30 September 2009), rom 0.3% in FY2008. Revenue has
allen well below target during FY2009 as the domestic recession eroded
government income rom sources such as import duties and value-
added tax. Parliament in June passed emergency legislation authorizing
additional government borrowing beyond limits set under the budget law,
and it approved new debt issues o up to B800 billion.
Monetary stimulus came rom aggressive reductions in interest rates
by the Bank o Tailand: rom the start o December 2008 to April
2009 it lowered its policy rate by 250 basis points to 1.25% (Figure 3.9.7).Nevertheless, the impact on lending was muted. Commercial banks,
concerned about credit risks in a contracting economy, were cautious
in lending, while private sector demand or credit generally declined
in tandem with economic activity. Te rate o increase in loans by
commercial deposit-taking institutions slowed rom 8.4% in the rst
quarter to 6.1% in the second.
Stock prices as reected in the SE index, aer alling by 48% in 2008,
picked up in the second quarter o 2009. Te index rose by 45% in the rst
8 months o this year (Figure 3.9.8), a gain in line with other Asian markets.
Citing the political unrest, S&P in April lowered Tailand’s long-term
local currency debt rating to A- rom A. Fitch downgraded the long-term
oreign currency rating to BBB rom BBB+ that month, on the grounds
that political strie undermined the ability o the Government to
implement policies.
ProspectsTe orecasts assume that there are no disruptive changes in government
in the orecast period and that scal policy is implemented as planned.
In addition to the rst scal stimulus package, the Government has
approved a second package that comprises public investment and that
willcostB1.43trillion($42billion)over3scalyearsstartinginOctober
3.9.6 Monthly infation
-6
0
6
12
Jan
09
Jan
08
Jan
07
Jan
06
Jan
05
Jan
2004
%
Sources: CEIC Data Company Ltd.; Bureau o Trade andEconomic Indices, available: http://www.price.moc.go.th,both downloaded 2 September 2008.
Click here or fgure data
3.9.7 Policy rate
1
2
3
4
JulAprJan
09
OctJulAprJan
2008
%
Source: Bloomberg, downloaded 14 September 2009.
Click here or fgure data
3.9.8 SET index
200
400
600
800
1,000
JulAprJan
09
OctJulAprJan
2008
30 April 1975 = 100
Source: CEIC Data Company Ltd., downloaded 4 September
2009.
Click here or fgure data
8/7/2019 Asian Development Outlook 2009 Update: Broadening openness for a resilient Asia
http://slidepdf.com/reader/full/asian-development-outlook-2009-update-broadening-openness-for-a-resilient 175/188
8/7/2019 Asian Development Outlook 2009 Update: Broadening openness for a resilient Asia
http://slidepdf.com/reader/full/asian-development-outlook-2009-update-broadening-openness-for-a-resilient 176/188
160 Asian Development Outlook 2009Update
to edge the policy rate back up in the second hal o 2010. Te main
nancial constraint or many rms is access to credit, rather than its cost.
Addressing this issue, the Government has asked state-owned nancial
institutions to give more attention to rms acing a liquidity squeeze and
provided credit guarantees to small and medium-sized enterprises andexporters.
Most o the nancing or the 3-year public investment program will
be o-budget, sought rom domestic debt markets and public–private
partnerships. Borrowing or the program is expected to increase the
ratio o public debt to GDP to a still-manageable 58% o GDP by 2012,
rom 37.4% in 2008. Te FY2010 budget targets a reduction in spending
rom FY2009, but when planned outlays or the public investment
program are added, the combined scal decit or FY2010 will be as
high as 7.4% o GDP.
Domestic risks to this outlook center on possible renewed political
turbulence that would disrupt policy making and delay disbursement o
budget spending and the public investment program. Bolstering domesticdemand is particularly important, considering that the outlook is or only
modest growth in industrial-country markets. (Tailand has oen relied
on exports to drive growth, but this is less likely to be an option in the
orecast period.)
