Outlook: Asian Development

Outlook
2010
Asian Development Bank
Macroeconom|c management
beyond the cr|s|s
AS|AN 0LvLL0PMLN1
2010 Asian Development Bank
All rights reserved. Published 2010.
Printed in the Philippines.
ISSN 0117-0481
Publication Stock No. FLS101545
Cataloging-in-Publication Data
Asian Development Bank.
Asian development outlook 2010.
Mandaluyong City, Philippines: Asian Development Bank, 2010.
1. Economics. 2. Finance. 3. Asia. I. Asian Development Bank.
Te annual Asian Development Outlook provides a comprehensive economic analysis of 45 economies in
developing Asia and the Pacifc.
Te views expressed in this book are those of the authors and do not necessarily refect the views and policies of
the Asian Development Bank (ADB) or its Board of Governors or the governments they represent.
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Poreword
As developing Asia rebounds from the global economic crisis ahead of
the rest of the world, the Asian Development Outlook 2010 (ADO 2010)
predicts growth exceeding 7% in the region this year and next. Although
that is still lower than the precrisis outcome of 9.6% in 2007, such a
healthy rebound, from a low of 5.2% in 2009, would be welcome.
Te global economy has also turned the corner, with the United
States, eurozone, and Japan beginning a mild recovery in late 2009. From
a collective contraction of 3.5% last year, the three are forecast to expand
by 1.7% and 2.0% in the next two years, respectively.
Extraordinary fscal and monetary stimulus packages implemented
in countries around the world to mitigate the negative efects of the
global fnancial crisis fueled the quick turnaround. Large and fast-tracked
public spending, targeted transfers, low interest rates, and unconventional
liquidity measures combined to lif growth, albeit with varying
efectiveness.
But there are substantial downside risks to the recovery that could
still see regional and global growth falter in the near term. Mistimed
withdrawal of macroeconomic stimulus measures could derail the fragile
recovery. A reversal of last years commodity price defation and a sharp
rise in international commodity prices could also thwart the global and
regional revival. Te persistence of global imbalances, meanwhile, risks
sparking future turmoil, while deteriorating debt positions could imperil
fscal credibility in some countries.
ADO 2010 highlights two additional risks that are particularly relevant
to developing Asia. Te regions early recovery is attracting large capital
fows, the perils of which were made clear in the 199798 Asian fnancial
crisis; volatile capital fows could again have serious implications for
exchange rates and money supply. Moreover, the quick return to high
growth could accelerate the increase in consumer and asset prices.
As it exits the worst efects of this crisis, therefore, developing
Asia must remain faithful to its tradition of sound and responsible
fscal and monetary policies. Just as they did before the crisis, these
policies will promote macroeconomic stability and sustained growth.
Such macroeconomic prudence will provide the needed resources and
credibility for tackling any large and adverse shocks in the future.
Tere is also plenty of scope for improving and strengthening the
regions fscal, monetary, and exchange rate policy frameworks. As Part 2
of ADO 2010 lays out, such adjustments will enable the region to better
adapt to the postcrisis world.
In monetary policy, price stability must remain the overriding
objective. But the global crisis highlights the need to prevent asset price
bubbles. Tis suggests that fnancial regulation should be more closely
coordinated with monetary policy.
More fexible exchange rates are desirable to reduce the regions
current account surpluses. Tis also requires coordinated efort to
iv Asian Development Outlook 2010
overcome the fear of losing competitiveness, especially during the
transition to greater fexibility.
Finally, while safeguarding fscal sustainability, supported by strong
medium-term fscal policy frameworks, a wide range of institutional and
policy measures can contribute to economic rebalancing by removing
structural impediments to domestic demand.
As developing Asias recovery gains momentum, policy makers must
embed these macroeconomic policy prescriptions in their longer-term
planning. Doing so will enhance the sustainability not only of the regions
economic recovery, but, increasingly, of the worlds as well.
HARUHIKO KURODA
President
Acknow|edgments
Te Asian Development Outlook 2010 (ADO 2010) was prepared by the staf of
the Asian Development Bank from the Central and West Asia Department,
East Asia Department, Pacifc Department, South Asia Department,
Southeast Asia Department, Economics and Research Department, as well as
the resident missions. Representatives from these departments and the Ofce
of Regional Economic Integration constituted a Regional Economic Outlook
Task Force, which met regularly and coordinated closely to develop consistent
forecasts for the region.
Te economists who contributed the sections are bylined in each
chapter. Te subregional coordinators were Safdar Parvez, Tomomi Tamaki,
and Kiyoshi Taniguchi for Central and West Asia; Jan Hansen for East Asia;
Tadateru Hayashi for South Asia; Puran Rajapakse for Southeast Asia; and
Craig Sugden for the Pacifc.
A team of economists from the Economics and Research Department,
led by Joseph E. Zveglich, Jr., Assistant Chief Economist, Macroeconomics
and Finance Research Division, assisted by Editha Lavia, coordinated the
overall production of the publication. Technical and research support was
provided by Shiela Camingue, Gemma Esther Estrada, Nedelyn Magtibay-
Ramos, Maria Cynthia Petalcorin, Pilipinas Quising, Aleli Rosario, Lea
Sumulong, Ronaldo Tamangan, and Raquel Tabanao. Richard Niebuhr and
Anthony Patrick as the economic editors made substantive contributions to
the country chapters and other parts of the book.
Niny Khor and Iva Sebastian of the Economics and Research
Department provided material on the uneven job recovery; while Hsiao
Chink Tang and Ganeshan Wignaraja of the Ofce of Regional Economic
Integration contributed materials on the central bank credibility and
business impacts of free trade agreements, respectively.
Jonathan Aspin did the style and manuscript editing. Fred Dahl handled
the initial copy editing for Part 2. Elizabeth E. Leuterio was responsible for
typesetting and data linking, as well as graphics generation in which she
was assisted by Maria Susan Torres. Art direction of the cover design was
by Anthony Victoria, with watercolor artwork from Alvin Dennis Cristobal.
Zenaida Acacio, Lagrimas Cuevas, and Elenita Pura provided administrative
and secretarial support. Te publication would not have been possible without
the cooperation of the Publishing, Info and Web Unit of the Department
of External Relations and the Logistics Management Unit of the Ofce of
Administrative Services.
Ann Quon, Omana Nair, and Andrew Perrin of the Department of
External Relations planned and coordinated the dissemination of the
ADO 2010.
JONG-WHA LEE
Chief Economist
Economics and Research Department
R|gh||ghtsA00 2010
Part 1: Momentum for a susta|ned recovery! 1
Momentum for a sustained recovery? 3
Gauging the strength of industrial countries recovery 4
Developing Asias prospects in the recovery 25
Sources of Asias growth during and beyond the crisis 29
A case for monetary and fscal activism? 39
Part 2: Macroeconom|c management beyond the cr|s|s 41
Macroeconomic management beyond the crisis 43
Introduction 43
Monetary policy 48
Exchange rate and capital account liberalization 62
Fiscal policy 77
Key policy messages 93
Part 3: Lconom|c trends and prospects |n deve|op|ng As|a 105
Centra| As|a 106
Armenia 107
Azerbaijan 111
Georgia 114
Kazakhstan 117
Kyrgyz Republic 121
Tajikistan 124
Turkmenistan 127
Uzbekistan 129
Last As|a 133
Peoples Republic of China 135
Hong Kong, China 142
Republic of Korea 146
Mongolia 151
Taipei,China 155
Contents
Asian Development Outlook 2010 vii
South As|a 159
Islamic Republic of Afghanistan 161
Bangladesh 164
Bhutan 169
India 172
Maldives 179
Nepal 182
Pakistan 186
Sri Lanka 192
Southeast As|a 196
Brunei Darussalam 197
Cambodia 199
Indonesia 203
Lao Peoples Democratic Republic 208
Malaysia 211
Myanmar 216
Philippines 219
Singapore 224
Tailand 228
Viet Nam 233
1he Pac|c 238
Fiji Islands 239
Papua New Guinea 242
Democratic Republic of Timor-Leste 246
Small Pacifc countries 249
Stat|st|ca| append|x 257
Statistical notes and tables 258
viii Asian Development Outlook 2010
0en|t|ons
Te economies discussed in Asian Development Outlook 2010 (ADO 2010) are classifed by major analytic or
geographic groupings. For purposes of ADO 2010, the following apply:
- Association of Southeast Asian Nations (ASEAN) comprises Brunei Darussalam, Cambodia,
Indonesia, Lao Peoples Democratic Republic, Malaysia, Myanmar, Philippines, Singapore, Tailand,
and Viet Nam.
- Developing Asia refers to the 44 developing member countries of the Asian Development Bank and to
Brunei Darussalam, an unclassifed regional member.
- Central Asia comprises Armenia, Azerbaijan, Georgia, Kazakhstan, Kyrgyz Republic, Tajikistan,
Turkmenistan, and Uzbekistan.
- East Asia comprises Peoples Republic of China; Hong Kong, China; Republic of Korea; Mongolia; and
Taipei,China.
- South Asia comprises Islamic Republic of Afghanistan, Bangladesh, Bhutan, India, Maldives, Nepal,
Pakistan, and Sri Lanka.
- Southeast Asia comprises Brunei Darussalam, Cambodia, Indonesia, Lao Peoples Democratic Republic,
Malaysia, Myanmar, Philippines, Singapore, Tailand, and Viet Nam.
- Te Pacifc comprises Cook Islands, Fiji Islands, Kiribati, Republic of the Marshall Islands, Federated
States of Micronesia, Nauru, Papua New Guinea, Republic of Palau, Samoa, Solomon Islands,
Democratic Republic of Timor-Leste, Tonga, Tuvalu, and Vanuatu.
- Unless otheiwise specifed, the symbol s" and the woid dollai" iefei to US dollais.
ADO 2010 is generally based on data available up to 16 March 2010.
Acronyms and abbrev|at|ons
ADB Asian Development Bank
ASEAN Association of Southeast Asian Nations
CPI consumer price index
EU European Union
FDI foreign direct investment
FY fscal year
GDP gross domestic product
IMF International Monetary Fund
OECD Organisation for Economic Co-operation and Development
PRC Peoples Republic of China
US United States
VAT value-added tax
WTO World Trade Organization
HighlightsADO 2010
Developing Asia can look ahead to a robust recovery in the next
2 years. Growth is forecast to rise to 7.5% in 2010 and moderate to
7.3% in 2011, marking a healthy rebound from the 2009 slowdown.
Shifting the drivers of growth from the support of monetary and
fscal expansion to robust private sources is now the key challenge
for sustaining the recovery, both globally and regionally. Infation
pressures are increasing but still manageable in most developing
Asian economies. Beyond the crisis, developing Asia faces the
challenge of adjusting its monetary, exchange rate, and fscal policies
to foster macroeconomic stability and sustained growth within the
broader direction of a return to prudence and discipline.
2 Asian Development Outlook 2010
Key messages
Developing Asia weathered the harsh global environment in 2009 well. It was the
frst region to emerge from the global turmoil, helped by decisive policy responses.
Supported by improving global prospects, the Asian Development Outlook 2010
(ADO 2010) projects developing Asias growth to rebound to 7.5% in 2010, a strong
acceleration from 5.2% in 2009, though still well below the record 9.6% growth of
2007. The region faces the challenge nonetheless of maintaining momentum against
the backdrop of a gradual unwinding of expansionary measures and a slow pickup
in external demand. The projection for 2011 is a moderate 7.3%.
As recovery takes hold, infation pressures, particularly in asset prices, may well
start to mount in the region. ADO 2010 projects that infation will increase, but to
a still moderate 4.0% in 2010, conditional on the implementation of appropriate
policy measures. Unusually easy monetary policy throughout the region cannot
be kept for too long, and there is a need to revert to a normal stance. The surplus
in developing Asias current account balance narrowed for a second consecutive
year to 4.9% of gross domestic product (GDP) in 2009 from a recent peak of 6.5%
in 2007. It is forecast to narrow further to 4.1% in 2010 and 3.6% in 2011.
Several downside risks to the global outlooka slower global recovery, mistimed
withdrawal of macroeconomic stimulus measures, a sharp increase in international
commodity prices, deteriorating fscal positions, and the persistence of global
imbalancescould derail developing Asias growth momentum. In addition,
the regions stronger recovery and higher interest rates relative to those in the
major industrial countries are already attracting potentially volatile capital
fows, complicating macroeconomic management. Rising food prices, which
disproportionately impact the poor, also pose a risk.
Beyond the global crisis, the regions policy makers face the key challenge of
adapting monetary, exchange rate, and fscal policies to foster stable and sustainable
growth. A long-standing tradition of fscal and monetary prudence served the
region well during the crisis. For example, ample fscal space built up over years
of sustained fscal discipline enabled the unleashing of decisive and large fscal
stimulus programs. Part 2 of ADO 2010 calls for the region to remain faithful to
sound and responsible fscal and monetary policy, while adapting those policies
appropriately as recovery takes hold and the economic crisis recedes.
There is plenty of scope for improving and strengthening Asias monetary, exchange
rate, and fscal policy frameworks. As Part 2 lays out, such adjustments will enable
the region to better adapt to the postcrisis world. For example, while price stability
must remain the overriding objective of monetary policy, the global crisis highlights
the need to prevent asset price bubbles, suggesting a need to improve coordination
between fnancial regulation and monetary policy. In fscal policy, while it is of
paramount importance to safeguard sustainability with strong medium-term fscal
policy frameworks, a wide range of measures can contribute to more balanced
growth by removing structural impediments to domestic demand. Finally, more
fexible exchange rate systems are in the regions own interest, and carefully
designed capital controls that mitigate disruptive capital infows may be desirable
during the transition to greater fexibility, at least in the short run
Highlights 3
Performance |n 2009
At 5.2% in 2009, developing Asias growth was its lowest in 8 years. Economies
decelerated across the region, with only South Asia performing marginally better
than in 2008. The larger economies, such as the Peoples Republic of China (PRC)
and India, fared better. But for many economies, slower growth resulted from a
sharp decline in exports to the industrialized world.
Infation in developing Asia was subdued at 1.5%, held down by depressed economic
activity and lower international commodity prices. In some economies, such as the
PRC; Taipei,China; and Thailand, consumer prices even declined on average during
the year as defation pressures persisted. Current account surpluses fell marginally.
Although demand for the regions exports slowed sharply, imports also weakened,
leaving the surplus in developing Asia at 4.9% of GDP, down from 5.4% the previous
year. Surpluses in East Asia, Central Asia, and the Pacifc declined substantially in
2009.
Though most economies in East Asia contracted in 2009, solid growth in the PRC
buoyed the aggregate performance. Overall GDP expanded 5.9%, almost entirely
a result of 8.7% growth in the PRC, which was based heavily on exceptional fscal
and monetary stimulus adopted to combat the impact of the global recession.
The Republic of Korea grew marginally, also helped by fscal stimulus, but global
headwinds battered Hong Kong, China; Mongolia; and Taipei,China, all of which
contracted in 2009. Consumer prices fell slightly in the PRC and Taipei,China, and
were fat on a subregional basis.
Southeast Asias growth slowed sharply to just 1.2% in 2009, the weakest outcome
since the 199798 Asian fnancial crisis. Aggregate GDP would have declined if
it had not been for relatively high growth of 4.5% in Indonesia, the subregions
biggest economy. Indeed, half the 10 economies contracted (Brunei Darussalam,
Cambodia, Malaysia, Singapore, and Thailand), as the global recession cut into
exports and investment fows. In many economies, imports fell even more steeply
than exports, such that the subregional current account surplus rose. Aggregate
infation decelerated to 2.7%.
South Asian growth edged up to 6.5% in 2009 from 6.4% in 2008, but only India and
Afghanistan saw gains. India experienced a strong rebound to an estimated 7.2% for
the year, despite the impact of a drought on crops. Continued fscal stimulus and
monetary easing in India over the year, alongside an improving global environment,
prompted large capital infows as investor and consumer confdence strengthened.
Afghanistan recovered from a drought, posting 15.1% growth. But the Pakistani
economy again slowed, though macroeconomic imbalances narrowed, as worsening
security and power shortages obstructed any meaningful improvement in economic
performance. GDP growth also slipped in Bangladesh, Bhutan, Maldives, and Sri
Lanka, although Sri Lanka revived markedly from May, after the end of its long civil
confict. Infation in the region was back to around pre-crisis levels, at 5.6%.
In Central Asia, growth fell by half for a second year, to 2.7% from 6.1% in 2008, with
all countries putting in a weaker performance. Armenia and Georgia were jolted
by contractions in GDP. Kazakhstan eked out a 1.2% expansion, despite major bank
failures and depressed non-oil activity. And growth in the Kyrgyz Republic and
Tajikistan was clipped sharply, in part by reduced infows of workers remittances
and economic difculties in Central Asia and the Russian Federation. Among the
four oil and gas producers, Azerbaijan, Turkmenistan, and Uzbekistan experienced
only moderate slowing in growth. Across the subregion, infation slowed to an
average of about 6%, down from double-digit rates of the past 2 years.
Aggregate growth in the Pacifc decelerated to 2.3% in 2009, from 5.4% a year
earlier. In Papua New Guinea, the biggest subregional economy, GDP grew by 4.5%
(slowing from 2008), supported by fscal spending and expectations of a large new
natural gas export project. However, seven of the 14 Pacifc economies contracted
in 2009, with Fiji Islands GDP declining for a third consecutive year. GDP in three
others was estimated to be fat. Infation slowed from high rates in the previous
year, to 5.2% on a subregional basis in 2009.
u|oba| out|ook
After the historic frst-quarter contraction in GDP, the global economy began to
revive in the second quarter of 2009. But uncertainty still clouds the global outlook,
particularly beyond the frst half of 2010. Emergency policy measures are gradually
being unwound, but the strength of broader demand components is not robust
enough to take over from these temporary forces. On aggregate, GDP in the United
States (US), eurozone, and Japan is expected to show a mild recovery in 2010, and
grow by 1.7%. Growth in 2011 will rise only slightly to 2.0%, still below potential.
Infation is forecast to pick up to 1.4% this year and 1.3% in 2011.
Several substantial short-term downside risks remain for the global outlook.
Continued weakness in the US housing market is worrisome, as the uncertainty
may impede the resumption of new lending there. Mistimed macroeconomic policy
responses by authorities in the major industrial economies could squelch recovery,
but any weakening of fscal sustainability would undermine fnancial stability.
Globally, a sharp rise in commodity prices cannot be ruled out.
Among the medium-term risks is the failure of countries with current account
defcits and surpluses to take measures to reduce those imbalances. Any reignition
of the growth of global imbalances could lead to another bout of global instability.
Moreover, poor international policy coordination could delay global fnancial
regulatory reform. Failure to tackle the unfnished reform agenda will leave fnancial
markets vulnerable to future shocks. Multilateral cooperation is equally important to
avoid bilateral conficts over exchange rate and trade issues.
Highlights 5
0ut|ook for deve|op|ng As|a
Prospects for developing Asia in the next 2 years have improved after better than
expected growth in the second half of 2009. GDP is projected to grow by 7.5%
in 2010 as a moderate global recovery supports a modest revival in global trade.
Investment is expected to remain strong as the stimulus measures of last year
continue to have a positive impact. Private consumption is projected to improve
as income prospects pick up and unemployment continues to decline. In 2011, GDP
growth will edge back to 7.3%, as the efects of the emergency policy measures
begin to fade.
Robust regional growth in the next 2 years will lift domestic demand, boosting
consumer price infation to about 4% in each year. The overall current account
surplus is predicted to decline further this year and next as external demand only
slowly picks up and domestic demand strengthens.
Growth in East Asia is forecast to accelerate to 8.3% in 2010, with strong recoveries
in the three economies that shrank last year (Hong Kong, China; Mongolia; and
Taipei,China). GDP growth will remain buoyant in the PRC, while the Republic of
Korea is expected to rebound to a 5.2% expansion, driven by stronger private
investment and consumption and the pick up in global trade. Similar factors will
beneft both Hong Kong, China and Taipei,China. In 2011, the fve subregional
economies are likely to see a slight easing in the pace of expansion, partly a result
of a phasing out of stimulative policies and because this years rebound will set a
higher base.
The PRC economy is forecast to grow by 9.6% in 2010. Aggressive fscal and monetary
stimulus is being adjusted, but will continue to contribute to strong growth, and
frmer external demand will back buoyant domestic demand. The trade surplus
will resume its upward trend. Economic growth is forecast to ease to about 9.1%
in 2011, as the stimulus policies are phased out. Infation is seen picking up to 3.6%
this year and moderating to 3.2% next year as the highly stimulatory monetary
policy is reined in.
In Southeast Asia, aggregate growth is forecast to rebound to 5.1% in 2010, based
in large part on the recovery in global trade and a rebound in investment. The fve
contracting economies of 2009 will return to growth in 2010. Next year, the pace of
growth in most of the subregion will likely quicken a bit. Infation is seen averaging
a moderate 4.5% in 2010. Viet Nam is the outlier, where consumer prices might rise
by 10%, partly on account of last years rapid growth in money supply and local
currency devaluation.
Growth is expected to pick up in most of South Asia in 2010. India will lead the
group with a projected 8.2% performance. Its rebound a year earlier and continued
strong expansion stem largely from domestic demanda revival of exuberance of
the years prior to 2008. For its part, Sri Lanka is expected to see an uptick of 6.0%,
boosted by the peace dividend of stronger investor confdence. Improved domestic
economic fundamentals should allow Pakistan to attain higher growth of 3.0%.
Bangladesh and Nepal are projected to see growth ease slightly.
Infation is expected to pick up but remain moderate in South Asia, provided
that monetary policy makers remain alert. The countries are not highly open to
trade, but are vulnerable to abrupt changes in commodity prices, especially oil.
Bangladesh, Nepal, Pakistan, and Sri Lanka all rely heavily on workers remittances
to ofset large trade defcits; but these earnings have held up quite well over the
past 2 years. Maldives, Pakistan, and Sri Lanka have all experienced large losses in
foreign exchange reserves in the past 2 years and have turned to the International
Monetary Fund (IMF) for adjustment assistance. All three countries are in the
process of working down the macroeconomic imbalances that have caused their
difculties.
Growth in all of Central Asias economies should edge up in 2010, underpinned by
higher oil prices and recovery in the Russian Federation, the major trade and fnancial
partner. Ongoing weakness in Kazakhstans non-oil economy will hold its overall
growth down to 2.5%, while the Armenian and Georgian economies are projected
to turn around but record anemic growth (about 2%). In the Kyrgyz Republic and
Tajikistan, expansion is expected to accelerate slightly, to about 4%6%.
Infation is expected to pick up to 6.7% this year in the subregion, but not to be
a major issue in any country. Stronger oil prices will bring higher current account
surpluses for the hydrocarbon exporters. But Armenia, Georgia, the Kyrgyz Republic,
and Tajikistan will continue to face relatively large defcits of 8%15% of GDP, little
changed from 2009: these four countries will continue their adjustment programs
with the IMF.
Aggregate growth in the Pacifc is forecast to rise to 3.7% in 2010, buoyed mainly
by stronger growth in Papua New Guinea and Timor-Leste, both of which beneft
from higher export demand and prices for natural resources. However, GDP in the
Fiji Islands is expected to contract again, and most of the smaller economies will
grow by less than 1%. In Papua New Guinea, a large new gas project is likely to spur
growth in 2011. Infation in the Pacifc is expected to remain around an average of
5.3% in the next 2 years.
Highlights 7
Macroeconom|c po||cy for postcr|s|s deve|op|ng As|a
Governments across developing Asia quickly rolled out large fscal and monetary stimulus
packages to fght the sharp slowdown of economic activity stemming from the global
fnancial crisis. The crisis highlights the potential usefulness of countercyclical fscal and
monetary policies for coping with the impact of large shocks. This positive experience
has sparked debate on whether the region should pursue fscal and monetary activism
in the postcrisis period.
As the global crisis recedes and normalcy returns, developing Asia should revert to the
sound and responsible fscal and monetary policies that fostered macroeconomic stability
and sustained growth. There is, however, plenty of scope to improve and strengthen
monetary, exchange rate, and fscal policies to better prepare the region for the postcrisis
world.
In the area of monetary policy, the global crisis highlights the potentially huge risks of
an excessively narrow focus on consumer price infation. After all, the combination of
lax monetary policy and inadequate fnancial regulation contributed to infating the US
housing market bubble that was the immediate catalyst of the global fnancial crisis. For
developing Asian policy makers, this means that asset price trends must be watched
and preventive action taken before disruptive asset bubbles materialize. More efective
fnancial supervision and regulation, and its closer coordination with monetary policy,
will help avert a homegrown fnancial crisis.
Developing Asia would also beneft from a shift toward more fexible exchange rates.
Reducing the excessive rigidity imposed by heavy foreign exchange market intervention
would allow exchange rates to move more in line with their fundamentals, and help
economies rebalance demand toward domestic sources. Intraregional exchange rate policy
coordination among developing Asian countries can help promote greater exchange rate
fexibility in the region, with less concern over losing export competitiveness vis--vis
neighboring economies. Carefully designed capital controls can help guard against
disruptive short-term capital fows and prevent extreme volatility in exchange rates.
Developing Asia should maintain the fscal discipline that served it well in the past and
enabled it to aggressively boost public spending and cut taxes during the global crisis.
The potentially more challenging postcrisis global environment strengthens the case
for setting up strong and credible medium-term fscal frameworks that can withstand
even large negative shocks. Well-designed and well-implemented automatic stabilizers
can be core components of such frameworks. A wide range of fscal measures can also
promote the rebalancing process by easing the structural distortions that constrain
domestic demand.
In general, addressing this wide range of structural challenges will require authorities to
coordinate monetary, exchange rate, and fscal policies more closely and systematically.
During the global crisis, the coordinated easing of fscal and monetary policies magnifed
the countercyclical impact of the macroeconomic expansion. Exiting current expansionary
policies, likewise, calls for a closer coordination of fscal and monetary policies within
an economy and among regional economies. Monitoring asset price trends to prevent
bubbles also requires coordination between monetary policy and fnancial regulation.
Fiscal measuressuch as strengthening social protectionin tandem with more fexible
exchange rates, can boost domestic consumption and demand and maximize the impact
of macroeconomic policy on developing Asias rebalancing process.
1ab|e 1 urowth rate of u0P (% per year) 1ab|e 2 |nat|on (% per year)
Subreg|on/economy 2007 2008 2009 2010 2011 2007 2008 2009 2010 2011
Centra| As|a 12.0 6.1 2.7 4.7 5.9 11.2 16.5 5.9 6.7 6.6
Azerbaljan 25.1 10.8 9.3 9.5 9.7 16.7 20.8 1.5 5.8 6.0
Kazakhstan 8.9 3.3 1.2 2.5 3.5 10.8 17.3 7.3 6.8 6.5
Last As|a 10.4 7.3 5.9 8.3 7.7 3.9 5.4 0.0 3.3 3.0
Chlna, People's Rep. of 13.0 9.6 8.7 9.6 9.1 4.8 5.9 -0.7 3.6 3.2
long Kong, Chlna 6.4 2.1 -2.7 5.2 4.3 2.0 4.3 0.5 2.2 2.8
Korea, Rep. of 5.1 2.3 0.2 5.2 4.6 2.5 4.7 2.8 3.0 3.0
Jalpel,Chlna 6.0 0.7 -1.9 4.9 4.0 1.8 3.5 -0.9 1.5 1.6
South As|a 8.7 6.4 6.5 7.4 8.0 5.6 9.3 5.6 6.0 6.0
angladesh 6.4 6.2 5.9 5.5 6.3 7.2 9.9 6.7 7.5 7.8
lndla 9.2 6.7 7.2 8.2 8.7 4.8 8.3 3.6 5.0 5.5
Paklstan 6.8 4.1 2.0 3.0 4.0 7.8 12.0 20.8 12.0 8.0
Srl lanka 6.8 6.0 3.5 6.0 7.0 15.8 22.6 3.5 6.5 8.0
Southeast As|a 6.5 4.3 1.2 5.1 5.3 4.1 8.8 2.7 4.5 4.5
lndonesla 6.3 6.0 4.5 5.5 6.0 6.4 9.8 5.0 5.6 6.2
Valaysla 6.2 4.6 -1.7 5.3 5.0 2.0 5.4 0.6 2.4 3.0
Phlllpplnes 7.1 3.8 0.9 3.8 4.6 2.8 9.3 3.2 4.7 4.5
Slngapore 8.2 1.4 -2.0 6.3 5.0 2.1 6.6 0.6 2.3 2.0
Jhalland 4.9 2.5 -2.3 4.0 4.5 2.2 5.4 -0.9 3.5 3.0
vlet Nam 8.5 6.2 5.3 6.5 6.8 8.3 23.0 6.9 10.0 8.0
1he Pac|c 5.0 5.4 2.3 3.7 5.0 3.6 9.5 5.2 5.1 5.4
lljl lslands -0.5 -0.1 -2.5 -0.5 0.5 4.8 7.7 3.7 3.4 3.1
Papua New Culnea 7.2 6.7 4.5 5.5 7.7 0.9 10.6 7.6 7.1 7.7
0eve|op|ng As|a 9.6 6.6 5.2 7.5 7.3 4.4 6.9 1.5 4.0 3.9
Notes: 0eveloplng Asla refers to 44 developlng member countrles of the Aslan 0evelopment ank and runel 0arussalam, an
unclassled reglonal member, last Asla comprlses Peoples Republlc of Chlna, long Kong, Chlna, Republlc of Korea, Vongolla,
and Jalpel,Chlna, Southeast Asla comprlses runel 0arussalam, Cambodla, lndonesla, lao Peoples 0emocratlc Republlc, Valaysla,
Vyanmar, Phlllpplnes, Slngapore, Jhalland, and vlet Nam, South Asla comprlses lslamlc Republlc of Afghanlstan, angladesh,
hutan, lndla, Valdlves, Nepal, Paklstan, and Srl lanka, Central Asla comprlses Armenla, Azerbaljan, Ceorgla, Kazakhstan, Kyrgyz
Republlc, Jajlklstan, Jurkmenlstan, and uzbeklstan, and Jhe Paclc comprlses Cook lslands, lljl lslands, Klrlbatl, Republlc of
the Varshall lslands, lederated States of Vlcronesla, Nauru, Papua New Culnea, Republlc of Palau, Samoa, Solomon lslands,
0emocratlc Republlc of Jlmor-leste, Jonga, Juvalu, and vanuatu.
0ata for angladesh, lndla and Paklstan are recorded on a scal year basls. lor lndla, the scal year spans the current years Aprll
through the next years Varch. lor angladesh and Paklstan, the scal year spans the prevlous years July through the current
years June.
Momentum for a sustained
recovery?
1
Momentum for a susta|ned
recovery!
Te year 2009 opened with a global economic maelstrom in full fury.
Te questions put forth by pundits and policy makers alike at that time
were how long the storm would last and how much wreckage would
be lef in its wake. Yet by midyear, it seemed that governments rapid
emergency responses had limited the damage, and that a tentative calm
had returned.
Afer the historic frst-quarter contraction in gross domestic product
(GDP), the global economy began to revive (Figure 1.1.1). Financial
instability was contained, consumer sentiment brightened, businesses
started restocking, and cross-border trade recovered. Taken together,
these signs suggest a solid global recoveryand even optimism for 2010.
Yet clouds remain on the horizon. Te upswing in
consumer sentiment can be easily derailed if income prospects
do not improve. Te recovery must generate more jobs to
eliminate the anxiety over eroded personal wealth and income,
which is holding back spending. Consumer lending is inching
up, but continued weakness in banks mortgage portfolios
makes them hesitant to ofer new loans, and such hesitancy
hinders the growth of private investment. Building inventories
is itself a transient process, and frms will not restock for
long if economic activity is sluggish. Robust recoveries in
developing economies cannot serve as the sole engine of
global recovery. Trade with the industrial world is still fuel for
emerging economies dynamism.
Underlying these concerns is the fact that the recovery
was driven mainly by temporary forcesincluding huge
government stimulus measures. Markets are closely
scrutinizing the sustainability of these measures, and
increasing sovereign risks could complicate the normalization
process. In the end, a shif from public support to private
forces is needed to maintain the momentum. Yet, because of the fragility
of the recovery and the sheer size of the various stimuli, the winding
down of public support must be carefully managed.
In place of the temporary emergency response measures, therefore,
what robust sources of growth will come to the fore to sustain the recovery?
This chapter was written by Akiko Terada-Hagiwara, Benno Ferrarini, William James,
Shikha Jha, Juthathip Jongwanich, Donghyun Park, Pilipinas Quising, Arief Ramayandi,
and Joseph E. Zveglich, Jr., of the Economics and Research Department, ADB, Manila.
The authors gratefully acknowledge the contribution of background materials
prepared by Chee Sung Lee.
.. urowth |n |ndustr|a| product|on
-40
-20
0
20
Japan Eurozone United States
Jan
10
Jul Jan
09
Jul Jan
2008
%, seasonally adjusted year on year
Sources: oard of Covernors of the lederal Reserve System. http://www.
federalreserve.gov, Vlnlstry of lconomy, Jrade and lndustry. http://www.metl.
go.jp, luropean Commlsslon. http://ec.europa.eu (all accessed z, Varch zoo).
..z uarter|y u0P growth, ma[or |ndustr|a| econom|es
-15
-10
-5
0
5
10
G3 Japan Eurozone United States
Q4 Q3 Q2 Q1
09
Q4 Q3 Q2 Q1
2008
%, seasonally adjusted annualized rate
Sources: uS 0epartment of Commerce. ureau of lconomlc Analysls. http://
www.bea.gov, lconomlc and Soclal Research lnstltute. Cablnet 0ce,
Covernment of Japan. http://www.esrl.cao.jp (both accessed , Aprll zoo), CllC
0ata Company (accessed ) Aprll zoo).
uaug|ng the strength of
|ndustr|a| countr|es recovery
Te global economic turmoil that began in 2008 accelerated rapidly, as
is evident from the quarterly GDP growth rates of the major industrial
economies of the United States (US), Japan, and eurozone (Figure 1.1.2).
Cumulatively, production in these economies plummeted by
8.1% in the frst quarter of 2009 (annualized), but in a dramatic
reversal of this trend, the contraction ended and industrial
economies grew by 1.5% and 3.1% in the third and fourth quarters
of the year. While the main driving forces variedinventory
restocking pushed the US revival while net exports helped Japan
and parts of the eurozone (particularly Germany)support from
government spending was a common theme.
Te recoverys momentum relies on the potency of the
underlying sources of growth, since it is unclear how long
government interventions can continue to buoy economic
activity. Yet looking to the private sources of demand, signs
that temporary factors have been replaced by a more robust
foundation for future expansion are not yet obvious. Assessing
the extent to which these shifs are under wayfrom public
support to private demand and from transient factors to
stable sourcesis critical for setting the medium-term growth
forecasts for the major industrial economies.
Cr|s|s response and norma||zat|on
Governments and monetary authorities responded quickly to the fnancial
crisis and economic slump, stabilizing fnancial markets in the early
stages and later shoring up fagging GDP. Central banks across the major
industrial countries aggressively lowered interest rates, strengthened bank
deposit guarantees, and adopted a raf of unconventional approaches to
keep credit fowing. Governments also approved substantial multiyear
fscal measures, which began to be implemented in the frst half of 2009.
Te fscal support was meant to be considerably front loaded, such as
the US 10-year fscal package that was to disburse the bulk of its support
within the frst 3 years.
As the global recovery seemingly consolidates, policy makers have
to tackle the dilemma of when to start reining in their stimuli. Te
recovery could falter if policy makers tighten too early. Te 193738 US
recession that came in the wake of the Great Depression is a frequently
cited cautionary tale of the efect of pulling back policy support too soon.
In the mid-1930s, signs of recovery prompted US policy makers to raise
taxes, reduce spending, and tighten money supplyactions which quickly
pushed the economy back into recession. Alternatively, normalizing
too late may lead to higher infation and unsustainable fscal defcits in
the longer term. Authorities are clearly concerned about repeating the
expansion of credit that created the conditions for the subprime crisis
that ultimately sparked the latest global fnancial crisis.
In fact, while lacking the fanfare that surrounded the announcements
of the stimulus packages, the normalization process has begun. Many
temporary measures have fnished or are set to end this year, particularly
fnance sector stabilization measures and nonrecurring fscal expenditures.
While other elements of the stimulus require direct interventions to
reverse their efectssuch as raising policy interest rates and reversing
tax cutsnew support is unlikely as long as the recovery takes hold. With
policy normalization under way, an issue is how much monetary and fscal
policy will continue to boost growth in the months ahead.
Conc|ud|ng nance sector support
Uncertainty surrounding the health of the international fnancial system
that began in mid-2007 was refected in the elevated risk premiums on
interbank lending (Figure 1.1.3). Te spike in interest rates in the
afermath of the Lehman Brothers collapse jolted policy makers
into action. Central banks took drastic steps to ensure the
stability and liquidity of the fnance sector.
Risk premiums have since returned to their precrisis
levels, and monetary authorities have begun to roll back their
emergency support to the fnance sector. For example, the US
Federal Reserves support provided to money market mutual
funds, commercial paper markets, and dollar swap lines with
foreign central banks were closed in February 2010. In late
2009, the European Central Bank (ECB) began phasing out
nonstandard operational measures, such as providing unlimited
liquidity to the eurozone banks at longer than usual maturities
(12 months), planning to gradually reach normal 3-month
maturities by end-April 2010. As an exception to the trend, the Bank
of Japan doubled the total amount of loans to be provided through an
existing fund-supplying operation in March 2010 to encourage a further
decline in long-term interest rates.
Some unconventional measures will take more time to unwind,
but as calm has been restored to fnancial markets, further expansion
of this support is unlikely. For example, the Federal Reserve ended its
purchases of publicly guaranteed mortgage-backed securities in March
2010 afer accumulating $1.1 trillion in these securities (Figure 1.1.4). Its
purchases of such securities have helped hold mortgage rates
to near-record lows to foster recovery in the housing market.
For such unconventional measures, policy makers are faced
with the challenge of managing the assets they have acquired,
to maximize recovery value at the time of disposal. But they
will need to be careful not to disrupt recovering asset markets,
where trading may still be thin and price discovery mechanisms
not yet well anchored.
Weak spots remain, and difcult tasks lie ahead, despite
overall stabilization of fnancial markets (Box 1.1.1). While lending
conditions remain tight and infation is still low, policy makers
should stay watchful of fnancial market developments and be
ready to intervene as necessary. Timing, though, is of the essence.
.. 1L0 spread, se|ected econom|es
%
0
1
2
3
4
5
United Kingdom United States Eurozone
Jan
10
Jul Jan
09
Jul Jan
08
Jul Jan
2007
Note: Jhe Jl0 spread ls the dlerence between ,-month ll0R and the yleld on
,-month Jreasurles.
Source: loomberg (accessed zz Varch zoo).
.. Secur|t|es he|d by the Pedera| keserve
0.0
0.7
1.4
2.1
Mortgage-backed securities
Federal agency debt securities
US Treasury securities
Jan
10
Oct Jul Apr Jan
09
Oct Jul Apr Jan
2008
$ trillion
Source: oard of Covernors of the lederal Reserve System. http://www.
federalreserve.gov (accessed | Aprll zoo).
With tight global credit conditions persisting, many
industrial economies fnancial institutions are still fragile,
especially banks. Finance sector equity prices have recovered
from their trough of March 2009, but they remain weaker
than the market as a whole (Box fgure 1), largely refecting
banks need to rebuild their balance sheets.
Te weakness in the fnance sector has its origins in the
meltdown of the United States (US) subprime mortgage
market. Several countriesnot just the USexperienced
property bubbles. Te housing sector in the US and United
Kingdom have stabilized since then, albeit in part due
to special measures. However, the picture is still wobbly
for commercial and industrial property prices in the US,
refecting the sluggish recovery of business activity. Low
real estate prices depress the resale value of the property
relative to the unpaid mortgage balance, raising the risk
of default. Delinquency rates on residential mortgages and
commercial real estate loans are on the rise (Box fgure 2),
and bank balance sheets are sufering as a consequence.
Te process of absorbing bad credit losses is set
to run a long while yet. Afer the huge provisioning
for nonperforming residential mortgages, losses from
commercial real estate exposure to falling prices are now
on the rise (Box fgure 3). Finance sector writedowns
on securities and loans will continue in the quarters
ahead. Banks may need substantial additional capital
before they fully recover. For example, at end-2009, the
European Central Bank estimated that total eurozone
bank writedowns for 20072010 would reach 553 billion,
13% higher than its 488 billion estimate made 6 months
earlier. Te expected writedowns are concentrated in
countries that experienced the largest runups in prices and
subsequent corrections.
Given that banks in the US and Europe are still weak,
the withdrawal of central bank liquidity facilities and
government guarantees for their debt is a concern. While
the use of both types of programs has fallen as money
markets and funding markets have stabilized, some banks
remain more dependent than others on such support, and
unless these more fragile banks weaknesses are addressed,
renewed distress is a risk. Longer term, uncertainty about
more stringent regulatory frameworks may also constrain
banks in their lending, as banks will surely need additional
capital if these frameworks are adopted.
Bank credit growth has yet to recover in the major
industrial economies. Bank lending ofcer surveys show
that lending conditions remain tight in the US and
eurozone, though the severity has eased greatly. While the
improving economic outlook should shore up both the
demand for credit and banks ability to lend, considerable
work lies ahead before the system fully recovers.
1.1.1 P|nanc|a| systems stab|||zed for now
1 Finance sector development
30
60
90
120
150
180
Finance sector index, United States
Overall fnance sector index
Overall stock market index
Jan
10
Jan
09
Jan
08
Jan
07
Jan
06
Jan
2005
Jan 2000 = 100
Note: 0verall lndex averages are averages of 0ow Jones
lndustrlal Average Composlte lndex (uS), Nlkkel,oo (Japan),
lJSloo lndex (uK), 0ax lndex (Cermany), and Slz,o lndex
(lrance).
Source: loomberg (accessed z, Varch zoo).
2 Delinquency rates on real estate loans,
United States
0
2
4
6
8
10
Single-family residential mortgages
Commercial real estate loans
Q3 Q1
09
Q3 Q1
08
Q3 Q1
07
Q3 Q1
06
Q3 Q1
2005
%
Note: loans are from all commerclal banks, commerclal real
estate loans exclude farmland.
Source: oard of Covernors of the lederal Reserve System.
http://www.federalreserve.gov (accessed , Varch zoo).
3 Property price indexes, United States
100
125
150
175
200
Commercial property prices House prices
Dec Jul Jan
09
Jul Jan
08
Jul Jan
07
Jul Jan
06
Jul Jan
2005
2000 = 100
Sources: VlJ Center for Real lstate. http://mlt.edu/cre,
Standard and Poors. http://www.standardandpoors.com
(both accessed z Varch zoo).
1|m|ng monetary t|ghten|ng
In setting monetary policy, authorities must choose the right timing
to withdraw the exceptionally accommodative monetary stance as
the economy gets to a frm recovery. If the economy is susceptible to
overheating, authorities should further tighten monetary policy. One
indicator is the output gap. Tis is the diference between what is
currently being produced (actual GDP) and the theoretical production
level that the economy can sustain without accelerating
infation (potential GDP). Various estimates suggest that
economic activities in the major industrial countries are
currently far below their potential (Figure 1.1.5), implying
that central banks can maintain accommodative monetary
policy until recovery becomes frm without undermining price
stability.
However, it is difcult to measure potential output precisely.
In addition, the global slowdown may have had permanent
efects, lowering these economies potential output. Te point
where monetary policy needs to be tightened may, therefore, be
closer than the fgure suggests.
Infation expectations are another important indicator of
an economys susceptibility to overheating. Economic agents
assessments of future price movements will afect their behavior
today in ways that tend to reinforce the anticipated price movements.
For example, if workers feel that prices will be higher next year, they will
incorporate this into their wage negotiations, which will create infation
pressures through higher costs of production.
Central banks need, consequently, to consider expectations of
future infation as well as current infation when setting the monetary
stance. One of the measures is based on the yield diferential between
nominal and infation-indexed bonds. Tis yield spread is also called
the breakeven infation rate. An increase in the breakeven rate can be
viewed as a sign that market infation expectations may be on
the rise (Figure 1.1.6).
Te breakeven infation rates for the US and eurozone are in
a positive range. Te infation expectation for the US rebounded
sharply from its low in March and, although the yield spread
is a slightly downward trend in the eurozone, the timing for
normalizing the policy rates seems to be in sight for these two
economies. In Japan, though, defation is expected, implying the
need to continue with the accommodative policy.
Entering 2010, the Federal Reserve, ECB, and the Bank
of Japan all held their main policy rates close to zero. With
output below potential and low infation expectations, this
accommodative monetary stance is likely to remain in place at
least through the frst half of 2010, and possibly longer for Japan
given the lingering threat of defation there.
However, in February 2010 the Federal Reserve raised its
discount rate by 25 basis points to 0.75%. While the diferential
between this rate and the Federal Funds rate, which is the main monetary
policy instrument in the US, is still below its precrisis level of 100 basis
points, the move is indicative of the Federal Reserves intentions.
.. 0utput gap, ma[or |ndustr|a| econom|es
-8
-4
0
4
Q1
10
Q3 Q1
09
Q3 Q1
08
Q3 Q1
07
Q3 Q1
06
Q3 Q1
2005
% of potential GDP
Sources: lnternatlonal Vonetary lund. zoo. world lconomlc 0utlook database.
0ctober. http://www.lmf.org (accessed Aprll zoo), loomberg (accessed zz
Varch zoo).
.. 8reakeven |nat|on rates
-5.0
-2.5
0.0
2.5
5.0
Mar
10
Dec Sep Jun Mar
09
Dec Sep Jun Mar
2008
%
Notes: reakeven lnatlon ls calculated by subtractlng the real yleld of the
lnatlon-llnked maturlty curve from the yleld of the closest nomlnal Jreasury
maturlty. Jen-year bond ls used for uS, ,-year bond for eurozone, and for Japan,
o-year bond for Varch zoo8, June zoo and ,-year bond thereafter.
Source: loomberg (accessed Aprll zoo).
Monetary policy, of course, was only one weapon in the authorities
armory. Fiscal policy was also aggressively used in aid of economic recovery.
Comp|et|ng sca| st|mu|us measures
Te multiyear fscal packages approved in most industrial economies will
likely be fully implemented. However, as mentioned, this support was
intended to be heavily front loaded, and the vast majority will have been
spent by the end of this year. Of the $787 billion (5.5% of GDP) 10-year
US fscal package, about one-third of the total was disbursed last year and
about half is to be spent this year. Te four largest eurozone economies
France, Germany, Italy, and Spainspent about 43% of their
collective 225 billion fscal package (3.2% of their 2008 GDP).
In Japan, the fscal stimulus approved last year has been mostly
spent, yet the government has approved a new budget for 2010,
which includes extensions of some packages.
While it is likely that these stimuli will bring about some
impacts this year, additional signifcant fscal stimulus for 2011
appears unlikely in a context of mounting sovereign risks for
2011 (Box 1.1.2). Indeed, pressures are already mounting on
eurozone countries to rein in large defcits and growing public
debt ratios, which are expected to surge to average 84.0% of GDP
in 2010 (Figure 1.1.7). Te European Commission has increased
pressure on governments to take frmer action toward reaching
the Stability and Growth Pact 3% defcit target by fscal year 2014/15. For
most eurozone countries, this will require structural consolidation eforts
starting in 2011.
w|nd|ng down po||cy support
Looking back on 2009, emergency fnance sector stabilization measures
as well as the monetary and fscal support that the major industrial
economies employed have generally been efective. Finance sector
support managed to assure liquidity, and monetary policy provided an
accommodative environment. Fiscal measures played a large role in the
immediate economic recovery, such that public spending solidly
contributed to GDP growth throughout 2009 (Figure 1.1.8).
Nonetheless, these policy measures are temporary and
will be withdrawn in time. Authorities are beginning to
remove fnance sector support, though the winding down of
some of the unconventional support to less liquid segments
(such as purchases of mortgage-backed securities) will need
to be managed carefully to avoid disrupting these markets.
Industrial economies central banks will likely maintain an
accommodative monetary policy through the frst half of 2010
(possibly longer in Japan).
Relatively high levels of fscal support are likely to continue
in 2010 as commitments under approved fscal packages are
fulflled in the US and some eurozone economies. Japan will
also continue with fscal support with the new 2010 budget.
However, not all economies have the fscal space to continue
their spending given rising concerns on sovereign risk,
../ Porecasts of gross government debt for zoo, eurozone
60
80
100
120
140
Forecasts of gross government debt
Spain
Portugal
Italy
Ireland
Greece
Germany
France
Eurozone
% of GDP
83.9
124.9
82.9
116.7
84.6
66.3
76.7
82.5
Source: luropean Commlsslon. http://ec.europa.eu (accessed , Varch zoo).
..8 Contr|but|ons to u0P growth, ma[or |ndustr|a|
econom|es
-6
-4
-2
0
2
United States Japan Eurozone
Percentage points,
seasonally adjusted annualiazed rate
Private consumption
GDP growth
Change in inventory
Government consumption Net exports
Gross fxed capital formation
Sources: uS 0epartment of Commerce. ureau of lconomlc Analysls. http://
www.bea.gov, lconomlc and Soclal Research lnstltute. Cablnet 0ce,
Covernment of Japan. http://www.esrl.cao.jp (both accessed , Aprll zoo), CllC
0ata Company (accessed ) Aprll zoo).
Fiscal instability is becoming a major concern in some
industrial economies. Te expansionary macroeconomic
policiesfscal stimuli in particularcannot be sustained
indefnitely as they add to the preexisting sustainability
concerns related to, for example, public pension funding.
Crisis-related stimulus and lower tax revenue have put
public debt on a sharply steeper trajectory (Box fgure 1).
Tis has emphasized the need for structural reform
in the medium and long run and, given worrisome
unemployment levels, has complicated near-term exit
strategies.
Financial markets are increasingly reacting to fscal
stability issues in industrial economies, especially as
substantially more public sector debt is to be issued
in the next 2 or 3 years. Such concerns (coupled with
political uncertainties) have led to a surge in sovereign
credit default swap spreads in some industrial economies,
such as Japan and the United Kingdom, in early 2010.
European issuersmost notably Greece, but also Portugal
and Spainhave come under greater pressure afer their
ratings were downgraded or as uncertainty heightened
over their fscal imbalances and consolidation plans
(Box fgure 2).
Tese increasingly heavy defcits and debts impose
fundamental challenges to policy makers and present
risks to fnancial stability. One risk is that issuance of new
public debt could crowd out private sector credit growth
through higher interest rates and therefore undermine
economic growth. Another risk is from a rapid increase in
interest rates on public debt valuations. With a steepening
of the yield curve, this would hit both fnancial institutions
and growth, as sovereign debt is repriced.
1.1.2 Mount|ng sovere|gn debt and constra|nts on po||cy
1 Public debt
Forecast 2010
Average 20082009
Average 19902007
0
100
200
300
Forecast 2010
Average 20082009
Average 19902007
Japan United States
% of GDP
0
50
100
150
Forecast 2010
Average 20082009
Average 19902007
Portugal
Spain
Ireland
Greece
United
Kingdom
Germany
France
Eurozone
% of GDP
Note: lor the eurozone, the average ls from , to zoo).
Sources: Jhe 0ce of Vanagement and udget. http://
www.whltehouse.gov/omb, ank of Japan. http://www.
boj.or.jp/en, luropean Commlsslon. http://ec.europa.eu (all
accessed ,o Varch zoo).
2 Credit default spread, senior 5-year
0
90
180
270
360
450
France
United Kingdom
Portugal Germany
Spain
Japan
United States
Greece
Mar
10
Dec Sep Jun Mar
09
Dec Sep Jun Mar
2008
Basis points
Source: loomberg (accessed z| Varch zoo).
particularly in 2011. Hence, the efects of these public support measures
are likely to gradually fade next year.
How well, therefore, will sources of private demand take up the baton?
Potent|a| pr|vate demand sources
With the normalization of monetary and fscal policy set to come on
stage, sustained recovery must be led by private demand sources. So
far, there are no obvious candidates among consumption, investment,
and external demand. Tere have been some signs of private demand
returning since the second half of 2009, but whether they have enough
strength to support continued growth in the medium term is not yet
clear.
uradua| return of pr|vate consumpt|on
In the initial stages of the global downturn, the deterioration of
personal wealth from falling stock and property prices inhibited
consumption spending across the major industrial countries,
especially in countries that experienced a burst property bubble.
Tightening credit further reinforced the declines in asset values,
as well as lowering consumption directly as consumer credit
evaporated. Uncertain labor market conditions served to further
depress spending.
Te US experienced the worst of all of these elements, but a
gradual recovery is under way. Te slide in residential property
prices eased in the second quarter of 2009 but they are only
picking up slowly. Government subsidies to promote vehicle
trade-ins for new more fuel-efcient models provided a boost in
the third and fourth quarters. However, consumer credit only
fnally started to grow in January 2010, following 17 consecutive
months of decline. Even though private consumption picked up
in the second half of 2009, it dropped by 0.6% overall for the
yearthe second consecutive year of contraction and the frst
multiyear contraction in consumption in the US since the 1930s.
Private consumption plummeted in the eurozone as the
global turmoil set in, but the recovery in consumption that
began in the second quarter of 2009 has been mild. Indeed,
retail sales remain weak and car registrations have slowed as
the generous subsidy schemes are being terminated in several
countries. High and growing unemployment remains a drag on
private consumptionand in the European Union more broadly. For the
countries that experienced a bust in domestic asset price bubbles, such as
Ireland, Spain, and the UK, households balance sheets need to deleverage
further for household consumption to pick up.
In Japan, in contrast, private consumption was the frst among the
demand components to pick up, contributing to growth for 3 consecutive
quarters. Te recovery in consumption was driven by eco-friendly
stimulus policies and by a car trade-in subsidy. As these programs have
been extended in scope and duration, private consumption this year will
continue to beneft from public support.
Te global pulse of private consumption is, therefore, not strong.
Many consumer confdence indexesespecially in Europeshowed signs
of fragility in the frst months of the year (Figure 1.1.9) on the
back of still weak labor markets. Retail sales, too, have begun to
fag a little, afer recovering sharply during the second half last
year (Figure 1.1.10).
In countries that are still recovering from the detritus of a
property bubble burst, households are undergoing the protracted
process of repairing their balance sheets, which will require
an extended period of lower spending. In the US, outstanding
household debt has contracted for an unprecedented 7
consecutive quarters, but it still remains abnormally high at well
above 100% of disposable income. Stagnant job markets across the
major industrial countries (Box 1.1.3) weigh heavily on prospects
for further expansion of consumption.
..p Consumer condence, ma[or |ndustr|a| econom|es
30
60
90
120
Japan United States
Jan
10
Jul Jan
09
Jul Jan
08
Jul Jan
2007
2005 = 100
-60
-40
-20
0
20
Italy France Spain Germany Portugal Eurozone
Jan
10
Jul Jan
09
Jul Jan
08
Jul Jan
2007
% balance
Note: Jhe condence lndlcator for eurozone ls calculated as the arlthmetlc
average of the dlerence between posltlve and negatlve answers glven ln
percentage polnts of total answers.
Sources: Survey Research Center: unlverslty of Vlchlgan. http://research.
stloulsfed.org, lconomlcs and Soclal Research lnstltute. Cablnet 0ce. http://
www.esrl.cao.go.jp, loomberg (all accessed z) Varch zoo).
..o keta|| sa|es, ma[or |ndustr|a| econom|es
-15
-10
-5
0
5
10
Eurozone United States Japan
Jan
10
Jul Jan
09
Jul Jan
08
Jul Jan
07
Jul Jan
06
Jul Jan
2005
%, year on year, seasonally adjusted
Sources: uS Census ureau. http://www.census.gov, Vlnlstry of lconomy Jrade
and lndustry. http://www.metl.go.jp, lurostat. http://www.ec.europa.eu/
eurostat (all accessed z) Varch zoo).
Te pace of the economic recovery is likely to be slow
given sluggish private sector prospects, specifcally the slow
improvement of labor markets. Elevated unemployment
persists in many industrial countries, such as 10.1% in
France, 7.5% in Germany, and 19.0% in Spain in February
this year (Box fgure 1). In the US, unemployment has
stuck at 9.7% through the frst quarter of 2010, and a
broader measure of underutilized labor (which adds those
who have given up searching or are employed part time
involuntarily to those unemployed) hovered near 17%.
Te apparently jobless recovery may stem from a variety
of reasons. Cyclically, companies may tend to overhire
during a boom, exaggerating the rise in unemployment
in an extended recession. Structurally, production shares
by industry change, such that some laid-of workers
may not have their old jobs to go back to. Prolonged
underutilization of workers can lead to deterioration in
human capital and labor productivity, raising the structural
unemployment rate (and undermining the economys
potential growth rate).
During the early phase of any economic recovery,
companies face uncertaintiesstrength of recovery in
consumer spending, changes in consumer habitsmaking
them reluctant to hire workers. Firms therefore ofen meet
early increased demand by relying on temporary workers
and more overtime work.
Te data themselves are worrisome. Te average length
of US unemployment rose above 30 weeks by early this
year (Box fgure 2), while in the eurozone one unemployed
person out of three has been jobless for over a year. Te
largest increase in the year to the third quarter of 2009 is
recorded for the categories of unemployed between 3 and
11 months (Box fgure 3).
In Japan, too, the omens are not good. For the frst
time since 2003, unemployment exceeded 5% in July 2009,
and has only edged back to 4.9% since, as only four jobs
were on ofer for every 10 applicants. Improving industrial
production toward the end of 2009 has generated little
new full-time employment. As of February 2010, the
index of regular workers employment shows no sign of
improvement, while overtime surged 11.4% from a year
earlier.
In the next couple of years, income constraints and
wealth erosion will likely prompt discouraged workers
and female workers to reenter the labor force on signs of
economic recovery. Te same factors may also encourage
workers to delay retirement. Either scenario will boost
the labor force, helping keep unemployment high. And if
hiring in the private sector grows only sluggishly, it will be
unable to absorb the labor force increase.
1.1.3 1hreat of [ob|ess recovery
1 Harmonized unemployment rate diference,
January 2008 to February 2010
-2 0 2 4 6 8 10
Harmonized unemployment rate diference
Germany
Japan
Italy
France
Greece
United Kingdom
Eurozone
Portugal
United States
Ireland
Spain
Percentage points, seasonally adjusted
Note: latest data for Creece and the unlted Klngdom are
0ecember zoo, for Japan, January zoo.
Source: lurostat. http://www.ec.europa.eu/eurostat
(accessed ,o Varch zoo).
2 Unemployment, United States
7
14
21
28
35
6
9
12
15
18
Rate of unemployed,
marginally attached
and working part time
a
Mean duration
of unemployment
Jan
10
Jan
09
Jan
08
Jan
07
Jan
06
Jan
2005
Number of weeks %
a
As share of labor force plus persons marglnally attached
to the labor force.
Source: uS ureau of labor Statlstlcs. www.bls.gov
(accessed | Aprll zoo).
3 Number of unemployed by duration,
eurozone
0
2
4
6
8
10
24 months and more
Between 12 and 23 months
Less than 12 months
Q3
2009
Q3
2008
Million
Source: lurostat. http://www.ec.europa.eu/eurostat
(accessed , Aprll zoo).
Te recovery in consumption was helped by temporary support
imbedded in some fscal stimulus packages. But defated wealth in
property-boom countries (and the related cleanup of household fnances),
coupled with weak job market prospects suggests that consumption will
not be a strong growth driver in the medium term. What, then, about
investment?
Res|tancy |n pr|vate |nvestment
Facing rising and at times enormous uncertainty in economic activity,
private investment tumbled from late 2008, and this was responsible for
much of the GDP contraction in 2009. Gross capital formation subtracted
more than 3 percentage points from GDP growth in the USa magnitude
beyond what happened during the oil crises in the 1970s. Similarly, Japan
and the eurozone sufered severe investment downdrafs. While gross
fxed capital formation improved steadily across these economies during
2009 and early 2010, it is still far from contributing to overall growth.
US investment showed buoyant growth in the fourth quarter
in 2009. Te turnaround was supported by the pickup in
residential investment and robust inventory restocking. Business
inventory adjustments added a surprising 3.9 percentage points,
a reversal of the drag this component had on GDP during
the depths of the crisis. Nonresidential investment, however,
remained weak (Figure 1.1.11). While residential property prices
seemed to have hit the trough and are recovering, commercial
property prices are still low, and demand remains weak.
Inventory adjustments have also progressed in the eurozone,
contributing 0.3 percentage points to GDP growth in the second
half of 2009. However, capital spending is likely to remain
depressed in the near term, as capacity utilization remains
weak and frms continue to keep low inventories despite
improving demand. Residential investment recovery has been slowed by
a particularly harsh winter, which postponed construction work, and is
likely to remain subdued during 2010.
In Japan, private investment edged up in the last quarter of 2009 afer
recording 6 consecutive quarters of decline until the third quarter of last
year, but it has yet to show clear signs of recovery. New house building
is still at low levels, refecting tight fnancing conditions for real estate
frms and a distressed labor market situation. Machinery orders inched
up by 1.9% year on year in December afer declining for 17 consecutive
months since the second half of 2008. Corporate investment, however,
may still be sluggish as the Tankan survey (of both large manufacturers
and nonmanufacturing industries) showed only a slow improvement in
negative sentiment on the back of still-declining corporate profts and
uncertainty over the strength of the global recovery.
Whether, globally, private investment and corporate activities will
help sustain growth this year and next is uncertain, particularly once
restocking is complete. Indicators related to private investment are still
weak across the industrial economies.
Te trend in the number of building permits is a useful indicator of
future developments in housing markets and construction, and ofer a
pointer to the level of current corporate optimism and future investment.
.. Pr|vate |nvestment growth, Un|ted States
-40
-20
0
20
Nonresidential investment Residential investment
Q3 Q1
09
Q3 Q1
08
Q3 Q1
07
Q3 Q1
06
Q3
2005
%, quarter on quarter, saar
saar seasonally adjusted annuallzed rate.
Source: uS 0epartment of Commerce. ureau of lconomlc Analysls. http://www.
bea.gov (accessed z Varch zoo).
..z 8u||d|ng perm|ts and construct|on act|v|ty
-250
0
250
500
-40
0
40
80
Eurozone Japan
United States
Jan
10
Jul Jan
09
Jul Jan
08
Jul Jan
07
Jul Jan
2006
Jan 2009 = 100 % balance
Note: uS: New prlvately owned houslng unlts authorlzed by bulldlng permlts,
Japan: New constructlon starts, prlvate dwelllngs, eurozone: Resldentlal
bulldlng actlvlty development over the past , months measured as balances
l.e., the dlerences between the percentages of respondents glvlng posltlve and
negatlve replles.
Sources: lurostat. http://www.ec.europa.eu/eurostat, Japan Vlnlstry of land,
lnfrastructure, Jransport and Jourlsm. www.mllt.go.jp, uS 0epartment of
Commerce. ureau of lconomlc Analysls. www.bea.gov (all accessed , Aprll
zoo).
Unfortunately, the number issued remains sluggish across the
major industrial countries (Figure 1.1.12).
New orders for capital goods, another indicator of
investment strength, are still weak and may not yet have hit
their nadir. Industrial production, which tends to lag new
orders for capital goods, also appears sof without any clear
sign of improving soon (except for Japan where the recent surge
in exports contributed to the latest pickup in manufacturing
output).
Japans capacity utilization index, too, increased by
45% by January this year from its trough in February 2009
(Figure 1.1.13). However, those for the US and the eurozone
remain at around 70%, or well below the historical average of
above 80%.
Putting the evidence altogether, while the fourth quarter
investment performance was striking in the US, it may not
be sustainable in the coming quarters based on the other
indicators. Tere is some hope for Japan, though, which may
see a pickup in private investment earlier than the other two economies.
Hence, as with consumption, the world should expect to see only a
gradual recovery in private investment in 2010.
Does external demandthe third leg of the private demand sources
ofer better prospects than the frst two?
ko|e of |nternat|ona| trade |n the recovery
Te gradual recovery of international trade is as much
a consequence as it is a driving force of the economic
bounceback. Refecting the large role played by global supply
chains in production, the traded parts and components of many
manufactured goods cross borders several times, magnifying
the efect of changes in global demand for fnal products on
growth in trade volume. Tis helps explain why trade volume
contracted much more strongly than global GDP during the
global downturn, and why its recovery has outpaced that
of production since. As inventories have rebuilt and as new
industrial orders have increased to meet the gradual pickup
in global demand, international trade in both capital and
consumption goods has been recovering, at a pace exceeding
that of income growth.
In 2009, as US consumers continued to rebuild their household
balance sheets by raising saving, demand for imports declined such that
imports fell by 23%much more than exports at 18%almost cutting
the US trade defcit to about $520 billion from $840 billion in 2008. Tis
has led net exports to be the only other contributor to GDP growth aside
from the public consumption in 2009. But this trend toward reduced
current account imbalances does not appear durable. As the US recovered
in the second half, net exports again subtracted from growth.
Te picture is diferent from the US in the eurozone and Japan.
Improving export performance ofen helps drive these economies out of
recession. During the second half of last year, the rebound of eurozone
and Japanese trade was particularly pronounced with regard to demand
.. Capac|ty ut|||zat|on, ma[or |ndustr|a| econom|es
50
70
90
60
90
120
United States
Eurozone
Japan
Q4 Q1
09
Q1
08
Q1
07
Q1
06
Q1
2005
%, seasonally adjusted 2005 = 100
Sources: oard of Covernors of the lederal Reserve System. www.federalreserve.
gov, Vlnlstry of lconomy Jrade and lndustry. http://www.metl.go.jp, luropean
Commlsslon. http://ec.europa.eu (all accessed z Varch zoo).
for merchandise exports from developing Asia, confrming the regions
leading role in the global recovery.
For both the eurozone and Japan, exports to developing Asia
remained strong throughout 2009. In the case of Japan, robust
export growth in automobile parts and components to the
Peoples Republic of China led this growth but exports of
computer chips to Taipei,China and to Malaysia were also
strong. If this surge in external demand is transmitted to
corporate profts, fxed investment, and employment, both the
eurozone and Japan will be on a slightly frmer footing again.
While it is still too early to point to any defnite trends,
there are signs that developing Asia may contribute to the
recovery by increasing its role as a net importer of US high-
technology manufactured goods such as aerospace, information
technology, and pharmaceutical products (Box 1.1.4).
What are the prospects for world trade and its role in the
global recovery? Leading trade-related indicators suggest a steady pickup
in trade volume this year and beyond. Te Baltic Dry Indexan
indicator of demand for shipping servicesrebounded
signifcantly in early 2009 and has kept up this momentum,
pointing to increased economic activity (Figure 1.1.14).
New export orders, too, seem to be holding up well
(Figure 1.1.15). Te recovery in world trade is both a cause
and a consequence of the recovery in global GDP. As such,
the positive leading indicators for trade growth bode well for
growth in the major industrial economies. Taken together,
though, with the weak consumption and investment demand, is
there enough private demand to sustain the recovery?
Uncerta|nty |n pr|vate demand
All in all, permanent forces have not emerged strongly to take
over the transitory sources. A shif from the public policy
support to the private forces may not be as smooth as hoped for. As many
of the emergency measures are being unwound, growth prospects are
clouded by the weak spots. Tere is considerable uncertainty surrounding
the strength of the global recovery.
Caut|ous return to g|oba| growth
Despite this uncertain environment, the Asian Development Outlook
2010 (ADO 2010) forecasts that the mild recovery in the major industrial
economies will continue through 20102011 (Table 1.1.1). GDP in the US,
Japan, and eurozone will expand by 1.7% in 2010 and slightly accelerate
to 2.0% in 2011, rates that are still less than potential growth. A mild
recovery in world trade is also projected for 20102011.
0ut|ook for |ndustr|a| country growth and wor|d trade
Te US led the major industrial countries in terms of the strength of
its recovery in 2009. Te demand components of GDP turned broadly
positive in the third quarter (2.2% growth) accelerating to 5.6% in the
fourtha far cry from the 6.4% contraction sufered in the frst quarter.
.. 8a|t|c 0ry |ndex
0
3,000
6,000
9,000
12,000
Baltic Dry Index
Jan
10
Jul Jan
09
Jul Jan
08
Jul Jan
07
Jul Jan
06
Jul Jan
2005
4 Jan 1985 = 100
Source: loomberg (accessed z Varch zoo).
.. urowth of new orders of durab|e goods
-50
-25
0
25
50
United States Eurozone Japan
Jan
10
Jul Jan
09
Jul Jan
08
Jul Jan
07
Jul Jan
06
Jul Jan
2005
%
Sources: uS Census ureau. http://www.census.gov, Vlnlstry of lconomy Jrade
and lndustry. http://www.metl.go.jp, lurostat. http://www.ec.europa.eu/
eurostat (all accessed z) Varch zoo).
During the high-growth years prior to the global fnancial
crisis, developing Asias prosperity was furthered by the
United States (US) absorbing much of the large and
expanding volume of global exports. US merchandise
trade defcits during 20062008 averaged nearly $1 trillion
annually, providing a strong and steady external market for
the worlds exporters, particularly those in developing Asia.
Before the crisis, the US trade balance had started to adjust,
with net exports expanding at a modest pace in 20072008.
With the onset of the crisis, however, US tradeand with it,
world tradecontracted. Te US trade defcit fell by one-third
in 2009 as its imports collapsed even faster than its exports.
Coming out of the crisis, US households and frms will
have to reduce their debt by saving a higher share of disposable
income and profts, which will further narrow the trade defcit
in the short term. Whether the US can sustain the increase in
exports relative to imports in the long term is an open question.
What industries are emerging from the rebalancing of US
trade and how will this afect developing Asia?
To explore these questions, US International Trade
Commission data on total net exports were compiled into
detailed product categories (specifcally, the 4-digit level of
aggregation in the harmonized system of tarif classifcations
for those products that averaged at least $100 million in real
net exports during 20072008). Te 20072008 average of
real net exports was used for the precrisis levels. Te detailed
product groups were then grouped by factor content into
four broad categories: high-technology manufacturing, low-
technology manufacturing, agricultural-related, and raw
materials and energy. Two hundred and thirty-one detailed
products met the criteria with an overall average value of
over $246 billion (in 2001 prices), nearly 58% of which were
in high-technology manufacturing (Box fgure 1).
Next, data from the same source were examined for the
group of economies that account for the bulk of US exports to
developing Asia: the Peoples Republic of China (PRC), India,
ASEAN-10, and the newly industrialized economies. Data
were compiled into the same detailed product categories as
was used for total trade, where real net exports averaged
at least $10 million per year in 20072008. In the precrisis
period, the US had net exports to developing Asia of at least
$10 million per year for 177 of the 231 productswith an
even greater concentration in the high-technology category
(60%) (Box fgure 2).
In contrast to the precrisis performance, in 2009 there was
a huge shif in US net exports from high-technology to the
other three categories and especially agriculture, but this is
almost certain to be reversed as recovery unfolds. Much of
this apparent shif was a result of the worldwide collapse in
demand for new aircraf (the most important product in US
net exports in normal years) and in information technology
products. With new commercial airliners coming of the
assembly lines soon, this shif is likely to be reversed.
Interestingly, India, ASEAN-10, and the newly
industrialized economies are destinations for US high-
technology net exports to an even greater extent than for
the world as a whole. In contrast, the PRC tends to receive
a lower portion of high-technology net imports (28%) but a
larger share of agriculture-related (41%) and raw materials
and energy products (30%) than the world as a whole.
As developing Asia renews its emphasis on improving
the quality of life and improving health and environment, its
demand for US-produced high technology goods is likely to
accelerate and thus to contribute to a more balanced global
trade relationship. Tis will be mutually benefcial as the US
seeks to raise saving and exports and to curb consumption and
imports.
keference
William E. James. Forthcoming. Asias Role in the New United
States Export Economy. ADB Economics Working Paper Series. Asian
Development Bank, Manila.
1.1.4 0eve|op|ng As|a |n the new export economy of the Un|ted States
1 United States real net exports to rest of the
world, by factor intensity, 20072008
RME
LT
HT
AR
US real net exports to world
Low-technology
manufactures
3.4%
Raw materials
and energy
15.3%
Agriculture-
related
23.5%
High-technology
manufactures
57.8%
Note: 0ata refer to net exports of over soo mllllon. Real
values were derlved uslng the average of export and
lmport prlce lndexes.
Source: unlted States lnternatlonal Jrade Commlsslon.
lnteractlve Jarl and Jrade 0ataweb. http://www.usltc.
gov/ (accessed z lebruary zoo).
2 United States real net exports to developing
Asia, by factor intensity, 20072008
RME
LT
HT
AR
US real net exports to developing Asia
Low-technology
manufactures
1.4%
Raw materials
and energy
16.8%
Agriculture-
related
21.8%
High-technology
manufactures
60.0%
Note: 0ata refer to net exports of over so mllllon. Real
values were derlved uslng the average of export and
lmport prlce lndexes.
Source: unlted States lnternatlonal Jrade Commlsslon.
lnteractlve Jarl and Jrade 0ataweb. http://www.usltc.gov
(accessed z lebruary zoo).
Private consumption and inventory restocking led the turnaround and
were joined by private fxed capital accumulation in the last quarter
(Figure 1.1.16). However, GDP still contracted by 2.4% for the year. Te
index of leading indicators in the US provides support for the view that
the trough in economic activity has passed (Figure 1.1.17). Te index
reached its lowest in February 2009 and has since risen for 11 consecutive
months.
Labor market concerns and persistent fnance sector weakness
weigh heavily on the prospects for the US economy this year and next.
Te uncertainty surrounding the extent to which fscal and
monetary stimulus can be maintained further clouds the
picture. Te sources of growth beyond the frst half of 2010 are
uncertain. Te projections are for a moderately paced recovery,
with GDP expanding by 2.4% in 2010 and 2.6% in 2011. While
this appears strong when compared to the forecasts for the
eurozone and Japan, the downside risks make for a fragile US
outlook.
Afer contracting by 2.5% and 0.1% (quarter on quarter)
in the frst and second quarters of the year, respectively, the
eurozone pulled out of recession in the third quarter of 2009
with a 0.4% increase in GDP (Figure 1.1.18). Tis brought to an
end a recession lasting 5 consecutive quarters, and the strength
of recovery exceeded consensus expectations. However, the
nascent optimism was soon damped by the release of fourth
1.1.1 8ase||ne assumpt|ons for externa| cond|t|ons
2008
Actua|
2009
Actua|
2010
ADO 2010
pro[ect|on
2011
ADO 2010
pro[ect|on
u0P growth (%)
Vajor lndustrlal economles
a
0.2 -3.5 1.7 2.0
unlted States 0.4 -2.4 2.4 2.6
lurozone 0.6 -4.1 1.1 1.6
Japan -1.2 -5.2 1.3 1.4
wor|d trade (% change)
Verchandlse exports volume 1.5 -12.0 7.1 8.1
Pr|ces and |nat|on
rent crude spot prlces
(average, 5 per barrel)
97.3 61.7 80.2 84.6
lnergy prlce lndex ( change) 40.1 -36.9 8.0 8.1
lood and beverage prlce lndex
( change)
23.3 -13.1 4.7 2.9
CPl lnatlon (C3 average, ) 3.2 -0.2 1.4 1.3
|nterest rates
uS lederal lunds rate (average, ) 1.9 0.2 0.3 1.0
lu renanclng rate (average, ) 3.9 1.3 1.1 1.5
Japan lnterest rate (average, ) 0.5 0.1 0.1 0.2
uS5 llbor
b
() 2.7 0.3 0.3 1.3
a
Average growth rates are welghed by CNl, Atlas method.
b
Average rate on -month uSs deposlts.
Sources: uS 0epartment of Commerce, ureau of lconomlc Analysls. http://www.bea.gov, lurostat.
http://www.ec.europa.eu/eurostat, lconomlc and Soclal Research lnstltute of Japan. http://www.esrl.
cao.go.jp, world Jrade 0rganlzatlon. http://www.wto.org, Consensus lorecasts, loomberg, lnternatlonal
Vonetary lund. Prlmary Commodlty Prlces. http://www.lmf.org, world ank. Clobal Commodlty Varkets.
http://www.worldbank.org, A0 estlmates.
.. Contr|but|ons to u0P growth, Un|ted States
-12
-6
0
6
Q1
2008
Q2 Q3 Q4 Q1
09
Q2 Q3 Q4
Percentage points,
seasonally adjusted annualized rate
Personal consumption
GDP growth
Change in inventories
Gross fxed capital formation
Source: uS 0epartment of Commerce. ureau of lconomlc Analysls. http://www.
bea.gov (accessed Aprll zoo).
quarter data, showing eurozone growth to have stalled, as
Frances strong performance (0.6%) was ofset by stagnation
in Germany (0.0%) and contraction in Italy (0.3%) and Spain
(0.1%). For all 2009, the eurozone economy is estimated to have
contracted by 4.1%.
Looking ahead, confdence indicators provide positive
signals for continued expansion of eurozone activity
(Figure 1.1.19), but industrial production and internal demand
remain subdued, while unemployment fgures are still rising.
Assuming a robust recovery of external demand for eurozone
exports as the main driving force in the years ahead, against a
slow and gradual rebound in domestic demand, eurozone GDP
is forecast to expand by an anemic rate of 1.1% in 2010 and by
1.6% in 2011.
Further risks to the eurozones outlook relate to the impact
of worsening labor market conditions on household saving
and consumption, and the combined efect of low capacity
utilization and higher interest rates on frms investment
spending. With both the consumption and investment
components of demand likely to remain fragile over the entire
forecasting period, any unexpected disruption to external
demand, including from Asia, risks putting the eurozones
recovery in jeopardy.
Japans economy is on the recovery path, but it is far
from being self-sustainable. Expansionary policies and the
upturn in exports to developing Asia have been the main
drivers of recovery so far. Initially, it was public demand, both
consumption and capital formation, which helped lif the
economy from its deep frst-quarter dip in 2009 (Figure 1.1.20). Ten,
private consumption and net exports came in, in the second
quarter. As public investment sofened in the second half, public
consumption became the sole contributor to overall growth in
2009. As a result, Japans GDP contracted by 5.2%the worst in
its postwar history.
Although the rebound in exports is hoped to serve as an
engine of growth, there is an increasing awareness that the
degree of external demand (of a limited set of trading partners)
dependence needs to be reduced, and that Japans source of
growth needs to come from domestic sources (Box 1.1.5).
Te prolonged recession is further straining the already
disturbing fscal situation in Japan, in which general
government debt reached 189% of GDP by the end of 2009, the
highest among industrial nations. Te expected increase in
bond issuance to fnance the defcit may start adding upward
pressure on fnancing costs this year. Te worsening fscal
situation too poses a threat if tax revenues do not recover as
fast and fnancing cost starts to climb. (Figure 1.1.21) Overall, the outlook
for Japan remains sluggish while the stimulus measures are gradually
unwound. Te sources of growth, particularly afer the second half of this
year, are uncertain, leading to relatively pessimistic growth projections of
1.3% in 2010 and 1.4% in 2011.
../ Compos|te |ead|ng |nd|cators, Un|ted States
85
90
95
100
105
Composite leading indicators
Jan
10
Jul Jan
09
Jul Jan
08
Jul Jan
07
Jul Jan
06
Jul Jan
2005
Seasonally adjusted index, 2000 = 100
..8 Contr|but|ons to u0P growth, eurozone
-10
-5
0
5
10
Q1
2008
Q2 Q3 Q4 Q1
09
Q2 Q3 Q4
Percentage points,
Private consumption
GDP growth
Net exports
Government consumption Statistical discrepancy
Gross capital formation
Source: CllC 0ata Company (accessed ) Aprll zoo).
..p Lconom|c sent|ment |nd|cator, eurozone
-40
-20
0
20
40
Building Retail Consumer Services Industry
Jan
10
Jan
09
Jan
08
Jan
07
Jan
06
Jan
2005
% balance
Note: Computed as the dlerence between the percentages of respondents
glvlng posltlve and negatlve replles.
Source: luropean Commlsslon. http://ec.europa.eu (accessed ,o Varch zoo).
Japan will, over the longer term, have to rebalance its
economy so as to reduce its dependence on exports
of its sophisticated products to the major industrial
economies. Even in the short term, these markets are
extremely unlikely to revert to their precrisis levels of
Japanese imports.
Japans exports to Asia are now rebounding
(Box fgure). In particular, capital goods exports to the
Peoples Republic of China (PRC) have increased due to
the stimulus outlays on infrastructure. But it is unclear
if exports to the PRCand to the other smaller markets
in Asiacan be sustained to drive recovery in Japan.
In an attempt to move away from the export-led
growth model, the government announced a New
Growth Strategy at end-2009. Instead of emphasizing
output growth (as many previous strategies have done),
it seeks to assign more importance to improving peoples
welfare more generally; to focus on new sources of
domestic demand (rather than on promoting supply);
and to promote closer Asian economic integration.
Te strategy aims to increase domestic demandled
growth by a focus on safeguarding the environment,
boosting tourism, improving health services, and
strengthening technology. Te idea is to take advantage
of the aging population and to utilize the countrys
achievements in advanced technology to develop
products where potential markets are large (both
domestic and abroad).
Tis focus, while serving to reduce vulnerability to
changes in the external environment by stimulating an
enlarged domestic demand, would also lead (on the
supply side) to the development of new products and
processes, thus contributing to rebalancing the sources
of growth. Japans potential growth and international
competitiveness would be also boosted.
How the goals in the strategy are to be achieved is
not, however, clear. In the budget for FY2010, social
welfare expenditure will grow by 9.8% from what was
planned in the initial budget for FY2009 (under the
previous government) to 27.3 trillion, while spending
on public works will fall by 18.3% to 5.8 trillion, the
lowest level in 32 years (Box table).
Tese moves refect increasing direct transfers to
households to boost domestic demand, as the new party
of government pledged at the election last year. Other
concrete measures to support the strategy are yet to be
announced.
To fund the FY2010 budget, however, the government
is planning a record bond issuance of 44.3 trillion,
partly because tax revenues are projected to fall to
37.4 trillion this year, the lowest level since FY1984.
Yet Japans wobbly fscal trajectory in the next few years
at least suggests that such transfers are unsustainable,
nor are enough to achieve the new strategys goals.
While greater details will be disclosed in the coming
months, it seems apparent that the strategy will have
to entail more signifcant structural reforms than it
currently does to yield any visible outcome to rebalance
Japans sources of growth. Potential areas for such
reforms include promoting deregulation in key major
nontradable industries such as airlines and medical care.
1.1.5 keba|anc|ng growth and the New urowth Strategy |n Japan
Trade balance, Japan
-6
-3
0
3
6
9
Q1
2007
Q3 Q1
08
Q3 Q1
09
Q3
trillion
-2
-1
0
1
2
3
% of GDP
Central and East Europe
Trade balance
Middle East
Western Europe
Rest of the world
Asia
North America
Sources: Jrade Statlstlcs of Japan. Vlnlstry of llnance.
http://www.customs.go.jp, lconomlc and Soclal Research
lnstltute. Cablnet 0ce, Covernment of Japan. http://
www.esrl.cao.go.jp (both accessed ) Varch zoo).
FY2010 budget allocation
Ma[or expend|ture Amount
( tr||||on)
% change
(PY2009 to PY2010)
Soclal securlty 27.3 9.8
lducatlon and sclence 5.6 5.2
Natlonal defense 4.8 0.3
Publlc works 5.8 -18.3
Vlscellaneous and
others
9.3 2.7
Note: 0thers lnclude expendltures for penslons for former mllltary
personnel, economlc asslstance, oclal development asslstance, promotlon
of small and medlum-slzed enterprlses, energy, and food supply.
Source: ased on Highlights of the Budget for FY. Vlnlstry of llnance.
0ecember zoo, p. z. http://www.mof.go.jp
World trade volume (as measured by merchandise exports)
contracted by an estimated 12% in 2009, and this sharp reversal
accompanied an overall global economic contraction of about
2.2%. Quarterly estimates of world merchandise trade (exports)
in current dollars during 2009 indicate that growth declined
year on year by as much as 33.2% in the second quarter of 2009
but exhibited mild growth of 3.9% in the fourth quarter.
Overall trade afer the frst 3 quarters of 2009 was a
cumulative 30% below the level of the same period in 2008. With
the recovery of world GDP growth to 2.7% in 2010, world trade
volume is also expected to recover, to 7.1%. In 2011, with GDP
forecast to rise by 3.2%, world trade is set to increase by 8.1%.
0ut|ook for commod|ty pr|ces and |ndustr|a| country |nat|on
Some commodity prices, such as food, are trending upward, but
recently oil prices have been relatively steady. However, with the output
gap still large, infation will remain under control in the major
industrial countries.
Commodity prices have begun to trend upward in
tandem with the global economic recovery, with a particular
thrust coming from demand by emerging market economies
(Figure 1.1.22). Te drop in prices since the spike in mid-2008
masks the fact that commodity prices in 2009 have remained
elevated compared to the average of 20052007, the years
immediately preceding the spike.
Afer falling from their peak in July 2008, energy prices
hit a trough in the frst quarter of 2009 and have been rallying
since. By January 2010, the energy commodity price index,
which includes coal, crude oil, and natural gas, had risen 57%
from the low base of a year earlier. (In comparison, nonenergy
commodity prices rose by 25% in the same period.) Tis
rebound in prices, despite generally high inventories, can be
primarily attributed to the expected strong demand in the
near term as global economic activity picks up. While elevated
prices encourage producers to boost supply, most producers
especially in the extractive industriescannot do so quickly.
Energy prices are expected to rise by about 8% annually in
20102011.
On oil specifcally, the average monthly price of crude oil
(Brent crude spot) has recovered from its low of $41.34 per
barrel in December 2008 to $74.76 per barrel in February 2010.
Prices are expected to range between $80 and $85 per barrel in
20102011 (Box 1.1.6).
For most of 2009, prices of base metals went up in sync
with the gradual recovery in industrial production and refected
some supply constraints. Te metals and minerals price index
increased by 46% in January 2010, compared to the same month of the
previous year, consistent with the acceleration of global industrial activity.
Further price increases are expected.
Prices of agricultural goods in 2009 were more stable and lower
than in the previous year (Figure 1.1.23). Troughout 2009, food and
..zo Contr|but|ons to u0P growth, Japan
-20
-10
0
10
Q1
2008
Q2 Q3 Q4 Q1
09
Q2 Q3 Q4
Percentage points,
Private consumption
GDP growth
Public investment Government consumption
Residual
Private investment
Net exports
Source: lconomlc and Soclal Research lnstltute. Cablnet 0ce, Covernment of
Japan. http://www.esrl.cao.go.jp (accessed zz Varch zoo).
..z P|sca| cond|t|on, Japan
0
30
60
90
120
Special defcit fnancing bonds issues
Construction bonds issues Tax revenues
Total expenditures
10 09 08 07 06 05 04 03 02 01 2000
trillion
Source: Vlnlstry of llnance. http://www.mof.go.jp (accessed ,o Varch zoo).
..zz Commod|ty pr|ce |ndexes
0
200
400
600
800
Fertilizer
Metals and minerals
Agriculture
Non-energy Energy
Jan
10
Jan
09
Jan
08
Jan
07
Jan
06
Jan
05
Jan
04
Jan
03
Jan
02
Jan
01
Jan
2000
2000 = 100
Source: world ank. Commodlty Prlce 0ata (Plnk Sheet). http://www.worldbank.
org (accessed , Aprll zoo).
|ntroduct|on
One potentially signifcant external variable that could
impinge on the regions performance is the path of global
oil prices. Te general pattern of oil prices for 2009 was a
marked but ftful climb. An intensifcation of the upward
momentum in 2010 would burden the region, with sizable
terms-of-trade losses and additional infation pressures.
An unexpectedly robust global recovery could lead to an
unexpected strong surge in global oil demand.
What is the likely trajectory of oil prices in the short
and medium term, and what are the key drivers?
0||-pr|ce ra||y |n 20092010: 0n the back of deve|op|ng
country demand
Te global crisis had a pronounced impact on global oil
prices. Just before the crisis in July 2008, prices surged
to a record high of over $140 per barrel. Due to a
dramatic weakening of demand as a result of the crisis,
they collapsed toward $40 in a few months. Prices have
bounced back since the end of 2008 as the Organization
of the Petroleum Exporting Countries (OPEC) quickly
cut its output target by 4.2 million barrels per day
(mb/d) from September 2008. Output reduction was
substantial, and amounted to about 15% of total OPEC
output and 5% of total world supply. Another major
driver behind the rebound in oil prices has been the
improvement in the global economic outlook.
Economic recovery has been visibly faster and stronger
in non-Organisation for Economic Co-operation and
Development (OECD) countries, in particular developing
Asia, than in OECD countries. Te OECD versus
non-OECD growth gap, which is expected to persist in
the short term, was already evident in the global pattern
of oil demand in 2009 and is continuing to make itself felt
again in 2010. More specifcally, in 2009 OECD accounted
for the entire drop in world demand of 2.2 mb/d whereas
non-OECD demand remained stable.
Global oil demand is projected to grow by 1.2 mb/d
in 2010. OECD oil demand is projected to remain
in negative territory in 2010, declining by 0.2 mb/d.
Although United States demand will grow again, OECD
Europe and Japanese demand will continue to shrink,
albeit marginally.
On the other hand, refecting the much frmer footing
of recovery outside OECD, non-OECD demand is likely
to gather momentum. Aggregate non-OECD demand
will grow by about 1.4 mb/d on average, with the Peoples
Republic of China, India, and Brazil leading the way. A
look at the quarterly trends further confrms that the
slump in world oil demand was concentrated in the
OECD (Box fgure 1).
Short term: Amp|e supp|y ||ke|y to conta|n pr|ce pressures
Global supply and demand trends point to a further rise
in inventories during 2010, even afer 2009s signifcant
buildup. While global demand is projected to rise by
1.2 mb/d in 2010, global supply of oil and oil substitutes
is projected to rise by as much as 1.5 mb/d.
Te increase in output will come from a variety of
sources700,000 barrels per day (b/d) from OPEC,
300,000 b/d from non-OPEC, 400,000 b/d in OPEC
natural gas liquids, and further increases in biofuel supply
due to government mandates. Te resulting excess supply
will further add to inventories and exert downward
pressure on prices.
Te main source of uncertainty surrounding this
baseline scenario is the speed and strength of global
economic recovery. In particular, the global demand
increment may overshoot the projected 1.2 mb/d by a
sizable margin if OECDs recovery surprises on the upside.
Te generally sof price outlook raises some questions
about whether OPEC members will comply with their
output quotas in the coming months. Any drop in
compliance and consequent increase in aggregate output
will further add to downward pressures. Ofsetting this
supply-side factor is the possibility of unexpectedly robust
rebound in the industrial countries. Taking all the relevant
factors into consideration, Dubai crude is expected
to average $70$80 per barrel in 2010, with a gradual
increase during the course of the year (Box fgure 2).
Med|um and |ong term: Pundamenta|s to re-|gn|te upward
pr|ce pressures
At a broad level, the plausible range of prices is between a
fairly robust foor of around $50$60 per barrel, protected
by OPEC, and an unsustainable peak of $150. In fact, in
1 OECD and non-OECD oil demand growth
-4
-2
0
2
4
Non-OECD OECD
Q1
10
Q4 Q3 Q2 Q1
09
Q4 Q3 Q2 Q1
2008
%
Forecast
0lC0 0rganlsatlon for lconomlc Co-operatlon and
0evelopment.
Source: lacts Clobal lnergy (zoo).
1.1.6 kecent g|oba| o|| pr|ce trends and short- to med|um-term prospects
the medium term, oil prices are unlikely to go above $100
on a sustained basis. Te dominant feature of the market,
at least through the medium term, is the large amount
of spare production capacity being carried by the OPEC
members (Box fgure 3).
Installed spare capacity is likely to increase from
around 4 mb/d in 2007 to 10 mb/d by the end of 2010.
Tis rapid expansion is due to a combination of sof
demand and new production capacity. Signifcantly, this
level of spare production capacity in OPEC will be only
slightly less than the record high of 1982.
Beyond the short term, as the global crisis recedes,
supply and demand fundamentals will reassert
themselves. In particular, strong demand growth from
developing countries, in particular the Peoples Republic
of China and India, will exert upward pressure. An
anticipated increase in marginal costs will also push
up prices. At the same time, structural demand growth
from developing countries will begin to play a bigger
role in price determination. Te perception of the
futures markets is that global oil prices are set to rise
in the medium term. In fact, NYMEX crude futures for
2015 are trading at about $10 above current spot prices
(Box fgure 4).
As|as need to use the short term to prepare aga|nst
pr|ce pressures |n the med|um term
Te impact of the global fnancial and economic crisis
on the global oil market cannot be overstated. To a large
extent, the rebound in prices during 2009 refects the
gradual reversion of prices toward values consistent with
oil market fundamentals.
Since mid-2009, prices have stayed relatively stable in
the $70$80 per barrel range. In the short term, ample
spare capacity will limit the scope for price increases.
However, upward pressures are likely to reemerge by
the middle of this decade and those pressures are set to
intensify by its end.
Terefore, the next 5 years ofer a relatively narrow
opportunity for Asian governments to take the necessary
measures to prepare their economies for a medium-term
environment of higher prices and greater volatility.
Foremost among those measures should be policy
actions that catalyze frms and households to use energy
more efciently.
keference
Based on Facts Global Energy. 2010. Oil Price Outlook and
Implications for Developing Asia. Background note prepared for the
Asian Development Bank. March.
2 Dubai crude oil prices
0
30
60
90
120
150
Dubai crude oil prices
Jul Jan
10
Jul Jan
09
Jul Jan
08
Jul Jan
2007
$/barrel
Forecast
3 OPECs installed spare production capacity
0
3
6
9
12
Saudi Arabia
Other Middle East OPEC
Angola, Iraq, and Ecuador
Other OPEC
25 20 15 13 11 09 07 2005
Thousand barrels/day
Forecast
Slump in global
demand and OPEC
output cutback
^
^
0PlC 0rganlzatlon of the Petroleum lxportlng Countrles.
4 NYMEX forward price: West Texas
Intermediate crude
78
81
84
87
NYMEX forward price
Oct Apr
14
Oct Apr
13
Oct Apr
12
Oct Apr
11
Oct Apr
2010
$/barrel
NYVlX New York Vercantlle lxchange.
1.1.6 kecent g|oba| o|| pr|ce trends and short- to med|um-term prospects (continued)
raw materials price indexes fell by 17% and 14%, respectively,
refecting weaker demand for food, feed, and biofuel; good
harvests; and larger stockpiles of key agricultural commodities,
particularly maize, rice, and wheat (Figure 1.1.24). But these
prices rose steadily in the second half of 2009 as a result of
robust demand, rising fertilizer prices, and adverse weather
conditions. Overall, the forecast is for moderate increases in the
food and beverage index: 4.7% in 2010 and 2.9% in 2011.
Consumer price movements in the US remain subdued.
Core infation (that is, consumer prices excluding food and
energy) averaged 1.7% in 2009 and 1.4% in the frst 2 months of
2010 (Figure 1.1.25). Rising fuel and food prices, though, have
led to a more rapid increase of consumer prices overall. Te
CPI infation gradually picked up in 2009, and accelerated to
2.4% in JanuaryFebruary 2010. As GDP growth is still below
its potential, infation is manageable, and infation expectations
are in check, the Federal Reserve is likely to maintain its 0% to
0.25% target for the Federal Funds rate through the frst half of
2010.
Eurozone infation remained subdued throughout the
year, due to the high and persistent output gap and growing
unemployment. Te year-on-year Harmonized Index of
Consumer Prices indicates fourth quarter eurozone annual
infation at 0.43%, back from a temporary dip into defation
during the third quarter, mainly on account of declines in
global commodity prices.
Annualized headline infation in the eurozone reached
1.0% in January 2010 and is expected to pick up further
as global commodity prices increase and recovery gains
momentum. However, infation pressures on wages and
consumer prices will be damped by sluggish economic growth,
subdued credit expansion, and low capacity utilization.
Consumer price infation is therefore expected to remain
subdued, and to increase gradually to 1.3% in 2010 and to 1.7%
in 2011.
In Japan, however, the concern is a declining consumer
price index. Excluding volatile fresh food, it declined constantly
in 2009 averaging 1.3% year on year (Figure 1.1.26). Te decline
was initially due to the base efects of the high oil price in
2008, but prices started to fall broadly in the second half of
last year. In December, prices of 377 of the total 585 items in
the consumption basket fell compared to the previous month,
confrming defation pressures. Yet, given the recent pick up
in private consumption, the CPI defation was gradually being
whittled back, to 1.2% in February.
k|sks to the g|oba| out|ook
Te ADO 2010 forecasts for the global economy are
conservativecontinued mild expansion of GDP in the US,
eurozone, and Japan, with an uptick in international trade
..z Agr|cu|tura| commod|t|es pr|ce |ndexes
50
100
150
200
250
300
Raw materials Beverage Food Total agriculture
Jan
10
Jan
09
Jan
08
Jan
07
Jan
06
Jan
05
Jan
04
Jan
03
Jan
02
Jan
01
Jan
2000
2000 = 100
Source: world ank. Commodlty Prlce 0ata (Plnk Sheet). http://www.worldbank.
org (accessed , Aprll zoo).
..z Ma|n agr|cu|tura| commod|t|es
0
100
200
300
400
500
Wheat, US, hard red winter Rice, Thailand, 5% Maize
Jan
10
Jan
09
Jan
08
Jan
07
Jan
06
Jan
05
Jan
04
Jan
03
Jan
02
Jan
01
Jan
2000
2005 = 100
Source: lnternatlonal Vonetary lund. Prlmary Commodlty Prlces database.
http://www.lmf.org (accessed , Aprll zoo).
..z |nat|on, Un|ted States
-3
0
3
6
Core infation Overall infation
Jan
10
Jul Jan
09
Jul Jan
08
Jul Jan
2007
%
Source: uS 0epartment of labor. ureau of labor Statlstlcs. http://data.bls.gov
(accessed z, Varch zoo).
..z |nat|on, Japan and eurozone
-3.0
-1.5
0.0
1.5
3.0
4.5
Eurozone Japan
Jan
10
Jul Jan
09
Jul Jan
08
Jul Jan
2007
%
Note: 0verall excludlng fresh food, Japan.
Sources: lurostat. http://www.ec.europa.eu/eurostat (accessed ,o Varch zoo),
CllC 0ata Company (accessed ) Aprll zoo).
and manageable infation rates. Yet the still-fragile outlook for major
industrial economies has to contend with various downside risks.
Continued weakness in US mortgage markets. US residential
property prices have picked up slowly from their 2009 trough. Yet nearly
one-quarter of mortgaged properties in the US still have loan balances
that exceed their market values. If mortgage defaults continue to rise,
credit market difculties will become even deeper and harder to resolve.
With the specter of large mortgage defaults hanging over them (directly
or through holdings of derivative instruments), fnancial institutions
may be hesitant to restart lending to businesses. Such an incomplete
resumption of credit fows could further disrupt the real economy,
weakening the prospects for recovery.
Mistimed macroeconomic policy responses. Massive macroeconomic
stimulus measures provided support to the major industrial economies
during the depth of the crisis, and helped usher in the mild recovery in
the latter half of 2009. Already, policy makers have begun to unwind
some of the temporary emergency measures, particularly those with set
expiration dates.
Other stimulus measuressuch as tax cuts or reduced interest
ratesmay require direct intervention to reverse. As discussed
earlier, the timing of such actions is critical, since policy makers
have to balance the need to provide an environment that fosters the
recovery today, while keeping an eye on signs of future problems
such as infation, asset bubbles, and unsustainable public debt. Mixed
signals, including rising asset prices concurrent with increasing loan
delinquencies and weak labor markets, further complicate the task of
getting the timing right.
Weakening fscal sustainability. Although liquidity constraints
generally eased by early 2009, fnancial markets still sufered intermittent
episodes of turbulence. With the emergency past (it would seem),
attention has shifed to a new source of stress in global fnancial markets:
the deteriorating fscal balances of many industrial countries. As the
Dubai and Greek crises highlight, sovereign risk may be on the rise with
dire consequences for fnancial stability.
Jump in commodity prices. Even though commodity prices
plummeted with the global slowdown, they have remained above their
20052007 average. Non-oil commodity pricesparticularly foodare
again on the rise. As happened during the 2008 price spike, rising food
prices could lead commodity producers to halt exports in the name of
food security, which would only exacerbate the problem. Such terms-
of-trade shocks for the major industrial countries would contribute to
infation pressures.
In comparison, oil-market supply and demand conditions suggest
only moderate price changes in the next couple of years. Large inventory
levels and excess capacity throughout the supply chain should prevent
abrupt price increasesthough geopolitical confict would likely push up
the price of oil, undermining the global recovery.
Persistent global imbalances. A medium-term risk to the global
outlook is the failure of external defcit and surplus countries to take
measures to reduce their imbalances. US households saving rate has
risen as they adjust their balance sheets, but whether it will be sustained
long and deep enough to unwind that countrys contribution to global
balance-of-payments imbalances is uncertain. Asia, for its part, will have
to undertake structural reforms to shif its demand away from excessive
dependence on the US export market. Failure by either set of economies
to make the necessary adjustments may reignite the growth of global
imbalances, ultimately leading to another bout of global instability.
Incoherent international policy coordination. Another medium-
term concern, poor international policy coordination could delay global
fnancial regulatory reform and also global rebalancing. Building a
resilient global fnancial system, which absorbs and diminishes shocks
rather than amplifying them, is crucial to support vibrant economic
growth. Coordinated policies are important for regulations to be efective,
particularly among the G20 group of countries, so as to avoid regulatory
arbitrage, a situation where fnanciers direct resources toward
institutions in the least regulated markets. Multilateral cooperation is
equally crucial to avoid bilateral conficts over exchange rate and trade
issues. Yet despite the huge issues at stake, there has been limited progress
in cross-country coordination of eforts so far. Without such eforts,
fnancial vulnerabilities that induce volatile cross-border capital fows will
persist, posing future challenges for policy makers.
0eve|op|ng As|as prospects |n
the recovery
Developing Asia weathered the harsh external environment in 2009
emerging frst from the global turmoilhelped by decisive policy
responses. Economies with large domestic markets performed well, while
those relatively more dependent on external demand sufered. Yet even
these weakened economies, where activity plunged in the early months of
the year, strengthened by year-end.
In tandem with the improving global outlook, developing Asias
growth is expected to rebound in 2010. Te regions growth should
accelerate beyond 2008s outturn, though it will still come in below 2007s
record 9.6% growth.
As in the major industrial countries, developing Asias outlook is
fraught with uncertainty as support from fscal and monetary stimulus
gives way to private demand sources. Authorities in the region face
infation risks stemming from maintaining expansionary monetary
policies, and most of them will begin normalizing their operations as
recoveries become more solid. Developing Asias ability to maintain
strong domestic demand will be tested while external demand picks up
only slowly.
kecent trends
Growth in 2009 decelerated across developing Asia with only South Asia
performing slightly better than in 2008. Developing Asias growth fell by
1.4 percentage points to 5.2% in 2009 (Figure 1.2.1).
Te aggregate performance of the East Asian subregion, where GDP
expanded by 5.9%, stemmed almost entirely from the 8.7%
expansion in the Peoples Republic of China (PRC). Te PRCs
performance was based heavily on its exceptional fscal and
monetary stimulus. Te Republic of Korea grew marginally,
helped by fscal stimulus and currency depreciation, but global
headwinds battered the economies of Hong Kong, China;
Mongolia; and Taipei,China, all of which contracted in 2009.
Southeast Asias growth slowed sharply to just 1.2% in 2009,
the weakest outcome since the Asian fnancial crisis of 199798.
Aggregate GDP would have declined had it not been for
relatively high growth of 4.5% in Indonesia, the biggest economy
in this subregion. Indeed, half the 10 economies contracted
(Brunei Darussalam, Cambodia, Malaysia, Singapore, and
Tailand), as the global recession cut into exports and
investment fows.
Te story in South Asia was somewhat diferent, partly because major
countries report fgures in fscal year terms, which shifs the severely
hit frst quarter to the previous year. Growth in 2009 inched up to 6.5%
.z. u0P growth, deve|op|ng As|a
0
5
10
15
Developing Asia
The Pacifc Southeast Asia South Asia
East Asia Central Asia
09 08 07 06 2005
%
Source: Asian Development Outlook database.
from 6.4% in 2008 but only India and Afghanistan saw gains. India
experienced a strong rebound in growth to an estimated 7.2% for the year,
despite a drought-impacted crop. Continued fscal stimulus and monetary
easing in India over the year, alongside an improving global environment,
prompted large capital infows as investor and consumer confdence
strengthened.
Te Pakistan economy again slowed, but fscal imbalances narrowed.
A worsening security environment and power shortages obstructed any
meaningful improvement in economic performance. Te annual rate of
growth slipped, too, in Bangladesh, Bhutan, the Maldives, Nepal, and
Sri Lanka, but Sri Lanka experienced a marked revival from May, afer
the end of its long civil confict.
Central Asia saw growth plummet for a second year, to 2.7% from 6.1%
in 2008, with all countries putting in a weaker performance. Armenia
and Georgia were jolted by contractions in GDP. Kazakhstan managed to
eke out a 1.2% expansion despite banking distress and depressed non-oil
activity.
Growth in the Kyrgyz Republic and Tajikistan was sharply
clipped, in part on reduced workers remittance infows and
economic difculties elsewhere in Central Asia and in the
Russian Federation. Te oil and gas producers (Azerbaijan,
Turkmenistan, and Uzbekistan, but excluding Kazakhstan)
experienced only a moderate slowing in growth.
Growth in the Pacifc pulled back to 2.3% in aggregate
in 2009, from 5.4% a year earlier. Papua New Guinea, the
biggest of these economies, grew by 4.5% (slowing from 2008),
supported by fscal spending and initial investment associated
with expectations of a large new liquefed natural gas project.
However, seven of the 14 Pacifc economies contracted in 2009,
with Fiji Islands GDP declining for a third consecutive year. GDP in
three others was estimated to be fat.
Te signifcant output gap across developing Asia coupled with food
and fuel prices that were lower than their 2008 averages led to a sharp
decline in regional infation (Figure 1.2.2). Aggregate infation in East Asia
was fat, with the PRC and Taipei,China both recording defation.
Infation in both South Asia and the Pacifc almost halved in 2009
while that of Southeast Asia decelerated by around two-thirds.
Central Asias infation rate of about 6%, though much below
the average of the past 5 years, remained the highest of all the
subregions.
In many open economies, such as Indonesia; Korea;
Taipei,China; and Tailand, imports fell even more steeply
than exports, so that current account surplus as a share of GDP
increased. However, overall, developing Asias current account
surplus as a share of GDP fell for the second year, to 4.9% from
5.4%, as the imbalance narrowed in all subregions except for
Southeast Asia (Figure 1.2.3).
Most notably in the PRC, the current account narrowed
by a signifcant 3.6 percentage points to 5.8% from 9.4% due to
reduced exports and robust domestic demand.
.z.z |nat|on, deve|op|ng As|a
0
6
12
18
Developing Asia
The Pacifc
Southeast Asia
South Asia
East Asia
Central Asia
09 08 07 06 2005
%
Developing Asia
The Pacifc Southeast Asia South Asia
.z. P|ve-year average and forecast of current account
ba|ance, deve|op|ng As|a
-20
0
20
40
2011
2010
20052009
Developing Asia
The Pacifc
Southeast Asia
South Asia
East Asia
Central Asia
% of GDP
2011 2010 20052009
0ut|ook
With global recovery now under way, the outlook for developing Asia
looks brighter. GDP growth is forecast to rebound to 7.5% in 2010,
with every subregion expected to perform better than last year. On the
assumption that the global economy will continue to recover
(slowly) and with sofening domestic demand as monetary and
fscal policies are normalized, regional growth is projected to
slow a bit to 7.3% in 2011 (Figure 1.2.4).
Despite steep declines, commodity prices in 2009 remained
elevated compared to the period before the commodity price
boom. As global economic recovery started to impact, they
began an upward trend, and as food and energy are major
components of Asias consumer price indexes, their rebound
will force developing Asian policy makers to keep a close eye on
infation pressures. Still, with the pickup in economic activity
and the impact of monetary policy easing becoming more
tangible, infation is expected to accelerate a little, to an average
of 4.0% in 2010 and 3.9% in 2011 (Figure 1.2.5).
Growth in the fve economies of East Asia is forecast to accelerate
to 8.3% in 2010, with strong recoveries in the three that shrank last year
(Hong Kong, China; Mongolia; and Taipei,China). GDP growth will
remain buoyant in the PRC, while Korea is expected to rebound to 5.2%,
driven by stronger private investment and consumption and the pickup in
global trade.
Similar factors will beneft both Hong Kong, China and Taipei,China.
But while East Asias exports will recover from their contraction in 2009,
the contribution to growth of net exports will be tempered by the rise in
imports as domestic demand increases.
Infation is expected to nudge up to an average of 3.3% in the region.
All East Asias economies (again, apart from Mongolia) will record
current account surpluses.
In 2011, all fve economies are likely to see a slight easing
in the pace of expansion, partly a result of a phasing down of
stimulative policies and because this years rebound will set
a high base. Te PRC is forecast to grow by 9.6% in 2010, up
by about one percentage point from 2009. Aggressive fscal
and monetary stimulus is being adjusted, but will continue
contributing to strong growth. Buoyant domestic demand will
be backed by frmer external demand. Te trade surplus will
resume its upward trend. Economic growth is forecast to ease
to about 9.1% in 2011, as the stimulus policies are phased out.
Infation in the PRC is seen picking up to 3.6% this year and
3.2% next year. Rising asset prices are a concern, particularly
real estate prices in major coastal urban centers, which calls for
close monitoring and possible regulatory intervention.
Against the backdrop that external demand will only slowly pick
up, strong domestic demand should further narrow the current account
surplus in the PRC as well as economies such as Hong, Kong, China;
Korea; and Taipei,China. East Asias outlook for the current account
surplus is a decline to 5.1% in 2010 and 4.7% in 2011.
In Southeast Asia, aggregate growth is forecast to rebound to 5.1% in
.z. P|ve-year average and forecasts of u0P growth,
deve|op|ng As|a
0
2
4
6
8
10
2011 2010 20052009
Developing Asia
The Pacifc
Southeast Asia
South Asia
East Asia
Central Asia
%
.z. P|ve-year average and forecasts of |nat|on,
deve|op|ng As|a
0
3
6
9
12
2011
2010
2005-2009
Developing Asia
The Pacifc
Southeast Asia
South Asia
East Asia
Central Asia
%
2011 2010 20052009
2010, based in large part on the recovery in global trade and a recovery
in investment. Te fve economies that shrank in 2009 will return to
growth in 2010. In 2011, the pace of growth in most of the subregional
economies will likely quicken a bit. Infation is seen averaging a moderate
4.5% in 2010 (the outlier is Viet Nam, where consumer prices might rise
by 10%, partly on account of last years rapid growth in money supply
and local currency devaluation). Te subregional current account surplus
will decline, mainly owing to the expected rise in imports as domestic
consumption recovers.
Growth is expected to pick up in most South Asian countries in
2010. India will lead the group with projected 8.2% growth. Its rebound a
year earlier and continued strong expansion stem largely from domestic
demand conditionsa revival of exuberance of the years prior to 2008.
For its part, Sri Lanka is expected to see an uptick of 6.0%, boosted by
the peace dividend of investor confdence. Improved domestic economic
fundamentals should allow Pakistan to attain higher growth of 3.0%.
Bangladesh and Nepal are projected to see growth ease slightly. Infation
is expected to pick up but remain moderate in South Asia, provided that
monetary policy makers remain alert. Bangladesh, Nepal, Pakistan, and
Sri Lanka all rely heavily on workers remittances to ofset large trade
defcits. Tese earnings have held up quite well over the past 2 years,
helping narrow their current account imbalances in 2009.
Recovery is slow in Central Asia, but the subregion is expected to
grow faster than in 2009 throughout the forecast period, underpinned
by recovery in the Russian Federation and higher oil prices. A still weak
non-oil exporting economy in Kazakhstan will hold back its overall
growth only slightly to 2.5% in 2010. Te Armenian and Georgian
economies are projected to turn around but record anemic growth (also
about 2%). Both the Kyrgyz Republic and Tajikistan should see slightly
accelerating expansions of about 4%6%.
Infation is seen edging up in Central Asia in the next 2 years to about
6.7%. Stronger oil prices will bring higher current account surpluses for
the hydrocarbon exporters. Armenia, Georgia, the Kyrgyz Republic,
and Tajikistan will continue to face relatively large defcits of 8%15% of
GDP, little changed from 2009: these four countries will continue their
adjustment programs with the International Monetary Fund.
Aggregate growth in the Pacifc is forecast to rise to 3.7% in 2010,
mainly owing to accelerations in Papua New Guinea and Timor-Leste,
both of which beneft from higher export demand and prices for natural
resources. However, GDP in the Fiji Islands is expected to contract again,
and most of the smaller economies will grow by 2% or less. Papua New
Guinea will likely see a spurt in growth from 2011, based on a large new
liquefed natural gas project. Subregional infation is seen staying at
around 5.3% both this year and next.
.. wor|d u0P growth, zoo8zo
-8
-4
0
4
8
Western Hemisphere
Middle East
Major industrial economies
Developing Asia Africa
11 10 09 2008
%
Forecast
Notes: Afrlca: Composed of ,o countrles: Algerla, Angola, enln, otswana,
urklna laso, urundl, Cameroon, Cape verde, Central Afrlcan Republlc, Chad,
Comoros, 0emocratlc Republlc of Congo, Republlc of Congo, Cte dlvolre,
0jlboutl, lquatorlal Culnea, lrltrea, lthlopla, Cabon, Cambla, Chana, Culnea,
Culnea-lssau, Kenya, lesotho, llberla, Vadagascar, Valawl, Vall, Vaurltanla,
Vaurltlus, Vorocco, Vozamblque, Namlbla, Nlger, Nlgerla, Rwanda, Sao Jome
and Princlpe, Senegal, Seychelles, Slerra leone, South Afrlca, Sudan, Swazlland,
unlted Republlc of Janzanla, Jogo, Junlsla, uganda, Zambla, and Zlmbabwe.
Vlddle last: Composed of | countrles: ahraln, lgypt, lslamlc Republlc of lran,
lraq, Jordan, Kuwalt, lebanon, llbya, 0man, atar, Saudl Arabla, Syrlan Arab
Republlc, unlted Arab lmlrates, and Republlc of Yemen.
western lemlsphere: Composed of ,z countrles: Antlgua and arbuda,
Argentlna, Jhe ahamas, arbados, ellze, ollvla, razll, Chlle, Colombla, Costa
Rlca, 0omlnlca, 0omlnlcan Republlc, lcuador, ll Salvador, Crenada, Cuatemala,
Cuyana, laltl, londuras, Jamalca, Vexlco, Nlcaragua, Panama, Paraguay, Peru,
St. Kltts and Nevls, St. lucla, St. vlncent and the Crenadlnes, Surlname, Jrlnldad
and Jobago, uruguay, and venezuela.
Sources: A0 estlmates based on data from lnternatlonal Vonetary lund.
zoo. World Economic Outlook. 0ctober. washlngton, 0C, world 0evelopment
lndlcators onllne database, Asian Development Outlook database (accessed
Aprll zoo).
Sources of As|as growth dur|ng
and beyond the cr|s|s
Despite the steep fall in global trade, developing Asia
outperformed the rest of the world in 2009 (Figure 1.3.1),
a surprising outcome for an export-oriented region. With
prospects for global recovery fragile, how it did this is
important for the regional outlook.
0penness and domest|c demand
Developing Asia started 2009 facing the collapse in external
demand from the major industrial countries. Exports from
developing Asia plunged in the frst half of the yearby 24.5%
in the frst quarter and 23.5% in the second. Economies more
open to trade sufered more than the relatively closed ones.
Equally, although it is true that the regional fnancial system as
a whole was not afected severely by the crisis, the fnancially
more open economies sufered more than relatively closed
economies.
While the collapse in regional trade was about as much
as the decline in goods to the major industrial countries (38%
versus 40%, Figure 1.3.2), this understates the importance of
industrial-country trade. Te US, eurozone, and Japan have
a predominant role as fnal goods importers. Te collapse in
regional trade was itself due to crumpled import demand from
the major economies as the movement of parts and components
along cross-border production networks stalled.
Varied GDP growth performance across Asia highlighted
the importance of resilient domestic demandboth
consumption and investmentwhen hit by a large external
shock. Te severe impact of the export collapse was felt
particularly through the fall in business sentiment and hence
private investment. Te impact was particularly severe for
the more open economies: in six of 12 economies (shown in
Figure 1.3.2) that experienced severe export contractions, the fall
in gross capital formation was the main factor taking economic
activity so low in 2009. Increased uncertainty, particularly for
export orders, reduced business investment.
Business sentiment and investment picked up in the second
half of the year, particularly in Hong Kong, China; Korea;
Taipei,China; and Malaysia (Figure 1.3.3). Buoyant import
demand from the PRC seemed to account for this turnaround
(Figure 1.3.4) because demand from the industrial economies
was still subdued.
Te three largest economiesthe PRC, India, and
Indonesiastood out in terms of investment, which contributed
..z Contr|but|ons to export contract|on |n se|ected As|an
econom|es, by dest|nat|on, January0ctober zoo8 vs
January0ctober zoop
-30
-20
-10
0
10
PRC HKG IND INO KOR MAL PAK PHI SIN TAP THA VIE
Percentage points
Peoples Rep. of China
United States Eurozone Japan
India
Rest of the world
Other Asia
PRC Peoples Rep. of Chlna, lKC long Kong, Chlna, lN0 lndla,
lN0 lndonesla, K0R Rep. of Korea, VAl Valaysla, PAK Paklstan,
Pll Phlllpplnes, SlN Slngapore, JAP Jalpel,Chlna, JlA Jhalland,
vll vlet Nam.
Note: 0ata for Jalpel,Chlna ls for full year zoo.
Source: lnternatlonal Vonetary lund. 0lrectlon of Jrade Statlstlcs (accessed
, Varch zoo).
to their GDP growth throughout 2009 (Figure 1.3.5). Large fscal
stimulus packages and generally upbeat business sentiment
supported their corporate sectors. Consumption, too, was
notably steady in these three economies throughout the year.
Strong private consumption was also seen in the Philippines,
though investment contracted. Tese four economies managed
not only to avoid large fuctuations in GDP growth but also
posted no single quarter of contraction.
Developing Asias exports to the major industrial countries
are strengthening (Figure 1.3.6). Yet with recoveries of these
economies expected to be weak, developing Asias engine of
growth has to come from domestic sources or from trade with
other regions. Box 1.3.1, focusing on the economies where export
sectors were badly hit, shows how the pickup in domestic
demand helped create services sector jobs while manufacturing
(catering mainly to the export sector) was still weak.
Improving domestic demand appears to be the major driver
in the regions recovery so far. At the same time, US households
are beginning to save more. Do these trends foreshadow an
unwinding of the global current account imbalances?
Early evidence suggested a move toward reduced imbalance.
On the defcit side, the US current account narrowed
signifcantly from its depth in 2005. In world GDP terms, it
contracted from 1.65% in 2005 to 0.64% in 2009. Tis decline
was matched by the adjustment in surplus countries, namely
in Japan, the Middle East, and the Russian Federation in 2009
(Figure 1.3.7). Te sharp decline in US import demand as well as
lower oil and commodity prices are refected in the shrinking
current account surplus in these economies.
US households are expected to remain cautious in their
spending while they adjust their balance sheets, moderating
consumption growthand hence import demand from
developing Asiain the coming quarters. As such, the
narrowing of developing Asias trade surplus is expected to
continue in the next 2 years. Te large fscal and monetary
stimulus packages quickly rolled out by governments across the
region were basically an attempt to boost domestic demand to
compensate for collapsing external demand.
It appears that the collapse of global trade during the crisis
and developing Asias policy responses have helped kick start the
rebalancing process. Yet it is far from certain that the regions
greater reliance on domestic demand will be maintained.
Sustaining a more balanced growth model also means addressing
several internal structural issues, as argued in ADO 2009.
Developing Asias contribution to the global imbalancesits
persistent high current account surpluseshas been driven
mainly by excess saving. Resolving this problem means removing
the policy bias toward specifc sectors and interest rate distortions
that induce excess corporate saving. Strengthening domestic
fnancial systems and underdeveloped social safety nets will
reduce households need to accumulate precautionary saving.
.. uarter|y contr|but|ons to growth (demand), se|ected
As|an econom|es, zoop
Hong Kong, China; Rep. of Korea; and Taipei,China
-20
-10
0
10
20
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
Hong Kong, China Rep. of Korea Taipei,China
Percentage points
Private consumption
GDP growth
Net exports
Singapore, Malaysia, and India
-20
-10
0
10
20
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
Singapore Malaysia India
Percentage points
Private consumption
GDP growth
Net exports
Thailand, Indonesia, and Philippines
-20
-10
0
10
20
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
Thailand Indonesia Philippines
Percentage points
Private consumption
GDP growth
Net exports
People's Republic of China
-5
0
5
10
15
Q1 Q2ytd Q3ytd Q4ytd
Percentage points
Consumption
GDP growth
Net exports
Note: lor the Peoples Republlc of Chlna, contrlbutlons to growth are ln terms
of year-to-date gures. Consumptlon comblnes prlvate consumptlon and
government consumptlon.
Sources: Natlonal ureau of Statlstlcs. http://www.stats.gov.cn, ank of Korea.
lconomlcs Statlstlcs System. http://ecos.bok.or.kr, CllC 0ata Company (all
accessed zz Varch zoo).
Te region also needs to wean itself from excessive dependence on
exports to countries outside the region and rely to a greater extent on
domestic demand. As discussed in ADO 2009 Update, expansion of
intraregional trade among Asian countries, especially in fnal goods, will
provide the region with an additional source of resilience against external
shocks. Further progress in regional free trade agreements (FTAs) would
play an important role to support sophistication of production network in
the region (Box 1.3.2).
It remains to be seen how well Asian governments can manage
the transition from the unbalanced precrisis economic structure to a
more balanced postcrisis structure. In the medium term, unwinding
of global imbalances requires higher saving and lower consumption in
the US. Even in the short term, it may take some time for the industrial
economies appetites for imports to fully recover, making greater reliance
on strong domestic demand and intra-Asian trade a matter of necessity
rather than choice.
As the global crisis recedes and Asian countries begin to exit from
their fscal and monetary expansion, rebalancing based on public
spending will diminish. But in the end, the main thrust of the stimulus
.. PkC |mports from deve|op|ng As|a
0
3,000
6,000
9,000
12,000
Rep. of Korea
Thailand Philippines
Malaysia
Taipei,China
Hong Kong, China
Jan
10
Oct Jul Apr Jan
09
Oct Jul Apr Jan
2008
$ million
Note: 0ata for long Kong, Chlna lncludes re-exports.
Source: CllC 0ata Company (accessed , Aprll zoo).
.. Contr|but|ons to growth (demand), se|ected As|an
econom|es, zoop
8.7
-2.7
6.8
4.5
0.2
-1.7
0.9
-2.0 -1.9
-2.3
-15
-5
5
15
PRC HKG IND INO KOR MAL PHI SIN TAP THA
Percentage points
Private consumption
GDP growth
Net exports
Investment
lN0 lndonesla, K0R Rep. of Korea, VAl Valaysla, Pll Phlllpplnes,
SlN Slngapore, JAP Jalpel,Chlna, JlA Jhalland, vll vlet Nam.
Note: lndla ls based on advanced estlmates of C0P at constant market prlces.
.. Lxports of deve|op|ng As|a to ma[or |ndustr|a|
econom|es
10
20
30
40
50
To eurozone To Japan To United States
Jul Jan
09
Jul Jan
08
Jul Jan
07
Jul Jan
06
Jul Jan
2005
$ billion
Sources: lnternatlonal Vonetary lund. 0lrectlon of Jrade Statlstlcs. http://www.
lmfstatlstlcs.org/dot, CllC 0ata Company (both accessed 8 Aprll zoo).
../ World current account balance
-2
-1
0
1
2
3
1986 91 96 2001 06 11
% of world GDP
Forecast
United States Middle East
Japan Rest of developing Asia
Peoples Rep. of China Other industrial countries
Russian Federation Rest of the world
Sources: lnternatlonal Vonetary lund. zoo. world lconomlc 0utlook database.
0ctober. www.lmf.org (accessed ) Aprll zoo), Asian Development Outlook
database.
As recovery took hold in the open trading economies of
developing Asia, jobs were created much faster than in
industrial economies. However, progress varied across
sectors: the increase was more signifcant in services;
in manufacturing it was sluggish, or the position even
worsened (Box table).
Even if higher than in 2008, the unemployment rate
in most of the economies in the table is on a declining
trend, and the number of employed has started to
increase. Total jobs in some Asian economies, led by
Tailand, have recovered to or exceeded precrisis levels
(Box fgure 1), in sharp contrast to industrial countries.
But the rebound in employment appears anemic in Hong
Kong, China; and in Taipei,China.
Naturally, it matters which types of jobs are lost, and
which created. For many of Asias more open economies,
the initial brunt of the global fnancial crisis was seen
in a swif export decline, hitting Asian enterprises and
manufacturing employment. Te latter impact
came about because exports of manufactured goods
constitute a large component of total exports among
the sample economiesabove 70% for Korea,
Malaysia, the Philippines, and Singapore.
Despite growth in total employment, jobs in
manufacturing have yet to recover to precrisis
levels, though the number of services jobs has
kept growing (Box fgure 2). Notably, by the third
quarter of 2009, total jobs in services had grown by
more than 10% in Malaysia from early 2008, and
more than 5% in the Philippines and Singapore. In
1.3.1 1rad|ng As|a: Uneven [ob recovery
1 Employment, selected Asian economies
95
100
105
110
Thailand Taipei,China
Singapore
Rep. of Korea
Philippines
Malaysia
Japan Hong Kong, China
Q4 Q3 Q2 Q1
09
Q4 Q3 Q2 Q1
2008
Q1 2008 = 100
Sources: CllC 0ata Company, Slngapore Vlnlstry of
Vanpower. http://www.mom.gov.sg, websltes of natlonal
statlstlcal agencles concerned (all accessed z Varch zoo).
Ofcial unemployment rates, selected Asian economies
2008 2009
2 3 4 1 2 3 4
Chlna, Peoples Rep. of - 4.0 4.2 - 4.3 - 4.3
long Kong, Chlna 3.3 3.7 3.9 5.1 5.5 5.6 4.7
lndonesla - 8.4 - 8.1 - 7.1 -
Korea, Rep. of 3.1 3.1 3.1 3.8 3.8 3.6 3.3
Valaysla 3.5 3.1 3.1 4.0 3.6 3.6 3.5
Phlllpplnes 8.0 7.4 6.8 7.7 7.5 7.6 7.1
Slngapore 2.8 1.9 2.4 3.0 4.1 2.9 2.1
Jalpel,Chlna 4.0 4.3 5.0 5.8 5.9 6.0 5.7
Jhalland 1.4 1.2 1.3 2.1 1.7 1.2 1.0
- not avallable.
Note: 0ata for lndonesla refer to lebruary for zoo8/o and August for , zoo,
for the Phlllpplnes, data refer to quarterly data collected ln January, Aprll, July,
and 0ctober of each year, for Jalpel,Chlna data refer to Varch for , June for z,
September for ,, and 0ecember for |, for the PRC, data refer to oclal urban
unemployment rate.
Sources: CllC 0ata Company, Slngapore Vlnlstry of Vanpower. http://www.mom.
gov.sg, websltes of natlonal statlstlcal agencles concerned (all accessed z Varch
zoo).
2 Manufacturing and services employment
indexes, selected Asian economies
Thailand
Taipei,China Singapore
Rep. of Korea
Philippines Malaysia
Hong Kong, China
80
90
100
110
Thailand
Taipei,China
Singapore
Rep. of Korea
Philippines
Malaysia
Hong Kong, China
Q4 Q3 Q2 Q1
09
Q4 Q3 Q2 Q1
2008
Q1 2008 = 100
Manufacturing employment index
95
100
105
110
115
Thailand
Rep. of Korea
Hong Kong, China
Q4 Q3 Q2 Q1
09
Q4 Q3 Q2 Q1
2008
Q1 2008 = 100
Services employment index
Malaysia, the expansion of services jobs was across the
board, including higher value-added services.
Although it is too early to ascertain the driver
behind this growth in services jobs, recovering domestic
demand is certainly helping. However, this upward
trend is in line with the long-run shif toward services
in many developing Asian economies, which occurs as
incomes rise.
Te relationship between export growth and changes
in employment is not straightforward (Box fgure 3).
Within the sample economies, those experiencing the
greatest drop in exports curiously saw the biggest increase
in total employment. As seen in Box fgure 2 earlier, this
could be due to a shif from manufacturing into services
jobs. Or it could be due to transitory factors like the fscal
policy measures deployed to combat the crisis. Tese
measures boosted private consumption, lifing retail sales
in many economies.
So how can it be seen if this shif to domestic sectors
is sustainable? One way is to ascertain whether the
domestic sectors are in fact productive and ofering
competitive wages, and serving as an engine of growth. If
services jobs are lower paid than manufacturings, then,
as soon as manufacturing resumes hiring, a swif reversal
of trend is likely.
In Tailand, where total employment has grown the
most since early 2008, the jobs lost in manufacturing are
being replaced by services jobs. However, not all these
new jobs are worse paid than manufacturing jobs. On the
contrary, the services sector that has grown the most
wholesale and retail tradehas higher average wages than
manufacturing (Box fgure 4).
If the structural transformation in Tailand follows
a path similar to that in Malaysia and Singapore, this
shif may well continue and services jobs may form the
majority of total employment.
keference
Niny Khor and Iva Sebastian. 2009. Exports and the Global Crisis:
Still Alive, though Not Quite Kicking Yet. ADB Economics Working
Paper Series No. 190. Asian Development Bank, Manila.
1.3.1 1rad|ng As|a: Uneven [ob recovery (continued)
3 Changes in exports and employment,
selected Asian economies, Q3 2009 vs Q3 2008
THA
TAP
SIN
PHI
MAL
KOR
HKG
-2
0
2
4
6
-30 -25 -20 -15 -10 -5 0
% change in exports (year on year)
%

