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Sustaining Asia’ s Economic Recovery Asia Economic Forum

Sustaining Asia’ s Economic Recovery Asia Economic Forum. Hang Chuon Naron 31 st July 2011 . 1. Table of Contents. 1. Issues facing Asia ’ s economic recovery 2. Inflation 3. Policy response. I. Issues facing Asia ’ s Economic Recovery. 3. Key issues facing Asia ’ s recovery.

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Sustaining Asia’ s Economic Recovery Asia Economic Forum

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  1. Sustaining Asia’s Economic Recovery Asia Economic Forum Hang ChuonNaron 31st July 2011 1

  2. Table of Contents 1. Issues facing Asia’s economic recovery 2. Inflation 3. Policy response

  3. I. Issues facing Asia’s Economic Recovery 3

  4. Key issues facing Asia’s recovery • The multi-speed global recovery is set to continue. • Asia is expected to continue leading the global recovery, but at a more moderate pace. • The tragic events in Japan, earthquake followed by tsunami, add to uncertainty in Asia. • The debt crisis in Greece, Ireland, Portugal and Spain undermines growth in the Eurozone. • US debt ceilings: political wrangling in Washington. This will have negative effect on the global economy.

  5. Key issues facing Asia’s recovery Navigating opposing risks will be challenging:Weaker global recovery and stronger commodity prices. The signs of overheating are broadening. The withdrawal of fiscal stimulus has been slow. Quantitative Easing (QE) 2 resulted in capital inflows into Asia in the first half of 2011.

  6. Key issues facing Asia’s recovery Now, foreign capital inflows have moderated, as has the growth in asset valuations. However credit dynamics remain very strong. Over the medium-term, rebalancing growth remains the key challenge.

  7. The multispeed recovery is set to continue with Asia increasingly propelling global growth World GDP Growth Projection (Year-on-year, in percent; Jan. WEO update) Contributions to Global Growth (In percentage points) Source: IMF

  8. Asia is expected to continue leading the global recovery, but at a more moderate pace Asia: Real GDP Growth (y/y; percent); as of the January 2011 WEO update Source: IMF

  9. II. Downside Risks to Asia’s Recovery 1. Rising commodity and food prices 2. Inflation 3. Capital inflows led to exchange rate appreciation and asset bubbles. 4. Balancing growth is a challenge. 9

  10. Risk 1: Navigating opposing risks will be challenging:Weaker global recovery and stronger commodity prices… Food Price: Global versus EM Asia (Year-on-year percent change) Asia: GDP Growth (Central forecast and 50, 70, and 90 percent confidence intervals; in percent) Source: IMF

  11. Risk 1: Key staples pushing region’s food prices up • Region’s food price inflation • Pushed by prices of rice and wheat • And other domestic food items • From June 2010 to Feb 2011 • International rice price rose by around 20%; while wheat prices doubled  • Partly due to Thailand and Viet Nam release of ample supplies from their stocks to mitigate price pressure

  12. Risk 1: Food dominates region’s CPIs Food Weights in Consumer Price Index (%) 1Includes non-alcoholic beverages. 2Includes beverages. 3Includes beverages and tobacco. Source: Asian Development Bank. March 2011. "Global Food Price Inflation and Developing Asia" (Forthcoming). Source: ADB 12

  13. Risk 1: larger than anticipated rise in oil prices Global Commodity Prices (January 2005 = 100) Oil Price Prospects (In U.S. dollars per barrel) Source: IMF Note: West Texas Intermediate (WTI) oil price futures information used.

  14. Risk 1: Commodity price increase Source: ADB

  15. Risk 2: Inflation is on the rise Source: ADB

  16. Risks 3: Capital inflows led to currency appreciation and importance of Europe and United States for Asia’s exports EM Asia: Capital Inflow and Global Risk Aversion Selected Asia: Exports to U.S. and Europe (In percent of total exports of goods) Source: IMF

  17. Risk 4: a few signs of asset market pressures Asia: Pass-through from Domestic Food and Energy Prices to Core Inflation 1 (In percentage points) Selected Asia: Property Prices (Year-on-year change, in percent) 1 Impact of change in food and energy prices by 1 percent. Wholesale prices used for India.

  18. Risk 4: Rebalancing of demand remains a challenge Selected Asia: Current Account Balances (In percent of GDP) Global Current Account Balances (In percent of world GDP) Source: IMF

  19. III. Policy Response 19

  20. Policy response 1: Increasing policy rates Policy Rates1—Selected Economies (% per annum) 1BI rate (Indonesia); unsecured overnight call rate (Japan); Korea base rate (Republic of Korea); overnight policy rate (Malaysia); reverse repurchase rate (Philippines); and 1-day repo rate (Thailand). Source: Bloomberg and Datastream. 20 Source: ADB

  21. Policy response 1: Rate increase is smaller than the cut during the crisis Policy Rate Movements1 (percentage points) 1One year lending rate (People's Republic of China); BI Rate (Indonesia); prime rate (Viet Nam); unsecured overnight call rate (Japan); Korea base rate (Republic of Korea); overnight policy rate (Malaysia); reverse repurchase (repo) rate (Philippines); and one-day repo rate (Thailand). 2Policy rate hikes started in December 2009. Source: Bloomberg and Datastream. Source: ADB

  22. Policy response 2: Currency appreciation, except Vietnamese dong Change in Exchange Rate against US dollar1(%) 1Year-to-date (YTD) figures based on 21 Mar 2011 closing. Negative values indicate depreciation. 2PRC = People's Republic of China. Source: OREI staff calculations based on Reuters data. 22 Source: ADB

  23. Policy Response 3: Accumulating International Reserves • International reserves increased from 0.5 billion in 2000 to USD1 billion in 2006, then reached USD2.9 billion in May 2011.

  24. Policy Response 4: Macro-prudential measures

  25. Policy Response 5: Structural policies to be long-term solutions • Enhance productivity and competitiveness to reduce supply bottlenecks • Reform labor and goods markets to increase flexibility when responding to aggregate supply shocks • Remove policy distortions―such as general subsidies & tariffs—to better reflect supply and demand • Improve market integration 25

  26. Policy Response 5: Longer-term policy responses

  27. Conclusion 1: Asia: Overheating or Smooth Landing? Inflation:Accelerating headline inflation and spilling over to core inflation. Credit Growth and Capital Flows: Credit growth accelerating; capital inflows moderating; domestic overheating pressures. Monetary Policy:Low real rates, closed or positive output gaps; need to tighten policy. Fiscal and Exchange Rate Policies: Pace of fiscal withdrawal can be quickened; exchange rate appreciation.

  28. Conclusions 2 • Asia’s growth outlook remains strong but overheating pressures have surfaced in a number of regional economies. • Dealing with these pressures requires tightening fiscal stances and stronger currencies. Higher policy interest rates should also be part of the policy mix. • In addition to dealing with overheating risks, policymakers need to make sure that growth will be balanced and inclusive.

  29. Conclusion 3 The multi-speed global recovery is set to continue, and Asian economies will remain in the lead As old risks recede, new ones are on the horizon Nevertheless, overheating pressures imply further tightening of macroeconomic policies Capital inflows need to be managed carefully, but pressures have moderated in recent months Over the medium-term, rebalancing growth remains the key challenge

  30. Thank You 30

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