Te public sector bears a heavy responsibility in reviving investment,
largely because the private sector has been weakened by recession and
political uncertainty. But the mediocre record o public investment in
recentyearsunderlinestheriskofrelyingonittoomuch.A$40billion
“megaprojects” inrastructure plan that was ormulated in 2005 and
that carried a similar responsibility was largely uncompleted because
o requent changes in government and political tensions. Some o that
plan’s projects have now been incorporated into the new 3-year program.Overall, public investment has been relatively low since the 1997–98 Asian
nancial crisis (Figure 3.9.12).
Any renewed political turmoil that disrupts the rollout o the public
investment program (and policy making in general) would hurt growth
directly and erode still-ragile consumer and investor condence. In these
circumstances, GDP growth would be lower than orecast, as would scal
revenue, which would put additional pressure on the budget.
3.9.12 Public invesment
0
3
6
9
12
080604022000981996
% of GDP
Source: National Economic and Social Development Board,
available: http://www.nesdb.go.th, downloaded 24 August2009.
Click here or fgure data
3.9.11 Annual infation
-2
0
2
4
6
1009080706052004
%
Forecast
5-year moving average
Sources: National Economic and Social Development Board,
available: http://www.nesdb.go.th, downloaded 27 August2008; sta estimates.
Click here or fgure data
8/7/2019 Asian Development Outlook 2009 Update: Broadening openness for a resilient Asia
http://slidepdf.com/reader/full/asian-development-outlook-2009-update-broadening-openness-for-a-resilient 177/188
Viet Nam
The economy is weathering the global economic crisis relatively well due largely to swit and strong
policy responses. The GDP growth orecast or is revised up rom that made in March and the
orecast is maintained, with growth expected to accelerate in the second hal o and into . The
projections or infation are raised, chiefy because o higher world commodity prices. Forecasts or current
account decits are narrowed, though the overall balance o payments is still expected to be in decit this
year, beore it returns to surplus next year. Thereore, the Government needs to strike a balance between
stimulating growth through demand-side measures and saeguarding macroeconomic stability.
Updated assessmentDespite the weak external environment, the economy has continued
expanding this year, albeit at a slower rate. GDP grew by 3.9% in the rst
hal o 2009, as against 6.2% in 2008 and more than 8% in 2005–2007
(Figure 3.10.1). Expansionary scal and monetary policies boosted public
consumption and domestically nanced investment. Imports ell more
steeply than exports, so that net exports contributed to GDP growth. At the
same time, a rise in unemployment and all in remittance inows damped
growth o private consumption, and a downturn in inows o oreign direct
investment (FDI) caused a decline in oreign-nanced investment.
Viet Nam’s economic slowdown appears to have bottomed out early
in 2009, with year-on-year GDP growth quickening to an estimated 4.5%in the second quarter rom 3.1% in the rst. Growth o agriculture pulled
back sharply in the rst quarter because o bad weather, but rebounded
in the second quarter, aided by a bountiul winter–spring rice harvest.
Manuacturing, which contracted in the rst quarter on account o weak
external demand, started growing again in the second, as expansionary
monetary and scal policies strengthened domestic demand. Growth o
services and construction accelerated in the second quarter owing to a
pickup in private consumption and domestically nanced investment.
Following several years o decline, output o crude oil grew by 17.9% in
the rst hal o 2009 (Figure 3.10.2). Falling output at some old elds was
more than oset by increases at new elds.
A soening in the labor market that started in late 2008 continued
in early 2009, as economic activity slowed and businesses shed labor.
Although most layos occurred in urban areas, unemployment and
underemployment increased in both urban and rural areas, as some o
those rom villages who had lost their jobs in cities returned home. Declines
in remittance receipts and wages pushed some households into poverty.
oward mid-2009, however, demand or labor appeared to pick up again.
Ination has decelerated sharply owing to lower world commodity
prices and relatively slow domestic economic growth. Period-average
3.10.1 GDP growth by sector
0
3
6
9
12
ServicesIndustryAgricultureGDP
H1 090807062005
%
Source: General Statistics Oce o Viet Nam.
