Economic Recovery and Policy Challenges in Asia Asia Economic Forum

Phnom Penh, July 31, 2011

Faisal AhmedIMF Resident Representative, Cambodia

The views expressed in this presentation are those of the author, and not necessarily those of the IMF, its Executive Board or Management

2

On the theme of the 2011 Asia Economic Forum:

Is it the “rise” or “resurgence” of Asia?(During the Khmer empire era, Asia produced three-fourths of

world GDP)

0 1000 1500 1600 1700 1820 1870 1913 1950 1973 20000

20

40

60

80

100

Asian Share of World GDP during the Past 2000 Years(In percent)

Source: Angus Maddison

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Plan of the presentation• The global recovery has continued in 2011-Q1• The slowdown in Q2 is only a bump on the

road• But downside risks have intensified since April

Global Recovery

• Strong growth outlook in Asia• Concerns on quality of growth• Main risks are from volatile capital inflows and

global slowdown

APEC: Growth Outlook

• Inflationary pressures in many APEC EMs have extended from food and energy prices to other prices, and expectations

• A few signs of overheating in asset markets

Overheating: How Serious

Are the Risks?• Macro policy stances should be tightened

further in APEC EMs facing inflationary pressures

• Macro prudential measures a useful complement, not a substitute

• Beyond the short-term: need to rebalance demand, and make growth more inclusive

Policy Challenges:

Engineering a Smooth Landing

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Global Recovery

5

The global economy has continued to advance in Q1

despite some negative surprisesGlobal GDP Growth

(q/q, in percent; SAAR)Selected Economies: GDP Growth in

2011:Q1(q/q, in percent; SAAR)

Global Recovery

-8

-6

-4

-2

0

2

4

6

8

2006

:Q1

2006

:Q3

2007

:Q1

2007

:Q3

2008

:Q1

2008

:Q3

2009

:Q1

2009

:Q3

2010

:Q1

2010

:Q3

2011

:Q1

April 2011 WEO forecast

-4-202468

10

U.S.

Euro

area

U.K.

Japa

n

Latin

Am

eric

a

EM A

sia

EM E

urop

e

April 2011 WEO

Actual

Output

A sluggish recovery so far, as expected

6

AE recessions following financial crises

Source: IMF staff calculations.

House Prices

Unemployment Rate(normalized at 0) Equity Prices

Other AE recessions Current U.S. path

Global Recovery

(indices; quarters after peak in real GDP on x-axis)

94

96

98

100

102

104

106

0 1 2 3 4 5 6 7 8 9 10 11 1280

85

90

95

100

105

0 1 2 3 4 5 6 7 8 9 10 11 12

0

1

2

3

4

5

0 1 2 3 4 5 6 7 8 9 10 11 1250

60

70

80

90

100

110

120

0 1 2 3 4 5 6 7 8 9 10 11 12

7

Risks remain from slow progress in reducing unemployment

and insufficient fiscal and financial adjustment in AE

EU Banks: Core Tier-1 Ratios

(In percent; end-2010)

Global Recovery

Required Fiscal Adjustment

(In percent of GDP)

Note: Cyclically adjusted primary balance adjustment needed to bring the debt ratio to 60 percent in 2030, except for Japan.

Unemployment Rate (Percent)

Source: GFSR, April 2011.Note: Includes 84 EU banks.

Japa

nU.

S.U.

K.Sp

ain

Fran

ceCa

nada

Ital

yGe

rman

y

0

2

4

6

8

10

12

14Projected Adjustments 2010–15

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101214161820

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101112

2005

:Q1

2007

:Q1

2009

:Q1

May

-11

U.S.U.K.GermanyEuro areaG-20 advanced

8

Commodity prices have declined since Apriland supply disruptions from Japan should

soon fade

Global Recovery

Commodity Price Indices(January 2010 = 100)

Japan: Restoration of Capacity in Different Sectors

(Percent of firms with restored capacity)

0

20

40

60

80

100

120

Mar Apr

May Jun

Jul

Aug

Sep

Oct

Nov

Dec

Auto industryMaterial industryProcessing industry

(After earthquake)Source: METI and IHS Automotive.Note: The chart is from April and restoration plans have been moved up by 1-2 months, but no new comprehensive survey data are available.

