Jong-Wha Lee. Chief Economist Economics and Research Department Asian Development Bank. Washington, DC April 19, 2010

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2 Asian Development Outlook 2010 Macroeconomic Policy Challenges Jong-Wha Lee Chief Economist Economics and Research Department Asian Development Bank Washington, DC April 19, 2010

3 Outline 1. Economic prospects Global recovery Sustained recovery in Asia Risks to outlook 2. Macroeconomic policy challenges 3

4 Key Messages Asia s recovery takes firm hold Inflation on the rise but manageable Uncertain global recovery and volatile capital flows present risks Gradually unwind stimulus and shift to private demand Reaffirm commitment to prudent monetary and fiscal policies 4

5 Economic prospects

6 Global conditions improving Actual Actual ADO 2010 projection ADO 2010 projection GDP Growth Major industrial economies (%) United States (%) Eurozone (%) Japan (%) World trade Merchandise exports (% change) Inflation Inflation (G3 average, %)

7 Recovery takes firm hold GDP growth, developing Asia % 12 5-year moving average

8 due to a combination of factors Contributions to GDP growth percentage points Pi Private consumption Government consumption Investment Net exports Statistical discrepancy GDP growth -10 SIN MAL THA INO PHI KOR PRC IND SIN=Singapore; MAL=Malaysia; THA=Thailand; INO=Indonesia; PHI=Philippines; KOR=Republic of Korea; PRC=People s Republic of China; IND=India 8

9 including substantial fiscal stimulus Fiscal balance, selected DMCs Average ( ) 2009 PRC HKG KOR TAP IND INO MAL PHI SIN THA % PRC=People s Republic of China; HKG=Hong Kong, China; KOR=Republic of Korea; TAP=Taipei,China; IND=India; INO=Indonesia; MAL=Malaysia; PHI=Philippines; SIN=Singapore; THA=Thailand Source: Asian Development Outlook database. 9

10 Variation across subregions GDP growth % Central East Asia South Asia Southeast The Pacific Developing Asia Asia Asia 10

11 ...and across economies Central Asia Azerbaijan Kazakhstan East Asia China, People's Rep. of Hong Kong, China Korea, Rep. of 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 Vanuatu Developing Asia

12 Inflation pressures emerging but still manageable Inflation, developing Asia year average

13 Current account surplus narrowing Current account balance, developing Asia % of GDP Central Asia East Asia South Asia Southeast Asia The Pacific Developing Asia 13

14 Risks to the outlook Continued weakness in US mortgage g markets Mistimed exit from policy stimulus Deteriorating fiscal positions Sharp rise in commodity prices Persistent t global l payments imbalances Poor international policy coordination Asset price bubbles Volatile capital flows 14

15 US mortgage markets weak US delinquency rates % Real estate commercial loans Single-family residential mortgages Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q Notes: Loans are from all commercial banks; commercial real estate loans exclude farmland. Source: The Federal Reserve Board. (accessed 15 March 2010). 15

16 Persistent global current account timbalances World current account balance % of world GDP United States China, People's Rep. of Middle East Other industrial countries Japan Russian Federation Rest of developing Asia Rest of world Sources: International Monetary Fund World Economic Outlook Database. October. (accessed 7 April 2010); Asian Development Outlook database. 16

17 Risk of asset bubbles House prices Index (2005=100) Jan-06 Jul Jan-07 Jul Jan-08 Jul Jan-09 Jul Jan-1 People's Rep. of China Hong Kong,China Source: CEIC Data Company (accessed 5 April 2010). 17

18 Volatile capital flows Capital flows in emerging Asian economies Net flows FDI inflow Portfolio inflow Other inflow FDI outflow Portfolio outflow Other outflow $ billion H H2 H H2 H H2 H H2 H H2 18 Sources: ADB estimates based on data from CEIC Data Company; International Monetary Fund. International Financial Statistics online database (accessed 31 March 2010).

19 Role of macroeconomic policy Fiscal and monetary stimulus helped the region recover A wide range of macroeconomic and structural challenges Role of fiscal and monetary policy in addressing those challenges 19

20 Macroeconomic Management Beyond the Crisis i

21 Macroeconomic management in post-crisis Asia Reaffirm prudence and discipline in fiscal and monetary policy Consider challenging post-crisis environment (e.g. rebalancing, asset bubbles, capital flows) Adjust fiscal, monetary, and exchange rate policies to meet challenges 21

22 Lower and more stable inflation Average and standard deviation of inflation SD ( ) SD ( ) Average inflation ( ) Average inflation ( ) 28 Standard deviation % BAN HKG IND INO KAZ KOR MAL PAK PHI PRC SIN TAP THA VIE -7 BAN = Bangladesh; HKG = Hong Kong, China; IND = India; INO = Indonesia; KAZ = Kazakhstan; KOR = Republic of Korea; MAL = Malaysia; PAK = Pakistan; PHI = Philippines; PRC = People's Republic of China; SIN = Singapore; TAP = Taipei,China; THA = Thailand; VIE = Viet Nam Note: Based on monthly year-on-year inflation figures for each country. Source: ADB estimates based on data from CEIC Data Company. 22

23 Regional currencies have faced appreciation pressure Change in exchange rates versus US$ 1 (in percent) Japanese yen Thai baht Malaysian ringgit Philippine peso Indonesian rupiah Singaporean dollar New Taiwan dollar Hong Kong dollar Indian rupee PRC yuan Korean won Vietnamese dong 2 Sep08-Mar09 Apr09-Mar10 % change from Sep08 to Mar Depreciation Appreciation 1 Based on monthly average of $ value of local currency as of 31 March People's Republic of China (PRC). Source: Staff calculation from Bloomberg data. 23

24 Fiscal prudence led to low-debt burdens Central government debt, 2007 % of GDP G7 average Asia 7 average 40 0 PRC IND INO KOR MAL PHL THA CAN FRA GER ITA JAP UK USA PRC = People's Republic of China; HKG = Hong Kong, China; IND = India; INO = Indonesia; MAL = Malaysia; PHI = Philippines; KOR = Republic of Korea; TAP = Taipei,China; THA = Thailand; CAN = Canada; FRA = France; GER = Germany; ITA = Italy; JAP = Japan; UK = United Kingdom; USA = United States of America Sources: CEIC Data Company; Indonesia Debt Management Office; IMF Article IV (for PRC); International Monetary Fund. World Economic Outlook October 2009 database. (accessed 16 December 2009). 24

25 Policy recommendations Coordinate monetary policy with financial regulation Reduce exchange rate rigidity Reaffirm fiscal discipline Fiscal and exchange rate policies for rebalancing Need for policy coordination and regional and global cooperation

26 Thank you Contact: Asian Development Bank 6 ADB Avenue, Mandaluyong City 1550 Metro Manila, Philippines 26