Click here or fgure data
This chapter was written by Bahodir Ganiev o the Viet Nam Resident Mission,
ADB, Hanoi.
3.10.2 Crude oil output
0
5
10
15
20
H1 09H1 080807062005
Million metric tons
Source: General Statistics Oce o Viet Nam.
Click here or fgure data
8/7/2019 Asian Development Outlook 2009 Update: Broadening openness for a resilient Asia
http://slidepdf.com/reader/full/asian-development-outlook-2009-update-broadening-openness-for-a-resilient 178/188
162 Asian Development Outlook 2009Update
ination eased to 8.3% in January–August 2009 rom 23.0% in 2008. Year-
on-year ination ell to 2.0% in August 2009 rom 28.3% in August 2008
(Figure 3.10.3). However, ination pressures reemerged in the second quarter
as commodity prices edged up and growth accelerated. Seasonally adjusted
month-on-month ination rose to 0.8% in the June–July period, a airly high rate given that world commodity prices were well below their peaks.
o stimulate economic activity and limit the rise in unemployment,
the State Bank o Viet Nam (SBV), the central bank, eased monetary
policy signicantly in late 2008 and early 2009 and has kept it relatively
loose since then. Year-on-year growth o reserve money quickened rom
13.7% in the third quarter o 2008 to 26.7% in the rst quarter o 2009,
beore a decline in SBV’s oreign assets pulled it back to 21.2% in the
second quarter (Figure 3.10.4). Spurred by the introduction o government
interest rate subsidies, growth o credit and money supply accelerated in
the rst hal o 2009; in particular, growth o total liquidity (M2) stepped
up to 35.8% in the second quarter rom 20.3% in the ourth quarter o 2008.
Since the easing o monetary policy was not enough to prevent a sharpslowdown in growth, the Government approved several scal stimulus
measures in the rst hal o 2009 (Box 3.10.1). Tey include a temporary
30% cut in the corporate tax rate or small and medium-sized enterprises,
additional nancial assistance to poor households, a 4 percentage point
interest rate subsidy on certain bank loans, and a boost in planned
inrastructure spending. Te total cost o these measures is estimated at
D145.6 trillion, more than was expected when Asian Development Outlook
2009 (ADO 2009) was launched in March this year.
Te tax breaks, coupled with a all in oil income caused by lower
world oil prices, reduced budget revenue and grants in the rst hal o
2009 (Figure 3.10.5). Budget expenditure decreased as well, because the
scal stimulus mainly increased o-budget spending and lending. Tebudget ell into decit, rom a surplus a year earlier. Te overall scal
decit (including o-budget expenditure and lending) was likely much
larger than the budget decit.
SBV has kept its reerence oreign-exchange rate airly stable since
December 2008 (Figure 3.10.6). Declines in exports as well as in remittance
and oreign capital inows have reduced the supply o oreign exchange,
while expansionary monetary and scal policies have increased demand
or it. Consequently, there has been a shortage o oreign exchange in the
ormal market and the dong’s exchange rate against the US dollar has
remained at the upper bound o its trading band since October 2008.
Te band was widened to +/-5% rom +/-3% around SBV’s reerence rate
in March 2009, resulting in depreciation against the US dollar by about
2% in the ormal market. However, this depreciation was insufcient or
the market to clear. Te black market exchange rate has stayed above the
upper bound o the trading band most o the time since October 2008.
Te shortage o oreign exchange in the ormal market has helped
narrow the trade decit by suppressing imports. But it has also created
difculties or businesses, given rise to indirect payments or oreign
exchange in the ormal market, and hurt the business environment.
Furthermore, the shortage has ueled expectations o devaluation and
put depreciation pressure on the dong in the black market. Te spread
between SBV’s reerence rate and the black market rate widened to more
3.10.3 Infation
-10
0
10
20
30
-2
0
2
4
6
Seasonally adjusted monthly inflation
Year-on-year inflation
Period-average a inflation
JulAprJan
09
OctJulAprJan
2008
% %
a Year-to-date average.