80

100

120

140

160

180

200

220

240

260

Jan-

10

May

-10

Sep-

10

Jan-

11

May

-11

MetalsFoodRaw MaterialsCrude Oil (APSP)

9

Overheating is a concern in many EMsOutput Gap and Inflation

(In percent)

Global Recovery

Credit to Private Sector(Year-on-year percent change)

-10

0

10

20

30

40

50

60

Jan-

08Ap

r-08

Jul-

08Oc

t-08

Jan-

09Ap

r-09

Jul-

09Oc

t-09

Jan-

10Ap

r-10

Jul-

10Oc

t-10

Jan-

11Ap

r-11

Emerging Asia (excl. China)ChinaLatin AmericaRussia

HK SAR

KORSGP

TWN

IDN

MYS

PHL

THA

IND

CLE

MEX PER

BRA

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10

-1 0 1 2

Hea

dlin

e in

flatio

n(y

ear-

on-y

ear,

April

201

1)

Estimated Output gap in 2011

10

APEC Growth Outlook

11

APEC EMs started 2011 with strong momentum

Outlook

2011:Q1 GDP Growth(q/q, in percent; SAAR)

-10

-5

0

5

10

15

20

25

AUS

JPN

MEX IDN

PER

KOR

MYS THA

PHL

CHN

HK S

AR CLE

TWN

SGP

Actual April 2011 WEO forecast

Exports of Goods(In billions of U.S. dollars, seasonally

adjusted)

2002-07 trend

200

300

400

500

600

700

800

Jan-

08Ju

l-08

Jan-

09Ju

l-09

Jan-

10Ju

l-10

Jan-

11Ja

n-08

Jul-0

8Ja

n-09

Jul-0

9Ja

n-10

Jul-1

0Ja

n-11

EM Asia Latin America

12

Growth will be driven by exports in EM Asia and domestic demand in LATAM

Outlook

Emerging Asia: Exports of Goods and Global Investment Cycle

(Year-on-year percent change)

Domestic Demand and GDP(Year-on-year percent change)

CLE

MEX

PER

HKGKOR

SGP

TWN

IDN

MYS

PHL

THA

VNM CHN

BRA

INDARG

BOL

COL

ECU

URU

VEN

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101112

2 4 6 8 10 12

Real

dom

estic

dem

and

grow

th in

201

1

Real GDP growth in 2011

45 degree line

-20

-10

0

10

20

30

2000

:Q1

2002

:Q1

2004

:Q1

2006

:Q1

2008

:Q1

2010

:Q1

2011

:Q4

Emerging Asia's export (volume)Real fixed investment in advanced economies

13

Risks from capital inflows volatility…Weekly Flows into EM Equity and Bond

Funds and Global Risk Aversion

Outlook

Domestic Demand Growth in Episodes of Easy External Financing

(Difference of growth rates relative tonon-episode years)

00.010.020.030.040.050.060.070.08

-3-2-1012345

Jun-

07Se

p-07

Dec-

07M

ar-0

8Ju

n-08

Sep-

08De

c-08

Mar

-09

Jun-

09Se

p-09

Dec-

09M

ar-1

0Ju

n-10

Sep-

10De

c-10

Mar

-11

Jun-

11

Flows (12-week moving average, left scale)

CBOE VIX (inverted, right scale)

Trill

ions

of U

.S. d

olla

rs

0

1

2

3

4

5

Latin America

Asia Emerging Europe

MENA

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…further increases in oil prices, and a global slowdown

Impact of Oil Price Shock on 2011 Growth

(Deviation from baseline; in percentage points)

Note: Impact of a 40 percent rise in oil prices from April 2011 WEO baseline assumption.

Outlook

Impact of Slowdown in U.S. Growth(In percentage points)

Note: Impact of a 1 percentage point slowdown in U.S. growth.

-0.7

-0.6

-0.5

-0.4

-0.3

-0.2

-0.1

0

Asia Latin America

-1.0

-0.5

0.0

0.5

1.0

1.5

NZL

TWN

HK S

AR CHN

KOR

VNM

PER

JPN

SGP

THA

MEX PH

LCL

EID

NAU

SM

YS RUS

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Overheating: How Serious Are the Risks?

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A key risk for EMs is overheating: higher food and energy prices have spilled over to

generalized inflation… Changes in Headline Inflation

(As of May 2011; change since minimum inflation rate in 2009, in percentage

points)

Overheating

Expectations of Annual Average Inflation

in 2011: Change since October 2010(In percentage points; as of May 2011)

-5

0

5

10

15

20

MEX RUS

AUS

KOR

NZL

PER

JPN

IDN

TWN

PHL

SGP

CLE

MYS

HK S

AR CHN

THA

VNM

Contribution from other pricesContribution from food and fuel pricesChange in headline inflation

0

1

2

3

4

5

6

MEX AUS

IDN

NZL

TWN

MYS THA

RUS

JPN

PER

PHL

KOR

CLE

HK S

AR SGP

CHN

VNM

Note: Data for Hong Kong SAR, Japan, Malaysia, and Singapore are as of April 2011; and Australia and New Zealand are as of March 2011.

