Asian Development Outlook 2015: Financing Asia s Future Growth

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2 Asian Development Outlook 215: Financing Asia s Future Growth Shang-Jin Wei Chief Economist Asian Development Bank The views expressed in this document are those of the author and do not necessarily reflect the views and policies of the Asian Development Bank or its Board of Governors or the governments they represent. 2

3 Key messages Steady growth in developing Asia continues: 6.3% in 215 and 216 Growth underpinned by domestic reform, advanced economy recovery, and commodity price reductions India expected to grow at 7.8%, faster than PRC s 7.2% Inflation pressures easing partly due to lower commodity prices Low oil prices an opportunity for fiscal reforms Financial development must support growth, inclusion, and stability 3

4 Economic outlook: Developing Asia extends steady growth GDP growth (%) year average: year average: f 216f f: forecast 4

5 contributing the most to global growth 4 Global cumulative GDP growth, = 21.4%, annual growth=4.% 31.2 Percentage contributions to global GDP growth PRC India ASEAN US Japan Euro area 31.9 Global GDP growth, 215 = 3.6% PRC India ASEAN US Japan Euro area Asia accounts for about 6% of global growth; still fastest-growing region 5

6 Key growth drivers for Asia The 3Rs Reforms at home Recovery in advanced economies Reduction in commodity prices Moderation in PRC growth 6

7 High overall growth, but divergence across countries f 216f 5-year ave. 1-year ave. East Asia South Asia Southeast Asia f: forecast Central Asia The Pacific 7

8 PRC: Shrinking labor force, rising wages, and appreciating currency reduce growth Working age population (million) Real wage, $ (in 2 prices) 8, PRC 6, India 4, 2, PRC India REER (21=1) PRC 1 Korea 8 6 India Indonesia Japan REER=real effective exchange rate 8

9 India: Reforms begin to bear fruit Federal budget indicators Purchasing managers indexes 9

10 Indonesia: Reforms to spur growth Fiscal indicators Consumer and business confidence indexes 1

11 ASEAN poised for a rebound GDP growth, Southeast Asia (%) f 216f 5-year ave. INO THA PHI MAL SIN VIE BRU CAM LAO MYA f: forecast INO=Indonesia; THA=Thailand; PHI=Philippines; MAL=Malaysia; SIN=Singapore; VIE=Viet Nam; BRU=Brunei Darussalam; CAM=Cambodia; LAO=Lao PDR; MYA=Myanmar 11

12 Tumbling commodity prices Brent crude Commodity price indexes 21=1 Food Beverage Copper Gold Natural gas Sources: World Bank Pinksheets; Bloomberg Futures 12

13 ease inflation pressures 8 Inflation (%) year average: year average: f 216f f: forecast 13

14 and slightly increase current account surplus Current account (% of GDP) PRC Developing Asia Japan European Union US f: forecast 14

15 Import shares 21, $12.7 trillion ROW, $6.1 India, $.4 PRC, $1.4 Euro area, $3.9 ASEAN, $1. US, $2. Japan, $.7 214, $19.1 trillion ROW, $7.7 India, $.5 ASEAN, $1.3 PRC, $2. Euro area, $4.4 US, $2.4 Japan, $.8 15

16 Contributions to global import growth Percentage contributions to global import growth (from $12.7 tn in 29 to $19.1 tn in 214) cumulative growth = 5.% PRC Euro area US ASEAN Japan India 16

17 Risk factors Deeper Greek debt crisis and deepening recession in the Russian Federation Slower than expected growth in PRC or India Capital outflow due to impending increase in US interest rates 17

18 Special topic 1: Lower world oil prices an opportunity for reforms Diesel pump prices ($/liter) Hollow bars: Jun 214 Filled bars: Jan 215 JPN HKG SIN PRC TAJ VIE USA PHI IND SRI THA BAN KGZ AZE KAZ MAL INO -5 5 Reduce subsidy? Increase tax? Y Y Y Y change in exchange rate, Jun 214 Jan 215 Y Y Y Y Y Y AZE=Azerbaijan; BAN=Bangladesh; HKG=Hong Kong, China; IND=India; INO=Indonesia; JPN=Japan; KAZ=Kazakhstan; KGZ=Kyrgyz Republic; MAL=Malaysia; PHI=Philippines; PRC=China, People s Rep. of; SIN=Singapore; SRI=Sri Lanka; TAJ=Tajikistan; THA=Thailand; USA=United States; VIE=Viet Nam 18