Sources: General Statistics Oce o Viet Nam; sta
estimates.
Click here or fgure data
3.10.4 Growth o money and banking
indicators
0
20
40
60
80
Total liquidity (M2)
Banking system net domestic credit
Reserve money
Q2Q1
09
Q4Q3Q2Q1
08
Q4Q3Q2Q1
2007
%
Sources: State Bank o Viet Nam; sta estimates.
Click here or fgure data
3.10.5 Government nance
0
7
14
21
28
35
Budget expenditureb
Budget revenue and grantsa
H1 09H1 080807062005
% of GDP
a Excludes revenue carried over rom the previous year.b Excludes amortization o public debt and expenditure
brought orward rom the ollowing year.
Sources: Ministry o Finance and General Statistics Oce o
Viet Nam; sta estimates.
Click here or fgure data
8/7/2019 Asian Development Outlook 2009 Update: Broadening openness for a resilient Asia
http://slidepdf.com/reader/full/asian-development-outlook-2009-update-broadening-openness-for-a-resilient 179/188
Southeast Asia Viet Nam 163
Te Government approved various scal stimulus measuresin January–May to ease the impact on the economy
o the global economic slump. Given the consensus-baseddecision making system, it approved policies in a piecemealashion to speed their implementation, rather than wait toget agreement on a package o measures.
Tis approach enabled the Government to start carryingout some stimulus measures as early as February. However,it also created some uncertainty about the impact o the stimulus on the budget, and the total amount raisedquestions about the implications or macroeconomicstability and sustainability o public debt.
Te total amount is indeed large, estimated atD. trillion, or . o projected GDP(Box table ). However, the direct impact on the
budget will be less than this amount, even i all measuresare ully carried out. Tis is because the measures includehousing assistance to the poor that will be mostly nancedby the Viet Nam Bank or Social Policies and interest ratesubsidies that will be partly disbursed in .
Te potential direct impact o the measures on the budget is positive, given that they include both deerment o
some tax payments and budget loan repayments rom
to and the bringing orward o some expenditure rom to .
In June , the National Assembly lowered the ofcialGDP growth target or rom . to . and raisedthe ceiling on the budget decit (based on the Government’sdenition) rom . o GDP to . o GDP (Box table). Tis in eect increased the planned overall scal decit(including net o-budget expenditure and lending) rom. to . o GDP. However, the Government’s revisedbudget plan is based on conservative projections o world oilprices and revenue perormance. Actual revenue is likely toexceed the planned amount owing to higher world oil pricesand improved tax administration.
In addition, planned capital spending is unlikely tobe ully disbursed due to implementation and nancingconstraints. Accordingly, the ADO orecast o theoverall scal decit in is revised up only slightly,rom . o GDP to . o GDP. Te gap is expectedto be nanced mainly by drawdowns on the Government’sdeposits at SBV and at commercial banks, and by borrowingrom multilateral and bilateral development agencies.
Te scal decit is thereore unlikely to put sustainability o public debt at risk. Nor is it expected to jeopardizemacroeconomic stability, assuming that SBV starts
tightening monetary policy toward the end o .
.. Fiscal stimulus measures and the budget
Fiscal stimulus measures, trillion dong,
Amounta Potential direct impact
on the budgetb
Measures aectinggovernment revenue
. -. .
Measures aecting government
expenditure and net lending
. . -.
Total . -. .
Billion US dollars . -. .
o GDP . -. .
a Excludes quasi-scal stimulus measures undertaken through the Viet NamDevelopment Bank (such as guaranteeing bank loans to small and medium-
sized enterprises). b Sta estimates based on the assumption that theannounced scal stimulus measures will be ully implemented. Excludes
the indirect impact o the measures on the budget through their eects onpublic debt, growth, etc.
Source: Government o Viet Nam; sta estimates.
Budget, % o GDP,
Government’s plan ADBrevised
projectionsOriginal Revised
Budget revenue and grants . . .