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…as output gaps have closed and macroeconomic policies remained

accommodativeReal Lending Rates

(In percent) Estimated Output Gap Closing Dates

Overheating

2009 2011 2013 2015 2017JPNNZLRUSMEXAUSCLE

HK SARIDNMYSPERTHAKORPHLSGP

TWN

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10

TWN

RUS

HKG

MEX JPN

PHL

KOR

CHN

SGP

MYS THA

PER

AUS

CLE

IDN

NZL

VNM

2011:Q2 Average (2000-10)

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Inflation is expected to generally peak in 2011

but to remain highConsumer Price Inflation(Year –on-year; in percent)

Overheating

Note: Core inflation targets for Indonesia and Thailand.

-202468

1012141618

JPN

TWN

PER

MYS SGP

AUS

CLE

MEX THA

NZL

KOR

CHN

PHL

HK S

AR IDN

RUS

VNM

2011 (Proj.) 2012 (Proj.) Mid point of target (or average over 2005-10)

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Policy Challenges: Engineering A Smooth Landing

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Both monetary and fiscal policy tightening is warranted

in economies facing generalized inflationary pressures

Policy Challenges

Policy Interest Rates(In percent)

Cyclically Adjusted Fiscal Balances(In percent of GDP)

-5-4-3-2-10123456

Indu

stria

l Asi

a

NIEs

ASEA

N-5

Chin

a

Chile

Mex

ico

Peru

Russ

ia

2002-07 (average) 2011 (Proj.) 2012 (Proj.)

0

1

2

3

4

5

6

7

8

9

AUS

NZL

MYS

KOR

THA

PHL

PER

CLE

IDN

Policy rate (as of June 14)

Taylor rule implied rate (2011)

21

There is also room for further exchange rates appreciation, especially for a number

of Asian economiesReal Effective Exchange Rates

(Percent change between peak during 2007-08 and April 2011; increase = appreciation)

Policy Challenges

-25

-20

-15

-10

-5

0

5

10

15

KOR

VNM

HK S

AR MEX JPN

NZL

TWN

PER

CLE

CHN

PHL

THA

MYS IDN

RUS

SGP

AUS

22

Asian economies have generally reacted to large capital inflows by accumulating

reservesSources of Change in Stock of FX

Reserves(In percent of GDP)

Stock of FX Reserves(In billions of U.S. dollars)

Policy Challenges

0

1000

2000

3000

4000

5000

6000

Emerging Asia

Latin America

Emerging Europe

Sep-07Apr-11

-4-202468

10

2008

2009

2010

2008

2009

2010

2008

2009

2010

EmergingAsia

LatinAmerica

EmergingEurope

OtherValuation effectFinancial account flowsCurrent account flowsChanges in stock of FX reserves

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More exchange flexibility and fiscal prudence would also provide a buffer

against risks from volatile capital inflows

Note: Average response of quarter-on-quarter seasonally adjusted growth rate to an increase in portfolio and other investment flows by 1 percentage point of GDP. Emerging Asia includes ASEAN-4, India, Korea, and Chinese Taipei.

EM Asia: Response of Private Domestic Demand to Non-FDI Net Capital Flows by Policy Regimes(In percentage points, 4-quarter cumulative response)

Policy Challenges

0.0

0.3

0.6

0.9

1.2

1.5

0.0

0.2

0.4

0.6

0.8

1.0

Private consumption expenditure

Private gross fixed capital formation

Private consumption expenditure

Private gross fixed capital formation

Less flexible ER More flexible ER Procyclical FP Countercyclical FPExchangerate regime (ER, left scale) Fiscal policy regime (FP, right scale)

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Conclusions In many EM APEC economies growth outlook

remains strong but overheating pressures have surfaced. Need to remain vigilant against the risk of credit/property prices cycles in a few regional economies.

Dealing with these pressures requires tightening fiscal stances and stronger currencies. Higher policy interest rates should be part of the policy mix.

Macro-prudential measures are a useful complement, not a substitute

In addition to dealing with overheating risks, policymakers need to make sure that growth will be balanced and inclusive.

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Thank You.