19 Decline in oil prices supported growth Falling oil prices present opportunity for subsidy and tax reform: Oil importers reduce subsidies; raise taxes Oil exporters subsidy and tax reform; economic diversification Lower inflation provided scope for lower interest rates to stimulate economic activity 19

20 Special topic 2: Financing Asia s future growth Asia lags behind advanced economies; more room for financial development Financial development does not automatically lead to inclusive growth Financial stability important for growth and equity 2

21 Asia s financial systems still lag advanced economies Financial structure around the world (% of GDP), OECD Bonds Stock market Banking system Latin America Dev. Asia Source: ADB estimates based on data from Beck et al. (2, 29) and Cihak et al. (212). Pension and mutual fund assets (% of GDP), 213 Australia United States United Kingdom Brazil Mexico Korea, Rep. of India PRC Pakistan Pension fund Mutual fund Sources: OECD (215), Pension funds' assets (indicator). doi: /d66f4f9f-en (accessed on 13 February 215); Worldwide Mutual Fund Assets, available: 21

22 resulting in high cost of capital 4 3 Hollow bars: lending rate, 211 Filled bars: deposit rate, ARM=Armenia; AZE=Azerbaijan; BAN=Bangladesh; BHU=Bhutan; BRU=Brunei Darussalam; FIJ=Fiji; HKG=Hong Kong, China; INO=Indonesia; KGZ=Kyrgyz Rep.; KOR=Korea, Rep. of; MAL=Malaysia; MLD=Maldives; MON=Mongolia; MYA=Myanmar; OECD=Organisation for Economic Co-operation and Development; PHI=Philippines; PNG=Papua New Guinea; PRC=China, People s Rep. of; SAM=Samoa; SIN=Singapore; SOL=Solomon Islands; SRI=Sri Lanka; TAJ=Tajikistan; THA=Thailand; TON=Tonga; VIE=Viet Nam Source: IMF, International Financial Statistics. 22

23 Financial deepening associated with higher investment and faster growth Developing Asia Latin America Bank loans to GDP (%), Dec. 213/Mar BRA COL PHI ARG MAL CHL PER INO SRI MEX VEN KOR THA VIE IND PRC Investment to GDP (%),

24 but may not be inclusive Log Gini in market income y=.8x 2.45x +.63 (.2)*** (.13)*** (.21)*** Log private credit to GDP 24

25 Scope to make finance more inclusive Formal account penetration rate (% of adults with account at a formal financial institution) HIC EE LAC Dev. Asia MENA 17 SSA EE=Emerging Europe; HIC=high-income countries; LAC=Latin America & Caribbean; MENA=Middle East & North Africa; SSA=Sub- Saharan Africa Sources: Ayyagari and Beck (forthcoming) based on data from Demirgüç-Kunt and Klapper (213); World Bank Enterprise Surveys, % of enterprises with credit line/loan LAC EE Dev. Asia 19 SSA 14 MENA 25

26 Financial instability disrupts growth and hurts the poor 15 Pre-AFC growth, Post-GFC unemployment, Korea, Rep. of Post-AFC growth, 1998 Indonesia Thailand Malaysia Pre-GFC unemployment, 2 27 Spain Greece Ireland Portugal AFC=Asian financial crisis; GFC=global financial crisis 26

27 so ensuring stability must be part of financial development agenda Bank regulation is first line of defense Macroprudential policies crucial FDI and diverse foreign funding can mitigate external financial shocks Diversification of external liability in short-term debt and currency depreciation, 212 Developing Asia Other economies Percentage change in nominal exchange rate, between end- April & end- August IND 15 MON 1 THAINO MAL PHI 5 SRI PAK KOR GEO KAZ BAN Diversification of short- term liabilities in short term debt, 212 Share of foreign direct investment in the foreign liabilities of selected economies, 212 India Malaysia Philippines Thailand Indonesia Hong Kong, China PRC Mexico United States Brazil Developing Asia Other economies

28 Key overall messages Steady growth in developing Asia continues: 6.3% in 215 and 216 Growth underpinned by domestic reform, advanced economy recovery, and commodity price reductions India expected to grow at 7.8%, faster than PRC s 7.2% Inflation pressures easing partly due to lower commodity prices Low oil prices an opportunity for fiscal reforms Financial development must support growth, inclusion, and stability 28