c
h
a
n
g
e

i
n

e
m
p
l
o
y
m
e
n
t

(
y
e
a
r

o
n

y
e
a
r
)
lKC long Kong, Chlna, K0R Rep. of Korea,
VAl Valaysla, Pll Phlllpplnes, SlN Slngapore,
JAP Jalpel,Chlna, JlA Jhalland.
4 Changes in employment and average
wages, Thailand
-100
0
100
200
300
400
Other community and personal activity
Health and social work
Education
Public administration and defense
Real estate, renting, and business activities
Financial intermediation
Transport, storage, and communication
Hotels and restaurants
Wholesale and retail trade
Q4 Q3 Q2 Q1
09
Q4 Q3 Q2 Q1
2008
Thousand persons
Change in service sector employment, year on year
6,000
7,000
8,000
9,000
Services: Wholesale and retail trade, etc.
Services: Hotel and restaurants
Manufacturing
Q4 Q3 Q2 Q1
09
Q4 Q3 Q2 Q1
2008
Baht
Monthly average wages
Source: Jhalland Natlonal Statlstlcal 0ce. http://www.
web.nso.go.th (accessed z Varch zoo).
Amid the stalled Doha Round trade talks, free trade
agreements (FTAs) ofer a means to liberalize trade
and sustain economic recovery in East and Southeast
AsiaASEAN-10; the Peoples Republic of China (PRC);
Hong Kong, China; the Republic of Korea (Korea); and
Taipei,Chinaplus Japan. FTA numbers have grown
rapidly within this groupfrom three to 44 over the last
decadeand another 85 agreements are at various stages
of preparation.
Te FTA surge is due to dissatisfaction with slow
progress in global trade talks, the need to support
sophisticated production networks through continued trade
and investment liberalization, and a defensive response to
the spread of FTAs elsewhere in the world.
Te benefts and costs of these trade deals are the subject
of polarizing debate in the region (for example, Baldwin
2006 and Bhagwati 2008). Advocates point out that such
agreements strengthen the policies that underpin regional
trade integration, laying the building blocks of multilateral
liberalization.
Critics, though, worry that this wave of agreements
is undermining the multilateral process and is fostering
an alarming noodle bowl of overlapping rules of origin
requirements, which may be costly to business. Te lack
of empirical evidence on business impacts of FTAs had
previously made it difcult to resolve this debate and
explore the policy implications.
During 20072008, export-oriented manufacturing
frms in the PRC, Japan, Korea, the Philippines, Singapore,
and Tailand, were surveyed to canvass the views of those
most afected by FTAs (Kawai and Wignaraja forthcoming).
Te surveys yielded a dataset of opinions from 841 frms,
ofering insights into several key questions.
0o rms use P1A preferences!
East and Southeast Asian exporting frms tend to use
FTA preferences more than conventionally thought and
may even increase their use in the future. In the sample,
around 28% (237 frms) of the 835 frms responding to this
question use FTA preferences. When those which plan to
use FTA preferences are added (that is, capturing future
intent as well as current use), the number nearly doubles to
53% (Box fgure 1).
By country, the high level of FTA use among frms in the
PRC can be attributed to the aggressive buildup of new and
expanding production networks that required channeling
resources across the region. In Japan, FTA use rates may
be explained by giant manufacturing frms that are anchors
for regional production networks, as well as by the many
networks of private sector industry associations and public
trade support institutions that provide services to help
businesses adapt to FTA guidelines.
Tailands relatively high use of FTAs is likely the result
of the countrys emergence as a regional production hub
(automotive, for example), high rates of export-oriented
foreign direct investment, and the governments reliance on
FTAs as a tool of trade policy.
Even though current use is higher than expected, the
majority of the East and Southeast Asian frms still do not
take advantage of FTA preferences, facing many barriers to
use. As the Box table shows, non-use of FTA preferences in
the overall sample is explained by several factors.
what |mpedes rms from us|ng P1As!
Impediments to FTA use vary by country. In the PRC for
instance, more than 45% of responding frms (102 frms)
indicated lack of information on FTAs as the biggest
impediment, followed by low margins of preference (14%).
In Korea, low margins of preference (36%) and lack of
information (34%) were the major reasons (delays and
administrative costs linked to rules of origin and nontarif
measures seemed less important there). In the Philippines,
lack of information was overwhelmingly the most important
impediment (70%), followed by delays and administrative
costs, and rules of origin (31%).
1.3.2 8us|ness |mpacts and the As|an nood|e bow| of free trade agreements
1 Utilization of FTA preferences
0
25
50
75
100
Current and planned
Current
Philippines
Thailand
Singapore
Rep. of Korea
People's Rep.
of China
Japan
% respondents
29.0
40.7
20.0
45.7
24.9
28.0
17.3
54.2
20.8
77.9
45.1 47.4
Source: Kawal and wlgnaraja, eds. (forthcomlng).
policy was immediate crisis response, rather than resolving a medium-
term development issue. Aside from the temporary boost to a more
balanced growth model, how efective was policy support in keeping
developing Asia afoat?
0o mu|t|p|e ru|es of or|g|n |mpose a s|gn|cant cost on
bus|ness!
Only 20% of respondents reported that multiple rules of
origin signifcantly added to business costs (Box fgure 2).
Singaporean frms had the most negative perceptions (38%)
while PRC frms had the least negative (6.3%).
Tough only a limited burden in the survey, more broadly,
multiple rules of origin are potentially the most challenging
aspect of FTAs (since they determine which goods enjoy
preferential tarifs to prevent trade defection among FTA
members). Some studies on FTAs argue that complex rules of
origin raise transaction costs for frms, while restrictive rules
of origin deter the use of FTA preferences.
According to the survey, East and Southeast Asian frms
seem to view FTAs as a beneft rather than a burden, and
are currently using them to expand trade to a far greater
degree than had been thought. A large majority of exporters
did not view rules of origin as a signifcant hindrance to
business activity.
Still, as more FTAs under negotiation begin to take efect
and the complexity of the Asian noodle bowl intensifes, the
negative business impact may be felt more.
In the medium term, therefore, consolidating overlapping
bilateral FTAs into a simpler, regionwide FTA is important.
Tat would ofer a more efcient means to coordinate trade
liberalization than the bilateral route while mitigating the
risk of a noodle bowl.
One practical way forward might be to take the best
features from each East and Southeast Asian FTA and
design a boilerplate regional agreement that is both
comprehensive in scope and consistent with World Trade
Organization rules. Tree regionwide FTA proposals are
under discussionan East Asian FTA (or ASEAN+3 FTA),
a Comprehensive Economic Partnership Agreement (or
ASEAN+6 FTA), and a Transpacifc Strategic Economic
Partnership Agreement (spanning APEC economies
including the United States)but it is not clear which will
emerge, or when.
Te formation of such a regionwide FTA may make it
easier to achieve a deep Doha trade deal, if concessions on
agriculture and industrial goods are already incorporated
into the regionwide agreement. It would also spur the
growth of Asian trade and investment through a larger
regional market, the realization of economies of scale, and
technology transfer. Further, it would insure against any rise
in global protectionism, which would put Asias trade and
sustainable economic recovery at risk.
keferences
Baldwin, R. 2006. Multilateralizing Regionalism: Spaghetti Bowls
as Building Blocks on the Path to Global Free Trade. Te World
Economy 29(11): 14511518.
Bhagwati, J. N. 2008. Termites in the Trading System: How
Preferential Agreements Undermine Free Trade. Oxford: Oxford
University Press.
Kawai, M. and G. Wignaraja, eds. Forthcoming. Asias Free Trade
Agreements: Is Business Responding? Cheltenham (UK): Edward
Elgar.
1.3.2 8us|ness |mpacts and the As|an nood|e bow| of free trade agreements (continued)
2 Burden imposed by multiple rules of origin
0
10
20
30
40
Burden imposed by mulitple rules
Philippines
Thailand
Singapore
Rep. of Korea
People's Rep.
of China
Japan
% respondents
31.0
27.7
26.2
37.5
15.4
6.3
Source: Kawal and wlgnaraja (forthcomlng).
Impediments to using free trade agreements
|mped|ment Share of
responses
(%)
lack of lnformatlon 35.2
Small margln of preference 16.5
0elays and admlnlstratlon cost
a
15.1
use of lPZ schemes/lJAs 8.0
Condentlallty of lnformatlon requlred
a
7.3
NJVs ln lJA partners 6.3
Rent seeklng 6.1
Joo many excluslons 5.6
a
Rules of orlgln requlrement.
lPZ export processlng zone, lJA free trade agreement,
lJA lnformatlon technology agreement, NJV nontarl
measure.
Source: Kawal and wlgnaraja, eds. (forthcomlng).
Po||cy act|ons
Substantial (and ofen unprecedented) fscal measures provided a direct
boost to consumption and investment. In a selected group of economies,
which together constitute more than 90% of developing Asias GDP,
the contribution of government consumption to growth was signifcant
(Figure 1.3.5 above). Te fscal measures were supported by an extremely
accommodative monetary stance. Various monetary measures were
employed to provide the supportive environment for the recovery
process. Policy rates were slashed by 234 basis points on average to reach
the historic low for these 10 economies, which injected ample
liquidity.
Lect|veness of sca| po||cy
Plunging external demand, compounded by weak domestic
private demand, lef the government as the consumer of last
resort throughout developing Asia. In striking contrast to the
Asian crisis a decade earlier, the region was unable to export its
way out of the recession. Governments responded decisively with
sizable fscal stimulus packages (Figure 1.3.8). Indeed, the forceful
and synchronized fscal policy response was uncharacteristic
for a region in which the use of countercyclical fscal policy is
uncommon. Developing Asias macroeconomic focus has been
more on keeping budget defcits under control rather than using
spending and taxes to smoothen the business cycle.
But did developing Asias fscal experiment, as it might be called,
play a key role in maintaining regional resilience? Te answer (discussed
in detail in Part 2), would seem to be yes. In particular, higher
government spending had a positive efect on GDP during the worst of
the slowdown. At a minimum, the fscal stimulus is likely to have had a
major positive efect on plunging business and household confdence by
signaling the resolute commitment of regional governments to prevent an
economic meltdown.
Lect|veness of monetary po||cy
Te prudent policies and behavior of Asian monetary authorities and
fnancial institutions certainly contributed to avoiding crisis, but luck may
have played a role too, since Asian central banks had not been challenged by
hard choices, unlike the advanced economies central banks (or their own,
prior to the Asian currency crisis).
Concurrent with the fscal expansion, monetary policies were loosened
to maintain adequate liquidity for the economy. Most central banks
went beyond the usual operating channel of cutting the policy rate by
pumping additional liquidity to the economy through either pursuing
direct injection of liquidity or creating demands for domestic assets. Policy
interest rates were cut sequentially from the last quarter of 2008 and, in
most economies, have been kept at a decade low since.
Tis drop of policy rates initiated expansion in fnancial depth
(measured by M2/GDP). Between the fourth quarter of 2008 and fourth
quarter of 2009, on average, fnancial depth grew by about 38% in a
sample of 11 developing Asian economies (PRC; Hong Kong, China; India;
Indonesia; Korea; Malaysia; Philippines; Singapore; Taipei,China; Tailand;
..8 Change in fscal balance over GDP ratio, 2009 vs average
of 20042008
-5
-4
-3
-2
-1
0
Change in fscal balance
THA SIN PHI MAL INO IND TAP KOR HKG PRC
Percentage points
PRC Peoples Rep. of Chlna, lKC long Kong, Chlna, K0R Rep. of
Korea, JAP Jalpel,Chlna, lN0 lndla, lN0 lndonesla, VAl Valaysla,
Pll Phlllpplnes, SlN Slngapore, JlA Jhalland.
and Viet Nam). Attributing this all to a change in policy rates would be
misleading since that would suggest a percentage point decrease in the
policy rate corresponds to an 18% growth in the ratio of M2 to GDP.
Terefore, liquidity operations must have played a considerable role in
promoting fnancial depth.
Tese monetary operations provided more comfortable room for the
large fscal expansion to play its role in cushioning the impact of the
slowdown and promoting the regions strong recovery.
Both fscal and monetary policies worked. Yet, as Asias recovery picks
up, policy makers are facing a new challengehow to normalize the policy
stance while continuing to support the recovery process and avoid creating
new problems.
8eyond the cr|s|s
While additional fscal measures are unlikely to be implemented this year,
the monetary measures are expected to continue to support the recovery
process by maintaining an expansionary stance. Nonetheless, this stance
throughout the region cannot be kept for too long and needs to be
unwound once economies recover and are back to normal operations.
Early indication of a pickup in infation is emerging, most notably in
India where wholesale price index infation is reaching close to 10%.
On the back of the expectations for robust economic recoveries, asset
prices, particularly of real estate, are also showing a surge, especially in
the PRC and Hong Kong, China (Figure 1.3.9). In fact, initial unwinding,
though not necessarily through an increase in the main policy rate, has
already begun, or has been discussed in many economies (Table 1.3.1).
Central banks in the region need to closely watch how macroeconomic
indicators develop and put more discipline in leaning against any threat
1ab|e 1.3.1 Unw|nd|ng |oose monetary po||cy
Lconomy Act|ons taken by monetary author|t|es Lect|ve date
Chlna, Peoples Rep. of 3-month blll yleld was lncreased by 4.04 basls polnts
1-year blll yleld was lncreased by 8.29 basls polnts
Cash-reserve ratlo was lncreased by 50 basls polnts to 16
1-year blll yleld was lncreased by 8.3 basls polnts
3-month blll yleld was lncreased by 4.04 basls polnts
Cash-reserve ratlo was lncreased by 50 basls polnts to 16.5
7 January 2010
12 January 2010
18 January 2010
19 January 2010
21 January 2010
25 lebruary 2010
lndla Repurchase rate was ralsed by 25 basls polnts to 5.0 and the reverse repurchase rate by
25 basls polnts to 3.5
Cash-reserve ratlo was lncreased by 25 basls polnts from 5.5 to 5.75
Cash-reserve ratlo was lncreased by 50 basls polnts from 5.0 to 5.5
Statutory llquldlty ratlo was lncreased by 100 basls polnts
19 Varch 2010
27 lebruary 2010
13 lebruary 2010
0ctober 2009
Valaysla 0vernlght pollcy rate was ralsed to 2.25 4 Varch 2010
Phlllpplnes Peso redlscount rate was lncreased by 50 basls polnts to 4.0
Peso redlscountlng wlndow was reduced from P60 bllllon to P40 bllllon
loan value of ellglble redlscountlng papers was restored to 80 from 90
Nonperformlng loan ratlo requlrement of 2 percentage polnts above the lndustry average
(from 10 percentage polnts) was restored for banks uslng the redlscountlng faclllty
1 lebruary 2010
15 Varch 2010
15 Varch 2010
15 Varch 2010
vlet Nam Key rate was ralsed from 7 to 8
lnterest rate cap on medlum-term and long-term loans was removed
1 0ecember 2009
lebruary 2010
Sources: Natlonal ureau of Statlstlcs of Chlna. http://www.stats.gov.cn/engllsh/, Reserve ank of lndla. http://www.rbl.org.ln, ank Negara Valaysla. http://www.
bnm.gov.my, angko Sentral ng Plllplnas. http://www.bsp.gov.ph, State ank of vlet Nam. http://sbv.gov.vn
..p House prices, January 2006January 2010
100
125
150
175
200
225
Hong Kong, China People's Rep. of China
Jan
10
Jul Jan
09
Jul Jan
08
Jul Jan
07
Jul Jan
2006
2005 = 100
Source: CllC 0ata Company (accessed , Aprll zoo).
of destabilizing aggregate domestic price levels and expectations, as soon
as strong indications appear.
Additionally, surging capital infows into several economies
especially those that have rebounded frmly and attracted investors with
a rising risk appetiteare complicating macroeconomic management. In
addition, the continued low policy rates in the major industrial countries
and greater market liquidity have prompted speculative fows due to large
interest-rate diferentials and a resumption of some carry trades.
Economies faced with such surges have several options, including
better coordination with industrial countries, from which much of these
fows may originate in the search for better yields. Te response need not
be an immediate monetary tightening. In economies where recovery is
frm, pursuing some fscal tightening can ease pressures on rising interest
rates. For others, accumulation of international reserves or allowing
greater exchange rate fexibility may be more appropriate.
Tere is also room for applying macro-prudential policies, to deter
the formation of asset and price bubbles or for fnancial institutions to
accumulate bufers. Where institutional capabilities are well established,
temporary use of carefully designed capital controls are one possible
approach to deter disruptive short-term fows (Box 1.3.3).
Developing Asias vigorous recovery, alongside low interest
rates in most industrial countries, has sucked in huge capital
infows. If these infows had been driven by fundamental
factors (and countries had the absorptive capacity), policy
makers concerns would be limited.
However, they were not driven in this way: Box fgure 1
shows that the rebound afer frst half 2009 was carried by
portfolio and other types of fows, such as investment by
banks. On the back of the improving economic conditions,
the portfolio infows were signifcant in economies such as
Hong Kong, China; the Republic of Korea; and Taipei,China,
reaching a total of about US$46 billion in the second half of
2009.
Expectation of currency revaluations and interest rate
diferentials triggered the speculative capital fows. As both
these factors may well remain at play for some time, such
infows, too, will likely persist.
Abrupt surges in short-term capital infows (a dominant
feature of speculative capital) pose substantial risks to an
economy, including excessive liquidity, economic overheating,
asset price bubbles, and overall fnancial fragility. Yet if the
central bank attempts to head of these risks, usually by
sterilizing the infows, this eventually induces signifcant real
exchange rate overvaluation.
Te surges in capital infows have already lifed asset
prices, both property and stocks, in some economies. In
just over a years time as of January 2010, property prices
had grown sharply in some of the coastal cities in the
Peoples Republic of China (PRC)around 50% in Haikou
and Sanyaand 28% in Hong Kong, China. Stock prices
recovered, as measured by the MSCI Asia Pacifc index,
which climbed 78% from the trough on 9 March 2009 to
end-March 2010.
Te appreciation of the real exchange rate has become
evident in some countries, including India, Indonesia, Korea,
and Tailand (Box fgure 2). However, because of signifcant
intervention in foreign exchange markets, the degree of real
exchange rate appreciation in the region has been limited.
Given recent developments, additional capital restrictions
appear likely. Te PRC recently introduced additional capital
control measures to block speculative infows, and regulators
there have greater power to investigate currency payments.
Tey can also levy fnes of 30% on unauthorized transfers of
foreign currency. Other central banks are closely monitoring
capital infows.
Two policy issues relate to the buildup of capital infows in
the regionexchange rate management and capital controls.
Too much foreign exchange intervention could lead to serious
repercussions of macroeconomic management in the region,
especially risks emerging from exchange rate misalignments.
Policy makers in some economies may need to reappraise
their exchange rate policy, including considering stronger
moves toward regional cooperation in exchange rate and
reserves management.
Past experience shows that capital controls can be efective
in the short run, but they tend to lead to deterioration in
business sentiment if retained too long. In the medium to
longer term, central banks should free up the exchange rate
to play its role as a shock absorber.
Also over the longer term, countries should progressively
build their absorptive capacity to productively and efciently
use their capital infows, especially in terms of fnance sector
reform and foreign exchange market development.
1.3.3 kespond|ng to surg|ng cap|ta| ows
z Real exchange rates, developing Asian
economies
60
80
100
120
140
160
Thailand Singapore
Philippines Malaysia Indonesia
Q1
09
Q1
08
Q1
07
Q1
06
Q1
05
Q1
04
Q1
03
Q1
02
Q1
01
Q1
2000
1990 = 100
60
80
100
120
140
Rep. of Korea India
Q1
09
Q1
08
Q1
07
Q1
06
Q1
05
Q1
04
Q1
03
Q1
02
Q1
01
Q1
2000
1990 = 100
Source: A0 estlmates based on data from CllC 0ata
Company, and from lnternatlonal Vonetary lund.
lnternatlonal llnanclal Statlstlcs onllne database (both
accessed , Varch zoo).
1 Capital fows, developing Asian economies
-200
-100
0
100
200
Net fows
Other outows Portfolio outows FDI outows
Other inows Portfolio inows FDI inows
H2 H1
09
H2 H1
08
H2 H1
07
H2 H1
06
H2 H1
2005
$ billion
l0l forelgn dlrect lnvestment.
Source: A0 estlmates based on data from CllC 0ata
Company, and from lnternatlonal Vonetary lund.
lnternatlonal llnanclal Statlstlcs onllne database (both
accessed , Varch zoo).
A case for monetary and sca|
act|v|sm!
Developing Asia quickly and strongly bounced back from the recent
crisis. In fact, it led the world out of recession. Tis marks a complete
reversal from the Asian crisis of 199798 when the region exported its
way out of trouble.
What is all the more remarkable is that the regions turnaround
has taken place against the backdrop of sluggish recovery in industrial
countries. How did developing Asia manage to bounce back so quickly
while its main export markets have yet to fully recover?
First, due to limited exposure to subprime assets, the regions banks
and fnancial systems continued to function normally even during the
depth of the crisis. Te region is largely free from the structural problems,
such as the high household debt plaguing the US.
Second, and far more important, was the large fscal and monetary
stimulus.
Still, Asian policy makers should be extremely cautious about reading
too much into the apparent efectiveness of the fscal stimulus during
the global crisis, in particular, drawing lessons for normal noncrisis
periods. For one, Asias unprecedented fscal expansion represented an
extraordinary response to an extraordinary shock. As noted earlier,
fscal stimulus can have an enormous confdence-boosting efect during
a severe shock. Tis beneft is much less important during a regular
business cycle downturn.
Furthermore, it was precisely because Asia had ample fscal space,
the consequence of years of sustained fscal prudence, that it was able to
quickly unleash huge fscal stimulus packages. More fundamentally, fscal
discipline laid the foundation for macroeconomic discipline and sustained
growth in the past.
Part 2 explores this issue furthershould Asia pursue fscal and
monetary activism afer the crisis, or is it better served by a return to its
basic macroeconomic framework of monetary and fscal prudence?
Macroeconomic management
beyond the crisis
2
Macroeconom|c management
beyond the cr|s|s
|ntroduct|on
Te recent global fnancial and economic crisis has had severe
repercussions for developing Asias economic performance. Te preceding
high growth came to a halt as the crisis spread from the fnancial systems
of the industrial countries to their real economies, dulling their appetite
for imports.
As a result, in striking contrast to the 199798 Asian crisis, Asia was
unable to export its way out of trouble this time. On the contrary, the
collapse in world trade and exports brought the global crisis home to
the export-dependent region. In efect, plummeting external demand,
compounded by feeble private domestic demand, made expansionary
monetary and fscal policy the default policy option.
Despite the pronounced initial impact on output, most evident in the
fourth quarter of 2008 and frst quarter of 2009, the region has staged
a spectacular V-shaped recovery that is reminiscent of its rebound from
the Asian crisis. Developing Asia as a whole is estimated to have grown
by 5.2% in 2009 and is projected to grow by 7.5% in 2010. Remarkably,
the regions robust revival has taken place despite the fragile state of
the major industrial economiesthe United States (US), the European
Union, and Japan. Te natural question is how export-dependent Asia has
managed to recover so fast and so strongly when its supposed primary
engine of growth has sputtered so badly.
One plausible explanation has to do with the large monetary and
fscal stimulus packages that the regions governments rolled out in the
wake of the global crisis. Facing enormous political pressures to prevent
an economic meltdown, Asian governments aggressively slashed interest
This chapter was written by Donghyun Park, William James, Benno Ferrarini, Shikha
Jha, Juthathip Jongwanich, and Arief Ramayandi of the Economics and Research
Department, ADB, Manila. It draws on background papers that they prepared with
Charles Adams, Stephen Grenville, Seok-Kyun Hur, Takatoshi Ito, Sushanta Mallick, and
Ramkishen Rajan, consultants.
rates, increased spending, and cut taxes, all in an efort to boost demand
and growth.
Although the contribution of the monetary and fscal stimulus to
Asias recovery remains somewhat uncertain, the widespread perception
is that the downturn could have been far worse. Te direct impact of
interest rate cuts on consumption and investment in the face of depressed
business and consumer confdence may be debatable. However, easy
monetary policies with direct liquidity injections are likely to have
contributed to the recovery indirectly by helping to stave of a credit
crunch and fnancial disintermediation.
Te fscal stimulus probably more directly impacted the real economy.
Te regions stimulus programs were tilted toward heightened public
spending, particularly infrastructure investments, rather than tax cuts,
thereby creating direct additional demand for goods and services and
counterbalancing the weakness of private demand. What enabled Asian
governments to serve as the consumer of last resort was their healthy
fnancial position.
Asias decisive monetary and fscal response was entirely appropriate
and necessary. Te decisive response trumpeted the commitment of
governments to do everything within their power to prevent economic
collapse and sent critical confdence-boosting signals at a time of extreme
crisis, when confdence was at rock bottom.
In historical terms, however, Asias unprecedented easing of monetary
and fscal policies marked a sharp break from the regions long-standing
tradition of macroeconomic prudence. Traditionally, both monetary
and fscal policies have been geared toward promoting macroeconomic
stabilitythat is, low and stable infation and manageable government
budget defcits. Over the long term, central banks gave high priority to
price stability, and governments balanced their books. Of course, the state
of the economy afects Asian monetary policy, and Asian government
budgets tend to expand during downturns. Nevertheless, the use of
monetary and fscal policy for countercyclical output stabilization has
been relatively limited. Asias conservative approach to macroeconomic
policy has therefore served the region well. Specifcally, it has created a
stable macroeconomic environment for frms and households, laying the
foundation for the regions sustained rapid growth.
Yet even if Asia reverts to its traditional precrisis monetary and fscal
conservatism afer it unwinds its anticrisis fscal stimulus, the global crisis
is already a game changer for macroeconomic policy in the region. Never
has the region experienced such a forceful and synchronized monetary
and fscal response to an economic downturn. Certainly, Asias comeback
highlights the potentially valuable role of macroeconomic policy in
reducing the adverse impacts of large external shocks. More generally,
it serves as a powerful reminder of the possibly large benefts of using
macroeconomic policy for short-term output stabilization, in addition to
promoting long-term price stability and output growth.
Te widespread perception that the unprecedented stimulus
contributed substantially to the regions unexpectedly quick and strong
recovery may foster political pressures for greater monetary and fscal
activism. At a minimum, such perceptions will lead to more active debate
about the pros and cons of countercyclical macroeconomic policy.
In that debate, a central consideration is that Asias decisive monetary
and fscal policy stimulus represented an exceptional response to an
exceptional shock, and therefore drawing policy lessons from the global
crisis and applying them to the normal noncrisis period, to which the
world economy is gradually returning, would be dangerous.
Using an extraordinary monetary and fscal stimulus to stave of a
severe negative shock originating from the worlds largest economy is one
thing. Fine-tuning the economy by infuencing the routine ups and downs
of a normal business cycle is something else altogether. Even in industrial
economies, equipped with strong institutions, efective governance,
and stable policy environments, the evidence is at best mixed that
governments are capable of reducing short-term output volatility with
their monetary and fscal policy. As is evident in industrial economies,
political-economy considerations make it much easier for governments
to pursue expansionary policies during recessions than to pursue
contractionary policies during booms.
In developing countries, a truly countercyclical policy that responds
symmetrically to both downturns and upturns is even less possible. Yet
an asymmetric countercyclical policy that responds only to downturns
is likely to jeopardize macroeconomic stability by creating infation
expectations and impairing fscal sustainability.
Monetary, exchange rate and sca| po||cy |n
postcr|s|s As|a
Te global crisis raises a number of more specifc questions about the
conduct of monetary, exchange rate, and fscal policy in Asia in the
postcrisis period.
With respect to monetary policy, an important issue is whether to
incorporate asset price infation, and if so, how. Te immediate cause of
the crisis was the bursting of the US housing market bubble, which had
been infated by complex fnancial innovation that encouraged fnancial
institutions to take excessive risk and overinvest in housing for subprime
buyers.
Even though the impact on Asias fnancial stability was limited,
the origins of the crisis are relevant for the region. For one, because
Asia is recovering more quickly and strongly than other parts of the
world, the risk of an asset price bubble is higher than elsewhere. Indeed,
even though there are no concrete signs of a bubble so far, some major
economies have experienced a surge of equity and property prices. Te
US housing and fnancial market failure resulted from a combination
of inadequate fnancial regulation and excessively lax monetary policy.
Terefore, a key challenge for Asian policy makers is how to strengthen
fnancial regulation and to efectively coordinate it with monetary policy,
so as to prevent such bubbles.
In the context of exchange rate policy, the big question is about
the desirability and feasibility of relatively rigid exchange rates, and
they are, in turn, intimately tied to the issues of export-led growth and
managing capital fows. Certainly the types of exchange rate regimes
and the degrees of fexibility are far from uniform across Asia. However,
governments have kept a close watch on exchange rates out of fear of
losing export competitiveness. Now, the unwinding of global imbalances
implies that the regions postcrisis growth will be less dependent on
exports. Te consequent decline in the relative importance of exports may
encourage Asian economies to become more open to fexible exchange
rate regimes. At the same time, greater exchange rate fexibility will help
wean the region from its disproportionate dependence on exports.
Managing volatile capital fows is a related and major issue. As
a result of its robust recovery, the region is already experiencing
a resurgence of capital infows, which may lead to sharp currency
appreciation. Tis strengthens the case for selective, well-designed capital
restrictions, which would facilitate the regions transition to greater
exchange rate fexibility.
With regard to fscal policy, a fundamental question in the postcrisis
period is whether to pursue heightened fscal activism, particularly in
the use of fscal policy for countercyclical purposes. Industrial economies
have a long history of using government spending and taxes in an efort
to infuence short-run economic conditions. Asian economies, though,
have relatively limited experience in using fscal policy for countercyclical
output stabilization. By and large, Asian governments have kept their
spending within their means to create a macroeconomic environment
conducive to long-run growth.
Tus the broader issue linked to a more activist fscal policy is the
appropriate role and size of government. However, the countercyclical
use of fscal policy does not necessarily require a quantitative expansion
of government. In particular, strengthening the regions automatic fscal
stabilizers (which currently remain underdeveloped) can, in principle,
enhance Asias capacity to use public spending and taxes to reduce
short-run output volatility without impairing its fscal sustainability.
keturn to prudence but ad[ustments needed
In the wake of the global crisis, Asia clearly needs to rethink and
redesign the three main components of its macroeconomic policy:
monetary, exchange rate, and fscal. Te region can draw valuable lessons
from the crisis (even though it originated elsewhere) for improving
and strengthening its own macroeconomic policy. Equally clearly, the
region should adapt its monetary, exchange rate, and fscal policies to
the realities of the postcrisis world. However, although relevant lessons
must be learned, nothing in the global crisis calls for altering the regions
monetary and fscal prudence. Tis tradition has been the cornerstone of
the regions macroeconomic stability, which underpinned its sustained
growth.
Te positive contribution of monetary and fscal stimulus to the
regions V-shaped recovery only strengthens the case for maintaining
rather than abandoning that approach. Te ample fscal space that
was the consequence of sustained fscal prudence enabled the region
to unleash its massive stimulus. Te global crisis highlights a vital
but underappreciated beneft of sound and responsible monetary and
fscal policy: the capacity to support the economy when such support is
desperately needed.
Returning to the basic macroeconomic tradition of monetary and
fscal prudence will be challenging for Asia in the postcrisis world. One
consideration is that the benign global economic environment of precrisis
times may no longer prevail. To a large extent, the regions very rapid
growth immediately before the crisis was the result of strong exports to
the major industrial economies and to the US in particular. As the global
imbalances unwind, however, the US will have to make adjustments that
are likely to cause Asia to experience a slowdown of exports.
Te resulting reduction is more desirable than the breakneck
precrisis growth driven by unsustainable exports to the US. However, it
has adverse implications for fscal sustainability because, other things
remaining equal, lower output growth will increase the public debt-
to-GDP ratio, and, as mentioned earlier, political pressures may be at
work for greater countercyclical fscal activism in the postcrisis period.
For example, central banks may come under pressure to give heightened
priority to growth over price stability.
Te unprecedented monetary and fscal expansion rolled out by
governments around the world has stimulated the debate about the pros
and cons of countercyclical macroeconomic policy. Although the debate
is welcome and relevant for industrial and developing economies alike,
there is a misguided and dangerous tendency to frame the discussion
from the perspective of industrial countries.
For developing countries, the overriding policy objective remains the
achievement of high but sustainable output growthhistorically the most
efective means of reducing widespread poverty. Asia has made enormous
strides in growth and poverty reduction precisely because its monetary
and fscal policy has been focused on macroeconomic stability. Tis is
not to deny the importance of short-term output stabilizationand,
in fact, short-term output stability is supportive of and conducive for
long-term growth. However, what really matters is not so much the
tradeof between short-term stability and long-term growth, but the need
for Asian governments to guard against excessive intervention, activism,
and discretion in the postcrisis period. Tis could impair the regions
long-term policy discipline.
Te central message of the need for Asia to return to its roots of
sound and responsible monetary and fscal policies does not rule out
a stepped-up role for postcrisis macroeconomic policy. Although the
postcrisis economic environment will infuence the evolution of Asias
macroeconomic policy, policy can also infuence that new environment.
Given the regions medium-term need to encourage more domestic
demand and to depend less on exports to the US, both fscal policy
and exchange rate policy can make substantial contributions to that
rebalancing process. Also, governments may be able to do more for
short-term output stabilization, such as with automatic fscal stabilizers,
without putting fscal sustainability at risk. In the long run, the key
challenge for Asia is to adapt monetary, exchange rate, and fscal policies
to the postcrisis world without compromising the macroeconomic
prudence that has benefted it so much in the past.
Monetary po||cy
Monetary po||cy frameworks and performance
s|nce the As|an cr|s|s
Afer the Asian fnancial crisis in 199798, countries in the region started
to get their growth momentum back. In the 2000s, developing
Asian economies have generally been growing at varying but
relatively high rates which, compared to the 1990s, have been
in a relatively lower and more stable infation environment
(Figure 2.2.1).
Tis environment is largely consistent with the present
general consensus that high and volatile infation tends to
be detrimental to economic growth. Arguably, the regions
relatively low and stable infation environment may have been
infuenced by the trend of great moderation in the industrial
economies, where economic growth was steady and coupled
with stable infation. However, the economics profession has
also acknowledged that good macroeconomic policies also
contributed to this great moderation in which Asia shared.
Consequently, economies have sought an appropriate
framework for monetary policy aimed at lowering infation and
maintaining its stability, and infation targeting, as a framework
for monetary policy, gains currency for its empirical ability to
deliver such results. In this framework, a monetary authority
publicly announces a medium-term infation target and makes
an institutional commitment for achieving the target. Te
authority needs to be transparent about its monetary policy
plans and objectives, communicating them to the public and the market
makers. In addition, the authority must increase its accountability by
attaining its infation objectives.
In practice, most central banks tend to adopt a relatively fexible
infation-targeting framework; the resultant monetary policy is designed
to stabilize not only infation around its target but also the activities of
the real economy. Tis type of framework enables a country to focus
on dealing with particular shocks hitting the economy and hence its
domestic interests. It also provides a frm nominal anchor for countries
that are forced to abandon fxed exchange rate regimes. Terefore, the
framework appears to be suitable for adoption even by emerging market
economies (Mishkin 2000).
Following the Asian fnancial crisis 199798, many developing Asian
countries were forced to abandon their pegged currency regime, and
some, in response, adopted the infation targeting framework (Table 2.2.1).
Te Republic of Korea (hereafer Korea) adopted the infation-targeting
framework in the middle of the currency crisis and implemented it in
April 1998. Indonesia and Tailand adopted it in January 2000 and April
z.z. Average and standard dev|at|on of |nat|on, se|ected
As|an econom|es
-7
0
7
14
21
28
Average (20002004)
Average (20012009)
Average (19902000)
Tang,
SD (20002004)
SD (20012009)
SD (19902000)
VIE THA TAP SIN PRC PHI PAK MAL KOR KAZ INO IND HKG BAN
Standard deviation Average, %
S0 standard devlatlon.
AN angladesh, PRC Peoples Rep. of Chlna, lKC long Kong, Chlna,
lN0 lndla, lN0 lndonesla, KAZ Kazakhstan, K0R Rep. of Korea,
VAl Valaysla, PAK Paklstan, Pll Phlllpplnes, SlN Slngapore,
JAP Jalpel,Chlna, JlA Jhalland, vll vlet Nam.
Note: Calculatlon ls based on monthly year-on-year lnatlon gures for each
economy.
Source: A0 calculatlons based on data from CllC 0ata Company (accessed
Varch zoo).
2.2.1 Monetary po||cy framework of se|ected As|an econom|es
Lxchange rate anchor |nat|on target|ng Monetary aggregate
target
0ther
angladesh lndonesla None lndla
Chlna, Peoples Rep. of Korea Valaysla
long Kong, Chlna Phlllpplnes Paklstan
Kazakhstan Jhalland Slngapore
vlet Nam Jalpel,Chlna
Note: 0ther applles to countrles that have no expllclt statement on nomlnal anchor, but rather
monltors varlous lndlcators ln conductlng monetary pollcy.
Source: ased on 0e lacto Classlcatlon of lxchange Rate Reglmes and Vonetary Pollcy lrameworks
as of , Aprll zoo8. lnternatlonal Vonetary lund. http://www.lmf.org/external/np/mfd/er/lndex.asp,
and relevant central bank websltes.
2000, respectively. In these countries, losing the de facto anchor of a US
dollar peg in the crisis was the motivation for taking on the infation-
targeting framework as a new anchor. Te Philippines adopted infation
targeting in January 2002 (Ito 2010).
Although only four economies in the region are formally adopting
fexible infation targeting as their framework for monetary policy, many
others are implicitly implementing similar regimes. Malaysia and India,
for example, are not announcing an explicit nominal anchor. Instead,
they monitor various indicators in conducting monetary policy with
the objective of maintaining domestic currency stability. Both countries
also formally manage the short-term interest rate, their instrument for
conducting monetary policy. Singapore is also aiming to promote price
stability by managing its dollar exchange rate against an undisclosed
trade-weighted basket of currencies of its major trading partners and
competitors.
Figure 2.2.1 suggests that, within the last decade, the average level of
infation in the region has been brought down with improved stability,
regardless of the framework of monetary policy adopted. Exceptions
to this observation are Bangladesh, Kazakhstan, and Viet Nam. Apart
from Bangladesh, however, this exception might be disregarded if the
economies infation rate is compared to its average rate in the frst half
of the 2000s, when commodity prices in the international market were
not volatile. Tis decade of relatively low and stable infation rates in
most of the regions economies, even afer considering the period of high
international commodity prices in the 2000s, suggests that good policy
had to have contributed to the outcome.
Does infation targeting matter in emerging economies? A study
by Goncalves and Salles (2008), analyzing 36 emerging economies
including 10 Asian developing member economies, suggests that it
does: economies that adopt a (fexible) infation-targeting framework
tend to experience lower infation and greater reduction in growth
volatility compared to those that do not. On this analysis, claims that
an infation targeting framework tends to deter economic growth seem
unjustifed empirically.
Infation performances for the economies depicted in Figure 2.2.1
largely support the fndings of Goncalves and Salles (2008). Table 2.2.2
provides fgures on the relative gains in the mean and volatility
of infation for these economies in the last decade. Te gains are
2.2.2 ke|at|ve ga|ns |n average |nat|on
and |ts vo|at|||ty |n 2000s
Leve| ga|n 0ev|at|on
ga|n
angladesh 15.5 0.6
Chlna, Peoples
Rep. of
0.3 0.3
long Kong, Chlna 0.0 0.5
lndla 0.6 0.8
lndonesla 0.6 0.2
Kazakhstan 1.2 2.5
Korea, Rep. of 0.6 0.4
Valaysla 0.6 1.7
Paklstan 0.9 1.8
Phlllpplnes 0.6 0.6
Slngapore 0.8 1.6
Jalpel,Chlna 0.3 1.0
Jhalland 0.6 1.0
vlet Nam 2.0 1.8
Note: Smaller gures lndlcate better performance
ln both level and volatlllty. llgures below lndlcate
lmprovement ln the lnatlon development, and
vlce versa.
Source: A0 calculatlons based on data from CllC
0ata Company (accessed Varch zoo).
measured as the ratio between the 2000s average fgures and their 1990s
counterparts. In that table, the four explicit infation-targeting countries
(Indonesia, Korea, Philippines, and Tailand) show relatively larger gains
in both level and volatility compared to most of the others. However,
some notable exceptions beg for further discussion.
Te frst is Tailand, where the gain in infation stability is relatively
lower than in the other explicit infation targeters. Tailands rather wide
range of infation target (0%3.5%) provides room for more fuctuations
without increasing the pressure for the monetary authority to respond
too actively. However, because the country started of with a relatively
low infation rate, the wide band does not seem to create big problems in
terms of lowering the average level of infation.
Another notable exception is the case of nonexplicit infation-
targeting economiesfor example, Hong Kong, China, and the
PRCthat adopt exchange rate anchors in managing their monetary
policy. Tese economies seem to be demonstrating performance, in terms
of improvements in the level of average infation and its stability, that is
comparable to, if not better than, that of the explicit infation targeters in
the region.
With these two exceptions, the regions experience suggests that
fexible infation targeting frameworks generally deliver better outcomes
than other monetary policy regimes.
Te overall picture highlights a few points regarding the conduct of
monetary policy in the region. A fexible infation-targeting framework
provides one promising approach to stabilize the price environment,
thereby supporting the pursuit of stable economic growth. However,
alternative monetary policy regimes in the region could be as efective
in providing a stable price environment. Terefore, at this stage,
implementing a sound and consistent policy that credibly focuses on
stabilizing the fuctuation in aggregate domestic price levels and on
managing infation expectations seems to be the key consideration for the
region.
Te credibility of the executing monetary authority plays an
important role in assuring the success of a fexible infation targeting
framework. Credibility turns on two issues: (1) Te central banks ability
to commit to its monetary policy and communicate its objectives to the
public; (2) maintaining the central banks independence in pursuing
policies to achieve its target. Once the central bank gains a sufcient level
of credibility, its task of managing infation expectation becomes easier.
Only then can a central bank work efectively in responding to economic
shocks and in enhancing a stable environment for economic growth to
take place. However, credibility seems to be something that most of the
central banks in the region need to improve (Box 2.2.1).
Ito and Hayashi (2004) provide an early survey of Asian infation-
targeting experiences. Tey marked high Korea and Tailand for
keeping the infation rate on average within the targeted range and for
communicating their intentions well to the public. In Tailand, the
central bank targets not headline infation, but the core rate, with a rather
wide range (0%3.5%). Te wide band gives the central bank more room
to keep actual infation within the target range, and this objective is
perceived as preferable in terms of acquiring credibility.
Te track records of Indonesia and the Philippines in keeping
infation in the range was not so good. Te target range is fairly narrow,
and the infation rate was more volatile than in other economies; hence
the target was missed from time to time. In Indonesia, the narrow band
is not only changed from year to year but also highly infuenced by the
budget assumptions set by the Ministry of Finance.
Te lesson to learn, from the successful fexible infation targeters, is
that the target range should be set for the medium term. Doing so gives
the central bank a more stable infation target and hence induces infation
expectations to converge, in addition to maximizing the probability of
hitting the target, thereby gaining credibility for the central bank.
Monetary po||cy |n As|a dur|ng the
g|oba| downturn
Most Asian economies sufered a sharp decline in real activities during
the global downturn, but the nature of sufering difered from that of
countries in other regions. Asian countries did not sufer a collapse of
the fnance sectors and/or a currency crisis. However, Asian exports
fell sharply. Countries that relied on exports to the US and Europe,
such as Korea, sufered the most, whereas countries with large domestic
economies, such as the PRC, India, and Indonesia, managed to escape
from the worst of output decline. Yet, mainly through the trade channel,
real economic activities in Asian countries were badly afected, creating a
widening output gap for the region.
Po||cy responses to the g|oba| cr|s|s
Monetary and fscal policies in the region responded fairly well to the
crisis impact. In coordination with expansionary fscal policy designed to
bolster the weakening private sector, monetary policy in the region sought
to maintain the availability of adequate liquidity fows in the economy.
Te traditional monetary policy stance was relaxed dramatically, as
indicated by decreases in the policy interest rate, and liquidity was
pumped into the economy, as refected in the large increase of money and
credit in most economies (Figure 2.2.2).
Figure 2.2.2 plots the rate of relative changes in fnancial depth
(measured in terms of M2 to GDP and total credit to GDP) and the
quarterly changes in policy rates for 11 Asian economies. On average,
sharp falls in policy rates (even if not fully passed on to borrowers) took
place afer the fourth quarter of 2008. Te economies cut their policy
rates sequentially to ease the way to the cut that was perceived as needed
to stimulate their domestic fnance sectors. Tis measure provided
the domestic fnancial institutions with adequate liquidity to expand,
as indicated by the growth of both of the measures of fnancial depth
displayed in Figure 2.2.2. Using the short-term interest rate as a means
toward this end seems to have worked well in the countries observed.
Te action was supplemented by greatly expanded liquidity operations,
which were needed to make a sufcient amount of liquidity available for
the fnancial market to function. Table 2.2.3 lists the additional measures
taken to ensure liquidity.
Credibility is a key to keeping infation expectations well
anchored, and central banks must be seen walking the
talk. However, most Asian central banks are no epitomes
of credibility. In general, their infation track records
are not in the same league as those of the advanced
economies. In addition, even afer adopting an infation-
targeting regime, the regions infation targeters have not
yet efected infation levels comparable to those of non-
infation targeters. Besides the historical comparison, the
infation targeters records afer the adoption of infation
targeting are not consistently lower (despite the much
more moderate infationary environment of recent years)
than non-infation targeters, such as Hong Kong, China;
Malaysia; and Singapore (Box fgure).
Given the environment of questionable credibility, it was
no surprise that infation expectations during the 20072008
commodity price spike were easily unmoored, though
less so in Taipei,China; the PRC; Hong Kong, China; and
Korea (see the percentage point changes in the box fgure).
Further evidence was found in the upward shifs in the term
structure of interest rates over time, rising core infation
rates as early as the second half of 2007, and increased
minimum wages in some countries.
Given such signs, more forceful actions would have
seemed appropriate. Instead, when commodity prices took
of, most notably in the second half of 2007, the regions
monetary policy was still in either an expansionary or
accommodative mode. In Tailand, monetary policy was
loosened as late as July 2007; in Indonesia, in December
2007; and in the Philippines, in January 2008. In addition,
for a long period, some central banks chose not to raise
rates, claiming that the causes of the commodity price
hikes were external supply shocks that were beyond their
infuence. Te actuality was that a confuence of factors
whether cyclical or structural, domestic or global, supply
or demandwere all reinforcing each other, pressuring the
prices of all commodities upward.
Disappointingly, the central banks did not see this
and failed to note that what matters is not the cause
but rather the efects of the out-of-control price-wage-
setting behavior of market agents. Most central banks,
nonetheless, did eventually raise interest rates, but not by
any signifcant amount. Tey were not only behind the
curve, but also the monetary conditions they operated in
were ill suited to combating high infation. From the end
of June 2007 to the end of August 2008, all the regions
economies, except the PRC, had negative real interest
rates, whereas Indonesia, Korea, Tailand, and Viet Nam
recorded nominal depreciations against the US dollar
2.2.1 Centra| bank cred|b|||ty: A rev|s|t
|nat|on track record (annua| average)
0
20
40
60
Historical to 2007 Since targeting infation
INO
a
LAO
KOR
a
PHI
a
VIE
CAM
THA
a
TAP
MAL
SIN
PRC
HKG
BRU
UK
US
EU
%
2.1
4.6
10.1
50.4
11.1
3.2
8.2
4.8
4.7 4.6
2.5
4.4
3.1 3.1 3.0
2.1 1.9
5.4
1.6
3.9
2.6
28.3
a
lnatlon targeters.
lu luropean unlon, uS unlted States,
uK unlted Klngdom, Ru runel 0arussalam,
lKC long Kong, Chlna, PRC Peoples Rep. of Chlna,
SlN Slngapore, VAl Valaysla, JAP Jalpel,Chlna,
JlA Jhalland, CAV Cambodla, vll vlet Nam,
Pll Phlllpplnes, K0R Rep. of Korea, lA0 lao Peoples
0em. Rep., lN0 lndonesla.
Source: ased on Jable , of Jang (zoo8).
Such expansionary monetary policy measures have served well in
helping the region mitigate the impact of the global downturn. Policy
rates have been brought down to their lowest levels (according to the
countries standards) in a decade. Also, most of the economies are
now operating with huge amounts of liquidity, which has served fairly
well.
However, when the reason for saturating the economy with liquidity
weakens, leaving such huge amounts in the economy will increase the
pressure for infation. Measures to quantitatively ease expansion need
to be put in place only temporarily, and they have to be unwound
immediately afer serving their purpose. Although not yet serious, early
signs for increasing infation in Asia have started to appear in the PRC,
India, and most ASEAN countries (Figure 2.2.3). To deal with this, a
sound conduct of monetary policy is needed.
(Malaysia; the Philippines; Singapore; and Taipei,China
showed small appreciations).
Te failure of many regional central banks to
demonstrate credibility puts them at risk of repeating
the mistake made by the US Federal Reserve in the
early 1970s oil price shock. In that case, the US Federal
Reserve, more fearful that high oil prices would adversely
afect output than the consequences of rising infation
expectations, stimulated the economy, eventually spurring
an unexpected wage-price spiral and a prolonged period
of high infation. More important, Paul Volcker, the then
chairman of the Reserve, had to raise interest rates to close
to 20%, resulting in two back-to-back recessions and the
highest unemployment rate since the Great Depression.
Similar occurrences took place in other countries with
well-regarded central banks, like the UK, Australia, and
New Zealand, to name a few.
Central bank autonomy, fscal discipline, openness, and
transparency are key prerequisites for credibility. Without
autonomy from political interference, central banks can be
held ransom by politically tinged agendas. Without fscal
discipline and autonomy, central banks are easily forced
to fund government defcit. Playing this role over an
extended period is a sure recipe for economic calamity.
Credibility is a virtue that is difcult to earn and easily
lost. Institutional microstructure therefore has to be
developed to nurture and enhance credibility. Maintaining
openness and transparency helps central banks be more
accountable and autonomous, and it improves monetary
policy efectiveness. Te more clearly the central bank
spells out and acts on its policy objectives and strategies,
the better understanding and higher confdence the public
has in its workings, and the better infation expectations
can be anchored.
Dincer and Eichengreen (2007) examined the level
of transparency (information disclosure) of 100 central
banks throughout the world from 1998 to 2005 and found
an evolution of a larger number of central banks toward
greater transparency and openness. As expected, the
requirements of an infation-targeting framework put the
infation targeters ahead of the group.
A selected ranking of some Asian economies and
their scores (in parentheses) in 2005 are as follows: the
Philippines (10); Korea (8.5); Indonesia (8); Tailand (8),
Hong Kong, China (7); Sri Lanka (7); Singapore (6.5);
Malaysia (5); the PRC (4.5); India (2). Te analysis also
lends broad if relatively weak support to the notion that
transparency reduces infation and output variability.
Compared to the transparency champions of New Zealand
(13.5) and Sweden (13), all Asian central banks have
much room for improvement, regardless whether they are
infation targeters or nontargeters, or who has a better
infation track record.
Te close coordination of monetary (including fnancial)
and fscal policies is key to sound macroeconomic
management. Te central banks in developing economies
are ofen the main fnancial advisors to the government,
and, in most instances, they are also the chief economic
advisors. In these capacities, central banks are best placed
to infuence the directions and goals of macroeconomic
management. Not surprisingly, the key success factor in
the impressive track records of the more credible Asian
economies is the very close coordination of these policies,
all working in sync to produce the desired outcomes.
keference
Drawn from H. C. Tang. 2008. Commodity Prices and Monetary
Policy in Emerging East Asia. ADB Working Paper Series on Regional
Economic Integration No. 23. December. Asian Development Bank,
Manila.
2.2.1 Centra| bank cred|b|||ty: A rev|s|t (continued)
Conduct of monetary po||cy at the onset of the recent cr|s|s
How was monetary policy conducted in the region during the onset of the
global fnancial crisis, relative to its behavior when regional economies
managed to maintain fairly stable domestic infation rates? To answer this
question, the actual policy rate can be compared with a suggested rate
derived from an approximation of past monetary policy.
Te conduct of monetary policy can be approximated by means of
predetermined rules that explain the behavior of the policy. Te so-called
Taylor rule has become very popular in this regard. It states that the
setting of the policy rate by a central bank can be approximated by three
factors: the natural interest rate; the diference in the current infation
rate from the target infation rate; and the GDP gap. In its empirical
application, a modifed version of the rule is ofen estimated against past
data to gain insights over how monetary policy has been behaving. Te
z.z.z 0eve|opments |n ||qu|d|ty pos|t|ons and po||cy rates |n As|an econom|es
Policy rate (right) M2/GDP (left) Credit/GDP (left)
0eve|op|ng As|a, PkC and |nd|a
-20
0
20
40
-2
0
2
4
Policy rate (right)
M2/GDP (left)
Credit/GDP (left)
Sep
09
Mar
08
Sep
06
Mar
05
Sep
03
Mar
2002
% %
Developing Asia (11 economies)
-10
0
10
20
30
-1.5
0.0
1.5
3.0
4.5
Policy rate (right)
M2/GDP (left)
Credit/GDP (left)
Sep
09
Mar
08
Sep
06
Mar
05
Sep
03
Mar
2002
% %
Peoples Republic of China
-50
0
50
100
150
200
-3
0
3
6
9
12
Policy rate (right)
M2/GDP (left)
Credit/GDP (left)
Sep
09
Mar
08
Sep
06
Mar
05
Sep
03
Mar
2002
% %
India
New|y |ndustr|a||zed econom|es
-10
0
10
20
-2
0
2
4
Policy rate (right)
M2/GDP (left)
Credit/GDP (left)
Sep
09
Mar
08
Sep
06
Mar
05
Sep
03
Mar
2002
% %
Hong Kong, China
-50
0
50
100
-2
0
2
4
Policy rate (right)
M2/GDP (left)
Credit/GDP (left)
Sep
09
Mar
08
Sep
06
Mar
05
Sep
03
Mar
2002
% %
Republic of Korea
-15
0
15
30
-1.4
0.0
1.4
2.8
Policy rate (right)
M2/GDP (left)
Credit/GDP (left)
Sep
09
Mar
08
Sep
06
Mar
05
Sep
03
Mar
2002
%
%
Singapore
-10
0
10
20
-1.5
0.0
1.5
3.0
Policy rate (right)
M2/GDP (left)
Credit/GDP (left)
Sep
09
Mar
08
Sep
06
Mar
05
Sep
03
Mar
2002
% %
Taipei,China
Southeast As|a
-20
-10
0
10
20
30
-6
-3
0
3
6
9
Policy rate (right)
M2/GDP (left)
Credit/GDP (left)
Sep
09
Mar
08
Sep
06
Mar
05
Sep
03
Mar
2002
% %
Indonesia
-15
0
15
30
-1.5
0.0
1.5
3.0
Policy rate (right)
M2/GDP (left)
Credit/GDP (left)
Sep
09
Mar
08
Sep
06
Mar
05
Sep
03
Mar
2002
% %
Malaysia
-20
0
20
40
-2
0
2
4
Policy rate (right)
M2/GDP (left)
Credit/GDP (left)
Sep
09
Mar
08
Sep
06
Mar
05
Sep
03
Mar
2002
% %
Philippines
-12
0
12
24
-1.5
0.0
1.5
3.0
Policy rate (right)
M2/GDP (left)
Credit/GDP (left)
Sep
09
Mar
08
Sep
06
Mar
05
Sep
03
Mar
2002
% %
Thailand
-12
0
12
24
36
-5
0
5
10
15
Policy rate (right)
M2/GDP (left)
Credit/GDP (left)
Sep
09
Mar
08
Sep
06
Mar
05
Sep
03
Mar
2002
% %
Viet Nam
Notes: 0eveloplng Asla ls taken to be the economles shown on thls page.
lor Slngapore, domestlc lnterbank lnterest rate ls used.
Source: CllC 0ata Company (accessed Varch zoo).
z.z. |nat|on trends
-3
0
3
6
9
Rep. of Korea Taipei,China
Oct Jul Apr Jan
09
Oct Jul Apr Jan
2008
%
East Asia
-7
0
7
14
21
28
Pakistan Kazakhstan Bangladesh India
Oct Jul Apr Jan
09
Oct Jul Apr Jan
2008
%
South and Central Asia
-8
0
8
16
24
32
Viet Nam Thailand Singapore
Philippines Malaysia Indonesia
Oct Jul Apr Jan
09
Oct Jul Apr Jan
2008
%
Southeast Asia
2.2.3 Summary of monetary po||cy act|ons |n se|ected As|an econom|es
PkC RKu |N0 |N0 K0k MAL PR| S|N 1RA
lase monetary pollcy
llquldlty assltance ln
local currency