Budget expenditure . . .
Budget scal balance
(Government's denition)a-. -. -.
O-budget expenditure and
lending (net)
. . .
Overall scal balanceb -. -. -.
ADB = Asian Development Bank.a Includes carried over 2008 revenue (as revenue) and amortization o public
debt (as expenditure). b Excludes carried over 2008 revenue and amortizationo public debt but includes net o-budget expenditure and lending.
Source: Government o Viet Nam; sta estimates.
than 9% in mid-July 2009 rom about 3% at end-2008. SBV increased the
supply o oreign exchange in the ormal market in July, which cut the
spread to about 8% in August.
Weak external demand reduced merchandise exports by 10.2% in
the rst hal o 2009 (Figure 3.10.7). Exports o seaood, coee, crude
oil, and wood products, or example, ell by more than 10%. Tis drop
was partly oset by reexports o gold (about 9% o total exports) and an
increase in exports o rice. Imports dropped at the much aster rate o
8/7/2019 Asian Development Outlook 2009 Update: Broadening openness for a resilient Asia
http://slidepdf.com/reader/full/asian-development-outlook-2009-update-broadening-openness-for-a-resilient 180/188
164 Asian Development Outlook 2009Update
3.10.6 Exchange rates
15,000
16,000
17,000
18,000
19,000
20,000
Black market exchange rate
Lower bound of the trading band
Upper bound of the trading band
Reference rate of the State Bank of Viet Nam
JulAprJan
09
OctJulAprJan
2008
Dong/$
Sources: State Bank o Viet Nam; sta observations.
Click here or fgure data
3.10.7 Trade indicators
-60
-30
0
30
60
90
-8
-4
0
4
8
12
Trade balanceImport growth
Export growth
Q2Q1
09
Q4Q3Q2Q1
08
Q4Q3Q2Q1
2007
%, year on year $ billion
Sources: State Bank o Viet Nam; sta estimates.
Click here or fgure data
3.10.8 Current account and reserves
-13
0
13
26
Gross official reserves
Current account balance
H1 09H1 080807062005
$ billion
Note: Reserves exclude the Government’s oreign exchangedeposits at the State Bank o Viet Nam and the oreignexchange counterpart o swap operations.
Sources: State Bank o Viet Nam; sta estimates.
Click here or fgure data
34.1%, reecting the slowdown o economic activity, lower import prices,
reduced availability o trade credit, and the shortage o oreign exchange.
A downturn in FDI inows contributed to the sharp decline in imports
o capital goods. Te trade decit (balance-o-payments basis) narrowed
to$0.2billioninJanuary–June2009from$11.4billioninthesameperiodo the previous year. Despite declines in remittance inows and tourism
income, the current account recorded a surplus o 0.4% o GDP in the
rst hal o 2009, compared with a decit o 23.8% in the same period o
2008 (Figure 3.10.8). (Te rst-hal current account balance would be a
decit o 5.7% o GDP i reexports o gold were excluded.)
Te capital account balance turned rom surplus into decit due to a
downturn in FDI inows and outows o portolio investment and short-
term capital. Te overall balance o payments recorded a decit, and gross
ocialreservesfellto$17.6billionatend-June2009from$23.0billionat
end-2008. In terms o import coverage, however, gross ofcial reserves
increased to 16.4 weeks o imports at end-June 2009.
For the rest o 2009, it is assumed that the Government will nottake additional scal stimulus measures. It is urther assumed that SBV
will start tightening monetary policy toward the end o this year, as the
balance o risks shis rom growth to macroeconomic stability. Output at
new oil elds that came on stream in late 2008 is now expected to reach
its peak in 2009, rather than in 2010. Hence, total oil output is projected
to rise to 16.5 million metric tons in 2009, revised up rom March.
