Economic Prospects: East Asia and South Asia Daniel Jeongdae Lee, UN ESCAP UN DESA EGM on the World Economy 2 October 216, Toronto
Main messages Steady high growth >> quality of growth (jobs, poverty, inequality, environment) Weak private investment >> infrastructure, governance, restructuring Favorable financial conditions >> proactive fiscal policy, caution capital swings Accommodative monetary policy >> assess effectiveness, avoid sudden tightening Low productivity >> structural reforms (labor, financial, public finance, competition)
Growth relying on consumption, public investment Given weak external demand, growth relying on domestic demand, especially consumption Further rebalancing in China towards consumption and services, with strong sales of automobiles, appliances and clothing in Q1-Q3 Fixed investment contracted in FY Q1 in India, but strong manufacturing growth (against weak production volumes) suggests improving corporate profitability 1 8 6 4 2-2 2 15 1 5-5 -1 Demand-side contributions 15 16 15 16 15 16 15 16 15 16 China India Indonesia Korea Thailand Private consumption Public consumption Fixed investment Retail sales, industrial production sales prod sales prod sales prod sales prod sales prod China India Indonesia Korea Thailand
Investment in China how sustainable? Government infrastructure projects and property boom have spurred prices and demand for raw materials, cement and steels Private investment growth was only 2.5 percent in January- September New restrictions since early October has resulted in a sharp drop in home sales, and a price correction is likely in second-tier cities Investment growth will have to slow down, but sustainability also has to do with composition Private vs public investment 25 2 15 1 5 Jan-15 May-15 Sep-15 Jan-16 May-16 Private Infrastructure Real estate investment, house price 12 1 8 6 4 2 Jan-15 May-15 Sep-15 Jan-16 May-16 Real estate investment House price (RHS) 2 15 1 5
Inflation rising but still low Reflects soft demand and industrial slack as well as global oil prices Lower inflation in Indonesia due to reduced fuel prices and food imports Below official targets in most countries Stable core better anchoring inflationary expectations? Easing producer price deflation in China bodes well for corporate earning Impact on poverty? Consumer price inflation 8 6 4 2-2 215 216 Jan-Aug 216 target Producer price deflation in China 1 99 98 97 96 95 94 93 92 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16
8 7 6 5 4 3 2 1-1 -2 A relatively positive near-term growth outlook In 217-18, real GDP growth to stabilize at 5-6 percent in East Asia and accelerate to nearly 7 percent in South Asia Real GDP growth projections 215 216 217 218 East Asia South Asia Western Asia Africa LAC Developed Real GDP growth Inflation 215 216 217 215 216 217 East Asia 5.5 5.4 5.3 1.5 1.9 2.2 Brunei Darussalam -1.2 2. 3. -.4.2.4 Cambodia 6.9 7. 7.1 1.2 2. 2.9 China 6.9 6.6 6.3 1.4 2. 2.1 Hong Kong, China 2.4 1.5 2.2 3. 2.3 2.5 Indonesia 4.8 5.1 5.3 6.4 3.8 4. Kiribati 3. 1.8 1.5 1.4.7 2. Lao PDR 6.4 7. 7. 1.3 2. 2.3 Malaysia 5. 4.4 4.6 2.1 2.5 2.8 Myanmar 8.5 8.5 8. 1.7 9.5 8.5 PNG 9.9 2.2 3. 6. 6.5 7.5 Philippines 5.9 6.4 6.2 1.4 1.8 2.9 Republic of Korea 2.6 2.7 2.9.7 1.2 2. Singapore 2. 2. 2.5 -.5 -.5.5 Solomon Islands 2.9 2.7 2.5 -.3 4.4 3.3 Thailand 2.8 3.3 3.4 -.9.3 1.5 Timor-Leste 4.3 5. 5.5.6 1.5 3.8 Tuvalu 3.5 3. 3. 3.5 2. 2. Vanuatu -1. 3.5 3.8 2.5 1.9 2.4 Viet Nam 6.7 6. 6.3.6 2. 3. South Asia 6.2 6.8 6.9 6.2 6.3 6.4 Afghanistan 2. 3. 4. -1.3 3. 4.3 Bangladesh 6.6 7.1 7. 6.4 5.9 5.8 Bhutan 5.9 6.5 6.6 6.6 4.6 5.1 India 7.6 7.6 7.6 4.9 5.5 5.3 Iran.8 4.4 5.1 13.6 12.5 12.8 Maldives 2.1 3.4 4. 1. 1. 1.8 Nepal 3.4 2.2 6.5 7.2 9.5 7.5 Pakistan 4.2 4.7 4.8 4.5 2.9 5. Sri Lanka 4.8 5. 5.5 3.8 4. 5.