lend forelgn exchange
lxpand deposlt
lnsurance

Cuarantee non-deposlt
llabllltles
Prepare bank capltal

lnjectlon

Create demand for assets
lmpose short sale
restrlctlons

Relax mark to market
rules

PRC Peoples Rep. of Chlna, lKC long Kong, Chlna, lN0 lndla, lN0 lndonesla, K0R Rep. of
Korea, VAl Valaysla, SlN Slngapore, JlA Jhalland.
Note: Jhe pollcy actlons have been proposed but not necessarlly lmplemented.
Source: ased on Jable l. of Jhe lnternatlonal llnanclal Crlsls: Jlmellne, lmpact, and Pollcy Responses
ln Asla and the Paclc. lS Representatlve 0ce for Asla and the Paclc, ank for lnternatlonal
Settlements, August zoo.
estimation ofen includes a lagged policy rate to capture the
degree of persistence in conducting monetary policy. In this
sense, the Taylor type of rule relates to a past policy reaction of
a central bank.
Using the approximation of past monetary policy behavior
in Box 2.2.2, the counterfactual policy rates for each country
under consideration are derived. To do this, the series reported
in the two studies referred to in the box are extended up to the
latest available data, and the implied policy rates are calculated
based on the characterization of monetary policy reaction
function reported in the box. Te lead infation fgures are
used to represent infation expectations, while the output gap
is roughly calculated by log diferencing the actual output to its
extended Hodrick-Prescott fltered trend. Te counterfactual
policy rate series provides the reference rates for the countries
under consideration. Tese reference rates, however, should not
be taken as the desirable path as in Taylor (2009). Te rules
that derive the reference series in this case are not necessarily
the optimal ones; rather, they are just representations of past
monetary policy that deliver relative tranquility in infation
behavior.
Figure 2.2.4 displays the diference between the actual
policy rate and its reference based on the rule, normalized to
a standard deviation of the estimates. A value that is smaller
than 1 or greater than 1 indicates a too lax or too tight
monetary policy, respectively. Te fgure suggests that monetary
policy in most of the countries has generally been consistent
up to the frst quarter of 2007. Te fact that the policy rate
diference lies within the band of 1 to 1 suggests that there
is no statistically signifcant diference between the actual
De Brouwer et al. (2006) and Ramayandi (2007) provided
estimates of the Taylor type of rule for the period up to
2004 for some economies in the region: Indonesia; Korea;
Malaysia; the Philippines; Taipei,China; and Tailand. Tey
estimated the following monetary policy reaction function:
i
t
= (1-) + (1-) E
t

t+n
+ (1-)x
t
+ i
t-1
+
t

where, i
t
is the short-term nominal interest rate (the proxy
for target policy variable) at time t; E
t

t+n
is the time
t expectation of infation at time t + n; x
t
is the log of
output gap; and
t
is the unsystematic monetary policy
shock.
Te log of output gap is defned as a log diference
between actual output and its Hodrick-Prescott fltered
trends. Expected infation is not observed in practice
and is approximated using observed instrumental
variables. Terefore, the parameters [, , , ] are
estimated using a generalized method of moments
technique following Clarida et al. (1998), by utilizing
the instrumental variables as the underlying information
for representing the unobserved expected infation. Te
summary of their estimated parameters is presented in the
box table.
Te estimation period for the above parameters is
relevant for two reasons. First, it covers a time when
infation was the most stable for the countries under
consideration (Figure 2.2.1 in the text). Second, it excludes
the period when commodity prices in the international
market behaved erratically, a condition that tends to
induce higher volatility in domestic price infation and
that should not be the object of monetary policy aimed at
stabilizing infation.
For the instruments, De Brouwer et al. (2006) and Ramayandi
(2007) use the lagged value of short-term nominal interest rate,
infation, output gap, and relative changes in the exchange rate of the
respective economies.
2.2.2 Approx|mat|on of past monetary po||cy
Parameters for the policy reaction function
Lconomy
lndonesla -2.73 1.78 1.04 0.52
Korea, Rep. of -7.51 3.59 0.02 0.89
Valaysla 0.56 1.66 0.19 0.69
Phlllpplnes 0.04 0.72 1.22 0.56
Jalpel,Chlna 0.79 1.49 1.00 0.92
Jhalland -3.59 2.65 0.09 0.70
Source: 0e rouwer et al. (zoo) and Ramayandl (zoo)).
policy rate and what the rule suggested. In 2005, Indonesias policy rate
indicates huge deviations where monetary policy was suggested to be too
lax. Te deviations, however, were justifed because massive cuts in the
domestic oil price subsidy pushed up infation and required an increase
in the reference rate at that time. Te central bank of Indonesia made a
right decision not to overreact to the event because the cause of the price
increase was not monetary.
Starting in late 2007, however, the monetary policy stances of most of
the economies (except Korea) tended to become too loose, leading to an
unchecked increase in infation in all these countries. It may be argued
that the passive response was also proper because the infation was not
core but rather due to rising commodity prices in the international
market. Tis argument, however, does not seem to be justifed due to
a very high correlation between these countries core infation and
commodity prices during that period (Filardo and Genberg 2009 discuss
this). In other words, their central banks should have responded more
actively to contain infation in that period.
As the impact of the global fnancial crisis hit Asia, economies in the
sample reacted by reducing their policy rates, sending them to record
lows for the decade (according to each countrys standard) and keeping
them low since then. Te current level of interest rates for economies
like Korea, the Philippines, and Tailand are seen as consistent with the
suggested rates from the monetary policy rule. For Indonesia; Malaysia;
and Taipei,China, the current rates seem to be still higher than what
z.z. Norma||zed d|erence of po||cy rates
-4
-2
0
2
Philippines Indonesia
09 08 07 06 05 04 03 02 2001
Percentage points
-4
-2
0
2
Thailand Malaysia
09 08 07 06 05 04 03 02 2001
Percentage points
-4
-2
0
2
4
Taipei,China Rep. of Korea
09 08 07 06 05 04 03 02 2001
Percentage points
Source: A0 calculatlons based on data from CllC 0ata Company (accessed
Varch zoo).
the rule suggested. Tis observation has implications on how
a country deals with the trend of infation in the short run if
the trend starts putting pressure on the economy. Countries
like Korea, the Philippines, and Tailand may be compelled
to deal with such a pressure by increasing the interest rate.
On the other hand, economies like Indonesia, Malaysia, and
Taipei,China seem to still be able to handle the infation
pressure without having to increase the interest rate. Tese
economies may be able to tame the immediate infation pressure
by selectively unwinding the quantity measures they put in
place to deal with the global downturn.
Monetary po||cy and the asset bubb|e
Monetary po||cy and asset pr|ces
Te bubble burst that initiated the global fnancial crisis
has taught a huge lesson with respect to monetary policy: It
seems that the element of fnancial stability can no longer
be considered an external part of managing macroeconomic
fuctuations, particularly when it has the potential to wreak
such catastrophic damage on the aggregate economy, as
witnessed in the recent crisis. Tis lesson has pushed the
relationship between asset prices and monetary policy back to
the forefront of the monetary policy debate.
Asia must also be wary of threats from asset market failures
to the well-being of their aggregate economies. Gochoco-
Bautista (2008) examines the risk of extreme outcomes on
real output and price levels, given booms in asset markets,
for eight East and Southeast Asian economies: Hong Kong,
China; Indonesia; Japan; Korea; Malaysia; the Philippines; Singapore; and
Tailand. Her fndings suggest that booms in asset prices signifcantly
increased the probability that these economies could experience bad
extreme outcomes in the form of heavy losses in both real output and
prices. Conversely, given such booms, the probability of good extreme
outcomes is less likely. Consequently, booms in assets market have to
be monitored closely in order to mitigate the risk of the economys
being caught in a slump. Terefore, Asia may not ignore the question
about how monetary policy should be best conducted in facilitating
fnancial stability, at the same time maintaining a low and stable infation
environment.
Ito (2010) discusses two opposing views with regard to this issue.
Benign neglect. Monetary policy could neglect developments in
asset prices. Te main goal of monetary policy should be limited to
maintaining stability in prices and output. Monetary policy makers
should leave the prevention of a banking and fnancial crisis to fnancial
supervision policy, a tool that has been entirely separated from monetary
policy. To prevent a hard landing by the banking system, the regulatory
authority can introduce prudential measures, such as a higher (and
variable) capital standard, introducing and/or tightening regulation on
the loan-to-value ratio and the loan-to-income ratio ceilings, and an
examination of the internal risk assessment of banks portfolios.
Leaning against the wind. In addition to maintaining aggregate price
stability, monetary policy needs to pay more attention to asset prices
and react to developments in them. Because the bursting of the assets
bubble most likely induces fnancial instability, precautionary monetary
tightening is recommended to contain the bubble from growing. A low
interest rate is bound to encourage risk-taking activitiesreckless rather
than normaland the fnancial supervision policy cannot perfectly
prevent risk concentration in some sectors of the economy. Asset prices
should be either included in a set of target variables or treated as a special
variable that should be watched carefully, along with aggregate price
infation.
Recent experience in the crisis signals that the benign neglect
argument has certain limitations. Te argument rests its case on having
strong, efective, and reliable regulatory oversight of the countrys
fnancial market mechanisms. Yet the crisis has just demonstrated that
this type of oversight may actually be missing in most cases.
|ncorporat|ng asset pr|ces |n monetary po||cy dec|s|ons
So should monetary policy incorporate developments in asset prices
directly into its current policy setting? If so, how efective could this
approach be?
Te literature suggests limitations on monetary policys ability to be
generally efective when directly responding to asset prices. Cecchetti et
al. (2000) strongly argue that the design of monetary policy to achieve
an infation target and to manage its expectation could show superior
performance if policy instruments adjusted not only to infation and
the output gap, but also to asset prices. By leaning against unsustainable
developments in the asset market, monetary policy could help keep a
bubble from growing.
Tis argument makes much sense. However, asset prices ofen
behave erratically and with relatively high volatility. Adjusting the policy
instrument directly to asset prices will only tend to transfer their erratic
behavior to the instrument. Although this efect could be justifable
when asset prices development is unsustainable and on the way to an
unwanted bubble, the automatic adjustment would tend to induce more
variability in the monetary instrument during normal times when asset
prices development was, in fact, sustainable. More variability in a policy
instrument could further penalize the economy by increasing variability
in both output and infation, making the management of infation
expectation all the more difcult for a central bank.
Studies that lend support to the leaning against the wind view
typically fnd marginal improvements in the stability of output and
infation. Tese improvements are achieved through relatively very
minimal reaction in the policy instrument to changes in asset prices. De
Grauwe (2008) added that the efectiveness of this type of policy reaction
depends strongly on the degree of credibility of the central bank. Te
more credible central banks are potentially more efective. Te small
range of the optimal proportion policy instrument reaction to movements
in asset prices partly refects the fact that the main policy instrument
should not be continuously reacting to developments in asset prices.
Te policy may need to react more strongly when a bubble materializes,
but not otherwise. In addition, with regard to Asia, the issue of central
bank credibility could be another hurdle to be overcome (Box 2.2.1)
before countries in the region may reap the full beneft from this kind of
monetary policy setup.
To more efectively maintain macroeconomic stability, monetary
policy may need to react to asset prices only when needed, that is, when a
bubble is forming. Otherwise, a central bank may want to keep its hands
of asset markets. Unfortunately, in most cases, central banks are not
equipped with an ex ante capability of determining whether movements
in asset prices are fundamental, for at least two reasons: the problem of
asymmetric information between a central bank and market players; and
the relatively poor quality of information available to monitor unfavorable
developments in asset markets (primarily property).
Given the informational constraint, a central bank may limit its
reaction to asset prices by assigning a threshold in asset prices, over
which it should start responding. Te threshold could be designed so as to
allow the policy instrument to react to changes in asset prices whenever
the latter crosses the assigned threshold. Haugh (2008), for example,
argues that setting a relatively high threshold (a three-standard deviation
threshold rule in his case), rather than completely ignoring asset prices
when designing monetary policy, may provide better outcomes in terms
of providing macroeconomic stability. Although improving the approach
for monetary policy to deal with unwanted bubbles in asset markets,
the approach still tends to be heuristic in nature. Determining the right
threshold would still be a tricky part, particularly given the problem of
limited ex ante information available in assessing developments in asset
markets.
Te bursting of the bubble that set of the global crisis ofers lessons
in the possible preventive role of monetary policy. Te lax monetary
policy in industrial countries before the crisis has been considered one of
the contributing factors in creating the asset price bubble. Te hands-of
stance was thought to be justifed by the relatively low and stable
infation environment at that time, which was not exerting any pressure
to tighten monetary policy. Low interest rates and a stable economic
condition created a comfortable environment for people to systematically
underestimate risks and put low-risk premiums in the fnancial market.
But, is a traditional monetary policy reaction function like the Taylor
rule really silent about such bubbles? It would seem not. Taylor (2007)
suggested that the interest rate in the US afer the dot com bubble in
2001 was kept lower than what the Taylor rule prescribed (although the
rule does not explicitly take asset prices into account). Te prescribed
interest rate, based on the simple Taylor rule, was higher than the actual
rate, suggesting that the arguments driving the rate prescribed by the
Taylor rule somewhat captured the sign of a bubble buildup in the asset
markets. Te lower actual interest rate certainly leaves room for the
bubble to fourish. Although arguably an increase in the actual rate may
not have fully contained the growing bubble in asset prices, it would
defnitely have put a check on the supportive conditions.
Te resultant policy failure is not limited to the US. Similar
indications appear elsewhere. In Asia, for example, a low policy rate
had been accompanied by a very high growth in credit in Indonesia and
to some extent in Tailand (Figures 2.2.2 and 2.2.4 and Box 2.2.1). As
demonstrated by the recent crisis, this type of policy failure may lead to a
dire outcome.
Tus the need should be clear for greater discipline in conducting
monetary policy for purposes of achieving its target to keep infation and
its expectation stable. In other words, resisting change in the monetary
policy stance for the sake of any other reason than managing infation
and its expectation is a mistake. A failure to shif the policy instrument in
a timely fashion may send false signals to the economy, create incentives
for people to undervalue their risks, and plunge the economy into trouble.
Although more such discipline may not be sufcient to completely
contain fnancial shocks when they occur, designing rules for monetary
policy in direct response to changes in asset prices at all times may
introduce additional volatility when fnancial shocks are absent, hence
imputing potential costs to the aggregate economy. Analysis of the
issue suggests that rules that enable monetary policy to react directly
to developments in asset prices perform better than a simple Taylor
rule only when the shocks come from fnance sectors. When the shocks
emanate from other than fnance sectors, a simple Taylor rule tends to
outperform the augmented rules in terms of delivering more stable output
and infation.
|mprov|ng monetary po||cy
Tere is no one, single approach to improving monetary policy for all
countries. Te recent global fnancial crisis signaled that fnancial market
stability can no longer be considered beyond the realm of monetary
policy. Even though the structuring may difer from country to country,
certain requirements are clear.
For one thing, conducting sound monetary policy has to involve
a commitment to maintaining fnancial market stability. However, a
single policy instrument like the short-run interest rate is a rather blunt
tool for dealing with both the buildup and afermath of fnancial crisis.
A combination of the traditional monetary policy objective with a
commitment to maintaining stability in the asset markets is necessary.
Tis additional objective may be best attained by complementing the
traditional monetary policy framework with additional policy measures
that deal specifcally with undesirable developments in the asset markets.
Also, instruments to restrain asset prices, in the form of micro
instruments such as capital ratios, loan-to-valuation ratios, a capital gains
tax, or even credit growth limits, could prove to be a better approach.
Te execution of these micro instruments can be given over to a separate
regulatory authority, which has the explicit task of using the instruments
to restrain asset prices. Another important element is a mechanism to
take over large, systemically important institutions if their capital drops
below a certain critical level, thereby avoiding a moral hazard while
maintaining systemic stability.
Making all this work requires a fnancial authority to supervise and
regulate the fnance sector. Te main responsibility of this authority
would be to make the call on a bubble early and introduce prudential
policy measures when necessary. With this type of enhanced supervision
and regulation, monetary policy is freed from the difculty of pursuing
too many targets with a limited number (ofen just one) of strong policy
instruments.
Accomplishing all this with resources either within the central
bank or outside it depends on the availability of experts. Ofen human
resources are limited in emerging market economies, so supervision
is most efciently done within the central bank. In that case, however,
the potential confict of interest with monetary policy objective has to
be controlled. Maintaining policy independence for the two authorities
is important in order to provide enough room for both to pursue their
designated objectives. Nevertheless, in as much as the objectives for both
authorities are related, a smooth and efective coordination between the
two is critical. Micro prudential policy should also be strengthened with
a politically independent body outside or inside the central bank, so that
fnancial stability can be maintained with day-to-day regulation and
measurement. Preventing the bubble to get bigger with ongoing measures
is the frst line of defense.
Given the informational constraint mentioned previously, to enable
monetary and fnancial authorities to make appropriate policy judgments
and take timely action, developing and improving the indicators and
their relevant measurement methodologies are crucial. Creating reliable
databases for these indicators is also necessary. Te information should
be relevant for indicating whether speculative activities are increasing
and whether they pose fnancial risk to the agents involved. Intercountry
cooperation and coordination in exchanging such information would also
be benefcial to monitoring regional trends and avoiding contagion from
one country to another.
When large or systemically important fnancial institutions are
deemed insolvent, an efective legal structure is needed to take them
over. A legal framework is important to avoid panics in the fnancial
market, which could cause turmoil in the fnance sector, thereby acting
as a backstop for fnancial stability. It also sidesteps the potential for
moral hazards by assuring that both management and shareholders
bear the brunt of failure. An intrusive supervisionas part of the
answercalls for crisis management protocols covering the liquidation or
nationalization of failing institutions.
When these measures are exhausted or inefective, the monetary
policy can be modifed so that the interest rate is hiked to ensure that the
bubble does not get so large as to threaten fnancial stability. Tis measure
may cause output declines and defationary pressure, but the sacrifce may
be needed to avoid even bigger sacrifces later. Tis approach, however, is
the second best. Te weaker supervision regime obliges the central bank
to deviate from its regular monetary policy framework.
Lxchange rate and cap|ta|
account ||bera||zat|on
0e [ure and de facto exchange rate reg|mes
Afer the 199798 Asian fnancial crisis, almost all the crisis-
afected countries, except Malaysia, chose to abandon a
conventional pegged exchange rate regime to implement de jure
foating exchange rate regimes (Table 2.3.1), but with varying
degrees of fexibility. Whereas Korea and the Philippines are
implementing independently foating regimes, other countries
adopted managed foating regimes with no predetermined path
for the exchange rate. Malaysia implemented a conventional
pegged arrangement until 2005 and a managed foating
exchange rate regime since. As mentioned in the monetary
section, Indonesia, Korea, the Philippines, and Tailand
initiated fexible infation targeting with a foating exchange
rate regime. In Malaysia, the central bank monitors several
key indicators, including infation and output stability, in
conducting monetary policy.
For those economies not afected by the Asian crisis, the
exchange rate regime spans a wide spectrum but, except in
Hong Kong, China, it tends to move toward a more fexible
exchange rate arrangement. For example, in the PRC, the de
jure exchange rate regime changed from a conventional pegged
arrangement in 19992005 to a managed foating exchange rate
regime with reference to a currency basket. Tis is the same de
jure exchange rate regime announced in Singapore.
Hong Kong, China, over the last few decades has had a
hard-pegged exchange rate regime in terms of a currency board
arrangement. In the PRC; Hong Kong, China; and Singapore,
the exchange rate is still used as an anchor in conducting
monetary policy, whereas in Taipei,China, the central bank
monitors various macroeconomic indicators, including infation
and output stability.
Although de jure exchange rate regimes have been edging
toward increased fexibility, the volatility of exchange rates,
against both the US dollar and a trade-weighted basket of
currencies, remained low in the region afer the Asian crisis.
Tis has led to doubts about the inconsistency between de
jure and de facto regimes, especially fear of a resurrected
dollar-pegged arrangement. Between 2000 and just before the
global fnancial crisis intensifed in late 2008, exchange rate
volatility in many countries was relatively limited or declining
(Figure 2.3.1).
Te far lower exchange rate volatility than that in a
z.. vo|at|||ty of nom|na| eect|ve exchange rates
2009 2008 20052007 20002004 19911996
0
2
4
6
2009 2008 200507 200004 199196
Thailand Singapore Philippines Malaysia Indonesia India
per $
Bilateral exchange rate
0
2
4
6
8
2009
2008
200507
200004
199196
Taipei,China
Rep. of Korea
Hong Kong,
China
People's Rep.
of China
United
Kingdom
Japan
Australia
per $
Bilateral exchange rate
0
2
4
6
2009
2008
200507
200004
199196
Thailand Singapore Philippines Malaysia Indonesia India
Index
Nominal eective exchange rate
0
2
4
6
2009
2008
200507
200004
199196
Taipei,China
Rep. of Korea
Hong Kong,
China
People's Rep.
of China
United
Kingdom
Japan
Australia
Index
Nominal eective exchange rate
Note: volatlllty ls measured by the standard devlatlon of changes ln monthly
nomlnal exchange rates.
Sources: A0 estlmates based on data from lnternatlonal Vonetary lund.
lnternatlonal llnanclal Statlstlcs onllne database, CllC 0ata Company (both
accessed zz lebruary zoo).
2.3.1 Lvo|ut|on of de jure exchange rate reg|mes |n se|ected emerg|ng As|an
econom|es
Countr|es Per|od Lxchange rate keg|me
Chlna, Peoples Rep. of 19901998
1999June 2005
July 2005present
Vanaged oatlng
Conventlonal pegged arrangement
Vanaged oatlng exchange rates wlth
reference to a currency basket
long Kong, Chlna 1983present Currency board arrangement
lndla 1990-present Vanaged oatlng wlth no predetermlned
path for the exchange rate
lndonesla 1990July 1997
Aug 1997June 2001
July 2001present
Vanaged oatlng
lndependently oatlng
Vanaged oatlng wlth no predetermlned
Korea, Rep. of 19901997
1998present
Vanaged oatlng
lndependent oatlng
Valaysla 1991August 1998
Sep 19982005
2006present
Vanaged oatlng
Conventlonal pegged arrangement
Phlllpplnes 1990present lndependent oatlng
Slngapore 1990present Vanaged oatlng exchange rates wlth
reference to a currency basket
Jalpel,Chlna 1990present lndependent oatlng
Jhalland 1990June 1997
July 19972001
Pegged to a composlte of currencles
Sources: ), to 8: lnternatlonal Vonetary lund, Annual Report on lxchange Arrangements and
lxchange Restrlctlons, varlous years untll 8, 8 to present: central bank websltes.
country with an independent foating regime, such as Australia, Japan,
or the United Kingdom, has shown the high degree of foreign exchange
intervention in the region. In particular, the level of volatility in many
countries does not match well with the announced de jure exchange
rate regime (Figure 2.3.1). For example, the degree of volatility in the
Philippines and Tailand was roughly the same afer the crisis, but the
exchange rate regime in the Philippines is classifed by the International
Monetary Fund (IMF) as independently foating whereas Tailands is
classifed as managed foating.
Along with fear of a resurrected dollar-pegged exchange rate regime,
a signifcant buildup of foreign exchange reserves has been evident in the
region since 1998. In contrast to before the Asian crisis, the accumulation
of foreign reserves aferward has come mainly from current account
surpluses, instead of net capital infows. Particularly in the PRC, changes
in the stock of foreign exchange reserves of around US$330 billion a
year during 20042009 stemmed from a current account surplus of
US$261 billion and net capital infows of only US$58.5 billion. Regardless
of the source of reserve accretions, most studies (at least prior to the
recent crisis), show that Asia holds more than enough precautionary
reserves.
Te reserves stock declined in all developing Asian countries during
the crisis, with signifcant drops in India and Korea, because of the need
to limit exchange rate depreciation resulting from the reversal of capital
infows (Figure 2.3.2). However, afer the frst quarter of 2009, the
accumulation of foreign exchange reserves in all developing Asia resumed
an upward path, and the regional stock of foreign reserves has become
even higher than before the crisis. (In the PRC, reserve stocks
reached a new high of US$2.4 trillion in December 2009.) Tis
trend suggests a high degree of exchange rate management in
the region.
To provide concrete evidence of the degree of such
management, a framework proposed by Frankel and Wei (2007),
which examines the degree of infuence of the dollar, euro, and
yen, is applied (Box 2.3.1).
Te estimation results show that, except for Indonesia, the
dollar still has the greatest degree of infuence on the local
currency (Table 2.3.2). Te PRC case is the most clear cut,
with the weight associated with the dollar close to 1. For the
Philippines and Malaysia, the dollar weights are large (0.87 and
0.79, respectively), suggesting that both currencies still manage
their currencies against the dollar. Te result in the case of
the Philippines is in sharp contrast to the de jure exchange
rate regime, which is defned by the IMF as an independently
foating regime. In India, Singapore, and Tailand, the infuence
of the dollar was lower than in the preceding three countries, but there
is an indication of management against the dollar. In Indonesia, the
statistical insignifcance of the three currencies refects more reliance on
market-driven exchange rate movements.
In Korea before the recent crisis, systematic intervention was found,
with statistically signifcant coefcients associated with the dollar and
yen. Tis fnding implies that the central bank had managed the Korean
won against a basket of currencies before the crisis. However, when the
crisis period is included, no systematic infuential pattern emerged from
either currency. Te results are consistent with the recursive estimations
for the dollar weight shown in Figure 2.3.3. Te weight of the dollar fell
sharply in Korea during the recent crisis, whereas it dropped only slightly
in Singapore and Taipei,China. A distinct decline in the dollar weight is
also found in India and Indonesia afer the crisis because the central bank
allowed the currencies to depreciate in response to capital reversals. By
contrast, in the PRC the weight of the dollar is relatively stable over the
estimation periods.
1hree key reasons for |ntervent|on |n the fore|gn
exchange market
Te foregoing analysis makes apparent that most developing Asian
currencies remain fairly heavily managed, either against the US dollar
or a basket of currencies, and that the intervention did not occur only
during the crisis. A de jure exchange rate regime exaggerates the degree
of de facto exchange rate fexibility. Te empirical literature has suggested
three main reasons for intervening in the foreign exchange market and
building up foreign exchange reserves.
Insurance. Authorities build up reserves as insurance against crisis.
Although the debate on how much is too much will go on, the buildup
of reserves has proved helpful in redressing the adverse efects of the
z..z Pore|gn exchange reserves |n se|ected As|an
econom|es
0
100
200
300
400
0
1,000
2,000
3,000
4,000
People's Rep. of China Thailand
Rep. of Korea Indonesia
India Hong Kong, China
Jan
10
Jul Jan
09
Jul Jan
08
Jul Jan
07
Jul Jan
06
Jul Jan
2005
$ billion $ billion
Source: CllC 0ata Company (accessed , lebruary zoo).
2.3.1 Mode| for measur|ng de facto
exchange rate ex|b|||ty
Te model is based on the Frankel and
Wei framework (2007), as shown in
the equation.
e
t
=
0
+
1
US
t
+
2
JP
t
+
3
EU
t
+
t
where e is defned as the local
currency per special drawing rights.
Te extent of fxity is captured by
coefcients, measuring the infuences
of the dollar, euro, and yen.
Te model is estimated for
nine developing Asian economies
(the PRC; India; Indonesia; Korea;
Malaysia; the Philippines; Singapore;
Taipei,China; and Tailand) during
1999M22009M9. For India,
Indonesia, and Korea, where exchange
rates depreciated notably during
the recent crisis, another model is
estimated by excluding the recent crisis
period.
Excluding the crisis period, the data
are covered for 1999M22007M12.
Te crisis period is excluded to
appropriately measure the de facto
exchange rate fexibility of these three
countries during normal times.
2.3.2 0egree of de facto exchange rate ex|b|||ty |n se|ected emerg|ng As|an econom|es
Peop|e's
kep. of
Ch|na
|ndones|a |nd|a kep. of Korea Ma|ays|a Ph|||pp|nes S|ngapore 1a|pe|,
Ch|na
1ha||and
(1) (2) (1) (2) (1) (2)
Const -0.06 0.11 0.08 0.11 -0.02 0.07 -0.17 -0.03 0.13 -0.06 0.04 0.01
(0.004)` (0.78) (0.85) (0.37) (0.79) (0.71) (0.26) (0.68) (0.31) (0.42) (1.64) (0.94)
0ollar 0.95 0.34 0.76 0.61 0.86 -0.23 0.42 0.79 0.87 0.38 0.44 0.43
(0.00)` (0.39) (0.14) (0.00)` (0.00)` (0.38) (0.02)` (0.00)` (0.00)` (0.00)` (0.00)` (0.01)`
Yen -0.002 -0.3 -0.07 -0.1 0.03 -0.19 0.33 -0.04 0.01 0.03 0.05 0.09
(0.88) (0.15) (0.83) (0.22) (0.71) (0.32) (0.01)` (0.25) (0.9) (0.51) (0.27) (0.19)
luro 0.001 0.29 0.32 -0.06 0.05 -0.33 -0.15 0.09 0.1 0.1 -0.03 0.04
(0.98) (0.5) (0.6) (0.59) (0.54) (0.06) (0.37) (0.17) (0.4) (0.18) (0.65) (0.75)
Adj R
2
0.95 0.04 0.02 0.31 0.53 0.13 0.26 0.63 0.34 0.17 0.32 0.22
0w 2.37 1.9 1.85 1.93 2.01 1.91 1.72 1.84 1.97 1.94 1.83 1.84
Sample 01V3: 99V2: 99V2: 99V2: 99V2: 99V2: 99V2: 99V2: 99V2: 99V2: 99V3: 99V2:
09V9 09V9 07V12 09V9 07V12 09V9 07V12 09V9 09V9 09V9 09V9 09V9
Notes:
llgures ln parentheses are p-values and ` reects those parameters slgnlcant at o%,% or better.
A -month lag dependent varlable ls lncluded ln all regresslons and a -month lag term for the uS dollar per S0R ls lncluded for the People's Republlc of Chlna, lndla,
Valaysla, the Phlllpplnes, and Jhalland lf lts lncluslon helps to reduce serlal correlatlon.
Source: R. Rajan. zoo. Jhe lvolutlon and lmpact of Aslan lxchange Rate Reglmes. ackground paper prepared for Asian Development Outlook , Aslan
0evelopment ank, Vanlla.
z.. kecurs|ve |east squares est|mates for US do||ar we|ght
-0.4
0.0
0.4
0.8
1.2
Thailand Philippines Rep. of Korea Indonesia
Jul Jan
09
Jul Jan
08
Jul Jan
07
Jul Jan
06
Jul Jan
2005
0.25
0.50
0.75
1.00
1.25
India
Malaysia People's Rep. of China
Jul Jan
09
Jul Jan
08
Jul Jan
07
Jul Jan
06
Jul Jan
2005
Note: Countrles ln the left panel have exlble lnatlon-targetlng reglmes, economles ln the rlght panel have adopted other monetary reglmes but have lnatlon as the de
facto target.
Source: See Jable z.,.z.
recent crisis, particularly in containing the signifcant depreciation of real
exchange rates.
Stimulating exports and growth. During normal periods, central
banks intervene in the foreign exchange market to stimulate exports
and growth (i.e., for mercantile purposes). Central banks behavior
and the bias of their intervention can be used as evidence for this
reason. (Box 2.3.2 explains how to estimate central bank behavior and
the bias of their intervention.) In most developing Asian countries,
the estimation results show asymmetric intervention in the foreign
exchange market with a strong bias toward preventing appreciation
rather than depreciation (Table 2.3.3). Te degree of the bias, however,
varies depending on the preferences of central banks. Singapore and
Tailand appear to react against exchange rate appreciation more than
2.3.2 Centra| bank |ntervent|on react|on funct|on
other countries (i.e., for mercantile purposes), whereas Indonesia and the
Philippines exhibit more symmetric intervention (i.e., low ).
Central banks may intervene against exchange rate appreciation
because the exchange rate still plays a role in infuencing trade. However,
with production and trade moving toward a global sharing structure
in developing Asiathat is, the division of the production process into
vertically separated stages that are carried out in diferent countries
central banks have more room to let the exchange rate appreciate, with
less concern for export loss.
Given such global production sharing, trading in parts and
components accounts for a notable share of total trade in the region.
Te PRC has been established as a key assembly point, importing most
parts and components from other Asian countries and producing
fnished products to mostly developed countries. Te quantitative
analysis presented in Table 2.3.4 shows that parts and components
trade is remarkably less sensitive to changes in real exchange rates than
fnished products trade. Te efect of the real exchange rate on machinery
and transportation exports, which contain a high proportion of parts
and components trade, is less than that on other export components.
Tis box shows the empirical model for estimating the
preference of central banks in intervening in the foreign
exchange market. Te model assumes that the central bank
intervenes in the foreign exchange market to minimize the
following intertemporal criterion.
(r
t
)
min E
t - 1
= 0

L
t +
(1)
where is the discount factor and L
t
is the period loss
function.
Te loss function is specifed as the deviations of
international reserves (r) and of exchange rate (e) from
their targets, as shown in equation (2):
L
t
= 1/2 (r
t
- r*)
2
+ /2 {(e
t
- e*)
2
+ /3 (e
t
- e*)
3
} (2)
where (> 0) is the relative weight; is the asymmetric
preference parameter on exchange rate stabilization; e
t

denotes the percentage change in the exchange rate (the
nominal efective exchange rate); r* is the optimal level of
reserves; and e* is the central banks target exchange rate,
which is assumed to be 0 in this case. If < 0, deviations
of the same size but opposite sign yield diferent losses,
and thus the rate of appreciation is weighted more heavily
than the rate of depreciation:
L
t
(e
t
) = [e
t
+ (2) (e
t
)
2
] < 0, for e
t
< 0
Minimizing equation (1) by choosing r
t
subject to the
constraint, e
t
e* = a
0
+ a
1
r
t
+
t
, leads to the following
intervention reaction function of the central bank:
r
t
= r* + a
1
E
t-1
{e
t
+ /2 (e
t
)
2
} (3)
Replacing expected values with actual values, the
empirical version of the intervention reaction function can
be simplifed:
r
t
= c + e
t
+ (e
t
)
2
+
t
(4)
where = a
1
, = a
1
2
Equation (4) is estimated based on monthly data for
the sample period between 2000M1 and 2009M7, for six
emerging Asian economies: India, Korea, the Philippines,
Singapore, Tailand, and Indonesia.
Te reduced-form parameters (, ) allow identifcation
of the asymmetric preference on exchange rate
stabilization, . It can be shown that the asymmetric
preference parameter is = 2/.
Tis parameter is the main concern of the empirical
analysis. Te positive and statistical signifcance of
implies that the central banks do not intervene
asymmetrically: they intervene to guard against
appreciation of the exchange rate but do not intervene
when the rate shows a depreciation trend.
2.3.3 |ntervent|on react|on funct|on and po||cy preference est|mates:
2000M12009M7
Country = 2/ J-test
lndla 1.202```
(0.089)
-0.432```
(0.102)
-0.148```
(0.035)
0.687```
(0.123)
16.25
Korea, Rep. of 0.568```
(0.086)
-0.131```
(0.032)
-0.019``
(0.007)
0.291`
(0.155)
14.58
Phlllpplnes 1.328```
(0.138)
-1.014```
(0.093)
-0.132``
(0.054)
0.259```
(0.103)
14.05
Slngapore 0.991```
(0.144)
-0.923```
(0.302)
-0.716```
(0.236)
1.551```
(0.529)
12.66
Jhalland 0.506```
(0.084)
-0.437```
(0.086)
-0.997```
(0.078)
4.567```
(0.647)
13.69
lndonesla 1.621```
(0.151)
-0.722```
(0.104)
-0.041```
(0.012)
0.113```
(0.022)
16.62
Notes: ```, ``, and ` denote rejectlon of the null hypothesls that the true coeclent ls zero at the %,
,%, and o% slgnlcance levels. Jhe standard errors of are obtalned uslng the delta method.
Standard errors uslng a four-lag Newey-west covarlance matrlx are reported ln parentheses. e
t
ls
measured uslng the nomlnal eectlve exchange rate (NllR). J-test refers to the lansens test of
over-ldentlfylng restrlctlons, whlch ls dlstrlbuted as a
(m) under the null hypothesls of valld over-

ldentlfylng restrlctlons. A constant, lagged values ( to o, z, and , months) of r
t
, e
t
as well as current
and lagged values ( to |, 8, and , months) of the uS lederal lund Rate.
Source: v. Pontlnes and R.S. Rajan. zoo. lorelgn lxchange Varket lnterventlon and Reserve
Accumulatlon ln lmerglng Asla: ls there lvldence of lear of Appreclatlon! 0ecember.
Particularly, in the longer term, the efect of the exchange rate is found
to be statistically signifcant only in Indonesia and Malaysia. Tis result
implies that the sensitivity of aggregate trade fows to relative price
changes diminishes as the share of parts and components trade increases.
Exchange rate volatility. Central banks ofen use the impact of
exchange rate volatility to justify intervening in the foreign exchange
market. Aside from the issue of the exchange rate level or trend, countries
with fexible exchange rate regimes evidently may experience more
nominal exchange rate volatility than a country adopting a relatively
fxed exchange rate regime. Given relative price rigidities, this implies
2.3.4 kLk coec|ents |n e|ght Last and Southeast As|an econom|es
Short-run coec|ent Long-run coec|ent
1ota|
merchand|se
(1L)
Manufactur|ng
(ML)
M&1 1ota|
merchand|se
(1L)
Manufactur|ng
(ML)
M&1
Chlna, Peoples
Rep. of
0.60` 0.69` 0.61` 0.50`` 0.50``
lndonesla 1.17` 1.44`` 0.72` 4.52` 2.15` 0.97`
Valaysla 0.64` 0.65` 0.48` 1.48` 1.37` 1.06`
Phlllpplnes 0.20``
Korea, Rep. of 1.12` 1.17` 0.14```
Slngapore 0.89(-2)``` 0.53 (-2)``
Jhalland 0.34` 0.18` 0.14` 0.70` 0.39```
Jalpel,Chlna 0.38 (-3)`` 0.33 (-3)```
V8J machlnery and transportatlon.
Note: Jhe values ln the parentheses show the lag perlod of the slgnlcance. ` slgnlcant at the ,% level, `` slgnlcant at
the o% level, and ``` slgnlcant at ,% level.
Source: J. Jongwanlch. lorthcomlng. Capltal llows and Real lxchange Rates ln lmerglng Aslan Countrles. ADB Economics
Working Paper Series. Aslan 0evelopment ank, Vanlla.
a corresponding fuctuation in the real exchange rate, and it would be
of less concern if the exchange rate volatility is in line with underlying
macroeconomic fundamentals. However, high-frequency exchange rate
movements can be driven by speculative elements, especially speculative
(short-term) capital fows, rather than by underlying macroeconomic
fundamentals. Tis circumstance would cause not only excessive volatility
of the exchange rate but also a signifcant misalignment of the rate from
its equilibrium or fundamental level.
However, the impacts of exchange rate volatility on key variables,
especially in developing and emerging market economies, are still
inconclusive, and mixed results are found in the recent empirical
literature. Although further analysis of the nexus of exchange rate
volatility and other key economic variables is still needed, the excessive
volatility of exchange rates that emerged from speculative elements is
defnitely undesirable. Price signals become distorted, and the exchange
rate can diverge from its equilibrium level, leading to a destabilized
situation in an economy.
keg|ona| concerns on exchange rate
management after the cr|s|s
Te analysis of exchange rate management in developing Asia shows that
most countries have implemented de facto middle-ground exchange
rate regimes involving extensive intervention in the foreign exchange
market. Te recent crisis has provided positive support for middle-ground
exchange rate management and has highlighted the possible faws in
implementing either hard-pegged or freely foating regimes (the so-called
corner solution). Te IMF has begun to change its views from the corner
solution to the middle-ground regime (Ghosh and Ostry 2009).
However, as mentioned in Part 1, extensive postcrisis intervention in the
foreign exchange market could have serious implications for macroeconomic
management. Te quick and strong economic recovery in developing Asia,
together with low interest rates in most developed countries, began to bring
huge short-term capital infows into the region. Given extensive intervention
combined with excessive liquidity, real exchange rate appreciation and
economic overheating could follow. In particular, the sudden reversal of
short-term capital fows could endanger fnancial and economic stability and
bring about a currency and fnancial crisis.
Lxchange rate management
To redress the risks associated with middle-ground exchange rate
regimes, central banks in the region should allow the exchange rate to
adjust and fall into line with its so-called equilibrium or fundamental
level. Te equilibrium exchange rate is defned as the exchange rate
that simultaneously attains internal and external balances. Internal
balance is reached when the economy is at full employment output
and operating in a low-infation environment. External balance is
characterized as a sustainable balance-of-payments position over the
medium term, ensuring desired net fows of resources and external debt
sustainability. Allowing the exchange rate to adjust and fall into line
with the equilibrium level has several benefts: it provides a mechanism
for absorbing shocks; exchange rate misalignment can be limited; and
allocations of resources can become more efcient. Given capital infows,
it can also help reduce real returns so that incentives to bring in further
capital infows are subdued.
Intervention in the foreign exchange market is still plausible to dampen
excessive swings (i.e., volatility) in the exchange rate, which an uncertain
and imperfect market can deliver. However, the intervention should be
done to mimic the equilibrium exchange rate of a well-functioning market,
not override it to produce a nonequilibrium exchange rate.
On a practical basis, defning the equilibrium exchange rate is not
straightforward because it is unobservable in the real world. To arrive
at the equilibrium level, several issues need to be taken into account,
including model specifcations and quantitative techniques. One
analysis uses an internal and external balance approach to determine
the appropriate level of the current account balance and then applies
a macroeconomic model to produce the equilibrium exchange rate
(Williamson 1994). In another analysis, the concept of uncovered interest
rate parity is applied to build an equilibrium exchange rate model (Clark
and MacDonald 1998).
Even though establishing a unique level of equilibrium exchange rate
seems difcult, it is possible to identify a so-called rational-beliefs range,
or band, that is wide enough to encompass the uncertainties of the model
and yet sufciently narrow to have policy implications. International
institutions such as the IMF, World Bank, and regional banks could
play a role in arriving at such a range and provide policy advice to the
governments in the region.
Recent analysis from Cline and Williamson (2010) shows the
estimation of the equilibrium exchange rate in
2009 (Table 2.3.5). Compared to the actual exchange
rate, the misalignment in the form of undervalued
currencies is evident in many developing Asian
economies, refecting signifcant intervention in the
foreign exchange market.
Five economies where undervaluation against the
US dollar in December 2009 was signifcant and more
than 20% are the PRC (40.7%); Hong Kong, China
(32.3%); Malaysia (30.5%); Taipei,China (28.5%); and
Singapore (24.7%). In the Philippines and Tailand,
the undervaluation against the US dollar was around
10%. In only three countries (Indonesia, Korea, and
India) do exchange rates exhibit a slight overvaluation
in response to rapid increases in capital infows. In
terms of a trade-weight average basis, however, Cline
and Williamson (2010) show that only four economies
do the currencies exhibit noticeable undervaluation,
namely the PRC (21.2%); Malaysia (17.7%); Taipei,China
(13.6%); and Singapore (10.3%).
Other studies also fnd exchange rates in the region, especially
the yuan, to be undervalued, but the extent of undervaluation varies.
2.3.5 Actua| and fundamenta| equ|||br|um exchange rates, per
US do||ar
Aga|nst the US do||ar Aga|nst a trade-
we|ghted bas|s
PLLk Actua| % change
to reach
PLLk
% change to reach
PLLk
Chlna, Peoples
Rep. of
4.9 6.8 40.7 21.2
long Kong, Chlna 5.9 7.8 32.3 -0.3
lndla 47 47 -1.5 -5.2
lndonesla 9,884 9,395 -5 -0.6
Korea, Rep. of 1,201 1,164 -3 -0.5
Jhalland 29.7 33.3 12.4 -0.4
Valaysla 2.62 3.42 30.5 17.7
Slngapore 1.13 1.4 24.7 10.3
Phlllpplnes 40 46 14.8 -0.4
Jalpel,Chlna 24.9 32 28.5 13.6
Source: w. R. Cllne and J. wllllamson. zoo. Notes on lqulllbrlum lxchange Rates.
Peterson lnstltute Pollcy rlef o-z. January.
Bergsten (2010) argues that the yuan is undervalued by almost 25% on a
trade-weight average basis and by about 40% against the dollar. Ferguson
and Schularich (2009) point to an undervaluation of the yuan relative
to the dollar of about 30%50%. Reison (2009) suggests that the yuan is
undervalued by 12%.
keg|ona| cooperat|on for exchange rate po||cy
and reserve management
Regional cooperation could play a crucial role in ensuring a well
functioning middle-ground exchange rate regime. As mentioned, one of
the key reasons for extensive intervention in the foreign exchange market
is the fear of losing competitiveness. In particular, when the PRC insists on
maintaining its limited fexibility of exchange rate, other Asian countries
are unlikely to allow the exchange rate to strengthen in response to their
balance of payment surplus. To resolve the dilemma, policy coordination
among developing Asian countries should be initiated.
Certainly, coordination does not imply putting all the countries
in the region in a common exchange rate straight jacket. Indeed, this
approach would be inadvisable at this point, given the diferent stages
of development and unlikelihood that all countries would give up their
independent monetary policies. However, some sort of loose coordination
among these countries could still be possible. Given an equilibrium
exchange rate guideline, these countries could agree on a gradual
adjustment of their exchange rates toward the equilibrium level.
Te coordination of exchange rates could also help redress the global
imbalance issue that could reemerge in the afermath of the global
crisis. Torbecke and Smith (2010) show that the adjustment of the PRC
currency alone would have very limited efect on trade adjustment in the
region but that an across-the-board appreciation of East and Southeast
Asian currencies could have more powerful efect in reducing the
distortion, especially for the PRC. Tey use a panel dataset, including
the PRCs exports to 33 countries, and fnd that a 10% yuan appreciation
would reduce ordinary (mostly labor-intensive) exports from the PRC
by 12% and processed exports (sophisticated, capital-intensive goods)
by less than 4%. But a 10% appreciation of all East and Southeast Asian
currencies would reduce processed exports from the PRC by 10%.
However, exchange rate adjustments should be viewed as a facilitator
for the global imbalance issue only. To solve the imbalance problem,
policy measures need to be implemented to reduce precautionary saving
in Asian countries and improve the quantity and quality of investment,
since the economic fundamentalssaving and investmentin surplus
and defcit countries are the key determinants of the imbalance problem
(ADB 2009a).
Regional cooperation can also play an important role in reserve
management. Te recent crisis provided strong evidence for the
usefulness of holding foreign exchange reserves to weather fnancial
stress. So it is plausible for developing Asian countries to hold a certain
level of foreign exchange reserves to absorb shocks in addition to using
the exchange rate channel. However, holding too many foreign exchange
reserves, currently evident in the region, can come with signifcant costs.
Several initiatives have been introduced, including reserve pooling of
US$120 billion through the multilateralized Chiang Mai Initiative (CMI),
but the efective drawings on this initiative are very limited. In fact, the
region came through the current global crisis with no drawings on the
CMI, but with some use of the Federal Reserves swap facility, suggesting
a need to promote a stronger sense of solidarity and the opportunities
available in the region.
Te Asian Bond Funds and Asian Bond Market Initiative need to
be further developed to link the fnancial systems of the region more
closely, but closer coordination will require more dynamism and drive
than recently shown. Although the ultimate aim of these initiatives is to
develop a deep and dynamic commercial bond market, their basic building
block is a strong government bond market, with enough depth to absorb
change in foreign demand and to ensure participants sufcient liquidity.
Strengthening regional cooperation in these matters could result not only
in the better use of foreign reserves but also in the indirect and gradual
reduction of foreign reserve holdings for individual countries, allowing the
exchange rate to adjust and be in line with its equilibrium level.
Cap|ta| account ||bera||zat|on
Capital and fnancial liberalization has been implemented in most
developing Asian countries since the late 1980s. Restrictions have been
gradually phased out with an aim of enhancing a countrys capacity to
garner the benefts of capital fows. Fundamentally, capital fows should
provide benefts to a receiving country because they allow that country
to allocate resources more efciently, to enhance domestic saving, and to
transfer technological and managerial know-how. Economies with greater
fnancial openness should also be able to stabilize themselves through risk
sharing and portfolio diversifcation (Ito et al. 2009). However, evidence
over the past two decades has led to questions on the costs and benefts of
capital and fnancial liberalization, and over the past decade, it has been
blamed as a key factor in the boom-and-bust cycle in many developing
countries, including the sudden reversal of capital infows in the Mexican
crisis of the early 1990s and the Asian fnancial crisis later in the decade.
Blaming capital and fnancial account liberalization policy for
inducing economic instability is, however, inappropriate. Such policy
takes place in context with the other two macroeconomic policies
(monetary and exchange rate), in the so-called Impossible Trinity
or Trilemma hypothesis. Te hypothesis states that a country may
simultaneously choose any two, but not all, of the following three goals:
monetary independence, exchange rate stability, and fnancial and capital
account openness. Policy makers must decide within the constraints of
choosing two out of the three policy goals.
As discussed in previous sections, afer the 1997 Asian fnancial crisis,
many countries still wanted to preserve their monetary autonomy with
extensive intervention in the foreign exchange market. To guard against
a possible adverse efect from a signifcant buildup of capital infows in
the early 2000s, capital restrictions were reintroduced in many developing
countries. For example, in response to the turn in bank fows, the PRC
authorities restricted the borrowing of dollars by foreign bank branches
in that country in September 2006. Such a restriction was also introduced
in Korea in April 2007 and in India in August 2007. In Tailand, the
unremunerated reserve requirement on fxed income fows was initiated
in September 2006 afer measures taken in 2003 to limit the buildup in
nonresident holdings of baht accounts had proved unsuccessful.
Te index of de jure fnancial openness constructed by Chinn and
Ito (2008) confrms that, afer the Asian fnancial crisis, restrictions on
capital accounts were introduced more ofen in many Asian economies,
including Indonesia, Malaysia, and Tailand (Figure 2.3.4). For the rest of
developing Asia, de jure fnancial openness was relatively stable or slightly
increasing (i.e., had higher de jure fnancial index values).
In fact, concerns over capital liberalization and the rapid
increase in capital infows would be limited if:
A country allows the exchange rate to act as another channel
in absorbing shocks.
Te fows are driven by fundamental factors.
Countries have the absorptive capacity, especially the
fnancial institutions, to deal with such infows.
In that case, countries should accept the inevitability
of a pickup in international infows and their consequence,
especially on real exchange rate appreciation. However, these
conditions, especially allowing the exchange rate to be a channel
in absorbing shocks, are not met in most of developing Asia.
In such situations, a capital account restriction is needed and
viewed as a useful tool to guard against economic instability as
well as to preserve monetary autonomy.
A number of empirical studies have found the ability of
capital controls to restrict capital movements doubtful. Te
controls could come with signifcant costs, especially when they
lead to deterioration in the business environment; also, they
could lose their efectiveness when they become more permanent,
because in time economic agents fnd ways of evading them. Tus
capital restrictions should not be viewed as a long-term tactic.
In the medium to longer term, central banks should allow the
exchange rate to adjust and act as a channel in absorbing external
shocks, while economies should build their absorptive capacity
for dealing with capital fows, especially in the form of fnance
sector reform and foreign exchange market development (Ito et al. 2009;
ADB 2009b). If banks are well capitalized and diversifed, they are more
resilient to volatile capital fows and exogenous shocks. More developed
equity and bond markets could promote greater risk diversifcation, helping
to minimize the fnancial stability risks associated with capital fows.
Hedging instruments, as well as a deep and liquid foreign exchange market,
should be gradually developed to reduce excessive swings in exchange rates
without the need for much intervention in the foreign exchange market.
Still, using these measures does not preclude implementation of
capital restrictions and controls as part of policy instruments that are
intended to deal with surging capital fows in the short run, even if a
z.. De jure measure of nanc|a| openness, se|ected
econom|es
2007 20002007 19971999 19901996
-2
-1
0
1
2
3
2007 200007 199799 199096
Rep. of Korea
India
Hong Kong, China
People's Rep.
of China
Developing Asia
Index
-2
-1
0
1
2
3
2007
200007
199799
199096
Thailand Singapore Philippines Malaysia Indonesia
Index
Notes: Jhe lndex ranges from -z., to z.. llgher values lndlcate hlgher degrees of
nanclal and capltal openness.
0eveloplng Asla ls taken to be the nlne economles ln thls gure.
Source: V. Chlnn and l. lto. zoo8. A New Veasure of llnanclal 0penness. Journal
of Comparative Policy Analysis o(,). pp. ,o,zz.
market-driven exchange rate regime is implemented. Te justifcation
for imposing some control measures is based on the fact that capital
fows are sometimes driven not by fundamental factors but by speculative
aims, which are very volatile and disruptive. Tey tend to produce
excessive swings in exchange rates, and a sudden reversal of capital
fows can lead to signifcant misalignments of the exchange rate and
endanger fnancial and economic stability. Instead of either allowing the
exchange rate to adjust or implementing a sterilized foreign exchange
intervention at the risk of overheating the economy, introducing capital
controls could be useful in tackling the problem at its source. In any case,
capital restrictions and controls should be well designed and initiated
with caution because restrictions could lead to a serious deterioration in
market sentiment.
1ypes of cap|ta| account restr|ct|ons
Capital controls can be introduced to restrict both capital infows and
capital outfows, but the justifcations for their use are slightly diferent.
Although controls on capital infows are introduced typically during a
boom to restrict excessive and volatile capital, restrictions on outfows
are normally imposed during a bust to limit downward pressure on
a domestic currency and the depletion of foreign exchange reserves.
In normal times, restrictions on capital outfows are mainly made to
preserve saving for domestic investment, but liberalizing such outfows
may act as a safety valve for speculative capital infows (Box 2.3.3).
Regardless of purpose, capital controls can take two broad forms:
administrative and market-based. Administrative control measures
restrict capital through outright prohibitions, an approval procedure that
is either rule-based or discretionary, and explicit quantitative restrictions.
Most administrative control measures seek to directly afect the volume
of cross-border fnancial transactions. Tis type of control was introduced
in many developing countries during the boom periods to restrict capital
infows. For example, in the early 1990s, Malaysia prohibited nonresidents
to purchase money market securities and in September 2006, the PRC
authorities restricted the borrowing of dollars by foreign bank branches
in the PRC.
Market-based controls restrict capital by introducing additional costs
associated with cross-border fnancial transactions. Tey include:
Explicit taxes on cross-border fnancial fows (e.g., the Tobin tax).
Implicit taxes in the form of non-interest-bearing compulsory reserve
requirement (e.g., unremunerated reserve requirements).
Dual (two-tier) or multiple exchange rate system or other indirect
prudential controls (e.g., reporting requirements for specifc
transactions).
Market-based controls could afect only the price of capital or both
the price and volume in cross-border transactions.
Explicit taxation involves the imposition of taxes on external
fnancial transactions or on income resulting from the holding of
foreign (or domestic) assets by nonresidents (or residents). Tax rates can
be diferentiated among the components of capital fows to discourage
certain types and maturities. However, many problems can arise. Te
Easing restrictions on capital outfows is another option to
redress the adverse impact of speculative capital infows.
Tis type of policy allows residents to diversify their risks
and mitigates economic overheating, especially when the
real exchange rate appreciates as the result of excessive
capital infows. Jongwanich (forthcoming) shows that, afer
the Asian fnancial crisis, capital outfows, including both
FDI and other forms of capital fows, such as portfolio
investment and bank loans, tend to have a greater impact on
real exchange rate movements than capital infows. Among
all types of capital fows, portfolio outfows generally have
the greatest impact on real exchange rate depreciation.
India and Tailand have initiated a liberalization policy
to encourage capital outfows. In 2005, frms in India were
allowed to invest up to 200% of their net worth, with an
upper limit of $100 million a year, without approval from the
Reserve Bank of India, and were permitted to transfer funds
through any authorized foreign exchange dealer. In August
2009, the central bank of Tailand relaxed its rule on capital
outfows by letting Tai companies with minimum assets
of $150 million invest directly in foreign securities without
going through mutual or private funds.
Expanding intraregional capital fows is another
means to encourage capital outfows, and it should be of
particular interest to countries in the region. Recent data
show that such fows have been limited: intraregional
fows of portfolio investment were only 17% of total
portfolio fows in 2007, though up from 9% in 2001.
However, stimulating intraregional capital fows would
take time because the administrative infrastructure
required, particularly in fnance sectors throughout the
region, would have to be set up.
In addition, the efectiveness of this measure depends
on having sufcient pent-up demand for foreign assets.
Without it, easing capital outfow controls can lead to
repatriation of funds and even to additional net capital
infows. In addition, a key concern for encouraging capital
outfows from developing Asia at this stage is that it
may support the recycling of excessive saving without a
structural adjustment in economic fundamentals.
To improve both the quantity and quality of investment
in the region, countries would be better of liberalizing
capital outfows while redressing the problems both of
excessive saving and the inefcient use of saving.
2.3.3 Cap|ta| outows ||bera||zat|on
policy measure can be evaded easily through derivative instruments, and
how such a tax should be managed is unclearinefcient management
could lead to considerable administrative costs, overwhelming the
benefts of the controls.
In contrast to an explicit tax, implicit taxation in the form of
unremunerated reserve requirements (URRs) requires banks and
nonbanks to deposit a certain share of cross-border transactions at
zero interest rate with the central bank for a given time. Tis measure
implicitly reduces efective investor returns and discourages cross-border
transactions. Te control may be placed on a particular type of capital to
discourage a certain maturity of capital transactions.
However, the efectiveness of URRs remains inconclusive because they
are sensitive to choice of methodology, including the coverage of fows
and the degree of reserve requirements. Le Fort and Lehman (2003) found
that URRs reduced the volume of capital fows in the short run but lost
efectiveness over time; also that the adverse impacts fell harder on small
and medium-sized frms than on large frms with access to a wider range
of fnancing instruments. Edwards (1999) argues that URRs may have
protected the fnancial market in Chile from small shocks but they could
not prevent the economy from large shocks (as in the recent crisis). Kawai
and Takagi (2008) reviewed evidence of other countries implementing
URRs and found the ability of URRs to afect volume and composition
of private capital fows doubtful. Implementation of URRs in Tailand in
2006 also showed that the market reaction against the URRs was strong
enough to make the authorities reverse policy.
In a dual (two-tier) exchange rate system, a central bank attempts to
split the foreign exchange market between residents and nonresidents
by either requesting or instructing domestic fnancial institutions not to
lend to borrowers engaged in speculative activity. Te two-tier market
approach attempts to increase costs for speculators in domestic credit,
who need to establish a net short domestic currency position, while
allowing nonspeculative domestic credit demand to satisfy normal
market exchange rates (Ariyoshi et al. 2000). Tis measure generally
needs to be implemented in tandem with administrative control measures
to directly restrict fnancial institutions from lending to speculative
borrowers. In the late 1990s, this measure was implemented in Tailand,
with the goals of segmenting the onshore and ofshore markets and
of limiting the reversal of capital infows. Tai banks were required to
suspend all transactions with nonresidents who could facilitate a buildup
of baht positions in the ofshore market. However, because of serious
macroeconomic imbalances in the country, the central bank could not
defend the position, and the baht leaked out from the onshore market.
Eventually, the central bank abandoned the two-tier policy.
Creat|ng eect|ve contro|s
Designing capital control measures is not an easy task for central banks,
and no one control measure is efective across all countries at all times.
However, past experience suggests that, to enhance the efectiveness
of capital control measures, administrative capacity, including the
competence of the bureaucratic system, is extremely important, and
in many developing Asian countries, it should be improved. Te ease
with which restrictions are circumvented is mitigated somewhat when
a country has a strong monitoring and enforcing system. Johnston
and Ryan (1994) show that capital controls implemented in industrial
countries were more efective than in developing countries since they
could adjust their control measures better in response to the adaptation of
speculative investors.
In addition, capital control measures can be more efective if they are
imposed on investor-based controls, instead of transaction-based controls.
Investor-based control can enable central banks to easily track who is
investing in the country and how fows are coming in (Kawai and Takagi
2008). Te qualifed foreign investor scheme implemented in the PRC and
the foreign institution investor classifcation applied in India are examples
of investor-based controls that restrict short-term capital movements.
Kimball and Xiao (2005) and Shah and Patnaik (2005) provide evidence
of efectiveness of investor-based controls in managing capital accounts
in the PRC and India. Tey also show that the volatility of capital fows in
these countries is far lower than in other countries, even in India where a
rapid expansion of capital fows has been evident.
Grenville (2010) argues that a normal withholding tax on interest
income could become more efective in controlling speculative capital
fows if it is levied by the source of investment income, instead of by the
investors country. Finally, the capital control policy could become even
more efective if there is cooperation among regional and global bodies.
Such cooperation could endorse actions in principle and determine when
their use is appropriate.
P|sca| po||cy
|ntroduct|on
In contrast to industrial countries, developing Asia has only limited
experience in using government spending and tax changes to smooth the
business cycle. Nevertheless, the recent crisis has awakened the regions
interest in countercyclical fscal policy. In fact, countries throughout
developing Asia quickly adopted huge fscal stimulus packages to
cushion the impact of the crisis. Te stimulus is widely believed to have
contributed to the regions surprisingly speedy and robust recovery. What
made such a decisive fscal response possible was the regions healthy
state of public fnances, the result of a long history of fscal prudence and
discipline. Te key challenge now facing the regions fscal policy is how
to contribute meaningfully to sustainable growth in the postcrisis period
without compromising its valuable tradition of fscal sustainability.
Asias uncharacteristic and unprecedented fscal activism brings a
number of important issues to the fore. First, this section looks at the
fscal stimulus programs implemented by Asian governments. Te next
logical question is how much the fscal stimulus in fact contributed
to the regions recovery. A related issue is the potential of government
spending and tax cuts to contribute to output stability in the postcrisis
period. Given the enabling efect of Asias fscal space, evident in
its relatively low public debt-to-GDP ratio, it would be desirable to
empirically validate the conventional wisdom that Asias public fnances
are in good shape as a result of responsible fscal behavior in the past.
Two related, forward-looking issues are the implications of the stimulus
on the regions medium-term fscal sustainability; and the role of fscal
policy in addressing Asias postcrisis medium-term structural challenges,
particularly rebalancing growth toward domestic sources.
S|ze and structure of deve|op|ng As|as sca|
st|mu|us packages
Te collapse in exports, coupled with the weakness of private
consumption and investment, galvanized Asian governments to introduce
fscal stimulus packages, that is, the discretionary loosening of a
governments fscal stance. Tis section presents a broad overview of the
size and structure of the regions fscal stimulus.
Measuring the size of the stimulus is complex because of an inherent
tendency for the fscal balance to deteriorate during recessions, as tax
revenues fall and government spending rises. With this qualifcation
in mind, taking a look at the fscal stimulus is still worthwhile.
Although the PRC grabbed the headlines with its massive CNY4 trillion
($585 billion) package, which amounted to a huge 13% of GDP, many other
Asian countries rolled out large fscal stimulus programs of their own
(Figure 2.4.1). In fact, the average stimulus size in 15 developing
Asian economies was equal to 7.5% of GDP, almost three times
the level of 2.8% for the G7 nations. Many countries have since
injected additional stimulus. According to Khatiwada (2009),
for 2009, the economic stimulus announced by 32 countries
(including all the G20 countries) amounted to 1.4% of global
GDP, with almost 90% of it coming from G20.
Tax cuts account for more than a third of the stimulus plans
of industrial economies, while infrastructure projects make
up about half of the packages in developing and emerging
economies. Te share of infrastructure spending in the total
fscal package is three times as high in these economies as
in industrial countries (Figure 2.4.2). Developing Asias fscal
stimulus packages are consistent with this pattern.
Among the G20 countries, implementation rates appear
to be higher for revenue measures and social transfers than
for infrastructure projects (IMF 2009b). Te implementation
of capital expenditures usually takes a longer time as the
government pronouncement needs to be followed by the
allocation of budget, the transfer of resources to diferent levels
of government, the choice of contractors, procurement, and
funds disbursement.
Hur, Jha, Park, and Quising (forthcoming) ofer a detailed description
of the fscal stimulus programs implemented by 12 major Asian
economies. Te general picture that emerges is one of heightened fscal
activism during the global crisis. By and large, the evidence supports the
view that the developing Asian governments boldly used countercyclical
fscal policy to ofset the slowdown of economic activity. Te structures of
the stimulus packages may difer across countries; for example, the PRC
has given high priority to promoting small and medium-sized enterprises,
whereas Korea is pushing fscal measures that will contribute to a cleaner
environment. Whatever the makeup of the package, the countries across
the region have aggressively boosted public spending and cut taxes to
support demand and growth.
On balance, the regions stimulus packages are tilted toward higher
spending, particularly on infrastructure investments. Government
spending dominates tax cuts as the main component of the
fscal stimulus package, although there are exceptions, such as
in Indonesia. Tis tendency is consistent with the regions long-
standing progrowth orientation; more and better infrastructure
will beneft growth well beyond the short run. Even given
delays in some cases (as in Indonesia, for example), Asian
governments have generally rolled out the stimulus measures
quickly and decisively. Although the magnitudes of the stimulus
packages difer across the countries, the general regional trend
was toward stimuli sizable enough to have an efect. Overall,
an examination of the fscal stimulus packages confrms that
Asia has in fact proactively used fscal tools for countercyclical
purposes during the global crisis. Such activism marks a sharp
departure from the regions traditional fscal conservatism.
z.. St|mu|us p|ans of se|ected econom|es
0 5 10 15 20
Stimulus plans
Italy
France
United Kingdom
Germany
Canada
Japan
United States
Sri Lanka
Bangladesh
Indonesia
India
Taipei,China
Philippines
Hong Kong, China
Malaysia
Singapore
Rep. of Korea
Viet Nam
People's Rep. of China
Kazakhstan
Thailand
Georgia
% of 2008 GDP
Average
Average
Source: Y. Zhang, N. Jhelen, and A. Rao. zoo. Soclal Protectlon ln llscal Stlmulus
Packages: Some lvldence. uN0P/00S worklng Paper. http://www.undp.org/
developmentstudles/docs/ soclalprotectlon_scalstlmulus_marchzoo.pdf
z..z Compos|t|on of sca| packages
0
10
20
30
40
50
Developing and emerging economies Advanced economies
Other spending
Transfers to
low income
households
Tax cuts
Infrastructure
spending
Employment
measures
%
Source: S. Khatlwada. zoo. Stlmulus Packages to Counter Clobal lconomlc Crlsls:
A Revlew. lnternatlonal lnstltute for labour Studles 0lscusslon Paper /zoo.
http://www.llo.org/publlc/engllsh/bureau/lnst/publlcatlons/dlscusslon/
dpo.pdf. p. .
z.. Path of forecast and actua| output
Time
Economic
growth
t*
A
Note: Jhe solld llne represents the path of actual output, the dotted llne the
path of forecast output, and t` the tlme the global nanclal crlsls broke out, l.e.,
the thlrd quarter of zoo8.
Source: S. K. lur, S. Jha, 0. Park, and P. ulslng. lorthcomlng. 0ld llscal
Stlmulus llft 0eveloplng Asla 0ut of the Clobal Crlsls! A Prellmlnary lmplrlcal
lnvestlgatlon. ADB Economics Working Paper Series. Aslan 0evelopment ank,
Vanlla.
Ras As|as sca| st|mu|us contr|buted
to |ts recovery!
Lmp|r|ca| framework
Tis subsection provides a broad overview of the methodology
and data used for empirical analysis. Te sample consists of
18 of the G20 economies, including the PRC, India, Indonesia,
and Korea, plus six other developing Asian countries: Hong
Kong, China; Malaysia; Philippines; Singapore; Taipei,China;
and Tailand. Te total sample of 24 countries thus includes
eight major industrial countries, six non-Asian developing
countries, and 10 developing Asian countries. Te data set is
an unbalanced panel of quarterly data where the length of each
countrys data is determined by availability.
Broadly speaking, the empirical framework consists of two
stages. Te frst stage involves using an econometric model to
generate dynamic GDP forecasts of each sample country during
the global crisis: the fourth quarter of 2008, and the frst and
second quarters of 2009. Tis sample period was selected because,
during this period and especially the fourth quarter of 2008
and the frst quarter of 2009, Asias crisis-induced downturn
reached its peak as a result of collapsing exports and weak private
demand. By the second quarter of 2009, some Asian countries
already began to recover, and by the third quarter recovery was under way
in many more.
Te second stage involves a cross-country regression in which the
gap between the actual GDP and forecast GDP is regressed on a number
of explanatory variables. Using panel data from the 24 sample countries,
the analysis seeks to answer the following question: Which variables help
explain why actual GDP growth exceeded forecast GDP during the crisis
period?
In Figure 2.4.3, t* represents the time the global crisis broke outthe
third quarter of 2008. Te solid line represents the actual output path,
and the dotted line represents the forecast output path. Te distance A
thus represents the gap between the forecast and actual output paths
during the crisis. Te explanatory variables include lagged domestic
GDP growth, global GDP growth, government revenue, government
expenditure, the policy interest rate, the term spread, and the real
efective exchange rate. Of particular interest is the impact of the two
fscal variablesgovernment revenues and expenditureson A. Te
expected efect of expenditures is positive, whereas that of revenues
is negative. Te expected efect of both lagged domestic GDP growth
and global GDP is positive. Lower policy interest rates and smaller
term spreads are proxies for expansionary monetary policy. Finally, the
depreciation of the real efective exchange rate should boost exports and
output.
In addition to these explanatory variables, three interaction variables
for government expenditures and revenues are included. Of these, the
most important is the dummy for developing Asia, which captures the
output impact of fscal policy for the developing Asian subsample. A
second variable captures the impact of fscal soundness, and a third
variable captures the efect of economic openness on the output impact of
fscal policy.
Lmp|r|ca| resu|ts
Table 2.4.1 reports only the statistically signifcant results of the
empirical analysis. For the whole sample of 24 countries, monetary
policy variablespolicy interest rate and term spreadhave a negative
and signifcant efect. Lagged domestic GDP growth has a positive and
signifcant efect. In terms of insignifcant results, which are not reported
in the table, neither fscal policy variablegovernment expenditures and
revenueshas a signifcant efect on the gap between actual and forecast
GDP. Global GDP growth and real depreciation are also insignifcant.
However, interestingly, the interaction term between government
expenditures and the dummy variable for developing Asia is positive and
signifcant at the 5% level. Terefore, although government expenditures
are insignifcant for the whole sample, they are positive and signifcant
for the developing Asian subsample. On the other hand, government
revenues are insignifcant for the Asian subsample, as they are for the
whole sample.
Overall, the empirical results lend support to the popular belief that
the fscal stimulus boosted aggregate demand and output in developing
Asia during the global crisis. In particular, government spending appears
to have had a positive efect on output. Te above results suggest that
the fscal stimulus may have been more efective in developing Asia than
elsewhere. Tis is consistent with the widespread belief that the regions
fscal response was more decisivethat is, quicker and biggerthan in
other parts of the world. At a more fundamental level, however, a great
deal of caution is needed in interpreting the results, given the narrow
time window of the sample period. At best, the empirical analysis
marks a preliminary frst step toward better understanding the actual
contribution of Asias fscal stimulus to its remarkable V-shaped rebound.
Much more research needs to be done for a more defnitive assessment.
2.4.1 kegress|on resu|ts: 0ependent var|ab|e |s gap between actua| output and forecast output
(1) (2) (3) (4) (5) (6) (7) (8)
lagged C0P growth 0.750``` 0.777``` 0.670``` 0.703``` 0.657``` 0.705``` 0.640``` 0.695```
(0.11) (0.10) (0.11) (0.10) (0.12) (0.11) (0.13) (0.13)
Jerm spread -0.715` -0.774`` -0.738` -0.721`
(0.37) (0.37) (0.38) (0.39)
Pollcy lnterest rate -1.198`` -1.278``` -1.058`` -1.121`` -1.147`` -1.189`` -1.088`` -1.157``
(0.48) (0.47) (0.47) (0.45) (0.5) (0.49) (0.54) (0.53)
Covernment
expendlture for
Aslan countrles
0.283`` 0.286`` 0.331`` 0.318`` 0.339`` 0.326``
(0.13) (0.12) (0.14) (0.13) (0.14) (0.14)
0bservatlons 60 60 60 60 57 57 57 57
R-squared 0.56 0.57 0.61 0.62 0.63 0.64 0.63 0.64
Note: Standard errors are ln parentheses. ``` p<o.o, `` p<o.o,, ` p<o.o.
Source: S. K. lur, S. Jha, 0. Park, and P. ulslng. lorthcomlng. 0ld llscal Stlmulus llft 0eveloplng Asla 0ut of the Clobal Crlsls! A
Prellmlnary lmplrlcal lnvestlgatlon. ADB Economics Working Paper Series.
2.4.3 |mpacts of pos|t|ve expend|ture shocks on
rea| u0P (%)
Shocks on |mpacts |n kea| u0P
Chlna, People's Rep. of SR 0.0065
lR -0.01
long Kong, Chlna SR -0.0015
lR -0.0174`
lndla SR 0.0027
lR -0.0526
lndonesla SR -0.0004
lR 0.0018
Korea, Rep. of SR 0.0086
lR -0.0083
Valaysla SR 0.0023
lR 0.0098
Phlllpplnes SR 0.0053`
lR -0.0113
Slngapore SR 0.0057`
lR 0.023
Jalpel,Chlna SR -0.0021
lR 0.1073
Jhalland SR -0.0017
lR -0.0577`
lR long run, SR short run.
Note: ` slgnlcantly dlerent from zero.
Source: S. Jha, S. Valllck, 0. Park, and P. ulslng.
lorthcomlng. whlther Jax Cuts or Covernment Spendlng!
Some lvldence from 0eveloplng Asla. ADB Economics
Working Paper Series.
2.4.2 |mpacts of pos|t|ve revenue shocks
(h|gher taxes) on rea| u0P (%)
Shocks on |mpacts |n kea| u0P
Chlna, Peoples Rep. of SR 0.0171
lR 0.003
long Kong, Chlna SR -0.0023
lR -0.0178
lndla SR -0.0017
lR -0.0185
lndonesla SR -0.0064`
lR -0.0038
Korea, Rep. of SR 0.0006
lR -0.0076
Valaysla SR -0.0070`
lR -0.0087
Phlllpplnes SR -0.0119`
lR -0.0309`
Slngapore SR 0.0063`
lR 0.0529`
Jalpel,Chlna SR 0.0003
lR 0.3959`
Jhalland SR 0.0035
lR 0.0076
lR long run, SR short run
Note: ` slgnlcantly dlerent from zero.
Source: S. Jha, S. Valllck, 0. Park, and P. ulslng.
lorthcomlng. whlther Jax Cuts or Covernment Spendlng!
Some lvldence from 0eveloplng Asla. ADB Economics
Working Paper Series.
Can countercyc||ca| sca| po||cy stab|||ze output
as As|a returns to norma|cy!
Te evidence of the preceding section supports the belief that
developing Asias unprecedented fscal stimulus has contributed to the
regions recovery. However, there is a risk that policy makers may make
unwarranted conclusions about the desirability of countercyclical fscal
policy in the postcrisis period from its apparent efectiveness during
the crisis period. To guide them as the region returns to normalcy, this
section empirically investigates whether countercyclical fscal policy
helped stabilize output in the precrisis normal times. Te section also
explores the status of automatic stabilizers in Asia as well as policy
directions for improving their efectiveness.
Lect|veness of countercyc||ca| sca| po||cy |n As|a: Lv|dence from
h|stor|ca| t|me-ser|es data
Te efectiveness of countercyclical fscal policy depends on the relative
importance of tax cuts versus government spending. Intuitively,
government spending can be seen as having a higher infuence on
output because it has a more immediate and direct impact on aggregate
demand through governments direct purchase of goods and services
(e.g., public works and infrastructure). On the other hand, tax cuts have
a smaller impact on aggregate demand because households and frms
may save the additional income resulting from tax cuts. Since tax cuts
and government spending may have diferential efects on output, the
composition of fscal policy matters.
Using historical time-series data from 10 developing Asian
economies, Jha et al. (forthcoming) estimate the dynamic efects of
unanticipated fscal shocks. In contrast to the empirical analysis of the
preceding section, which examines panel data from a group of countries
during the global crisis, the analysis of this section looks at data from
individual countries over a much longer time span. Table 2.4.2 shows
the short- and long-run impacts of a revenue shock on output. If the
discussion is limited to statistically signifcant efects, a tax cut has a
positive short-run efect in Indonesia, Malaysia, and the Philippines and
a positive long-run efect in the Philippines. A tax cut has a negative
efect on Singapores output in both the short and the long run and on
Taipei,Chinas long-run output. Tis surprising result may arise from
a high propensity to save among households or from leakages through
trade and remittances. Table 2.4.3 shows the short- and long-run
impacts of positive expenditure shocks on output. If the discussion is
limited to statistically signifcant results, higher government spending
has a positive short-run efect in the Philippines and Singapore and a
negative long-run efect in Hong Kong, China and Tailand.
Overall, the historical time-series evidence provides at best only
limited support for the countercyclical efectiveness of policy in
developing Asia, particularly in the South-East Asian economies. In
both the short and long run, government spending and tax cuts have
a positive efect on output in many countries, but most of the efects
are insignifcant. Tis fnding strengthens the case for caution against
interpreting the apparent usefulness of the anticrisis fscal stimulus
as a mandate for pursuing greater fscal activism beyond the crisis.
Te limited evidence in favor of countercyclical fscal policy is perhaps
unsurprising given the relative absence of countercyclical
fscal policy in the region. For example, in comparison
to the industrial countries, automatic stabilizers remain
underdeveloped in developing Asia. Terefore, one policy option
for improving the countercyclical efectiveness of fscal policy in
the region is to strengthen automatic stabilizers (Box 2.4.1).
State of sca| hea|th |n As|an countr|es
What enabled Asian governments to quickly unleash big
stimulus packages was ample fscal space built up over years
of sustained fscal prudence. Fiscal space will also help the
regions governments cope with large shocks in the future. Tis
section assesses the state of fscal health in developing Asia
by examining the evolution of fscal balances and public debt
across the region and over time. It also explores the response
of the ratios of primary fscal balances to public debt in order
to assess whether Asian governments have made the necessary
adjustments to deteriorating debt positions. Primary fscal
balance (the overall fscal balance minus interest payments
on public debt) is especially important because it provides
an indication of current fscal efort. Interest payments are
predetermined by the size of budget defcits in the past.
P|sca| ba|ances and pub||c debt |n deve|op|ng As|a
Fiscal sustainability refers to whether the government budget
can be smoothly fnanced without generating explosive
increases in public debt (or money supply) over time. When this
condition is met, the budget is said to be sustainable; when it is
not, it is unsustainable. Even though fscal sustainability is very
important, there is no universal agreement about how best to
assess it. However, a descriptive analysis of the evolution of debt
ratios and fscal balances over time, combined with estimates
of fscal policy reactionshow governments have traditionally
responded to rising debt levelscan be useful tools in assessing
the prospects for fscal sustainability.
Table 2.4.4 and Figures 2.4.4 and 2.4.5 display key fscal
indicators for the region for 19902008 as a whole and over
three subperiods. To highlight relevant shifs in the indicators,
the three subperiods chosen are the years leading up to,
during, and afer the Asian crisis of 199798. In line with ADB
classifcations, the region is broken down into fve subregions:
Central Asia, East Asia, South Asia, Southeast Asia, and the
Pacifc. Both overall and primary fscal balances in Table 2.4.4
are measured as the diference between receipts and spending so
that a positive sign implies a fscal surplus and a negative sign, a
defcit.
Several descriptive observations can be made on the basis of
the fscal indicators shown:
z.. 0ebt-to-u0P rat|os
0 20 40 60 80
Debt-to-GDP ratio by subperiods
The Pacifc
Southeast Asia
South Asia
East Asia
Central Asia
The Pacifc
Southeast Asia
South Asia
East Asia
Central Asia
The Pacifc
Southeast Asia
South Asia
East Asia
Central Asia
%
19901997
19981999
20002008
By subperiod
0
20
40
60
80
100
South Asia
Southeast Asia The Pacifc
08 06 04 02 2000 98 96 94 92 1990
%
Annual
0
40
80
120
160
200
2007
USA
UKG
JPN
ITA
GER
FRA
CAN THA
PHL
MAL
KOR
INO
IND
PRC
G7 average
Asia-7 average
%
Annual, 2007
PRC Peoples Rep. of Chlna, lN0 lndla, lN0 lndonesla, K0R Rep. of Korea,
VAl Valaysla, Pll Phlllpplnes, JlA Jhalland,
CAN Canada, lRA lrance, ClR Cermany, lJA ltaly, JPN Japan,
uKC unlted Klngdom, uSA unlted States.
Notes: Asla-) comprlses the Peoples Republlc of Chlna, lndla, lndonesla,
Republlc of Korea, Valaysla, Phlllpplnes, and Jhalland. Central Asla excludes
Jurkmenlstan, Southeast Asla excludes runel 0arussalam and Vyanmar, the
Paclc excludes Klrlbatl, Vlcronesla, Nauru, Jlmor-leste, Jonga, and Juvalu.
Sources: A0 estlmates based on data from: Aslan 0evelopment ank. Asia
Economic Monitor. varlous lssues. http://arlc.adb.org/asla-economlc-monltor,
Asian Development Outlook database, Key Indicators database, CllC 0ata
Company (accessed , Varch zoo), lnternatlonal Vonetary lund. Article
IV Consultation. http://www.lmf.org and world lconomlc 0utlook onllne
database, 0ctober zoo8 (accessed , Varch zoo), 0. Jalmovlch and P. ugo. zoo.
Publlc 0ebt Around the world: A New 0ataset of Central Covernment 0ebt.
lnter-Amerlcan 0evelopment ank worklng Paper No. ,. http://ssrn.com/
abstract8|, world ank. world 0evelopment lndlcators onllne database
and Covernment llnanclal Statlstlcs onllne database (both accessed 0ecember
zoo), lndonesla 0ebt Vanagement 0ce. http://www.dmo.or.ld (accessed ,
Varch zoo).
what are they!
Automatic stabilizers are taxes and transfers that change
automatically to dampen economic cycles without requiring
any explicit action by the government. Such countercyclical
stabilizers are triggered by built-in tax codes or spending
rules that increase net government expenditure in a
downswing and reduce it in a boom. For example, public
spending on food stamps or employment programs
automatically goes up as more people apply for benefts.
why are they usefu|!
Instituting automatic stabilizers for countercyclical
stabilization has several advantages. Above all, they are not
only endogenous and predictable but also timely, targeted,
and temporary, thereby promoting economic stability and
social protection without jeopardizing fscal sustainability.
Once designed and established, automatic stabilizers have
the advantage of being outside the political process and thus
free from political interference. Tis is an especially
important feature for developing countries where
discretionary fscal policy may be inefcient and
inequitable due to weak institutions, governance, and
policy environment. In addition, automatic stabilizers
have a strong element of social protection and social
safety nets.
However, allocating benefts on the basis of need
rather than political economy factors requires good
design, implementation, and governance.
|ndustr|a| versus deve|op|ng econom|es
Industrial economies typically support automatic
stabilizers such as progressive and well-administered
income taxes, corporate taxes, indirect taxes, and committed
social spending, all of which are rule-based (and so they
automatically adjust during economic swings and contain a
pro-poor element). Te larger governments of Europe have
built strong automatic stabilizers.
In contrast, most poor countries have very small
governments and weak automatic stabilizers. Teir income
taxes and transfer programs are thus too limited to have a
sizable impact (Box table).
Moreover, in low-income countries, automatic stabilizers
are procyclical due to institutional failures and a lack of
access to fnance during economic downturns (Kraay
and Servn 2008). Developing economies usually rely on
discretionary fscal policies that are ofen not designed to
stabilize the economy. Empirical evidence from the past 30
years suggests limited success of these countries in using
discretionary fscal policy to stabilize output fuctuations
(Kraay and Servn 2008).
2.4.1 Automat|c stab|||zers |n deve|op|ng As|a
Selected fscal indicators of diferent income groups of
countries
Country group 1ota|
spend|ng/
u0P (%)
0|rect taxes
(+ soc|a| secur|ty
contr|but|ons)/
tota| revenue (%)
1ransfers/ u0P
(%)
low lncome 19.5 26 6.5
Vlddle lncome 27.8 35.6 11.1
llgh lncome 32.9 53.6 18.4
Source: luls Serven. zoo. Comments on Antonlo latas, workshop on scal
pollcy. lVl. June. http://www.lmf.org/external/np/semlnars/eng/zoo/
spol/pdf/serven.ppt
For the period as a whole and across the region, fscal balances are
narrowly dispersed. Fiscal balances are in small defcits over the
entire 19902008 period, but the defcits are somewhat higher in the
Pacifc and especially in South Asia (at over 5% of GDP). With the
exception of Central and South Asia, which were not hit hard by the
Asian crisis, other subregions saw their fscal defcits increase in the
late 1990s, but the defcits were then generally pared back.
Across the entire period, the experiences with primary fscal balances
range widely, with some subregions averaging surpluses and others
averaging defcits. Southeast Asia, however, is the only subregion running
a large primary surplus, whereas subregions such as South Asia have on
average been running relatively large and persistent primary defcits.
With the exception of the Pacifc grouping, where government
spending and revenues are close to or above 40% of GDP, the average
levels of government spending and revenues across the region are
relatively low and clustered mainly at the low end of the 20%25% of
GDP range. Tese ratios are well below the averages in many other
parts of the world, particularly in developed Europe.
Overall, conventional stabilizers are weak on the revenue
side, and very few exist on the expenditure side. Income
taxes are not necessarily progressive, and they are ofen
poorly administered and riddled with evasion. Weak
fscal institutions and poor enforcement result in low tax
revenue. Another reason for weak stabilizers in developing
economies is inefcient delivery mechanisms for social
spending, such as employment guarantees.
Among Asias social protection policies, social insurance
and social assistance and welfare programs account for most
of the automatic stabilizers. Yet, in as many as 15 of 32
Asian economies, these programs account for barely 2% or
less of GDP. Hence, such spending is largely inefective from
an economic perspective.
0es|gn|ng eect|ve automat|c stab|||zers
A major problem with discretionary welfare programs is
the political difculty in withdrawing them once economic
conditions improve. Te efectiveness of such spending will
increase if it is based on a set of well-defned criteria and is
not discretionary.
To provide insurance against recessions, automatic
stabilizers must be countercyclical. Tis can be done,
for example, by making expenditure decisions automatic
through legislatively-mandated increases if food price
infation exceeds a certain prespecifed level.
To be cost efective, social programs must also be
designed to be pro-poor. For example, food and fuel
subsidies distort prices, do not target the poor well, and
can be replaced by cash transfers. Moreover, identifcation
of the target group eligible for social programs should
be made dynamic so that the list of benefciaries
automatically adjusts in tandem with changing economic
conditions. Although the administrative costs of identifying
benefciaries can be high, the costs can be ofset by more
efcient delivery mechanisms.
Making spending on social insurance and social
assistance pro-poor boosts their impact on demand as well
because the poor tend to spend more out of additional
income. Introducing incentives can also create a pro-poor
stabilization efect in social programs (Ravallion 2009). For
example, fxing wages in employment guarantee programs
at suitable levels enhances self-selection of the poor to the
programs.
As developing Asia emerges from the crisis, it is time
to build automatic stabilizers with desirable characteristics
to better prepare the region for future shocks. One big
advantage of well-designed stabilizers is that they do not
threaten fscal sustainability.
At the same time, the capacity to design and implement
efective and efcient stabilizers depends critically on the
level of institutions and governance. In countries where
these are inadequate, strengthening the overall fscal policy
environment must precede the establishment of stabilizers.
1 Social insurance programs cover the risks associated with
unemployment, sickness, maternity, disability, industrial injury, and
old age. Social assistance and welfare programs include programs
targeted at the disabled, the indigent, those afected by disasters,
and other vulnerable groups, cash in-kind transfers, and temporary
subsidies for utilities, housing, and other needs.
2.4.1 Automat|c stab|||zers |n deve|op|ng As|a (continued)
Public debt ratios in the region display considerable heterogeneity and
variation over time. Across much of the region, public debt ratios have
on average been relatively low (below 40%50% of GDP), with the
notable exceptions of Southeast and South Asia. In Southeast Asia, the
ratio has been in the range of 50%60% of GDP in the period since
the Asian crisis. In South Asia, on the other hand, the ratio has been
persistently above 60%. Public debt rose sharply in Central Asia in the
late 1990s but then was brought down by means of a number of fscal
adjustment and debt restructuring programs.
Across the region, interest payments on the public debt have been
around 1%3% of GDP and show no clear tendency to increase over
time. Generally, subregions with the highest debt-to-GDP ratios also
have the highest levels of interest payments relative to GDP. However,
the relationship between interest payment and debt is not always
very close since it is infuenced by funding costs, including access to
concessionary funding.
Te balance of evidence from the evolution of fscal balances and
2.4.4 P|sca| |nd|cators, percentage of u0P
Subreg|on Per|od Pub||c
debt
Pr|mary
surp|us
P|sca|
surp|us
uovernment
expend|ture
uovernment
revenue
|nterest
payments
Centra| As|a 19901997 35.1 -4.7 -7 21 14 1.3
19981999 68.7 -3.5 -5.5 20.2 14.7 1.4
20002008 34.5 1 0.2 25 25.2 0.8
All years 38 0.3 -0.7 24.3 23.6 0.9
Last As|a 19901997 17.3 -0.8 -1.4 18.2 16.7 1
19981999 35.2 -3.5 -3.7 23.8 19 1.7
20002008 32.2 0.9 0.2 21.8 22 1
All years 27 -0.2 -0.8 20.7 19.7 1.1
Southeast As|a 19901997 48.3 4.8 2.4 19.4 21.8 2.8
19981999 57.6 -1 -2.8 21.4 18.7 2.1
20002008 56.7 0.3 -1.7 20.7 19.1 2.2
All years 53.9 1.7 -0.4 20.3 20 2.4
South As|a 19901997 63.6 -2.6 -6 27.5 21.6 3.3
19981999 62 -1.9 -5 24 19.1 3.1
20002008 65.1 -2.1 -5.1 25.5 20.5 2.9
All years 64.2 -2.3 -5.4 26.1 20.8 3.1
1he Pac|c 1990-97 39 1.9 -0.2 38.7 38.5 2.4
1998-99 36.7 -0.5 -2.1 36.4 34.3 2.2
20002008 40.2 -1.7 -2.4 42.7 40.1 1.5
All years 39.5 -0.4 -1.7 40.7 38.9 1.8
Source: As llgure z.|.,.
public debt across developing Asia over time indicates that the
region is in relatively good fscal shape.
As|as trad|t|on of sca| respons|b|||ty: P|sca| react|on
funct|ons
Fiscal reaction functions are a powerful tool in assessing debt
sustainability because they involve so-called decision rules
for primary fscal balances, particularly for how primary
balances respond to change in public debt and other variables.
Intuitively, the basic assumption is that primary surpluses
tend to increase as public debt increases over time, thus
supporting sustainability. Te intensity with which primary
surpluses adjusts to rising public debt is a good measure of
fscal adjustment eforts in the past. Ultimately, it gives some
indication of Asian governments capacity to deal responsibly
with both current and future debt pressures (even though of
course the past is a less than perfect guide to future).
Te fscal reaction tests, based on broad and representative
samples of countries over the period 19902008, point to a
signifcant degree of responsibility in managing public debt. Te
empirical framework is based on Mendoza and Ostry (2007).
Te frst four columns of Table 2.4.5 report the estimation
results from a number of regression models based on data from
an unbalanced panel of the whole sample of 33 developing
Asian countries. Te last four columns do the same for a
balanced panel of seven regional countries. In all the estimation
z.. 0ebt-to-revenue rat|os
0 100 200 300 400 500
Debt-to-revenue ratio
The Pacifc
Southeast Asia
South Asia
East Asia
Central Asia
The Pacifc
Southeast Asia
South Asia
East Asia
Central Asia
The Pacifc
Southeast Asia
South Asia
East Asia
Central Asia
%
19901997
19981999
20002008
By subperiod
0
200
400
600
South Asia
Southeast Asia The Pacifc
08 06 04 02 2000 98 96 94 92 1990
%
Annual
Notes: Central Asla exclude Jurkmenlstan. Southeast Asla excludes runel
0arussalam and Vyanmar. Paclc excludes Klrlbatl, Vlcronesla, Nauru,
Jlmor-leste, Jonga, and Juvalu.
equations, the dependent variable is the primary fscal surplus and the
key independent variable is the lagged value of the debt ratio. Additional
variables include the square of lagged debt, which captures nonlinear
fscal response to debt, and two control variablesprimary government
spending relative to trend and output gapwhich capture temporary
infuences on fscal policy.
Te central result from the regressions for both the whole sample and
the subsample is that lagged public debt has a signifcant and positive
efect on primary fscal balance, where both variables are defned as
shares of GDP. Te implication is that countries tighten their fscal
stance in response to a deterioration of the debt position. Te estimated
coefcients for lagged debt are also broadly in line with other studies
(such as IMF 2003; Mendoza and Ostry 2007). Te estimated coefcients
for the two control variables have the expected sign and are signifcant.
All in all, the results are consistent across diferent regression models and
thus lend fairly robust support to the hypothesis of a fscally responsible
Asia.
Te basic thrust of the estimation results is best grasped visually.
Figures 2.4.6 and 2.4.7 show the estimated relationship between primary
fscal surpluses and the previous periods public debt, each as a share of
GDP. Figure 2.4.6 is derived from the whole sample; Figure 2.4.7, from
the subsample of seven countries. A prevalence of responsible fscal
policies would entail upward-sloping fscal reaction functions, that is,
Asian governments on average expand primary surpluses in reaction to
heightened public debt. Both fgures depict an upward-sloping reaction
2.4.5 Pr|mary surp|us: Lconometr|c est|mat|on resu|ts, 19902008
kegressors Large samp|e (33 deve|op|ng As|an econom|es) Sma|| samp|e (7 deve|op|ng As|an econom|es)
(1) (2) (3) (4) (5) (6) (7) (8)
PuLS 0LS PL SuMM PuLS PuLS 0LS PL SuMM PuLS
(||near) (||near) (||near) (quadrat|c) (||near) (||near) (||near) (quadrat|c)
l.debt
1
0.0578``` 0.12445``` 0.1279 0.1651``` 0.04973``` 0.06253``` 0.0733``` -0.0637`
l.debt^2
2
-0.0009``` 0.0011```
C0P Cap
3
0.0987``` 0.1503 0.1733` 0.1096``` 0.08141``` 0.05428` 0.1408``` 0.08147```
ClXP Cap
4
-0.1333``` -0.1263``` -0.1575``` -0.1421``` -0.1648``` -0.16143``` -0.1843``` -0.1614```
0bservatlons 417 384 384 417 126 119 119 126
Notes:
lClS feaslble generallzed least squares, 0lS ll ordlnary least squares wlthln-estlmator, allowlng for xed (country) eects, SCVV System Ceneral Vethod of
Voments.
lor a descrlptlon of the regresslon models, please refer to C. Adams, . lerrarlnl, and 0. Park. lorthcomlng. llscal Sustalnablllty ln 0eveloplng Asla. ADB Economics
Working Paper Series. Aslan 0evelopment ank, Vanlla.
Jhe regresslon ls based on two-talled wald tests of zero coeclents (` slgnlcant at o%, `` slgnlcant at ,%, ``` slgnlcant at %).
0ebt/C0P ratlo: lagged one year, thls ratlo enters regresslons at two-year averages for the case of regresslons lnvolvlng the sample of all economles.
z Squared 0ebt/C0P ratlo: lagged one year, thls ratlo enters regresslons at two-year averages for the case of regresslons lnvolvlng the sample of all economles.
, C0P Cap: C0P devlatlon from lodrlck-Prescott trend, ln percent.
| ClXP Cap: Jotal government expendlture devlatlon from lodrlck-Prescott trend, ln percent.
lconomles lncluded:
large sample (,,): Afghanlstan, Armenla, Azerbaljan, angladesh, hutan, Cambodla, Peoples Rep. of Chlna, lljl lslands, Ceorgla, long, Kong, Chlna, lndla,
lndonesla, Kazakhstan, Rep. of Korea, Kyrgyz Rep., lao Peoples 0em. Rep., Valaysla, Valdlves, Varshall lslands, Vongolla, Nepal, Paklstan, Palau, Papua New Culnea,
Phlllpplnes, Solomon lslands, Srl lanka, Jalpel,Chlna, Jajlklstan, Jhalland, uzbeklstan, vanuatu, and vlet Nam.
Small sample ()): Peoples Rep. of Chlna, lndla, Rep. of Korea, lndonesla, Phlllpplnes, Valaysla, and Jhalland.
function, but they take diferent shapes, refecting the diferent
underlying samples of countries.
Countries obviously difer sharply in terms of both the
average level and the variability of fscal balances and public
debt, as well as in their capacity to react to increasing debt
pressures. Although the results hide country-specifc factors
and are not representative of all the sample countries, they do
suggest that, on average, primary fscal balances in the region
respond in a stabilizing manner to increases in debt ratios.
Moreover, the nonlinear shape of the fscal reaction
functions provides some evidence of diferential efects whereby
the primary balance function either has a U shape or an N
shape. In a U-shaped function, fscal adjustment frst moderates
as debt ratios increase but then strengthens when a certain critical debt
ratio is reacheda wake-up call efect. In an N-shaped function, fscal
response initially strengthens but falters when debt levels reach
very high levelsa fatigue efect. Importantly, Figures 2.4.6
and 2.4.7 show that in the U-shaped function the turning point
lies well below the median debt ratio, whereas in the N-shaped
function the turning point lies well above it. In other words,
most countries fall within the upward-sloping section of the
estimated reaction functions, suggesting that the region as a
whole has been fscally responsible.
Based on these results, two broad conclusions can be drawn:
Across the region, the evidence is consistent with a
statistically signifcant positive response of the primary
surplus-to-debt ratios, that is, consistent with stabilizing
behavior. Refecting considerable heterogeneity across
countries and over time, however, the average fscal behavior
in the region is not easily captured by a single one-size-fts-all
specifcation of the linkage between primary fscal balances and debt
ratios.
Te evidence is consistent with nonlinear responses of the primary
balance-to-debt ratios and with the existence of debt tipping points.
Tese may be of either the U- or the N-shape kind, with diferent
implications for the efects of fscal slippages on the adjustment efort.
Overall, the evidence in this section confrms the view that
developing Asia enjoyed healthy public fnances as it entered the crisis.
Te fscal space that allowed the region to implement an unprecedented
fscal stimulus during the crisis was the result of a tradition of fscal
prudence. Tis tradition includes making necessary fscal adjustments in
response to rising debt ratios. Maintaining fscal prudence will be pivotal
to securing the fscal space the region will need to tackle future shocks,
but the evidence of this section provides grounds for optimism about the
regions capacity to do so.
z.. N-shaped pr|mary ba|ance response funct|on
2
4
6
8
10
N-shaped
120 88.9 43.4 1
Primary fscal surplus (% of GDP)
Sample median
Debt (% of GDP)
Note: ased on feaslble generallzed least squares regresslon on the whole
sample. 0ebt data are z-year averages, wlth -year lag.
z../ U-shaped pr|mary ba|ance response funct|on
0
3
6
9
12
U-shaped
120 39.8 28.8 1
Primary fscal surplus (% of GDP)
Sample median
Debt (% of GDP)
Note: ased on feaslble generallzed least squares regresslon on a sample of
seven countrles: Peoples Republlc of Chlna, lndla, lndonesla, Republlc of Korea,
Valaysla, Phlllpplnes, and Jhalland. 0ebt data are lagged year.
P|sca| susta|nab|||ty |n the postcr|s|s per|od and
sca| po||cy for reba|anc|ng
Te preceding section confrmed that developing Asia entered the global
crisis in good fscal shape. However, as the crisis recedes, concerns
are growing about the impact of the regions anticrisis fscal stimulus
on its fscal sustainability. Te frst subsection projects the postcrisis
evolution of the regions debt position under three assumptions about the
normalization of fscal policy. As examined extensively in ADB (2009a),
the single biggest structural challenge facing developing Asia in the
postcrisis period is its rebalancing in the direction of domestic demand.
In this context, the second subsection examines the potential contribution
of fscal policy to this rebalancing in four regional countries.
Lect of ant|cr|s|s sca| st|mu|us on As|as debt susta|nab|||ty
Tis section analyzes the implication of the regions anticrisis fscal
stimulus on its debt sustainability. Tree alternative scenarios about the
unwinding of the stimulus are applied to a group of countries for whom
detailed projection data are available.
Te frst scenarioScenario 1holds fscal stimuli constant at their
200910 levels and projects the implications for debt ratios on the basis
of projected nominal GDP in Asian Development Outlook. A further
assumption is that interest rates will rise gradually from their current low
levels in the context of monetary policy normalization.
Scenarios 2 and 3 are based on the fscal policy reaction functions
estimated in the previous section and allow for the fscal stimulus to be
unwound on the basis of historical adjustment patterns. To incorporate
regional heterogeneity into these scenarios, the projections use the upper
and lower bounds for the 95% confdence intervals for the average value of
the fscal adjustment to debt ratios. An upper bound of 0.08 is used to
capture very forceful fscal adjustmentScenario 2and the lower bound
of 0.04 is used to capture much slower fscal adjustmentScenario 3.
Te baselines for the last two scenarios incorporate estimates of the
fscal balances for the selected group of countries in 2009 and 2010. As
indicated in Figure 2.4.8, a failure to unwind the stimulus afer 2010
would generally lead to elevated public debt ratios and, in some instances,
a sharp escalation above current levels. Te key exception to this pattern
is in South Asia, where rapid GDP growth in relation to interest rates
contributes to a steady decline in the debt ratio.
Terefore, generally, delaying the removal of the stimulus for too long
is undesirable, especially for countries with borderline fscal sustainability
that cannot aford sharp rises in debt ratios. As expected, forceful fscal
adjustment generally brings about sharper declines in debt ratios than
does moderate fscal adjustment. However, the dynamics of the model,
along with the narrowing of the gap between growth rates and interest
rates over the projection period, imply that the diference between these
adjustment paths is not always very large. Intuitively, in the near term,
the combination of rapid cyclical recovery and low interest rates means
that continued large fscal defcits does not necessarily lead to large
increases in debt-to-GDP ratios. Over time, however, as the gap between
z..8 P|sca| st|mu|us unw|nd|ng scenar|os
Scenario 3 Scenario 2 Scenario 1
20
30
40
50
60
70
Scenario 3
Scenario 2
Scenario 1
15 14 13 12 11 10 09 2008
Debt (% of GDP)
Central Asia
20
30
40
50
60
70
Scenario 3
Scenario 2
Scenario 1
15 14 13 12 11 10 09 2008
Debt (% of GDP)
East Asia
20
30
40
50
60
70
Scenario 3
Scenario 2
Scenario 1
15 14 13 12 11 10 09 2008
Debt (% of GDP)
South Asia
20
30
40
50
60
70
Scenario 3
Scenario 2
Scenario 1
15 14 13 12 11 10 09 2008
Debt (% of GDP)
Southeast Asia
20
30
40
50
60
70
Scenario 3
Scenario 2
Scenario 1
15 14 13 12 11 10 09 2008
Debt (% of GDP)
Asia-7
Notes:
Scenarlo : llscal stlmull constant at zoo/zoo level. Scenarlo z: lorceful adjustment of the prlmary balance (rhoo.o8). Scenarlo ,: Vodest adjustment of the prlmary balance
(rhoo.o|).
Asla-) comprlses the Peoples Republlc of Chlna, lndla, lndonesla, Republlc of Korea, Valaysla, Phlllpplnes, and Jhalland. Central Asla excludes Jurkmenlstan. last Asla excludes long
Kong, Chlna, Vongolla, and Jalpel,Chlna. Southeast Asla excludes runel 0arussalam, Cambodla, and Slngapore. South Asla excludes Afghanlstan, hutan, Valdlves, and Nepal.
growth rates and interest rates tends to narrow, pressure on public debt
ratios start to increase if fscal defcits remain large.
Based on the scenario results, the need to unwind fscal stimulus
packages difers across countries and regions. Countries with currently
high debt need to unwind at a faster pace than in the past, especially in
circumstances where the gap between growth rates and interest rates may
be narrowing. On the other hand, it may be possible for countries with
more fscal space to maintain their fscal stimulus for somewhat longer.
Even in those cases, however, it is vital that the governments put in place
an efective and credible medium-term plan for fscal normalization.
Overall, the scenario results indicate that all countries must guard against
a deterioration of fscal sustainability due to the fscal stimulus, especially
in the medium term.
1he ro|e of sca| po||cy |n deve|op|ng As|as reba|anc|ng process
By defnition, the fscal stimulus programs rolled out by Asian
governments during the global crisis contribute to rebalancing because
they strengthen domestic demand. However, rebalancing based on
public spending is at best a short-term solution to the regions quest
for balanced, sustainable growth in the postcrisis world. Beyond the
crisis, sustainable rebalancing that weans the region from its excessive
dependence on exports requires robust private consumption and
investment. Te key to strengthening Asias private consumption and
investment in the medium and long term is to remove the structural
impediments and distortions that has constrained domestic
demand and favored the production of exportable goods. Fiscal
policy can play a useful role in removing such impediments
and distortions, but the specifc role of fscal policy in the
rebalancing process will difer from country to country.
Te great deal of heterogeneity in the regions current
account positions (Figure 2.4.9) implies that the rebalancing
process will necessarily difer across countries. For example,
some countries are already more or less balanced; so their
need for rebalancing demand is limited. In some countries,
the current account surplus may be the result of oversaving,
but in others it may refect underinvestment. Te appropriate
remedy for rebalancing will difer according to the source
of the imbalance. Countries sufering from oversaving will
need to create an environment that encourages households to
consume more. Countries sufering from underinvestment will
need to create a better investment climate to induce frms to
invest more. As diferent Asian economies thus face diferent
challenges in terms of rebalancing their economies, the role of
fscal policy in the rebalancing process is likely to vary.
In the case of the PRC, the balance of evidence indicates
that the external surplus is overwhelmingly driven by
oversaving (Figure 2.4.10). Terefore, in the PRC, the role of
fscal policy in the rebalancing process should be to boost
domestic consumption. Specifcally, reallocating public
spending from investment to health care, education, pensions,
social protection, and social safety nets would mitigate the risk
and uncertainty confronting PRC households and encourage
them to spend more. Increased social spending is preferable
to tax cuts as a means of promoting consumption. Given the
small number of income tax payers in the PRC, tax cuts will
have only a limited efect on overall consumption and domestic
demand.
Among specifc consumption goods, housing deserves
particular attention because it is the major driver of private
consumption in the PRC. In this context, fscal policy can
play a key role in both the supply and the demand side of
housing. A wide range of fscal subsidies and incentives could
be introduced to attract the participation of the private sector
in low-income housing. Consumers would beneft from tax
exemptions, cash subsidies, or housing allowances and capital
grants.
In contrast to the PRC, Koreas current account position has
been more or less balanced, averaging 1.4% during 20002008.
Terefore, rebalancing primarily by shifing aggregate demand
from exports to domestic demand is not relevant for Korea. Te
severe impact of the global crisis on Korea can be explained
by the disproportionate role of manufacturing in the economy
(Figure 2.4.11). Terefore, rebalancing requires instead a supply-
side shif in the composition of output from manufacturing
to services (Ha, Lee, and Sumulong 2010). Given the need
z..p Average current account ba|ance for zooozoo8,
se|ected As|an econom|es
-5
0
5
10
15
20
Average current account balance
VIE THA TAP SIN PHI MAL KOR INO IND HKG PRC
% of GDP
lN0 lndonesla, K0R Rep. of Korea, VAl Valaysla, Pll Phlllpplnes,
SlN Slngapore, JAP Jalpel,Chlna, JlA Jhalland, vll vlet Nam.
z..o Actua| and tted va|ue of sav|ng rate, Peop|es
kepub||c of Ch|na
0.0
0.2
0.4
0.6
Actual
Fitted value
0508
200004
9799
9096
8589
8084
7579
197074
Saving rate
Actual Fitted value
Note: Jhe model that generated the tted values ls that of Park and Shln (zoo)
and lncludes standard explanatory varlables used ln much of the llterature,
lncludlng C0P growth rate, level of per caplta C0P, and demographlc varlables.
Sources: lstlmates of Park and Shln (zoo) based on data from A. leston, R.
Summers, and . Aten, Penn world Jable verslon .z, Center for lnternatlonal
Comparlsons of Productlon, lncome and Prlces at the unlverslty of Pennsylvanla,
September zoo, . osworth and C. Chodorow-Relch. zoo). Savlng and
0emographlc Change: Jhe Clobal 0lmenslon. http://ssrn.com/abstractz)oz,
lnternatlonal Vonetary lund. lnternatlonal llnanclal Statlstlcs onllne database
(accessed 8 January zoo), world ank. World Development Indicators. varlous
lssues. washlngton, 0C: world ank.
z.. urowth rates |n zoo8 and share of manufactur|ng

