Asia and Pacific

Asia and Pacific: Navigating an Uncertain Global Environment While Building Inclusive Growth

October 2011

©2011 International Monetary Fund
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In line with the weaker global outlook, growth in Asia is expected to be slightly lower in 2011-12 than forecast in April 2011, mainly as a result of weakening external demand, but the expansion should remain healthy, supported by domestic demand, which has been generally resilient. Overheating pressures remain elevated in a number of economies, with credit growth still robust and inflation momentum generally high, though inflation is expected to recede modestly after peaking in 2011. The sell-off in Asian financial markets in August and September 2011 underscores that an escalation of euro area financial turbulence and a renewed slowdown in the United States could have severe macroeconomic and financial spillovers to Asia. Against this backdrop, Asian low-income and Pacific Island economies face particular challenges in the near and medium term. In low-income countries, the fight against inflation is complicated by strong second-round effects, the need to phase out subsidies, and less well-anchored inflation expectations. Pacific Island economies need to undertake further structural reforms to lift potential growth.

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Contents
Executive Summary

Chapter I: Navigating an Uncertain Global Environment

Resilient Domestic Demand Amid Pockets of Inflation Pressure
An Uncertain Global Environment Poses Downside Risks
Stress in the Euro Area and United States: Spillovers to Asia
How Vulnerable Are Asian Banks and Firms?
Policy Challenges

Chapter II: Drivers and Implications of Rapid Credit Growth in Emerging Asia

Episodes of Rapid Credit Growth in Emerging Asia
Domestic versus External Factors and the Role of Monetary Policy
Conclusions

Chapter III: Asia’s Quest for Inclusive Growth

How Does Asia Compare With Other Regions?
Poverty, Growth, and Inequality
Policies

Chapter IV: The Benefits of Further Financial Integration in Asia

Assessing the Degree of Financial Integration in Asia
Risk Sharing versus Contagion
Policy Implications
Conclusions

Chapter V: Asian Low-Income and Pacific Island Countries: Managing Inflation Risks and Strengthening Growth Prospects

Recent Inflation Trends in Asian LICs
Pacific Island Countries: Improving Resilience to External Shocks

References
 
Boxes
Chart Data 1.1 Vietnam: Stabilization at the Crossroads
Chart Data 1.2 How Large Are Chinese Inflation Spillovers to the Region?
Chart Data 1.3 Recent Trends in ASEAN Exports to China
Chart Data 1.4 Sterilization of Reserve Accumulation in Times of Large Capital Inflows
Chart Data 1.5 A Strategy for Growth and Fiscal Sustainability in Japan
Chart   4.1 Assessing the Contagion of Systemic Risk form Financial Integration through Banks
 
Tables
1.1. Asia: Real GDP
3.1. Number of People Living on Less than $1.25 per Day
3.2. Pro-poor and Inclusive Growth Measures
5.1. Selected Asia: Decomposition of Inflation and Exchange Rate Regimes
5.2. Selected Asia: Monetary Conditions
 