Based on these assumptions, the GDP growth orecast or 2009 is raised
to 4.7% rom 4.5% in ADO 2009, mainly a result o the larger than expected
scal stimulus, oil output, and net exports. Growth in the second hal is
orecast to accelerate to 5.4%. Ination in 2009 is now seen averaging 6.8%,
above that predicted in March because o stronger than expected ination
inertia as well as higher projections o global commodity prices. Te currentaccount will return to decit in the second hal as exports shrink urther
and imports pick up. For all 2009, the decit is likely to be 7.0% o GDP,
revised rom 11.5% in view o larger exports o oil and rice, gold reexports,
the sharper decline in imports, and larger GDP than projected in ADO 2009.
Te overall balance o payments is still expected to record a decit this year.
ProspectsForecasts o 2010’s outcomes are based on the assumption that the
Government will not adopt additional scal stimulus measures next year
and that SBV will pursue moderately tight monetary policy. It is urther
assumed that SBV will eliminate the shortage o oreign exchange through
greater exibility o its reerence rate, tighter monetary policy, and increased
sales o oreign exchange. Te projection or oil production in 2010 is
maintained at 15.5 million metric tons, an easing rom this year’s level.
On this basis, GDP growth is orecast to increase to 6.5% in 2010
(Figure 3.10.9), in line with the ADO 2009 projection. Growth o
consumption and domestically nanced investment will speed up as
the 2009 monetary and scal stimuli work through the economy. Te
anticipated improvement o global nancial conditions will bring about
an upturn in oreign-nanced investment. At the same time, net exports
o goods and services will all, with imports growing aster than exports.
8/7/2019 Asian Development Outlook 2009 Update: Broadening openness for a resilient Asia
http://slidepdf.com/reader/full/asian-development-outlook-2009-update-broadening-openness-for-a-resilient 181/188
Southeast Asia Viet Nam 165
3.10.10 Fiscal and current account decits
-15
-10
-5
0
5
Current account Fiscal
10090807062005
% of GDP
Forecast
Sources: Ministry o Finance; State Bank o Viet Nam; sta estimates.
Click here or fgure data
3.10.9 Growth and infation
0
2
4
6
8
10
0
5
10
15
20
25
InflationGDP
10090807062005
%
Forecast
%
Sources: Asian Development Outlook database; sta estimates.
Click here or fgure data
.. Selected economic indicators (%)
ADO
Update ADO
Update
GDP growth . . . .
Infation . . . .
Current acct. bal.
(share o GDP)
-. -. -. -.
Source: Sta estimates.
Te labor market will pick up on the back o accelerating growth, and
incomes will increase. Ination is now orecast at 8.5% next year, revised
up rom 5.0%. Te reason is the rapid growth o money supply in 2009
and expected increases in world commodity prices.
Te overall scal decit is likely to narrow to about 4.5% o GDPnext year (Figure 3.10.10). Te orecast rise in world oil prices (hence oil
revenue), aster economic growth, and deerral o some tax payments
rom 2009 to 2010 as part o the scal stimulus will boost government
receipts. Expenditure will all because some outlays initially planned
or 2010 are being brought orward to 2009 (also part o the 2009 scal
stimulus), and no additional scal pump priming is expected next year.
Viet Nam’s stock o public and publicly guaranteed debt is likely
to be slightly higher than was orecast in March, at about 46% o GDP
in 2010, compared with 48% in 2009 and an estimated 44% in 2008
(Figure 3.10.11). Since much o the debt is on concessional terms, its
present value will remain below 20% o GDP.
Te current account decit is orecast to widen rom 7.0% o GDPthis year to 9.0% in 2010. Stronger external demand and higher prices
or goods shipped abroad will li exports, and remittance inows will
increase as economies in source countries improve. However, these actors
will be more than oset by increases in imports resulting rom stronger
economic growth, improved availability o trade credit and oreign
exchange, and higher import prices. Te overall balance o payments
should return to surplus i capital inows rebound as anticipated.