0 5 10 15 20 25 30 35 40
GDP growth Q4 2008 (quarter on quarter, %)

Share of manufacturing in GDP (2006, %)

Rep. of Korea

Japan

Germany
Italy

US
Canada
France
Spain
Netherlands
Australia
Malaysia
Taipei,China

Singapore

Hong Kong, China

India
Peoples Rep. of China

Thailand

-7
-6
-5
-4
-3
-2
-1
0
1
Source: 0. Cho. zoo. Jhe Republlc of Koreas lconomy ln the Swlrl of Clobal Crlsls.
ADBI Working Paper Series |). Aslan 0evelopment ank lnstltute, Jokyo. p. ,.
z..z Actua| and tted va|ue of |nvestment rate,
Ph|||pp|nes
0.1
0.2
0.3
Actual Fitted value
0508
200004
9799
9096
8589
8084
7579
7074
196569
Investment rate
Sources: lstlmates of Park and Shln (zoo) based on data from A. leston,
R. Summers, and . Aten, Penn world Jable verslon .z, Center for lnternatlonal
Comparlsons of Productlon, lncome and Prlces at the unlverslty of Pennsylvanla,
September zoo, . osworth and C. Chodorow-Relch. zoo). Savlng and
0emographlc Change: Jhe Clobal 0lmenslon. http://ssrn.com/abstractz)oz,
lnternatlonal Vonetary lund. lnternatlonal llnanclal Statlstlcs onllne database
(accessed 8 January zoo), world ank. World Development Indicators. varlous
lssues. washlngton, 0C: world ank.
z.. Annua| returns on CPP ba|ances and |nsurance funds
versus rea| growth |nd|cators, S|ngapore, p8/zoo8
0
2
4
6
8
Returns on CPF balances
GDP growth Wage growth Insurance funds CPF balances
%
CPl Central Provldent lund.
Note: llgures for CPl balances and lnsurance funds refer to real rates of return.
Source: A0 estlmates based on data from Central Provldent lund oard.
varlous lssues. Annual Report. http://mycpf.cpf.gov.sg/CPl/About-us/Ann-Rpt/
Ann_Report.htm, CllC 0ata Company (accessed Varch zoo).
for rebalancing and the central role of a vibrant services sector in that
process, Korea might be well advised to consider proactive fscal measures
for enhancing productivity in the services sector: tax breaks for
R&D in services industries and/or fscal incentives to boost the
services sector.
In the case of the Philippines, consumption already plays
a big role in demand and growth, and underconsumption has
never been a policy concern. If the purpose of rebalancing is
to achieve a more dynamic and robust domestic economy, then
rebalancing in the Philippines means strengthening investment.
Yet the countrys investment rate has recently fallen below the
levels predicted by fundamental economic determinants of
investment (Figure 2.4.12), and a chronically poor investment
climate accounts for the weak investment.
Appropriate fscal measures can help in a number of ways
to create a more conducive business for both domestic and
foreign investors. In particular, given that poor infrastructure
is a major deterrent to private investment in the Philippines,
more public spending in that area can ease infrastructure
bottlenecks and attract investment. However, the relative lack
of fscal space seriously limits the governments capacity to
allocate additional resources for this purpose.
Singapore has large and persistent current account surpluses,
driven by extraordinarily high saving rates. In Singapore, the need for
rebalancing is driven by rapid population aging due to a low fertility rate.
Rapid population aging requires that society set aside more resources
for the elderly. Singaporeans rely on a mandatory saving scheme,
administered by the Central Provident Fund (CPF), to fnance their
retirement.
A key quasifscal measure that has been widely suggested for
improving the ability of CPF to deliver adequate old age income
support is to end the implicit tax on CPF wealth. Te real rate of return
credited to CPF members was a meager 1.2% during 19872008
(Figure 2.4.13). A second major way for fscal policy to
contribute to the rebalancing process is expanding social sector
expenditures, including social pensions. Given its exceptionally
strong fscal position, the government seems uniquely well
positioned to take this route.
In summary, developing Asian countries can adopt a wide
range of fscal measures to balance their economic structures.
However, the appropriate fscal measures will difer across
countries because the need for and defnition of rebalancing are
far from uniform.
kecap|tu|at|on
Developing Asias large and decisive fscal response to the
economic slowdown resulting from the global fnancial crisis represents
an exceptional response to an exceptional shock. Te preliminary
empirical analysis in this section yields evidence afrming the widespread
belief that developing Asias fscal stimulus contributed to the regions
recovery from the crisis. However, drawing policy implications about
normal, noncrisis periods from the crisis experience would take a big
leap of faith. Further evidence in this section indicates the need to be
extremely cautious about maintaining heightened countercyclical fscal
activism once the crisis recedes and normalcy returns.
Te main positive lesson from developing Asias experience during
the crisis is that the healthy public fnances that the region enjoyed as
it entered the crisis served the region well. For the region as a whole,
the evidence points to sufcient fscal space accumulated as a result of
sustained fscal prudence. By and large, Asian governments have been
fscally responsible and, when fscal sustainability was at risk, made the
necessary adjustments.
Once the crisis recedes, Asia should revert to its basic tradition of
fscal prudence. Strengthening medium-term fscal policy frameworks
will be helpful in this context. However, the return to fscal responsibility
still allows for fscal policy to contribute meaningfully to sustainable
growth in the postcrisis period. For example, institutional improvements
such as well designed automatic stabilizers can help Asia cope better with
output volatility at minimal fscal cost. Fiscal policy can also facilitate the
regions medium-term transition to a more balanced economic structure.
Te key challenge for Asian fscal policy now is to adapt itself to the
postcrisis world so that it can contribute to sustainable growth without
compromising the fscal sustainability that has served the region so well.
Key po||cy messages
Developing Asias tradition of sound and responsible monetary and fscal
policy served it well during the global crisis. Ample monetary and fscal
space had been built up from a history of fscal conservatism that kept
public spending within budgets and monetary policies that gave top
priority to price stability. Te result was that the region had the resources
and the credibility to quickly roll out a massive stimulus that contributed
to the regions V-shaped recovery.
Te overarching message emerging from the analysis in this chapter is
this: Once the crisis recedes, the region should return to its long-standing
tradition of macroeconomic prudence, one that fosters macroeconomic
stability and long-run growth.
Te global crisis has changed the regions monetary and fscal
landscape in many respects, including a newfound recognition that
monetary and fscal tools can be useful for coping with large shocks.
However, the global crisis has done nothing to change the central
importance of long-run growth for still-poor Asia or the proven need
for prudent monetary and fscal policies. Te hundreds of millions of
Asians lifed above poverty lines by sustained growth are proof of the
risks of tinkering with a macroeconomic policy philosophy that has
consistently delivered.
Within the broad framework of returning to the regions sound
and responsible monetary and fscal roots, however, there is plenty of
scope for enhancing the capacity of monetary, exchange rate, and fscal
policies to contribute to the regions sustainable growth in the postcrisis
period. For example, well-designed and well-implemented automatic
fscal stabilizers can contribute to greater output stability at no cost
to fscal sustainability. A pivotal postcrisis challenge for central banks
across the region will be to better coordinate fnancial regulation and
monetary policy so that the two can jointly prevent asset price bubbles,
which can have devastating consequences, as highlighted by the global
crisis. Against the backdrop of global rebalancing and the declining role
of exports as a growth engine, the region also needs to fundamentally
rethink its precrisis exchange rate philosophy, which gave undue weight
to export competitiveness. Capital controls against volatile short-term
infows can facilitate the transition to less rigid regimes.
At an even more fundamental level, given the potentially more
challenging postcrisis global environment and political pressures for
greater activism, the region should further strengthen the institutions,
governance, and overall policy environment that will be indispensable for
sound and responsible policy.
Macroeconomic policies can also make a substantial contribution to
shaping the postcrisis global environment in a manner that will beneft
the regions sustainable growth. Macroeconomic policies can contribute to
the regions pursuit of a more balanced economic structure. Governments
in the region can promote rebalancing by using fscal policy to remove
the structural distortions that constrain demand from households and
frms. Te role of fscal policy is to provide an environment conducive to
private consumption and investment.
Tis shif requires, among other things, strengthening health,
education, pensions, and social protection to reduce household
uncertainty and thus boost private consumption. Greater exchange rate
fexibility will also be needed as part of the package of policies to achieve
more balanced growth. On the demand side, more fexible exchange rates
will increase domestic demand by reducing the price of importables and
thus boosting purchasing power. On the supply side, greater exchange
rate fexibility will speed up the development of the nontradable sector.
A mutually supportive constellation of monetary, exchange rate, and
fscal policies will be required to deliver sustainable growth for the region
in the postcrisis period.
Monetary po||cy and nanc|a| regu|at|on
Te global crisis underlines the huge risks of unsound monetary policy
and inadequate fnancial regulation. A key challenge for Asia is to better
monitor and prevent asset price bubbles while maintaining the primary
focus on goods price infation. Te overall objective of monetary policy,
which is identical to that of the precrisis period, must be to provide a
stable macroeconomic environment for frms and households.
Te main focus for monetary policy should be geared toward stabilizing
the fuctuation in the aggregate domestic price level and managing its
expectation. A fexible infation-targeting framework is still viable for
monetary policy. Empirical observation suggests that this monetary
policy framework, which usually works through the operational
target of interest rates, has been able to deliver relatively low and
stable infation. However, the operating target should not be seen
as a one-size-fts-all for every country in the region. Other types of
operational targets, such as a quantity or exchange rate, could just as
well deliver similar outcomes. What matters is that monetary policy be
conducted in a disciplined manner to deliver low and stable infation
with sustained economic growth. Policy independence from external
interference is conducive for monetary discipline and favorable
infation outcomes.
Financial supervision and regulation need to be strengthened and better
coordinated with monetary policy to prevent asset boom and bust cycles.
Te global fnancial crisis has shown that a narrow focus on managing
aggregate infation may lead to asset bubbles. Terefore, in addition
to addressing its traditional objectives, monetary policy should also
aim to maintain asset market stability. Tis additional objective is best
served by complementing the traditional fexible infation-targeting
framework with additional policy measures that deal specifcally
with asset markets. Setting up a fnancial authority to supervise and
regulate the fnance sector, whether within or outside the central bank,
is crucial to monitor and detect bubbles, and to introduce prudential
policy measures. As with monetary policy, fnancial regulation would
beneft from policy independence. Collection and analysis of high-
frequency macroeconomic and fnancial indicators would provide
valuable information for both monetary and fnancial authorities.
Lxchange rate po||cy and cap|ta| contro|s
Clearly, the transition to a more balanced economic structure in the
postcrisis period will beneft substantially from more fexible exchange
rate regimes. Exchange rate policy must therefore shif away from an
excessive focus on export competitiveness. However, volatile short-term
capital infows may cause excessive appreciation and complicate the
transition to more fexible exchange rates, and capital controls may ease
the transition.
Exchange rates should be allowed to adjust and refect the fundamentals-
driven rate, and intra-Asian coordination on exchange rate policy
and reserve management needs to be strengthened. Too much
intervention in the foreign exchange market could lead to exchange
rate misalignment, with adverse implications for macroeconomic
management. More fexible exchange rates driven by fundamentals
provide a mechanism to absorb shocks, result in a more efcient
allocation of resources, and promote the regions rebalancing process.
Intra-Asian coordination on exchange rate policy will mitigate the
fear of losing export competitiveness vis--vis neighboring economies,
which has been a major barrier against greater exchange rate fexibility
for the region as a whole. Cooperation on reserve management can
also contribute to fexibility by reducing the need for Asian countries
to individually build up excessive levels of reserves.
Capital controls against volatile short-term infows can safeguard
macroeconomic stability and facilitate the transition to more fexible
exchange rates. In contrast to long-term capital infows such as FDI,
short-term capital fows are ofen volatile and disruptive. Tey can
cause overheating pressures and their sudden reversal can wreak
fnancial havoc. Short-term infows can also lead to sharp currency
appreciation, thereby eroding a countrys competitiveness. Such
episodes can decelerate the momentum toward greater exchange rate
fexibility. However, capital controls should be selective, and targeted
toward potentially more destabilizing types of infows. In light of the
well-known distortions and efciency costs that they introduce, capital
controls should be gradually withdrawn as a country reaches higher
levels of fnancial development. Easing restrictions on capital outfows
could be another option to redress the adverse impact of speculative
capital infows.
P|sca| po||cy
Ample fscal space, the consequence of a history of responsible fscal
behavior, served Asia well during the global crisis, a fact strongly
suggesting the need to maintain fscal discipline in the postcrisis period,
in preparation for large future shocks. Although the region should return
to its tradition of sound fscal policy, fscal policy can nevertheless help
the region adapt better to the postcrisis world. In particular, fscal policy
can speed up the rebalancing process.
Asian countries should continue to maintain their fscal discipline,
and strengthen their medium-term fscal policy frameworks. Years of
sustained fscal prudence gave the region ample fscal space, which
allowed it to unleash an unprecedented fscal stimulus during the
crisis. Te stimulus has contributed to the regions recovery from the
global crisis. Tis fnding highlights an important additional beneft
of fscal discipline: adequate fscal space to cope with large shocks.
In the postcrisis period, the region would do well to revert to its
basic tradition of fscal prudence. However, given the potentially
more challenging global environment, securing adequate fscal space
for future shocks requires strong and credible medium-term fscal
policy frameworks. In principle, fscal rules are more consistent than
discretion as frameworks for strong, medium-term fscal policy but
more fundamentally, responsible fscal behavior ultimately requires
sound institutions, governance, and overall policy environment.
Asian governments can tap into a wide range of fscal measures to
facilitate sustainable and more balanced growth in the postcrisis period.
Although the overall policy direction must be the recovery of fscal
discipline, there is still plenty of scope for fscal policy to help Asia
meet the difcult macroeconomic and structural challenges of the
postcrisis period. For example, strengthening automatic stabilizers
through better design and implementation can contribute to output
stability and social protection without impairing fscal sustainability.
Fiscal policy can make substantial contributions in terms of addressing
Asias paramount postcrisis structural challenge of rebalancing, and
country-specifc fscal measures can mitigate the structural distortions
that stand in the way of more vibrant domestic demand. In countries
that perform poorly in key areas, such as revenue mobilization, the
priority must be improving institutional capacity.
0vera|| po||cy messages
Asias unprecedented monetary and fscal response to the unprecedented
global fnancial crisis, and its contribution to the regions V-shaped
recovery, will open up a debate on the appropriate role of fscal, exchange
rate, and monetary policies in the postcrisis period. Te debate is timely
and welcome but should not lose sight of the huge benefts of the regions
long-standing tradition of monetary and fscal discipline. Te debate
should also consider the relationship between the three sets of policies.
As the global crisis recedes, Asia should gradually return to its basic
macroeconomic framework of monetary and fscal prudence. Tis
framework has delivered enormous benefts for the region, in the form
of macroeconomic stability and sustained growth, and will continue to
do so. Monetary policy that is geared toward low and stable infation
and fscal policy that keeps public spending within government
budgets create the best environment for households and frms to plan
rationally and for the economy to grow. However, a broader return
to monetary and fscal policy discipline does not rule out signifcant
contributions of macroeconomic policy to sustainable growth. From
rebalancing to preventing asset bubbles to enhancing social protection,
macroeconomic policy can play an important role. However, playing
that role should not come at the expense of compromising the
macroeconomic stability that has paved the way for the regions
remarkable success in the past.
More systematic coordination between diferent macroeconomic
policies will enhance their efectiveness. During the global crisis, Asian
governments, like those elsewhere, jointly pursued monetary and fscal
expansions. Higher public spending and tax cuts, accommodated by
lower interest rates, helped lif the region out of recession. By the same
token, closer coordination between diferent policies will magnify their
impact in the postcrisis period. For example, disciplined monetary
policy must go hand in hand with adequate fnancial regulation
to prevent asset bubbles. Regardless of the specifc institutional
arrangements, there must be better coordination between the two.
Rebalancing would beneft substantially if the wide range of fscal
measures to remove structural impediments against domestic demand
were accompanied by more fexible exchange rates. In fact, pursuing
one without the other may do very little to move the region toward
more balanced economies.
Conc|ud|ng observat|ons
One of the hallmarks of the Asian development model has been sound
and responsible monetary and fscal policy. Tis conservative approach
to macroeconomic policy has delivered huge benefts to the region in
the form of macroeconomic stability and sustained growth. Te Asian
governments decisive monetary and fscal expansion during the global
crisis highlights an additional important but underappreciated beneft
of macroeconomic prudence: the resources and credibility required to
address large negative shocks.
Terefore, the broad direction of Asias postcrisis macroeconomic
policy must be a return to its roots and to its precrisis tradition of
keeping infation low and public spending within the governments
means. Nonetheless, there is signifcant scope for improving the capacity
of monetary, fscal, and exchange rate policies to contribute to sustainable
growth in the postcrisis period.
Finally, as illustrated in the joint role of exchange rate and
fscal policy in the rebalancing process, the diferent components of
macroeconomic policy must be mutually consistent and supportive.
Within a stronger and better macroeconomic policy framework, there is
every chance that the regions remarkable economic success will continue
into the more challenging postcrisis world.
Lndnotes
1 See, for example, the discussion in Goodfriend (2007).
2 See, among others, Bernanke et al. (1999).
3 Namely, the PRC; India; Indonesia; Korea; Malaysia; Pakistan; Philippines; Singapore;
Taipei,China; and Tailand.
4 Note, however, that this higher gain does not necessarily imply that their average levels of
infation are lower than other countries in the group (Box 2.2.1).
5 Both Hong Kong, China and Singapore appear as exceptions, where the interest rate
dropped as early as in 2007. Tese two economies anchor their monetary policy to an
exchange rate. As a result, the trend in the interest rate tends to move with the trend of the
interest rate in the reference countrys currency.
6 Tis particular representation allows for a direct comparison among series of diferent
countries under consideration
7 See, for example, Cecchetti et al. (2000) and De Grauwe (2008) for a more recent study.
8 See, among others, the discussion in Gruen et al. (2005).
9 To put balance on the assessment, however, it also has to be remembered that the output
gap (one of the arguments in the standard Taylor rule equation) is not observable in
practice. Consequently, it also faces similar informational constraints, as in the measures for
deviation between asset prices and their fundamental values.
10 Ahrend et al. (2008) discuss the eurozone.
11 Discussed in IMF (2009a).
12 In the recent crisis, depreciation in emerging Asian countries (except Korea at 40%, Indo-
nesia at 30%, and India at 20%), was less than 10%, compared to an average of 70% during
the Asian crisis.
13 During the Asian crisis and its immediate afermath, there was much discussion of the
problems associated with a weak currency. Particularly, the worry over was that the depre-
ciation of the exchange rate would pass through into infation. Intervention during those
periods was against depreciation. However, some recent empirical studies such as those by
Ghosh and Rajan (2007) and Jongwanich and Park (2009) show a decline of exchange rate
pass-through into domestic prices in Asian countries.
14 In developing Asia, parts and components exports increased from 13% of the total to 32%,
and imports from 22% of the total to 30%, from 1992 to 2007.
15 For example, Tenreyro (2003) and Broda and Romalis (2003) fnd a small impact of
exchange rate volatility on trade, whereas McKenzie (1999), Frankel and Rose (2000), and
Glick and Rose (2002) show a statistically signifcant and negative relationship between
volatility and trade.
16 Te analysis so far does not rule out the country in implementing a hard-pegged exchange
rate regime as in Hong Kong, China, but the pegged rate should be consistent with
economic fundamentals.
17 See for example, Williamson (1994), who introduced the fundamental equilibrium exchange
rate. Under this model, the equilibrium exchange rate is the rate that allows the economy
to simultaneously attain internal and external balances. Internal balance is reached when
the economy is at full employment output and operating in a low infation environment.
External balance is characterized as a sustainable balance of payments position over the
medium term, ensuring the desired net fows of resources and external debt sustainability.
Clark and MacDonald (1998) underpin the equilibrium real exchange rate on the basic
concept of uncovered interest parity (UIP) and use econometric analysis to build up an
equilibrium rate called the behavior equilibrium exchange rate (BEER). Edwards (1989) and
Bafes et al. (1999) also use the concept of internal and external balance approach to reveal
the equilibrium exchange rate, but, instead of explicitly assuming the level of sustained
current account balance, they use econometrics, like Clark and MacDonald, to reveal the
equilibrium level.
18 Te de jure measures attempt to measure regulatory restrictions on capital account trans-
actions using the information about regulatory restrictions on cross-border capital fows
reported in the Annual Report on Exchange Arrangements and Exchange Restrictions
(AREAER), published by the IMF (Chinn and Ito 2008; Kose et al. 2006).
19 See for example, Edwards (1999), Le Fort and Lehman (2003), and Kawai and Takagi
(2008).
20 Te IMF has substantially rethought its position on the use of capital controls in emerging
economies and concluded that capital controls are sometimes justifed as a part of policy
instruments in dealing with surging capital infows (Ghosh and Ostry 2009).
21 Capital controls can be classifed as direct and indirect controls (Ariyoshi et al. 2000) or
in some studies (Neely 1999), the control measures are classifed as quantity and price
measures. Tese classifcations seem to be comparable since because most of administrative
controls are direct and quantity- based controls while, whereas market-based measures are
mostly indirect and price- based measures.
22 Ample fscal space, in particular a low public debt-to-GDP ratio, is conducive for counter-
cyclical fscal policy in at least two ways. First, it enables governments to run up large fscal
defcits at less cost to fscal sustainability. Second, fscal stimulus is likely to be less efective
if it is implemented by highly indebted governments.
23 Hur, Jha, Park, and Quising (forthcoming) present a comprehensive description of the
empirical framework and results.
24 Indeed, some of our results change when we rerun the regressions by extending the data
up to the third quarter of 2009. For example, government spending has a positive and
signifcant efect for the whole sample, suggesting that it took longer for fscal policy to
have an impact for the whole sample than for the developing Asian subsample. However,
the central resultthe positive and signifcant efect of government spending on Asian
outputremains.
25 All balances are measured as the diference between revenues and expenditures. A positive
sign denotes a surplus and a negative sign a defcit.
26 Fiscal developments in Central Asia during the 1990s were heavily infuenced by the inter-
national treatment of the debts of the former Soviet Union.
27 For simplicity, the control variables in these equations are held constant.
28 Park (forthcoming) provides an in-depth analysis of the role of fscal policy in Asias rebal-
ancing. In a related paper, Hur, Mallick, and Park (forthcoming) empirically examine the
impact of Asian fscal policy on Asias private consumption and investment.
8ackground papers
Monetary Po||cy
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Economic trends and
prospects in developing Asia
3
Central Asia
Armenia
Azerbaijan
Georgia
Kazakhstan
Kyrgyz Republic
Tajikistan
Turkmenistan
Uzbekistan
Armen|a
Jhe global and reglonal recesslons severely battered exports, workers remlttances, and prlvate
capltal ows, forclng the country lnto lts worst recesslon slnce just after lndependence. Jo counter
the downdraft, the government lmplemented a wlde-ranglng antlcrlsls program. lts measures have
malntalned nanclal and external stablllty, kept lnatlon ln check, and cushloned the adverse lmpact on
the populatlon. wlth momentum establlshed, the outlook ls for recovery wlth modest but strengthenlng
growth. Jhe medlum-term challenges lnclude broadenlng the productlon base, strengthenlng the scal
posltlon, and lmprovlng governance.
Lconom|c performance
Te global recession, as well as continued tension between Georgia
and the Russian Federation (which disrupted trade routes), stopped the
economy dead in its tracks in late 2008 and in 2009 afer several years of
strong performance.
Fortunately, due to previous signifcant reforms and prudent
macroeconomic policies, the country entered last year with strong
economic fundamentalsa small fscal defcit, moderate infation,
and low external debtallowing the authorities to respond with a
comprehensive anticrisis plan. But GDP still contracted by 14.4%, its worst
outturn in 16 years.
Te blast of recession was felt from the start of the year, with GDP on
a monthly basis hitting double-digit declines by May and bottoming in
July. Tis trend eased throughout the rest of the year (Figure 3.1.1).
Te economic downturn was experienced in all sectors of the
economy (Figure 3.1.2). Construction, which had been the main driver of
the economy, hemorrhaged with a 42.3% loss of output. Te energy sector
(electricity and natural gas) ebbed by 14.3%.
Other important industry activities, such as chemical products,
building materials, mining and metallurgy, and the diamond-processing
trade, all slumped. Agriculture saw no growth: lower animal output was
ofset by better crops. Te services sector grew by a mere 0.7% due to
reduced activity in fnance, tourism, communications, and transport.
From the demand side, private investment tumbled by 25% as net
infows of remittances, which had driven the housing boom, sank by
one-third (Figure 3.1.3) and net foreign direct investment declined by
about one-fouith to about s,oo million. Piivate consumption also
withered due to the reduced remittance infows and the economic
downturn. Public consumption and investment, however, were bolstered
by the anticrisis program.
To stimulate mortgage lending, a National Mortgage Company was
.. Month|y u0P growth
-30
-20
-10
0