Figures
Chart Data 1.1 Selected Asia: Real GDP at Market Prices
Chart Data 1.2 Selected Asia: Exports of Goods
Chart Data 1.3 Selected Asia: Financial Condition Index (FCI)
Chart Data 1.4 Selected Asia: Contributions to Year-to-Date Changes in REER
Chart Data 1.5 Selected Asia: Change in Inflation Rates since January 2011
Chart 1.6 Selected Asia: Inflation Target Tracker
Chart Data 1.7 Emerging Asia: Equity and Bond Funds––Weekly Net Flows in 2011
Chart Data 1.8 Selected Asia: Trade Links to Japan and Export Growth in 2011:Q2
Chart Data 1.9 Selected Asia: Contributions to Projected Growth
Chart Data 1.10 Selected Asia: Headline Consumer Price Inflation
Chart Data 1.11 Selected Asia: Current Account Balances
Chart 1.12 Asia: GDP Growth
Chart Data 1.13 Selected Asia: Foreign Holdings in Local Currency Government Bonds
Chart Data 1.14 Consolidated Claims of European and U.S. Banks on Selected Asia
Chart Data 1.15 Selected Asia: U.S. Dollar––Local Currency Basis Swap Spreads
Chart Data 1.16 Selected Asia: Impact of Severe Global Slowdown on Real GDP Growth
Chart Data  1.17 Selected Asia: Impact of Severe Global Slowdown on Selected Indicators
Chart Data 1.18 Selected Asia: Impact on Real GDP Growth of Discretionary Fiscal Spending in China
Chart Data 1.19 Emerging Asia: External Bond Issuance by Corporations
Chart Data 1.20 Emerging Asia: Leverage in Corporate Sector
Chart Data 1.21 Selected Asia: Debt-to-Equity Ratio
Chart Data 1.22 Asia: Debt-to-Equity Ratio during Recoveries from 2001 and 2008 Recessions
Chart Data 1.23 Emerging Asia: Leverage in Different Sectors
Chart Data 1.24 Selected Asia: Tier 1 Ratio of Top 25 Banks
Chart 1.25 Emerging Asia: Overheating Map
Chart Data 1.26 Selected Asia: Change in Inflation Expectations for 2011 since March 2011
Chart Data 1.27 Selected Asia: Overheating Index and Vulnerabilities to a Slowdown in Growth in G-2
Chart Data 1.28 Selected Asia: Change in General Government Cyclically Adjusted Fiscal Balance
Chart Data 1.29 Selected Asia: Fiscal Space
Chart Data 1.30 Selected Asia: Cyclically Adjusted Changes in General Government Spending
Chart Data 1.31 Selected Asia: Deviation from Model-Based Norms of Public Spending on Health and Education
Chart Data 1.32 Selected Asia: Deviation of Retail Gasoline and Diesel Prices from International Prices
Chart Data 1.33 Selected Asia: Increase in Net Oil Subsidy
Chart Data 2.1 Nominal Credit to Private Sector
Chart Data 2.2 Crises Associated with Emerging Market Credit Booms
Chart Data 2.3 Real Credit
Chart Data 2.4 Credit Booms Across Emerging Economies
Chart Data 2.5 Emerging Asia: Real Credit Growth and the Role of Domestic versus External Factors
Chart Data 2.6 Real Credit Growth in Emerging Asia: Forward-Looking Scenarios
Chart Data 3.1 Stylized Facts: Asia’s Growth Experience over the Last Two Decades
Chart Data 3.2 Selected Asia: Change in Poverty and Inequality during the Global Crisis
Chart Data 3.3 Income Elasticity of Poverty Reduction
Chart Data 3.4 Degree of Inclusiveness of Growth
Chart Data 3.5 Fiscal Policy and Inclusiveness
Chart Data 3.6 Labor Market Institutions and Inclusiveness
Chart Data 4.1 Regional and Nonregional Sources of Portfolio Investment Liabilities, 2001—09
Chart Data 4.2 Trade and Financial Integration, 2001—09
Chart Data 4.3 Deviations from Model-Based Norms of Financial Integration
Chart Data 4.4 Risk Sharing within and between Regions
Chart Data 4.5 Trade-Offs between Risk Sharing and Contagion
Chart Data 4.6 Decomposing the Gap between International Risk Sharing in Asia and the G-2
Chart Data 4.7 Effect of Financial Integration on Current Account Surplus
Chart Data 5.1 Selected Asia: Inflation and World Prices
Chart Data 5.2 Selected Asia: Headline Inflation, January 2005–Latest
Chart Data 5.3 Selected Asia: Inflation Persistence, 2005—11
Chart Data 5.4 Pass-Through from International Prices to Domestic Prices
Chart Data 5.5 PICs: Real GDP Growth
Chart Data 5.6 PICs Real GDP Growth: Correlation with Australia and New Zealand, 2002—10
Chart Data 5.7 PICs (Commodity Importers): Real GDP Growth around Downturns
Chart Data 5.8 PICs: Impulse Response of Output Loss to Terms-of-Trade Shock
Chart Data 5.9 PICs: Impulse Response of Output Loss to External Demand Shock