Risks to this outlook are mainly on the downside. A weaker than
expected global economic recovery would damp growth in Viet Nam,
and an unexpected spurt in world commodity prices would mean
higher ination. A conceivable domestic risk is that ination pressures
and expectations o devaluation could build up to an extent that they signicantly reduce demand or dong-denominated assets. In such an
event, the black market exchange rate would depreciate sharply and
ination could return to double digits. Te current account decit would
be wider than projected in this Update because speculative imports would
surge, as they did in the rst hal o 2008. Te resultant macroeconomic
turbulence and stabilization measures would likely cause slower economic
growth than orecast in the ADO 2009 Update baseline scenario.
Moving to guard against such an outcome, SBV has started
taking measures to keep ination in check and to damp devaluation
expectations. In particular, it has committed to limit growth o banking
system credit and total liquidity (M2) to 30% in 2009; asked state-owned
commercial banks to limit loan growth to 25% in 2009; and urged all
commercial banks to tighten credit or consumer spending and purchases
o real estate and stocks. It has also committed not to devalue its
reerence exchange rate in the near uture and has increased the supply
o oreign exchange in the ormal market. As noted, SBV is also likely to
start tightening monetary policy toward the end o 2009. It is expected to
pursue moderately tight monetary policy in 2010 to support the dong and
to counter ination pressures stemming rom accelerating growth and
rising world commodity prices.
3.10.11 Public and publicly guaranteed debt
20
30
40
50
10090807062005
% of GDP
Forecast
Sources: Ministry o Finance o Viet Nam; sta estimates.
Click here or fgure data
8/7/2019 Asian Development Outlook 2009 Update: Broadening openness for a resilient Asia
http://slidepdf.com/reader/full/asian-development-outlook-2009-update-broadening-openness-for-a-resilient 182/188
8/7/2019 Asian Development Outlook 2009 Update: Broadening openness for a resilient Asia
http://slidepdf.com/reader/full/asian-development-outlook-2009-update-broadening-openness-for-a-resilient 183/188
Statistica
appendix
8/7/2019 Asian Development Outlook 2009 Update: Broadening openness for a resilient Asia
http://slidepdf.com/reader/full/asian-development-outlook-2009-update-broadening-openness-for-a-resilient 184/188
Statistical notes and tables
Te statistical appendix presents selected economic indicators or44 developing member economies o the Asian Development Bank (ADB)
and or Brunei Darussalam, an unclassied regional member, in three
tables: gross domestic product (GDP) growth, ination, and current
account balance as a percentage o GDP. Te economies are grouped
into ve subregions: Central Asia, East Asia, South Asia, Southeast Asia,
and the Pacic. Te tables contain historical data or 2006 to 2008 and
orecasts or 2009 and 2010.
Te data were standardized to the degree possible in order to allow
comparability over time and across economies, but dierences in
statistical methodology, denitions, coverage, and practices make ull
comparability impossible. Te national income accounts section is based
on the United Nations System o National Accounts, while the balance-o-payments data are based on International Monetary Fund (IMF)
accounting standards. Historical data were obtained rom ofcial sources,
statistical publications and databases, and documents o ADB, IMF, and
World Bank. Projections or 2009 and 2010 are generally sta estimates
made on the basis o available quarterly or monthly data, although some
projections are rom governments.
Most countries report on a calendar year basis, while South Asian
countries (except or Maldives and Sri Lanka) report all variables on a
scal year basis. Republic o Palau reports balance-o-payments data on a
scal year basis.
Regional and subregional averages are provided or the three tables.
Te averages are computed using weights derived rom levels o gross
nationalincome(GNI)incurrentUnitedStatesdollars(US$)following
the World Bank Atlas method. Te GNI data or 2006–2007 were
obtained rom the World Bank’s World Development Indicators Online.
Weights or 2007 were carried over through 2010. Te GNI data or Cook
Islands and uvalu were estimated using the Atlas conversion actor.
Myanmar and Nauru have no GNI data, and data or these two countries
are excluded rom the computation o all subregional averages and totals.