Nov Sep Jul May Mar Jan
2009
Percentage points
-0.7
-14.4
-16.0
-17.5
-18.3
-18.4
-18.5
-16.3
-15.7
-9.7
-6.1
-3.7
Source: Natlonal Statlstlcal Servlce of the Republlc of
Armenla. http://www.armstat.am (accessed , Varch zoo).
This chapter was written by Kiyoshi Taniguchi of the Uzbekistan Resident Mission, ADB,
Tashkent; and Grigor Gyurjyan of the Armenia Resident Mission, ADB, Yerevan.
..z Contr|but|ons to growth (supp|y)
-14.4
6.8
13.8 13.2
13.9
-20
-10
0
10
20
2005 06 07 08 09
Percentage points
Agriculture
GDP growth
Industry (excluding construction)
Construction Services (including indirect taxes
and other items
Sources: Natlonal Statlstlcal Servlce of the Republlc of
Armenla. http://www.armstat.am, Central ank of Armenla.
http://www.cba.am (both accessed , Varch zoo).
established by the Central Bank of Armenia in July 2009. Te new body
began shoring up the construction sector by providing more-afordable
resources to participating banks and lending organizations.
Te earlier, strong infation pressures had dissipated by the
early months of 2009 (Figure 3.1.4). However, the devaluation of the
dram by 22% in March and a 40% increase in imported natural gas prices
in April, along with rising international prices for oil, commodities,
and basic foodstufs in the second half, sent infation back upward.
Headline infation hit 6.5% in December, beyond the upper limit of the
central banks infation target band. In 2009, sugar, fuel, medicine, and
household utilities, in that order, recorded the highest price increases
(ranging from 34% to 20%). Despite the hike of infation in the fourth
quarter, average infation was 3.4% for the year.
Monetary policy is underpinned by an infation targeting framework.
Te target of 4% +/- 1.5% for 2009 was difcult to sustain due to the
March devaluation and increased utility tarifs in April. Nonetheless,
the devaluation and the subsequent program with the International
Monetary Fund (IMF) served the economy well by restoring business
confdence, reducing concerns about fnancial stability, and increasing
competitiveness of exports.
By Febiuaiy :oo, gioss omcial ieseives fell to s:.: billion oi
3.9 months of imports, the lowest level since May 2007. Given the rapidly
worsening economic situation, the government formulated an economic
recovery program that was supported by an IMF standby arrangement
that took efect in early March. From June, reserves started to accumulate
as economic activity bottomed, climbing to s:.o billion (o.o months of
imports) at year-end (Figure 3.1.5).
Real and nominal efective exchange rates depreciated throughout
2009. Due to the fear of further dram depreciation, dollarization
accelerated: the share of deposits held in foreign currency doubled and
that of loans climbed by half, relative to 2008. In such conditions, total
lending volumes increased by 17.5% in 2009. Te share of nonperforming
loans edged down to 4.2% from 4.4% in 2008. Since banks are generally
well capitalized, this marginal increase presents no serious concerns.
To stimulate economic activity, the central bank implemented an
expansionary monetary policy through quantitative easing and reduction
of the refnancing interest rate, which it gradually cut from 7.75% in
March to 5.0% at year-end. Money supply grew by 15.1%, refecting
increases in net foreign assets and credit to the economy (Figure 3.1.6).
In a deteriorating economic situation, fscal policy was relaxed
to boost aggregate demand. Public spending on pensions and public
servants salaries were increased by 16.3%, and other social outlays were
largely maintained. Tax receipts fell with lower economic activity, helping
push out the fscal defcit to 4.7% of GDP from 0.7% in 2008 (Figure 3.1.7).
External resources more than fnanced the defcit, and even permitted a
buildup of government deposits in the banking system.
With budgetary and balance-of-payments fnancial support from
development partners, external debt nearly doubled during 2009 to
s, billion by end-Decembei :oo (Figuie ,.:.8). Te public sectoi debt-
to-GDP ratio hit 40.1%, with foreign currencydenominated debt at
34.0%. IMF debt projections indicate that the debt ratio may peak
.. kem|ttance |nows, sources and
growth
-120
0
120
240
360
480
-60
0
60
120
180
240
Jan
10
Jul Jan
09
Jul Jan
08
Jul Jan
2007
Total growth rate
United States
Rest of the World
Russian Federation
$ million %, year on year
.. |nat|on
-5
0
5
10
15
Nonfood Food Overall
Jul Jan
09
Jul Jan
08
Jul Jan
2007
%
.. Contr|but|ons to money supp|y growth
-40
-20
0
20
40
60
2005 06 07 08 09
Percentage points
Net foreign assets
Broad money (M2x)
Credit to the economy
Net claims on
central government
Net other items
Source: Central ank of Armenla. http://www.cba.am
(accessed , Varch zoo).
.. Lect|ve exchange rates and reserves
0
60
120
180
0.0
0.8
1.6
2.4
Gross international reserves Real
Nominal
Jul Jan
09
Jul Jan
08
Jul Jan
07
Jul Jan
2006
2005 = 100 $ billion
Sources: lnternatlonal Vonetary lund. lnternatlonal
llnanclal Statlstlcs onllne database. http://www.
lmfstatlstlcs.org/lmf, Central ank of Armenla. http://www.
cba.am (both accessed , Varch zoo).
Central Asia Armenia 109
at 46.6% in 2011 before falling to under 40% by 2013. While both the
government and the IMF regard the debt dynamics as sustainable, these
are subject to risks such as the projected improvement in the fscal
position or in economic growth failing to materialize.
Weak external demand for the main exports and slower than expected
benefts of the drams devaluation resulted in exports falling by 35.0%
in 2009. Tis decline in value terms nevertheless was outweighed by a
25.4% fall in imports due to weak domestic demand that stemmed from
lower remittances. Imports sufered in all major categories. For example,
precious metals and diamonds (both items for export processing)
collapsed by two-thirds and cars and other transport equipment by nearly
thiee-ffhs. As a iesult, the tiade defcit naiiowed to s:.: billion in :oo
fiom s:., billion in :oo8.
Due to lower remittance infows and transfers, the current account
defcit naiiowed slightly to s:., billion fiom s:. billion, though it
widened in relation to the shrunken GDP, to 15.4% from 11.6% in 2008
(Figure 3.1.9).
In support of its anticrisis program, the government received
budgetary support from international fnancial institutions of nearly
s,oo million. In addition, it has been using a s,oo million loan fiom the
Russian Federation for earthquake zone reconstruction, as well as for
support to the banking sector, large commercial frms, and small and
medium-sized enterprises. Tese anticrisis measures stimulated the real
sector, and output will further strengthen this year.
Lconom|c prospects
Economic recovery in large part depends on the assumed rebound in
the Russian Federation, as resumed remittance infows from the many
Armenian workers there will be necessary for economic expansion. Tis
pickup in remittances, improved external demand, and an increase in
capital infows are the ingredients to bring GDP growth to 1.5% then to
3.0% in the forecast period.
Fiscal policy will be gradually tightened in 2010 due to rising concerns
on debt servicing. Te fscal position is expected to remain weak, and the
recovery of tax revenue will be gradual. Yet excessive tightening in 2010
would slow the pace of the economic recovery. Still, through budgetary
support from development partners as well as external borrowing,
the public sector will remain one of the main economic buttresses in
20102011.
Infation will be largely contained to a range of 4.5%5.0% despite a
17% increase in the import price for natural gas that will push up utility
tarifs and be generally passed on in higher transportation and consumer
goods prices. Continuing weak demand and monetary policy, directed by
the central banks well-developed infation-targeting procedures, should
be able to keep infation in check.
Remittance infows and transfers are projected to grow by around
10%15% in the forecast period, though they are not expected to recover
to precrisis levels. Exports are seen rising by 5.2% in 2010 and then
stepping up to 11.8% growth, supported by gradual strengthening in the
diamond-processing, chemical, and metallurgy sectors. Import growth
3.1.1 Se|ected econom|c |nd|cators (%)
2010 2011
C0P growth 1.5 3.0
lnatlon 4.5 5.0
Current account balance
(share of C0P)
-12.0 -10.5
Source: A0 estlmates.
../ P|sca| ba|ance
-10
0
10
20
30
-5
0
5
10
15
Balance Expenditure
Revenue
09 08 07 06 2005
% of GDP % of GDP
..8 Lxterna| debt
0.0
0.7
1.4
2.1
2.8
3.5
Q3 Q1
09
Q3 Q1
08
Q3 Q1
07
06 2005
$ billion
..p 8a|ance-of-payment components
-4
-2
0
2
2005 06 07 08 09
$ billion
Goods Current account Income
Services Transfers
Armenla. http://www.armstat.am (accessed 8 Varch zoo).
is projected to be moderate at 4.7% and then climb to 5.1%, on the net
efect of a slow recovery in consumer spending but a faster pickup in
investment goods. Te current account defcit is expected to moderate to
12.0% of GDP in 2010 and to 10.5% in 2011 (Figure 3.1.10).
Exports of agricultural products will beneft from the early March
reopening of the Upper Lars checkpoint at the RussianGeorgian border,
which is Armenias sole overland route to the Russian Federation and
thence to Europe.
0eve|opment cha||enges
Over the last few years, the economy has generally benefted from greater
openness to trade and investment, although the global recession took
a heavy toll (Figure 3.1.11). Te immediate to medium-term challenges
include tightening the fscal stance, limiting the rising external debt,
broadening the production base, and adding trade partners. Establishing
stronger trade relationships with European countries, while maintaining
ties with traditional trade partners, is a hard juggling act.
Te authorities acknowledge the need for a faster pace of reforms
in the areas of tax policy and administration, and a more competitive
business environment. An action plan with clear milestones will be
necessary to implement reforms to improve governance, form an efective
incentive structure for fair distribution of resources, and strengthen the
antimonopoly policy.
Te government recognizes the existence of oligopolies in key sectors
of the economy that have strong links with entrenched elites. To reduce
such conficts of interest and to improve the business environment, it will
continue its eforts to reduce corruption, modernize public expenditure
management, and strengthen the civil service and judiciary.
..o Current account ba|ance
-18
-12
-6
0
11 10 09 08 07 06 2005
% of GDP
Forecast
5-year moving average
Sources: Natlonal Statlstlcal Servlce of the Republlc of
Armenla. http://www.armstat.am (accessed 8 Varch zoo),
A0 estlmates.
.. u0P growth
-15.0
-7.5
0.0
7.5
15.0
11 10 09 08 07 06 2005
%
Forecast
Armenla. http://www.armstat.am (accessed 8 Varch zoo),
A0 estlmates.
Azerba|[an
Strong performance ln the oll and gas sector, desplte lower lnternatlonal prlces, and a countercycllcal
pollcy helped sustaln buoyant growth ln 2009. Jransfers from the State 0ll lund propped up publlc
lnvestment, whlle the authorltles eased monetary pollcy aggresslvely. llgh growth ls expected to be
malntalned ln 2010 as oll prlces cllmb and as publlc lnvestment expands. 0ver the long term, the
economy ls challenged by lts excesslve dependence on oll and lts low level of dlverslcatlon. Veasures
are needed to transform the lndustry sector and to boost productlvlty ln agrlculture.
Despite the global fnancial crisis and fall in international oil prices
from their 2008 highs, growth slipped only a little to 9.3% in 2009,
from 10.8% in 2008. Helped by higher oil prices in the second half of
2009 and by increased production of hydrocarbons from the Caspian
Sea, the oil and gas sector (constituting 55% of GDP and 95% of total
export revenue) remained the major driver of growth (Figure 3.2.1).
At 370 million barrels, oil production was higher than in 2008, as
technical difculties in a major oil feld were overcome (Figure 3.2.2).
Accommodative fscal and monetary policies also worked to counter the
impact of the global slowdown.
Construction, though helped by higher public investment, decelerated
from 2008 as private demand for housing was damped by uncertain
market conditions and lack of confdence in real estate. Mainly due to
the slowdown of trade and transport, services growth declined (from
14.0%) but was still a robust 9.1% in 2009. Dynamism in information
technologyrelated services, though still a relatively small area, helped
sustain growth in services.
Agricultural growth fell by half to 3.5% in 2009 on account of
expensive inputs, low credit availability, and water shortages in rainfed
agriculture areasmost farmers continued to focus on subsistence wheat
production. Overall, non-oil GDP growth at 3.2% of GDP in 2009 was
much lower than its 15.7% growth in 2008, as activity was depressed by
an uncertain economic outlook that restrained domestic demand and
curtailed exports.
On the demand side, higher public investment, which rose to 21% of
GDP in 2009, supported growth, refecting government moves to counter
the impact of the global crisis. Tat impact was, however, seen in falling
private sector investment, which came down to only 6% of GDP in 2009.
Lower prices constrained investment in the oil sector, which consequently
accounted for a smaller proportion of total investment in 2009 than it did
in 2008.
.z. u0P growth by sector
0
20
40
60
80
Non-oil Oil Total
09 08 07 06 2005
%
Sources: Central ank of Azerbaljan. zoo,. Statistical
Bulletin. No. ,. January, State Statlstlcal Commlttee of the
Republlc of Azerbaljan. http://www.azstat.org
This chapter was written by Nail Valiyev of the Azerbaijan Resident Mission, ADB, Baku;
and Safdar Parvez of the Pakistan Resident Mission, ADB, Islamabad.
.z.z 0|| product|on
0
150
300
450
10 09 08 07 06 2005
Million barrels
Forecast
Sources: State Statlstlcal Commlttee of the Republlc of
Azerbaljan. http://www.azstat.org (accessed zz Varch
zoo), A0 estlmates.
2010 2011
C0P growth 9.5 9.7
lnatlon 5.8 6.0
(share of C0P)
23.0 21.7
Higher public investment was partly fnanced by the State Oil Fund
(SOFAZ), to which a large part of the governments oil receipts are
channeled. SOFAZ has become an important source of fnancing for
important socioeconomic and investment projects. It focuses on fnancing
contractual agreements with production-sharing companies and with the
State Oil Company of Azerbaijan for operating and developing oil and gas
basins. Te overall aim is to reduce year-to-year variation in oil revenues
and act as a wealth fund that supports long-term economic growth.
SOFAZ's assets climbed by ,:.8 in :oo and stood at s:. billion
(Figure 3.2.3).
Transfers from SOFAZ constituted 47.6% of total state revenue in
2009, up from 35.3% in 2008, as the government used them to fnance
its accommodative fscal policy. Te share of such transfers in total
revenue has been growing since 2006. Te budget defcit amounted to
AZN242 million (0.7% of GDP). However, excluding SOFAZ transfers, the
government ran a fscal defcit of AZN5.1 billion in 2009 (14.8% of GDP),
compared to an AZN3.8 billion (9.5% of GDP) defcit in 2008.
Tis dependence on SOFAZ points clearly to the need for generating
more tax and nontax revenue. Te tax-to-GDP ratio of around 15% is low
and can be further scaled up. Te budget defcit in these circumstances
is currently being heavily fnanced by SOFAZ transfers, although the
government intends also to use proceeds of privatization of state assets
and domestic borrowing to fnance part of the defcit in 2010.
With falling international commodity prices, the consumer price
index rose by only 1.5% in 2009, versus 20.8% in 2008 (Figure 3.2.4). Te
Central Bank of Azerbaijans heavy market intervention maintained a
stable exchange iate to the dollai in :oo (at AZN o.8/s:), pieventing a
depreciation that would have caused infation pressure and raised debt-
servicing costs for businesses that have sizable foreign-currency loans.
Stable civil service salaries and economic uncertainty helped bring down
infation pressure from the demand side.
Falling infation allowed the central bank to relax monetary policy
through phased but steep reductions in the refnancing rate, which
ultimately fell to only 2% in 2009 from a high of 15% in 2008. In
addition, the central bank markedly lowered banking sector reserve
requirements to 0.5% in March 2009 from 12%. With greater liquidity,
commercial banks ability to lend was strengthened and they reduced
lending rates. Te central bank received new authority to provide
long-term loans in diferent currencies, as well as subordinated loans. It
also provided additional special fnancing support to banks and private
companies.
Tese measures, as well as new tools employed by the central bank,
such as swap operations and repurchase of mortgage notes, helped create
additional liquidity and were an important countercyclical response from
the monetary side. Domestic assets consequently increased by about 23%
in 2009 though the broad money supply stagnated as net foreign assets
fell (Figure 3.2.5).
Banking sector resilience grew as a result of monetary policy
measures of the central bank. Despite slow growth, banks maintained
strong loan portfolios, and the proportion of overdue loans was kept in
check, at 4.5% of the total.
.z. S0PA2 assets
0
4
8
12
16
09 08 07 06 2005
$ billion
Source: State 0ll lund of the Republlc of Azerbaljan. Annual
Report. varlous lssues. http://www.ollfund.az
.z. |nat|on
-10
0
10
20
30
Jan
10
Jul Jan
09
Jul Jan
08
Jul Jan
07
Jul Jan
2006
%
Source: lnternatlonal Vonetary lund. lnternatlonal
llnanclal Statlstlcs onllne database (accessed zz Varch
zoo).
.z. Contr|but|ons to money supp|y (M)
growth
-50
0
50
100
150
Jan
2007
Jul Jan
08
Jul Jan
09
Jul
Percentage points
Claims on the economy
Net foreign assets Net claims on government
Broad money (M3)
llnanclal Statlstlcs onllne database (accessed z, Varch
zoo).
Central Asia Azerbaijan 113
As oil export income fell due to sliding international prices, the trade
account is estimated to have posted a suiplus of only s:.o billion, down
fiom s:,.o billion in :oo8. Tis diop was mitigated by an estimated
s:.: billion fall in impoits, laigely because of lowei food piices and a
decline in oil companies demand for investment machinery.
Te lower trade surplus was ofset to an extent by a sharp fall in
net oil and gas factor income payments, helping reduce estimated net
payments for services, income, and transfers by about one-third to
s. billion. Still, the cuiient account suiplus at s:o.: billion was much
less than the s:o., billion eained in :oo8, falling as a shaie of GDP to
23.6% from 33.7%.
Gioss inteinational ieseives contiacted by s:.: billion to s,. billion
at end-December 2009. Tis decline, in a context of a current account
surplus, refected a buildup in SOFAZ investment assets abroad.
Exteinal debt iose slightly to s,. billion (8.8 of GDP) in :oo fiom
s,.o billion a yeai eailiei. Azeibaijan's debt at these levels iemains low
and theie aie no majoi iisks to debt seivicing in view of the s:. billion
SOFAZ soveieign fund and the s,. billion in foieign ieseives.
Lconom|c prospects
Growth prospects hinge on oil. As oil prices rise in 2010 and as
production levels increase, GDP is projected to accelerate a shade to
9.5%. Higher oil revenue through increased SOFAZ transfers in 2010 (for
a total of AZN. billion, oi so.: billion) will also enable gieatei public
investment that will sustain growth at this higher level. At the same time,
cuts in corporate proft and personal income taxes should help boost
domestic demand. Ample liquidity and a likely continued expansionary
monetary policy will permit commercial banks to expand their lending
and lower lending rates to the private sector.
Agriculture is expected to be more robust as various public
investment projects are completed. Communication and transport sectors
will also continue to contribute to growth. With oil prices set to rise
further next year, GDP growth will edge up to 9.7%.
Te focus of monetary policy in 2010 remains on keeping infation
low. Te central bank currently projects infation at 3%. However, rising
commodity and food prices and higher public investment and demand
fueled by oil revenue, along with the current relatively liberal monetary
policy environment, suggest that estimates of 5.8% (and about 6.0% in
2011) mark a more likely outcome. However, the likely appreciation of the
local currency on higher oil revenues this year could complicate monetary
policy if the central bank needs to intervene in the market to keep a lid
on appreciation.
Te external account is expected to remain strong on higher oil
export receipts with the current account surplus projected at 23.0% of
GDP before easing to 21.7% next year (as stronger GDP growth sucks
in imports). Te recovery of the global economy will boost non-oil
exports, too, while the upturn in the Russian economy will support
higher workers remittances. Te larger current account surplus, along
with larger transfers from SOFAZ, will preclude the need for net foreign
borrowing. External debt is projected to fall over the forecast period.
3.2.1 0eve|opment cha||enges
Excessive dependence on oil is the
Achilles heel of this economy. Forceful
moves to diversify are required
for strengthening services and the
non-oil industry subsector, for raising
agricultural productivity (building
on the budgetary allocations for
irrigation), and for developing fsheries
and livestock.
Te fact that the country ranks
number two among the Central Asian
republics and 38 among 138 countries
worldwide on the World Banks Doing
Business 2010 report suggests that the
relatively sound business environment
ofers a springboard from which to
catalyze growth and innovation in the
non-oil economy.
A linked challenge is to diversify
sources of government income to
provide for stable public spending
during downturns in international oil
prices. To a degree, SOFAZ receipts
help the government smoothen public
spending over oil-price peaks and
troughs, but more widely, revenues
need to be boosted and the tax-
to-GDP ratio raised to provide for
sustainable public fnances. An already
planned measure in this regard,
which needs to be fully implemented,
includes the online submission of
value-added tax invoices.
Finally, electricity supply has to
be improved and expanded. Greater
investment in the sector is critically
needed.
ueorg|a
Jhe economy fell lnto recesslon ln the wake of the 2008 conlct wlth the Russlan lederatlon and the global
downturn. ut alded by a strong scal response and slzable external lnows, the contractlon bottomed ln
June and recovery ls, apparently, under way. Jhe outlook ls for modest but gradually strengthenlng growth
on the assumptlon that exports, forelgn lnvestment, and credlt to the prlvate sector contlnue to plck up.
Reduclng the scal stlmulus ls the lmmedlate prlorlty, but eorts to dlverslfy productlon and trade are
needed for the longer term.
Te several years of high growth rates from 2005 through the frst half
of 2008 were underpinned by general macroeconomic stability, strong
revenue performance, and a liberal business environment that attracted
large infows of foreign direct investment (FDI). But the armed confict
with the Russian Federation in August 2008 pummeled the economy,
leading the authorities to seek an International Monetary Fund (IMF)
standby arrangement the following month and emergency fnancing from
donors. Te September global fnancial crisis and subsequent recession
then made a dire situation worse.
GDP contracted by 3.9% in 2009, well below the truncated 2.3%
outturn in 2008 and far away from the 12.3% expansion in 2007
(Figure 3.3.1). Te shrinkage refected a 50% decline in FDI, which had
provided real impetus to private investment and growth; a huge drop in
demand for exports; and the conficts dislocation of normal economic
activity.
For the year, nearly all sectors of the economy were hit. Wholesale
and retail trade saw double-digit declines while manufacturing and
agriculture fell by more than 5%.
Large fscal spending, however, put a foor on the decline in economic
activity, and the downdraf appears to have bottomed in the second half
of 2009, with a slight pickup in activity in the fourth quarter as investor
and consumer confdence strengthened.
Infation pressures were contained due to weak domestic demand
and a drop in prices for major import items. Infation, which had peaked
at 12.7% in August 2008, steadily declined to 3.0% by December 2009
(Figure 3.3.2). It picked up somewhat in February 2010, mainly refecting
a seasonal increase in food prices. Average infation dropped to 1.7% in
2009 from 10.0% in 2008.
In other measures to help stabilize the economy, the National Bank of
Georgia, the central bank, shifed policy to monetary easing. It cut its key
refnancing rate from 12% before August 2008 to 5% in November (where
it stays). Moreover, it launched foreign exchange swaps and expanded
.. u0P growth
-10
-5
0
5
10
15
F H2 H1 F H2 H1 F H2 H1 F H2 H1 F H2 H1
%
2005 06 07 08 09
9.6
12.3
2.3
-3.9
9.4
l full year.
Source: Natlonal Statlstlcs 0ce of Ceorgla. http://www.
geostat.ge (accessed , Varch zoo).
This chapter was written by George Luarsabishvili of the Georgia Resident Mission,
ADB, Tbilisi; and Nariman Mannapbekov of the Central and West Asia Department,
ADB, Manila.
..z |nat|on
-4
0
4
8
12
16
Jan
10
Jul Jan
09
Jul Jan
08
Jul Jan
07
Jul Jan
2006
%
Source: Natlonal ank of Ceorgla. http://www.nbg.gov.ge
uncollateralized loans to commercial banks as part of emergency lending.
Tese changes had little impact on bank lending rates and on bank credit
to the private sector, which dropped by nearly 12% in 2009. Still, the
decline in private credit appeared to stabilize in the fourth quarter. New
lending picked up in early 2010, though credit remained well below year-
earlier levels.
Broad money contracted by around 14% in the frst half of 2009 from
a year earlier, though it rebounded to grow by around 8% by year-end
(Figure 3.3.3).
Even though the banking sector continued to face difculties,
commercial banks began to show signs of improvement by a return to
proftability in the third quarter of 2009. Te share of nonperforming
loans has increased since 2008 in part due to high levels of unhedged
foreign borrowing. However, the nonperforming loan ratio at 6.8% in
January 2010 was fully provisioned. Dollarization of deposits increased
by about 10 percentage points in the last quarter of 2008 to 75.8%, but
eased to 73.4% by end-2009, indicating strengthening public confdence.
Te authorities proactive policy response to the crisis helped the
economy weather the contagion efects of the global crisis, and was the
main stabilizing force in the domestic economy. As part of the fscal
stimulus package, the government reduced income tax (from 25% to
20%) and dividend tax (from 20% to 15%). Tax collection declined by 7.7%
in 2009. Te decline in overall budget revenue, however, was larger, at
10.1%, attributed to a steep fall in grant assistance as the large grantsfor
those displaced by the confict and for emergency infrastructure
repairsslowed.
Current expenditure was essentially maintained at the 2008 level,
though social welfare spending was signifcantly increased and defense
outlays reduced. Total expenditure fell by 2.1% on a reduction in capital
outlays (of about 8%). Te fscal defcit reached 9.2% of GDP in 2009,
in line with the governments plan and the program with the IMF
(Figuie ,.,.). Public exteinal debt iose to s,. billion (oi ,:.8 of GDP) at
year-end.
In light of lower than expected privatization revenue, weaker tax
collection, and (to a lesser extent) a gap in external fnancing, sales of
treasury bills were reintroduced in August 2009 and net issuance funded
about 16% of the fscal defcit in 2009. Te bills were well received and
will be used in fnancing the 2010 budget.
Te current account defcit narrowed sharply to 11.9% of GDP
(s:., billion) in :oo, fiom ::.8 in :oo8 (Figuie ,.,.,). Te impiovement
was mainly due to a 31% drop in imports. Te fall refected weak domestic
demand (in good part owing to a marked decline in investment), lower
commodity prices, and devaluation of the lari, the domestic currency.
Exports fell by 22% on slumping demand. Net invisible receipts increased
by :: to s:.: billion, as iemittance infows (equaling so., billion oi
around 9% of GDP) stayed strong.
Te authorities devalued the lari by around 17% against the dollar in
November 2008 afer sustaining reserve losses afer August. By February
2009, downward pressure on the lari had eased and from May 2009
interventions were conducted only through foreign exchange auctions, in
efect adopting a market-determined exchange rate. Te rate was relatively
.. Contr|but|ons to money supp|y (M)
growth
-60
0
60
120
Jan
2007
Jul Jan
08
Jul Jan
09
Jul Jan
10
Percentage points
Net claims on government
Net foreign assets Claims on the economy
Broad money (M3)
Net other items
llnanclal Statlstlcs onllne database (accessed , Varch
zoo).
.. P|sca| |nd|cators
-15
0
15
30
45
Budget balance Expenditure Revenue
09 08 07 06 2005
% of GDP
Sources: lnternatlonal Vonetary lund. zoo8. Request for
Stand-By ArrangementSta Report. 0ctober, zoo,. Third
Review Under the Stand-By Arrangement. August, zoo,.
Fourth Review Under the Stand-By Arrangement. 0ecember.
http://www.lmf.org, Vlnlstry of llnance of Ceorgla. http://
www.mof.ge/en (accessed , Varch zoo).
.. Current account components
-8
-4
0
4
2005 06 07 08 09
$ billion
Merchandise imports
Income Merchandise exports
Current transfers Current account balance
Services
Source: Natlonal ank of Ceorgla. http://www.nbg.gov.ge
Central Asia Georgia 116
stable in :oo, vaiying little aiound the aveiage of GEL:.o8/s, though this
was about 11% weaker than 2008s average.
Gioss inteinational ieseives incieased to s:.: billion by end-:oo
fiom the piioi yeai-end low level of s:., billion. About one-thiid of the
increase was due to an allocation of special drawing rights by the IMF.
Lconom|c prospects
Te economic outlook remains challenging. As a small, open economy at
the cross-roads of Europe and Asia, trade and economic growth heavily
depend on developments in neighboring countries and major trade
partners. Given the projected global and regional economic recovery
and the return of investor confdence, as evidenced by strengthening
momentum in the domestic economy in the fnal months of 2009, GDP
growth is projected to increase to 2.0% in 2010 and 4.0% in 2011.
While government expenditure will remain the mainstay of the
economy, private investment is expected to pick up owing to a mild
strengthening of FDI and improved domestic fnancing conditions
as confdence in the recovery reasserts itself. A revival in trade and
commodity prices is seen bringing export activity up sharply. Consumer
expenditure should improve, if only slightly, on some gain in remittances
and a return to domestic growth.
During the last few months of 2009 tax revenue, remittances, and
trade turnover began to perk up, and will likely continue doing so in
the forecast period. Te 2010 budget plans to ease spending from 38.5%
in 2009 to 36.5% of forecast GDP, but it would still underpin much
economic activity. Notably, there would be a shif toward domestic
expenditure and donor-fnanced postconfict rehabilitation spending
away from import-oriented defense spending at 8% of GDP in 2008 to
4% of 2010s forecast GDP.
In addition, the budget envisages no increase in social spending
relative to 2009, while other public expenditure will be brought down
across the board. While revenue as a share of GDP will be little changed,
expenditure policy is expected to lower the budget defcit to 7.4% of GDP.
Te governments medium-term fscal plan targets are to reduce the
budget defcit to 2%3% of GDP by 2013 to ensure debt sustainability.
Monetary policy will continue to be geared to expanding lending to
the private sector. Although domestic demand will be subdued, increases
in international prices will likely push infation higher to around 6% in
20102011. Te central bank will continue to let the exchange rate adjust
to market conditions.
Te current account defcit is projected to widen to about 14% of
GDP. Tis mainly refects an increased import bill, in part on higher
commodity prices, both for hydrocarbons and food. Te revival in
economic activity and global price developments is projected to push
imports higher by about 12% in 2010. Given the expected growth in major
trade partners, exports are forecast to strengthen by about 12% in 2010
and 14% in 2011. Tese factors will push the trade defcit higher, and with
relatively little foreseen improvement in workers remittances and other
invisible receipts, the current account defcit will rise.
2010 2011
C0P growth 2.0 4.0
lnatlon 6.0 6.0
(share of C0P)
-14.0 -14.0
To achieve a sustainable fscal and
external balance, the government will
need to modernize and diversify the
export structure, then promote exports
more. (Te list of leading Georgian
exports of a decade ago is remarkably
similar to now.)
Traditionally, the share of FDI in
manufacturing and agriculture has
not exceeded one-quarter of total FDI,
even though these two sectors have
large potential for growth. Tourism
and transportation sectors could be
attractive for foreign investors as the
country has a potential to become a
major commercial and logistical hub in
the Caucasus via the Poti and Batumi
ports. Moreover, the countrys sizable
hydropower potential should be better
tapped.
To rebalance growth toward
export-led strategy it is important to
create a conducive environment for
attracting FDI to the tradable sector.
Additional measures and incentives
are needed to channel funds into the
above promising sectors.
Kazakhstan
Jhe economlc contractlon bottomed ln the mlddle of 2009 and the economy marked posltlve, albelt modest,
growth for the year, bolstered by a rally ln lnternatlonal oll prlces ln the second half. An expanslonary scal
pollcy dlrected through an antlcrlsls program, an accommodatlve monetary pollcy, and banklng sector
stablllzatlon constltuted the maln pollcy focus. weak domestlc demand and llmlted access to credlt curbed
lnatlon pressures. Jhe outlook ls for modest growth wlth moderate lnatlon and a current account surplus,
though the banklng sector stlll faces dlcultles and domestlc demand wlll remaln weak.
In the second half of 2008, the oil-driven boom of previous years was
put into a tailspin by the onset of the global fnancial crisis (because
domestic banks had overborrowed from abroad) and then by the
downdraf in oil prices. In 2009, GDP contracted by 2.2% in the frst
3 quarters, but managed a marked rebound to post growth of 1.2%
for the year (Figure 3.4.1) on the impetus of strengthening oil and
commodity prices.
On the supply side, industry (excluding construction) grew by 1.8%,
with output on the rise over much of the year (Figure 3.4.2). A fllip to
growth came from a 13.8% expansion in agriculture as good weather
produced a record grain harvest. Services output shrank marginally, and
construction dropped by about 5%.
While data on the expenditure side are not yet available, private
consumption and (non-oil) investment likely contracted or stagnated.
One of the most signifcant impacts of a local banking crisis, which has
wracked the country since end-2007 and essentially froze lending, has
been a sharp slowdown in domestic demand.
In prior years, local banks had relied on external borrowing to
fnance large increases in construction, real estate, and personal lending.
When international capital dried up (from late 2007), the banks faced
an increasingly serious liquidity crisis that in efect ended new lending,
defating the property boom and leaving many projects unfnished
(Figure 3.4.3). Moreover, many consumers found themselves overindebted
as the economy slowed. In response, the government adopted an anticrisis
program (Box 3.4.1).
Annual average infation fell to a low of 7.3% in 2009, from 17.3% in
2008, due to weak domestic demand and low international commodity
prices, particularly at the start of the year. Even Februarys currency
devaluation (adding upward price pressure to imports) could not
outweigh the inertia of weak private consumption. Year-on-year infation
at end-December was 6.2% (Figure 3.4.4). By main component, food was
.. Contr|but|ons to growth (supp|y)
9.6 9.7
10.7
8.9
3.3
1.2
-3
0
3
6
9
12
2004 05 06 07 08 09
Percentage points
Services Industry, excluding construction
Construction GDP Agriculture
Source: Agency of Statlstlcs of the Republlc of Kazakhstan.
Tashkent; and Asset Nussupov, consultant of the Kazakhstan Resident Mission, ADB,
Almaty.
..z |ndustr|a| product|on
-10
-5
0
5
10
15
Jan
10
Jul Jan
09
Jul Jan
08
Jul Jan
2007
%
.. kes|dent|a| property pr|ces
0
500
1,000
1,500
2,000
Residential real estate
New residential real estate
09
Oct
08 07 06 05 04 03 02 2001
Dec 2000 = 100
up only 3.0% from a year earlier while nonfood items and services were
about 8.5% higher.
On the monetary front, infations tumble created space for monetary
easing. Te National Bank of Kazakhstan (NBK), the central bank, cut
the refnancing rate (the main policy rate) seven times in 2009 from
10.5% at the start of the year to 7.0% by September. It also lowered reserve
requirements from 2.0% to 1.5% for domestic obligations and from 3.0% to
2.5% on foreign borrowing to boost banks liquidity. Broad money grew
by 17.9% during 2009, mainly refecting an increase in net foreign assets.
Even though bank credit to the economy marked a 5.8% increase in 2009,
growth came from the change in valuation of foreign currency loans due
to the devaluation (Figure 3.4.5).
Te exchange rate came under increasing downward strain toward
the end of 2008, as oil and commodity prices fell, and as pressure
on the foreign reserves mounted. Te NBK devalued the tenge, the
local cuiiency, by about :o fiom T::o/s: to T:,o/s: (with a , band)
on 4 February 2009 (Figure 3.4.6). Tis step essentially matched an
adjustment in the Russian ruble in late January.
Te devaluation proved a success on the whole, because speculative
pressures against the currency dissipated, the rate remained relatively
stable against the dollar, and the foreign exchange reserve position
strengthened over the rest of the year. However, the rate adjustment
entailed costs of higher debt service on foreign borrowing and ate
into the beneft that falling global commodity prices had for infation.
Subsequently, on upwardly mobile hydrocarbon prices and the nascent
global economic recovery, the NBK widened the trading band to
T::,.,-:o,/s: fiom , Febiuaiy :o:o.
Refecting the slow economic activity as well as tax-easing measures
that underpinned the anticrisis program, current revenue (comprising
tax and nontax revenue and capital receipts) contracted by 18.9% in 2009.
In moves to support domestic demand and to mitigate the downturns
impact on vulnerable groups, the government pushed up its social outlays,
.. |nat|on
0
7
14
21
28
35
Jul Jan
09
Jul Jan
08
Jul Jan
2007
%
Source: Natlonal ank of Kazakhstan. http://www.
natlonalbank.kz (accessed , Varch zoo).
In response to banking and real-sector woes, the
government launched an anticrisis plan in late 2008.
A total of $10 billion or 9.5% of GDP, largely from the
National Fund of the Republic of Kazakhstanthe national
oil fundwas pledged.
Te plan focused on the following: capital injections
in four major banks (made through Samruk Kazyna,
the government holding company for state-owned assets
that also provides development fnance); support for
construction and the real estate market; assistance to small
and medium-sized enterprises and agriculture; and public
investment in industry. Te initiative has stabilized the
economy but a strong revival in the non-oil sectors does
not appear at hand.
To deal with the banking crisis, the government early in
2009 efectively nationalized two of the largest banks and
provided two other banks with relatively smaller amounts
of capital. In the course of 2009, however, four fnancial
institutions defaulted on external debt obligations and all
are now in negotiation with their creditors to restructure a
total of about $20 billion in debt.
To strengthen confdence in banks, the authorities
enhanced the existing deposit guarantee for individuals
from T700,000 to T5 million. To back up this move, they
also increased the capital base of the deposit insurance
fund to T100 billion.
In addition, a distressed asset fund was established
in October 2009. Te government provided most of
its resources, though the fund is relatively small. It has
purchased real estate loans and fnanced industrial credits.
3.4.1 0ea||ng w|th domest|c cr|s|s
.. 8ank |oans to the economy
0
3
6
9
Foreign currency-denominated
National currency
Jul Jan
09
Jul Jan
08
Jul Jan
07
Jul Jan
06
Jul Jan
2005
Tenge trillion
Central Asia Kazakhstan 119
including a 25% increase in public servants salaries and pensions. Current
expenditure rose by an estimated 10.4%. Taking account of smaller capital
expenditure and transfers from the National Fund of the Republic of
Kazakhstan (NFRK), the general government budget defcit widened to
3.1% of GDP in 2009 from 2.1% a year earlier (Figure 3.4.7).
Export revenue is estimated to have declined by 38.9% year on year
in 2009 (mainly on lower oil prices), and imports by 25.2%, primarily
due to weak domestic demand, slimming the trade surplus by more
than half to s:,.: billion. Both expoits and impoits stiengthened in the
second half, and nearly three-fourths of the annual trade surplus was
earned in this period.
Te stronger second-half performance stemmed from increased
exports on the back of better oil prices. Imports stayed anemic, refecting
what was only a slight improvement in economic activity in this period.
A sharp fall in the large income payments made to foreign investors in
the oil industry ofset around two-ffhs of the drop in the trade surplus
(Figure 3.4.8). As a result, the current account was held to a defcit
estimated at s,. billion (,.: of GDP) in :oo following the so., billion
surplus in 2008 when oil prices were much higher.
Capital infows more than covered the current account defcit,
generating an estimated overall balance-of-payments surplus of
s:., billion and biinging the NBK's inteinational ieseives to s:,.: billion
at end-:oo (Figuie ,..). Assets of the NFRK weie s:. billion at this
time. Assets of both the NBK and the NFRK grew in the frst 2 months
of 2010.
In :oo, the goveinment committed s:o billion fiom the NFRK to
support the anticrisis plan. Afer that drawdown, the NFRK stood at
aiound s:, billion-s:8 billion, of which the foieign cuiiency ieseive
accounted foi s:, billion, and a bond to Samiuk Kazyna foi s, billion
(denominated in tenge).
Private sector external debt (excluding intracompany debt, which is
mainly related to oil and gas corporations) grew rapidly over the years
thiough end-:oo, to s,., billion (,8 of GDP), when bank debt peaked
at so billion. Subsequently, theie was only a modeiate inciease in piivate
debt to s:o8., billion at end-:oo and bank debt declined to s,o.: billion
(Figure 3.4.10).
Lconom|c prospects
GDP is projected to grow modestly by 2.5% in 2010 and 3.5% in 2011,
as the global recovery consolidates. Oil prices are expected to move up
to aveiage s8: a baiiel in :o:o and s8o in :o::, and oil pioduction is
expected to increase by 4.6% or to 80 million tons in 2010, which will
continue to grow by 5.0% or to 84 million tons in 2011. Construction
will likely face difculties still, as the property market adjusts, though
it should post moderate growth as infrastructure and oil sector
investment expand.
Agricultural growth over the forecast period will likely be modest due
to the base-year efect of 2009s large gain. Foreign direct investment in
oil and gas projects will continue at a relatively high level.
Public expenditure will continue exceeding non-oil sector private
.. Lxchange rate
115
125
135
145
155
Jan
10
Jul Jan
09
Jul Jan
08
Jul Jan
2007
T/$
../ P|sca| |nd|cators
-10
0
10
20
30
Fiscal balance Expenditures Revenues
10 09 08 07 2006
% of GDP
Forecast
Sources: Vlnlstry of llnance, A0 estlmates.
..8 8a|ance-of-payments |nd|cators
-40
0
40
80
-10
0
10
20
Transfers
Income
Services
Imports
Exports
09 08 07 06 05 2004
$ billion % of GDP
..p keserves and assets of the Nat|ona|
Pund of the kepub||c of Kazakhstan
0
20
40
60
Assets of the National Oil Fund
Gross international reserves
Jan
10
Jul Jan
09
Jul Jan
08
Jul Jan
07
Jul Jan
06
Jul Jan
2005
$ billion
investment over the forecast period. Even though fscal space will stay
tight in 2010, the government will persist in its expansionary policy to
maintain a high level of social outlays and investments in infrastructure.
Total expenditure and net lending together are expected to grow by 4.6%.
At the same time, total revenue and grants are expected to contract by
3.6% in view of tax concessions and continued slow growth. Te budget
envisages a fscal defcit of 4.9% of GDP in 2010. Te budget will continue
to be boosted by a transfer of T1.2 trillion from the NFRK.
Infation is forecast at 6.8% in 2010 and 6.5% in 2011 on the
assumption that domestic demand remains weak, and access to credit
stays tight due to the time needed to resolve the domestic banking
problems. Even though global commodity prices will edge up, moderate
appreciation in the exchange rate will help ofset external price pressures.
Te current account is forecast to be in surplus in 2010 and 2011.
Exports are expected to increase by 30% in 2010, due to higher prevailing
oil prices, and then advance by about 13% in 2011 on about a 5%
strengthening in both oil prices and export volumes in conjunction with
some further gains in non-oil exports as the global recovery strengthens
further. Since domestic demand will gradually come back throughout the
forecast period, imports will increase moderately.
Tese estimates point to a substantial trade surplus, though a pickup
in income payments on direct investment in the oil sector will likely hold
the cuiient account suiplus to about s:.8 billion in :o:o and s.o billion
in 2011 (2.3% and 3.3% of GDP, respectively).
Te main downside risk to the forecast is in weaker oil prices. In
addition, it is important that ongoing negotiations on foreign debt
restructuring by the defaulting banks be concluded soon so that more
normal fnancing conditions for investment and consumption can
reassert themselves. If economic recovery in the Russian Federation is
slower than expected, export demand will be crimped.
Te economy is still narrowly based, with economic activity and
investment concentrated in the hydrocarbon and mining sectors. Te
current crisis has underlined the need to accelerate polices to diversify
the production base beyond these sectors and their immediate feed-in
industries.
In this context, under the state program for advanced industrial
development and industrialization, the government plans to implement
:o: piojects totaling To., tiillion (about s, billion) in investments duiing
20102014.
For its part, the thin fnancial market requires deepening through
improvements to the capital markets infrastructure and through revamps
to the banking system. Moreover, it is critical to strengthen bank
supervision to monitor risk-management and asset-valuation practices, if
another round of asset boom and bust is to be avoided.
..o Pr|vate externa| debt
0
30
60
90
120
Total Other sectors Banks
Sep Mar
09
Sep Mar
08
Sep Mar
07
Sep Mar
06
Sep Mar
2005
$ billion
2010 2011
C0P growth 2.5 3.5
lnatlon 6.8 6.5
(share of C0P)
2.3 3.3
Kyrgyz kepub||c
0esplte the global and reglonal downturns and power supply lssues, the economy showed modest growth
ln 2009 on the back of a scal stlmulus and strong performance ln agrlculture. lnatlon fell sharply and
the external posltlon lmproved. Jhe outlook ls for acceleratlng, though moderate, growth glven the
expected recovery ln major economlc partners and the constructlon of new power generatlon capaclty.
Jhe authorltles are pursulng reforms to render the publlc sector more eclent and to create favorable
condltlons for prlvate sector development.
Economic downturns in Kazakhstan and the Russian Federation
(the major economic partners) and the countrys power shortfalls
took economic performance in 2009 down to 2.3% from 8.4% in 2008
(Figure 3.5.1). Teir difculties hit the economy through reductions in
three channels: remittances from migrant workers (which constituted
around 20% of GDP in 2008); infows of foreign direct investment; and
demand for exports.
GDP growth was driven mainly by a robust performance of
agriculture (due to favorable weather conditions), which grew by 7.3%.
Construction increased by 6.3%, afer a 10.8% contraction the prior
year, a rebound primarily due to activity in the hydropower generation
and mining subsectors, rehabilitation and construction of roads, and
residential building. However, industry overall declined by 3.4 because of
reduced output in the textile and sewing industry, transport equipment,
electric energy, and gas and water distribution. Gold production also
declined.
Te traditionally high-performing services sectors grew only
moderately (2.4%) as the downdraf in workers remittances crimped
consumer expenditure.
Reduced demand, together with sliding world food and energy prices,
slashed average consumer price infation from 24.5% in 2008 to 6.9% in
2009. Te rate fell steadily during the year and by December was zero
(Figure 3.5.2). Te good domestic harvest also helped lower food prices, to
7.4% below December 2009 levels.
Services sector prices also tumbled. Nonfood goods infation stayed
relatively high as depreciation has worked against the decline in global
prices of imported commodities and consumer goods.
Boosting expenditure on social safety net programs and infrastructure
projects, the government took a strong countercyclical fscal stance: it
propelled budget expenditure by 35% (to nearly 38% of GDP). Financial
assistance fiom the Russian Fedeiation, in the foim of a s:,o million
.. Contr|but|ons to growth (supp|y
-0.2
3.1
8.5 8.4
2.3
2005 06 07 08 09
Percentage points
-5
0
5
10
Industryconstruction
Agriculture GDP
Industrygold
Industryother Services
Source: Natlonal Statlstlcs Commlttee of the Kyrgyz
Republlc. http://www.stat.kg (accessed , Varch zoo).
This chapter was written by Nurbek Jenish, consultant of the Kyrgyz Resident Mission,
ADB, Bishkek; and Gulkayr Tentieva of the Kyrgyz Resident Mission, ADB, Bishkek.
..z Month|y |nat|on
-20
0
20
40
60
Services Nonfood Food Overall
Jul Jan
09
Jul Jan
08
Jul Jan
2007
%
Source: Natlonal Statlstlcs Commlttee of the Kyrgyz
Republlc. http://www.stat.kg (accessed , Varch zoo).
giant and a s,oo million concessional loan, enabled such a boost. Tis
increase in ofcial transfersthey shot up to seven times the 2008 level
lifed total budget revenue by 25.8%. It also was instrumental in holding
the defcit to only 1.8% of GDP in 2009 (Figure 3.5.3) from the original
budget plan of 4.6%. Te government intends to use the loan to fnance
infrastructure projects and support small and medium-sized enterprises.
Tax revenue declined by 17.8% in 2009, mainly on a reduction of the
average value-added tax (VAT) rate from 20% to 12%, and abolition of
some levies such as road and emergency taxes. Customs collection also
declined, by around 11%, refecting weaker trade.
Te government forecasts its budget defcit at 5.1% of GDP in 2010.
Te widening defcit is a result of the increased budgetary allocations for
the development budget (mainly infrastructure projects), monetization
of benefts, higher pensions, and increased compensation to vulnerable
groups (to ofset an increase in electricity and heating tarifs).
Te National Bank of the Kyrgyz Republic (NBKR) followed an
expansionary monetary policy. It reduced banks reserve requirement
from 10% at the start of the year to 9.5% from June; and lowered the
discount rate from 14.4% in January to a record low 0.9% at year-end.
Although the commercial banks lending rate remained almost
unchanged (at about 20%), credit to the private sector surged by 46.5%.
For the year, money supply rose by 20.4%, carried by increased net foreign
assets (refecting the budget assistance) and the expanded credit to the
private sector.
Te NBKR continued its managed foating exchange rate regime.
Following a sharp depreciation of the Russian ruble and Kazakh tenge
in early 2009, the NBKR opted for a smooth depreciation of the national
currency, the som. Given the large import content of consumption,
the NBKR had to sell foreign currency extensively to prevent rapid
depreciation of the som in the frst quarter. Over the year, the som
depreciated by around 15% against the United States dollar (Figure 3.5.4).
Te economic downturn in the countrys main partners cut their
demand for products from both the Kyrgyz Republic and the Peoples
Republic of China (PRC), the latter product reexported to neighboring
countries. Preliminary data indicate that exports fell by 11.3% in 2009,
mainly due to weaker demand for domestic textile exports and the PRCs
reexports.
At the same time, imports decreased by 24.3% owing to the slowdown
in the economy and the drop in imports for reexport. As a result, the trade
defcit decieased by about ,, to s:,:o, million and the cuiient account
defcit to an estimated 10% of GDP from around 12% (Figure 3.5.5). A
capital account surplus more than fully fnanced the defcit, and reserves
incieased by about s,o million to s:.o billion at end-:oo.
A new tax code, in efect from 1 January, cut the number of taxes (as
well as reducing the VAT rate). To ofset the revenue losses, the authorities
introduced new taxes on owners of automobiles and property. Overall,
many of these changes were welcomed by large businesses. Te authorities
also introduced a new tax contract scheme under which businesses pay
a fxed amount indicated in the contract and are not subject to further
tax inspections.
Among fnancial reforms, a deposit insurance scheme was launched
.. 8udget ba|ance
-6
-3
0
3
10 09 08 07 06 2005
% of GDP
Budget
Sources: lnternatlonal Vonetary lund. zoo8. Exogenous
Shocks Facility-Sta Report. 0ecember, zoo,. Article IV
Consultation. July. http://www.lmf.org, Vlnlstry of llnance.
.. Lxchange rate
46
42
38
34
Jan
10
Jul Jan
09
Jul Jan
08
Jul Jan
07
Jul Jan
06
Jul Jan
2005
Som/$
llnanclal Statlstlcs onllne database (accessed zz Varch
zoo).
.. Current account ba|ance
-12
-8
-4
0
4
09 08 07 06 2005
% of GDP
Source: Natlonal ank of the Kyrgyz Republlc. Balance of
Payments of the Kyrgyz Republic. varlous lssues. http://www.
nbkr.kg
Central Asia Kyrgyz Republic 123
in Apiil :oo, coveiing deposits up to Som:oo,ooo (s:,:o). All banks aie
required to participate. A new law under which agricultural land can be
used as collateral for loan receipts was adopted on 29 June 2009.
In the energy sector, the government believes that the new tarif will
bring the sector to cost-recovery levels and attract private investment. It
has no plans for any further tarif increases this year.
Te PRC made a pieliminaiy agieement to giant a s,: million loan
for a power transmission line, which would help the country ensure
energy security. Construction is expected to start in 2011 and fnish
2 years later.
In October 2009, the country embarked on a government sector
reform under which the number of ministries and agencies has been
reduced. Te reform also envisages cutting the number of government
employees by 30% and aims to streamline the work of government and
cut other costs.
Lconom|c prospects
GDP is projected to grow at 5.5% and 6.0% in 2010 and 2011, respectively.
Te expansion is mainly due to the expected recovery of Kazakhstan
and the Russian Federation, boosting demand for exports, foreign direct
investment infows, and migrants remittancesthe last of which will
directly bolster private consumption. Foreign-fnanced hydropower
projects should carry on underpinning strong construction growth, but
until all those projects are brought into commission (the frst is scheduled
for May), power shortfalls will continue to hamper manufacturing.
Te government will also provide impetus to growth as it is planning
to raise spending on wages and pensions and on infrastructure, the latter
with fnancing assistance from development partners.
Te expected increase in global food and oil prices will exert upward
pressure on prices, though the contracted import price for natural gas
will fall by about 10%, as will stronger workers remittances. Tese forces
will push up infation in 2010 and 2011, to 8.5% and 9.0%, respectively.
Given the large import share in the consumer basket, the NBKR will
use the exchange rate to mitigate infation. Credit growth will remain
subject to the bottlenecks that face Kazakh banks (which account for
half the banking sector) in supplying capital to their subsidiaries in this
country. However, increased foreign exchange infows may allow the
NBKR to adopt an accommodative credit policy.
Te expected regional economic revival is expected to increase
demand for Kyrgyz exports by about 10% in the forecast period, while
workers remittances will increase, though not dramatically. Te expected
recovery of the Kyrgyz economy and continued project implementation
will increase demand for imports by an estimated 15%. Te current
account defcit is projected at 12% in 2010 and 2011.
Te government recognizes that
in order to achieve a sustainable
growth path it has to push through
institutional reforms and changes
in key areas such as energy,
trade facilitation, and customs
administration. It has undertaken
major administrative and government
reforms to make public-sector decision
making more efcient. In addition, it
is revising its long-term development
strategy with a key focus on the
business investment environment.
Complementing these moves,
it has to design and implement
mechanisms to substantially raise the
level of private domestic saving and
investment. Success is essential both
to lay the foundation for sustainable,
inclusive, private sectordriven growth
and to strengthen the countrys ability
to resist external shocks.
2010 2011
C0P growth 5.5 6.0
lnatlon 8.5 9.0
(share of C0P)
-12.0 -12.0
1a[|k|stan
lalllng remlttance lnows, whlch hlt welfare ln rural areas, as well as weak external demand for export
commodltles slowed growth ln 2009 and took down forelgn exchange reserves. Alumlnum and cotton
productlon, ln partlcular, were pummeled. Jhe government launched an ambltlous reform program for
prlvate sector development. wlth lmprovement ln lts major trade partners, the outlook ls for hlgher, though
stlll moderate, growth. Successful lmplementatlon of an ongolng reform program ls crltlcal for developlng
the prlvate sector and broadenlng the productlon base, whlch ls needed to underpln long-term growth.
A sharp reduction in workers remittances (mainly due to economic
difculties in Kazakhstan and the Russian Federation) and weak demand
for Tajikistans main export commodities (aluminum and cotton) were
the main factors in slowing GDP growth by more than half in 2009 (to
3.4% versus 7.9%Figure 3.6.1). Some improvement in prices in the second
half of the year for these commodities, together with healthy yields of
the noncotton agriculture subsectors, helped buttress growth. Continued
work on externally fnanced large infrastructure projects (including the
Sangtuda-1 hydroelectricity plant, the SouthNorth transmission line, and
various roads and tunnels) also underpinned expansion.
Industrial production, making up about 30% of GDP, contracted by
6.3% during the year, largely due to lower aluminum production, though
it strengthened in the fourth quarter. Power shortages at the start of
the year also mauled the sector. Despite the 16% fall in cotton output,
agriculture grew by 10.5% in 2009, as noncotton agriculture recorded
substantially higher output. Tis performance refects more land allocated
from cotton to food crops and new land plot distributions, which became
part of the governments anticrisis employment program.
Remittance infows in :oo weie s:.8 billion (about ,, of GDP), a
nearly one-third drop from those in 2008 (Figure 3.6.2). Tis wracked
private consumption, import demand, and house construction, especially
in rural areas, where many households depend on remittances. Te
International Monetary Fund estimated that the poverty rate rose by
5 percentage points during the year.
Infation came down to average 6.5% from 20.4% in 2008, largely
on declines in energy (notably oil and natural gas) and food, of which
Tajikistan is a net importer. On a year-on-year basis, monthly infation
fell steadily afer mid-2008 to 4.9% (Figure 3.6.3) in December 2009.
Slowing infation provided the central bank, the National Bank
of Tajikistan, with space to ease monetary policy. However, the
underdeveloped nature of the fnancial market meant that its movesit
.. u0P growth
0
2
4
6
8
09 08 07 06 2005
%
Sources: State Statlstlcal Commlttee of the Republlc of
Jajlklstan, A0 estlmates.
Tashkent; and Kakhorjon Aminov of the Tajikistan Resident Mission, ADB, Dushanbe.
..z kem|ttance |nows
0
70
140
210
280
350
Jan
09
Jan
08
Jan
07
Jan
2006
$ million
Source: lnternatlonal Vonetary lund, Resldent
Representatlve 0ce ln Jajlklstan.
cut the refnancing rate four times during 2009 from 13.5% to 8.0% in an
attempt to stimulate domestic demand and alleviate the debt-servicing
obligations of state-owned enterpriseshad little impact on the economy.
It is more infuenced by remittance infows and commodity prices. (Broad
money growth in 2009 was 10.9%.)
Banks lack of access to capital infows is, in addition to slumping
remittances and commodity prices, another reason for the tight liquidity
since end-2008. Traditionally, most Tajik banks raised capital from
Kazakhstans banks, but this source largely dried up because of that
countrys own banking liquidity issues.
Te local currency, the somoni, depreciated sharply by about 22%
against the US dollar in the frst half of 2009 due to a large drop in
foreign exchange receipts from remittances and exports (Figure 3.6.4). In
the second half the exchange rate was broadly stable. Foreign reserves at
end-:oo weie low-only s::,., million, oi o.o months of impoits.
Due to the frst-half depreciation, the share of deposits held in foreign
currencies has accelerated (the majority of remittance receipts are in
Russian rubles and US dollars). However, most demand came from people
looking for local currency loans. Due to the perceived risks of further
somoni depreciation and the increased foreign exchangedenominated
deposit base, banks preferred to grant loans in foreign currencies. Hence,
with the currency mismatch, they only gave loans to a small portion of
clients, such as traders.
Te government launched an anti-global-crisis fscal plan in April
2009. Similar to those in other countries, it aimed to stabilize the
macroeconomy; bolster growth, jobs, and private sector development;
and sustain social programs. In support, in April 2009 the International
Monetaiy Fund appioved a s::o million loan to iun ovei :oo-:o::.
Subsequently, the 2009 budget prioritized social sector spending (over
capital expenditure), also to help protect the most vulnerable social
groups.
Even though budget revenue was 15% less than planned, the 2009
budget, excluding the largely foreign-fnanced public investment program,
recorded a defcit equivalent to only 0.5% of GDP (Figure 3.6.5). Including
the program, the defcit was 7.0% of GDP.
Due to the global recession, a signifcant price reduction for major
export items, particularly aluminum and cotton, as well as weaker
internal demand lowered trade turnover by 23% in 2009. Exports fell, and
impoits shiank by about :, to s:.: billion, slightly naiiowing the tiade
defcit to s:.8 billion (some ,, of GDP). Accounting foi seivice payments
and a lower level of remittances, the current account defcit increased to
9.7% of GDP (Figure 3.6.6).
Te government is pursuing a structural reform agenda aimed to lay
the foundations for sustained economic growth. Tajikistan ranked among
the top 10 reformers in the World Banks Doing Business 2010 report
which assessed the business environment in 181 countries.
Actions taken by the government include a 2-year inspections
moratorium for small and medium enterprises, which considerably
reduces the regulatory burden on business enterprises. In July, a program
was launched that aims to streamline administrative procedures and
make doing business less costly for entrepreneurs. It includes 24 reform
.. |nat|on
0
10
20
30
40
Food
Overall
Jan
10
Jan
09
Jan
08
Jan
07
Jan
2006
%
Source: State Statlstlcal Commlttee of the Republlc of
Jajlklstan. http://www.stat.tj (accessed z, lebruary zoo).
.. P|sca| ba|ance
-8
-4
0
4
Excluding PIP Including PIP
09 08 07 06 2005
% of GDP
PlP publlc lnvestment program.
Sources: lnternatlonal Vonetary lund. zoo8. Financial
System Stability Assessment. 0ecember, zoo,. Article IV
Consultation. June. http://www.lmf.org
.. Nom|na| exchange rate
4.5
4.0
3.5
3.0
Jan
10
Jan
09
Jan
08
Jan
07
Jan
06
Jan
2005
TJS/$
llnanclal Statlstlcs onllne database, Natlonal ank of
Jajlklstan. http://www.nbt.tj (both accessed z Varch zoo).
Central Asia Tajikistan 126
items covering areas such as implementing one-stop-shop business
registration, licensing and permit reform, improving the tax regime,
protecting minority shareholders, and simplifying foreign trade
operations.
Lconom|c prospects
Te major determinants of economic growth include the economic
trajectories of Kazakhstan and the Russian Federation, and export prices
for aluminum and cotton. Fortunately, both countries are expected to
come back frmly from the recession, posting moderate growth in the
next 2 years, while cotton and aluminum prices are also likely to continue
frming up. It is also expected that noncotton agriculture will experience
healthy growth. In view of these projections, economic growth is put at
4.0% in 2010 and 5.0% in 2011.
In the short run, fscal policy will need to maintain the social outlays
in order to arrest further deterioration in the welfare conditions of lower-
income households. Also, additional external support on concessional
terms will be necessary to develop infrastructure, particularly in the
energy sector, which is needed to underpin sustainable GDP growth.
Increased import prices for food and energy as well as a revival of
domestic demand due to rising remittances are the main factors behind
growing infation pressures, which are likely to take the rate to 10.8% and
9.5% in the next 2 years.
Recovering remittances over the next 2 years will also boost domestic
demand for imports, which will grow faster than exports. In turn, exports
are expected to rise on the back of the global recovery and stronger
commodity prices, widening the trade defcit. With larger remittances the
current account defcit is forecast to trim to 8.3% of GDP in 2010 and 7.1%
in 2011.
Te trajectory of the economy essentially turns on remittance infows,
exports of a few commodities, and public expenditure on large investment
projects, since the production and resource base is narrow. However, the
country possesses huge hydropower potential, though this may not be
fully realized in the foreseeable future for several reasons.
Weak capacity of public institutions, governance, and accountability
in policy reforms is the frst item on the development agenda, followed
immediately by successful implementation of the current reform
initiatives. Although the government has started to improve the business
and investment environment, infrastructure bottlenecks, including
chronic wintertime electricity shortages, remain a major challenge.
Te government is therefore seeking funding to complete the Roghun
hydroelectric power station, a project essential to tackling economic
problems resulting from power outages. But it has to take into account
the economic, welfare, and environmental implications of the project and
work in cooperation with all interested parties, both at home and abroad.
2010 2011
C0P growth 4.0 5.0
lnatlon 10.8 9.5
(share of C0P)
-8.3 -7.1
-3.0
-1.5
0.0
1.5
3.0
2005 06 07 08 09
$ billion
Goods
Services
Income Transfers
Sources: lnternatlonal Vonetary lund. zoo8. Financial
System Stability Assessment. 0ecember, zoo,. Article IV
Consultation. June. http://www.lmf.org, A0 estlmates.
1urkmen|stan
Relylng heavlly on gas, the economy slowed ln 2009 because lts major gas export plpellne was shut for
most of the year, though lncreases ln publlc and forelgn dlrect lnvestment helped underpln a moderate
C0P expanslon. lnatlon sharply decelerated on lower lmport prlces and tlght monetary pollcy. wlth
new gas plpellnes now operatlng, the outlook ls for a return to hlgh C0P growth. A challenge for the
government ls to dlverslfy lts productlon base.
Te impact of the global recession was limited because the economy
is at the very early stages of integrating itself into world markets. In
April 2009, however, a technical accident in the main gas pipeline to
the Russian Federation, as well as lower energy demand, suppressed
gas exports. Even though the gas pipeline was reportedly restored by
September, shipments of gas to the Russian Federationa mainstay
of production and exportsdid not resume until January 2010.
Reportedly, total forgone gas export revenue amounted to about
s, billion-s:o billion.
Still, GDP growth in 2009 came in at 6.1%, on robust growth in
construction, services, and agriculture (Figure 3.7.1). Te main driver
of growth was public investment, which amounted to 25 billion
Tuikmen manat (TMM) (oi s8.8 billion), oi :.o times the :oo8 level.
A general increase in investment was supported by a state program to
support small and medium-sized enterprises. In addition, there was a
surge of externally fnanced infrastructure projects.
Ofcial statistics indicate that consumer price infation sharply
decelerated in 2009 to an average of 0.1%, down from 14.5% in 2008.
High infation in 2008 refected both the unifcation of the informal
and the (substantially appreciated) formal exchange rates in May, and
commodity price pressures, while the drop in 2009 was mainly due to the
sharp fall in global non-oil commodity prices (the country imports much
machinery and food) (Figure 3.7.2).
Te Turkmen manat was redenominated on 1 January 2009 with
5,000 of the old denomination made equivalent to one of the new. Te
exchange iate, set at TMM:.8,/s:, was stable thioughout :oo. Accoiding
to the International Monetary Fund, broad money is estimated to
have contracted by 4.4% in 2009, refecting a tight monetary policy. To
maintain low infation as well as to stabilize the nominal exchange rate,
cash circulation was tightly controlled.
Te government ran an accommodative fscal policy in 2009, with
the budget surplus estimated to have fallen to 3.0% of GDP in 2009,
down from 11.3% in 2008 (Figure 3.7.3). Rapid expenditure growth was
./. u0P growth
0
4
8
12
16
09 08 07 06 2005
%
Sources: lnternatlonal Vonetary lund. zoo,. Regional
Economic Outlook, Middle East and Central Asia. 0ctober.
http://www.lmf.org, A0 estlmates.
Tashkent; and Nariman Mannapbekov of the Central and West Asia Department, ADB,
Manila.
./.z |nat|on
0
5
10
15
09 08 07 06 2005
%
2010 2011
C0P growth 6.5 11.0
lnatlon 3.5 5.0
(share of C0P)
30.0 30.0
maintained while the nonhydrocarbon tax base was broadened, mainly
due to high growth of construction activity. Te fall in the surplus was
largely a refection of less buoyant receipts from the oil and gas sector,
the source of about 75% of fscal revenue. State budget surpluses are
accumulated in the Stabilization Fund of Turkmenistan, which was
created in October 2008.
In December 2009, the government announced a 10% across-the-
board increase in salaries for public sector employees. Pensions and other
social benefts were also raised. As a result, the average salary for these
employees incieased to TMM,8 (s::o) pei month.
Despite the gas pipeline shutdown for most of the year, hydrocarbon
sector exports, which accounted for more than 80% of total exports,
continued to underpin the 2009 outturn. Export revenue managed to
increase by 8.0% (in US dollars) in 2009 though performance was well
less than the 27% gain a year earlier. At the same time, due to substantial
increases in major capital investment projects and construction, imports
increased by 19.2%. As a result, trade surplus shrank to 21.0% of GDP in
2009 from 23.4% in 2008 and the current account surplus decreased to
17.8% of GDP, down from 18.7% in 2008 (Figure 3.7.4).
December 2009 saw the opening of a natural gas pipeline connecting
the Peoples Republic of China and Turkmenistan via Uzbekistan and
Kazakhstan, thereby helping loosen the stranglehold that the Russian
Federation had on Turkmenistans natural gas exports. Te pipeline is
capable of delivering 40 billion cubic meters a year of gas at full capacity
in 2012. A second pipeline to Iran came into operation in January 2010
with capacity of 12.5 billion cubic meters a year.
Lconom|c prospects
Growth of the economy will continue to be robust, supported by buoyant
hydrocarbon and investment activity. GDP is projected to grow in 2010
and 2011 by 6.5% and 11.0%, respectively. By 2011, hydrocarbon exports
will be back to the level of the pre-accident period as the phase-in of
newly constructed pipelines will be able to handle gas at about full
production capacity.
Te government is likely to stick to its accommodative fscal policy.
Due to the expected strengthening of nonhydrocarbon commodity
prices, infation is projected to accelerate to 3.5% in 2010 and to 5.0%
in 2011. Since large current-account and overall balance-of-payments
surpluses are expected these years, the central bank will need to carry
out sizable sterilization operations to keep the large foreign exchange
infows from boosting the money supply and creating sharply higher
price pressures.
Despite the expected increases in imports owing to a step-up in
investment and increased commodity prices, it is likely that the current
account surplus will grow substantially in 20102011, mainly due to a surge
in gas exports (refecting the completion of gas pipeline construction). Te
current account surplus is forecast to reach 30% of GDP.
./. uenera| government sca| ba|ance
0
4
8
12
09 08 07 06 2005
% of GDP
Economic Outlook, Middle East and Central Asia. 0ctober,
Vlnlstry of llnance, A0 estlmates.
./. Current account ba|ance
0
5
10
15
20
09 08 07 06 2005
% of GDP
Uzbek|stan
Jhe government responded to the recent global nanclal and economlc crlsls wlth a well structured and
tlmed antlcrlsls program. Jhe program substantlally lncreased domestlc lnvestment to create employment
opportunltles that oset the lmpact of the crlsls on exports. Jhe government has strengthened lts eorts
to dlverslfy the economy through the prlvate sector. lurther acceleratlon of sector modernlzatlon wlll help
greater prlvate sector moblllzatlon. Jhe recovery of the global economy wlll lmprove external demand,
provldlng an opportunlty to accelerate reforms.
Despite the global recession and economic contraction among its
major trading partners, Uzbekistan continued its strong economic
performance in 2009 with GDP growth of 8.1% (Figure 3.8.1). Te
economy was afected by the recession through weaker external demand
and lower remittance infows.
Te government responded to the recession early with a large-scale
anticrisis program for 20092012, which was adopted at end-2008.
Measures included substantial public infrastructure investment, tax
preferences to exporting industries and small and medium-sized
enterprises, increases in public sector wages, and recapitalization
of commercial banks. Te program was fnanced through the
government budget, state-owned enterprises (SOEs), and the Fund
for Reconstruction and Development (FRD), a sovereign wealth
management fund established in 2006. Healthy budget revenues and good
export performance of gold and natural gas supported the programs
implementation. As a result, GDP growth was sustained by output gains
in industry, including construction (11.2%) and services (14.0%).
Nonconstruction industrial growth is attributable to increased
production of hydrocarbons, machinery, and chemicals, which together
accounted for 42% of total industrial production. Tese three subsectors
combined posted growth of 13.1%. Te performance of other industrial
subsectors was more modest, with the output of nonferrous metallurgy
(mainly gold, silver, and copper) growing by 2.6%.
Within industry, construction shot up by 33.1%. Tis gain was
driven primarily by an increase in fxed capital investment. According
to ofcial data, such investment rose by 24.8% in 2009. Construction
output was lifed by public infrastructure development projects in rural
areas. Notable sources of construction demand were large SOEs under
government-led sector modernization and renovation programs (primarily
manufacturing and mining). Te share of fxed capital investment in GDP
increased from 23.0% in 2008 to an estimated 26.1% in 2009.
.8. u0P growth by sector
0
5
10
15
20
Services Industry
Agriculture GDP
09 08 07 06 2005
%
7.0
8.1
9.0
9.5
7.2
Sources: lnternatlonal Vonetary lund. zoo8. Article IV
Consultation. July. http://www.lmf.org, State Statlstlcs
Commlttee of uzbeklstan, A0 estlmates.
This chapter was written by Iskandar Gulamov and Kiyoshi Taniguchi of the Uzbekistan
Resident Mission, ADB, Tashkent.
Rapidly growing telecommunications and fnancial markets were
one of the major contributors to growth in services: mobile subscriber
numbers have increased 10-fold in less than 4 years. Te fnancial
services market is growing fast in areas of microfnancing and bank
debit card processing. In response to rising demand for credit from
microenterprises, especially in rural areas, the volume of microfnance
lending ieached s:oo million in :oo.
Agriculture posted growth of 5.7%. Although difcult climatic
conditions impacted the cotton harvests, increased production of cereal
crops and vegetables supported sector growth.
Te government reported that foreign direct investment in 2009
increased by 80% from 2008. Te bulk of the increase came from
expansion of activities in the hydrocarbons and communications sectors.
In December 2008, the government established the frst free industrial-
economic zone in the Navoi region (FIEZ Navoi), which provides tax
and customs preferential facilities for foreign investors. By end-2009, the
government had signed 37 investment agreements with various foreign
investois foi FIEZ Navoi amounting to moie than s,oo million. Te fist
investment outlays are expected this year.
Infation has been falling since 2008 despite infation pressures
stemming from a nominal depreciation of the exchange rate against the
US dollar (of around 10% in 2009) and public sector wage increases. Such
pressures were balanced by lower global commodity prices, coupled with
administrative price caps on energy and utilities. Te government reported
end-period consumer price infation of 7.4% for 2009. Te latest estimate of
the year-average consumer price index by the International Monetary Fund
is 12.5%. Broad money growth is estimated at 34.0% in 2009 (Figure 3.8.2).
Te depreciation of the local currency supported exports. Sharp falls
in the Kazakhstan tenge and Russian ruble against their respective major
trade partners added downward pressure on the nominal exchange rate.
Te main elements of the anticrisis program implemented through
fscal policy were recapitalization of commercial banks to support lending;
increased public infrastructure development to support job creation; and
tax exemptions to support exporting industries and small and medium-
sized enterprises. Te government also increased public sector wages by
40% on average in 2009. Tese expenditures were ofset by strong revenue
receipts stemming from high export prices (especially for gold and gas) and
tax reforms. Te general government budget is estimated to have posted
a surplus of 0.2% of GDP in 2009 (Figure 3.8.3). Including the FRD, the
consolidated budget surplus is estimated at 4.4% of GDP.
Te crisis had impacts on exports and remittances. Exports to
Uzbekistans main markets, namely Kazakhstan, the Russian Federation,
and Ukraine, and remittances from Kazakhstan and the Russian
Federation, were heavily afected. Nonhydrocarbon exports contracted by
:: in :oo. Machineiy (with a o: deciease to s,: million) and cotton
(a o diop to s:.o billion) weie among the woist hit, but theii lowei
export revenues were ofset by strong global demand for gold and income
from natural gas sales to the Russian Federation (the largest customer).
Hydiocaibon expoits incieased by : to s.o billion. With the gold and
gas prices hitting records, export revenue increased by about 2.0% relative
to 2008.
.8. P|sca| pos|t|on
0
9
18
27
36
45
0
3
6
9
12
15
Fiscal balance Expenditures
Revenues
09 08 07 06 2005
% of GDP % of GDP
.8.z |nat|on and money
0
20
40
60
Broad money growth Infation
09 08 07 06 2005
%
Central Asia Uzbekistan 131
Te growth of imports is estimated at 25.8% in 2009. As in past
years, machinery and equipment were the largest import items, refecting
infrastructure development. Te sharp fall in export growth, increased
imports, and lower remittances cut the current account surplus to
an estimated 12.0% of GDP at end-2009, down from 16.7% in 2008
(Figure 3.8.4).
In the framework of its anticrisis program for 20092012, the
government will continue its infrastructure development initiatives
as well as sector modernization programs. Tis implies signifcant
investment commitments, most of which will be fnanced by domestic
banks, the FRD, and SOEs. Domestic investments by SOEs will be geared
toward the hydrocarbon, energy, chemical, and transport sectors. Foreign
direct investment will also provide important fnancing for investment.
Te goveinment's investment piogiam envisages a s:. billion infow
of foieign diiect investment in :o:o, out of which s:.o billion will
be directed to hydrocarbons. In April 2009, the national oil and gas
company, Uzbeknefegaz, established a s:., billion inteinational joint
venture to produce gas-to-liquid synthetic fuel.
Due to the active industrial policy, foreign investments are expected
to increase steadily in the near future. At FIEZ Navoi, 16 investment
piojects foi a total amount of s:oo million aie foiecast to stait in :o:o.
A major part of the foreign investment is expected to be from Asia and
the Middle East. Te goveinment plans to attiact about s:.o billion of
investment into FIEZ Navoi in the medium term. It has supported the
private sector through reductions in rates of unifed and fxed taxes, as
well as value-added tax refunds and sof loans through commercial banks
for exporters.
Lconom|c prospects
Due to the economic recovery of the major trading partners as well as
the governments active industrial policies, improved export performance
and higher investment infows are expected to be major drivers of
growth in the forecast period (at 8.5% and 9.0%). International prices for
Uzbekistans major export commodities look favorable in 2010 and 2011
(Figure 3.8.5).
Te downside risks to these forecasts lie in external factors related
to the situations in the main trading partners, as well as persistent
fundamental imbalances in industrial countries. On the domestic
side, timely implementation of the investment program and continued
eforts on sector modernization would ensure intended outcomes of
the governments anticrisis program. Well-designed public and private
investment, including commercial bank lending, will beneft a broader
population through improved access to credit and increased employment
opportunities.
Te government will continue increasing its social and infrastructure
expenditures while broadening the tax base and reducing tax rates. Te
2010 budget, approved by Parliament at end-December 2009, envisages
increasing these expenditures to 13.5% of GDP in 2010, up from an
estimated 11.5% in 2009. Te rates of both corporate and personal
income taxes will be decreased to stimulate business investment and
2010 2011
C0P growth 8.5 9.0
lnatlon 9.3 9.0
(share of C0P)
13.0 14.0
.8. Lxterna| sector
0
3
6
9
12
15
0
5
10
15
20
25
Current account balance Merchandise imports
Merchandise exports
09 08 07 06 2005
$ billion
% of GDP
Sources: lnternatlonal Vonetary lund. zoo8. Article IV
Consultation. July. http://www.lmf.org, A0 estlmates.
.8. |nternat|ona| commod|ty pr|ces
50
75
100
125
150
2008 09 10 11
2008 = 100
Copper Cotton Oil Gold
Forecast
Note: Prlces of commodltles are based on uSs prlces.
Sources: world ank. zoo. Global Commodity Markets.
www.worldbank.org/globaloutlook, loomberg (accessed
8 Varch zoo), lconomlc lntelllgence unlt. zoo. Global
Outlook. Varch, A0 estlmates.
private consumption. Te corporate and personal income tax rates fall
by 1 percentage point to bring rates to 9% for corporations, 8% for small
businesses, and 11% for individuals. Te revenue will be sustained by
the recovery in international commodity prices for certain exports that
weakened in 2009, counterbalancing the increasing expenditures. Te
consolidated budget, including the FRD, is seen posting a surplus of 5.5%
of GDP in 2010 and 6.5% of GDP in 2011.
Investment will also be boosted by increased bank lending and FRD
resources. Te banking sector increased its lending to small businesses by
50% in 2009, and this trend is expected to continue in 2010 and 2011 in
light of signifcant demand for small and micro-lending. A new direction
in the investment activities will be residential construction. Te rural
residential housing construction program for 2010 plans to allocate up
to SUM,88., billion (s,o million) foi this puipose. A laige poition of
funding will come from the new Rural Construction Bank, established in
2009, in which the government is the majority shareholder.
Strong external demand and rising exports will stimulate growth
in net foreign assets and the money supply, creating infation pressures
that will be boosted by the large increases in public sector wages. It is
expected that nominal depreciation of the sum will be gradual. Tus,
fully sterilizing the excess liquidity from the large foreign exchange
infows may be a challenge. As a result of these factors, the government
forecasts infation in the range of 9% in 20102011.
Te gradual recovery of the global economy and expected growth of
world trade will underpin the current account surplus. Te country will
beneft from the international prices of its main export commodities,
which will stay high on rebound.
Export gains will be partly ofset by rising imports. Import growth
will be determined mainly by demand for inputs into modernization of
manufacturing and public infrastructure development, and by higher
global commodity prices. Te current account surplus is forecast at 13.0%
in 2010 and 14.0% in 2011.
Te immediate challenge is to mitigate emerging infation pressures
from rising exports and continued fscal expansion. A close
coordination of monetary, fscal, and industrial policies will be useful in
ensuring price relative stability and continued economic development.
For the longer term, the major challenge is to diversify the economy.
Currently, it is resource-based, making it susceptible to the fuctuations
of the global commodity prices. Te sources of export income need to
be more widely spread.
In order to achieve broad-based inclusive growth, private sector
development, industrial diversifcation and trade liberalization are
essential. Accelerating ongoing reforms in these areas, along with
the continued eforts to streamline public administration, would
help sustain economic growth and broaden improvements in living
standards. Te recent economic achievements of the country provide a
sound opportunity for speeding up the transition to a sustainable and
competitive economy.
East Asia
Peoples Republic of China
Hong Kong, China
Republic of Korea
Mongolia
Taipei,China
Peop|es kepub||c of Ch|na
A v-shaped economlc recovery ln 2009 was underplnned by very expanslonary scal and monetary
pollcles. Strong lnvestment and, to a lesser extent, growth ln consumptlon largely oset the lmpact of
shrlnklng external demand. Allowlng for some adjustments, expanslonary pollcles wlll contlnue thls year.
Coupled wlth a stronger global economy, C0P growth ls forecast to accelerate. lnatlon wlll rlse from low
rates. A new ve-year plan provldes an opportunlty to revamp the structure of growth, ln partlcular to
encourage lncreases ln prlvate consumptlon.
Aggressive fscal and monetary stimulus in the Peoples Republic of China
(PRC) in 2009 ofset much of the impact of the global recession. Afer a
weak frst quarter, the economy picked up pace over the rest of the year
(Figure 3.9.1), spurred by the stimulus measures and a recovery in exports,
to record growth of 8.7%. Tat outturn compares with double-digit
expansion in the 20032007 period and with 9.6% in 2008.
A slowdown in industry, which produces nearly three-ffhs of GDP,
was the main cause of last years slower GDP growth on the output
side. Growth in industry decelerated to 9.5% in 2009, although it still
contributed most to the total expansion of GDP (5.5 percentage points
Figure 3.9.2). Industry picked up as the year progressed (Figure 3.9.3) as
a result of a stimulus-led investment boom and some improvement in
exports. Growth eased in services to a still robust 8.9%, and in agriculture
to 4.2%, owing to a drought in the south.
Te V-shaped recovery was driven mainly by domestic demand,
especially public investment that benefted from the stimulus policies.
Total investment contributed 8 percentage points, or a record 92%, of
total GDP growth on the demand side. Te investment-to-GDP ratio rose
to nearly 46% (Figure 3.9.4), the highest level in at least three decades.
Consumption contributed 4.6 percentage points of total growth. In
contrast, a fall in net exports subtracted 3.9 percentage points from GDP
growth.
Fixed asset investment accelerated by just over 30% in nominal terms
in 2009, from 26% in 2008. Refecting the priorities of the governments
stimulus plan, investment in agriculture soared by nearly half and
investment in services (mainly transport such as railways and urban
public systems) jumped by 33.0%. Investment in industry also surged (by
about 27%), while a 17.2% rise in property investment was a little slower
than in 2008.
Consumption, both private and government, played a role in 2009s
recovery, although not the leading role taken by investment. Te volume
.p. uarter|y u0P growth
3
6
9
12
Q4 Q3 Q2 Q1
09
Q4 Q3 Q2 Q1
2008
%
Source: CllC 0ata Company (accessed , Varch zoo).
This chapter was written by Jian Zhuang, and its box by Yolanda Fernandez-Lommen,
both of the Peoples Republic of China Resident Mission, ADB, Beijing.
.p.z Contr|but|ons to growth (supp|y)
0
3
6
9
12
15
Agriculture Industry Services GDP
09 08 07 06 2005
Percentage points
10.4
8.7
9.6
13.0
11.6
Sources: Natlonal ureau of Statlstlcs of Chlna. http://www.
stats.gov.cn (accessed , Varch zoo), A0 estlmates.
of retail sales, a proxy for consumption, took a hit early in the year amid
widespread layofs of migrant workers and a fall in consumer confdence,
but it then strengthened (Figure 3.9.5) to be up by 16.2% in real terms for
the year. Government incentives to buy cars propelled automobile sales
to 13.6 million (when the PRC became the worlds biggest car producer).
Consumption was also supported by rising real incomesby 9.8% in
urban areas and by 8.5% in rural areas.
Te slump in exports caused by the global recession bottomed during
the frst half of 2009 (Figure 3.9.6), and export growth was back in
positive territory by December. For the year though, merchandise exports
in US dollar terms fell by 16.1%. Merchandise imports, too, shot up late
in 2009, refecting robust domestic demand and recovering exportsbut
again, for the year they fell by 11.2%. As this was a smaller contraction
than expoits', the tiade suiplus naiiowed by s::: billion. With a widening
defcit in services trade, the current account surplus was trimmed by
about ,,, to s:8.: billion (,.8 of GDP).
Refecting the global fnancial crisis, foreign direct investment (FDI)
fell for the frst 7 months of 2009, then started to rebound. FDI for the
yeai was down by about :,, at a still substantial so billion.
Te trade surplus, FDI, and other capital infows boosted foreign
exchange ieseives to s:. tiillion. Howevei, the stepup in capital infows
also raised some concerns about speculation in booming property and
stock markets.
A key element of the stimulus program was to food the economy with
credit from state-owned banks, mainly for fxed asset investment. Bank
lending surged by CNY9.6 trillion, more than double the amount in 2008
and equivalent to about 29% of GDP. About a quarter of the credit went on
infrastructure, such as airports, railways, and city transportation networks,
and 15% on housing. State-owned enterprises received the majority.
Afer the frst half s huge surge in credit, the authorities started to
check it in the second (Figure 3.9.7), concerned that it could fuel asset
bubbles and infation, and erode the quality of bank loan portfolios.
Broad money supply (M2) climbed by 27.7% over the year, exceeding the
target of 17%.
Te yuan was kept steady against the US dollar in 2009, part of the
stimulus program to support exports. Against a basket of currencies,
though, it depreciated by 5.0% in real efective terms, according to the
Bank for International Settlements.
Infation dissipated in 2009, owing to lower global oil prices, another
bumper harvest at home, and overcapacity in several manufacturing
subsectors. Te consumer price index fell for most of the year, recording
year-on-year increases only in November and December (Figure 3.9.8),
when food and housing costs rose. Te food of bank lending fed into
rising asset pricesthe Shanghai A-share stock market index gained
80% last year and property prices rose afer midyear (Figure 3.9.9) to be
up nearly 6% year on year in the fourth quarter. Local governments rely
on land sales for much of their revenue, so have an incentive to promote
real estate development. Teir income from land sales, according to the
cential goveinment, climbed by oo to s:,, billion in :oo.
Fiscal stimulus measures designed to counteract the impact of the
global recession focused on infrastructure and, to a smaller extent,
.p. urowth |n |ndustr|a| va|ue added
0
5
10
15
20
25
Heavy industry Light industry Total
Jan
10
Oct Jul Apr Jan
09
Oct Jul Apr Jan
2008
%
.p. 1ota| |nvestment
10
20
30
40
50
0
25
50
75
100
Contributions to growth Share in GDP
09 08 07 06 05 04 03 02 01 2000
% %
Sources: Natlonal ureau of Statlstlcs of Chlna. http://www.
stats.gov.cn (accessed , Varch zoo), A0 estlmates.
.p. keta|| sa|es growth
8
12
16
20
24
Jan
10
Oct Jul Apr Jan
09
Oct Jul Apr Jan
2008
%
Real
Nominal
.p. 1rade |nd|cators
-60
-30
0
30
60
90
-30
-15
0
15
30
45
Trade balance Import growth
Export growth
Jan
10
Oct Jul Apr Jan
09
Oct Jul Apr Jan
2008
% $ billion
East Asia Peoples Republic of China 137
afordable housing, rural development, and social spending. Te fscal
package involves expenditure of CNY4 trillion over 2 years from
November 2008 (equivalent to 12.7% of 2008 GDP). Te allocation for
infrastructure was reduced in March 2009 from 45% to 38% of the total,
and funds for social projects (such as health care and education) were
raised from 1% to about 4%.
Given relatively low levels of central government debt (about 30%
of GDP including domestic and foreign debt) and small budget defcits,
the debt-funded package is manageable. Te government will issue
bonds to cover 25% of the fscal stimulus, with the rest provided by local
governments and low-interest loans from state banks. About half the
fscal stimulus was disbursed in late 2008 and during 2009, leaving the
rest for this year.
Total fscal expenditure, including that for the fscal stimulus, rose by
just over 21% in 2009. Revenue increased by nearly 12%. Te fscal defcit
came in at just 2.8% of GDP (Figure 3.9.10).
An estimated 20 million migrant workers had lost their jobs by early
2009 as demand for manufactured exports dived. Te labor market
started to improve in the second quarter, on the back of improving
industrial production and construction. By year-end, some employers
in eastern provinces reported labor shortages, a result of strengthening
export orders and moves by unemployed migrant workers to other
regions that were benefting from stimulus-funded infrastructure projects.
Te government said that 11 million new jobs were generated last year,
above its target, but fewer than the average 24 million new job seekers
who enter the labor market every year.
Lconom|c prospects
Fiscal policy is expected to remain expansionary in 2010. Tere will
likely be adjustments as the government acts to avoid potential problems
caused by the food of investment. For example, the authorities have
indicated that they will make eforts to contain investment that results
in excess industrial capacity, and will curb rising indebtedness of local
governments brought about by their extensive investment projects. Te
fscal defcit is projected to remain around 2.8% of GDP in 2010 but
slightly fall to 2.6% of GDP in 2011.
Some moderation is expected in the highly stimulatory monetary
policy, in light of the strengthening of economic activity and rising
infation and asset prices. Policy fne tuning was seen from July last year. A
more potent adjustment was made in January and February 2010 when the
Peoples Bank of China (the central bank) raised the reserve-requirement
ratio for banks twice, to 16.5%. Tis ratio may well be raised further this
year, and banks may be required to put aside larger provisions for bad
debts. Interest rates will probably be raised as the year progresses.
Te governments target for M2 money supply growth in 2010 is 17%
(as in 2009). Te exceptional rate of increase in new bank lending seen
in 2009 is to be pared back, but the 2010 target of CNY7.5 trillion is
still more than 70% higher than the 20072008 average. Te monetary
authorities will probably shif from a relatively easy monetary policy in
2010 to a tighter stance in 2011.
.p./ 8ank |end|ng
0
400
800
1,200
1,600
2,000
0
10
20
30
40
50
Growth in total lending New bank lending
Jan
10
Oct Jul Apr Jan
09
Oct Jul Apr Jan
2008
CNY billion %
Sources: CllC 0ata Company (accessed , Varch zoo), A0
estlmates.
.p.8 |nat|on
-10
-5
0
5
10
15
Producer
Consumer
Jan
10
Jul Jan
09
Jul Jan
08
Jul Jan
2007
%
.p.p Property pr|ces
-5
0
5
10
15
Jan
10
Oct Jul Apr Jan
09
Oct Jul Apr Jan
2008
% change
Note: 0ata cover both resldentlal and nonresldentlal
bulldlngs.
.p.o P|sca| |nd|cators
-40
-20
0
20
40
-3.0
-1.5
0.0
1.5
3.0
Fiscal defcit Expenditure
Revenue
09 08 07 06 2005
Growth, % % of GDP
Forecasts assume the authorities may well tolerate some slight
appreciation of the yuan this year, and more in 2011, in the context of
sustained economic growth, a revival of infation, and a rising current
account surplus. Tey also assume there will be no signifcant natural
disasters or serious epidemic diseases in the forecast period.
Investment in fxed assets is projected to grow by 25% in nominal
terms, underpinned by the huge stimulus funding yet to be disbursed and
by an expected increase in private investment now that global fnancial
fows are accelerating. Still, investment will slow from 2009s hectic pace
because of the frmer stance on bank lending. As the fscal stimulus
phases out, growth in fxed asset investment in 2011 is projected to
moderate to 18%.
Private consumption growth in nominal terms is forecast to speed
up to 12% in 2010, from 9.0% in 2009, responding to rising incomes and
improving consumer confdence (Figure 3.9.11). Planned increases in
government spending on health care, education, and pensions will support
consumption. Furthermore, the government is considering changes to the
hukou (household registration) system, which divides the population into
rural and urban residents and limits migrant workers access to subsidized
education, health care, housing, and pensions when they move to work
in cities. Te system hampers the mobility of labor, reduces disposable
incomes of migrant workers, and widens the income gap between rural
and urban areas. Te authorities late last year marginally eased the hukou
system but only for some small and medium-sized cities.
Te modest recovery in world trade envisaged in ADO 2010 will
prompt a rebound in PRC merchandise exports in 2010, forecast at
nearly 13.0% in 2010 and 13.5% in 2011. A free-trade agreement between
the PRC and members of the Association of Southeast Asian Nations,
efective 1 January this year, will contribute to growth in trade. Imports
are forecast to increase by 13.5% in 2010 and 15.0% in 2011, owing to robust
domestic demand and higher global prices for oil and other commodities.
Te increase in the trade surplus and the income account will be more
moderate than in domestic demand, and the current account surplus is
forecast to narrow a little as a share of GDP.
In contrast to 2009, net exports in real terms will probably rise this
year and contribute slightly to GDP growth. Net exports will rise further
next year, but not to levels seen prior to the global recession, given the
modest recovery expected for industrial countries.
Based on the above considerations, GDP is forecast to grow by 9.6%
in 2010 (Figure 3.9.12). Growth will be stronger in the frst half of 2010
owing to the relatively lower base in the prior-year period than the second
half. Taking into account the phasing out of the stimulus policies, growth
is forecast at 9.1% in 2011. Te declining contribution to GDP growth
from investment will be partly ofset by a larger contribution from
consumption and net exports.
Growth data for the frst 2 months showed a solid start to 2010,
although some of this was a low-base efectthe prior-year period was
the weakest part of 2009. In year-on-year nominal terms, fxed asset
investment climbed by nearly 27%, retail sales by about 18%, and exports
by 31% in JanuaryFebruary 2010 from a year earlier. Industrial value
added grew by about 21% in real terms. M2 money supply growth of
.p. Consumer condence
98
102
106
110
114
Jan
10
Oct Jul Apr Jan
09
Oct Jul Apr Jan
2008
%
.p.z u0P growth
6
8
10
12
14
11 10 09 08 07 06 2005
%
Forecast
Sources: Natlonal ureau of Statlstlcs. http://www.stats.gov.
cn (accessed , Varch zoo), A0 estlmates.
2010 2011
C0P growth 9.6 9.1
lnatlon 3.6 3.2
(share of C0P)
5.7 5.3
25.5% in February was well above the 2010 target, and new bank lending
in the frst 2 months totaled CNY2.1 trillion, or already 28% of the
full-year target.
Higher prices for oil and commodities, coupled with a narrowing of
the economys output gap, will put upward pressure on prices, ofset to
some extent by the expected frmer stance in monetary policy. Consumer
price infation is forecast at 3.6% in 2010 and 3.2% in 2011 (Figure 3.9.13),
still below the 20072008 levels of about 5%6%. For the frst 2 months of
2010, it averaged 2.1%. Residential property prices jumped by 13.0% year
on year in February, even though the growth rate of housing sales eased.
Downside risks to the growth forecasts are a weaker than expected
global recovery and an intensifcation of trade-related disputes. On the
upside, a continuation of highly stimulatory monetary policy (without the
expected adjustments) would likely produce higher rates of GDP growth,
but could overheat the economy so that a spike in infation and increased
speculation in stocks and property trigger a more severe monetary
tightening later. Rapid rates of lending, if maintained for too long, also
raise the risk that local governments, in particular, pursue imprudent
investment projects that erode bank asset quality, leading to higher levels
of nonperforming loans that weaken the banking system.
Te global recession and expected modest recovery in industrial countries
have reduced the potential for exports to be a major driver of growth.
While massive fscal and monetary stimulus has acted as a substitute
in the short term, there is a limit to public investment and monetary
expansion. Sustaining economic growth in the medium and long term is
likely to require a revamp of the structure of growth.
From the supply side, services have great potential to generate growth
and employment. Tey accounted only for about 42% of GDP and 35%
of employment in 2008, much less than in other countries with similar
per capita incomes (Figure 3.9.14). However, unlocking the potential of
services requires comprehensive reforms (Box 3.9.1).
On the demand side, a greater emphasis on private consumption
would promote economic growth and raise living standards. Under the
current investment-driven economic growth model, the share of private
consumption in expenditure-based GDP has fallen by 15.8 percentage
points in the past 20 years (Figure 3.9.15).
Te stress on investment has also led to overcapacity in some industries
and unsustainable use of natural resources. Expanding investment is
relatively easy in a system where state-owned enterprises are fed with
substantial amounts of public investment that they promptly channel into
expansion. Increasing private consumption, in contrast, requires raising
purchasing power and changing saving habits across the population.
Growth in consumption is limited by household incomes declining
share of total income. Te share of household income in total national
disposable income shrank from about 66% in 1997 to 58% in 2007, while
the share of government income increased from about 17% to 20% and
that of enterprises from 17% to 22% (Figure 3.9.16).
Furthermore, households are concerned about saving for education,
.p. |nat|on
-1.5
0.0
1.5
3.0
4.5
6.0
11 10 09 08 07 06 2005
%
Forecast
Sources: Natlonal ureau of Statlstlcs. http://www.stats.gov.
cn (accessed , Varch zoo), A0 estlmates.
.p. Sector shares |n current u0P, zoo8
0
16
32
48
64
Services Industry Agriculture
THA PHI MAL KOR IND PRC
%
PRC Peoples Rep. of Chlna, lN0 lndla, K0R Rep. of
Korea, VAl Valaysla, Pll Phlllpplnes, JlA Jhalland.
.p. u0P expend|ture shares
20
28
36
44
52
Investment Private consumption
09 06 03 2000 97 94 91 1988
%
health care, and old age, in the context of inadequate social services.
Urban and rural incomes in nominal terms rose by an annual average
of 12.4% and 9.7%, respectively, in 20002008. Savings of all households
rose faster than incomes, by 16.5%. Against this backdrop, a signifcant
increase in consumption is likely to require a strengthening of the social
safety net, and provision of well-targeted public goods, such as education,
health care, and afordable housing, as well as higher incomes.
High GDP growth rates in the past three decades have not been
accompanied by the expected increases in employment generation. On
the contrary, the relationship between GDP growth and employment
has weakened, given the capital-intensive nature of growth in the
past few years. Tis has led to large labor surpluses, mainly in rural
areas, compounded by rigidities in the labor market, including the
non-portability of benefts and restricted labor mobility owing to the
cumbersome hukou system.
To address these issues, a profound reform in the labor market is
warranted. Te main targets should include labor mobility through the
relaxation of the hukou system, improved social security provision for all
workers (including migrants), and greater portability of acquired benefts
of potentially mobile workers. Enhanced mobility will help both lif
rural incomes and narrow urban-rural and regional income disparities.
Tis process would greatly beneft from development of labor-intensive