Risks are tilted on the downside Bouts of financial volatility can reemerge with China s transition and policy uncertainties in the US and Europe Trade protectionist measures can be particularly harmful for export-oriented Asian economies Rapid increase in global oil prices and rapid hike in US federal fund rate could be a toxic mix Implementation of infrastructure projects and reform measures could be delayed Economic growth impact of lower share prices and rising economic uncertainty (ESCAP, 216) Mimics what was observed during the sell-offs in June-Aug 215 and Jan 216. Assumes that market risk premium rise and market confidence deteriorates.
per dollar NEER REER per dollar NEER REER per dollar NEER REER per dollar NEER REER per dollar NEER REER Stable exchange rates what about RMB? Regional currencies have mostly stabilized, after depreciation in 212-15 no notable impact on trade Renminbi continues to depreciate against the dollar and a trade-weighted basket of currencies, despite PBOC fixing the onshore market s midpoint Mainly reflects China s slowdown and dollar strength but the renminbi will be closely watched also by other exportoriented Asian economies Exchange rates 1 5-5 -1-15 China India Indonesia Korea Thailand 215 216 Jan-Aug Estimated net FX purchases: China 6 4 2 Jan-12-2 Jan-13 Jan-14 Jan-15 Jan-16-4 -6-8
Easing of financial conditions Reflects improved sentiment toward developing countries and expectations that developed countries will keep interest rates low for longer Capital outflows from China has eased (mostly international bank claims) Large portfolio inflows to Korea, Indonesia and Philippines (more to debt securities than equity) Sovereign yields drop further since Brexit Large equity market gains in India and Pakistan Net capital inflows excl. direct invt 4 2 Mar-12-2 Mar-13 Mar-14 Mar-15 Mar-16-4 -6 Portfolio investment Financial derivatives Other investments 1-year government bond yields.5. -.5-1. -1.5-2. pre-brexit post-brexit
Monetary easing but how effective? Lower policy rates and reserve requirements and an easing of macro-prudential measures, with a view to support growth and boost investment But credit dynamics have varied above-trend in China and below-trend in India, especially in industrial and infrastructure sectors, in part due to irreponsive commercial lending rates Moreover, credit growth has not translated into higher private investment Need to avoid sudden tightening Change in policy rates 2 1-1 -2-3 -4 since Jan-16 since Jan-14 Credit-to-GDP gap, % of GDP 3 2 1 Mar-12 Mar-13 Mar-14 Mar-15 Mar-16-1 China India
27 216 27 216 27 216 27 216 27 216 27 216 Deleveraging and restructuring challenges China is trying to address high corporate debt through bank purchase of SOE bonds, debt-forequity swaps, planned launch of CDS markets, etc. But does this simply reshuffle poor-quality assets around the economy? 25 2 15 1 5 Non-finl private debt, % of GDP Related measures include interest rate liberalization, capacity reduction targets in coal and steel, and guidelines on SOE reforms India has taken steps for realistic recognition of NPLs and enhanced provisioning, and speedy resolution with the new bankruptcy code 18 16 14 12 1 8 6 4 2 China Korea Malaysia Thailand India Indonesia Corporate Household India public bank NPLs
Fiscal space, stance and reforms Most countries have the fiscal space to support growth and structural reforms, and some have introduced supplementary budgets 3 2 1 Gen govt debt, % of GDP 9 6 3 But in India, Indonesia, consolidation mode and efforts to meet deficit targets, including tax amnesty programs -1-2 -3 pp change since 28 216 (RHS) -3-6 -9 In China, moving away from offbudget spending and implicit guarantees, especially at local government level Enhancing efficiency on both spending and revenue sides (e.g. India biometric identity and a national GST) 2 15 1 5 Tax revenues, % of GDP individual corporate property goods and services int'l trade others
Enhancing the quality of growth Poverty reduction targets lower poverty incidence by up to 9 percentage points in 6 years (Philippines), eliminate poverty by 22 (China) Job creation targets 1 million new urban jobs per year (China), 1 million new jobs in the next decade, particularly in manufacturing (India) Carbon emission reduction targets and environmental goals new environmental protection and resource tax laws, 2 PBOC green finance guidelines, 1 planned carbon emission -1 trading scheme (China) -2-3 -4-5 Change in consumption share bottom 1% Q1 Q2 Q3 Q4 Q5 top 1%
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