Te ollowing paragraphs discuss the three tables in greater detail.
able A1: Growth rate o GDP (% per year). Te table shows annual
growth rates o GDP valued at constant market prices, actor costs, or
8/7/2019 Asian Development Outlook 2009 Update: Broadening openness for a resilient Asia
http://slidepdf.com/reader/full/asian-development-outlook-2009-update-broadening-openness-for-a-resilient 185/188
8/7/2019 Asian Development Outlook 2009 Update: Broadening openness for a resilient Asia
http://slidepdf.com/reader/full/asian-development-outlook-2009-update-broadening-openness-for-a-resilient 186/188
170 Asian Development Outlook 2009Update
Table A1 Growth rate of GDP (% per year)
Subregion/Economy 2006 2007 2008 2009 2010
ADO 2009 Update ADO 2009 Update
Central Asia . . . . . . .Armenia . . . . -. . .
Azerbaijan . . . . . . .
Georgia . . . . -. . .
Kazakhstan . . . . -. . .
Kyrgyz Republic . . . . . . .
Tajikistan . . . . . . .
Turkmenistan . . . . . . .
Uzbekistan . . . . . . .
East Asia . . . . . . .
China, People’s Rep. o . . . . . . .
Hong Kong, China . . . -. -. . .
Korea, Rep. o . . . -. -. . .
Mongolia . . . . . . .Taipei,China . . . -. -. . .
South Asia . . . . . . .
Aghanistan . . . . . . .
Bangladesh . . . . . . .
Bhutan . . . . . . .
India . . . . . . .
Maldives . . . . -. . .
Nepal . . . . . . .
Pakistan . . . . . . .
Sri Lanka . . . . . . .
Southeast Asia . . . . . . .
Brunei Darussalam . . -. -. -. . .
Cambodia . . . . -. . .
Indonesia . . . . . . .Lao People’s Dem. Rep. . . . . . . .
Malaysia . . . -. -. . .
Myanmar . . - - - - -
Philippines . . . . . . .
Singapore . . . -. -. . .
Thailand . . . -. -. . .
Viet Nam . . . . . . .
The Pacific . . . . . . .
Cook Islands . . -. . -. . .
Fiji Islands . -. . -. -. . .
Kiribati . -. . . . . .
Marshall Islands, Rep. o . . -. . . . .
Micronesia, Fed. States o -. -. -. -. . . .Nauru . -. . . . . .
Palau, Rep. o . . -. -. -. -. -.
Papua New Guinea . . . . . . .
Samoa . . -. -. -. -. -.
Solomon Islands . . . . . . .
Timor-Leste, Dem. Rep. o -. . . . . . .
Tonga . . . -. -. -. .
Tuvalu . . . . . . .
Vanuatu . . . . . . .
Average . . . . . . .
- = data not available.
8/7/2019 Asian Development Outlook 2009 Update: Broadening openness for a resilient Asia
http://slidepdf.com/reader/full/asian-development-outlook-2009-update-broadening-openness-for-a-resilient 187/188
8/7/2019 Asian Development Outlook 2009 Update: Broadening openness for a resilient Asia
http://slidepdf.com/reader/full/asian-development-outlook-2009-update-broadening-openness-for-a-resilient 188/188
172 Asian Development Outlook 2009Update
Table A3 Current account balance (% of GDP)
Subregion/Economy 2006 2007 2008 2009 2010
ADO 2009 Update ADO 2009 Update
Central Asia . . . . . . .Armenia -. -. -. -. -. -. -.
Azerbaijan . . . . . . .
Georgia -. -. -. -. -. -. -.
Kazakhstan -. -. . -. -. -. -.
Kyrgyz Republic -. -. -. -. -. -. -.
Tajikistan -. -. -. -. -. -. -.
Turkmenistan . . . . . . .
Uzbekistan . . . . . . .
East Asia . . . . . . .
China, People’s Rep. o . . . . . . .
Hong Kong, China . . . . . . .
Korea, Rep. o . . -. . . . .
Mongolia . . -. -. -. -. -.Taipei,China . . . . . . .
South Asia -. -. -. -. -. -. -.