services and from further urbanization, the latter entailing great potential
for future growth.
Increased labor mobility and a better educated and trained workforce
would also help mitigate the impact on the economy of the aging of the
population. Aging is particularly challenging in the PRC, because it is
happening at a relatively low level of per capita income.
Te sustainability of the current high energy-consuming and
environment-unfriendly growth model is doubtful. A more sustainable
model would be more reliant on technology, innovation, and skills. Tat
could be achieved by increasing spending on research and development,
which at present is below the governments target. Large investments in
education and vocational training are also needed.
Te government is aware of these challengesindeed it started
planning some restructuring of the economy in the mid-1990s, as
refected in the Ninth fve-year plan (19952000). By the 11th plan
(20062010), it had set certain targets, such as raising the shares of
services in nominal GDP (from 40.3% to 43.3%), that of services in total
employment (from 31.3% to 35.3%), that of research and development
expense in GDP (from 1.3% to 2%), and that of urban residents in the total
population (from 43% to 47%). However, trends in the past 4 years suggest
that it will be difcult to realize these targets by the end of this year.
Te 12th fve-year plan (20112015), which will likely be unveiled
in March 2011, provides an opportunity to add momentum to the
restructuring eforts by establishing new targets, including one for the
share of private consumption in GDP, coupled with policy adjustments to
achieve such a target.
.p. |ncome d|str|but|on
10
22
34
46
58
70
Households Enterprises Government
07 05 03 2001 99 1997
%
Source: Shanghai Security News. zoo. Jhe Crowth of
lousehold lncomes Should e Vatched wlth the Crowth
of the Vacroeconomy (translated from Chlnese). http://
www.cnstock.com/paper_new/html/zoo-oz/z,/
content_)zo,,.htm. z, lebruary.
Expanding the services sector would strengthen the
domestic engine of growth, generate new sources of
employment, and raise living standards. However,
unlocking the sectors potential requires policy action on a
long list of constraints. Tey include:
Excessive market concentration and entry barriers - .
Te authorities committed to liberalizing the services
sector when it joined the World Trade Organization in
2001; however, implementation and enforcement of the
commitments remain weak. As a result, state-owned
enterprises dominate services, a fact that restrains
competitiveness and obstructs the entry of new players,
thus reducing the benefts that greater competition
and liberalization would bring. Entry barriers
include administrative hurdles; opaque regulations;
cumbersome licensing requirements; and restrictions on
the geographic range in which businesses can operate,
their legal structure, and their access to banking
services.
Restrictions on direct foreign participation - . With the
exception of a few subsectors, such as hotels and some
types of banking, services remain largely closed to
foreign frms and hence the capital, technology, skills,
and competition that they would inject.
Incentive bias toward manufacturing - . Fiscal incentives
direct investment to the production of goods, and
exemptions and rebates favor export of goods,
discouraging investment in services.
Inefcient allocation of capital - . Large state-owned
enterprises, including those in services, receive
about two-thirds of total lending. In contrast, private
enterprises get only one quarter of the credit available
and face much higher interest rates. Despite their
signifcantly smaller capital allocation, private frms
generate about half of GDP and are the main generators
of employment. Te current embryonic stage of capital
market development aggravates the difculties in
accessing credit.
Incomplete urbanization and labor market rigidities - .
Service providers generally thrive in cities, where
demand is strong and customers are concentrated in a
relatively small area. While there are many cities, about
65% of the population still lives in far-fung rural areas.
Urbanization has been slowed by rigidities in the labor
market, in particular by the hukou system.
Underinvestment in education and training - . Not only
is expenditure on education relatively low, but the
education system is oriented toward rote learning and
exam-based performance. Further, there is a decline in
the proportion of students in science and engineering,
which will hinder development of technology-oriented
services and, more broadly, innovation. Employers
report shortages of specialized skills. Te policy
investment bias favors the acquisition of equipment and
materials, to the detriment of investment in training.
Wide-ranging policy changes are needed to facilitate the
transition to a more services-oriented growth model. Tese
include improving the regulatory framework, changing
production incentives, further liberalizing the fnance
sector, reforming the labor market, and investing more in
education and training.
To ease barriers to entry into services, reform should
aim at fostering greater private sector participation in
services. Tis could be achieved through enforcement
of antitrust legislation, including against all state-owned
enterprises, and opening more services to foreign
participation. Tere is signifcant scope to improve
the policy environment for small and medium-sized
enterprises and the self-employed, for example, by
improving their access to credit. Liberalizing the fnance
sector and developing capital markets would help to lower
the cost of, and improve access to, fnance, including in
rural areas that ofen lack basic fnancial services.
Given that the private sector generally is more
productive and innovative than state-owned enterprises, as
shown by its contribution to GDP and employment, more
efcient capital allocation could increase the rate of GDP
growth by several percentage points.
A larger services sector could absorb much of the
surplus labor from agriculture and manufacturing, as
well as a signifcant share of new workers entering the
labor force. Reforming the hukou system would maximize
employment gains, as would other policies that speed up
the move of the population to cities. To minimize the
impact of job losses caused by reducing policy incentives
for low-skilled manufacturing, it would be necessary
to implement supportive measures, including large
investments in education, vocational training, and social
safety nets.
3.9.1 0eve|op|ng serv|ces
Rong Kong, Ch|na
Jhls trade-orlented economy was dealt a heavy blow by the global recesslon and nanclal crlsls. A
gradual recovery from the second quarter accelerated late ln 2009, spurred by a plckup ln exports, strong
growth ln the Peoples Republlc of Chlna, and a masslve expanslon ln the monetary base. Jhe economy
ls forecast to grow ln 2010, drlven by the better global outlook for trade and nanclal servlces. lnatlon
wlll rlse to moderate levels. A near-term challenge ls to prevent speculatlon ln houslng from lnatlng an
unsustalnable property boom.
Owing to its heavy reliance on trade-related and fnancial services, this
economy was shaken by the fnancial crisis and the plunge in global trade
that unfolded from 2008 through early 2009. Exports, consumption, and
fxed investment contracted sharply.
Te frst signs of recovery emerged in the second quarter of 2009
(Figure 3.10.1), as the global outlook improved and recovery gathered pace
in the Peoples Republic of China (PRC), driven by its aggressive stimulus
programs. Further impetus was provided by targeted fscal stimulus enacted
by the Hong Kong, China authorities, combined with a massive expansion
of the monetary base, refecting the Hong Kong dollars link with the United
States (US) dollar. For the full year, GDP shrank by 2.7% (Figure 3.10.2),
compared with average growth of 6.2% over the previous 5 years.
Private consumption fell by 0.3%, depressed in the frst half of the year
by the slump in trade in goods and services and the related sofening of
the labor market. Retail sales gradually improved, afer a plunge early in
the year (Figure 3.10.3).
As companies cut back on investment in equipment and construction,
private fxed investment fell by 3.7% in 2009. Te rate of contraction
slowed in the second half. By contrast, public fxed investment rose by
13.5% in 2009. Public sector construction grew by 10% in the second
quarter and 31% in the third, because of increased public spending on
infrastructure projects. Te government also stepped up its consumption
spending to support aggregate demand.
Te external sector was a major drag on the economy throughout
the year. Goods exportsabout 98% of which are reexportsplunged
in the frst quarter as external demand evaporated, but then improved
progressively, thanks to solid growth in the PRC and the better global
trade environment toward the end of the year. Nevertheless, goods
exports fell by nearly 13% in real terms in 2009.
Faring better than goods trade, services exports fell by 0.7% in real
terms. Trade and transportation services contracted over the year, but
.o. uarter|y u0P growth
-8
-4
0
4
8
Quarter on quarter Year on year
Q4 Q3 Q2 Q1
09
Q4 Q3 Q2 Q1
2008
%
Source: Census and Statlstlcs 0epartment. http://www.
censtatd.gov.hk (accessed Varch zoo).
This chapter was written by Benno Ferrarini of the Economics and Research
Department, ADB, Manila.
.o.z Contr|but|ons to growth (demand)
7.1 7.0 6.4
2.1
-2.7
2005 06 07 08 09
-10
-5
0
5
10
Percentage points
Government consumption
Investment Private consumption
GDP
Net exports
East Asia Hong Kong, China 143
travel and fnancial and business services staged a strong rebound during
the second half, benefting from a rise in visitor arrivals, coupled with
a brightening economic outlook and abundant liquidity in the banking
system. Capital raising activity rebounded in the second half, mostly for
PRC companies. Initial public oferings of shares raised the equivalent
of USs,:. billion last yeai, moie than any othei fnancial centei. Since
services accounts for more than 90% of GDP, this sectors rebound was
crucial to the overall pickup. In the fourth quarter, services contributed
all the economys growth.
Te current account remained in surplus throughout 2009, though
narrowing, and averaged 8.7% over the year. Te overall balance of
payments registered a huge surplus equal to 33.6% of GDP, refecting
sustained fnancial capital infows that more than outweighed the
narrowing of the current account surplus.
Employment shrank for the frst time since 2003. Te jobless
rate rose to 5.4% in AprilJune 2009, in part a result of layofs in
private construction. As recovery took hold in the second half, the
unemployment rate declined to 4.9% by year-end. Loan guarantees
provided by the government to small and medium-sized frms facing
a credit squeeze, together with increased public construction, helped
protect jobs. Te slack labor market put downward pressure on wages
(Figure 3.10.4), which fell by 1.3% in real terms in 2009.
Asset markets slumped, then rebounded. By year-end, the Hang
Seng index of share prices had climbed by 87% from its March 2009 low.
Similarly, price indexes for residential, ofce, retail, and factory property
turned up (Figure 3.10.5), against the background of substantial infows of
funds and easy monetary conditions that drove interest rates to very low
levels.
Sales of residential properties surged, and prices of apartments rose
by an average 28% last year. Mortgage loans increased markedly, driven
by the ample banking liquidity and low interest rates. Acting to maintain
stability in the banking system and limit increases in apartment prices,
the Hong Kong Monetary Authority (HKMA) in October 2009 raised
the minimum deposit requirement to 40% (from 30%) for residential
moitgages valued at HKs:o million oi moie, and capped maximum loans
at HKs:: million foi piopeities valued at less than HKs:o million.
Te surge of capital infows (Figure 3.10.6), driven by expansionary
monetary policies in the US, boosted the monetary base (Figure 3.10.7),
refecting the Hong Kong dollars link to the US dollar through a
currency board framework. Infows early in 2009 refected frms
repatriation of funds to meet liquidity needs and investors search for a
safe haven.
Later, infows were driven by investment in the buoyant asset markets
and in share oferings. Te HKMA undertakes to buy US dollars at
HKs,.,, and sell them at HKs,.8, (the conveitibility band). Te infows
pushed the Hong Kong dollar to the strong side of its convertibility band,
and the HKMA acted as counterparty to banks selling foreign currency.
Te monetaiy authoiity puichased USso: billion in :oo, in doing so it
injected HKs8o.8 billion into the banking system. Although this diove
interest rates to very low levels, bank credit contracted in 2009 (banks
.o. urowth |n reta|| sa|es
-15
0
15
30
45
Volume Value
Jan
10
Oct Jul Apr Jan
09
Oct Jul Apr Jan
2008
%
.o. Unemp|oyment and wages
-3
0
3
6
Growth in real wages
Unemployment, seasonally adjusted
Q3 Q1
09
Q3 Q1
2008
Q3 Q1
2007
%
.o. 8a|ance-of-payments |nd|cators
-30
0
30
60
Current account
Financial account
Capital account
09 08 07 06 2005
$ billion
Sources: long Kong Vonetary Authorlty, CllC 0ata
Company (accessed Varch zoo).
.o. Property pr|ce changes
-40
-20
0
20
40
60
Factory space
Retail space
Ofce space
Residential
Jan
10
Sep May Jan
09
Sep May Jan
2008
%
were cautious to lend and demand for credit was suppressed by the
recession), except for mortgage lending, which rose in the second half.
Moderate defation pressures prevailed during the frst 3 quarters of
2009 (Figure 3.10.8), given the slack economy and lower global oil and
commodity prices. Infation picked up in the last quarter, and averaged
0.5% for the year.
High transaction volumes in property markets generated considerable
tax revenue, and produced a budget surplus estimated at 0.8% of GDP in
FY2009 (ended 31 March 2010).
Lconom|c prospects
Te growth momentum that built in late 2009 is forecast to continue
through 2010, lifing GDP by 5.2% this year (Figure 3.10.9). Tis open
economy will beneft from its close links with the PRC (where growth is
forecast to accelerate to nearly 10%), from solid growth in much of Asia,
and from the expected modest recovery in industrial economies. Te
low base set in 2009 will contribute to the growth spurt forecast for this
year. In 2011, GDP growth is forecast to ease to 4.3%, taking into account
that base efect in 2010 and the phasing out of exceptional government
stimulus policies in the PRC.
Private consumption is forecast to pick up throughout the year,
underpinned by the strengthening labor market. Retail sales rose by just
over 17% in volume terms in the frst 2 months of 2010 (from a low prior-
year base). Private demand will receive a further boost on the investment
side, as business confdence continues to improve in light of the improved
global economic and fnancial environment.
Outlays on public woiks aie expected to be at least USso., billion a
year for some time, according to the FY2010 budget. Several large public
infrastructure projects that began in late 2009 will continue through 2010
and beyond. Te government expects to have a budget defcit equivalent
to 1.5% of GDP this fscal year, compared with the actual surplus last year.
On the supply side, fnancial services are set to beneft from the
capital infows and corporate fund-raising activity. Fund management
and retail sales of mutual funds have picked up considerably since the
second quarter of 2009, and insurance has recorded strong gains in
premium incomes. Tourism, too, is rising.
Infation is forecast to pick up moderately, to average 2.2% in 2010
and 2.8% in 2011, a result of the stronger domestic demand, higher prices
for imported food and fuel, the end of a subsidy on household electricity
bills, and expected increases in residential and commercial rents. In the
frst 2 months of 2010 infation averaged 1.9%.
Merchandise exports are expected to rebound by about 13% in US
dollars this year. Services exports will rise, too, a result of robust demand
for fnancial services, as well as a rebound in tourism and business
travel. Merchandise imports are seen rising by about 11% in 2010. (In the
frst 2 months of 2010 exports rose by nearly 23% and imports by 31%).
(Figure 3.10.10).
Te merchandise trade defcit will be more than ofset by a healthy
surplus on trade in services. Supported also by sustained earnings from
foreign exchange reserves and overseas investments, the current account
3.101 Se|ected econom|c |nd|cators (%)
2010 2011
C0P growth 5.2 4.3
lnatlon 2.2 2.8
(share of C0P)
7.6 7.2
.o./ Monetary |nd|cators
%
0
300
600
900
1,200
0
2
4
6
8
Base rate, end of period Monetary base
Jan
10
Sep May Jan
09
Sep May Jan
2008
HK$ billion
Source: long Kong Vonetary Authorlty. http://www.lnfo.
gov.hk (accessed , Varch zoo).
.o.8 Month|y |nat|on and components
Jan
2009
Mar May Jul Sep Nov Jan
10
-3
0
3
6
Percentage points
Housing
Electricity, gas, and water Food
Adjusted overall infation
Other goods and services
Overall infation
Note: Adjusted overall lnatlon refers to the rate once the
eects of temporary subsldles by the government are
removed.
Sources: CllC 0ata Company (accessed , Varch zoo),
Census and Statlstlcs 0epartment. zoo. Monthly Report on
the Consumer Price Index. lebruary. http://www.censtatd.
gov.hk
.o.p u0P growth
-3
0
3
6
9
11 10 09 08 07 06 2005
%
Forecast
Sources: Census and Statlstlcs 0epartment. http://www.
censtatd.gov.hk (accessed Varch zoo), A0 estlmates.
East Asia Hong Kong, China 145
is forecast to record comfortable surpluses exceeding 7% of GDP this year
and next.
Tere are a number of risks to the forecasts. Depending on the pace
of withdrawal of monetary stimulus in the US and PRC, it is likely that
excess liquidity and very low interest rates will prevail in Hong Kong,
China, with the associated risk of fueling a credit boom and further
upward pressure on asset prices. Conversely, capital fows might reverse
and interest rates rebound when the US phases out its monetary stimulus.
Te Hong Kong dollar exchange rate will likely move to the lower side
of its convertibility band and the HKMA will absorb Hong Kong dollar
liquidity. Tese adjustments could cause disruptions in fnancial markets.
While the food of liquidity and low interest rates have fueled speculation
in high-end apartments, speculative activity does not appear to have
signifcantly spilled over into the broader residential market at this
stage. A housing afordability index rose to 38% of median incomes in
the fourth quarter year on year (Figure 3.10.11), still below the historical
average and far below the peak in 1997. Similarly, the number of
transactions involving a buyer reselling a property before the completion
of the original sale, usually for a quick capital gain, is around 2%, also
well below the previous peak.
Nevertheless, at a time of low interest rates and rising investor
confdence, apartment prices may continue to increase for some time,
raising the risk of an overextended market that would eventually peak
and then dive, denting consumer and investor sentiment with knock-on
efects for economic growth and for the health of the banking sector.
In an efort to prevent such an outcome, the government in February
2010 followed up its tightening of bank prudential regulations for housing
loans with moves to check speculation in housing. Te FY2010 budget
raised the stamp duty tax on high-end housing and indicated that
the increase will be extended if speculation takes hold in the broader
residential market. To increase supply of apartments, the government
plans to speed up the pace of auctioning urban residential sites.
Still, it will take several years for these moves to substantially increase
the number of apartments on the market. In the meantime, afordability
of private housing is likely to worsen and rents are likely to rise, afer a
lag of 1 or 2 years.
Hong Kong, China is constrained by its linked exchange rate system
from raising interest rates to damp a housing boom. Rather, it is tied
to US monetary policy, which is unlikely to tighten much this year.
Monetary policy also remains expansionary in the PRC, with some
spillover impact on the housing market. Further, if the yuan starts to
appreciate against the US dollar, the attractiveness of Hong Kong, Chinas
assets to investors from the PRC would increase.
.o.o Merchand|se trade growth
-30
-15
0
15
30
45
Imports Exports
Jan
10
Sep May Jan
09
Sep May Jan
2008
%
Source: CllC 0ata Company (accessed z Aprll zoo).
.o. Rous|ng aordab|||ty |ndex
0
20
40
60
80
100
Q1
09
Q1
08
Q1
06
Q1
04
Q1
02
Q1
2000
Q1
98
Q1
96
Q1
94
Q1
92
Q1
1990
%
Note: 0ata refer to the ratlo of mortgage payments (for
a |,-square meter apartment) to medlan lncome of
households (excludlng those llvlng ln publlc houslng).
Source: lconomlc Analysls and uslness lacllltatlon unlt,
llnanclal Secretarys 0ce.
kepub||c of Korea
Crowth surprlsed on the upslde ln 2009 as the economy avolded an expected contractlon. llscal
stlmulus and better than expected export performance fueled recovery from the lmpact of the global
recesslon. A sharp rebound ln growth ls forecast for 2010 as domestlc demand plcks up and the export
recovery broadens. Vedlum-term pollcy challenges are to encourage the employment of women and
accelerate the transltlon to economlc growth that ls based on productlvlty lmprovements.
Afer hitting bottom in the fourth quarter of 2008, when output
contracted by 4.5% (quarter on quarter), the Republic of Korea (hereafer
Korea) staged a strong recovery in 2009. GDP grew by 0.2% in the year,
a much better outcome than expected, although far below the 5-year
average of 4.2% in 20042008. Figure 3.11.1 shows the year-on-year and
quarter-on-quarter trajectory of GDP growth in 2008 and 2009.
Despite weakness of external demand, net exports were the primary
driver of growth in 2009 (Figure 3.11.2), helping ofset weakness in
domestic private demand. Mirroring the impact of a sizable fscal
stimulus, government consumption also contributed substantially to
growth. However, private investment dragged down growth throughout
2009. Interestingly, although Koreas slowdown started as a collapse of
exports, net exports helped the economy get back on its feet, while the
negative impact of domestic demand on growth persisted.
Merchandise exports plunged in late 2008 and early 2009, then
bounced back (Figure 3.11.3), to be fat for the year. Two factors account for
the resilience of exports in the face of weakness in industrial economies.
First, exports benefted from continued robust appetite for imports
from the Peoples Republic of China (PRC). Also, the PRCs fscal stimulus
had positive spillover efects. In particular, subsidies for rural households
to buy household appliances benefted Korean electronics exporters.
Exports to other developing economies also held up relatively well. An
underlying driver of exports in 2009 was an average 12.7% depreciation of
the won relative to 2008 (Figure 3.11.4).
Second, manufacturing diversifcation over the past 20 years has
reduced the former export dependence on a few product groups. Since the
impact of the global crisis difered across product groups, this contributed
to export resilience.
Private consumption was weak in early 2009 before picking up
(Figure 3.11.5), to be little changed for the full year. Te turnaround was
most evident in durables and services. Consumer sentiment improved
during the year, and, with an appreciating won, buoyant stock market,
and rising housing prices, supported consumption, as did lower interest
rates and tax cuts.
.. uarter|y u0P growth
-6
-3
0
3
6
Q4 Q3 Q2 Q1
09
Q4 Q3 Q2 Q1
2008
%
Source: ank of Korea. lconomlcs Statlstlcs System. http://
ecos.bok.or.kr (accessed z Varch zoo).
This chapter was written by Donghyun Park of the Economics and Research
..z Contr|but|ons to growth (demand)
0.2
2.3
5.1 5.2
4.0
2005 06 07 08 09
-6
-3
0
3
6
Percentage points
Private consumption GDP growth
Investment
Statistical discrepancy Net exports
East Asia Republic of Korea 147
Hit by the gloomy global economic outlook early in 2009, total
fxed investment fell by 0.2% for the year, mainly because equipment
investment dropped by 9.1%. As the year progressed, business confdence
improved and average manufacturing capacity utilization rose
(Figure 3.11.6). Construction investment grew by 4.4% in 2009 afer a
contraction of 2.8% in 2008. Te turnaround was based on public works
projects in the fscal stimulus.
Aggressive monetary and fscal easing, adopted as the global recession
intensifed, helped prop aggregate demand. Te Bank of Korea cut its key
policy interest rate six times from the beginning of October 2008 through
February 2009 (Figure 3.11.7). In addition, the government provided
liquidity support to the fnancial system.
Te government brought forward a large part of its 2009 budget to
the frst half of the year. It also quickly adopted a sizable fscal stimulus
package. Te 3-year (20082010) package amounts to around 6.5% of 2008
GDP, and contains a mix of tax cuts and additional spending. Tax cuts
consist of both specifc, temporary measures (such as tax incentives for
replacing old automobiles, which had a big efect on automobile purchases
and overall private consumption from the second quarter of 2009) as well
as longer-term cuts in personal and corporate income taxes. Key areas
for spending are public infrastructure, assistance for low-income groups,
and job-creation initiatives. A 5.0% increase in government consumption
and additional public works also supported domestic demand. Te overall
budget defcit widened from 2.0% in 2008 to 3.9% in 2009 as a result of
fscal easing.
Infation slowed to 2.8% in 2009 from 4.7% in 2008, refecting weak
private demand and lower global oil and commodity prices. Te impact
of low economic growth was felt in the labor market, where the number
of employed persons fell last year, though only by 71,000. While the labor
market remained sof, the unemployment rate rose only modestly, from
3.2% to 3.6%, helped by the job-creation programs and women workers
dropping out of the workforce.
A much steeper fall in the United States (US) dollar value of
merchandise imports (25.7%) than in the value of merchandise exports
(13.7%) produced a huge trade surplus, and led to a current account
surplus equivalent to 5.1% of GDP.
Lconom|c prospects
Strengthening domestic demand and a brightening global outlook
point to the Korean recovery gathering momentum this year. Private
consumption and investment are set to replace government spending
and public works as the primary engines of domestic demand growth.
Improving external conditions will also contribute signifcantly. In
particular, the consolidation of recovery in industrial economies will
broaden the scope of export recovery.
Korean manufactured exports such as automobiles, electronics, and
capital goods tend to be highly sensitive to the global business cycle.
Hence, afer their earlier plunge, exports to industrial countries began
to recover in the second half of 2009, a trend set to continue through
2010. Elsewhere, given projected acceleration of PRC growth and strong
.. Merchand|se rea| export growth
-16
-8
0
8
16
Q4 Q3 Q2 Q1
09
Q4 Q3 Q2 Q1
2008
%
.. Lxchange rate
800
1,000
1,200
1,400
1,600
Jan
10
Oct Jul Apr Jan
09
Oct Jul Apr Jan
2008
Won/$
Source: CllC 0ata Company (accessed z Varch zoo).
.. Capac|ty ut|||zat|on rat|o
60
65
70
75
80
85
Jan
10
Oct Jul Apr Jan
09
Oct Jul Apr Jan
2008
%
.. Pr|vate consumpt|on growth
-6
-3
0
3
6
Q4 Q3 Q2 Q1
09
Q4 Q3 Q2 Q1
2008
%
recovery in many other developing countries, exports to developing
countries as a whole will remain robust.
In terms of export industries, the information technology (IT)
product groupprimarily semiconductors, liquid crystal displays, and
mobile phoneswill continue to play a leading role, underpinned by
global demand recovery and competitive advantage in supply capacity
and product innovation. Global demand for automobiles is projected to
bounce back, fueled by demand expanding in the PRC and recovering
in the US. Still, the outlook for petrochemical exports is clouded by the
prospect of global supply outpacing global demand as a result of Middle
Eastern production capacity coming online in mid-2010, while difculties
at global shipping companies are leading to delays and cancellations of
orders, afecting Korean shipbuilders prospects. An expected increase in
export unit prices brought about by higher prices for refned petroleum
products and some IT products will have a positive efect.
On the downside, the won is piojected to aveiage aiound W:,:oo/s:
in 2010, which would be an appreciation of about 15% from 2009. Te
stronger won will hurt price competitiveness in global markets, but past
experience suggests that the impact will be limited. Net exports will add
to GDP growth in 2010, although by less than in 2009.
Private consumption is expected to increase by about 5%, with
stronger growth in the frst half refecting the base efect from a sharp
compression of consumption in the frst half of 2009. Te biggest impetus
will come from strong growth in incomes as a result of expected large
bonuses by corporations. Robust growth of gross national income, which
adjusts GDP for terms of trade and so better refects purchasing power,
will also support consumption. Gross national income began to grow
faster than GDP in the second quarter of 2009, owing to rising export
unit prices of IT and some other products, and this is likely to persist to
the end of 2010.
In light of favorable overall conditions, buoyant consumer confdence
(Figure 3.11.8) is likely to persist this year. Te wons appreciation will
boost household purchasing power by helping contain infation. Against
this, the tax incentives for replacing old automobiles ended in mid-2009,
which will somewhat slow the momentum of consumption.
Total fxed investment is expected to grow by close to 10% in the
frst half of 2010 and by about 5% in the second. Te primary cause will
likely be a rebound in equipment investment. Growing by as much as
15% (again with a stronger frst half, partly due to a low-base efect), this
surge is underpinned by a rapid improvement in business confdence
(Figure 3.11.8). Increased capacity utilization in manufacturing and
rapid growth of industrial production will prompt companies to expand
investment. Furthermore, the corporate sector is in good fnancial shape,
due to improving proftability, and this is most evident in the IT sector,
which accounts for about 30% of total investment.
At a broader level, the slowdown of global growth (relative to before
the global recession) and persistent global overcapacity will constrain
investment. Construction investment is projected to rise by 3% this year,
a little weaker than in 2009. Public works will slow as the government
unwinds its fscal stimulus, but housing construction will pick up because
2010 2011
C0P growth 5.2 4.6
lnatlon 3.0 3.0
(share of C0P)
1.5 1.0
..8 Condence |nd|cators
105
110
115
120
125
130
70
80
90
100
110
120
Consumer Business
Jan
10
Jul Jan
09
Jul Jan
08
Jul Jan
2007
2005 = 100 Index
Notes: 0ata for consumer condence from January
zoo,August zoo8 refer to the Consumer lxpectatlons
lndex, whlle values after that were derlved uslng
the Composlte Consumer Sentlment lndex. uslness
condence refers to the leadlng Composlte lndex.
ecos.bok.or.kr (accessed , Varch zoo).
../ Po||cy rate
1
2
3
4
5
6
Mar
10
Dec Sep Jun Mar
09
Dec Sep
2008
%
Source: ank of Korea ase Rate. http://eng.bok.or.kr
East Asia Republic of Korea 149
the government has eased some constraints on private housing supply and
plans to continue to increase the supply of public housing.
Te labor market picture is less benign. Government job-creation
programs will be scaled back, while private sector hiring will be sluggish
in light of the usual lag between growth and employment. A further
constraint is weakness in the self-employed sector, which shed more than
300,000 workers in the third quarter of 2009. Te number of employed
persons is projected to rise by about 150,000, but unemployment will
remain an area of concern.
Te speed and scale of the exit from the monetary and fscal stimulus
will impinge on the recovery process, but are not expected to act as a
serious drag on growth. Te conducive environment for keeping infation
under control suggests that increases in the policy interest rate are likely
to be small. Te fscal stimulus, which amounted to W38.8 trillion or 3.6%
of GDP in 2009, will be scaled back to W17.2 trillion, or 1.7% of GDP, in
2010. As a result, the fscal defcit is expected to narrow from 3.9% in 2009
to about 3% in 2010.
Taking all these factors into account, GDP growth for 2010 is
projected to climb to 5.2% (Figure 3.11.9). Tis above-trend performance,
largely driven by the low-base efect of 2008 and 2009, will mostly close
the wide output gap that opened when growth slumped in those years.
GDP growth is forecast to ease to a still-high 4.6% in 2011, as the pace of
equipment investment slows from this years exceptionally high rate.
Infation is projected to hover around 3.0% in the forecast period,
within the central banks 2%4% target band. Te stronger won will help
contain import prices, and an output gap persists in the economy. Tese
factors are likely to ofset the infation impact of higher oil prices.
In the external accounts, merchandise exports in US dollar terms are
projected to grow by about 12% this year, whereas merchandise imports,
driven by stronger domestic demand and higher oil and commodity
prices, will grow by about 20%. Te current account surplus will shrink
from its record high in 2009 to the equivalent of about 1.5% of GDP and
then to 1.0% in 2011.
Slower and weaker than expected recovery among industrial
countries is the main downside risk to the forecasts, given Koreas
openness to trade and fnancial fows. Te primary domestic downside
risk is the structural problem of high household debt. Te ratio of
personal debt to personal disposable income has reached about 150%,
and is much higher among low-income households. However, various
mortgage-related risk-management measures imposed on banks and
nonbank fnancial institutions should retard the growth of mortgage-
dominated household loans.
Overall, the positives outweigh the negatives, and growth may
surprise on the upside again, as hinted at by recent trends in a key leading
indicator (producers shipments to inventoriesFigure 3.11.10).
Creating a better working environment for women and accelerating the
transition to an economy based on productivity improvements (Box 3.11.1)
are two medium-term policy challenges.
..p u0P growth
0
2
4
6
11 10 09 08 07 06 2005
%
Forecast
Sources: ank of Korea. lconomlcs Statlstlcs System. http://
ecos.bok.or.kr (accessed z Varch zoo), A0 estlmates.
..o urowth |n |ndustry |nd|cators
-30
-15
0
15
30
45
Ratio of producers' shipments to inventories
(3-month lag)
Industrial production
Apr Jan
10
Oct Jul Apr Jan
2009
%
Sources: CllC 0ata Company (accessed , Varch zoo), A0
estlmates.
Improving the working environment for women has become more
pressing in light of prospective labor shortages due to rapid population
aging and low fertility in Korea. Te global recession highlighted this
point: its impact on the Korean labor market was much more pronounced
for women than men (Figure 3.11.11). Women tend to land less stable frst
jobs than men, including a large share of nonwage and temporary-
contract wage jobs, so were more vulnerable when the economy turned
down. Finally, of women who lef their employment, among the core
working-age groupsthe 30s50sa large majority dropped out of
the labor force altogether, with child raising and household work the
dominant reasons.
As well as leaving the workforce, too many women do not join it. For
example in 2007, the employment rate among female university graduates
was nearly 20 percentage points below the average of countries in the
Organisation for Economic Co-operation and Development. Using the
female workforce more efciently could bring signifcant benefts for the
economy and the women involved. Indeed, rapid population aging and
the consequent prospective reduction of the labor force make full use of
female workers, especially highly skilled ones, even more important.
.. Change |n emp|oyment
-200
-100
0
100
200
300
Male Female
Q3 Q1
09
Q3 Q1
08
Q3 Q1
07
Q3 Q1
2006
Thousands
Source: Korea Natlonal Statlstlcal 0ce. http://www.kosls.
kr/eng/lndex.html (accessed , Varch zoo).
As the global recession recedes, an issue that will come
back to center stage is: What is Koreas longer-term
potential growth ratethe economys aggregate supply
capacityand what are policy options to boost it?
Koreas GDP growth has slowed since the early
1970s, from an average of 10.3% in 19711979 to 4.9%
in 20002008. Potential GDP growth has also declined
(Box fgure).
Broadly, the deceleration of potential growth refects a
slowing in the accumulation of capital and in the growth of
the labor force. Te growth of the working-age population
fell sharply from 2.4% in 19801989 to 1.2% in 1998
2008. Te growth of equipment investment slowed from
8.7% in 19911997 to 4.8% in 19982008. Technological
progress and other productivity improvements have been
insufcient to signifcantly ofset the decline in growth due
to slower factor accumulation. Research and development
(R&D) expenditures have risen rapidly, but their size is not
enough (3.5% of GNP in 2007) to have a notable positive
efect on economywide efciency.
In the coming years, rapid population aging, lack of
competitiveness in knowledge-based industries, and the
catch-up of latecomers, such as the PRC, in Koreas main
industries all point to clear limits to growth.
Still, Korean policy makers have a range of options
to accelerate the transition from a growth model based
on factor accumulation to one based on productivity
improvements. Here, the broad thrust should be to
promote the acquisition of capital goods that embody new
technology and the accumulation of highly skilled human
capital for high-tech industries and knowledge-based
service industries.
For example, the government could consider
providing fscal incentives for hiring older and female
workers to lessen the impact of the decline in the
working-age population and expanding its R&D support
to communications, fnance, and other service industries.
Services, which lag manufacturing in productivity, would
beneft from an easing of regulations that constrain the
entry of new competitors. Such measures would help raise
potential growth.
3.11.1 ka|s|ng Koreas potent|a| growth rate
Potent|a| u0P growth
3
5
7
9
08 05 2002 99 96 93 90 87 84 81 1978
%
Note: Potentlal C0P growth was estlmated uslng the
lodrlck-Prescott lter, a smoothlng method to remove
cycllcal components of a tlme serles.
Mongo||a
After contractlng for the rst 3 quarters of 2009, the economy started to recover late ln the year as
global commodlty prlces plcked up and the government adopted an extenslve pollcy reform program.
Jhe economy ls forecast to return to solld growth thls year and next, spurred by development of a large
copper and gold mlnlng project. lnatlon faded ln 2009 but wlll accelerate thls year. 0omestlc rlsks to the
outlook center on weaknesses ln the banklng system and posslble scal pressures.
Despite a rebound in the fourth quarter, the economy contracted
by 1.6% in 2009 (Figure 3.12.1), hit hard by the impact of the global
recession, notably the fall in prices of Mongolias commodity exports.
Te contraction in GDP followed robust average growth of 9% during
20042008, when world commodity prices were rising. GDP contracted
in each of the frst 3 quarters of 2009. Te slump was mainly a result of a
plunge in world copper prices in late 2008 and reduced infows of foreign
direct investment (FDI) into the countrys mining and construction
industries as global investment fows dwindled.
Tese external shocks knocked the economy at a particularly
vulnerable time: macroeconomic policy had been overly expansionary
during the commodity boom years, resulting in high infation (peaking
at 34.2% in August 2008), deteriorating external and fscal balances, and
serious strains in the banking system. Consequently, in early 2009 the
government had to rein in spending and hike the policy interest rate,
further suppressing consumption and investment.
Mongolia turned to the International Monetary Fund, agreeing
in Maich :oo to boiiow s:: million undei an :8-month standby
arrangement, and received additional funding from other development
institutions and governments. In return, the government pledged to
follow fscal policies that would repair the budget and monetary policies
to safeguard dwindling international reserves. Te authorities also agreed
to allow greater exchange rate fexibility, to strengthen the fragile banking
system, and to improve the targeting of social spending. Te funding and
policy actions stabilized the economy, positioning it to resume growth as
the price of copper and other minerals recovered (Figure 3.12.2).
Still, for the full year industrial production fell by 1.9%, hurt by
weakness in world markets for the major exports copper, coal, and zinc.
Investment in mining was hampered by the global tightening of credit
and by continued delays in reaching agreements between the government
and international companies to develop new mines, especially the large
Oyu Tolgoi copper and gold resource.
.z. u0P growth by sector
-5
0
5
10
15
20
Services Industry Agriculture GDP
09 08 07 06 2005
%
Source: Natlonal Statlstlcal 0ce of Vongolla. zoo,.
Monthly Statistical Bulletin. 0ecember. http://www.nso.mn
This chapter was written by Christer Ljungwall of the Mongolia Resident Mission, ADB,
Ulaanbaatar.
.z.z M|nera| pr|ces
0
100
200
300
400
0
100
200
300
400
Crude oil Coal
Zinc
Copper
Jan
10
Jul Jan
09
Jul Jan
08
Jul Jan
07
Jul Jan
2006
Index, Jan 2006 = 100 Index, Mar 2008 =100
Source: loomberg (accessed 8 January zoo).
Construction activity fell abruptly in 2009 as both the public and
private sectors cut back capital investment and banks tightened lending.
Agriculture, which supports about 40% of the population, grew by
just 1.5% in 2009. Te sector sufered from lower prices for cashmere and
other livestock-related products. Further, a summer drought, followed
by heavy snow and lower than usual temperatures in late 2009, reduced
feed available for livestock, worsening a problem caused by years of
overgrazing, when the herd expanded to about 44 million (mainly goats,
sheep, and cattle). Livestock losses from the bad weather were estimated
in early 2010 at more than 5 million.
Growth in the services sector slowed sharply to 2.0% in 2009, in part
refecting a weak labor market and reduced government outlays that hurt
consumer spending. Continued banking stresses hampered growth in
fnancial services.
A Labor Force Survey put the unemployment rate in September 2009
at 10.5%, taking into account both those registered and not registered as
unemployed. Te loss of jobs and falling real wages in the informal sector
aggravated poverty (35.2% of the population lived below the national
poverty line in 2008).
Merchandise exports in US dollar terms fell by about 25% in 2009,
largely a result of lower prices rather than lower volumes. Imports fell
even more sharply, by about 35%, refecting lower costs for imported oil
and food, weaker consumption and investment, and a 36% depreciation
of the togrog against the US dollar in the frst quarter. As a result, the
trade defcit narrowed. With earnings from tourism and remittances
from Mongolian workers abroad taking a hit from the global recession,
the current account remained in defcit, equivalent to 9.1% of GDP
(Figure 3.12.3).
Te current account gap was primarily fnanced by donor
disbursements and FDI. International reserves, afer plunging by half to
about s,oo million, climbed to s:.: billion (about , months of impoit
cover) by end-2009.
Infation slowed sharply from 22.0% year on year at end-2008 to 4.2%
by end-2009 (Figure 3.12.4), refecting the slump in domestic demand,
lower prices for imported commodities, and an increase in the policy
interest rate in March. With infation subsiding and the exchange rate
recovering, the Bank of Mongolia lowered its policy interest rate in three
steps starting from May 2009. Growth in the money supply (M2) picked
up early in the year and posted an increase of 26.9% for all 2009.
Strains in the banking sector in 2008 persisted in 2009. Te economic
slump and rising real interest rates (as infation slowed) caused a near
doubling of nonperforming loans to 18.3% of total loans by end-2009
from a year earlier. Construction frms had the highest rate of bad debts.
Commercial banks reported aggregate losses in 2009 (as they did in
2008), and capital-adequacy ratios fell in 2009. Poor governance and weak
internal controls deepened the problems in the banking subsector.
Afer Anod Bank foundered and was taken over by the government
in December 2008, the authorities tightened bank prudential ratios,
raised capital requirements, and strengthened banking laws. Te central
bank provided liquidity to the banking system and introduced a blanket
deposit guarantee. Nevertheless, Zoos Bank failed in November 2009 and
.z. Lxterna| sector
-4
-2
0
2
4
-14
-7
0
7
14
Current account balance Imports
Exports
09 08 07 06 2005
$ billion % of GDP
Source: ank of Vongolla. zoo,. Balance of Payment Report.
0ecember. http://www.mongolbank.mn
.z. |nat|on and money supp|y
-40
-20
0
20
40
-8
-4
0
4
8
Infation M2 growth
Sep May Jan
09
Sep May Jan
08
Sep May Jan
2007
% %
Source: ank of Vongolla. zoo,. Statlstlcal ulletln.
0ecember. http://www.mongolbank.mn
East Asia Mongolia 153
was put into receivership. Te banks difculties, coupled with concerns
about the fnancial soundness of borrowers, caused banks to cut lending
in 2009, by 26.2%.
Reductions in government spending brought down total public
expenditure and net lending to the equivalent of 38.3% of GDP (from
41.0% in 2008). In particular, the government slashed spending on
construction and subsidies, partly ofset by a higher wages bill. Revenue
also fell, eroded by weak copper prices early in the year and the impact
of the recession on tax collections. Total revenue and grants fell to 32.9%
of GDP, from 36.1%. Te overall fscal defcit widened to 5.4% of GDP
(Figure 3.12.5).
Lconom|c prospects
Te outlook depends heavily on the global price of copper, the
development of new mines, and the continued implementation of policies
that maintain macroeconomic stability.
As for copper, the price is projected to remain at high levels during
the forecast period, which will stimulate production. Prospects for
development of new mines brightened considerably in October 2009,
when the government signed an agreement with an international mining
company to exploit the Oyu Tolgoi copper and gold deposit. Investment
in this pioject is expected to total s, billion, with about s,oo million to be
spent this yeai and s:., billion next. Pioduction is piojected to stait in :o:,.
Te long-awaited Oyu Tolgoi agreement and subsequent construction
will raise investor confdence and have knock-on efects on other parts of
the economy. Moreover, the government is considering proposals to mine
the large Tavan Tolgoi coal deposit. FDI infows into mining are expected
to rise signifcantly over the forecast period.
Severe winter early in 2010 will curtail agricultural production.
Livestock losses are likely to reduce incomes of herders, who constitute
about 30% of the population. As for the services sector, transport and
communications staged a strong rebound in late 2009 and other services
will join in the recovery this year. However, the banking sectors problems
damp its prospects for growth.
Te need to strengthen public fnances will limit budgetary stimulus
to the economy in the forecast period. Te government aims to narrow
its budget defcit to 5.0% of GDP in 2010. Higher mineral prices should
beneft revenue, but the scheduled ending of a windfall proft tax on
mining in 2011 will erode total revenue by the equivalent of about 2% of
GDP. Furthermore, donor budgetary support is expected to be phased
down from 2011. On the monetary policy front, projected faster infation
limits further interest rate cuts.
Investment is expected to rebound, driven by Oyu Tolgoi. Te outlook
for growth in bank lending is clouded by the high level of bad loans,
weak bank balance sheets, and high real interest rates. Consumption will
beneft from an expected pickup in employment, ofset by the impact of
lower incomes in agriculture. Taken all together, the economy is forecast
to grow by about 7.0% in 2010 (Figure 3.12.6).
Growth is seen slowing a bit to 6.5% in 2011, mainly a result of the
impact on government revenue and spending of the end of the windfall
2010 2011
C0P growth 7.0 6.5
lnatlon 7.9 6.0
(share of C0P)
-16.1 -21.2
.z. 8udget ba|ance
-350
-175
0
175
-12
-6
0
6
Share in GDP Level
09 08 07 06 05 04 2003
MNT billion %
Source: Natlonal Statlstlcal 0ce of Vongolla. zoo,.
Monthly Statistical Bulletin. 0ecember. http://www.nso.mn
.z. u0P growth
-3
0
3
6
9
12
11 10 09 08 07 06 2005
%
Forecast
Sources: Natlonal Statlstlcal 0ce of Vongolla. zoo,.
Monthly Statistical Bulletin. 0ecember. http://www.nso.mn,
A0 estlmates.
.z./ Current account ba|ance
-24
-12
0
12
11 10 09 08 07 06 2005
% of GDP
Forecast
Sources: ank of Vongolla. zoo,. Balance of Payment Report.
0ecember. http://www.mongolbank.mn, A0 estlmates.
proft tax and reduced donor budgetary fnancing. Implementation
of a proposed fscal responsibility law would also impose limits
on government spending. On the upside, growth could be faster if
agreements are reached to mine several large mineral deposits.
In the medium term, GDP growth is expected to spurt to double-digit
levels once production ramps up from the Oyu Tolgoi project.
Infation is forecast to accelerate to an average of nearly 8% in 2010
from 6.3% last year, refecting the rebound in domestic demand, increase
in oil prices, and likely higher meat prices for at least part of the year
due to the bad weather. Infation is expected to ease in 2011 as fscal
consolidation eforts strengthen.
Policy reforms planned for 2010, if followed through, will improve
the economys prospects for sustained growth. Te proposed fscal
responsibility law will promote budget discipline by efectively placing
ceilings on spending growth, the fscal defcit, and public debt. Te
law will require mandatory cost estimates for government spending
proposals to ensure that spending is consistent with a medium-term fscal
framework. More broadly, the idea behind the law is to help insulate the
budget, and the economy generally, from swings in the price of copper.
In other reforms, the government plans to replace some universal
social transfer programs with better targeted transfers that focus on
the very poor. It also proposes to strengthen the central banks powers
to supervise the banking system and to intervene when banks strike
fnancial trouble.
Merchandise exports are expected to rise in line with commodity
prices and improved external demand. Buoyant GDP growth in the
Peoples Republic of China (forecast at 9.6% in 2010) will underpin
exports, since that market takes most of Mongolias exports. Merchandise
imports will likely increase at an even faster rate than exports, refecting
the need for machinery and equipment for Oyu Tolgoi and the pickup in
consumption. Te current account defcit is forecast to widen sharply to
about 16% of GDP in 2010 and to 21% in 2011 (Figure 3.12.7). FDI should
fnance much of the gap.
Domestic risks to the economic forecasts center on the weaknesses
in the banking system and possible renewed fscal pressures. More bank
failures would hurt confdence and further restrict credit, and could deal
a blow to the budget (as a result of the deposit guarantee). Fiscal pressures
would also arise if the government hikes spending before signifcant
extra revenue starts fowing from mining in about 2015. However,
the authorities have so far demonstrated the will to undertake agreed
fscal reforms and to improve the economic policy framework. Volatile
commodity prices are a perennial risk.
Expansion of mining will bring
important beneftsnew investment,
jobs, export income, and a surge in
government revenue that could fund
social and development spending, so
as to increase the productive capacity
of the economy and reduce poverty.
However, the food of new
investment and revenue into this
small, narrowly based economy may
also aggravate problems. For a start,
increased demand for labor and
materials, plus higher incomes and
public spending, could easily spur
infation to double-digit rates. Wages
in mining and in the public service
are likely to rise. Te boost in export
earnings will put upward pressure on
the real exchange rate.
Such developments would hurt the
competitiveness of manufacturing and
other nonmineral industries, including
tourism. Nonmineral industries trying
to export, or exposed to competition
from imports, might well contract.
At the least, the higher costs would
make it more difcult to diversify the
economy away from mining. Indeed, an
increase in minings role would likely
amplify the economys vulnerability
to swings in global copper prices.
(Mongolia experienced some of these
problems during the copper boom from
2005 to early 2008 and, when copper
prices crashed, it sufered recession.)
Managing windfall revenue and
smoothing public expenditure will
be critical to avoiding such boom
and bust cycles. Te government
has proposed structures to address
these issues, in particular the fscal
responsibility law. Te challenge now
is to adopt the law and adhere to
its rules. It has also put forward a
stabilization fund to manage revenue,
but it will be several years before the
fund is large enough to help bufer the
economy from another copper slump.
While steps have been taken to
strengthen the central banks role in
maintaining price and banking system
stability, more needs to be done,
including changes to make infation its
main policy goal.
Taipei,China
Jhe collapse ln global trade reverberated through thls economy, knocklng manufacturlng output and
depresslng prlvate lnvestment. Recovery started ln the second quarter of 2009 and then accelerated, so
that the contractlon ln C0P was mllder than earller antlclpated. Supported by the strengthenlng world
trade performance, C0P ls forecast to expand thls year and next. lnatlon has returned (after consumer
prlces fell last year), but ls forecast to be low thls year and next.
An economy that relies heavily on trade (merchandise imports and
exports together equal nearly 100% of GDP), Taipei,China sufered a sharp
recession when global trade collapsed in 2008. During the slump, exports
of goods in value terms plunged by about 30% year on year for several
quarters. GDP contracted from the second quarter of 2008 for 4 quarters
on a sequential basis (Figure 3.13.1), or by nearly 10% over that period.
Still, the economic contraction in 2009 was not as severe as earlier
anticipated. Exports picked up as the year progressed. So did private
consumption and public investment, supported by fscal and monetary
stimulus. Tese developments contained the decline in 2009 GDP to 1.9%
(Figure 3.13.2). (GDP was fat in 2008 and grew by 5.2% on average over
the previous 5 years.)
Private consumption eased in the frst half of 2009, owing to a weak
labor market and decline in consumer confdence. It frmed in the second
half, partly a result of government stimulus measures, to be up by 1.5%
for the year. Layofs, mainly in manufacturing and construction, pushed
the unemployment rate up to 6.1% in August, before employment started
to pick up again. Average monthly earnings in nominal terms fell for 8
consecutive months through October
Government consumption grew by 3.6% in 2009, in part a result of
its fscal stimulus measures. Net exports were also positivethe fall in
exports of goods and services from 2008 was outpaced by an even steeper
drop in imports.
However, these positive factors were more than ofset by a fall
in private investment. Fixed capital investment, which is strongly
correlated with the performance of merchandise exports, dropped
by 29.4% in the frst quarter, a deeper dive than seen afer the global
information technology bubble defated in 2001. For the full year, fxed
investment fell by 11.8%. Investment was particularly weak in machinery
and equipment (down by 21.0%). Te fall in fxed investment would have
been worse if the government had not pumped up its capital works as
part of the fscal stimulus.
-10
-5
0
5
10
15
Q4 Q3 Q2 Q1
09
Q4 Q3 Q2 Q1
2008
%
Source: 0lrectorate Ceneral of udget, Accountlng and
Statlstlcs. http://eng.dgbas.gov.tw (accessed 8 Varch zoo).
This chapter was written by Akiko Terada-Hagiwara of the Economics and Research
4.7
5.4
6.0
0.7 -1.9
2005 06 07 08 09
-10
-5
0
5
10
Percentage points
Private consumption
GDP
Investment
Sources: 0lrectorate Ceneral of udget, Accountlng and
Statlstlcs. http://eng.dgbas.gov.tw (accessed 8 Varch zoo),
A0 estlmates.
Manufacturing production (27% of GDP) slumped early in 2009 as
export orders dwindled, and was down by 4.6% for the year. Te pace of
contraction later slowed, and manufacturing rebounded in the fourth
quarter (Figure 3.13.3) along with exports.
Construction activity contracted by 6.7%. Te services sector was
virtually fat in 2009, with trade-oriented and transportation activities
slack. Agriculture, too, put in a poor performanceproduction fell by
3.1% owing to bad weather. Typhoon Morakot, which hit the island in
August 2009, lef more than 700 people dead or missing and inficted
damage to agriculture and infrastructure.
Te fall in merchandise exports, at just over 20% in US dollar terms
for the full year, was the sharpest in more than 2 decades. External
demand slumped for a wide range of exportschemicals, electronics,
machinery, optical products, plastics, and others.
Imports fell even more steeply, by 27%, refecting the slide in exports
(which use a high proportion of imported materials), slack demand
for imported capital equipment, and lower prices for imported oil and
commodities. By the fourth quarter of 2009, exports were growing
again year on year, driven by a 46% surge in shipments to the Peoples
Republic of China (PRC), whose expansion was benefting from an
aggressive fscal and monetary stimulus.
Te current account surplus rose to the equivalent of 11.2% of GDP,
buttressed by a larger surplus in goods trade (as imports plunged), an
uncommon surplus in services trade (freight payments for imports fell),
and a surplus in the income account (including repatriated profts and
dividends).
Inbound portfolio investment surged, to an extent that the monetary
authorities expressed concerns about the speculative nature of these
infows. Residents portfolio investment abroad was also substantial.
Laige net infows totaling USs: billion in the fnancial account (afei
3 years of net outfows) were mainly attributable to an increase in
withdrawals of overseas deposits by the private sector. Te overall
balance of payments iecoided a veiy laige suiplus of USs,.: billion,
and gioss inteinational ieseives giew to USs,8.: billion, to neaily
three times as high as in 2001.
Consumer prices fell in 2009, owing to a large output gap and lower
global oil and commodity prices. Te consumer price index declined by
0.9% on a year-average basis. Te pace of decline eased late in the year
(Figure 3.13.4) owing to rising oil and commodity prices.
During the depths of the slump, the monetary authorities lowered
the policy interest rate by a total of 238 basis points, to 1.25%, between
September 2008 and February 2009. Broad money supply (M2) grew by
7.0% on average in 2009, but demand for credit contracted from March
through December (Figure 3.13.5).
Fiscal stimulus measures deployed to combat the weakness in
domestic demand included shopping vouchers for all citizens, cash
transfers to low-income families, subsidies for car purchases, tax breaks,
and a public infiastiuctuie piogiam to cost about USs:o billion ovei
4 years. Higher spending and weakness in revenue led to a budget
defcit equal to 1.1% of GDP.
-12
-8
-4
0
4
8
Q1
2008
Q2 Q3 Q4 Q1
09
Q2 Q3 Q4
Percentage points
Wholesale and retail trade Construction
Finance, insurance, and
real estate
Others
Agriculture Manufacturing
A0 estlmates.
.. Month|y |nat|on
-3
0
3
6
Jan
10
Oct Jul Apr Jan
09
Oct Jul Apr Jan
2008
%
Source: CllC 0ata Company (accessed Aprll zoo).
.. Monetary |nd|cators
-5
0
5
10
-3
0
3
6
Policy rate
Private credit growth M2 growth
Jan
10
Oct Jul Apr Jan
09
Oct Jul Apr Jan
2008
% %
.. urowth |n |ndustr|a| product|on
-50
-25
0
25
50
75
Jan
10
Oct Jul Apr Jan
09
Oct Jul Apr Jan
2008
%
East Asia Taipei,China 157
Lconom|c prospects
Just as the slump in global trade sent reverberations through this
economy in 2008 and 2009, the trade upturn that is expected to continue
over the next 2 years will have positive spillover efects economywide,
buoying consumption and investment.
Rising export orders propelled both industrial production and exports
early in 2010 (Figures 3.16.6 and 3.13.7), though from a low base in the
prior-year period. Strengthening global markets and the launch of new
electronic products are expected to support export growth this year. So
will improving economic links with the PRC (whose GDP is forecast
to expand by nearly 10%). Te PRC and Hong Kong, China together
account for about 40% of Taipei,Chinas exports. Furthermore, economic
growth in Southeast Asia, which accounts for 15% of exports, is forecast
to accelerate sharply this year, and that subregions overall imports are
projected to jump by 20%.
Te public infrastructure program will also support economic growth.
About USs, billion of the piogiam's funds aie allocated foi this yeai. In
addition, reconstruction work for areas hit by Typhoon Morakot in 2009
will add about NTs,o billion (USs:., billion) to public investment this
year. Fiscal measures to stimulate consumption largely expired in 2009,
though. A fscal defcit equal to 1.4% is projected for 2010.
Leading indicators of the economy have been broadly trending up.
Domestic inventories of manufactured products bottomed in August
2009 and both export orders and permits for construction rose from
early last year (Figure 3.13.8). Exporters are expected to ramp up fxed
investment provided the rebound in export orders is sustained. Private
fxed investment is projected to be a key driver of growth in 2010
Consumer confdence, too, strengthened headed into 2010
(Figure 3.13.9), assisted the pickup in the labor market and generally
improved outlook for the economy. Gains in asset markets have
contributed to the more positive outlookstock prices rallied by 86%
from the 2009 low point through March 2010, and Taipei city house
prices rose by 20% year on year in February 2010. Private consumption
is expected to grow this year but only moderately, constrained by
relatively high unemployment and slight growth in wages.
Taking these infuences into account, GDP is projected to increase
by 4.9% this year (Figure 3.13.10) and by 4.0% in 2011 (as the low-base
efect ends and the PRCs growth moderates).
Higher prices for imported oil and commodities, coupled with
strengthening domestic demand and a frmer labor market, will
revive infation this year and next, but to low rates of about 1.5%
(Figure 3.13.11), Te consumer price index rose by an average of 1.3%
in the frst 2 months of 2010. As economic growth gathers pace and
infation edges up, the expansionary monetary stance adopted during
the global fnancial crisis is expected to be withdrawn gradually. As
a step in this direction, the monetary authorities increased issuance
of certifcates of deposit in the frst quarter of 2010 to absorb excess
liquidity from the fnancial system.
Merchandise exports in US dollar terms are forecast to increase by
nearly 20% this year. Imports will rise faster than that, by a forecast
26.5%, driven by the rebound in export industries and their investment,
2010 2011
C0P growth 4.9 4.0
lnatlon 1.5 1.6
(share of C0P)
8.2 6.7
../ Merchand|se export growth, by
dest|nat|on
-70
0
70
140
210
United States
People's Republic of China Total
Jan
10
Oct Jul Apr Jan
09
Oct Jul Apr Jan
2008
%
..8 Lead|ng |nd|cators
60
80
100
120
140
160
500
1,000
1,500
2,000
2,500
3,000
Permits for building construction
Producer's inventory
Export orders
Jan
10
Oct Jul Apr Jan
09
Oct Jul Apr Jan
2008
Index, 2006 = 100
Thousand square meters
..p Condence |nd|cators
70
80
90
100
110
120
Business leading composite index,
seasonally adjusted
Consumer confdence for the next 6 months
Jan
10
Oct Jul Apr Jan
09
Oct Jul Apr Jan
2008
Jan 2008 =100
as well as higher oil and commodity prices. Te current account surplus
is seen at a touch over 8% of GDP in 2010, declining to a little under 7%
next year.
Closer trade and investment links have been forged with the PRC in
recent years. Annual trade between the two economies has increased to
about USs:oo billion, and the PRC's shaie of Taipei,China's expoits iose
from less than 3% in 2000 to 26% in 2008, or 40% taking Hong Kong,
China into account. (Te share of exports going to Europe, Japan, and the
United States declined in this time.)
Companies fiom Taipei,China have invested at least USs8o billion in
the PRC over the past couple of decades (some estimates are substantially
higher), relocating production of electronic components, computers, and
optical products to take advantage of lower costs in the PRC.
Te challenge now is to broaden and deepen the economic ties. Cross-
strait negotiators have reached several agreements in the past 2 years,
covering areas such as fnancial cooperation and transport. However, the
direct economic impact of these agreements has been limited so far.
Negotiators from both sides are now working on an Economic
Cooperation Framework Agreement. Tis pact could include reductions
in tarifs (on selected items to start) and in other trade barriers,
investment protection measures, protection of intellectual property rights,
and a mechanism for dispute mediation. Cooperation has been proposed
in industries including solar energy and automobiles.
Successful conclusion of the agreement would facilitate trade and
investment between the two economies and could pave the way for
Taipei,China to be able to negotiate trade pacts with other economies.
Taipei,China is likely to face heightened competition in the PRC market
unless it gains some trade concessions there, since a free trade agreement
between the Association of Southeast Asian Nations and the PRC came
into force on 1 January this year.
..o u0P growth
-3
0
3
6
11 10 09 08 07 06 2005
%
Forecast
A0 estlmates.
.. |nat|on
-1
0
1
2
3
4
11 10 09 08 07 06 2005
%
Forecast
A0 estlmates.
South Asia
Islamic Republic of Afghanistan
Bangladesh
Bhutan
India
Maldives
Nepal
Pakistan
Sri Lanka
|s|am|c kepub||c of Afghan|stan
Jhe economy grew robustly on a recovery ln agrlculture ln lY2009, and lnatlon decllned sharply. Vore
wldely, the polltlco-economlc envlronment was characterlzed by a slgnlcant worsenlng ln securlty, as well
as corruptlon and uncertalnty. Steady economlc growth and development ln the medlum term requlre
contlnued moves toward the followlng: strengthenlng securlty, bulldlng crltlcal lnfrastructure, substantlally
ralslng government lnstltutlonal capaclty whlle lmprovlng governance, creatlng a pro-growth buslness
regulatory envlronment, fosterlng soclal lncluslon and equlty, and expandlng access to soclal servlces.
In FY2009 (ending 20 March 2010), GDP growth is estimated to have
rebounded to 15.1%, driven by a recovery in agriculture afer severe
drought a year earlier (Figure 3.14.1). Te sector recorded the largest
harvest in 32 years. Te continued infow of external assistance and
increased security spending benefted other sectors.
Te opium economy, which is equivalent to about 20%25% of
legal GDP, saw an estimated 10% decline in FY2009 owing to increased
suppression eforts, lower prices, and expanded eforts to support legal
crops. Nevertheless, it remains a major source of income for many
farmers and especially rewards those involved in trafcking, which in
turn boosts domestic demand in the legal economy.
Infation (in Kabul) has been on a marked downward trend
(Figure 3.14.2), refecting lower global food prices and the recovery in
domestic crop production (food has a 61% weight in the consumer price
index). Te 12-month rate in November 2009 was minus 13%, plummeting
from a peak of 43% in May 2008, as the food index moved into negative
territory. For FY2009, consumer prices are expected to be 10% lower on
average than a year earlier.
Te Da Afghanistan Bank, the central bank, continued to focus on
controlling infation while seeking to smooth exchange rate volatility. It
responded to the fall in infation and eased monetary policy, raising its
target for growth in circulation of currency in FY2009 to 22% from the
original 16%. Tis policy is consistent with the 12-month end-March 2010
infation target of about 6%. To attain its monetary targets, the central
bank is increasing the use of its 28-day capital notes as well as purchase
and sale of foreign exchange with market dealers. It continues to promote
a secondary market for these notes to develop a basis for controlling
reserve money and monetary policy through open-market operations.
Afghanistan maintains a managed foating exchange rate system. Te
iate foi the afghani stiengthened slightly in FY:oo to aiound AF/s:
(Figure 3.14.3), and close to its 5-year average in real efective terms. Large
infows of funds from external donors, remittances, and narcotics-related
.. u0P growth
0
6
12
18
09 08 07 06 2005
%
Source: lnternatlonal Vonetary lund. zoo. Country Report
No. o/zz. January. http://www.lmf.org.
This chapter was written by Allan Thomas Kelly of the Afghanistan Resident Mission,
ADB, Kabul.
..z Kabu| |nat|on
-25
0
25
50
75
Sep May Jan
09
Sep May Jan
08
Sep May Jan
2007
%
Source: Vlnlstry of Agrlculture, lrrlgatlon 8 llvestock.
Agricultural Commodity Price Bulletin. varlous lssues. http://
mall.gov.af.
activities continue to create upward pressure on the real exchange rate,
and this could deteriorate Afghanistans external competitiveness.
Te government made further progress in terms of revenue collection,
by controlling expenditure, by adopting a programmatic and sustainable
medium-term fscal framework, and by aligning the budget with the
objectives of the Afghanistan National Development Strategy (ANDS) to
achieve macroeconomic stability and sustainable growth. It has focused
on controlling non-security spending while incorporating increases in
security spending fnanced with additional grants.
Over the past few years, even though the government has increased
collection of domestic revenue, it is insufcient to meet operating budget
spending; development expenditure in the government budget is almost
fully donor funded. Moreover, a large part of donor activity is undertaken
outside the government budget and accounts for more than half total
public spending. Tis reduces the efectiveness of the governments
development agenda in terms of priorities, resource allocation, fscal
policy, and in monitoring progress against desired outcomes according to
the ANDS.
Te fscal position strengthened in FY2009 with domestic revenue
estimated to have risen by almost 32%, bringing it to 8.1% of GDP afer
several years of little improvement (Figure 3.14.4). Tis increase was
achieved by greater tax collection from large and medium taxpayers,
stronger customs revenue via tighter controls on fuel imports, and legal
amendments that subjected imports to a business tax.
With the decline in security, the government lifed operating budget
spending to 14.4% of GDP in FY2009, with much of the increase due to
an increase the size of the police and army (by about 23% to 205,800).
Te operating budget (excluding grants) is expected to worsen by 1.6% of
GDP, though including grants it will remain unchanged as nearly all the
additional spending will be fnanced by grants (more than 80% of security
expenditure is met from external sources). As the need for much higher
levels of security spending has become evident, the governments target of
being able to fully fnance its operating budget through domestic revenue,
originally slated for FY2015, will likely slip to FY2023, according to a
January 2010 report from the International Monetary Fund (IMF).
Te current account defcit (Figure 3.14.5), excluding grants, is
estimated to have widened fiom so. billion to s,.o billion, oi about
53.7% of GDP (but still lower as a share of GDP from 54.5% a year earlier).
Including giants, the cuiient account defcit was only so: million
(about 3.6% of GDP), and was more than fully fnanced by ofcial loans
(s,: million) and foieign diiect investment (s:8, million). Impoits, the
bulk of which are associated with donor-fnanced activities, increased
by 3.5%. Domestic exports fell by 2.4%. Gross international reserves rose
duiing the yeai and at an estimated s,.8 billion in Maich :o:o could
fnance about 13 months of domestic (non-donor) imports.
Te IMFs sixth review of the Poverty Reduction and Growth Facility,
completed in January 2010, noted the successful implementation of the
FY2009 economic program and the series of steps that qualifed the
countiy foi s:.o billion debt ielief fiom multilateial, bilateial, and piivate
creditors, equivalent to a 96% reduction in the countrys external debt as it
had reached the completion point under the heavily indebted poor country
.. Nom|na| exchange rate
45
47
49
51
53
Jan
09
Jan
08
Jan
07
Jan
06
Jan
05
Jan
04
Jan
2003
AF/$
llnanclal Statlstlcs onllne database. http://www.
lmfstatlstlcs.org/lmf/ (accessed Varch zoo).
.. 0omest|c revenue and operat|ng
expend|ture
0
5
10
15
Operating expenditure Domestic revenue
Nontax Tax
09 08 07 06 2005
% of GDP
6.4
8.1
6.9 6.9
7.5
-80
-40
0
40
Including ofcial grants
Excluding ofcial grants
09 08 07 06 2005
% of GDP
South Asia Islamic Republic of Afghanistan 163
initiative. As part of this process, the Paris Club of 19 creditor countries
met in March 2010 and canceled Afghanistans debt owed to its members.
While the debt relief will reduce debt burden indicators to sustainable
levels, the economy will remain at high risk. Given its reliance on foreign
grants, it is vulnerable if grant support decreases. A sensitivity analysis
carried out by the IMF in January emphasized that the external position
is particularly exposed to slower growth and to greater reliance on debt
rather than grant fnancing.
Lconom|c prospects
GDP growth in FY2010 is forecast to moderate to 7.6% and to a little
under 7.0% the following year. Tis forecast is based on a number of key
assumptions: a gradual improvement in security, continuation of the
large development partner funding for projects, sustained agricultural
production, continued growth of business enterprises catering to
growing consumer demand, improved revenue administration and public
enterprise reform, fnancial sector development, and growing foreign
direct investment, especially that aimed at development of the countrys
substantial mineral resources (such as copper and iron ore).
Monetary policy is expected to contain infation to 8.4% and 4.5%
in the forecast period, barring unexpected developments in global
commodity prices or domestic crop failures. Te current account defcit
(including grants) is projected to improve slightly to about 2% of GDP,
mainly owing to an improvement in export performance.
Te medium-term growth forecast is subject to several key risks
in terms of the domestic security situation; political stability; and
the governments ability to combat corruption and to address the
infrastructure constraints in power, transport, and irrigation. Inability
to achieve steady implementation in structural reforms that will facilitate
private sector investment is a further risk underscored in the World
Banks Doing Business 2010 report.
It is important that the government continue with strengthening
and developing its range of macroeconomic policy instruments, with
advancing fscal reform, and with increasing domestic revenue collection.
It will also need to tightly manage and control budget expenditure, as
well as improve the budget formulation process and capacity to execute
projects among line ministries. Improved budget expenditure alignment
with the ANDS priorities is also necessary.
Achieving greater aid efectiveness through stronger alignment of
the donor activities (done outside the government budget) with the
national development priorities and the government budget is another
priority. Associated with these measures are improvements in structural
policies and the business and regulatory environment, the building of
core government institutional capacity for efcient service delivery, and
improvements in social inclusion, equity, and access to social services.
2010 2011
C0P growth 7.6 6.8
lnatlon 8.4 4.5
(share of C0P)
-1.8 -2.1
8ang|adesh
Jhe global recesslons late-unfoldlng eects wlll, thls year, sllghtly slow growth, but lt wlll llkely lmprove next
year as the worldwlde recovery strengthens. Vacroeconomlc stablllty has been malntalned, but llquldlty
pressures ln banklng have emerged and wlll need to be dealt wlth declslvely. Power and natural gas shortages
wlll have to be tackled through large and qulck lnvestments, and pollcy and lnstltutlonal reforms accelerated,
to ralse medlum-term growth. Jherefore, greater lmplementatlon capaclty ls needed for government
development projects and lnfrastructure lnvestments under the new publlcprlvate partnershlp scheme.
Tis economy has performed better than many others in Asia due in
part to its lack of integration with global fnancial markets as well as the
nature of its garment and labor exports, which are targeted mainly at the
low end of the market (a segment that was less afected during the early
stages of the crisis).
Ofcial sources estimate that GDP growth declined slightly to 5.9%
in FY2009 (ended June 2009) from 6.2% in the previous year largely
because of industrys decelerating growth (Figure 3.15.1), as export
production slowed during the global recession. Industrys growth was also
constrained by power and natural gas shortages and by a weakening in
construction activity.
Agriculture performed well, aided by favorable weather and
government support to farmers that improved their access to inputs and
credit. Expansion in services decelerated as the slowdown in industry
crimped trade and transport activity.
On the demand side, private consumption remained the major driver of
growth (Figure 3.15.2), fueled by a healthy expansion in workers remittances
from abroad. Total fxed investment, at 24.2% of GDP in FY2009, was
unchanged as the marginal rise in private investment was ofset by a
decline in public investment due to continued sluggish implementation of
the governments annual development program (ADP). Te contribution to
growth of net exports of goods and services was negative.
Foreign direct investment (FDI) has stagnated at the meager level of
less than s: billion annually ovei the past , yeais. In an attempt to boost
FDI into gas, the government invited bids for ofshore gas exploration and
awarded contracts for three ofshore blocks. To attract potential investors
into the power sector, it relaxed the cap on producers gas sales prices to
bring them close to international levels.
Average infation dropped to 6.7% in FY2009 from 9.9% the year
before, with the fall in food prices steeper than that in nonfood prices.
Te steep decline in petroleum and food import prices and an uptick in
domestic agricultural performance were the main factors contributing to
easing price pressures. However, afer falling to a 90-month low of 2.3%
0
2
4
6
8
GDP growth Agriculture
Industry Services
09 08 07 06 2005
Percentage points
6.0
5.9
6.2
6.4
6.6
Source: angladesh ureau of Statlstlcs. zoo,. National
Accounts Statistics. Vay.
This chapter was written by Mohammad Zahid Hossain, Md. Golam Mortaza, and
Shamsur Rahman of the Bangladesh Resident Mission, ADB, Dhaka.
2005 06 07 08 09
Percentage points
-2
0
2
4
6
8
GDP growth
Net exports Investment
Consumption
Statistical discrepancy
Source: angladesh ureau of Statlstlcs. zoo,. National
Accounts Statistics. Vay.
South Asia Bangladesh 165
year on year in June 2009 (Figure 3.15.3), infation accelerated to 9.0% in
January 2010, with food and nonfood prices rising sharply. Tis upturn
refected the impact of unfavorable weather on domestic crop production
and the strengthening of global prices of rice and other commodities.
Growth in broad money was strong throughout FY2009, advancing
19.4% year on year in June 2009, compared with the 17.5% program target
of Bangladesh Bank, the central bank (Figure 3.15.4). Tis buoyancy
largely refected unexpected strength both in the banking systems net
foreign assets and in the balance-of-payments outturn. Expansion in
private sector credit fell to 14.6% year on year in June 2009 (against
a target of 18.5%), as slower domestic economic activity and business
uncertainty curtailed demand.
Bangladesh Bank cut its policy rates (repo and reverse repo) by
25 basis points in March 2009 in an efort to bolster economic activity.
Moreover, its operations in the foreign exchange market substantially
raised commercial banks excess reserves and lending capacity. Refecting
these factors, the average interbank call money rate dropped sharply to
1.8% in June 2009, from 8.3% in March 2009. However, commercial banks
weighted average lending rate declined only marginally to 11.9% in June
2009 and credit fows did not strengthen perceptibly. In October, the
central bank cut the two policy rates by 400 basis points in an efort to
encourage banks to reduce lending rates and to stimulate credit demand.
Afer that move, credit to the private sector climbed strongly.
Te taka-dollai exchange iate iemained stable at about Tko/s: in
FY2009, as Bangladesh Bank intervened heavily in the interbank market,
puichasing s:., billion duiing the yeai (up fiom only so.: billion in
FY2008) to prevent that rate from appreciating. However, the real efective
exchange rate appreciated by 7.2% over the year due to higher domestic
infation than in its major trading partners, implying erosion in export
competitiveness.
Revenue collection rose slightly to 11.2% of GDP in FY2009, but fell
well short of the FY2009 budget target, mainly because of the slower
growth in imports. Total spending at 15.3% of GDP was also lower than
target. Lower international prices of food, fuel, and fertilizer contained
current spending on subsidies, and the ADP was also substantially
underspent due to continuing human resources constraints in key line
agencies. Te overall budget defcit was therefore only 4.1% of GDP, well
below the target of 5.0%.
Export growth decelerated to 10.1% in FY2009 from 17.4% in FY2008,
with essentially stagnant year-on-year export gains afer the September
2008 global fnancial meltdown (Figure 3.15.5). Readymade garments
posted a still-healthy growth of 15.4%, which helped raise their share in
total exports to 79.3% from 75.8% the previous year, as other products
exports declined by 5.7% on weak demand and lower prices.
Contracting in the second half from year-earlier levels, imports
plummeted to only 4.2% growth in FY2009 from 25.6% (Figure 3.15.6).
A good domestic crop and a combination of falling global commodity
prices and weaker imports of capital machinery and raw materials were
the major factors.
Te improved trade defcit, together with 22.4% growth in workers
iemittances, lifed the cuiient account suiplus to s:., billion (:.8 of
.. Contr|but|ons to |nat|on
0
3
6
9
12
Total Food Nonfood
Oct Jul Apr Jan
09
Oct Jul Apr Jan
2008
Percentage points
Sources: angladesh ureau of Statlstlcs. http://www.bbs.
gov.bd (accessed ) Varch zoo), A0 estlmates.
.. urowth of monetary |nd|cators
9
15
21
27
Oct Jul Apr Jan
09
Oct Jul Apr Jan
2008
%
Broad money
Domestic credit
Private sector credit
Source: angladesh ank. http://www. bangladesh-bank.
org (accessed lebruary zoo).
.. Month|y export growth
-40
0
40
80
Oct Jul Apr Jan
09
Oct Jul
2008
%
Source: lxport Promotlon ureau. http://www.epb.gov.bd
(accessed 8 Varch zoo).
.. Month|y |mport growth
-40
-20
0
20
40
Oct Jul Apr Jan
09
Oct Jul
2008
%
GDP) fiom s,o: million (o. of GDP) in FY:oo8 (Figuie ,.:,.,). A
small defcit in the capital and fnancial account resulted in a surplus
of s:.: billion in the oveiall balance of payments in FY:oo, dwaifng
the piioi-yeai's s,,: million suiplus. Foieign exchange ieseives iose
to s,., billion (,.8 months of impoits) at end-June :oo, and suiged to
s:o.o billion at end-Febiuaiy :o:o, neaily twice the level of a yeai eailiei,
and equivalent to over 5 months of imports (Figure 3.15.8).
Lconom|c prospects
Economic forecasts for FY2010 and FY2011 assume continued prudence in
macroeconomic management and steady progress in governance reforms.
Commissioning of new power generation capacity should moderately
reduce supply shortages.
GDP growth in FY2010 is forecast at 5.5%, somewhat lower than in
FY2009 due in part to the lagged efects of depressed external demand
on Bangladeshs mainly low-end garment exports. In FY2011, growth
is expected to rise to 6.3%, underpinned by the global recovery and
strengthened business confdence and investment.
Despite continued policy support, agricultural growth is seen
moderating in FY2010 to a still-high 4.1% from 4.6%, as the aus
(summer) crop has been afected by drought and the aman (monsoon)
crop by inadequate rainfall. Te high base of the previous year and less
remunerative farmgate prices are also factors. Sector growth is projected
to nudge up to 4.3% in FY2011 on an expected return to normal weather.
Industrial growth is seen decelerating to 5.6%, refecting subdued
domestic and external demand in the frst half of FY2010. Several
indicators suggest that industry will remain sluggish throughout the
year. Export performance was dismal in the frst half, declining by 6.2%
(Figure 3.15.9), with most items (including garments) contracting due to
weak retail sales in industrial countries. In addition, domestic investor
sentiment has not fully revived following the initial uncertainty over the
extent and depth of the impact of the global recession on Bangladesh.
Moreover, decelerating remittance growth will limit growth in consumer
demand. Still, industrial performance is expected to strengthen in the
second half of FY2010 as exports return to a positive growth path on
recovering global momentum.
In FY2011, industry is likely to grow more robustly at 7.5% with
further recovery in global demand and improved domestic business
confdence that will raise construction activity and investment. Other
domestic factors, such as fnancial support to small and medium-sized
enterprises spearheaded by the central bank, should also help boost
industrial output.
Services growth in FY2010 is forecast to slow to 5.9% from 6.3%,
refecting weaker performance in agriculture and industry. Trade and
transport activity are especially afected. Growth is projected to rebound
to 6.5% in FY2011.
With the rise in year-on-year infation, the 12-month average has
also picked up. In FY2010, average infation is forecast to climb to 7.5%
and then to 7.8% the following year. Te excess liquidity in banks and
international commodity price pressures are expected to stoke infation.
2010 2011
C0P growth 5.5 6.3
lnatlon 7.5 7.8
(share of C0P)
1.8 0.5
..8 uross fore|gn exchange reserves
0
3
6
9
12
Jan
10
Sep May Jan
09
Sep May Jan
08
Sep May Jan
2007
$ billion
org (accessed 8 Varch zoo).
../ Components of the current account
ba|ance
-30
-15
0
15
30
2005 06 07 08 09
$ billion
-3.0
-1.5
0.0
1.5
3.0
% of GDP
Current account
Net income
Net services
Imports
Remittances
Exports
Other net transfers
Source: angladesh ank. zoo. Annual Report .
http:// www.bangladesh-bank.org.
..p urowth |n exports and components
-20
0
20
40
Total
Others Woven garments
Knitwear products
Jul
Dec
FY10
Jul
Dec
FY09
09 08 07 06 2005
%
Source: angladesh ank. zoo. Annual Report .
http:// www.bangladesh-bank.org.
South Asia Bangladesh 167
Te Monetary Policy Statement announced in January 2010 continues
the accommodative stance. Te statement seeks to maintain supportive
monetary conditions to help exports recover and investment pick up.
It also anticipates that the boost to production from improved credit
availability and the November 2009 cut in fertilizer prices will help
contain FY2010 infation. Te year-on-year growth in broad money
(20.7%) in December 2009 was higher than the central banks annual
program target of 15.5%, while growth in private sector credit at 19.2% was
also above its program target of 16.7%.
Remittances ieached a peak of s:.: billion in Novembei :oo, befoie
falling to s8.: million in Febiuaiy :o:o. Remittance giowth diopped
to 19.2% in the frst 8 months of FY2010 from 27.0% in the year-earlier
period. Job placements abroad also tumbled (42.2%) in this period
(Figure 3.15.10) and many workers came home. Refecting a decelerating
rise in the number of new migrants and an increasing number of
returnees, remittance growth is expected to slow further, to 16.5% in
FY2010 and to 12.5% in FY2011.
Based on orders received, exports are set to perform better in the
second half but, because they declined in the frst half, full-year FY2010
growth is projected at only 5.0%. Te frst-half decline also suggests a
more pronounced impact of the global recession in FY2010 than a year
eailiei. Te goveinment announced a Tk:o billion (s:, million) package
in November 2009 to boost exports performance. With continued global
recovery, growth is projected to rise to 11.0% in FY2011.
Imports declined sharply by 5.7% in the frst half of FY2010 but are
likely to pick up in the second half, with overall growth rising to 4.0%
in FY2010 and to 14.0% in FY2011, as international fuel and nonfuel
commodity prices recover and as domestic demand for imported raw
materials and capital machinery grows.
Te surplus in the current account is expected to decline to 1.8% of
GDP in FY2010 as export and remittance growth slow, although import
growth will also decelerate. Te surplus will slide further to 0.5% of GDP
in FY2011 (Figure 3.15.11), as the trade defcit widens due to a recovery in
import growth and a further slowing in remittance growth.
In June 2009, the government set an expansionary fscal stance in
the FY2010 budget. It included sizable spending on a new publicprivate
partnership (PPP) scheme, a much larger ADP, an expanded social safety
net program, and a special stimulus package (Box 3.15.1). Although ADP
utilization of 35% in the frst 7 months of the fscal year is an improvement
over past years, based on its current pace, the ADP allocation is unlikely
to be fully spent. Te allocation for PPPs is also likely to remain largely
unused, as the preparatory work for launching the scheme is taking longer
than foreseen. Tus, the FY2010 budget defcit is expected to be contained
within the projected level of 5.1% of GDP (Figure 3.15.12).
Te government has not raised the administered prices of domestic
fuels since it lowered prices of diesel and kerosene (together, close to 75%
of domestic consumption) in January 2009, despite subsequent increases
in international oil prices. Te Bangladesh Petroleum Corporation
(BPC) is sufering losses from selling these products at below cost. It is
making some proft on gasoline (petrol), which accounts for about 15% of
consumption; the price was reduced in December 2008. Efective 1 March
..o urowth |n overseas emp|oyment
-50
0
50
100
Jul
Feb
FY10
Jul
Feb
FY09
09 08 07 06 2005
%
-2
0
2
4
11 10 09 08 07 06 2005
% of GDP
Forecast
Sources: angladesh ank. zoo. Annual Report .
http:// www.bangladesh-bank.org, A0 estlmates.
..z P|sca| ba|ance
-6
-4
-2
0
2
Fiscal balance
Domestic fnancing
Foreign fnancing
11 10 09 08 07 06 2005
% of GDP
Forecast
Sources: Vlnlstry of llnance. zoo,. Budget at a Glance.
http://www.mof.gov.bd, A0 estlmates.
2010, the Bangladesh Power Development Board (BPDB) increased tarifs
by 6%7%. Without domestic price increases, BPC is likely to incur a
sizable defcit. Te FY:o:o budget eaimaiked s,,o million foi subsidies to
BPC and to BPDB to cover their likely losses.
Several downside risks could undermine projections. Tese include
a weaker than expected global economic recovery, failure of planned
measures to address growing power and gas shortages, business confdence
weakened by a lack of progress in economic and governance reforms,
and an unexpected surge in commodity prices or in bank credit pushing
infation much higher. Te threat of natural disasters always looms.
Infrastructure investment needs to be boosted for faster economic
growth and poverty reduction. Underinvestment over the years has
resulted in acute defciencies, especially in power and gas, ports, and
roads, which are restricting business opportunities and access to public
services. Consequently, the government has to substantially raise project
implementation capacity in public sector agencies, lif ADP utilization,
and carry out PPPs in infrastructure. To launch the PPP scheme, the
legal framework for setting the responsibilities of stakeholders, for cost-
recovery provisions, and for compensation and redress mechanisms needs
to be put in place quickly.
A combination of cheap labor and a supportive policy environment
helped Bangladesh emerge as a major exporter of garments over the past
two decades. However, overwhelming dependence on the one industry
has made the countrys export earnings acutely vulnerable to a global
slowdown. Recent experience underscores the urgency of diversifying
into other promising industries such as ceramics, pharmaceuticals,
food processing, leather products, and spare parts for machinery
and shipbuilding. An important requirement for such an export
transformation is the necessary utility services such as power, gas, and
water. Streamlining the export duty drawback system and improving
customs and bonded warehouse facilities are also required.
Population pressure is a related concern. It is straining ecosystem
services, such as safe water supply and habitat as well as other natural
resources, and pressuring the government in terms of providing
infrastructure, utilities, and other services. Although Bangladesh has
made progress over the past two decades in nearly halving the total
fertility rate to slightly above the population replacement rate, further
progress is neededby raising investment in family planning and
reproductive healthto push the fertility rate to below the replacement
rate. Job opportunities will also need to be created for the large number
of youths entering the job market each year.
Climate-induced disasters are endemic in Bangladesh, ruining the
lives and livelihoods of millions of people, damaging infrastructure,
and harming the physical environment. Climate change multiplies these
inherent risks, undermining development prospects and eroding the gains
in poverty reduction. Major eforts need to be mounted for mobilizing
funds for adaptation measures, putting in place the right policy
frameworks, and building institutional capacity.
3.15.1 Po||cy responses to the g|oba|
recess|on
Te governments frst response
announced in April 2009 was a
Tk34.2 billion ($500 million) stimulus
package for exports, agriculture, power,
and social safety net programs. Tis
package provided cash incentives for
the more severely afected export items
such as jute and jute goods, leather
and leather goods, and frozen foods.
It ofered no assistance to the garment
industry as it was still performing
reasonably well at the time.
Out of the Tk50 billion earmarked
for a second fscal stimulus package
(as part of the FY2010 budget),
the government initially allocated
Tk18 billion for export subsidies and
Tk12 billion for the power sector.
From the remaining Tk20 billion,
as the efects of global recession on
exports became more pronounced,
the government allocated Tk10 billion
in November 2009 for direct export
subsidies and other policy support,
including assistance to the garment
industry.
Te central bank sought to
align monetary policy to support
the expansionary fscal stance, and
has continued an accommodative
monetary policy stance in FY2010. In
addition to lowering policy rates to
improve the availability of credit, it did
not sterilize the higher bank reserves
(lending capacity) created by its large
market purchases of foreign exchange
as it kept the exchange rate stable.
8hutan
lconomlc growth ls domlnated by the hydropower project cycle. whlle growth decelerated last year from
very hlgh levels as the eect of newly lnstalled power productlon faded, constructlon of new power
plants wlll sustaln solld expanslon over the next few years. hutan has a record of relatlvely strong growth
that has cut poverty and advanced soclal development. lt ls based on prudent economlc management
and well-targeted donor support. Anchored by power, the medlum-term outlook ls brlght, though rlslng
unemployment, especlally among young people, remalns an economlc and soclal concern.
Bhutan was well insulated from the global meltdown as the economy is
driven largely by construction of hydropower stations and the export of
electricity to power-hungry India. Electricity is the single largest sector
of the economy, with a 22% share of GDP (its exports to India amount
to half total exports), followed by construction at 12%, agriculture at
17%, and manufacturing at about 9%. (Services as a group account for
around 36%.)
GDP growth in FY2009 (ended 30 June 2009) decelerated to an
estimated 6.0% from 11.8% in FY2008 (Figure 3.16.1) refecting the
leveling-of of power output gains afer the 2007 commissioning and
phase-in of the huge Tala hydropower station (Figure 3.16.2). Tere were no
stimulus measures introduced given the limited impact of the global crisis.
Tough its impact was not as severe as elsewhere in the region, the
global recession afected tourism and manufacturing. Tourism, though
small in relation to GDP, is important for employment creation and is
the largest source of hard currency earnings. While it benefted from the
one-time centenary and royal coronation celebrations held in JuneJuly
2008, arrivals dropped by 7.3% in JanuaryJune 2009, year on year
(Figure 3.16.3). Major manufacturing companies, most of which produce
raw materials, saw sales fall by 13.1% in FY2009, refecting a drop in
exports to India. In the labor market, unemployment is estimated to have
increased to 4.0% in FY2009 from 3.7% in FY2008.
With strong economic and fnancial ties to India, and its currency
(the Ngultrum) pegged at par with the Indian rupee, Bhutans infation
is highly infuenced by that in India, and averaged 7.1% in FY2009. It
decelerated to 3.0% in the fourth quarter of FY2009 from a peak of 8.8%
in FY2008, as nonfood price infation (including transport) tumbled
(Figure 3.16.4).
Money supply (M2) rebounded, to 24.6% growth in FY2009 from 2.3%
a year earlier, primarily due to growth in net foreign assets. Credit to the
private sector grew by 31.1%, refecting continued signifcant expansion in
6.0
11.8
13.5
6.7 7.5
6.0
2004 05 06 07 08 09
Percentage points
-5
0
5
10
15
Agriculture
Construction Services GDP
Other industries Electricity
Source: Royal Vonetary Authorlty. zoo. Annual Report
. January. http://www.rma.org.bt
This chapter was written by Tadateru Hayashi of the South Asia Department, ADB,
Manila.
..z urowth of hydropower sa|es
Q1
2005
Q3 Q1
06
Q3 Q1
07
Q3 Q1
08
Q3 Q1
09
%
-100
0
100
200
300
400
Others Tala Total
Note: Sales based on cost ln Ngultrum.
personal and housing loans and lending to manufacturers. Credit to the
private sector has grown rapidly by an average of 35% in the past 3 years
despite eforts by the Royal Monetary Authority, the central bank, to rein
in banks excess liquidly.
Credit quality deteriorated in FY2009 as nonperforming loans
increased from 13.3% to 18.3% of the total. Such loans in manufacturing
more than doubled, largely owing to lower prices and export sales in
metal and other processing industries, which beneft from low-cost
electricity. While the outlook for manufacturing is positive (largely
due to Indias rapid recovery), the central bank has raised provisioning
requirements of substandard and doubtful loans to 30% and 60%,
respectively, to minimize any potential adverse impact on banks.
Otherwise, developments in the fnance sector have generally been
positive. It is expected that the entry of two commercial banks, one
specialized bank, and an insurance company will stimulate greater
competition in the sector.
Budget revenue for FY2009 is estimated to be up by 30.6% from
FY2008, attributable to increases in personal income tax receipts,
business income tax receipts, excise duty, and proft transfer from Tala.
Total expenditure rose by 42.5%, refecting a surge in capital expenditure
(50.3%) due primarily to the inclusion of additional budget allocations
for agriculture-related infrastructure, rural electrifcation, and project
funds for a cement project. Te estimated fscal defcit of Nu1.6 billion is
equivalent to 2.8% of GDP (Figure 3.16.5).
Te FY2010 budget plan projects an increase in the defcit to
Nu4.8 billion, or about 9.0% of projected GDP. Te larger defcit refects
a 10.1% decline in budget revenue, mainly due to a fall in grant receipts,
which are volatile from year to year. Domestic revenue declined slightly
as weaker proft transfers from Tala are not expected to be ofset by
continued strong growth in domestic tax revenue. Total outlays are
projected at Nu26.3 billion (up 3.1%), with current expenditure rising by
about 14% (largely on a 23% increase in salaries and wages), and capital
spending falling (afer the large increase in FY2009).
Te overall trade balance is estimated to have deteriorated to a defcit
of 12.1% of GDP in 2009 from 5.0% in 2008 (Figure 3.16.6), attributable to
easing commodity exports and increased imports. Manufactured exports,
particularly textile- and mineral-based products, contributed to weaker
export performance, but their impact was mitigated by moderate growth
in hydropower exports. In the other direction, intermediate imports
surged on burgeoning construction-related activity.
Despite the much higher current account defcit (9.4% of GDP), the
overall balance remained in surplus due to large infows associated with
capital grants received from the Government of India. At end-September
2009, gross international reserves (convertible currency and Indian
iupee combined) climbed to s8 million, equivalent to :,.: months of
import cover.
External debt as a share of GDP was high at 65.0% as of end-FY2009,
with loans from India for hydropower development constituting more
than half. Te government recently started borrowing in rupees from
the Indian governments standby credit facility and the State Bank
of Indias overdraf facility to meet shortfalls in rupees required for
.. 1our|sm growth
-40
0
40
80
Revenue Number of tourists
Q2 Q1
09
Q4 Q3 Q2 Q1
08
Q4 Q3 Q2 Q1
2007
%
Note: Revenue changes calculated ln uS dollars.
.. Contr|but|ons to |nat|on
-5
0
5
10
15
India wholesale price index
Bhutan consumer price index
Nonfood
Food
Q3 Q1
09
Q3 Q1
08
Q3 Q1
07
Q3 Q1
2006
Percentage points
Sources: Royal Vonetary Authorlty. zoo. Annual Report
. January, zoo,. Monthly Statistical Bulletin.
September. http://www.rma.org.bt
.. P|sca| |nd|cators
-20
0
20
40
60
Capital expenditure
Current expenditure
Overall balance
Total revenue (including grants)
10 09 08 07 06 05 2004
% of GDP
Forecast
Sources: Royal Vonetary Authorlty. zoo. Annual Report
. January. http://www.rma.org.bt, A0 estlmates.
South Asia Bhutan 171
import payments. Still, Bhutans debt level is largely self-sustaining, as
a steady stream of earnings from power exports to India generate the
necessary service payments. Convertible currency debt is mostly on
highly concessional terms involving modest debt servicing. Te external
debt service ratio increased to 39.6% in FY2009 from 18.5% a year earlier,
refecting repayments to the State Bank of India (Figure 3.16.7).
Lconom|c prospects
It is expected that during the 10th fve-year plan (FY2009FY2013),
growth will continue to be strong, mainly driven by new hydropower
developments including 10 hydropower projects, with three of the projects
expected to start this year. Construction of these new power stations will
sustain high economic growth.
On these factors, GDP growth is projected to be 6.0% in FY2010 and
6.5% FY2011. With close trade links and the currency peg to the Indian
rupee, infation is projected at 5.0% for FY2010 and FY2011, largely
following Indian infation. While power exports to India will remain
stable due to strong demand and long-term contracts, commodity exports
will likely improve in view of that countrys expected strong expansion in
the forecast period.
Recovery of service exports (mainly tourism) may take time, refecting
the economic recovery in industrial countries. Te assumed relatively
stable fuel import prices will, however, help restrain import growth. Te
current account is projected to be in balance in both FY2010 and FY2011.
Rising unemployment is a concern, as hydropower-led development
employs few people and has small backward linkages. Labor-intensive
activities need to be developed. Tourism is one area where the
private sector can expand. Depending on the development of tourism
infrastructure and new tourism products, a more steady infow of tourists
throughout the year could be better promoted.
Private sector development will be a key focus in diversifying
economic activity. Bottlenecks such as lack of skilled labor, difcult access
to land, inadequate infrastructure, and limited fnancial sector outreach
need to be addressed to facilitate economic diversifcation and growth.
2010 2011
C0P growth 6.0 6.5
lnatlon 5.0 5.0
(share of C0P)
0.0 0.0
.. Current account |nd|cators
2004 05 06 07 08 09
% of GDP
-40
-20
0
20
Income
Trade balance Current account balance
Services Current transfers
../ Lxterna| debt |nd|cators
0
40
80
120
0
15
30
45
Debt service ratio
Nonconvertible currency
Convertible currency
09 08 07 06 2005
% of GDP %
|nd|a
Jhe economy rebounded strongly over the past scal year and ls among the leaders ln exltlng the global
recesslon. Prompt and strong scal stlmulus and monetary easlng, an lmprovlng global economlc envlronment,
a return of rlsk appetlte, and large capltal lnows were lnstrumental ln the bounceback. Rlslng lnatlon,
however, ls a concern. Vonetary tlghtenlng and wlthdrawal of scal stlmulus are under way. Jhe outlook ls
for a return of hlgh growth, though thls wlll requlre contlnued apt handllng of macroeconomlc pollcles. Jo
sustaln long-term growth, addresslng lnfrastructure bottlenecks and reformlng agrlculture are essentlal.
Starting slowly in the frst quarter of FY2009 (ending March 2010),
economic growth in India came back strongly over the year (Figure 3.17.1),
buoyed by monetary and fscal stimulus and by gradually strengthening
consumer and private business confdence. Te governments advance
estimate for the year put GDP growth at 7.2%, a marked improvement
over the 6.7% recorded in FY2008 (Figure 3.17.2).
At the sector level, industry fully accounted for the improvement
in growth as manufacturing output spurted (Figure 3.17.3) from the
very beginning of the fscal year to be 8.9% higher than a year earlier.
Manufacturings impressive performance signals that the economy has
regained the momentum lost at the onset of the global fnancial crisis.
Agriculture played no role in the upturn: output is estimated to have
fallen by 0.2% for the year, refecting the poor summer monsoon. Te
impact of this output decline was largely felt in the third quarter, and the
upward trend in growth faltered temporarily as farm production fell by
nearly 3% year on year.
Expansion in services, while a healthy 8.7%, slowed from a year
earlier. Tis refected a more moderate pace of spending by the
government on compensation to employees refected in slower growth of
social services.
On the demand side, preliminary data suggest that robust
contributions by private and government consumption continued, but
also that investment failed to show any signs of pickup with the fxed
investment-to-GDP ratio slipping marginally to 32.3%. Restocking of
inventories also added to GDP growth afer a large drop a year earlier,
helping boost growth in manufacturing output. Civil servants wage
hikes, low interest rates, and rising consumer confdence led to a surge in
vehicle sales during the year; production data indicate sales strength of
other durable items as well. Net exports also bolstered growth, refecting
a drop in imports.
Indian corporations made the most of lower commodity prices and
./. uarter|y contr|but|ons to growth
(supp|y)
8.6
6.0
7.9
6.1
5.8
6.2
7.5 7.6
8.5
9.7
9.4 9.3
-3
0
3
6
9
12
Q1
2007
Q3 Q1
08
Q3 Q1
09
Q3
% Percentage points
-3
0
3
6
9
12
Agriculture
Industry
Services GDP
Note: | zoo, sector breakdown not glven.
Sources: Vlnlstry of Statlstlcs and Program lmplementatlon.
http://www.mospl.nlc.ln (accessed z Varch zoo), A0
estlmates.
This chapter was written by Hiranya Mukhopadhyay of the India Resident Mission, ADB,
New Delhi.
./.z Annua| contr|but|ons to growth
(supp|y)
7.2
6.7
9.2
9.7 9.5
-4
0
4
8
12
2005 06 07 08 09
% Percentage points
-4
0
4
8
12
Agriculture
Industry
Services GDP
Source: Vlnlstry of Statlstlcs and Program lmplementatlon.
http://www.mospl.nlc.ln (accessed z| Varch zoo).
South Asia India 173
the governments cut in excise duty in response to the global crisis.
Companies curtailed their expansion plans, reduced marketing expenses,
and went slowly on granting pay rises to their staf. Tese moves, along
with falling interest rates, helped them report a 28% rise in afer-tax proft
in the frst half of FY2009.
Te outline of the improving economic landscape is, however,
blurred by a recent surge in infation to 10% in January 2010, largely
propelled by food infation that reached 20% in December 2009
(Figure 3.17.4). Te very weak summer monsoon in the sowing season,
followed by widespread fooding later, has triggered a spurt in food
prices. Importantly, escalating prices have not been confned to cereals
but include pulses, vegetables, and poultry products, pointing to the
governments inability to stabilize prices by the usual bufer-stock
operations. With the rise in the second half, infation is estimated to
average 3.6% in FY2009.
Beyond weather, one structural reason for persistent price pressure is
that the central government has raised its food procurement prices greatly
(the minimum support price for paddy has gone up substantially over the
past 3 years).
Te government took several supply-side measures to counter the
recent surge in prices, including selling wheat and rice from bufer stocks,
temporarily suspending duty on sugar imports, and initiating measures
against hoarding. While food prices are expected to moderate with the
new harvest season, their relentless rise (given their large weight in the
price index) has created concerns of spillover to nonfood prices and a
ratcheting up of infation expectations.
Uncertainties about domestic fuel prices (which again require heavy
subsidies as global oil prices climb) are also contributing to infation
expectations. Te Parikh committee, which took on the contentious
issue of domestic pricing of petroleum products, recommended complete
deregulation of petrol (gasoline) and diesel prices, and substantial
increases in the prices of cooking gas and kerosene.
Tis is, indeed, a much-needed reform because of high subsidy costs
and harm to the long-term health of the petroleum industry, which bears
part of the subsidy costs. Implementation, however, will be challenging
at the moment due to accelerating infation and higher duties imposed
on crude oil, petrol, and diesel in February 2010 that were passed on by
adjustments in administered sale prices.
Te Reserve Bank of India (RBI) signaled the beginning of an exit
from its crisis policy stance at its January 2010 policy meeting when it
raised banks cash-reserve ratio from 5.0% to 5.75% (Figure 3.17.5). Te
move did not represent signifcant tightening in view of large excess
reserves held by the banking system. In March, however, the central bank
raised its key lending and borrowing rates by 25 basis points. Tis action,
ahead of its scheduled policy meeting in April, signaled a determination
to begin shifing from a crisis mode toward a more neutral stance for
monetary policy.
In announcing the change, the RBI cited several developments that
prompted the need for a change in policy, including the positive trend in
growth (due predominately to domestic factors), a sustained increase in
demand for credit, a recent escalation in prices of nonfood manufactured
./. urowth of |ndustr|a| product|on
-5
0
5
10
15
20
Manufacturing Overall
Jan
10
Jul Jan
09
Jul Jan
08
Jul Jan
07
Jul Jan
2006
%, year on year
./. Contr|but|ons to |nat|on
-5
0
5
10
15
20
Jan
2007
Jul Jan
08
Jul Jan
09
Jul Jan
10
Percentage points
-5
0
5
10
15
20
%
Manufactured products
Fuel products
Primary articles Food infation
Overall
Source: Vlnlstry of lndustry and Commerce. http://
ealndustry.nlc.ln (accessed , Varch zoo).
./. Monetary po||cy |nd|cators
2
4
6
8
10
Cash-reserve ratio Repo rate
Reverse repo rate
Jan
10
Jul Jan
09
Jul Jan
08
Jul Jan
07
Jul Jan
2006
%
Source: CllC 0ata Company (accessed z, Varch zoo).
goods, a need to keep infation expectations in check, and lags inherent
in the impact of monetary policy. While a shif in monetary policy is
unlikely to afect food prices, timely policy adjustments in the months
ahead can help underpin a return to Indias past high growth rates while
maintaining relative price stability.
In a sign of rebound, export growth turned positive in November
2009 afer 13 months of year-on-year declines (Figure 3.17.6). An outlook
survey on exports that was conducted by the Confederation of Indian
Industry indicated that nearly half the respondents expected further
volume growth in the coming months despite the rising cost of raw
materials and stif international competition.
Te central government will continue for a time with the 2% interest
subsidy on bank loans to certain sectors that are labor intensive, such
as textiles, leather, handicrafs, cotton yarn, jute, minerals, and fruits
and vegetables, which were particularly hard hit by the fall in global
demand.
Imports moved to positive growth in December afer 12 months
of year-on-year contraction (Figures 3.17.7 and 3.17.8). Oil and non-oil
imports slumped by about 25% and 17%, respectively, from April 2009 to
January 2010, relative to the same prior-year period. Non-oil imports rose
shaiply fiom s::. billion in Maich :oo to s:o. billion in Januaiy :o:o
on the strength of the domestic economic recovery.
Although ofcial balance-of-payments data for FY2009 are
unavailable, various indicators suggest that the adverse efects of the
global recession have largely played themselves out. Tough reviving in
the fnal months of FY2009, annual exports and imports are estimated to
have declined by around 15% and 17%, respectively, yielding a moderate
impiovement in the tiade defcit of about s:, billion (Figuie ,.:,.). Net
invisible ieceipts aie estimated to have declined by s:o billion to aiound
s,o billion, mainly due to a fall in miscellaneous business ieceipts. By
these estimates, the current account defcit narrowed to 1.9% of GDP from
2.5% a year earlier.
A notable feature of economic revival was the resumption of large
capital infows, led by the turnaround in foreign institutional equity
purchases from large net sales a year earlier, and a sustained high level
of foreign direct investment. Total net capital infows are estimated at
soo billion in FY:oo (up fiom s, billion a yeai eailiei), iefecting a
return of risk appetite in global fnancial markets in conjunction with
Indias economic resilience as demonstrated over the course of the
fscal year. Te capital account surplus more than covered the current
account defcit.
Gross international reserves (including valuation adjustment)
incieased by about s:, billion to an estimated s:8o billion by the end of
FY2009 (Figure 3.17.10). Te increase in reserves includes the allocation
of SDR,., billion (s,.: billion) made by the Inteinational Monetaiy Fund
in August and September 2009. In November 2009, India purchased
200 tons of gold from that body, and this is refected in the diference
between gross international and foreign exchange reserves in the fgure.
Reserves are ample, amounting to about 13.1 months of imports of goods
and services.
Te rupee exchange rate appreciated both against the US dollar and
./. Lxport |nd|cators
-40
0
40
80
-200
0
200
400
Value, 12-month moving average
Year-on-year growth
Jan
10
Jul Jan
09
Jul Jan
08
Jul Jan
2007
% $ billion
Source: CllC 0ata Company (accessed ) Varch zoo).
././ |mport |nd|cators
-40
0
40
80
-200
0
200
400
Value, 12-month moving average
Year-on-year growth
Jan
10
Jul Jan
09
Jul Jan
08
Jul Jan
2007
% $ billion
./.8 1rade |nd|cators
Jan
2007
Jul Jan
08
Jul Jan
09
Jul Jan
10
$ billion
-40
-20
0
20
Non-oil imports
Exports
Oil imports
Trade balance
Note: Jotal exports and lmports based on customs data.
in real efective terms throughout FY2009 as the economy strengthened.
Tis contrasts with a downward slide in FY2008 as the economy and
balance of payments faltered. Te real efective exchange rate appreciated
by about 11% in FY2009, essentially reversing an equivalent depreciation
in FY2008, though it remains about 6% below its mid-2007 high
(Figure 3.17.11). Te return of a large capital account surplus has required
the RBI to resume interventions in the foreign exchange market to
moderate abrupt upward pressure on the rupee and to support exports.
But given the rise in infation and buildup of infation expectations,
the RBI may fnd it difcult to continue intervening. Among the frst
wave of economies leading the recovery phase, it may have to contend
with managing even much larger capital infows, which would put
upward pressure on the exchange rate, interest rates, and growth of
credit, replaying the difcult monetary policy mix of FY2007 when capital
infows surged. Tus, the central banks efective use of sterilization and
other capital control policies at the same time as it accepts some fexibility
in the exchange rate will be critical in efectively managing the economy
through its recovery phase.
Te FY2009 budget of the central government was prepared in the
midst of a marked slowdown in the domestic economy. It envisaged a
substantial rise in government spending and maintenance of lower excise
and service tax rates put in place in the latter part of the previous fscal
year as a main element of countercyclical policy measures. Te outturn
came very close to plans for both revenue and expenditure with the defcit
at 6.7% of GDP (Figure 3.17.12).
Te consolidated general government defcit in FY2009, however,
including of-budget liabilities for subsidies and the defcits of state
governments, is expected to be about 10%. Tis, the second year of
large defcits owing to the global crisis, had raised concerns over debt
sustainability. In announcing the FY2009 budget the government pledged
it would reduce the defcit to 5.5% of GDP in FY2010 and 4.0% in FY2011.
Te central government budget for FY2010, introduced in February
this year, was set against a somewhat more favorable background; the
complex challenge of renewing the commitment for fscal consolidation
while sustaining rapid growth momentum. Te central government
reiterated its commitment to kick-start a well-coordinated exit strategy,
and bring the budget defcit to 3.0% by FY2013.
Tis target was in line with the recommendations of the 13th Finance
Commission fscal road map that also called for the combined defcit of
the states to fall to 2.4% of GDP in FY2013 and set a target for general
government debt to be reduced to 68% of GDP by FY2014 (from 82% at
end-FY2009). Te introduction of a new direct tax code and a national
goods and services tax efective from the start of FY2011 will underpin
this fscal efort.
Te FY2010 budget defcit is set to decline to 5.5% of GDP, a
1.2 percentage point reduction. About one-half of fscal consolidation
is expected to be achieved through bigger revenue collection mainly
due to faster growth, some retracement of the stimulus excise tax rate
cut, a widening of the service tax net, divestment of stakes in state-run
enterprises, and the sale of spectrum for third-generation telephony. On
./.p 8a|ance-of-payments |nd|cators
$ billion
-140
-70
0
70
140
2009 2008 2007 2006 2005
Change
in reserves
Capital
account
Current
account
balance
Invisibles
balance (+)
Trade
balance (-)
Note: Change ln reserves lncludes valuatlon adjustments.
Sources: CllC 0ata Company (accessed z, Varch zoo), A0
estlmates.
./.o keserves
125
175
225
275
325
Foreign exchange Gross international reserves
Jan
10
Jul Jan
09
Jul Jan
08
Jul Jan
07
Jul Jan
2006
$ billion
./. Lxchange rates
55
50
45
40
35
90
95
100
105
110
Nominal Real efective
Jan
10
Jul Jan
09
Jul Jan
08
Jul Jan
07
Jul Jan
06
Jul
2005
Rs/$ Index, 2005 = 100
Sources: Reserve ank of lndla. http://www.rbl.org.ln, ank
of lnternatlonal Settlements. http://www.bls.org (both
accessed ) Varch zoo).
the expenditure side, a reduction in the defcit of 0.6% of GDP is driven
by a drop in current expenditure in relation to GDP.
Te guiding principle of the budget on the expenditure side was
to sustain high growth by boosting allocations for infrastructure
while elsewhere ensuring that the benefts of high growth are broadly
distributed. Te budget took several steps in this direction. Te
allocation for the education and health sectors was raised by 16% and
14%, respectively, from FY2009 levels. Te National Rural Employment
Guarantee Scheme continued to get top priority with an allocation of
Rso: billion (s billion) in FY:o:o. Te fnance ministei also ieiteiated
that the government will address key issues in the areas of fnancial
inclusion; rural and urban housing; social security for unorganized sector
workers; women and child development; and micro, small, and medium-
sized enterprises.
Te budget began the exit from fscal stimulus by partly rolling back
the earlier rate reduction of 4 percentage points in central excise duties.
It also raised the standard rate on all nonpetroleum products from 8% to
10%. Similarly, the ad valorem component of excise duty on large cars,
multi-utility vehicles, and sports-utility vehicles, which was reduced as
part of the stimulus package, was increased by 2 percentage points. Other
tax proposals included rationalization of the income tax slabs; additional
excise duty on petrol and diesel; and restoration of a 5% customs duty on
petroleum products, including crude oil.
A landmark reform in the area of government subsidy is the
introduction of nutrient-based subsidy for fertilizer. Tis policy is
expected to improve agricultural productivity, contain the subsidy bill
over time, and ofer environmental benefts. Further, the government will
no longer issue special of-budget bonds from FY2010 to fnance subsidies
for fuel, fertilizer and food; much-reduced programs are now to be
supported on the budget.
Another major fscal development is a revived program for
disinvestment of state-owned enterprises listed on the stock exchange by
reducing ownership stakes (though not majority control). In FY2009, the
goveinment iaised a iecoid Rs,,, billion (about s, billion); the FY:o:o
budget calls for sales of Rs400 billion.
Te Sensex, the main index of the Bombay Stock Exchange, witnessed
a large runup in FY2009. Tis recovery, which began in March, was
part of the general worldwide boom in stock prices set of by depressed
valuations in conjunction with early signs of recovery in the global
economy. A notable feature of the rally was the degree to which the
increase in the Sensex exceeded a general index of emerging Asian stock
markets: in the past, they have mostly moved in tandem (Figure 3.17.13).
Lconom|c prospects
ADO 2010 forecasts for FY2010 and FY2011 are based on six key
assumptions: monetary and fscal stimuli will be withdrawn gradually
over the next 2 years; the domestic food supply position will be
comfortable because of normal monsoons; international oil prices will
aveiage about s8o pei baiiel in :o:o and s8, in :o::; domestic fuel piices
will be revised upward; a modest recovery in industrial economies is
2010 2011
C0P growth 8.2 8.7
lnatlon 5.0 5.5
(share of C0P)
-1.5 -2.0
./.z Centra| government sca| |nd|cators
-10
0
10
20
Of-budget balance
On-budget balance Expenditure
Revenue
10 09 08 07 06 2005
%
Forecast
Source: Vlnlstry of llnance. http://lndlabudget.nlc.ln
(accessed z) Varch zoo).
./. Stock pr|ce |ndexes
40
70
100
130
160
MSCI AC AP excluding Japan
S&P 500 Sensex
1 Jan
10
1Jul 1 Jan
09
1 Jul 1 Jan
08
1 Jul 1 Jan
2007
Jan 2007 = 100
VSCl AC AP Vorgan Stanley Capltal lnternatlonal All
Country Asla Paclc.
Source: loomberg (accessed ) Varch zoo).
expected in 2010 followed by further acceleration in 2011; and world trade
will grow by 7%8%.
Appropriate adaptations in monetary policy and the fscal stimulus
measures by the authorities and economic recovery in industrial
economies will underpin the pace of growth in the forecast period. All
recent surveys point to a marked improvement in business confdence.
For example, the Dun & Bradstreet Composite Business Optimism Index
for the frst quarter of 2010 recorded an increase of 43% relative to the
frst quarter of 2009 (Figure 3.17.14). Moreover, six of seven optimism
subindexes registered an increase from the previous quarter.
Te HSBC Markit Purchasing Managers Index for manufacturing for
December 2009 recorded its highest level since May that year, suggesting
a robust month-on-month improvement in manufacturing. Te equivalent
index for services also registered signifcant expansion, suggesting that
the services sector, too, is well poised for a strong recovery.
Renewed investor and consumer confdencethe return of the
exuberance that marked FY2005FY2007, the years of 9% or more
growthis expected to fundamentally shape the outlook. Unlike FY2009,
the composition of aggregate demand will be driven by strong advances
in private consumption and investment in the next 2 years. Government
consumption expenditure will cease to be an engine of growth.
Te normalization of fnancial market conditions is expected to
support a rebound of private investment, sustaining demand as the fscal
stimulus fades even with some hardening of lending rates. Major capacity
enhancement plans in the cement, steel, aluminum, automobile, paper,
tire, and electricity sectors are in the works. Te return of ready access
to global capital by Indian corporations will help bring these plans to
fruition. Te governments high priority for developing infrastructure is
another factor in an investment-rich mix.
Urban consumption is expected to remain strong as the fear of large-
scale job cuts has disappeared, substantial new hiring is under way, and
salaries are back on a rising trend. Te marked revival in the Sensex is
also bolstering consumer and business attitudes. Expected normal rainfall
and an enlarged National Rural Employment Guarantee Scheme will
foster growth in rural consumption.
From the supply side, manufacturing and services will be the major
drivers of expansion. Technology spending is expected to rebound in
industrial countries, with their purchases set to post healthy growth,
boosting growth in Indian high-tech services. Tese factors, in
conjunction with recovery in the global economy, should lif GDP growth
to 8.2% in FY2010 and 8.7% in FY2011 (Figure 3.17.15).
Infation pressures are expected to ease in early FY2010 afer the
winter harvest. However, increases in the domestic prices of petrol,
diesel, cooking gas, and kerosene are likely during the forecast period
following the recommendations of the committee that rules on domestic
fuel prices. While demand-pull infation pressures in manufacturing are
on the rise, the RBI has already begun an exit from monetary stimulus
and is expected to keep price pressures in check. Tus infation is forecast
at 5.0% in FY2010 and 5.5% in FY2011 as international prices of oil and
non-oil commodities edge up (Figure 3.17.16).
Large annual falls in exports and imports were recorded in FY2009,
./. 0&8 Compos|te 8us|ness 0pt|m|sm
|ndex
80
100
120
140
160
Q1
10
Q4 Q3 Q2 Q1
2009
Q2 1999 = 100
Note: Jhe lndex ls calculated as the ratlo of the posltlve
responses for slx selected parameters (or sublndexes) for
the perlod under revlew to the posltlve responses ln the
base perlod (z ,,,).
Source: 0un 8 radstreet. zoo. Business Optimism Index:
India. January. http://www.dnb.co.ln
./. Annua| u0P
0
2
4
6
8
10
11 10 09 08 07 06 2005
%
Forecast
Sources: Asian Development Outlook database.
./. Annua| |nat|on
0
3
6
9
11 10 09 08 07 06 2005
%
Forecast
though growth moved into positive territory in the closing months of the
year. Trade fows in FY2010 and FY2011 will climb, though at a slower
pace than in years prior to the global slowdown. Exports are projected to
gain 16.0% in FY2010 and 12.0% in FY2011. Tis would bring exports in
FY:o:o to neai FY:oo8 levels and in FY:o:: to just ovei the s:oo billion
target set in the governments foreign trade policy. Tese rates of
expansion seem achievable given the expected revival in global trade
volumes of 7% and 8% in these 2 years and the demonstrated focus and
depth of Indias export industries, exports of which grew at an annual
average of nearly 24% in the 5 years through FY2008.
As GDP growth is pushed again to high levels and international oil
prices frm, imports will expand rapidly, at 20.0% in FY2010 and 18.0%
in FY2011. Tis projected expansion takes imports to 20%21% of GDP
and is in line with experience during FY2005FY2007. Te growing
trade defcit is, however, expected to be partly ofset by revival of
growth in net invisibles from an expansion in the services surplus and
an increase in transfers from nonresident Indians. Overall, the current
account defcit is expected to widen marginally to 2.0% of GDP by
FY2011 (Figure 3.17.17).
India is currently facing both short- and medium-term policy challenges.
In the current situation, with its signs of economic recoveryalbeit
with uncertainties of how well entrenched growth ispolicy makers
face a dilemma. Too slow a removal of the fscal stimulus may lead to a
quick uptake of infation and force them to raise interest rates by more
than they would otherwise choose. Alternatively, too rapid a removal of
monetary accommodation may lead the economy to stall and prolong the
downturn.
Given the repeated occurrence of food price infation in recent years,
one of the major medium-term challenges of the central government is to
design and implement a comprehensive plan for augmenting the domestic
supply of food products, including vegetables and dairy products.
Te policy cannot be restricted to measures that enhance agricultural
productivity. It needs to encompass many related issues including pricing,
distribution, trade, subsidies, infrastructure, and research.
More specifcally, one aim is to increase farmgate prices to trigger
efective supply-side responses while containing retail prices, in order to
mitigate erosion of purchasing power and adverse impacts on the poor.
Since nearly half the food produced is lost from feld to table, there is
ample scope for solutions.
Finally, sustained acceleration in growth requires signifcant
infrastructure building. Although much of the necessary investment
will have to be privately funded, the government is tasked with
substantially raising its own contribution. Tis is going to require real
dexterity, especially at a time when its priority is to contain the fscal
defcit. It can release additional funding for infrastructure spending by
containing subsidies as part of the consolidation of current expenditure
and by promoting alternative sources of investment fnancing, such as
publicprivate partnerships.
././ Current account ba|ance
-3.0
-1.5
0.0
1.5
11 10 09 08 07 06 2005
% of GDP
Forecast
Ma|d|ves
Joo rapld scal expanslon ln recent years and a global recesslonlnduced drop ln tourlsm have taken the
economy to the brlnk of crlsls. A new government ls attemptlng to correct structural lmbalances and restore
sustalnable growth, lncludlng broadenlng the revenue base, ratlonallzlng expendlture, and retrenchlng
publlc employment. lt also supports prlvatlzatlon as part of a wlder shlft of the role of government.
Afer the December 2004 tsunami disaster, the economy rebounded on
the back of large tourism-related investment and substantial increases
in government spending. Te fscal expansion was, however, excessive,
including as it did large increases in public sector wages and employment
as well as subsidies. It pushed budget expenditure to 63% of GDP by 2008
and the overall defcit to 17% of GDP.
Given high import dependency, this fscal expansion led to a marked
balance-of-payments deterioration. When the country was hit by a drop
in tourism afer the start of the global crisis in September 2008, the heavy
domestic and external imbalances threatened macroeconomic stability.
In these circumstances the economy struggled, with GDP dropping by
3.0% (a 9 percentage point tumble) in 2009, due primarily to contractions
in tourism (the current economic mainstay), construction, and fsheries,
by 4.8%, 16.8%, and 26.7% respectively (Figure 3.18.1). Tourist arrivals
declined by 4.0% in 2009; indeed, the drop would have been even worse
had it not been for a surge in arrivals from the Peoples Republic of
China, which helped ofset a 7.1% fall in European visitors, a market
usually responsible for around two-thirds of visitors (Figure 3.18.2). Hotel
occupancy rates declined to 70% from 78% the previous year. Fishing, the
main source of employment, saw a 22% decline in the catch. Total fsh
and fsh product exports fell by 36%, in part refecting a drop in prices.
Since the country imports the bulk of its goods, domestic price
volatility is largely attributable to price pressures in global markets. Afer
consumer infation peaked at 17.3% year on year in July 2008, the high
price hikes quickly moderated, as evidenced by infation declining to
4.0% by December 2009 (Figure 3.18.3). Infation averaged 4.0% in 2009,
down from 12.3% a year earlier. A drop in food pricesat one-third, the
most heavily weighted component in the consumer basketwas the main
factor in the decline.
Broad money grew by 12.5% in 2009 (Figure 3.18.4). Tis expansion
was due primarily to a 14% increase in net domestic assets as net foreign
liabilities were reduced. Te expansion in net domestic assets was
entirely due to continued large expansion in net credit to government,
.8. Se|ected u0P growth |nd|cators
-50
-25
0
25
50
Fisheries Construction Tourism GDP
09 08 07 06 05 2004
%
9.5
-3.0
6.3
7.2 18.0
-4.6
Source: Valdlves Vonetary Authorlty. zoo. Monthly
Statistics. lebruary. http://www.mma.gov.mv
This chapter was written by Tadateru Hayashi of the South Asia Department, ADB,
Manila.
.8.z Contr|but|ons to year-on-year growth
|n tour|st arr|va|s, by reg|on
Jul
2007
Oct Jan
08
Apr Jul Oct Jan
09
Apr Jul Oct Jan
10
Percentage points
-20
-10
0
10
20
Other areas Asia Europe Total
while credit to the private sector fell by 4.1% (in contrast to about a 30%
expansion a year earlier) as the government bond issue, which replaced
fnancing by the monetary authority as part of structural reform, crowded
out private investment.
Total fscal revenue, including grants, is estimated to have deteriorated
by 20% in 2009 to 31.6% of GDP from 46.2% in 2008 (Figure 3.18.5). All
major sources of tax revenue fell, refecting a 30% drop in imports and the
decline in tourism. Total expenditure climbed by about 7%, well below the
near 23% increase in 2008, as the government tried to rein in the defcit,
including wage cuts for civil servants. Still, the defcit expanded sharply
to 26.1% of GDP from 16.9% a year earlier with just over three-quarters
fnanced by the banking system.
Te current account defcit surged from 15.7% of GDP in 2004 to 51.4%
in 2008 owing to strong domestic demand led by new resort construction,
large government expenditure, and soaring food and oil prices afer
2007. As international prices stabilized and economic activity fell, the
defcit is estimated to have fallen to a still-high 28.5% of GDP in 2009
(Figure 3.18.6).
Capital infows have in large part fnanced the large defcit. Te
main items have been investment infows for resort development, greater
lending by Mal-based branches of two foreign commercial banks, and
foreign borrowing by the government. Since the onset of the global crisis,
foreign banks in Mal have sharply curtailed their lending, which has
led to a shortage of dollars in the domestic marketa particularly acute
problem in a dollarized economy. As the monetary authority intervened
to maintain the fxed exchange rate with dollar, gross international
ieseives declined to s:o, million in Septembei :oo befoie showing a
slight retracement.
In an attempt to restore macroeconomic stability, the current
President, who was elected in October 2008, began to implement an
emergency economic reform program that includes substantial fscal
reform. On the revenue side, airport passenger service charge has been
raised, a business proft tax will be introduced, and the tourism bed
tax will be transformed into a tourism goods and service tax, yielding
substantially higher revenue.
In order to align expenditures with revenues, the government is
streamlining administrative machinery by downsizing the civil service,
reducing electricity subsidies, and linking power tarif adjustments to cost
of inputs twice a year. Te government also plans to privatize parts of the
extensive network of state-owned enterprises.
To support the governments reform program, the IMF approved in
Decembei :oo a s,., million standby aiiangement and s:,.: million
under a program to deal with external shocks.
Lconom|c prospects
Te economic outlook heavily depends on performance of tourism and
fsheries, as well as the governments ability to push through its reform
measures. Although fsheries constitute a small fraction of GDP growth,
they remain vital in the economy as they are the main provider of food
and employment in many of the atolls. And, while tourist arrivals have
.8. Contr|but|ons to |nat|on
Jan
2008
Apr Jul Oct Jan
09
Apr Jul Oct
Percentage points
-5
0
5
10
15
20
Transport
Housing, water, power, and fuel Food Total
Others
.8. Monetary |nd|cators
-60
-30
0
30
60
-2
-1
0
1
2
Net foreign assets Broad money
Domestic assets
Jan
10
Oct Jul Apr Jan
09
Oct Jul Apr Jan
2008
% Rf billion
.8. P|sca| |nd|cators
-35
0
35
70
Fiscal balance
Expenditures and net lending
Revenues including grants
09 08 07 06 05 2004
% of GDP
South Asia Maldives 181
seemingly bounced of the bottom, driven by non-European arrivals,
it will no doubt be some time before arrivals from Europe recover to
precrisis levels.
With a better than initially expected economic outcome in 2009,
the economy is projected to grow at 3.0% for 2010 and 3.5% in 2011.
Infation is put at 4.0% in 2010 and 3.0% in 2011, broadly in line with
global commodity price assumptions where oil prices are expected to
rise marginally and nonfuel commodity prices to remain stable. It is also
assumed that the monetary authority will aim policy to support price
stability and not provide fnancing for the fscal defcit.
On the external front, lower commodity prices will ease the trade
defcit, but receipts from tourism will recover only from next year. Te
current account defcit is expected to remain fat at 25.0% of GDP in the
forecast period.
As a tiny, open economy the country is vulnerable to events beyond
its controlincluding geopolitics, global economic developments, and
climate change. Within its domain, however, the government needs to
correct structural economic imbalances, primarily via fscal reform and
consolidation as well as privatization of state-owned enterprises. In view
of the limited role of monetary policy under the currency peg with US
dollar, fscal policy has to play the greater role in demand management
and economic stabilization. In addition, weak institutions and human
resource defciencies are major constraints, including the fragmented
structure of government.
As the country lacks the natural capacity to expand its economic base
beyond tourism and fsheries, increasing value added in those sectors is
vital. Te government aims, within tourism, to ensure better training of
local staf to limit the current heavy reliance on expatriates, and within
fsheries, to promote exports.
Te signifcant income disparities between Mal and the atolls are
continually widening. Te government has an intention to group the
atolls into seven provinces and develop regional administration and
economic centers. Its hope is to concentrate and thereby improve service
delivery, but given that it aims to reduce the cost to itself at the same
time, this is a tall order.
Recognizing the countrys vulnerability to climate change (none of
the islands is more than 1.8 meters above sea level), in the short term,
all the government can do is attempt to minimize the disaster impact,
and therefore has strengthened mitigation responses for beach erosion.
By 2019, the government has committed to switching from oil to 100%
renewable energy production to serve as a model for other nations.
2010 2011
C0P growth 3.0 3.5
lnatlon 4.0 3.0
(share of C0P)
-25.0 -25.0
.8. Current account
2004 05 06 07 08 09
% of GDP
-100
-50
0
50
Trade in goods Transfers
Services trade Current account balance
Income
Nepa|
Jhe global economlc crlsls had a llmlted lmpact, but desplte that, polltlcal uncertalntles, poor weather,
and lnfrastructure bottlenecks restralned economlc growth ln lY2009. wlth the polltlcal uncertalntles
remalnlng and macroeconomlc challenges emerglng, C0P growth wlll be below par ln lY2010. ut lt
ls llkely to plck up ln lY2011, on account of contlnued sound scal management, strengthenlng global
economlc recovery, and some easlng of supply dlsruptlons.
Te continuing peace processmarked by controversies over the
rehabilitation of the Maoist combatants and transformation to a federal
structure from the current unitary systemled to frequent strikes and
transport blockades, which acted as a break on the much anticipated
postconfict economic recovery in FY2009 (ended July 2009). Coupled
with unfavorable weather, these setbacks slowed GDP growth to 4.7% in
FY2009, from 5.3% the year before.
Although the deceleration was broad-based (Figure 3.19.1), services
still grew by 5.8%, mainly supported by sturdy remittance-related
spending. Agricultural growth fell by more than half to 2.2% due to a
delayed monsoon and prolonged winter drought, which reduced both
the cultivated area and productivity. Industry remained a sluggish
performer, as labor unrest and persistent fuel and power shortages led to
a contraction in manufacturing, which was marginally ofset by increased
activity in the remittance-driven construction industry.
On the demand side, rapid growth in remittances continued to fuel
consumption spending and imports, further raising the share of private
consumption in GDP from 77.1% in FY2008 to 79.2% in FY2009. Te share
of private fxed capital formation decreased modestly to 17.1% of GDP from
18.0% over the same period, refecting uncertainty in the political landscape
and limited investment opportunities other than real estate and housing.
Slower agricultural growth and disruptions to transportation
produced shortages of foodgrains in several parts of the country,
especially remote districts, driving up infation to an average of 13.2%
in FY2009 from 7.7% a year earlier. While food price infation has been
generally trending up in the last few years, the increment in FY2009 was
more pronounced (Figure 3.1.9.2). Infation was exacerbated by a strong
expansion in the broad money supply in FY2008 and FY2009, which
refected larger remittance infows and the buildup of net foreign assets.
To rein in the rising infation and to curb the remittance-driven real
estate bubble in urban areas, Nepal Rastra Bank (NRB), the central bank,
tightened monetary policy by raising the cash-reserve ratio from 5.0%
.p. u0P growth by sector
0
2
4
6
8
GDP
Services Industry
Agriculture
09 08 07 06 2005
%
Source: Vlnlstry of llnance. zoo,. Economic Survey Fiscal
Year /. July. http://www.mof.gov.np
This chapter was written by Yubraj Acharya of the Nepal Resident Mission, ADB,
Kathmandu.
.p.z Contr|but|on to consumer pr|ce
|nat|on
0
3
6
9
Nonfood (5-year moving average)
Food (5-year moving average)
Nonfood
Food
09 08 07 06 2005
Percentage points
Source: Nepal Rastra ank. zoo,. Recent Macroeconomic
Situation. September. http://www.nrb.org.np
South Asia Nepal 183
to 5.5% (efective November 2008) and the policy rate from 6.25% to 6.5%
(efective October 2008).
On the fscal side, the government undertook several reforms on
revenue mobilization, including the introduction of an income disclosure
scheme and implementation of a performance-based incentive system for
tax ofces and ofcers. Tese reforms widened the tax base substantially
and curtailed leakages, resulting in a record 32% growth in domestic
revenue mobilization in FY2009 (well above the 3-year trend). For the
frst time, income tax collection exceeded customs revenue (Figure 3.19.3).
External grants also swelled, by 70%, as donors sought to support Nepal
during its political transition.
Despite the delayed approval of the budget (due to disagreements
among various factions in the Constituent Assembly) and a difcult
project implementation environment, capital spending picked up in the
latter part of FY2009, increasing by 30% from a year earlier (Figure 3.19.4).
Political pressures to raise salaries and wages of civil servants and
security forces resulted in 33% growth in recurrent expenditures,
contributing to the 32% growth in overall spending (excluding net
lending). Te resulting defcit, equivalent to 1.9% of GDP, was fnanced
mainly through domestic borrowing.
On the external front, import growth markedly slowed to 8.3% from
24.1% in FY2008, mainly because of a decline in oil imports. (Nepal Oil
Corporation, the state-owned and sole supplier of petroleum products,
struggled to clear its dues with the Indian Oil Corporation.) Imports
of other items continued to grow in line with the historical average.
Exports contracted by 4.7% in FY2009, the frst decline since FY2003, as
some domestic enterprises shut their operations, both because of intense
foreign competition in a weak market and domestic labor disruptions,
and because of the long-standing structural bottlenecks such as poor
infrastructure and skills shortages.
Te resulting wider trade defcit (21.8% of GDP afer 19.1% in
FY2008) was, however, more than ofset by remittance infows, which
grew by 24.2% (mainly due to the relatively inelastic demand for the
unskilled Nepalese workers) and by a 26.7% increase in tourism receipts
(Figure 3.19.5). With a strengthening current account surplusfrom
2.9% of GDP in FY2008 to 4.3%the overall balance-of-payments
position became stiongei, with ovei s:.8 billion in ieseives (equivalent to
7.7 months of total imports).
Given the continued peg to the Indian rupee, the Nepalese rupee
mirrored the former currencydepreciating rapidly against third country
currencies at the onset of the global crisis and appreciating afer May
2009. However, the real efective exchange rate has been appreciating since
August 2008 (Figure 3.19.6), refecting relatively high domestic infation.
Lconom|c prospects
Nepals medium-term growth and development prospects hinge on
progress in the political transition, macroeconomic stability, and the pace
of global economic recovery. With a high share of agriculture in GDP,
much of which relies on rainfed irrigation, prospects also heavily depend
on weather conditions.
.p. kevenue |nd|cators
0
9
18
27
36
45
0
6
12
18
24
30
Total revenue growth Nontax revenue
Other taxes
Customs
Income tax
Value-added tax
09 08 07 06 2005
Rs billion %
.p. P|sca| |nd|cators
-10
0
10
20
30
Fiscal defcit Capital expenditure
Current expenditure Revenue
10 09 08 07 06 2005
% of GDP
Forecast
Sources: Vlnlstry of llnance. zoo,. Economic Survey Fiscal
Year /. July. http://www.mof.gov.np, A0 estlmates.
.p. 1rade, tour|sm, and workers
rem|ttances
0
1
2
3
4
Tourism receipts Exports
Remittances Imports
09 08 07 06 2005
$ billion
A range of factors are challenging the sound macroeconomic
management seen in previous years (despite the political turmoil then).
Notably, the initial resilience seen in remittances and exports faded in
the frst half of FY2010 and reserves have declined modestly since July
2009 (Figure 3.19.7), raising concerns that a lagged efect of the crisis may
still be felt.
Growth in all sectors is expected to decelerate in FY2010 from FY2009
with overall GDP expansion expected to ease to 3.5%, on the assumption
that, with the emerging global recovery, remittance infows and tourism
receipts will not decelerate further. Te possible delay in writing the new
constitution before the 28 May deadline constitutes the key downside risk
to the outlook, as political uncertainties can afect the investment climate
and the project-implementation environment. Assuming continued
recovery in the global economy and a domestic political landscape more
conducive to economic activity, growth is expected to pick up to 4.5% in
FY2011 (on a par with that in FY2009).
Agriculture is expected to grow by only 1.0% in FY2010, assuming
normal winter weather, as the production of paddy and maize, two
major summer crops, was severely afected by the delayed and reduced
monsoon. Assuming a return to normal weather and no disruptions to
the transportation of fertilizers and seeds, the sector is expected to grow
by its historical average of 3.0% in FY2011.
Industrys performance in FY2010 will be checked by fuel and power
shortages and sporadic labor tensions, all of which will restrict recovery in
manufacturing. Construction activity will also slow due to reduced credit
from commercial banks. Consequently, industry is expected to grow by
only 1.5% in FY2010. Growth is expected to pick up to 2.5% in FY2011 as
power shortages ease somewhat (several micro-hydropower projects are
slated for completion in FY2010) and as strikes lessen (the political parties
have signed an agreement not to organize any bandhpolitically inspired
economic shutdownsduring Visit Nepal Year 2011).
Services are expected to continue to drive growth, although real
estate renting and business activities will be hit by credit limitations that
the NRB has placed on commercial banks to counter price pressures.
Expansion in services is expected to moderate to 5.5% in FY2010. As
performance in agriculture, industry, and tourism is expected to improve
in FY2011, growth in services will be pushed up to 6.0%.
While the NRBs tighter monetary policy from FY2009 seems to be
working to reduce infation, the pass-through from the policy rate and
cash-reserve ratio to infation has been slow and small. Consumer price
index infation remained in double-digits in January 2010, suggesting
that nonmonetary factors, such as reduced grain production, rising
transportation costs, and delays in importing certain items like sugar,
may be driving up infation. Terefore, 10.0% infation is expected in
FY2010, with moderation to 8.0% in FY2011 as supply disruptions lessen.
Te current account is expected to move into defcit in FY2010. Rising
oil prices will have a signifcant bearing on imports as oil constitutes 17%
of Nepals total imports. Imports of other items will moderate, adjusting
to decelerating remittance infows, but this moderation is unlikely to
fully ofset the efect of rising oil prices on overall imports. With reduced
competitiveness from the appreciating real exchange rate and domestic
2010 2011
C0P growth 3.5 4.5
lnatlon 10.0 8.0
(share of C0P)
-0.5 1.0
.p. Lxchange rates
Index NRs/$
100
104
108
112
116
120
85
80
75
70
65
60
Nominal (3-month moving average)
Real efective (3-month moving average)
Jan
10
Jul Jan
09
Jul Jan
08
Jul Jan
2007
Source: lnternatlonal Vonetary lund.
.p./ Pore|gn exchange reserves
1.0
1.5
2.0
2.5
3.0
Sep Jun Mar
09
Dec Sep Jun Mar
08
Dec
2007
$ billion
Dec
Source: Nepal Rastra ank. zoo. Recent Macroeconomic
Situation. Varch. http://www.nrb.org.np
South Asia Nepal 185
structural shortcomings that continue to plague key industries, exports
will continue to decline in absolute terms. Remittances and tourism
receipts, growing at their current pace, will fail to ofset the trade defcit,
leading to a current account defcit of approximately 0.5% of GDP.
In FY2011, remittances are expected to strengthen as the majority of
Nepalese workers are employed in oil-exporting countries in the Middle
East that are seeing a revival in growth. Moreover, improved industrial
activity and some moderation in the appreciation of the real exchange rate
are expected to support growth in exports. Aided by larger tourism receipts,
the current account is expected to recover to a surplus of 1.0% of GDP.
Te infrastructure defcitparticularly in transport infrastructure,
power, and irrigationis a major bottleneck to economic growth and to
development prospects. In particular, power shortages could have adverse
social and political implications if not addressed expeditiously.
Despite the large hydropower potential of around 80,000 megawatts,
half of which is economically viable, Nepal is a net importer of electricity.
Te electrifcation rate, at 48% in 2006, is one of the lowest in South
Asia, and means that more than 13 million mainly rural people are
without access to electricity. In urban areas, current peak demand is
more than 720 megawatts, of which only 40% is available, leading to up
to 16 hours of daily power cuts. A range of factors have contributed to
underinvestment in power generation, including the uncertain investment
climate, poor road access, and lack of transmission lines.
Te government is preparing a new energy strategy to promote the
power sector, but its implementation is likely to remain challenging
unless a political consensus is built. Two draf billsthe Nepal electricity
bill and the Nepal electricity commission billare currently before the
Constituent Assembly. In the meantime, the government is focusing
on repairing and upgrading existing generation, transmission, and
distribution infrastructure. It is also planning to expand existing
transmission links to India, and develop new high-capacity cross border
lines, to enable imports during dry periods. Recognizing the capital-
intensive nature of hydropower projects, the government should develop
a policy framework to encourage publicprivate partnerships, clearly
delineating public and private sector roles. Te policy should include
other modes of power generation including solar, wind, and thermal.
In the restructuring of policies, the government should give to private
power producers economically viable market access by clarifying and
liberalizing connection and tarif policy, and should provide related
infrastructure, such as access roads and distribution lines. A fast-track
approval process for hydropower projects needs to established. Policy
eforts should go beyond rural electrifcation and mitigating power
shortages in urban areas, to include a focus on export of electricity to
make hydropower a major source of foreign currency earnings.
To facilitate some of these changes, the capacity of the newly created
Ministry of Energy should be augmented and the fnancial health of
Nepal Electricity Authority, the key buyer and distributor of electricity,
needs to be improved.
Pak|stan
Contlnued modest growth ls expected ln scal year 2010. Vacroeconomlc lmbalances have narrowed and
economlc fundamentals have lmproved, but the securlty envlronment and an ongolng power crlsls are
both burdenlng the scal sltuatlon and obstructlng a growth revlval. Jhat revlval wlll depend on faster
lmplementatlon of structural reforms to strengthen revenue moblllzatlon, ellmlnate electrlclty outages,
and transform the lndustrlal and export sectors. Rapld scal lmprovements are also needed to underpln
recovery, sustaln the publlc sector development program, and prevent crowdlng out of the prlvate sector.
Te countrys recourse to an International Monetary Fund (IMF)
program in November 2008 (see ADO 2009 and ADO 2009 Update) and
its need for fscal and balance-of-payments stabilization coincided with
the onslaught of the global recession, precluding any immediate fscal
or monetary policy response. Tis lack of response, together with the
deteriorating security situation and electricity shortages, saw growth slow
further to only 2.0% in FY2009 (ended June 2009), from 4.1% in FY2008
(and from an average of over 7% in the 4 years prior to that).
Manufacturing contracted (Figure 3.20.1), and trade and services
slowed. Both public and private investment shrank. With economic
growth down to near the rate of population growth, per capita incomes
stagnated (Figure 3.20.2), afecting poverty rates. In this way, the difcult
economic circumstances of FY2008 carried over into FY2009, and
revealed how years of seemingly sustainable growth can unravel in a
single year because of structural problems in the face of exogenous shocks
and delayed policy response to such shocks.
Te global downturn, security challenges, and energy shortages,
by subduing industrial and export growth, also contributed to
underachievement of tax collection targets in a year of expenditure
overruns. Te tax-to-GDP ratio in FY2009, for taxes collected by the
Federal Board of Revenue, fell to a 10-year low of only 8.8%. Tis ratio
indicates a lack of buoyancy in the tax system and calls for urgent reform
in tax policy and administration.
Te fscal defcit was further undermined by the additional defense
outlays necessitated by military action against extremists. Te fscal
defcit target in FY2009 was, therefore, missed and at 5.2% of GDP, was
0.9 percentage points wider than projected. Te target was overshot even
though the government had started cutting subsidies and was reducing
the public sector development program (PSDP) as part of its expenditure
rationalization program. From 3.8% of GDP in FY2008, it cut subsidies to
1.9% of GDP in FY2009 (Figure 3.20.3), as it allowed domestic fuel prices
to foat with international prices.
.zo. u0P growth by sector
-10
0
10
20
Services Manufacturing
Other industry Agriculture GDP
09 08 07 06 2005
%
Source: Vlnlstry of llnance. Pakistan Economic Survey
. http://www.nance.gov.pk.
This chapter was written by Safdar Parvez and Farzana Noshab of the Pakistan Resident
Mission, ADB, Islamabad.
.zo.z uNP per cap|ta
0
400
800
1200
09 08 07 06 2005
$
Sources: Vlnlstry of llnance. Pakistan Economic Survey
. http://www.nance.gov.pk, State ank of
Paklstan. Annual Report . http://www.sbp.org.pk.
South Asia Pakistan 187
Electricity subsidies, however, stayed very high at 44% of total subsidies
in FY2009 and remained a signifcant budget burden. Te government is
phasing in a power tarif increase to reduce these subsidies, but since the
tarif is expected to reach cost recovery only in the frst quarter of FY2011,
cash subsidies will continue to be paid over the rest of FY2010.
Despite the increase in costs of production, consumers electricity
tarifs had not been increased for several years before FY2008 when the
oil price hike substantially raised generation costs and the need for much
higher tarif diferential subsidies. Te lack, however, of timely subsidy
payments created an intercorporate circular debt problemwhen
distribution companies could not pay power producers, who, in turn,
could not pay fuel suppliers.
Tis led to power plants inability to produce at optimum capacity,
thus adding to existing power shortages. Load shedding has continued,
with power shortages peaking at 5,000 megawatts in the summer time.
To improve operations in the power sector, the government in September
2009 paid of part of its circular debt while paying interest on its
outstanding obligations. Te circular debt is now being transferred to a
debt-holding company for servicing and resolution.
Te PSDP, already slashed to 4.4% of GDP in FY2008 (from a targeted
5.1% of GDP), was cut further in FY2009 to 3.0% of GDP as part of the
efort to rein in the defcit (Figure 3.20.4). As a result, expenditure on
education fell further to 2.1% of GDP in FY2009 from the already low
2.5% of GDP in FY2008, and on health from 0.6% to 0.5% in the same
period. Such weak social sector expenditures are difcult to justify in a
country whose human development index ranking of 141 places it toward
the bottom.
Even with the cuts in subsidies and the PSDP, fnancing the defcit in
FY2009 posed major problems at a time when few foreign resources were
available: only 22% of the defcit was fnanced with external resources
compared with 53% in FY2007. More than half the domestic fnancing was
arranged through banks. Te higher cut-of yields encouraged banks to
invest in Treasury bills when their eagerness to lend to the private sector
was dented by a higher concentration of nonperforming loans and a risky
business environment.
Te governments preemption of banking sector funds in this way
resulted in lower availability of credit for the private sector. Te private
sectors demand for credit had also diminished on account of higher
interest rates and other constraining structural factors, such as electricity
shortages. As a result, private sector credit nosedived to a negligible net
level in FY2009 (Figure 3.20.5).
In the high infation environment of late FY2008 and the frst half
of FY2009spawned by higher food and nonfood prices and reduction
of oil and energy subsidiesthe State Bank of Pakistan (SBP) sharply
tightened monetary policy through hikes in the policy discount rate.
Te policy rate peaked at 15% in October 2008 as year-on-year infation
surged (Figure 3.20.6). Te rate was then gradually brought down by 250
basis points from April to November 2009, as there was a trend decline in
year-on-year infation that receded to less than 9% by October 2009. Both
food and nonfood consumer price indexes had fallen sharply by then.
Despite the private sectors demand for a sharper cut in interest rates, the
.zo. Subs|d|es
0
90
180
270
360
450
0
1
2
3
4
5
Share Level
Target Actual Target Actual Target Actual
FY2007 FY2008 FY2009
PRs billion % of GDP
Source: Vlnlstry of llnance. Annual Budget Statements.
http://www.nance.gov.pk.
.zo. Pub||c sector deve|opment program
0
200
400
600
0
2
4
6
Share Level
Target Actual Target Actual Target Actual
FY2007 FY2008 FY2009
PRs billion % of GDP
Source: Vlnlstry of llnance. Pakistan Economic Survey
. http://www.nance.gov.pk.
.zo. Pub||c and pr|vate cred|t
0
200
400
600
0
30
60
90
Change in private credit
Change in public credit
Private credit
Public credit
09 08 07 06 2005
PRs billion % change
Sources: Vlnlstry of llnance. Pakistan Economic Survey
. http://www.nance.gov.pk, State ank of
Paklstan. http://www.sbp.org.pk (accessed Varch zoo).
.zo. |nat|on and po||cy d|scount rate
0
6
12
18
24
30
Policy rate
Year-on-year infation
12-month moving average infation
Jan
10
Jul Jan
09
Jul Jan
08
Jul
2007
%
Source: State ank of Paklstan. http://www.sbp.org.pk
(accessed Varch zoo).
SBPs measured response at that time, mindful of the downside risks to
infation, was nonetheless appropriate. (Te sharp resurgence in year-on-
year infation in January 2010 was to prove this later.)
Te economic slowdown in FY2009, combined with tighter
demand management policies, the fall in international oil prices, and
a depreciated currency, led to a sharp fall in imports of over 10% in
FY2009 (Figure 3.20.7). As exports fell by more than 6%, because of
lower international demand, domestic security challenges, and electricity
shortages, the trade defcit narrowed. High double-digit infation
diminished any competitiveness advantage exports might have gained
due to a 16.4% depreciation in the average nominal efective exchange
rate in FY2009 (Figure 3.20.8). Te average real efective exchange rate
depreciated by only 0.9%, while the competitiveness of exports remained
blocked by structural bottlenecks.
Te contraction in the trade defcit was complemented by a steep 48%
shrinkage in the services account defcit. Tat account improved mainly
due to receipts for logistical support to the United States in Afghanistan
and to a decline in outfows from foreign exchange companies following
administrative measures taken by the SBP. Te current account defcit
in FY2009 fell by a third to 5.6% of GDP (Figure 3.20.9), helped by
remittances that continued to defy the global recession, growing by 21%.
Foreign direct investment (FDI) and net portfolio investment
together fell to half the level of the preceding year, on account of the
global economic slowdown and the domestic situation (Figure 3.20.10).
Appioximately ,, of the s., billion cuiient account defcit was fnanced
by disbursements from multilateral institutions and aid agencies. Tis
implies a high dependence on ofcial borrowings that not only makes
current account fnancing vulnerable but also has adverse implications for
the countrys external debt profle.
Foreign reserves recovered strongly by end-FY2009 (Figure 3.20.11)
with the IMF's suppoit foi the balance of payments totaling s::. billion
(and fuithei to s:,.: billion by end-Decembei :oo). But the iatio of
reserves to external debt still declined, as higher reserves were ofset by
new exteinal debt, which shot up by so., billion in FY:oo. Tis buildup
of debt reversed, for the frst time in 6 years, the trend decline in the ratio
of external debt to GDP, which increased to 30.4% in FY2009 from 27.0%
in FY2008. External debt grew by 14.1% in dollar terms, but jumped by
36% in Pakistan rupee terms, over the same period (Figure 3.20.12).
Domestic debt rose by PRs587 billion to PRs3.9 trillion in FY2009
(or 29.4% of GDP); almost half the increase was short term. Overall
public debt continued to hover around 61% of GDP. Debt-servicing ratios
therefore deteriorated, and debt servicing consumed more than half
the total tax revenue in FY2009, representing a major drain on fscal
resources.
Although the IMFs third review in January 2010 of the ongoing
standby arrangement projects that Pakistans debt-to-GDP ratios will
begin to decline from FY2012, it also shows that the external and public
debt trajectories from the baseline are vulnerable to shocks, such as
those arising from lower growth, higher imbalances, lower FDI, and
larger local currency depreciation. Consequently, the fscal and current
account defcits need to be contained and higher non-debt-creating
.zo./ 1rade growth
-20
0
20
40
Imports Exports
09 08 07 06 2005
%
Sources: State ank of Paklstan, Annual Report ;
http://www.sbp.org.pk (accessed Varch zoo).
.zo.8 Lect|ve exchange rates
50
60
70
80
90
100
Real
Nominal
Jan
10
Oct Jul Apr Jan
09
Oct Jul Apr Jan
08
Oct Jul
2007
2000 = 100
Source: State ank of Paklstan. zoo. Statistical Bulletin.
Varch. http://www.sbp.org.pk.
.zo.p Current account |nd|cators
-16,000
-8,000
0
8,000
-10
-5
0
5
Current account balance Remittances
Net services and income
Trade balance
09 08 07 2006
$ million % of GDP
Sources: State ank of Paklstan. Annual Report ;
.zo.o P|nanc|a| account |nd|cators
(nondebt)
-2000
0
2000
4000
6000
-2
0
2
4
6
Portfolio investment
Direct investment
Privatization proceeds
Portfolio investment
Direct investment
09 08 07 06 2005
$ million % of GDP
Sources: State ank of Paklstan. Annual Report ,
infows have to be resumed for debt sustainability to be maintained in
the near and medium term.
Lconom|c prospects
Pakistans economic prospects over the next 2 years are predicated on
a successful completion of the current IMF program by end-2010; a
gradual improvement in the security situation; a phased reduction in
electricity shortages as tarifs are rationalized and new power plants are
commissioned; sustained implementation of fscal reforms, particularly
for tax and administration; a gradual economic recovery in the main
trading partners; and political stability.
Growth in FY2010 is expected to modestly improve to 3.0%, backed
by a slight recovery in manufacturing. Tis recovery, apparent in the
frst half of FY2010, refects (among other factors) higher production for
cement products for the local market and stronger domestic demand
for automobiles. Textiles manufacturing, however, has continued to
contract on account of lower cotton availability, electricity and gas
shortages, and poorer relative product competitiveness in international
markets.
Agricultural growth in FY2010 is set to remain below the
governments target owing to lower than targeted production of most
major crops, such as sugarcane and cotton. Production of wheat, a winter
crop, will be less than the target of 25 million tons due to water and seed
shortages, delayed sowing, and higher input costs.
Slower growth in agriculture, only a modest recovery in
manufacturing, and continued contraction in imports will all continue
to drag down wholesale and retail trade. Following years of strong
growth, telecommunications service providers, too, will need to
consolidate operations (because of stronger competition and lower
margins). Financial services could, however, perform better than in
FY2009, as seen in slower growth in nonperforming loans in the frst
half of FY2010, improving proftability of banks following higher spreads,
and banks good capitalization. Te services sector overall will grow only
moderately.
GDP growth is expected to reach about 4.0% in FY2011 as private
sector investment picks up following gradual improvement in the
security situation and fewer electricity shortages, and as public
investment accelerates, supported by an improved fscal situation with
value-added tax (VAT) and other administrative tax reforms kicking in
from 1 July 2010. Manufacturing growth is also expected to be stronger,
as is agricultures (to a lesser degree) on the back of higher commodity
prices. Higher real sector expansion with larger international trade
volumes and an improving fnancial sector should catalyze further
growth in services.
Te modest growth projected for FY2010 will make it hard for the
Federal Board of Revenue to achieve its revenue target. However, higher
oil and electricity prices (by way of larger customs revenues and sales
tax receipts) will compensate somewhat for lower direct tax collections.
Yet with higher than budgeted defense spending, the fscal defcit target
of 4.9% of GDP for FY2010 will be missed, and the government is now
2010 2011
C0P growth 3.0 4.0
lnatlon 12.0 8.0
(share of C0P)
-3.6 -4.2
.zo. Pore|gn exchange reserves
0
4
8
12
16
Total reserves
With commercial banks
With State Bank of Pakistan
Jan
10
Oct Jul Apr Jan
09
Oct Jul
2008
$ billion
Source: State ank of Paklstan. http://www.sbp.org.pk
.zo.z 0ebt |nd|cators
0
10
20
30
40
0
10
20
30
40
Domestic debt
External debt Change in domestic debt
Change in external debt
(rupee equivalent)
09 08 07 06 2005
% of GDP % change
Sources: State ank of Paklstan. Annual Report ,
http://www.sbp.org.pk (accessed , Varch zoo).
targeting a defcit of 5.1%. But this too could be overshot in case of further
shortfalls in tax and nontax revenues.
Even with this larger fscal defcit target, PSDP spending, although
higher in the frst half of FY2010 than in the same period in FY2009,
will need to be reduced to accommodate higher defense spending, and
will end up being lower than planned under the budget for FY2010.
To contain current expenditure, the government in December 2009
announced austerity measures including reducing the number of federal
ministries and slashing administrative expenses related to the ofces of
the President and the Prime Minister. It also set up a cabinet committee
to restructure loss-making state-owned enterprises. For 2011, resource
pressures will continue to weigh on the central government, owing to
restructuring of shared taxes and responsibilities between the central and
state governments (Box 3.20.1).
Te key issue with the fscal defcit remains its fnancing. A much
larger than planned recourse to the domestic credit market to fnance
the defcit was required in FY2009 as external sources of fnancing dried
up. Te trend continued in the frst half of FY2010. To this end, in the
frst 8 months of FY2010, the government borrowed PRs191 billion from
commercial banks, although it kept borrowings from the central bank
in check.
In addition to bank fnancing, nonbank domestic fnancing of the
defcit mainly through the National Saving Schemes jumped sharply. Such
borrowings at end-2009 relative to end-2008 were PRs300 billion higher.
Continued high levels of domestic fnancing from bank and nonbank
sources is unsustainable from the standpoint of fscal stability and not
desirable from the perspective of mobilization of deposits by commercial
banks, credit availability for the private sector, and growth.
Continued recourse to such sources is partly due to the delays
in foreign disbursements projected under the Friends of Democratic
Pakistan (FODP) aid groupa part of these unrealized disbursements
is being temporarily made up by the IMFs bridge-fnancing under
the stand-by arrangement. Te fscal framework for FY2010 had relied
heavily on such external resources for fnancing. Te fscal defcit target
for the year might yet need to be scaled back if the projected FODP
disbursements are not realized.
Infation in FY2010 is expected to fall from its peak of the previous
fscal year due to the base efect, a sharp year-on-year decline in
both food and nonfood prices between July and October 2009, and a
continued relatively tight monetary policy. But at a forecast 12.0%, it is
still high. Looking ahead, domestic oil prices will increase in line with
international prices with an automatic pass-through mechanism in place.
Phased increases in electricity tarifs will also contribute to maintaining
momentum in infation during the fscal year. In FY2011, improvement in
domestic food supplies and continued fscal and monetary discipline will
help moderate infation to 8.0%.
With projected double-digit infation this fscal year, the SBP will
need to carefully calibrate monetary policy to maintain price stability
amid strong pressure to cut interest rates further to revive growth.
Control of monetary aggregates will be complicated by the governments
continued large borrowing requirements from commercial banks.
3.20.1 Strengthen|ng sca|
federa||sm
An agreement in December 2009 on
a new National Finance Commission
award that distributes resources
between the federal and the provincial
governments and among provincial
governments is important from the
point of view of strengthening fscal
federalism.
Under the award, the share of
provinces in the total divisible pool of
federal taxes has been increased from
47.5% currently to 56% from the next
fscal year (FY2011) and further to
57.5% for the subsequent 4 years.
Consequently, the federal
government would need to meet its
fscal obligations (interest payments,
defense, large development projects
etc) with a smaller share of the
divisible pool, though the size of the
pool is to be boosted by the new
VAT and other revenue-generating
measures.
Tis will require the federal
government to rationalize and
restructure its expenditure obligations
over time and devolve greater
expenditure responsibilities to the
provinces. Provinces, in turn, will need
to upgrade their capacity to efectively
spend the additional resources.
Te provincial and federal
governments will also need to
coordinate more closely to maintain
fscal stability and meet the defcit
targets.
Exports are predicted to contract once more in FY2010, although only
by 1.4%. Infation will limit depreciation of the real efective exchange
rate and block increased export price competitiveness. Imports, too, will
decline in FY2010 by about 2.4% from their level in FY2009 because of
continued suppressed investment and economic activity. Backed by the
still robust remittance infows (up by 17.7% in the frst 8 months), the
current account defcit in FY2010 is projected to fall to 3.6% of GDP from
5.6% of GDP a year earlier.
Te current account defcit (Figure 3.20.13) is expected to rise in
FY2011 to 4.2% of GDP as imports grow by about 7.1% owing to recovery
in non-oil imports, on account of stronger economic activity. Higher
imports in FY2011 will, however, be ofset to an extent by projected 4.2%
growth in exports.
With FDI down sharply in the frst 8 months of FY2010, fnancing the
current account defcit will continue to depend heavily on debt-creating
infows from multilateral agencies, including FODP commitments. From
FY2011, non-debt-creating infows, such as foreign direct investment and
privatization proceeds, could assume a greater share of such fnancing,
but the outlook remains uncertain and debt sustainability remains a
major concern.
Pakistan faces three interconnected development challenges. Te frst is
its weak fscal situation, marked by underperformance in government
revenue over the years. Te second is low growth and the challenge to
revive it so as to create jobs and reduce poverty. Te third is to improve
the competitiveness of the economy so as to expand exports, sustain
growth, and avoid balance-of-payments problems in the future.
Pakistans economic crisis that erupted in FY2008 was essentially
fscal. To strengthen public fnances, the government has embarked on
an ambitious track of revenue reforms centering on institutionalizing
the new VAT, which it estimates will yield an increase in the
tax-to-GDP ratio of several percentage points. Tax administration
reforms to strengthen compliance, reduce exemptions, and harmonize
tax collection and monitoring systems are also under way. Tese
reforms are critical to generate the fscal space necessary to reinstate
public investment and free up banking and nonbanking fnance to
support private investment.
Likewise, reforms toward a technically and fnancially sustainable
power sector will release fscal space and reduce the sectors strain on
the budget, and, crucially, create an enabling environment for growth,
investment, and business development. Medium- and long-term growth
depends on sustained political commitment to these structural tax and
power reforms.
Part of the competitiveness challenge is to generate a diversifed,
vibrant, and higher value-adding export base. Such a base will not only
lead to a smaller current account defcit and improved debt profle, but
will also result in higher growth and greater generation of jobs to absorb
the countrys growing labor force.
.zo. Current account ba|ance
-9
-6
-3
0
3
11 10 09 08 07 2006
% of GDP
Forecast
Sr| Lanka
Chronlc large budget declts and rellance on short-term external borrowlng ln recent years made the
economy vulnerable to a global nanclal crlsls and recesslon. leavy losses of forelgn exchange reserves
and a domestlc downturn early ln 2009 threatened an economlc crlsls and requlred a recovery program
supported by nanclng from the lnternatlonal Vonetary lund. Jhe end of the 30-year lnternal conlct
ln Vay, however, marked a major turnlng polnt, and an lmmedlate revlval of condence colncldlng wlth
global economlc lmprovement sparked an economlc rebound. Jhe outlook ls posltlve, desplte large
budget declts welghed down by reconstructlon costs.
Te economy grew by an estimated 3.5% in 2009 (Figure 3.21.1). Growth
declined to 1.5% in the frst quarter, but picked up rapidly afer the
second quarter supported by optimism over the end of 3 decades of
civil war. With a revival of agriculture in Eastern province (which
came under government control in 2008), the sector performed well in
the frst half before shrinking marginally due to drought in the third
quarter.
During the second half of 2009, services and manufacturing picked
up sharply, driven by an upturn in domestic demand. External trade
related sectors stayed depressed throughout the year. Tourism saw a
rebound afer May.
Infation had peaked at 28.2% in June 2008, driven by high global
prices for food and fuel, but declines in these prices saw infation subside
to about 1% by mid-2009 (Figure 3.21.2). Prices picked up in the fnal
quarter of the year on short supply of certain agricultural products
including rice, vegetables, and coconuts, which have signifcant weights
in the Colombo consumer price index. Te annual average rate was 3.5%,
down from 22.6% in 2008.
As infation fell, the central bank eased monetary policy and cut
the policy interest rates fve times during the year. It also lowered
the statutory reserve requirement. But despite the repeated rate cuts,
commercial bank lending rates failed to come down signifcantly,
especially in relation to indicative market rates, such as the 3-month
Treasury bill rate (Figure 3.21.3). Te government, in an attempt to speed
up the process, directed the public sector commercial banks to bring
down interest rates by 700 basis points (to 8%12%) in October 2009.
Credit to the private sector remained in the doldrums throughout
2009, due to weak demand and banks cautious approach to lending
(Figure 3.21.4). Nonperforming loans increased, but the banking system as
a whole remains well capitalized.
.z. Contr|but|ons to growth (supp|y)
0
2
4
6
8
GDP Agriculture Industry Services
09 08 07 06 2005
Percentage points
6.2
6.8
3.5
6.0
7.7
Sources: Central ank of Srl lanka. zoo8. Annual Report.
http://www.cbsl.gov.lk, A0 estlmates.
This chapter was written by Nimali Hasitha Wickremasinghe of the Sri Lanka Resident
Mission, ADB, Colombo.
.z.z |nat|on
0
10
20
30
Jan
09
Oct Jul Apr Jan
09
Oct Jul Apr Jan
2008
%
Source: 0epartment of Census and Statlstlcs of Srl lanka.
http://www.statlstlcs.gov.lk (accessed Varch zoo).
South Asia Sri Lanka 193
Growth in broad money supply was subdued during the frst half as
the economy faltered, but accelerated in the second half, supported by
a signifcant buildup of net foreign assets at both the central bank and
commercial banks, and by an expansion of credit to the public sector.
Broad money supply grew by about 19% in 2009 and was within the
central banks target.
An economic stimulus package was introduced in December 2008.
It reduced prices of gasoline (petrol), diesel, kerosene, and liquefed
petroleum gas; and brought in a subsidy for fertilizer for tea smallholders,
and a subsidy for rubber manufacturers. In May 2009, Parliament passed
a supplementaiy SLRs8 billion (about s,o million) package to suppoit
exporters. It included a reward scheme to grant a 5% incentive for
exporters that maintained export earnings at levels similar to the year
before, kept their current employment levels, and met specifc domestic
value-added criteria for various sectors.
Weak revenue performance and expenditure pressures pushed the
2009 budget defcit to 10.2% of GDP (excluding grants) according to the
governments provisional estimates (Figure 3.21.5), substantially exceeding
the planned defcit target under an International Monetary Fund (IMF)
s:.o billion standby aiiangement of July :oo. Due to the slowdown in
external trade and domestic economic activity, total revenue in 2009
was SLRs702 billion, well below target; and at 14.6% of GDP, revenue
performance was marginally worse than a year earlier.
Expenditure increased to 24.7% of GDP in 2009 (a rise of
2.2 percentage points), accounting for the bulk of the defcits increase
from a year earlier. Expenditure pressures came from larger national
security spending, provision of basic needs for internally displaced
persons, greater public investment, and double-digit increases in wages
and pensions and in interest payments.
Total government debt increased by 16% in 2009 and the debt-to-GDP
ratio rose from 82% to 86%. While this ratio had decreased in recent
years through 2008, the structure of the debt became less favorable, with
the mix shifing from concessional external borrowing to higher-cost
domestic and nonconcessional external borrowing. Tis has increased
rollover risk, while the rise in dollar-denominated domestic debt has
added to the exchange rate risk.
Te central objective of the IMF standby program is to reduce the
fscal defcit to a sustainable 5.0% of GDP by 2011. Te government is
expected to introduce reforms to broaden the tax base and reduce tax
exemptions in the 2010 budget, which should assist in moving toward
this target.
One of the most difcult targets of the fscal reform efort under
the standby arrangement is hitting breakeven in operations at the two
loss-making state utilities, the Ceylon Electricity Board and the Ceylon
Petroleum Corporation.
As an initial step, the government established an independent
regulator for the power sector in March 2009. It is also moving toward
lower-cost electricity generation and has appointed a Joint Review
Mechanism committee to monitor the operations of the two enterprises
and to recommend improvements. In July 2009, the government
raised retail prices of gasoline and diesel by 5%10%, moving toward
.z. |nterest rates
5
10
15
20
25
Repurchase rate
3-months Treasury-bill rate
Prime lending rate
Jan
10
Sep May Jan
09
Sep May Jan
08
Sep May Jan
2007
%
Source: Central ank of Srl lanka. http://www.cbsl.gov.lk
(accessed z Varch zoo).
.z. Pr|vate cred|t growth
-10
0
10
20
30
Sep May Jan
09
Sep May Jan
08
Sep May Jan
2007
%
Source: Central ank of Srl lanka. Weekly Economic
Indicators. varlous lssues. http://www.cbsl.gov.lk.
.z. P|sca| performance
-15
0
15
30
Fiscal balance Expenditure Revenue
11 10 09 08 07 2006
% of GDP
Forecast
Sources: Central ank of Srl lanka. zoo8. Annual Report.
http://www.cbsl.gov.lk, Vlnlstry of llnance and Plannlng.
zoo. Pre-Election Budgetary Position Report. http://www.
treasury.gov.lk, A0 estlmates.
full pass-through of increases in international oil prices. However, it
cut gasoline prices by 11% in December 2009, prior to the presidential
election in late January.
Falling global demand and prices hit both exports and imports
heavily. Te largest factor in the 12.9% export drop was a 15.4% decline in
industrial products, due mainly to lower exports of textiles and garments,
food, beverages and tobacco, machinery, and equipment. Te even larger
import fall of 29.4% refected lower demand across all categories.
Remittances held up well, growing by about 14%. Te shrinking trade
defcit and growth in remittances took the current account into surplus at
about 0.3% of GDP in 2009 (Figure 3.21.6).
Tourist arrivals, which fell heavily during the frst 5 months,
recovered strongly over the rest of the year. Although they grew by only
2.1% for the whole year, it was the largest gain since 2004. Te outlook for
the industry is for marked upturn in the coming years.
Gioss omcial ieseives iebounded fiom a low of s:. billion (only
:., months of impoits) in eaily :oo (Figuie ,.::.,) to s,.: billion by
end-December 2009 (6.2 months of imports). Tis gain was underpinned
by s:.: billion fiom sales of goveinment shoit-teim secuiities and by
IMF disbursements. Te central bank intervened in the foreign exchange
market in this period to prevent a substantial appreciation of the
Sri Lanka rupee.
Te authorities made several policy changes at the beginning of
2010 with the intention of gradually relaxing restrictions on capital
account transactions. Te changes include allowing Sri Lankans to open
accounts with banks abroad and to invest in foreign company shares;
and permitting foreigners on tour to open domestic currency accounts in
Sri Lanka and to invest in local corporate bonds.
Lconom|c prospects
Te ending of the military confict in May last year is likely to boost
growth and development in the coming years. Investor confdence in
Sri Lankas markets has already shown signs of improvement, as evidenced
by a sharp runup in the stock market (Figure 3.21.8) and the countrys
standing in global capital markets. Substantial government investment in
social and economic infrastructure will still be needed, though.
With growth picking up in the second half of 2009, the economy
is poised to recover in 2010. Te sectors that performed poorly in 2009
were mainly industries and services related to the external sector, such
as textiles and garments, import and export trade, and cargo handling.
With the global economy in recovery mode and with higher domestic
and foreign investment, growth momentum is likely to strengthen and
reach 6.0% in 2010 and 7.0% in 2011. Tese projections assume that the
tax reforms and fscal consolidation will achieve fscal defcit targets,
sustaining investor confdence.
Te authorities aim to control infation through monetary targets,
while ensuring adequate credit to the private sector. Te central bank
plans the growth of both reserve money and broad money supply to
accelerate by 14.5% in 2010. Given international price pressures, infation
is expected to remain at around 6.5% in 2010.
2010 2011
C0P growth 6.0 7.0
lnatlon 6.5 8.0
(share of C0P)
-2.0 -3.0
.z. Current account |nd|cators
-20
-10
0
10
20
-10
-5
0
5
10
Current account Imports
Exports
09 08 07 06 2005
$ billion % of GDP
Sources: Central ank of Srl lanka. zoo8. Annual Report,
Weekly Economic Indicators. varlous lssues. http://www.
cbsl.gov.lk.
.z./ uross oc|a| reserves
0
2
4
6
8
0
2
4
6
8
Months of imports Gross ofcial reserves
Oct Jul Apr Jan
09
Oct Jul Apr Jan
2008
$ billion Months
.z.8 Stock market growth
-80
0
80
160
Market capitalization
Milanka Price Index (31 Dec 1998 = 100)
All Share Price Index (1985 = 100)
Jan
10
Jul Jan
09
Jul Jan
08
Jul Jan
2007
%
South Asia Sri Lanka 195
Te 20102012 development plan
for Northern province aims to spend
SLRs295 billion (about $225 million).
While it gives no estimate on
how much donors will fund, the
government likely needs to raise a
signifcant amount from them. GDP
growth of the province is expected to
average 13% during the 3 years.
Tere are manifold challenges in
reviving the economy of Northern
province (and to a lesser extent,
Eastern province). A substantial
infrastructure gap with the rest of the
country has opened during 30 years
of destruction and virtually no
investment. Te investment that the
two provinces need to bridge this gap
is enormous.
Yet developing the former
confict regions and normalizing
living conditions are key factors in
establishing lasting peace and placing
Sri Lanka on a higher growth path.
Consequently, there is no alternative
but to make this investment.
In February 2010, the European Commission withdrew preferential
tarifs under the Generalized System of Preferences Plus (GSP Plus) to
Sri Lankas exports on account of weak implementation of human rights
conventions. Te suspension will take efect in August. Te two sides,
however, are working on measures that could allow for the preference
to be reinstated. Te garment sector, which receives about 7% in tarif
concessions under the scheme, will be the most afected by the loss of
concessions.
External trade is expected to continue gathering momentum as
the global economy recovers. At about 5.0% growth, exports will be
below potential in 2010 owing to the impending withdrawal of GSP
Plus concessions (as well as only a modest improvement in demand for
garments).
Imports will advance from their current low base, growing by about
20.0%, refecting a marked increase in domestic demand and higher
oil prices. Te trade defcit will widen signifcantly, but continued
improvement in workers remittances should hold the current account to
a defcit of 2.0% of GDP in 2010 (Figure 3.21.9). It is likely to reach 3.0% of
GDP in 2011.
External capital infows have improved since May and are likely
to strengthen further in the forecast period. Sri Lanka foated a
s,oo million, ,-yeai inteinational soveieign bond issue in Octobei :oo,
and the ofei was oveisubsciibed, ieceiving so8o million and iefecting
the increased international confdence in the economy. Moreover, during
the second half of 2009, rating agencies raised Sri Lankas outlook to
stable from negative.
Budget expenditure is projected to come down to 23.3% of GDP in
2010 and reach 22.5% in 2011 (Figure 3.21.5 above). Since the 2009 targets
were not achieved and some of the additional expenditure items such as
humanitarian assistance to Northern province (the locus of the confict)
and expenses relating to stimulus measures introduced in 2009 will spill
over to 2010, greater adjustment than this would likely be difcult.
As the economy picks up, revenue collection should improve.
However, revenue-enhancement measures that were expected to be
implemented in 2010 under the IMF program have been delayed
due to the scheduling of the parliamentary election in April and the
consequent postponement of the 2010 budget. Te latest government
estimates envisage revenue to be 15% of GDP this year. A Presidential
Tax Commission, set up in 2009, is expected to recommend measures to
broaden the tax base. With these recommendations implemented, revenue
could reach 15.5% of GDP in 2011.
Te government aims to bring down the fscal defcit to 8.0% this year.
In 2011, the defcit should come down to 7.0%, if revenue and expenditure
adjustments are made. How the government will actually address fscal
issues this year and beyond will become clear only once the budget is
approved by Parliament (likely by midyear).
.z.p Current account ba|ance
-8
-6
-4
-2
0
2
11 10 09 08 07 06 2005
% of GDP
Forecast
Sources: Central ank of Srl lanka. zoo8. Annual Report,
Weekly Economic Indicators. varlous lssues. http://www.
cbsl.gov.lk.
Southeast Asia
Brunei Darussalam
Cambodia
Indonesia
Lao Peoples Democratic Republic
Malaysia
Myanmar
Philippines
Singapore
Thailand
Viet Nam
8rune| 0arussa|am
0ll and natural gas productlon ls estlmated to have decllned ln 2009, resultlng ln a moderate contractlon
ln C0P. lnatlon remalned low and the current account surplus large. A forecast return to modest
economlc growth ln 2010 ls based on hlgher global demand and prlces for hydrocarbons, the start of
output from a new methanol plant, and a plckup ln constructlon. As oll and gas reserves are depleted,
the maln development challenge ls to dlverslfy lnto new sources of growth.
Te economy contracted by 1.9% in 2008 as oil and natural gas
production, which accounts for 70% of GDP, fell by 6.2% (Figure 3.22.1).
Te signifcant contraction in hydrocarbon production, for a second
year in a row, refected the maturity of the countrys oil felds and a
government decision to use reserves more sparingly to extend the life of
energy production. Growth in the nonenergy sector slowed to 2.4%, from
8.5% in 2007, mainly due to the impact of the global downturn on trade,
tourism, and manufacturing (predominantly clothing).
GDP contracted by 2.8% year on year in the frst quarter of 2009 (the
latest period for which data are available). Oil and gas production fell by
a further 6.7%, and growth slowed in the nonenergy sector. For the full
year, GDP is projected to have contracted by 1.2% (Figure 3.22.2). Te
estimated decline in hydrocarbon production was likely ofset to some
extent by increased government services output associated with eforts
to expedite capital spending. Construction activity benefted from the
government spending, and services such as retail trading, transportation,
and recreational services likely picked up last year as consumer
confdence improved in line with the better overall economic outlook.
Infation moderated to 1.8% in 2009, from 2.7% in 2008, refecting
sofer commodity prices and subdued domestic demand. Food, which
accounts for 29% of the consumer price basket, was the main contributor,
increasing by 2.3% (down from 5.0% in 2008), while transport costs, which
account for 23% of the price basket, rose by 2.1% (versus 1.6% in 2008).
A broadly stable Brunei dollar, which is linked to the Singapore dollar,
helped contain infation.
Available data indicate that the budget fell into defcit (by
s8:. million) in the second quaitei of FY:oo (ended ,: Maich :o:o)
afei a s,:.: million suiplus in the fist quaitei, and a suiplus of
s,. billion in FY:oo8. Te tuinaiound in the fscal position was caused
by a slump in revenue from oil and gas (taxes, dividends, and royalties)
and an increase in both current and capital expenditure.
High oil prices in recent years have contributed to substantial current
account suipluses. Te suiplus incieased to an estimated s,.: billion
.zz. 0|| and gas product|on
0
60
120
180
240
1,000
1,100
1,200
1,300
1,400
Gas Oil
08 07 2006
Thousand barrels/day MMscf/day
VVscf mllllon standard cublc foot.
Source: 0epartment of lconomlc Plannlng and
0evelopment. zoo,. Brunei Darussalam Key Indicators.
http://www.depd.gov.bn
This chapter was written by Purnima Rajapakse of the Southeast Asia Department,
ADB, Manila.
.zz.z u0P growth
-3
0
3
6
11 10 09 08 07 06 2005
Forecast
%
2010 2011
C0P growth 1.1 1.5
lnatlon 1.7 1.5
(share of C0P)
33.0 31.0
in 2008 (50.4% of GDP) as the value of merchandise exports (almost
entiiely oil and gas) shot up by ,,., to s:o., billion. Meichandise
impoits iose by ::., to s:. billion. Duiing the fist quaitei of :oo,
the current account surplus narrowed as the value of hydrocarbon
exports fell and imports of food and machinery, transport equipment,
and other manufactured items rose.
Preliminary trade data for all 2009 indicate that exports (in
decreasing share) to Japan, Indonesia, Republic of Korea, and Australia,
which accounted for 87% of Bruneis exports, dropped by 45%, while
imports (also in decreasing share) from Singapore, Malaysia, Japan,
Peoples Republic of China, and Tailand, which account for 73% of
total imports, declined by 1.2%. As a result, the current account surplus
is likely to have narrowed to a still comfortable 35.0% of GDP in 2009.
Inteinational ieseives at the end of :oo amounted to s:. billion.
Lconom|c prospects
Te aging of oil and gas felds, coupled with consequent stoppages in
production for maintenance and repairs, suggests that hydrocarbon
production will remain subdued in the forecast period. As for the
nonenergy sector, recent eforts to diversify the economy will support
growth, but the extent of that support depends how fast that projects
under the national development plan, Rancangan Kemajuan Negara
20072012, are rolled out. Growth projections are based on the assumption
that there will be no sharp decline in oil and gas production in the forecast
period and no letup in eforts to expedite projects under the plan.
In this context, the economy is forecast to grow by 1.1% in 2010 and
1.5% in 2011, the recovery based on an expected gradual rise in global
demand for energy, higher oil and gas prices, and the startup in the frst
half of 2010 of a large methanol plant under construction for the past
6 years. Construction activity relating to Pulau Muara Besar port and a
power transmission line from Sarawak to Brunei, as well as the likely start
of construction on some agri-processing projects, will also support growth.
Foreign direct investment is expected to pick up as the recovery
in Asian economies strengthens, joining the rise in public investment
scheduled under the development plan. Private consumption is likely to
increase modestly with improved domestic economic prospects.
Infation is forecast to edge up to 1.7% in 2010 before moderating to
1.5% in 2011. Its evolution depends largely on movements in global prices
of food, most of which is imported. Price pressures will be contained
by government subsidies on rice, sugar, and fuel, as well as housing,
education, and health services, and by expected stability of the Brunei
dollar against the US dollar during the forecast period.
Te current account surplus is seen narrowing slightly, but staying at
over 30% of GDP, underpinned by exports of hydrocarbons and methanol
and likely increases in tourist arrivals and income from foreign assets.
Growth in imports is projected to more than ofset higher exports,
refecting increases in the machinery and equipment needed to maintain
and upgrade hydrocarbon facilities, as well as growth in construction
materials for government infrastructure projects.
Proven reserves of oil are sufcient
for about another 20 years of
production, and of gas for about
30 years. Te main long-term
challenges are therefore to diversify
the economy away from dependence
on hydrocarbons, while exploring for
new oil and gas felds. Some progress
on diversifcation has been achieved,
despite the small size of the domestic
market, but weaknesses in institutional
capacity and the business environment
need to be overcome before new
industries can become an important
source of growth.
While the government has
accumulated abundant fnancial
resources to promote diversifcation,
slow progress in implementing
government-funded projects points to
a need to improve the bureaucracys
capacity.
As for the private sector, the
World Economic Forums Global
Competitiveness Index for 2009/10
indicates that while the countrys
overall ranking is relatively high at 32
out of 133 countries, it ranks poorly on
several indicators including number of
procedures required to start a business
(ranked 126); time required to start a
business (126); and fnancing through
local equity markets (117).
To promote private sector
development, the government has
announced plans to privatize a range
of government services and is making
eforts to modernize the fnancial
sector. Tese include developing a
modern payment and settlement
system, drafing laws relating to capital
market development, and introducing
laws to vest a future monetary
authority with relevant powers
to supervise the fnancial system.
Progress in streamlining procedures
for businesses is likely to remain
important to diversify the economy.
Cambod|a
0ecllnes ln clothlng exports, tourlsm recelpts, and constructlon caused by the global recesslon
brought about a contractlon ln C0P last year. lnatlon faded, then turned up by year-end. 0esplte
the adoptlon of an expanslonary scal pollcy to cushlon the lmpact of the slump, poverty lncldence
llkely lncreased. Jhls demonstrates a need to dlverslfy sources of growth and to better target scal
pollcy. Jhe lmproved global outlook thls year paves the way for moderate rates of economlc growth
durlng the forecast perlod.
Afer growth that averaged 9.1% from 1998 to 2008, the economy
contracted by an estimated 2.0% in 2009 (Figure 3.23.1). Te shrinkage
refected output declines in three of the four drivers of growth: garment
exports, tourism receipts, and construction, which together account for
over one-third of GDP.
In contrast, the primary sector, the economys fourth driver producing
about 30% of GDP, maintained trend growth and served as a social
safety net for many laid-of workers. Agricultural output expanded by
an estimated 4%, mainly a result of favorable rains. Fisheries production
received a boost from aquaculture and marine fshing to expand by about
9%, while growth in livestock and forestry-related production is estimated
to have remained at around trend rates.
Growth in services slowed to about 1.5%, principally a refection of a
decline in tourism receipts as global travel waned, and of border tensions
with Tailand, a country through which many tourists transit. Total tourist
arrivals rose by 1.7% in 2009 (to 2.2 million), pushed up by increases of
about half from neighbors the Lao Peoples Democratic Republic and Viet
Nam. However, the number of higher-spending tourists from the Republic
of Korea (hereafer Korea) and Japan fell by 26% and 11%, respectively.
Industrial output last year fell by an estimated 13.0%. Data from the
United States (US) Department of Commerce showed that US garment
imports from Cambodia plummeted by 20.9% in dollar terms in 2009
(Figure 3.23.2) because of lower overall US demand and a loss of market
share to competitors such as Bangladesh. (Te US accounts for 70%
of Cambodias garment exports.) Construction is estimated to have
contracted by 10%, refecting a sharp decline in infows of construction-
related foreign direct investment (especially for large projects, including
those funded from Korea), and a slowdown in residential construction.
Heading into 2009, infation decelerated from very high levels, such
as 35.6% in May 2008 (Figure 3.23.3), as world oil and food prices fell and
domestic monetary policy was tightened in mid-2008. Weakening domestic
demand in 2009 further subdued price pressures, so that the consumer
.z. u0P growth
-20
-10
0
10
20
Services Industry
Agriculture GDP
09 08 07 06 2005
%
This chapter was written by Eric Sidgwick and Poullang Doung of the Cambodia
Resident Mission, ADB, Phnom Penh.
.z.z Un|ted States |mports of text||es and
c|oth|ng from Cambod|a
-30
-15
0
15
30
09 08 07 06 2005
Growth, %
Source: 0ce of Jextlles and Apparel. http://otexa.lta.doc.
gov (accessed Varch zoo).
price index on average in 2009 was 0.7% below prior-year levels. By
December, though, year-on-year infation had returned at a rate of 5.3%. Te
real efective exchange rate of the riel appreciated by about 2% during 2009.
Afer clear signs that infation was dissipating, and in response to the
economic slump and very low growth in broad money (3.7% at end-March),
the National Bank of Cambodia, the central bank, in early 2009 lowered
the minimum reserve requirement on banks foreign currency deposits and
introduced a new method of calculating minimum reserves that, in efect,
increased banks liquidity. As a result, broad money growth accelerated to
36.8% by end-December 2009 (Figure 3.23.4), driven by a buildup in foreign
currency deposits (the economy is heavily dollarized).
Private sector credit growth, however, decelerated from 55% at
end-2008 to 6.5% at end-2009 (Figure 3.23.5), refecting subdued economic
activity and increasingly risk-averse behavior of banks. Te banks grew
more cautious as property values declined (most loans are collateralized
on property) and their nonperforming loans rose to 4.8% of total loans at
end-2009 from 3.7% a year earlier.
Te government took a more expansionary fscal stance to stimulate
the slowing economy. It raised total expenditure to an estimated 17.6%
of GDP, above the budgeted allocation of 16.1%. Measures included
temporary tax relief for the tourism and garment industries; increases in
locally fnanced spending on rural infrastructure; elimination of tarifs
on feitilizeis and impoits of agiicultuial machineiy; and s:o million foi
retraining laid-of garment workers. Te government also awarded large
increases in wages and allowances to civil servants and military personnel,
so that its wage bill jumped from 3.4% of GDP in 2008 to 4.7% in 2009.
Increased public outlays, at a time that revenue was eroded by
the economic slump, pushed out the overall budget defcit to an
estimated 5.9% of GDP in 2009, double the 2008 gap (Figure 3.23.6).
An expansionary fscal stance was appropriate given the weakness in
aggregate demand, though the policys impact on the economy generally
and on poverty reduction specifcally was likely hindered by inadequate
targeting. Furthermore, in a reversal from recent years, the government
drew down its deposits in the banking system to help fund the budget
defcit. But this large injection of riel liquidity (equivalent to 1.4% of GDP)
risked undermining macroeconomic stability.
In the external accounts, preliminary data show a 17.0% fall in
merchandise exports in 2009, mostly stemming from the drop in garment
exports to the US. Imports contracted by 16.3 %, refecting lower oil prices
and a cooling of consumption. As said, tourism receipts likely declined.
Te current account defcit (excluding ofcial transfers) narrowed to an
estimated 10.7% of GDP (or 5% including ofcial transfers). Foreign direct
investment infows fell by an estimated :, to s,, million, iefecting the
fnancial crisis and global recession, but donor infows remained buoyant,
and inteinational ieseives incieased to aiound s:. billion, equivalent to
more than 4 months of projected imports.
An analysis conducted by multilateral organizations in late 2009
concluded that Cambodias external public debt remains sustainable
and that the risk of debt distress is moderate. Such debt at year-end was
estimated at s,.: billion (up slightly fiom end-:oo8), mostly on concessional
terms. Most external private debt is in the form of trade credits.
.z. |nat|on
-10
0
10
20
30
40
Oct Jul Apr Jan
09
Oct Jul Apr Jan
2008
%
.z. Contr|but|ons to money supp|y
growth
Jan
2007
Jul Jan
08
Jul Jan
09
Jul
Percentage points
-20
0
20
40
60
80
Net foreign assets
Net domestic assets M2
.z. urowth of pr|vate sector cred|t
0
30
60
90
120
Jul Jan
09
Jul Jan
08
Jul Jan
2007
%
Southeast Asia Cambodia 201
As a result of surging food prices in 2008 and the economic
contraction in 2009, it is likely that the incidence of poverty has risen
above the 30% rate recorded in 2007. In addition to the short-term relief
measures that it introduced last year, the government began preparations
for a social safety net system that will involve the expansion of targeted
conditional cash transfers and labor-intensive public works programs.
In other policy areas, some progress was made under the public
fnancial management reform program, most notably in enhancing the
credibility of the budget through improved medium-term macroeconomic
and expenditure frameworks as well as better budget, cash, and debt
management. Te authorities are implementing a program to restructure
and transfer certain roles and responsibilities to provinces, districts, and
communes; and to institute fscal arrangements at those levels to promote
transparent and accountable local development and improved service
delivery.
Among eforts to enhance the business climate, the authorities
extended the reach of fnancial services; improved the transparency of the
fnancial system; fnalized drafs of new laws on commercial contracts,
fnance, and insurance; and established a commercial arbitration center.
An automated customs-processing system is being extended from the port
of Sihanoukville to cross-border points.
Lconom|c prospects
If global economic growth is in line with the Asian Development Outlook
2010 assumptions and if the weather allows for reasonable crops in
Cambodia, GDP is projected to rebound by 4.5% in 2010 (Figure 3.23.7).
Te assumed lif in US consumer spending will likely result in only a
mild recovery in demand for Cambodian garments, however, owing
to the industrys loss of competitiveness to other suppliers. Te pace of
decline in garment exports to the US did ease, though, heading into 2010
(Figure 3.23.8).
Growth in services is projected to resume at around 5% in 2010.
Forward bookings suggest fairly weak growth in arrivals of higher-
spending tourists, although arrivals of less free-spending tourists are
expected to continue to increase. Other services are projected to recover
moderately, refecting a gradual pickup in domestic consumer and
business sentiment.
Construction activity will likely grow at a moderate rate of about
4%, as appetite for bank credit gradually recovers and infows of foreign
direct investment, particularly from Korea, resume for some projects.
Agricultural output is projected to expand by 4.7%, assisted by eforts to
increase irrigation and the greater availability of high-yield seeds.
Fiscal policy is expected to be less stimulatory this year than last. Te
2010 budget aims to narrow the defcit to 5.2% of GDP, to be achieved
by raising tax revenue to 9.7% of GDP (from 9.0% in 2009) and rolling
back the public sector wage bill a bit. Assuming a similar proportion
of external fnancing as in 2009, this would enable a reduction in the
drawdown of government deposits at banks to 0.6% of GDP. Revenue will
get a lif from the strengthening of economic activity and new taxes on
luxury vehicles and property.
2010 2011
C0P growth 4.5 6.0
lnatlon 5.0 5.0
(share of C0P)
-16.3 -17.0
.z. P|sca| |nd|cators
-10
0
10
20
Overall balance Revenue Expenditure
09 08 07 06 2005
% of GDP
.z./ u0P growth
-4
0
4
8
12
16
11 10 09 08 07 06 2005
%
Forecast
Te planned reduction in fscal stimulus, coupled with relatively
low infation pressures, is likely to presage an accommodative monetary
policy stance, although the monetary authorities have indicated that they
will adjust policy if infation quickens faster than anticipated.
In 2011, a return to higherthough still below trendgrowth
in garment exports and tourism, together with some expansion of
nongarment manufacturing and a pickup in other services subsectors, is
projected to raise GDP growth to around 6%. Te extent and timing of
exploitation of oil and gas reserves discovered ofshore are uncertain, but
are not expected to have an impact on GDP before 2012 at the earliest.
Infation of around 5.0% is projected for the forecast period, assuming
no renewed surges in oil or food prices or sharper depreciation of the
dollar, and assuming a reduction in domestic fnancing of the budget
defcit in 2010. With imports expected to recover faster than exports,
the current account defcit is seen widening to around 16% and then 17%
of GDP in the next 2 years (Figure 3.23.9). An increase in equipment
imports for infrastructure projects will more than ofset gradually rising
external demand for Cambodian exports. Gross international reserves are
expected to iemain at ovei s:.: billion by end-:o:o, equivalent to about
4 months of import cover.
Tis broadly positive outlook is predicated on the government
resuming a path of fscal consolidation, with a higher revenue efort
matched by improved targeting of expenditure, and the maintenance of
low infation. Slippage in these areas would put the forecasts at risk. On
the upside, growth prospects would be enhanced if key structural reforms
were deepened so as to improve the functioning of public administration,
to accelerate trade and transport facilitation with neighboring countries,
and to attract more private investment.
Te hit taken by three of the four drivers of growth and, probably,
poverty reduction during the global recession demonstrates the need for
Cambodia to accelerate the diversifcation of its sources of growth and
to open more opportunities to participate in such growth, especially in
rural areas where most of the poor live. Te likely increase in poverty
also shows a need to institute a social safety net to better protect the most
vulnerable during economic slumps.
Among the key challenges to achieving these objectives are improving
the competitiveness of garments and tourism, diversifying crops
and increasing crop yields, and improving linkages between farmers
and markets. Efective implementation of the agricultural and rural
development agenda will require a greater degree of coordination among
relevant government agencies, and between these agencies and evolving
subnational administrations.
While the legal framework for greater private sector development
is, on paper, taking shape, more needs to be done to implement laws
and regulations and, more generally, to create an environment to attract
higher levels of employment-generating investment.
.z.8 Un|ted States |mports of text||es and
c|oth|ng from Cambod|a
-40
-20
0
20
40
3-month moving average Year on year
Jul Jan
09
Jul Jan
08
Jul Jan
2007
Growth, %
Source: 0ce of Jextlles and Apparel. http://otexa.lta.doc.
gov (accessed , Varch zoo).
.z.p Lxterna| |nd|cators
-8
-4
0
4
8
-20
-10
0
10
20
Current account balance Imports
Exports
11 10 09 08 07 06 2005
$ billion % of GDP
Forecast
|ndones|a
Jhe global recesslon had only a moderate lmpact on thls large economy: growth was malntalned, malnly due
to lncreases ln prlvate consumptlon and government expendlture. lnatlon eased to low levels. lconomlc
actlvlty ls forecast to qulcken thls year and return to prerecesslon levels ln 2011, based on strengthenlng
domestlc demand and supportlve macroeconomlc pollcles. 0esplte economlc achlevements over recent
years, ralslng lnvestment ln lnfrastructure and generatlng enough jobs remaln major challenges.
Growth slowed during the global recession, but not precipitously,
refecting the economys relatively low dependence on exports (equal to
30% of 2008 nominal GDP) and large domestic market. Te slowdown
bottomed in the second quarter of 2009, and the economy rebounded
in the fourth (Figure 3.24.1), assisted by a pickup in exports and prices
of export commodities, as well as by stimulatory fscal and monetary
policies. For the year, GDP increased by 4.5%, only about 1 percentage
point below the average expansion in the previous 5 years.
Private consumption grew by 4.9% in 2009, to contribute the majority
of GDP growth (2.8 percentage points). It was driven by good harvests
(which bolstered rural incomes), low infation, government cash transfers
to poor households early in 2009, election-related spending, and tax cuts
(adopted as part of a fscal stimulus package).
Te government boosted its consumption spending by 15.7% (a
second consecutive year of double-digit increases), which contributed
1.3 percentage points to GDP growth. Alongside eforts to raise the rate of
budget disbursement to stimulate the economy, the fscal stimulus package
was an important factor in higher public spending. Election-related outlays
in the frst half and pay increases for civil servants also contributed.
Growth in investment slowed in the face of the world fnancial
crisis and poor global outlook. Fixed investment rose by a modest 3.3%,
due to increased outlays on buildings and infrastructure. Investment
in machinery and equipment slumped by 9.2%, although the pace of
its contraction moderated in the fourth quarter (Figure 3.24.2). As for
international trade, imports of goods and services contracted faster
than exports, generating positive net exports and contributing just over
1 percentage point of GDP growth.
On the supply side, growth of agriculture was solid at 4.1% (though
slower than in 2008). Harvests were good, but demand sofened for
exports of natural rubber and palm oil. Growth in manufacturing
production also eased from 2008, to 2.1%. Afer a drop in late 2008 and
early 2009, the manufacturing production index started to edge up
.z. Contr|but|ons to growth (demand)
5.7
5.5
6.3
6.0
4.5
-3
0
3
6
9
12
2005 06 07 08 09
Percentage points
Private consumption GDP growth
Investment
Statistical discrepancy Net exports
Sources: Asian Development Outlook database, Statlstlcs
lndonesla. http://www.bps.go.ld (accessed , Varch zoo).
This chapter was written by Jrn Brmmelhrster and Priasto Aji of the Indonesia
Resident Mission, ADB, Jakarta.
.z.z P|xed |nvestment
-15
0
15
30
45
Others
Transportation Machine and equipment
Building Total
Q4 Q3 Q2 Q1
09
Q4 Q3 Q2 Q1
2008
Growth, %
(Figure 3.24.3). Higher production of coal and copper lifed mining output
by 4.4% (but crude oil output fell by about 3% to 301 million barrels in
2009). Construction expanded by a solid 7.1%, bolstered by the investment
in buildings and by government spending on infrastructure.
Growth in services moderated to 5.7%, but this sector (accounting for
about 45% of GDP) still contributed more to total growth than industry
and agriculture together. Transport and communications continued to
outpace most other services subsectors, expanding at double-digit rates.
Lower prices for export commodities as well as sofer demand drove
down merchandise exports by 14.4% in United States (US) dollar terms
last year. Merchandise imports fell at nearly double the rate (27.7%),
refecting lower prices, weak investment in machinery and equipment,
and a fall in exports of manufactures (which require imported inputs).
Monthly data show exports and imports turning up in late 2009 as prices
and demand recovered (Figure 3.24.4). Te sharper slide in imports
than expoits geneiated a s,,.: billion tiade suiplus, and contiibuted to
a current account surplus equivalent to 2.0% of GDP (the trade surplus
outweighing a decline in current transfers and higher income and
services defcits).
Net foreign direct investment infows plunged by about 43% to
s,., billion in :oo, but poitfolio investment iose stiongly in a sign of
improved investor confdence. Te overall balance of payments recorded
a substantial surplus. International reserves, which had declined to
s,o.o billion in Octobei :oo8, iebounded to soo.: billion by end-:oo,
representing 6.5 months of imports and government foreign debt
payments. Te government entered into currency swap agreements
totaling moie than s,o billion that it could tap, if needed, to fuithei
bolster the external position.
Te good harvests, an appreciating rupiah, and lower global food and
fuel prices paved the way for infation to abate to its lowest in almost a
decade. Infation decelerated from 12.1% year on year in September 2008
to 2.8% in December 2009, averaging 5.0% in 2009.
Te unemployment rate declined slightly from 8.1% in February 2009
to 7.9% in August 2009, but employment in the formal sector increased by
just 0.8%, or 260,000 jobs in this period. Lower (notably food) infation
and government cash payments for poor households in early 2009
contributed to a decline in poverty incidence by about 1 percentage point
to 14.1% in the 12 months to March 2009.
As infation and economic activity slowed, Bank Indonesia, the
central bank, lowered its policy interest rate by 300 basis points from
November 2008 to August 2009 to 6.5% (Figure 3.24.5). However, because
commercial banks lagged in reducing their interest rates, these cuts had
little impact on lending. Growth in credit slowed to about 10% in 2009,
and growth in broad money supply eased to 12.4% by year-end.
Financial indicators strengthened as the year progressed. Te rupiah
appreciated against the US dollar by 18.2% in 2009, recovering from
a depreciation in late 2008. Capital infows picked up, along with the
economy, from March. Yields on government bonds fell signifcantly,
stock prices climbed, and credit default swaps returned to levels seen
before the crisis (Figure 3.24.6).
To counter the impact of the global recession, the government
.z. |ndustr|a| product|on |ndex
120
123
126
129
132
135
Jan
10
Oct Jul Apr Jan
09
Oct Jul Apr
2008
2000 = 100
.z. 1rade performance
-60
-30
0
30
60
90
Imports Exports
Jan
10
Oct Jul Apr Jan
09
Oct Jul Apr Jan
2008
%
Note: ased on customs data.
.z. |nat|on and po||cy rate
0
5
10
15
Bank Indonesia reference rate Infation
Jan
10
Oct Jul Apr Jan
09
Oct Jul Apr Jan
2008
%
Sources: ank lndonesla. http://www.bl.go.ld, CllC 0ata
Company (both accessed , Varch zoo).
Southeast Asia Indonesia 205
rolled out a fscal stimulus package costing Rp73.3 trillion, or about
1.4% of GDP. It consisted of tax breaks and subsidies to support private
consumption and businesses (84% of the total stimulus) and labor-
intensive infrastructure works. Eforts to raise the budget disbursement
rate succeeded in getting much of the package implemented.
At the same time, lower international fuel prices allowed for a
reduction in spending on fuel subsidies, so that total spending was less
than budgeted. Revenue fell by about 15%, trimmed by lower corporate
profits and commodity prices. The budget outcome was a deficit of
1.6%, widening from 0.1% in 2008, but smaller than the budgeted
deficit of 2.4%.
Funding for the stimulus package was augmented by unspent
budget resources from 2008 and from bond issuance. Te government
insured itself against a worsening fnancial climate by securing access
to s,., billion thiough :o:o in contingency fnancing fiom development
partners, only a small part of which was used in 2009. Te contingency
agreements helped restore confdence in fnancial markets, and the
goveinment was able to iaise about s:,., billion fiom domestic and
international debt markets in 2009.
Still, the debt-to-GDP ratio of the national government fell to 28%
in 2009, maintaining a decline that has cut the ratio by half in 5 years
(Figure 3.24.7). An expanding economy, fscal consolidation, and lower
interest rates have helped bring down the debt burden. Refecting
improvements in the countrys public and external positions, Standard &
Poors raised its long-term foreign currency credit rating for Indonesias
sovereign debt to BB from BB- in March 2010. Fitch Ratings upgraded its
rating to BB+ from BB (one notch below investment grade) in January
this year.
Some progress was made in addressing constraints to growth. A
regional tax law fnalized last year clarifes and limits new taxes that can
be levied by regional governments, and a new export fnance agency was
established to provide lower-cost export credit to small and medium-sized
businesses.
Eforts were stepped up to improve power supplies. Electricity demand
is growing by at least 8% a year, and the state power company, which
operates 85% of generating capacity and has a monopoly on transmission
and sales, has struggled to meet it. A law introduced in 2009 allows
private investors and local authorities to generate, transmit, and sell
electricity without having to work with the state frm.
Lconom|c prospects
Forecasts assume that the government will implement the major policies
outlined during the 2009 national elections, including following through
with the recently formulated National Medium-Term Development Plan
20102014. Tey also assume that monetary policy will be generally
accommodative to giowth, the iupiah will aveiage about Rp,oo/s:, and
that weather conditions will be normal.
Te medium-term plan envisages average annual GDP growth
of 6.3%6.8% over 20102014, as well as, by 2014, a reduction in the
unemployment rate to 5%6% and a decline in poverty incidence
2010 2011
C0P growth 5.5 6.0
lnatlon 5.6 6.2
(share of C0P)
1.4 0.6
.z. Cred|t defau|t swaps
0
300
600
900
1,200
1,500
Jan
10
Oct Jul Apr Jan
09
Oct Jul Apr Jan
2008
Basis points
Source: loomberg (accessed Varch zoo).
.z./ P|sca| |nd|cators
-25
0
25
50
75
-4
0
4
8
12
Fiscal balance Central government debt
09 08 07 06 05 2004
% of GDP % of GDP
Sources: 0lrectorate Ceneral of 0ebt Vanagement. http://
www.dmo.or.ld (accessed Varch zoo), Asian Development
Outlook database.
to 8%10%. Te plans focus is on ameliorating infrastructure, the
bureaucracy, governance, and the investment climate. It calls for
a substantial increase in development expenditure, which implies
ambitious targets for funding from the private sector and publicprivate
partnerships.
Te 2010 budget aims to support the economic recovery, increase
outlays on infrastructure, and sustain social spending. In September
2009, Parliament adopted a budget with a defcit target of 1.6% of GDP.
However, taking into account rising world oil prices that will lead to a
higher allocation for energy subsidies, the government proposed a revised
budget with a wider defcit of 2.1% of GDP. Tis revised budget assumes a
15% rise in electricity charges at midyear, but no increase in administered
fuel prices at any point during the year.
Budget revenue will beneft from higher rates of economic activity this
year. Ofsetting this to some degree will be a reduction in the corporate
tax rate from 28% to 25% and tax breaks to encourage companies to
list on the stock exchange and to invest in priority sectors, such as oil
and natural gas. Unspent funds from 2009 (totaling the equivalent of
s.: billion) will contiibute to fnancing this yeai's budget.
Monetary policy is expected to remain generally accommodative, with
infation projected to stay within Bank Indonesias 4%6% target band
in 2010. In March 2010, the central bank lef the policy rate at 6.5%, for
the seventh month in a row. Te monetary authorities are also adjusting
regulations to spur lending and encourage banks to lower their lending
rates, in an efort to stimulate sluggish growth in credit.
Against this policy background, private consumption is forecast to
grow by at least 5.5% this year, benefting from a stronger labor market,
increases in real wages, and relatively high prices for agricultural
commodities. Bank Indonesias consumer confdence index showed a
trend increase during 2009, though it subsequently dipped (Figure 3.24.8).
Investment will strengthen in light of better global trade and fnancial
conditions, the countrys record of solid growth, and the upgrades in
its credit rating. Foreign direct investment is expected to rebound and
domestic investment will be encouraged by the quickening pace of
economic activity, tax breaks, a better market for raising equity capital,
and improved credit availability. Fixed capital investment is forecast to
grow by at least 6% in 2010, accelerating to about 9% in 2011. Net exports
are expected to make a relatively small contribution to GDP growth in
the forecast period, given that higher exports of goods and services will
be accompanied by higher imports.
Based on the above factors, GDP growth is forecast to rise to 5.5%
in 2010 and about 6.0% in 2011 (Figure 3.24.9). Growth may exceed
this if the government can accelerate its rollout of infrastructure
investment.
In value terms, merchandise exports in January 2010 soared by 59%,
and imports by 45%, from depressed levels in the prior-year month.
For the full year, exports are forecast to rise by about 11%, based on
the forecast increase in world trade and frm prices for commodity
exports. Stronger domestic demand will propel imports by about 16%.
Consequently, the trade surplus will narrow (Figure 3.24.10) and the
current account surplus is forecast to contract to about 1.4% of GDP in
.z.p u0P growth
0
2
4
6
8
11 10 09 08 07 06 2005
Forecast
%
.z.8 Consumer condence |ndex
90
100
110
120
Jan
10
Oct Jul Apr Jan
2009
Basis points
Southeast Asia Indonesia 207
.z.o Merchand|se trade
0
40
80
120
160
Imports Exports Trade balance
11 10 09 08 07 06 2005
$ billion
Forecast
.z. |nat|on
0
3
6
9
12
15
11 10 09 08 07 06 2005
Forecast
%
Note: zoo, oo.
llnanclal Statlstlcs onllne database (accessed lebruary
zoo), A0 estlmates.
2010 and 0.6% in 2011. Higher infows of direct and portfolio investment
should keep the overall balance of payments in surplus.
Rising domestic demand and higher global prices for oil and
commodities this year will put upward pressure on infation, countered
somewhat by a projected appreciation of the rupiah. Food prices depend
heavily on the weather, and in this regard earlier concerns about the impact
of an El Nio weather pattern that could reduce food production have been
alleviated, in part by increases in food stocks. Infation in 2010 is forecast at
5.6% (it averaged 3.8% in the frst 2 months), accelerating to 6.2% next year.
Domestic risks to the forecasts are headed by oil prices. A signifcantly
higher global oil price than assumed, at a time that the authorities plan
to keep fuel prices steady, would propel the cost of government subsidies.
Tis would push out the budget defcit or lead to cuts in other spending,
or a bit of both. Policy slippage and natural disasters are also a risk.
Since 2004, Indonesia has achieved 5.5% average growth, maintained a
surplus in its current account, guarded a strong fscal position, reduced
external debt, and nearly doubled international reserves. Infation,
though, has averaged a high 8.5% since 2004, even if it has come down
from the double-digit rates of 20052006 (Figure 3.24.11).
Tese solid fundamentals provided good underlying support in
the face of the global recession. However, the moderate pace of growth
over an extended period has not generated sufcient jobs to absorb the
unemployed, underemployed, and new entrants to the labor market.
Furthermore, about 70% of those who are employed work in the
informal sector, where wages and job security are low. Te International
Labour Organization estimates that in 2006 there were 52.1 million
workers (about 55% of the total employed) earning no more than the
equivalent of about s: a day, and a fuithei ,. million (8.:) eaining
no moie than s: a day. Income inequality, as measuied by the Gini
coefcient, has increased from 0.32 in 2004 to 0.37 in 2009.
Insufcient job creation is a consequence of lackluster growth in the
tradable sector, particularly labor-intensive manufacturing. Tat, in turn,
is largely caused by weaknesses in the business environment (problems
include legal and regulatory certainty and governance issues), and
defcient infrastructure (such as roads, ports, and electricity supply).
Investment in infrastructure has dropped to the equivalent of about
3.5% of GDP in the past 3 years, from 7% before the Asian crisis, lagging
such investment in faster-expanding economies. Te governments
investment cooidinating agency estimates that s:,o billion is needed to
build and upgrade infrastructure in 20102014, of which the public sector
could supply one-third.
Bridging that gap with private investment will require, among other
things, faster progress in developing publicprivate partnerships, closer
alignment of national and local regulations (which are sometimes in
confict), and overcoming hurdles related to acquisition of land for
infrastructure projects.
Lao Peop|es 0emocrat|c kepub||c
Rlslng productlon of copper, gold, and sllver coupled wlth stlmulatlve government pollcles helped
the economy malntaln solld growth ln 2009. lxpanslon ls forecast to step up ln both 2010 and 2011,
underplnned by expanslon ln the mlnlng and hydropower lndustrles. lnatlon, curtalled ln 2009, wlll plck
up thls year. Rapld lncreases ln credlt have ralsed macroeconomlc and banklng system rlsks. longer-term
challenges lnvolve dlverslfylng sources of growth and generatlng more employment.
Given limited fnancial links with industrial countries and frm demand
from neighbors for its main exports, the economy was relatively
unscathed by the global slump, posting GDP growth of 6.5% in 2009.
Tis outturn, a little below 7.5% average growth of the previous 5 years,
was supported by signifcant increases in mineral production, a recovery
in the price of copper in the second half of the year, and expansionary
government policies.
Industrial production surged by about 17% and contributed most
of the growth in GDP (Figure 3.25.1). Tis jump stemmed from
mining, construction, hydropower, and, to a lesser degree, the small
manufacturing subsector. Several mining and power projects continued
the expansion works that had already been planned for the year, although
a few others that depended on foreign investment were postponed when
global fnancial fows dried up.
Output of copper from the countrys two main mines rose by about
40% to 121,560 tons in 2009 from 2008s level, gold output rose by about
39% to 161,800 ounces, and silver production more than doubled to 496,000
ounces. It was the frst full year of production from the Phu Kham copper
and gold mine, which started operating in April 2008. Te recovery of
global copper prices in the second half also stimulated mine production.
Construction was spurred by the building of roads, sports facilities,
and hotels for the Southeast Asian Games held in Vientiane in December
2009 and for the 450th anniversary of Vientiane as the capital, which is
being celebrated during 2010. Hydropower output rose by 2%.
Agriculture, which accounts for a third of GDP but employs more
than 70% of the workforce, expanded by 2.3%, refecting better crop
yields from improved rice varieties, growth in fsheries and livestock, and
expansion of plantations (for tree crops such as cofee and natural rubber)
and contract farming (especially of corn and cassava).
Growth in the services sector was moderate at 4.4%. Te Southeast
Asian Games attracted visitors from neighboring countries late in the year,
but tourism from industrial economies was damped by recession in Europe,
Japan, and the United States. Growth of service industries such as retailing,
0
2
4
6
8
10
Agriculture
Industry Services
GDP
09 08 07 06 2005
Percentage points
6.8
7.8
6.5
7.2
8.7
Note: Contrlbutlons to growth based on C0P at constant
baslc prlces.
This chapter was written by Christopher Hnanguie and Soulinthone Leuangkhamsing
of the Lao Resident Mission, ADB, Vientiane.
.z.z Month|y |nat|on
-4
0
4
8
12
Jan
10
Oct Jul Apr Jan
09
Oct Jul Apr Jan
2008
%
Southeast Asia Lao Peoples Democratic Republic 209
hotels, and restaurants decelerated, although the expansion of banking and
fnance services continued at a robust pace.
Te government stepped up spending in 2009, in part to cushion
the economy from the impact of the global recession and partly to build
facilities for the Southeast Asian Games. Total spending grew to the
equivalent of just over 21% of GDP in FY2009 (ended 30 September 2009).
A previously approved hike in public sector wages contributed to the
increase. Revenue was dented by the drop in copper prices in the frst half
of the fscal year, but recovered in the second half as copper prices turned
up. Te government moved to ofset the loss in copper revenue by raising
excise taxes on luxury items, cigarettes, and alcohol. Excluding grants, the
budget defcit widened to 5.9% of GDP in 2009 from 5.0% in 2008.
In addition to higher expenditure from the budget, the Bank of the
Lao PDR, the central bank, funded signifcant of-budget direct lending
for public infrastructure projects.
Infation was curtailed by lower global oil and food prices, averaging
just 0.04%, compared with 7.3% over the previous 5 years. For 7 months
of 2009, the consumer price index fell before turning up in the last
2 months and rising by 3.9% year on year in December (Figure 3.25.2). Te
kip depreciated by 2.5% against the Tai baht (Tailand is the Lao PDRs
biggest trading partner).
Rapid growth in creditat a pace of about 80% in both 2008 and
2009 (Figure 3.25.3)raised concerns that it could fuel infation and
lead to a rise in nonperforming loans at banks. Contributory factors
included the central banks lending for infrastructure projects and
increasing monetization of the economy, while during 2009, the central
bank lowered its policy interest rate from 7.0% to 4.0%. Growth in money
supply (M2) picked up to about 23.0% in 2009.
Lower prices for export commodities, notably copper, cofee, and corn,
trimmed the value of total merchandise exports by an estimated 10.0% in
dollar terms in 2009. Clothing exports fell by about 13% because of weak
demand in industrial countries. Merchandise imports declined by an
estimated 13.0%, mainly a result of lower international oil and food prices
and a fall in imports of machinery. With imports declining faster than
exports, the trade defcit shrank and the current account defcit narrowed
to ::.8 of GDP. Gioss inteinational ieseives edged up to so million
(Figure 3.25.4), sufcient for about 4 months of nonresource import cover.
Solid economic growth over an extended period lowered the incidence
of poverty from around 33% in 2003 to about 27% 5 years later.
Progress was achieved in some policy reforms in 2009. Te
recentralization of treasury, customs, and tax functions to the central
government from the provinces was completed and other public fnance
management reforms made advances. Implementation of a value-added tax
law promulgated in January 2009 was delayed to this year because of the
global recession. In changes that should improve the investment climate,
business registration procedures were simplifed and the government
continued to implement trade-related reforms in its eforts to join the
World Trade Organization. Te National Assembly approved a new
unifed investment promotion law that will abolish cumbersome licensing
procedures and harmonize investment incentives for domestic and foreign
investors. However, implementation of this law, and other reforms, is slow.
.z. Monetary |nd|cators
-20
0
20
40
60
80
Money supply Domestic credit
09 08 07 06 2005
Growth, %
.z. |nternat|ona| reserves
0
200
400
600
800
09 08 07 06 2005
$ million
.z. Lxterna| |nd|cators
-20
0
20
40
60
80
-20
0
20
40
60
80
Current account Imports
Exports
11 10 09 08 07 06 2005
Growth, % % of GDP
Forecast
2010 2011
C0P growth 7.0 7.5
lnatlon 5.6 6.0
(share of C0P)
-10.0 -11.0
Lconom|c prospects
Growth is projected to pick up in the forecast period, underpinned by
increases in investment and buoyant prices for export commodities,
particularly copper and gold. Te two major mining companies plan
substantial investment, some hydropower projects delayed last year are
being revived, and several other substantial mining and power projects
are under consideration.
Te countrys biggest hydropower project, the 1,088 megawatt Nam
Teun 2 plant, ramped up production in March 2010, a move that will
moie than double the countiy's powei expoits to moie than s,oo million
in 2010. Te Lao PDR exports about 80% of its electricity to Tailand.
Clothing shipments are expected to recover this year as markets in
Europe and the United States pick up.
Growth is forecast to recover somewhat in the services sector,
supported by an increase in tourist arrivals as recession recedes in
industrial countries and by an expected rise in visitors from neighboring
countries as a carryover from the national capitals celebrations.
Agriculture is envisaged to record slight growth, with some concerns for
2010 over a lack of rain in the north early in the year.
Te government has budgeted a substantial increase in spending in
FY2010, much of it directed at capital works. Revenue should rise quite
strongly, too, supported by buoyant prices for copper and gold exports,
rising income from hydropower exports, and the new value-added tax.
Te fscal defcit is forecast to widen.
However, a frmer stance is expected on monetary policy, in the
context of a rebound in imported infation. Te central bank aims to
curb M2 money supply growth to 10% in 2010 and the government has
committed to reining in the rapid growth in credit. Furthermore, the
central bank has phased out direct lending for of-budget infrastructure.
On the balance of these factors, GDP growth is forecast to rise to 7.0%
in 2010, quickening to 7.5% in 2011 as construction starts on several more
power plants.
Infation is seen accelerating to average about 5.6% in the forecast
period, owing to upward pressure from higher global oil and food prices,
recent rapid growth in credit, the depreciation of the kip against the baht,
and, for 2010, the value-added tax. In the frst 2 months of 2010 infation
quickened to average 4.5%.
Merchandise exports are forecast to rise by about 15.0% in 2010
(Figure 3.25.5), underpinned by buoyant copper and gold prices and rising
exports of hydropower, in particular from Nam Teun 2. Exports will get
a fllip from rebounding growth in the Tai economy, which contracted
in 2009. Imports are projected to increase at a slower rate than exports,
and the current account defcit should narrow slightly.
External public debt declined to 52% of GDP at end-2008 from 81%
at end-2005, but is projected to rise slightly in the medium term as the
government borrows to fund its equity stakes in some large projects.
Although the stock of debt remains high, debt service is manageable,
given that most is on concessional terms.
Aiming to broaden funding sources for the public and private sectors,
the government plans to launch a small stock exchange at the end of this
year, with assistance from other Asian exchanges.
Te near-term challenge is to maintain
low infation, a stable exchange rate,
and adequate foreign reserves at a time
that very high rates of credit growth
and generally expansionary policies
have raised the level of risk to these
achievements.
Now that infation has turned up
again, rapid rates of credit growth
would likely fuel price pressures.
Expansionary policies, if continued in
2010 as the economy picks up pace,
could spur imports to an extent that
depletes foreign reserves and jolts the
exchange rate.
Excessive growth of credit, or
an abrupt credit slowdown, would
undermine the quality of bank loan
portfolios, particularly as new private
banks enter the market. Te banking
system remains vulnerable: state-
owned commercial banks, which have
a 60% share of banking assets, need
to further strengthen capital positions
and improve banking practices,
including risk management. Central
bank oversight capacity should be
reinforced, especially in the context of
the increasing number of banks.
Diversifying the economys sources
of growth and generating jobs to
absorb the growing labor force remain
major longer-term challenges. Mining
and hydropower boost growth but
ofer few jobs. Reliance on mining puts
economic growth and public revenue
at the mercy of downswings in global
metal prices.
Hence it will be important to
build a fscal framework that channels
revenue from hydropower and
mining into projects that expand the
productive capacity of the economy,
and into reducing poverty.
Te private sector has the potential
to generate more employment, if
the government steps up eforts to
ameliorate the business environment.
Te Lao PDR has slipped in the
World Banks Doing Business 2010
ranking to 167 of 183 countries, and
in Transparency Internationals 2009
Corruption Perceptions Index to 158
of 180 countries.
Ma|ays|a
A plunge ln exports wounded thls trade-sensltlve economy ln 2009. Jhe lmpact of weak exports spread to
prlvate lnvestment, whlch fell sharply, and to prlvate consumptlon, whlch was nearly at. llscal stlmulatlon
packages provlded some buer for aggregate demand. lconomlc growth wlll rebound durlng the forecast
perlod, underplnned by a recovery ln exports and rlslng lncomes. Annual lnatlon ls set to plck up from
low levels. Jhe government plans renewed eorts to encourage hlgh valued-added lndustrles.
Heavily reliant on external trade, the economy was slammed by the global
recession in 2009. GDP dropped by 6.2% in the frst quarter on a year-on-
year basis, afer which the pace of contraction eased before the economy
expanded in the fourth quarter. On a quarter-on-quarter basis, GDP
started to grow afer the frst quarter (Figure 3.26.1). For the full year,
GDP contracted by 1.7%, compared with average growth of 5.8% over the
previous 5 years.
Te downturn was widespread, and declines in exports and
investment were accompanied by considerably slower growth in
government and private consumption. Exports in volume terms fell by
10.1%, refecting depressed demand in most major markets. Tis was
ofset by a 12.5% contraction in import volumes, as net exports registered
growth for the year. Fixed investment fell sharply by 5.5%, with many
frms canceling or deferring investment decisions. Investment acted
as the major drag on GDP in 2009 (Figure 3.26.2). Growth in private
consumption, which accounts for around one-half of GDP, slowed to
just 0.8% owing to job losses and reduced rural incomes on the back of
depressed agriculture commodity prices.
In terms of supply, agriculture grew by a slight 0.4% as depressed
export prices for palm oil and natural rubber damped production.
Output from industry fell and caused GDP to decline (Figure 3.26.3).
Mining and quarrying output declined by 3.8% in response to lower
condensate and crude oil prices. Manufacturing, which is dominated
by the export-oriented electrical and electronic subsector, contracted
by 9.3% due to the downturn in export markets. Construction, however,
increased by 5.7% for the year, supported by government stimulus
measures. Growth of services eased to 2.6%, in line with subdued
domestic economic activity.
Underpinning the upturn in the fourth quarter was a turnaround
in exports and investment as industrial economies replenished depleted
inventories and business sentiment improved on the back of a pickup in
external demand and a gradual recovery in private consumption.
.z. uarter|y u0P growth
-8
-4
0
4
8
-20
-10
0
10
20
Quarter on quarter, saar Year on year
Q3 Q1
09
Q3 Q1
08
Q3 Q1
2007
% %
saar seasonally adjusted annuallzed rate.
Sources: ank Negara Valaysla. zoo. Monthly Statistical
Bulletin. January. http://www.bnm.gov.my, CllC 0ata
Company (accessed z, Varch zoo).
ADB, Manila.
.z.z Contr|but|ons to growth (demand)
-1.7
4.6
6.2
5.8
5.3
-8
-4
0
4
8
2005 06 07 08 09
Percentage points
Private consumption
GDP
Net exports
Government consumption Total investment
Te labor market bottomed in the frst quarter, when the
unemployment rate peaked at 4.0%. Te rate then fell to 3.5% by the
fourth quarter. Most layofs were in manufacturing.
Infation decelerated to 0.6% in 2009 from 5.4% in 2008. Tis
stemmed from falling global commodity prices, slower domestic demand,
and the base efect of an increase in administered fuel prices in June
2008. Consumer prices fell for 6 months of last year (Figure 3.26.4).
However, month-on-month infation was pushed up steadily from August
2009 by the efect of fscal stimulus measures on domestic demand, a
gradual rise in commodity prices, and the low-base efect of the fall in
global food and fuel prices late in 2008. Afer falling sharply, producer
prices also picked up later in the year, to 1.8% in December 2009. In the
frst 2 months of 2010 consumer prices picked up to average 1.3%, while
producer prices increased to 4.2% in January 2010.
Malaysia's cuiient account suiplus modeiated to s,:.o billion in
:oo (:o., of GDP) fiom s,8. billion in :oo8. Tis decline was mainly
attributable to a reduced trade surplus, which ofset higher net receipts
on services and lower net income payments. Merchandise exports fell
by about 21%. All major categories of exports declined in value relative
to 2008, with electrical and electronic exports, which account for 41% of
export earnings, recording a decrease of about 11%.
Te export decline was only partly ofset by a 21% fall in merchandise
imports, since the value of exports outweighs those of imports. Te
decline in imports was mainly due to a sharp contraction in imports of
intermediate goods, most of which are used in making electrical and
electronic products for exports. Exports and imports picked up during
the second half of 2009 (Figure 3.26.5).
Te improvement in the services account was mainly attributable to
higher receipts from tourism ofsetting marginally higher payments on
transportation. Te narrower defcit in the income account was mainly
due to lower outfows of profts and dividend payments. Te lower current
account surplus was accompanied by a smaller defcit in the fnancial
account as a turnaround in portfolio investments, from a large outfow to
a modest infow, and a modest decline in direct investment outfows ofset
signifcantly higher outfows on account of other investments.
As a result of these developments, the overall balance of payments
iecoided a suiplus of s,. billion in :oo compaied to a defcit of s,., billion
in :oo8. Exteinal ieseives at the end of :oo amounted to so.8 billion, oi
8 months of retained imports and 4.4 times short-term external debt.
Te ringgit, having depreciated by 5.0% against the dollar during the
frst 3 months of 2009when increased risk aversion and deleveraging
activities by international investors increased the demand for dollarshas
since appreciated (Figure 3.26.6). At the end of 2009, the ringgit had
appreciated by 1.2% against the dollar on an easing of risk aversion. For
the frst 2 months of 2010, the ringgit further appreciated by around 1%
against the dollar.
While the recovery in the second half of 2009 was largely attributable to
external developments, the economy also benefted from expansionary
fscal and monetary stances. An RM7 billion fscal stimulus package (1%
of GDP) in November 2008 focusing mainly on infrastructure-related
projects was followed in March 2009 by a RM60 billion (9% of GDP)
-8
-4
0
4
8
2005 06 07 08 09
Percentage points
Sources: ank Negara Valaysla. zoo. Vonthly Statlstlcal
ulletln. January. http://www.bnm.gov.my, CllC 0ata
.z. Month|y |nat|on
-3
0
3
6
9
Jan
10
Jul Jan
09
Jul Jan
08
Jul Jan
2007
%
.z. 1rade growth
-30
-15
0
15
30
Imports Exports
Jan
10
Jan
09
Jan
08
Jan
07
Jan
06
Jan
2005
%, 3-month moving average
Southeast Asia Malaysia 213
set of measures to be implemented over 2 years. Te second package
includes additional spending measures (RM15 billion), loan guarantee
funds (RM25 billion), equity investments (RM10 billion), publicprivate
partnerships and other of-budget projects (RM7 billion), and tax incentives
(RM3 billion). As of January 2010, over 95% of stimulus expenditure under
the frst package had been spent, and 42% under the second.
Te central government fscal defcit in 2009 widened to an estimated
7.0% of GDP (Figure 3.26.7), the deepest gap since the 199798 Asian
fnancial crisis (although the actual defcit in 2009 was smaller than the
target of 7.4%). Capital expenditure increased by 15.5% relative to 2008 as
the government accelerated project implementation under the stimulus
packages and the Ninth Malaysia Plan 20062010. Operating outlays
also rose, due in part to increased domestic debt service payments, while
revenue declined slightly.
As a result of the deeper fscal defcit, the ratio of central government
debt to GDP increased from 41.5% at end-2008 to about 54% a year later.
Concerns over the size of the fscal defcit and an apparent lack of a
fscal consolidation plan led in June 2009 to the frst local currency debt
downgrade since the 199798 crisis. Most of the public debt is domestic
only 3.8% was external debt at end-2009.
Bank Negara Malaysia, the central bank, maintained an accommodative
monetary policy stance in the context of low infation and weak economic
activity. It reduced the overnight policy interest rate to 2.0% in February
2009 (Figure 3.26.8) and the bank reserve ratio to 1.0% in March 2009.
Tese actions brought down the average lending rate from 5.9% in
December 2008 to 4.8% in December 2009. Notwithstanding lower lending
rates, loan growth of the banking system slowed to 7.8% by end-2009, from
12.8% the previous year. Loan indicators rebounded late in 2009 refecting
improved consumer and business sentiment.
Most of Malaysias banking sector assets are domestic, and banks had
limited exposure to troubled foreign fnancial institutions or toxic assets.
As a result, banking soundness indicators remained healthy and net
nonperforming loans fell slightly to 1.8% of total loans in December 2009
from 2.2% a year earlier.
Long-term bond yields (10-year maturity) climbed from 3.1% to 4.3%
during 2009, marking investor concerns over the increased supply related
to the larger fscal defcit. Te stock market rebounded, along with other
markets in Southeast Asia, to end the year up 45%.
Lconom|c prospects
A considerable amount of the fscal stimulus funding from 2009 remains
to be spent in 2010. Still, fscal policy will be less stimulatory this year
than last as the government begins a much-needed fscal consolidation
process. Subsidies will be reduced, discretionary spending cut, and eforts
put into making public services more efcient. Te 2010 budget implies
a 14% across-the-board cut in operating expenditure and a 4.5% cut in
development expenditure, aiming to narrow the fscal defcit to 5.6% of
GDP in 2010.
On the monetary front, the authorities in March 2010 raised the
policy interest rate to 2.25% in light of the improved domestic economic
2010 2011
C0P growth 5.3 5.0
lnatlon 2.4 3.0
(share of C0P)
14.0 13.6
.z. Nom|na| exchange rate
RM/$
3.0
3.2
3.4
3.6
3.8
Jan
10
Jul Jan
09
Jul Jan
08
Jul Jan
2007
Company (accessed zz Varch zoo).
.z./ uovernment nance
0
7
14
21
28
35
0
2
4
6
8
10
Defcit Revenue
Expenditure
09 08 07 06 05 04 03 02 2001
% of GDP % of GDP
Sources: ank Negara Valaysla. zoo. Vonthly Statlstlcal
ulletln. January. http://www.bnm.gov.my, A0 estlmates.
.z.8 Po||cy rate
1
2
3
4
Jan
10
Jul Jan
09
Jul Jan
08
Jul Jan
2007
%
outlook. Te increase was aimed at normalizing monetary conditions and
preventing risks of fnancial imbalances from undermining economic
recovery. Monetary policy remains accommodative given considerable
excess capacity in the economy.
A likely appreciation of the ringgit in the forecast period due to a
balance-of-payments surplus should ofer the central bank some fexibility
to wait until a frmer recovery in credit demand emerges before further
raising interest rates. Additionally, the central bank could raise its reserve
ratio for banks if it feels a need for policy tightening.
Te positive sequential momentum in GDP growth during 2009
sets a solid basis for recovery to continue in 2010 and 2011. GDP growth
is forecast to rebound to 5.3% in 2010 before easing to 5.0% in 2011
(Figure 3.26.9). In 2010 the recovery will be underpinned by growth in
exports, driven by strong regional demand, particularly from the Peoples
Republic of China, and inventory restocking by industrial countries,
as well as the lagged efects of the stimulus packages. Growth will also
beneft from the base efect of a sharp contraction in GDP during the frst
half of 2009. Te governments index of leading indicators showed solid
gains headed into 2010 (Figure 3.26.10).
Te more moderate growth expected in 2011 stems from the factoring
out of the base efect of lower growth in the frst half of 2009, which
will boost growth in 2010, and more moderate growth forecast for next
year in some Asian trading partners. Te impact of inventory restocking
in industrial countries will likely dissipate in 2011, but exports will get
support from the forecast stronger global trade recovery. During the
forecast period, exports will also beneft from higher commodity prices,
particularly for crude oil, palm oil, and rubber.
Higher export growth will, in turn, spur employment and incomes
and feed into private consumption. Public consumption and investment
are, however, likely to be damped by the reining back of the fscal defcit,
while private investment is expected to rise only gradually due to excess
capacity in the economy.
Tis excess capacity, coupled with the likely appreciation of the ringgit,
suggests that infation pressures will be fairly subdued. Infation is expected
to move up to 2.4% in 2010 and to quicken to 3.0% in 2011 (Figure 3.26.11),
on the back of higher domestic demand, a rise in global commodity prices,
a rise in some administered prices, and the disappearance from the year-
on-year comparison of the high price base in 2008.
Te current account surplus is forecast to narrow to about 14% in
2010 and a touch below that in 2011 (Figure 3.26.12). Exports will beneft
from higher global commodity prices and a recovering global economy.
Imports are likely to outpace exports in the context of Malaysias
dependence on imported inputs for its manufacturing export industries
and a pickup in domestic demand.
A lower trade surplus during the forecast period is likely to be reinforced
by a further deterioration in the income balance because of increased
outfows of proft and dividend payments, while the services account is likely
to show a small surplus from a steady increase in tourist arrivals.
Malaysias reliance on external markets (both exports and imports of
goods and services are equivalent to more than 100% of GDP) implies that
the main downside risk to the forecasts is a slower than expected global
.z.p Annua| u0P growth
-4
0
4
8
11 10 09 08 07 06 2005
%
Forecast
.z.o urowth of |ead|ng and co|nc|dent
|ndexes
-10
-5
0
5
10
15
Jul Jan
09
Jul Jan
08
Jul Jan
07
Jul Jan
2006
%
Coincident
Leading
Source: CllC 0ata Company (accessed zz lebruary zoo).
.z. |nat|on
0
2
4
6
11 10 09 08 07 06 2005
%
Forecast
Southeast Asia Malaysia 215
recovery. Te countrys high level of international reserves and strong
banking sector position it relatively well to deal with any renewed bout of
global instability, provided it is short.
On the domestic front, there is a risk that the planned withdrawal of
stimulus measures could prove to be premature if the recovery in either
domestic private or external demand is not sustained.
Te economic pain caused by the global recession has led to renewed
debate on the need to reduce dependence on external markets. However,
given the limited size of the domestic market, policy makers seem to
accept that Malaysia will need to continue to embrace globalization,
alongside perhaps a structural shif in the economy to produce a more
diversifed range of goods for exports. Tere is also a growing sense that
the economy seems to be caught in a middle-income trap: unable to
remain competitive as a low-cost producer, but also struggling to move up
the value chain as a producer of knowledge-intensive products.
Economic growth, while impressive, has slowed and private investment,
averaging about 30% of GDP just before the Asian fnancial crisis, has fallen
to around 9.5% of GDP (Figure 3.26.13). Tese indicators point to the need
to address defciencies in the investment climate and to reappraise the role
of public sector companies that compete with the private sector.
Te government is well aware of the need to modernize the economy
and in March this year the Prime Minister announced a New Economic
Model, which calls for an overhaul of the countrys 4-decades-old
afrmative action policies, in order to improve the investment climate
and build a more competitive economy. To this end, the Prime Minister
outlined plans for privatization of state-owned companies, sales of
government land, a reassessment of subsidies, a further review of existing
restrictions on foreign investment in services, and education reform. Te
New Economic Model is to provide the foundation for the formulation
of the 10th Malaysia Plan (20112015), which is expected to be unveiled in
June this year.
In April 2009 the government announced a series of measures that
relaxed some rules on foreign investment in Malaysian companies and
property, on initial public oferings, and on the fnancial sector. Most
notable among these was the relaxation of a 30% bumiputra (ethnic Malay)
equity requirement for investment in 27 services subsectors, including
health and social services, tourism, transport, and business services.
While these are welcome developments, the unfnished agenda is long.
Te 27 subsectors are generally the relatively less important ones within
the sectors. Liberalization of the entire sector is more likely to bring about
a signifcant increase in private investment. Moreover, the services sector
is controlled by a licensing system, and relaxing Foreign Investment
Committee requirements do not remove the need for obtaining licenses
from the relevant ministries, which may stipulate diferent bumiputra
ownership limits to those stipulated by the committee. Investment climate
surveys in Malaysia have frequently identifed anticompetitive practices
and the regulatory burden as major constraints on frms activities and
investments.
.z.z Current account ba|ance
0
5
10
15
20
11 10 09 08 07 06 2005
% of GDP
Forecast
.z. uross xed cap|ta| format|on
0
10
20
30
40
50
Private Total
09 07 05 03 2001 99 97 95 93 1991
% of GDP
Sources: Jreasury Valaysla, Vlnlstry of llnance. Economic
Report /. http://www.treasury.gov.my, CllC 0ata
Company (accessed zz Varch zoo).
Myanmar
Vodest rates of economlc growth ln recent years reect pollcy weaknesses, compounded by some fallout
from the global recesslon ln 2009, and cyclone damage to agrlculture ln Vay 2008. Crowth ls forecast
to edge hlgher, supported by a modest lncrease ln prlvate consumptlon, government spendlng, and
lnvestment ln natural gas productlon. lnatlon pulled back ln 2009, but ls expected to accelerate ln the
forecast perlod. whlle the government has taken some lnltlal steps to llberallze the economy, the llst of
lmpedlments to development remalns long.
Growth slowed to an estimated 3.6% in the fscal year ended 31 March
2009 (FY2008) from 5.5% in FY2007 (ofcial GDP growth estimates,
which are considerably higher than these nonofcial ones, are
inconsistent with variables closely correlated with economic growth, such
as energy use and fertilizer applications).
Myanmar was not directly hit by the global recession, given its
absence of fnancial and trade links with industrial countries. However,
exports and private consumption were reduced by the combined efect of
economic slowdowns in neighboring economies, a collapse in commodity
prices, and the impact of Cyclone Nargis, which inficted severe human
loss and considerable damage to agriculture in parts of the Ayeyarwady
and Yangon divisions in May 2008.
Agriculture (including fsheries, forestry, and livestock) accounted for
around two-ffhs of GDP, one-fourth of exports, and over one-half of
total employment in FY2008. Industry, including export-oriented natural
gas production, contributed 23% of GDP, and services the rest. Ofcial
data indicate a decline in natural gas production in FY2008, refecting a
slowdown in demand from Tailand.
More recently, economic growth likely picked up to an estimated
4.4% in the fscal year ended 31 March 2010 (FY2009), in tandem with
recovery in demand from neighboring countries and a partial recovery in
agricultural production in areas damaged by the cyclone (Figure 3.27.1).
Gas production likely rose to meet increased demand from Tailand.
Private consumption, however, was subdued because of weakness in
remittances from Myanmar workers in recession-hit Malaysia, Singapore,
and Tailand, and because of stagnant rural incomes as farmgate prices
remained depressed.
Paddy production, the predominant crop, is estimated to have
increased by 2.5% in FY2008 and by 2.7% in FY2009. Production in
FY2009 was hampered by drought in the central region and by residual
soil salinity in cyclone-afected areas.
Infation pulled back sharply from 29% year on year in March 2008
.z/. u0P growth
2
4
6
8
11 10 09 08 07 06 2005
%
Forecast
ADB, Manila.
Southeast Asia Myanmar 217
to 2.5% in September 2009, largely a result of a sharp drop in food and
fuel prices, slower domestic economic activity, and reduced monetization
of the fscal defcit. Higher global commodity prices likely propelled
infation to about 6.5% by March 2010, leaving the FY2009 year-average
rate at 7.9% (Figure 3.27.2).
Te external current account fell into defcit in FY2008 (estimated
at 2.5% of GDP) from a surplus of 0.6% of GDP in FY2007, owing to
lower export volumes and declines in export prices of agricultural
products. Tis gap narrowed to about 1.0% in FY2009 (Figure 3.27.3),
when a contraction in imports more than ofset declines in gas exports
(due to lower prices) and in remittances. Te fall in imports in part
stemmed from the winding down of construction at the new capital
city, Naypyidaw. Infows of foreign direct investment into the energy
sectoi helped lif inteinational ieseives to about s, billion at end-FY:oo
(Figure 3.27.4), equivalent to 8 months of imports.
Te consolidated fscal defcit in FY2009 (covering the central
government and state economic enterprises) widened to an estimated
3.7% of GDP from 3.4% in FY2008. Current expenditure was driven up
by higher interest payments on domestic debt, spending to repair cyclone
damage, and a 35% public sector wage increase in January 2010. Revenue
growth was sluggish. Te revenue-to-GDP ratio at about 7% is low by
international standards, while social spending at around 1% of GDP is
extremely low.
In FY2008, the authorities moved away from routinely monetizing the
fscal defcit and fnanced about one-third of it through issues of Treasury
securities. Te government issued a new 2-year Treasury bond in January
2010 with a view to increasing the use of domestic saving for defcit
fnancing. Tis move is expected to go some way to containing the infation
impact of future fscal defcits. However, the practice of valuing exports
of state enteipiises at the omcial exchange iate of MKo/s: (as opposed to
the market rate of about MK1,000) leads to signifcant distortions because
domestic revenue available for spending is hugely undervalued.
As for monetary policy, administratively determined nominal interest
rates remained at their 2006 levels through 200917% for lending and 12%
for bank depositsdespite the easing of infation. Consequently, real interest
rates in the formal banking sector are among the highest in the world.
While this has, to some extent, helped bring back more domestic saving into
the formal banking system, it could have signifcant implications for bank
soundness as borrowers debt-servicing capacity deteriorates.
Lconom|c prospects
Projections for the economy are based on assumptions of normal
weather. Tey also assume that a national election scheduled for 2010
will, at the very least, bring about a more conducive environment for
economic reforms, and that there will be no regression of the limited
reforms seen so far.
On this basis, GDP growth is expected to edge up to 5.2% and then
to 5.5% in the next 2 fscal years. In FY2010, private consumption will
be supported by the public sector wage hike, while public consumption
is likely to pick due to expenditure related to the election. In FY2011, a
.z/.z |nat|on
0
7
14
21
28
35
11 10 09 08 07 06 2005
%
Forecast
.z/. Current account ba|ance
-4
0
4
8
09 08 07 06 2005
% of GDP
.z/. |nternat|ona| reserves
0
2
4
6
09 08 07 06 2005
$ billion
In the late 1980s, Myanmar began a process of gradually
unwinding state ownership and control of the economy.
Tese changes have improved efciency and growth in
some parts of the economy, but reforms have ofen been
piecemeal, without an apparent strategy to overcome the
many structural impediments to realizing the economys
potential. Te country has lagged behind its neighbors in
living standards (Box fgure) and poverty reduction, and the
agenda of required reforms remains extensive.
A gradual liberalization of agriculture has prompted
more farmers to grow cash crops. However, the sector faces
acute shortages of credit. Farmers invariably have to turn
to informal sources of fnance, at interest rates of 5%12%
a month. Te shortage of credit, in turn, leads to a glut
of paddy for sale at harvest times, resulting in very low
farmgate prices. Te credit shortage also means that farmers
are unable to aford adequate farm inputs and have reduced
the intensity of land cultivation, leading to a reduction in
farm yields and fewer rural jobs.
Banking system assets are below levels of a decade ago,
and 70% of all private fnancing requirements are sourced
from the informal sector. Broadening access to formal
fnance requires moving toward market-determined interest
rates, relaxing the deposit-to-capital ratio for banks, easing
stringent collateral requirements, and lifing administrative
controls on the expansion of new bank branches.
Stimulating competition among banks would improve
banking services. In this context, the priorities should be to
eliminate regulatory forbearance toward state banks, allow
state banks to operate on a commercial basis, and move
away from a segmented system whereby only certain banks
can operate in certain sectors.
Te government foated proposals to some business
groups in early 2010 to sell various state assets, such as the
fuel distribution network, some ports and buildings, and
the international airline. Tis has the potential to facilitate
development of the private sector. Enterprises that remain
in state ownership need to be modernized and allowed
to operate on a commercial basis, which would promote
competition and increase their contribution to the budget.
Addressing low levels of government revenue generation
requires a broadening of the tax base and fewer tax
exemptions. Now that capital spending on the capital city
has peaked, there should be room for increased outlays on
development and social projects. Unifcation of the multiple
exchange rates would create additional fscal resources and
reduce incentives for informal activity.
modest increase in rural incomes owing to increased exports and prices
of cash crops will underpin private consumption.
Public investment will rise if the government goes ahead with planned
increases in expenditure on infrastructure. Te authorities have indicated
that they will use pait of the SDR:o: million (s,o million) allocated
in 2009 by the International Monetary Fund for infrastructure. Infows
of foreign private investment are expected for the development of two
new gas felds, Shwe and Zawtika, and the construction of an oil and gas
pipeline project from Myanmar to the Peoples Republic of China. Aid
disbursements for cyclone victims are scheduled to be stepped up prior to
the completion of the humanitarian relief efort in July this year.
From the supply side, agricultural output is likely to gradually pick
up. Te rebound in neighboring economies is seen increasing demand for
gas, which will underpin industrial output.
Infation is projected to accelerate to 8.5%9% in the forecast period,
refecting somewhat higher domestic demand and increased world prices
for oil and foodstufs. A modest increase in exports of gas and food crops is
likely to be ofset by increased imports of capital equipment and construction
materials. Te current account defcit is projected to widen to about 2%.
2010 2011
C0P growth 5.2 5.5
lnatlon 8.5 9.0
(share of C0P)
-1.8 -2.1
8ox gure Per cap|ta u0P, zoop
0
1,000
2,000
3,000
4,000
THA PRC CAM BAN MYA
$
AN angladesh, CAV Cambodla, PRC Peoples Rep.
of Chlna, VYA Vyanmar, JlA Jhalland.
Notes: llscal year for angladesh and Vyanmar. lnd-year
market rate used for Vyanmar.
Ph|||pp|nes
Consumptlon spendlng, both prlvate and publlc, offset weakness ln lnvestment and net exports
last year, enabllng modest economlc growth. Remlttances from overseas workers and expanslonary
macroeconomlc pollcles supported consumptlon. Crowth ls forecast to qulcken thls year, based on
lncreases ln prlvate consumptlon and a rebound ln both exports and lnvestment. After electlons ln
Vay, one of the challenges for the new admlnlstratlon wlll be to strengthen the scal posltlon and
lmprove the lnvestment cllmate.
In the face of the global recession, the economy grew by 0.9% in 2009,
compared with average growth of 5.5% over the previous 5 years. (Gross
national product, which includes remittances from nearly 9 million
Filipinos working abroad, rose by 3.0%.) GDP maintained slight growth
throughout 2009 on a year-on-year basis, picking up in the fourth quarter
(Figure 3.28.1), as industrial output rebounded from a slump.
Buoyed by remittances from overseas workers, private consumption
grew by 3.8% (compared with 4.7% in 2008) to remain the biggest
contributor to GDP growth on the demand side. Remittances rose by
,.o to s:,., billion in :oo, with double-digit incieases in Novembei and
December when workers sent additional amounts to their families who
had been devastated by tropical storms.
Signifcantly higher government consumption spending (up by
8.5%) and a fscal stimulus package helped support aggregate demand.
Te government provided cash transfers and emergency employment
programs to vulnerable groups as the economy slowed. It also increased
spending on infrastructure to compensate for a slump in private
construction.
However, the impact of the global fnancial crisis and recession
depressed investment, in fxed capital by 3.5% and in durable equipment
by 11.4% (although the pace of contraction slowed in the second half). Te
ratio of fxed investment to GDP resumed its decline (Figure 3.28.2), afer
some improvement in 2007 and 2008. Total investment dragged down
GDP growth, as did net exports.
On the supply side, services (accounting for 50% of GDP in 2009)
expanded by 3.2% and were the only production sector to contribute to
GDP growth (Figure 3.28.3). Retail trading, assisted by the growth in
remittances, picked up during the year. So did communications, fnance,
and business process outsourcing. By contrast, industrial production fell
by 2.0%, in its frst contraction since 2001. Manufacturing, the biggest
industry subsector, shrank by 5.1%, with weaker external demand for
.z8. uarter|y u0P growth
0
1
2
3
4
5
Q4 Q3 Q2 Q1
09
Q4 Q3 Q2 Q1
2008
%
Sources: Asian Development Outlook database, Natlonal
Statlstlcal Coordlnatlon oard. http://www.nscb.gov.ph
(accessed z, January zoo).
This chapter was written by Teresa Mendoza of the Philippines Country Oce, ADB,
Manila.
.z8.z uross xed cap|ta| format|on
0
5
10
15
20
25
08 06 04 02 2000 1998
% of GDP
electronic products and clothing a major factor. Public construction
increased as the fscal stimulus was launched, though private construction
fell. Production from the fairly small mining industry rose by about 20%
in 2009.
Agriculture, representing a declining share of GDP but still accounting
for one-third of employment, sufered from severe tropical storms, which
reduced rice output by nearly 14% in the fourth quarter from the year-
earlier period. Overall, agricultural output was fat for the year.
Employment grew, mainly in services, but fell short of the 1.1 million
increase in the labor force, so that the unemployment rate rose to 7.5% in
2009 (the rate of underemployment was 19.1%). Pressure on under- and
unemployment was mitigated to some extent by the deployment of about
1.3 million workers overseas in the frst 11 months of 2009, 12% higher
than the prior-year period.
Lower international prices for oil and commodities, coupled with the
sof domestic demand, pulled down consumer prices (Figure 3.28.4), so
that infation averaged 3.2% in 2009. It picked up to 4.4% in December, on
the back of rising prices for oil and for food (owing to weather damage to
agriculture).
Te slump in global trade cut merchandise exports by just over 22% to
s,,., billion, the lowest value since :oo,. Expoits of electionic goods and
clothing were particularly afected. Merchandise imports fell by about
: to so. billion, iefecting the weakness in expoits (mateiials foi
manufactured exports are imported) and in investment, and lower prices
for oil and commodities.
By November, though, trade grew on a year-on-year basis
(Figure 3.28.5), from a low base in the prior-year month. In the last
2 months of 2009, the rebound in exports was driven by electronics;
that in imports by capital goods, materials for manufactured exports,
and higher oil prices. With the fall in the value of merchandise imports
outpacing that of exports, the trade defcit shrank.
Te cuiient account iecoided a laige suiplus of s8.o billion (,., of
GDP), benefting from the narrower trade gap, growth in remittances,
and an expansion of earnings from business process outsourcing.
Poitfolio investment iecoided an infow of s:. billion, a ieveisal fiom
outfows of s,.8 billion in :oo8. Net foieign diiect investment iemained
low by subregional standards. Te overall balance of payments recorded
a substantial surplus, and the stronger external position contributed to a
2.4% appreciation of the peso against the United States dollar in 2009.
Gioss inteinational ieseives stood at s,., billion as of Febiuaiy
2010 (Figure 3.28.6), representing a high 9.3 months of import cover and
10.2 times short-term external debt (based on original maturity). Reserves
were boosted by higher government borrowings on global fnancial
markets to fund the fscal stimulus.
Tat stimulus focused on extra spending for infrastructure and for
social protection measures. Government expenditure, other than for
interest payments on the large public debt, rose to 14.9% of GDP from
13.5% in 2008. Concurrently, tax revenue fell by 6.4%, eroded by weaker
economic growth and provision of tax exemptions and reductions
in 2009 (forgone revenue was estimated at about 0.6% of GDP). Poor
investment sentiment stymied planned sales of government assets. In
.z8. Contr|but|ons to growth (supp|y)
2005 06 07 08 09
Percentage points
-2
0
2
4
6
8
.z8. Month|y |nat|on
-5
0
5
10
15
20
Nonfood Food and beverages Overall
Jan
10
Oct Jul Apr Jan
09
Oct Jul Apr Jan
2008
%
Sources: Natlonal Statlstlcs 0ce. http://www.census.gov.
ph, CllC 0ata Company (both accessed o Varch zoo).
.z8. Merchand|se trade growth
-50
-25
0
25
50
Imports Exports
Jan
10
Oct Jul Apr Jan
09
Oct Jul Apr Jan
08
%
Sources: Natlonal Statlstlcs 0ce. http://www.census.gov.
ph, CllC 0ata Company (both accessed Varch zoo).
Southeast Asia Philippines 221
these circumstances, the fscal defcit widened to 3.9% of GDP, from 0.9%
of GDP in 2008 (Figure 3.28.7).
As the economy sagged and infation waned, Bangko Sentral ng
Pilipinas lowered its policy interest rates in steps by 200 basis points from
December 2008 to July 2009, taking the overnight borrowing rate to 4.0%,
the lowest in about two decades (Figure 3.28.8). Te central bank also
supported banking system liquidity and depositor confdence by, among
other changes, reducing commercial bank reserve requirements and
increasing the ceiling on deposit insurance.
Growth in bank lending slowed in the early part of the year, then
picked up as economic conditions improved. Broad money (M3) growth
decelerated to 8.3% year on year in December 2009, from nearly double
that rate a year earlier.
Lconom|c prospects
Te outlook assumes that there is a smooth political transition in 2010
following presidential and legislative elections scheduled for May, and
that the new government pursues credible economic and fscal programs.
Fiscal policy will likely be less stimulative in 2010, given budget
constraints and plans by the current administration to trim the fscal
defcit to 3.5% of GDP. Spending on social services is budgeted to rise (in
nominal terms), but the amount set aside for infrastructure is lower than
last year. Tere are risks on the revenue side. More tax exemptions were
approved early in 2010, and additional tax breaks are proposed, even
though the countrys low tax collection is a chronic constraint on the
budget.
Monetary policy is expected to support the recovery while the
authorities gradually unwind the liquidity-boosting measures put in place
during the global fnancial crisis. Te central bank increased the lending
rate to banks under a rediscounting facility and reduced the size of its
peso rediscounting window in the frst quarter of 2010.
Private consumption will likely remain the main driver of growth in
the next 2 years, underpinned by remittances (expected by the central
bank to rise by about 6% in 2010), a frmer labor market, and stronger
consumer confdence. Election-related spending will provide a boost
through May. Exports will grow in line with the global recovery and, on a
net basis, are expected to contribute modestly to GDP growth.
Investment is forecast to rebound from last years low levels now that
the external and domestic outlooks have improved (businesses might be
cautious until the May elections, though). Investment pledges reported
by government agencies in the fourth quarter of 2009 nearly trebled from
the prior-year period, and the index of business confdence rose to a
2-year high in the frst quarter of 2010 (Figure 3.28.9). Property companies
have laid out aggressive expansion plans to meet anticipated strong
demand for ofce space, mainly from business process outsourcing frms,
and for housing (stimulated by remittances and low interest rates).
Services will beneft from stronger growth in private consumption
as well as election-related spending. Higher levels of external trade will
continue, more specifcally, to stimulate wholesale trade, storage, and
transport. Te association representing business process outsourcing
.z8. |mport cover and reserves
5
6
7
8
9
10
0
10
20
30
40
50
Import cover Gross international reserves
Jan
10
Oct Jul Apr Jan
09
Oct Jul Apr Jan
2008
Months $ billion
Source: angko Sentral ng Plllplnas. http://www.bsp.gov.ph
.z8./ P|sca| dec|t
% of GDP
0
1
2
3
4
09 08 07 06 2005
Source: ureau of the Jreasury. http://www.treasury.gov.ph
.z8.8 Po||cy and |nat|on rates
0
4
8
12
16
0
2
4
6
8
Infation rate Overnight borrowing rate
Jan
10
Oct Jul Apr Jan
09
Oct Jul Apr Jan
2008
% %
Sources: angko Sentral ng Plllplnas. http://www.bsp.gov.
ph, CllC 0ata Company (both accessed z Varch zoo).
.z8.p 8us|ness and consumer expectat|ons
|ndexes
Index
-25
0
25
50
75
Business Consumer
Q1
10
Q3 Q1
09
Q3 Q1
08
Q3 Q1
2007
Note: Composlte consumer expectatlons lndex for the
next z months, buslness expectatlons lndex for the next
quarter.
Source: CllC 0ata Company (accessed ,o Varch zoo).
frms expects that growth in the industrys revenue this year will
exceed last years 19% gain. Rapid expansion has raised employment in
outsourcing to about 450,000 from about 100,000 over the past 5 years,
and some frms are extending into more value-added services felds.
Manufacturing is projected to recover gradually in tandem with the
improvement in external demand, particularly for electronic products.
Agriculture, still rebuilding afer last years storms, was hit by an El Nio
drought in the early months of 2010, which curtailed crop yields in some
areas. Te government planned rice imports of 2.4 million tons in 2010
(up from 1.8 million tons in 2009), but it might need to raise this target.
Te drought has also reduced hydropower output. Electricity supplies
for the largest island of Luzon, which accounts for about two-thirds
of GDP, were interrupted in the frst quarter when a lack of rain for
hydropower coincided with maintenance shutdowns and technical
problems of other plants. Mindanao, the second-largest island, has been
worse hit because hydropower accounts for about 55% of its electricity
supplies.
On drawing these strings together, GDP is forecast to increase by 3.8%
in 2010 (Figure 3.28.10), still below potential and under the 5.5% recorded
in 20042008.
Growth is seen accelerating to 4.6% in 2011, when a stronger global
recovery is expected to give impetus to exports and remittances.
Te forecast is subject to more uncertainty than usual, since the new
administrations economic and fscal policies will have an important
bearing on the momentum of growth.
Infation is forecast to rise to 4.7% this year, owing to the impact of
the drought, which is putting some upward pressure on food prices, and
higher prices for imported oil and commodities. Electricity charges look
set to increase as producers seek to cover rising costs, and suppliers turn
to more expensive oil-based power generation to compensate for shortfalls
in hydropower. Infation averaged 4.2% in the frst 2 months of 2010.
External trade will be considerably stronger this year. Merchandise
exports surged by nearly 43% and imports by 30% in January 2010 (both
from lows bases in the prior-year month). For the full year, growth of
imports will likely outpace exports, widening the trade defcit. Taking
into account higher remittances and business process outsourcing
income, the current account is expected to record a surplus, although it
will moderate from 2009 to around 3.3% of GDP in 20102011.
In the context of improved global fnancial market conditions, the
goveinment iaised s:.o billion fiom bond issues oveiseas in the fist
2 months of 2010, securing about half its external borrowing target for
2010. Te authorities also plan to issue bonds targeted at overseas Filipino
workers. Borrowing costs for external debt have broadly declined to
levels ruling before the fnancial crisis. Moodys upgraded its sovereign
credit rating for the Philippines in July 2009, from B1 to Ba3, citing the
resilience of the fnancial system and of the external payments position
during the global recession.
Risks to the forecasts come from the impact on agriculture and food
prices of a more severe El Nio, and the impact on trade and growth
from slower than projected recovery in the global economy. Signifcant
fscal slippage could unsettle fnancial markets and raise the countrys
.z8.o u0P growth
%
0
2
4
6
8
11 10 09 08 07 06 2005
Forecast
2010 2011
C0P growth 3.8 4.6
lnatlon 4.7 4.5
(share of C0P)
3.3 3.2
Southeast Asia Philippines 223
.z8. 1ax revenue
0
6
12
18
08 06 04 02 2000 98 1996
% of GDP
Sources: CllC 0ata Company, ureau of the Jreasury. http://
www.treasury.gov.ph (both accessed z Varch zoo).
.z8.z Nat|ona| government debt
0
20
40
60
80
09 08 07 06 05 04 03 02 01 2000
% of GDP
Sources: CllC 0ata Company, ureau of the Jreasury. http://
www.treasury.gov.ph (both accessed z Varch zoo).
.z8. Sav|ng and |nvestment
0
600
1,200
1,800
2,400
Gross national saving Gross capital formation
08 04 2000 96 92 88 84 1980
P billion
risk premium. It will be important that the new government commit to a
medium-term plan to strengthen the fscal position.
Although the economy maintained some growth during the global
recession, the slowdown in 2009, coming just afer the surge in food
and fuel prices in 2008, has made the attainment of the Millennium
Development Goals more challenging. One-third of the population was
poor even before the last 2 difcult years.
Over a long period, the Philippines has invested less in social sectors
and infrastructure than most of its neighbors, in large part a result of the
tight fscal situation, high levels of public debt, and a business climate
that hampers private investment. Gross domestic investment fell to the
equivalent of 14.0% of GDP in 2009, the lowest level on record.
Fiscal resources are severely constrained by weak revenue generation.
Tax revenue as a share of GDP, also lower than among most of its
neighbors, declined to 12.8% in 2009 (Figure 3.28.11). Tat decline
refected not only the temporary efect of lower tax collections during
the economic slowdown, but also a long-term erosion of the tax base due
mainly to tax exemptions. National government debt rose to 57.3% of GDP
in 2009 (Figure 3.28.12), and interest payments on the debt absorb about
20% of total budget outlays, crowding out development expenditures.
Reversing the structural erosion of taxes and reducing government
debt to release budget funding for development expenditure will require
renewed eforts at tax reform by the new administration. Tat could
include rationalization of fscal and investment incentives (they cause
large losses of tax revenue), and indexing excise taxes to infation.
Enhancing tax administration is equally important, including cracking
down on tax evaders and enforcing anticorruption programs in tax and
customs agencies.
Higher private investment, too, would play a more signifcant role in
upgrading infrastructure and, more generally, the productive capacity
of the economy. Saving is not the main constraint (Figure 3.28.13), since
national saving has steadily risen, bolstered by remittances.
Rather, sluggish private investment refects infrastructure defciencies,
particularly in power and transport, and weaknesses in governance and
the policy climate. According to the World Economic Forum, the global
competitiveness ranking of the Philippines in 2009/10 fell to 87 (out of
133 countries) from 71 (out of 134) in 2008/09, putting it below India,
Indonesia, and Viet Nam, among others. Te report cited corruption,
inefcient bureaucracy, policy instability, and inadequate infrastructure as
the main reasons for the low ranking.
S|ngapore
Clobal headwlnds bueted thls export-orlented economy ln 2009. Jhe slump ln trade and dwlndllng
capltal ows knocked down prlvate consumptlon and lnvestment. llscal and monetary stlmulus pollcles
went some way to temper the contractlon ln C0P. Crowth ls forecast to rebound strongly thls year,
as the lmpact of the plckup ln global trade and nance spreads through the economy. lnatlon ls
expected to edge hlgher. Jhe government, turnlng lts attentlon to a decllne ln lndustrlal productlvlty,
wlll lnvest ln upgradlng the economy and lts workforce.
Te world fnancial crisis and slump in global trade had a deep impact on
this exceptionally open economy (exports of goods and services represent
over 200% of GDP). From the frst quarter of 2008 to the frst quarter
of 2009, GDP fell by 9.5%. By the fourth quarter of 2009, though, the
economy was growing again on a year-on-year basis (Figure 3.29.1), the
recovery fueled by a rebound in exports. Tat late lif contained the 2009
full-year GDP contraction to 2.0%, not as severe as had been expected
earlier in 2009.
Singapores total trade in goods and services in volume terms fell
by nearly 12% last year, the sharpest fall in at least 3 decades. Te slump
in trade, which started in 2008, sent shockwaves through the economy,
battering most manufacturing and services industries, weakening the
labor market, and severely denting consumer and business confdence.
Private consumption and investment fell from 2008s levels.
Private consumption declined by 0.5%, undermined by the fall
in consumer confdence, job layofs, and lower incomes. (Per capita
gross national income in nominal terms fell by 6.5%.) To counteract
the weakness in private consumption, the government ramped up its
expenditure, lifing public consumption by 8.3%.
Te biggest drag on GDP on the demand side came from investment
which, measured as gross fxed capital formation, fell by 3.1% in 2009
(Figure 3.29.2), carried down by a 5.3% drop in private investment. Tat
latter decline more than ofset the impact of a 14.4% rise in public sector
investment, as the government accelerated infrastructure works, such
as mass transit rail lines. While investment in equipment fell by 14.6%,
that in construction rose by 13.1%, largely stemming from the public
infrastructure spending and the continued building of the large casino-
entertainment projects, Resorts World Sentosa and Marina Bay Sands.
Te economic rebound in the fourth quarter, when GDP rose by 4.0%
year on year, was spurred by a 4.5% rise in real exports (imports fell by
1.8%). Higher exports and a generally better international environment
.zp. u0P and export growth
-10
-5
0
5
10
-24
-12
0
12
24
Export growth GDP, quarter on quarter
GDP, year on year
Q4 Q3 Q2 Q1
09
Q4 Q3 Q2 Q1
2008
% %
This chapter was written by Arief Ramayandi of the Economics and Research
.zp.z urowth |n consumpt|on and
|nvestment
-3
0
3
6
9
12
-5
0
5
10
15
20
Gross fxed capital Government consumption
Private consumption
09 08 07 06 2005
% %
Southeast Asia Singapore 225
raised consumer and investor sentimentfxed investment increased by
8.3% and consumption by 6.2% in the OctoberDecember period.
On the production side, weakness in domestic demand and a fall in
tourist arrivals caused wholesale and retail trading to contract by 9.1%,
and transport and storage to fall by 7.0% (Figure 3.29.3). Te freezing up
of international fnancial markets and investment fows was refected in
a 1.4% decline in fnancial services. Manufacturing production, which is
heavily export oriented, fell by 4.1%. However, construction expanded by
16.0%, a third consecutive year of double-digit growth. Business services
and information and communications grew slightly.
Employment fell by about 14,000 in the frst half of 2009,
predominantly in manufacturing, raising the seasonally adjusted
unemployment rate to 3.3% for the period. When economic activity
rebounded in the fourth quarter, employment also started to recover,
particularly in services industries such as retailing and hotels. Te
unemployment rate fell to 2.1% in the fourth quarter.
Te weakness in domestic demand, coupled with lower prices for oil and
commodities, pulled infation down to just 0.6% in 2009, from 6.6% in 2008.
Te consumer price index fell for 7 months, year on year (Figure 3.29.4).
In the context of low infation and contracting GDP, the Monetary
Authority of Singapore maintained the efective loosening of monetary
policy that it adopted in October 2008 by allowing a depreciation of the
nominal efective exchange rate. Te Monetary Authority sets policy
by managing the Singapore dollar in a trade-weighted band against
a basket of currencies, rather than setting interest rates. In October
2008 it changed a 3-year-old policy of allowing a modest and gradual
appreciation of the Singapore dollar against the currency basket to a
target of zero appreciation, and in April 2009, lowered the center of the
trade-weighted band. Liquidity in the economy remained high and broad
money (M2) grew by a relatively strong 11.3% in 2009.
An expansionary budget for FY2009 (ended 31 March 2010) included a
Ss:o., billion stimulus package. Notable measuies included a Jobs Ciedit
Scheme to curb layofs by ofering employers a temporary wage subsidy,
and a Special Risk-Sharing Initiative to assist frms facing a squeeze on
credit with access to funds. Other elements of the package were cuts
in corporate income taxes and rebates on personal income taxes, and
additional assistance for low-income earners. Te programs performed
fairly well in stimulating the economy.
As it turned out, spending on several stimulus measures fell short of
the budgeted amounts, in large part because the economic performance
turned up earlier than expected. Similarly, revenue held up better than
previously anticipated. Te overall fscal defcit was equivalent to 1.1% of
GDP, compared with a small surplus in 2008.
In United States dollar terms, merchandise imports dived by 23.3%
last year, outpacing a 20.3% drop in merchandise exports (weak domestic
demand cut imports, as did the slump in manufacturing industries, which
use mainly imported materials). Te decline in trade bottomed in the
frst quarter of 2009 (Figure 3.29.5). External balances for goods, services,
and income remained in surplus, so that the current account surplus was
barely changed from 2008, at 19.1% of GDP. International reserves rose by
about 8 to USs:8,.8 billion, oi , months of impoit covei.
.zp. Contr|but|ons to growth (supp|y),
se|ected sectors, zoop
-10 -5 0 5 10 15 20
Contributions to growth (percentage points)
Growth (%)
Wholesale and retail
Transport and storage
Manufacturing
Financial services
Information and com.
Business services
Construction
Source: Slngapore Vlnlstry of Jrade and lndustry. zoo,.
Economic Survey of Singapore. http://www.slngstat.gov.sg
.zp. |nat|on and money supp|y (Mz)
-2
0
2
4
6
8
-4
0
4
8
12
16
M2 growth Infation
Jan
10
Oct Jul Apr Jan
09
Oct Jul Apr Jan
2008
% %
Source: CllC 0ata Company (accessed z| Varch zoo).
.zp. Merchand|se trade growth
-60
-30
0
30
60
Imports Exports
Jan
10
Oct Jul Apr Jan
09
Oct Jul Apr Jan
2008
%
Lconom|c prospects
Te recovery in world trade projected in ADO 2010 and pickup in
fnancial fows bode well for Singapores outlook. In particular, the
economy will beneft from the V-shaped recovery in Asia, a region
that accounted for about 60% of Singapores total exports in 2008
(Figure 3.29.6). Te share of exports shipped to industrial economies,
including Japan, was about 30%.
Merchandise exports surged by 35% and imports by 31% on a customs
basis in the frst 2 months of 2010, from a relatively low base in the
prior-year period. Stronger external demand for goods and services will
have spillover efects throughout the economy. Indeed, manufacturing
production rose by just over 29% in the frst 2 months of this year.
Fiscal policy has shifed focus from dealing with the recession and the
immediate recovery to the medium- and long-term goals of upgrading the
economy and reducing dependence on foreign labor. Te fscal stimulus
is being gradually removed. Te Jobs Credit Scheme will be phased out
by the third quarter of 2010 and the program to help frms obtain credit
will fnish by year-end. Te FY2010 budget allocates more for education
and research and development programs aimed at raising productivity.
Te fscal defcit is expected to be similar to last years outcome, at 1.1%
of GDP. Monetary policy is expected to remain generally accommodative
this year.
Investment is forecast to rebound in 2010, stimulated by the better
global trade and fnancial climate and an accommodative monetary
environment. Business confdence strengthened in the second half of
2009 (Figure 3.29.7). In particular, investment is expected to strengthen
in fnancial and business services, tourism, and manufacturing.
Construction investment will be supported by strong demand for
residential property and the infrastructure projects (the casino-
entertainment projects were largely completed in early 2010).
Private consumption will recover from last years weakness, benefting
from growth in employment and incomes and from the income efect of
higher equity and property prices. Net exports are expected to contribute
to GDP growth in the forecast period.
Taking these factors into account, GDP is forecast to rebound to show
6.3% growth in 2010 (Figure 3.29.8), and to expand by about 5.0% in 2011
(the pace easing because of 2010s higher base). Te outcome in both years
depends heavily on the global economic recovery.
Te expected level of GDP for the next 2 years is below the output
trend since 2001 (Figure 3.29.9). Upward pressure on domestic prices
from the demand side will therefore remain subdued. Infation is forecast
to speed up a little to 2.3%, on rising international prices for oil and
commodities and the low base set in 2009. (In the frst 2 months of 2010,
the consumer price index rose by an average of 0.6%.) Infation is forecast
to slow to about 2.0% in 2011 as the low-base efect dissipates.
Te rebounds in domestic demand and in exports will likely mean
slightly stronger growth in merchandise imports (21.0%) than exports
(19.5%) this year. Tis variation will contribute to a narrowing in the
current account surplus as a share of GDP, to a still-substantial 18.0%. In
2011, this surplus is likely to rise, to about 21.0% of GDP.
Strong demand for residential property in the second half of 2009,
2010 2011
C0P growth 6.3 5.0
lnatlon 2.3 2.0
(share of C0P)
18.0 21.0
.zp. Share of exports by trad|ng partner
30
40
50
60
Industrial economies Developing Asia
08 06 04 02 2000 98 1996
%
.zp./ 8us|ness condence |ndex
100
110
120
130
Q1
09
Q1
08
Q1
07
Q1
2006
2000 = 100
.zp.8 u0P growth
-3
0
3
6
9
11 10 09 08 07 06 2005
%
Forecast
Sources: Slngapore 0epartment of Statlstlcs. http://www.
slngstat.gov.sg (accessed Varch zoo), A0 estlmates.
Southeast Asia Singapore 227
accompanied by rising prices (Figure 3.29.10), was driven both by an
upturn in market confdence as the domestic outlook brightened, and by
infows of foreign capital. Te government moved to contain speculation
in housing by imposing new stamp tax on homes sold within 1 year of
purchase and by capping housing loans at 80% of a propertys value. A
signifcant number of housing projects are in the construction stage,
which indicates that supply will pick up next year. Tis should ease
pressure on prices, provided that speculation is contained.
Labor productivity has declined over recent years in construction,
manufacturing, and some services, especially business services, hotels and
restaurants, and wholesale and retail trading (Figure 3.29.11).
A government-appointed Economic Strategies Committee noted
in a report this year that Singapores productivity in manufacturing
and services, in absolute terms, is 55%65% that in the United States
and Japan. Hong Kong, Chinas productivity levels rank higher than
Singapores in construction and services.
Te report observed that a large part of Singapores average 5%
economic growth over the past decade had been achieved through
expansion of the labor force, including foreign workers, who now make
up almost one-third of the workforce. GDP growth averaged 8% from
2004 to 2007, a period when the increase in foreign workers accelerated.
However, average labor productivity tends to decline if industries
employ an increasing number of workers, while keeping other factors
of production, and levels of innovation, relatively steady. Easy access
to low-cost labor from abroad provides little incentive for Singapores
employers to invest in productivity improvements, the report noted.
Moreover, there are physical and social limits to the number of foreign
workers the country can accommodate.
Responding to the report, the government in February this year laid
out a strategy to drive growth through a greater focus on productivity,
rather than on an increasing labor force. It sets a goal of achieving
productivity increases of 2%3% a year over the next decade, more than
double the rate of the past decade. Tis higher rate, even with slower
labor force expansion, would enable the economy to grow by 3%5%
a year and to raise real incomes by one-third in 10 years. Te FY2010
budget committed to spend Ss,., billion ovei the next , yeais on tiaining,
on tax incentives for companies to upgrade and automate operations, on
stimulating research and development, and on encouraging mergers and
acquisitions.
At the same time, the government will increase levies on companies
that employ low-skilled foreign workers, to encourage them to put more
emphasis on productivity improvements by making labor more costly. Te
levies will be increased gradually over several years, starting in July 2010.
Although the higher levies are to be phased in, there is a risk that this
more restrictive approach could increase domestic production costs, given
that the labor market is tight. Tat could put a strain on companies still
straining to recover from recession.
.zp.p Actua| versus trend u0P
-280
-140
0
140
280
-16
-8
0
8
16
Output gap Trend GDP
GDP
11 09 07 05 03 2001
S$ billion S$ billion
Forecast
Sources: Slngapore 0epartment of Statlstlcs. http://www.
slngstat.gov.sg (accessed Varch zoo), A0 estlmates.
.zp.o Rous|ng pr|ces, year-on-year change
-40
-20
0
20
40
Public Private
Q3 Q1
09
Q3 Q1
08
Q3 Q1
07
Q3 Q1
2006
%
Note: Publlc refers to resale prlce lndex of houslng
admlnlstered by the louslng 0evelopment oard.
.zp. Labor product|v|ty |n se|ected
sectors, year-on-year change
-16
-8
0
8
16
Wholesale and retail trade
Transport and storage
Information and
communications
Financial services
Business services
Manufacturing
Construction
09 08 07 06 05 2004
%
Sources: Slngapore 0epartment of Statlstlcs. zoo,. Yearbook
of Statistics of Singapore, zoo. Monthly Digest of Statistics.
lebruary. http://www.slngstat.gov.sg
1ha||and
lractlous polltlcs aggravated the lmpact of the global recesslon on thls economy, whlch contracted steeply
ln 2009 desplte expanslonary scal and monetary stances. Consumer prlces fell over the year. Jhe pace of
recovery ls expected to be moderate ln 2010, ln llght of polltlcal tenslons that wlll llkely cause some delays
ln a government lnfrastructure program. lnatlon wlll qulcken and the current account ls llkely to record a
surplus. lconomlc growth ls forecast to plck up ln 2011, based on stronger exports and lnvestment.
Te impact of the global recession, coupled with a fractious domestic
political setting, caused this economy to contract by 2.3% in 2009, the
deepest decline in Southeast Asia last year. A steep slide in exports led
to cutbacks in manufacturing and in investment. Ten, antigovernment
street protests in April, coming afer a long period of rising political
tensions, eroded consumer sentiment and aggravated a decline in
tourism prompted by recession in industrial countries. GDP contracted
for 4 consecutive quarters year on year, then sprang back in the fourth
quarter of 2009 (Figure 3.30.1).
Manufacturing production fell by 5.1% in 2009, a result of the slide
in export demand. Worst-hit industries were those making capital goods
and higher-technology products such as automobiles and electrical
appliances. Tese industries led the recovery in the fourth quarter, when
export demand rebounded. Construction activity started to pick up in
the second quarter as the government accelerated public works under
two fscal stimulus packages aimed at cushioning the impact of the
global forces on the economy. For the full year, though, construction
output was fat. Total industrial output fell by 4.3% (Figure 3.30.2).
Weak consumer confdence and declining tourist arrivals contributed
to a 0.4% fall in services output last year. Tourist arrivals fell for most of
the year, then rebounded in the fourth quarter, but still showed a full-year
decline of about 3%. Te services subsectors of hotels and restaurants and
transport and communications fell particularly sharply from the fourth
quarter of 2008 through the third quarter of 2009. Even agriculture had a
bad year in 2009, with production down by 0.6% owing, on the one hand,
to price declines, notably for paddy, cassava, maize, and natural rubber,
and, on the other, to pest infestations.
Private consumption contracted by 1.1% in 2009, crimped, particularly
in the frst half, by the weaker labor market, declines in farm incomes,
and the political strife. Consumer sentiment improved in the second half,
when the government rolled out fscal stimulus measures, employment
started to pick up, and prices for farm products bottomed. In contrast
.o. uarter|y u0P growth
-8
-4
0
4
8
Q3 Q1
09
Q3 Q1
08
Q3 Q1
2007
%
Source: CllC 0ata Company (accessed z, lebruary zoo).
This chapter was written by Luxmon Attapich of the Thailand Resident Mission, ADB,
Bangkok.
.o.z u0P growth by sector
-6
-3
0
3
6
Services Industry Agriculture GDP
09 08 07 06 2005
%
Southeast Asia Thailand 229
to private consumption, public consumption spending rose by 5.8% in
2009, as the government ratcheted up its outlays, including the stimulus
measures.
Investment was a major drag on GDP in 2009. Fixed capital
investment fell by 9.0%, and the private sector segment dropped even
more sharply, by nearly 13% (government fxed investment rose by
about 3%). Fixed investment in construction was virtually fat, but that
in equipment fell by 13.4% as companies cut back on expansion and
reequipment plans. Te contraction in private fxed investment slowed in
the fourth quarter (Figure 3.30.3).
Net exports were positive in 2009 because real imports fell much
more sharply than exports. An expansionary fscal policy played an
important role in moderating the recession. Te frst stimulus package
of B::o billion (s,. billion) was implemented fiom Maich :oo. It
included monthly cash payments of B2,000 a person for about 9 million
low-income earners, assistance for the aged, and extra spending on
skills training and public health programs. Businesses received tax
breaks for small and medium-sized frms and the property and tourism
industries, and certain businesses were given access to concessional loans.
Altogether, this package was valued at the equivalent of 1.3% of GDP.
A second stimulus package that could cost as much as B1.43 trillion
(s: billion) is being implemented ovei , fscal yeais staiting fiom
October 2009. Tis program, named Tai Khem Kaeng, or Strong
Tailand, covers public investment mainly in infrastructure such as
transportation, water, and energy, as well as extra funding for health,
education, and tourism. Te planned outlays represent about 5% of GDP
for each of the 3 years.
State enterprises are responsible for driving around one-third of the
infrastructure program over the 3 years. Most of the funding for the
infrastructure will be of budget, sought from domestic debt markets and
publicprivate partnerships, supplemented by budget funds. However,
disbursement of the Tai Khem Kaeng program got of to a slow start in
the fourth quarter of 2009.
Additional government spending in FY2009, at a time of subdued
growth in revenue, widened the budget defcit to the equivalent of 4.3% of
GDP, from just 0.4% in FY2008.
Lower prices for imported oil and commodities, and weak domestic
demand, brought down infation in 2009 from high levels in the prior
year. Government concessions introduced in 2008 to help those on low
incomes (such as free electricity, water supply, and public transportation)
contributed to downward pressure on prices. Te consumer price index
fell for much of the year, then turned up late in the year (Figure 3.30.4)
when oil prices rose.
Fading infation and the weak economy prompted the Bank of
Tailand to cut its policy interest rate by 250 basis points, to 1.25%,
between early December 2008 and April 2009. Credit growth was
sluggish, thoughprivate credit rose by only 3% in 2009, and most of
that was for households. Te government directed state-owned fnancial
institutions to step up their lending, particularly to small businesses
facing a credit squeeze.
Merchandise exports fell by 13.9% in US dollar terms last year,
.o. Pr|vate xed |nvestment
-18
-9
0
9
Q3 Q1
09
Q3 Q1
08
Q3 Q1
2007
Growth, %
.o. |nat|on and po||cy rates
-5
0
5
10
Policy rate Infation
Jan
10
Oct Jul Apr Jan
09
Oct Jul Apr Jan
2008
%
Source: CllC 0ata Company (accessed 8 Varch zoo).
refecting the slump in external demand (Figure 3.30.5), especially in
industrial countries (exports to the Peoples Republic of China and
India were little changed from 2008). Sharp falls were recorded in both
manufactured and agricultural exports. Te slide hit bottom in the
frst half, and by November exports had rebounded on a year-on-year
basis. Imports tumbled by nearly 25% in 2009, a result of the slump in
manufactured exports (which require imported raw materials), weak
domestic demand, and lower prices for oil and commodities.
Partly as a consequence of the drop in imports, the trade balance
showed a iecoid suiplus of s:. billion. With balances in seivices,
income, and transfers close to 2008 levels, the trade surplus pushed
up the current account surplus to the equivalent of 7.7% of GDP. Net
outfows in the capital account slowed last yeai fiom :oo8 to s:., billion.
By yeai-end, foieign ieseives weie up by neaily :, to s:,8. billion, oi
10.6 months of import cover (Figure 3.30.6).
Large current account surpluses during the year contributed to a 4.1%
appreciation of the baht against the US dollar in 2009 (Figure 3.30.7),
and a rise of about 0.4% in its nominal efective exchange rate. Te Bank
of Tailand in August eased regulations on Tai investment in foreign
securities to facilitate capital outfows and ease upward pressure on the
baht. Te Tai stock market hit its nadir in March 2009 and rallied
strongly (up by 63% over the year), in line with other Asian markets.
Nevertheless, Standard & Poors lowered Tailands local currency
debt rating from A to A- in April 2009, while Fitch downgraded the
long-term foreign currency rating to BBB that month, on the ground
that political uncertainty undermined the ability of the government to
implement policies.
Lconom|c prospects
Te forecasts assume that there will be no severe political disruptions in
the next 2 years, and that national elections to be held later in 2010 will
go smoothly.
It is also assumed that a serious legal wrangle, which led to the
suspension of s:: billion of piojects at the Map Ta Phut industiial
estate on Tailands eastern seaboard, and has created uncertainty
about environmental regulations, will be resolved soon. Te new Tai
constitution that came into efect in 2007 requires that certain industries
conduct health impact assessments on new projects. But laws to
implement this provision were not put in place and the assessments not
done. In a case backed by residents and environmental activists, a Tai
court ruling in September 2009 suspended the projects, which are mainly
in petrochemicals, steel, and power plants. Some were later allowed to
proceed, but most remained suspended in March 2010. Te government is
working to resolve the problem so the projects can proceed this year, and
so new investors face a more certain regulatory environment.
On this basis, the economy is expected to recover this year, but
probably at the mild pace of about 4.0% (Figure 3.30.8), even though
it comes of a low base (GDP in 2009 was barely above that of 2007).
Growth is forecast to pick up to 4.5% in 2011 as exports and investment
strengthens.
2010 2011
C0P growth 4.0 4.5
lnatlon 3.5 3.0
(share of C0P)
4.0 2.0
.o. Merchand|se trade growth
-50
0
50
100
Imports Exports
Jan
10
Oct Jul Apr Jan
09
Oct Jul Apr Jan
2008
%
.o. uross |nternat|ona| reserves
0
40
80
120
160
0
3
6
9
12
Import cover Level
09 08 07 06 2005
$ billion Months of imports
Sources: ank of Jhalland. http://www.bot.or.th (accessed
8 Varch zoo), Asian Development Outlook database.
.o./ Lxchange rate
38
36
34
32
30
Jan
10
Oct Jul Apr Jan
09
Oct Jul Apr Jan
2008
B/$
Source: loomberg (accessed , Varch zoo).
Southeast Asia Thailand 231
Te rebound in exports that started late last year will accelerate in
2010, boosting manufacturing production, employment, and investment.
Industries like electronic products, household appliances, and motor
vehicles are benefting from inventory restocking in industrial economies
and strong growth in many Asian countries.
Private consumption is forecast to rise by about 3% this year. It is
getting support from growth in employment and wages (minimum
wages were raised in January 2010), increases in rural incomes based on
higher prices for agricultural products, and rising consumer confdence
(Figure 3.30.9) Sales of automobiles soared by just over 60% in January,
and motor cycle sales jumped by 24% (from a low base in the prior-year
period).
Investment will recover from last years low levels, and is expected
to move up by about 6% in 2010, quickening in 2011. Stronger export
demand has led to a rise in industrial capacity utilization (Figure 3.30.10),
which, if continued, will pave the way for an expansion of capacity in
industries such as food processing, petroleum products, and construction
materials.
Interest rates are expected to stay relatively low, and growth in credit is
edging up this year. Te infrastructure program should stimulate private
investment, particularly in construction and buildings materials. Te Board
of Investment reported a surge in applications for investment incentives late
last year, and the index of business confdence has turned up. Nevertheless,
the recovery in investment will be constrained for at least part of 2010 by
uncertainties over the election and the Map Ta Phut issue.
Political protests in the streets of Bangkok during March and April
2010 set back the recovery in tourism, but arrivals for 2010 are still
expected to rise from last years levels.
Fiscal policy will be expansionary this year, with the extent of the
stimulation depending in large part on the ability to disburse budget and
infrastructure funds. Te government has budgeted for a reduction in
spending in FY2010 and an increase in revenue, with a defcit target of
2.7% of GDP. Te budget will be supplemented by the of-budget spending
on the Tai Khem Kaeng program. Furthermore, the budget proposed
for FY2011 (starting in October 2010) includes a signifcant increase in
spending over the FY2010 level.
However, disbursement of the Tai Khem Kaeng program got of to a
slow stait. Of B8o billion (s:., billion) allocated foi FY:o:o, only about
22% was disbursed in the October 2009March 2010 fscal half-year. Te
government will need to accelerate disbursement of the infrastructure
program if it is to meet its target spending for FY2010.
Political tensions have caused delays as meetings on investment
projects were postponed. Te government is likely to be cautious in
approving projects and disbursing funds during periods of disruption.
Cases of alleged corruption have delayed disbursement in health and
education projects
Merchandise exports are forecast to increase by 16.0% in 2010 and
merchandise imports by 26.0% from last years low base. (Customs based
exports rose by 27% and imports by 58% in the frst 2 months of 2010.)
Te trade surplus is projected to decline and the current account surplus
will fall to a still sizeable 4.0% of GDP this year.
.o.8 u0P growth
-3
0
3
6
11 10 09 08 07 06 2005
%
Forecast
.o.p Consumer and bus|ness att|tudes
68
71
74
77
80
83
30
36
42
48
54
60
Business Consumer
Jan
10
Oct Jul Apr Jan
09
Oct Jul Apr Jan
2008
Index Index
Note: A readlng of less than oo for consumer condence
and less than ,o for buslness sentlment denotes a
deterloratlon.
.o.o Capac|ty ut|||zat|on rate
%
50
60
70
80
Oct Jul Apr Jan
09
Oct Jul Apr Jan
2008
Source: ank of Jhalland. http://www.bot.or.th (accessed ,
Varch zoo).
Infation is forecast to rise to average about 3.5% in 2010
(Figure 3.30.11), due mainly to higher food and fuel prices. Te rate for
the frst quarter was 3.7%, but core infation, excluding food and energy
prices, remained within the central banks target range. Te government
again extended the fee-free electricity, water, and public transportation for
low income earners, this time through to June 2010.
Te Bank of Tailand is expected to gradually move its policy interest
rate up to more normal levels, from the exceptionally low level set in
2009. It also appears likely to favor a moderate appreciation of the baht
against the US dollar, in line with other Asian currencies, as a means
of keeping infation in check. In February 2010 the central bank eased
foreign-exchange rules on overseas investment and hedging transactions
in a move that is expected to facilitate capital outfows and ease upward
pressure on the baht.
Downside risks to the forecasts from domestic factors are headed by
the political tensions and uncertainty, which, if prolonged could further
delay fscal implementation and hamper policy making in general. More
signifcant disruptions would hurt consumer and investor sentiment, and
fscal revenue. On the other hand, a more settled political situation and
resolution of the Map Ta Phut issues would likely spur stronger growth.
Investment in infrastructure has lagged during the past 4 years, in
large part a result of the political turbulence. Tailands rank in terms of
infrastructure in the 2009 IMD World Competitive Yearbook fell to 42 of
,, countiies, fiom , in the pievious yeai. A so billion megapiojects"
infrastructure plan prepared in 2005 was only partly implemented. Te
challenge is to do better with the Tai Khem Kaeng program, which also
involves about so billion in piojects, although they aie mostly smallei
and more manageable than the previous plan.
Reforms in the regulatory environment to encourage publicprivate
partnerships would increase the private sectors contribution to
infrastructure. Te establishment of a high-level committee on public-
private partnership issues chaired by the deputy prime minister has been
an important step in this direction. What is needed now are clear policy
framework guidelines for assessing bankable projects, and transparent
regulations and procedure for private sector participation.
Te government has the scope to borrow to fund much of its
contribution to infrastructure. Public debt is at manageable levelsit
rose last year to the equivalent of 43.9% of GDP (90% domestic) and
is projected to peak at 58.5% in 2012 (Figure 3.30.12), then decline as
economic growth accelerates. Total external debt has declined to about
27% of GDP, from over 70% a decade ago, and foreign reserves have
incieased by s:oo billion in this peiiod.
Still, the fscal defcit and debt need to be reined in when economic
growth is stronger and sustained. (At this stage, the government aims
to run budget defcits through 2014.) Broadening the tax base would be
helpful in this regard.
.o. |nat|on
-3
0
3
6
11 10 09 08 07 06 2005
Forecast
%
.o.z P|sca| ba|ance and pub||c debt
-15
0
15
30
45
60
-6
0
6
12
18
24
Fiscal balance Public debt
12 11 10 09 08 07 06 2005
Forecast
% of GDP % of GDP
Sources: ank of Jhalland. http://www.bot.or.th (accessed
8 Varch zoo), Asian Development Outlook database.
v|et Nam
Substantlal and tlmely pollcy responses helped the economy weather the global recesslon, allowlng
for reasonably hlgh economlc growth ln 2009. C0P growth ls projected to accelerate ln 2010 and 2011,
although not to the rapld rates seen ln 20012007. 0evaluatlon and lnflatlon pressures bullt up ln
late 2009, ln part a result of economlc stlmulus pollcles. lnatlon ls forecast to accelerate ln 2010. Jhe
authorltles face a challenge to ratchet up economlc growth whlle safeguardlng macroeconomlc stablllty.
Growth slowed sharply in the frst quarter of 2009 as the impact of the
global recession intensifed. Spurred by a strong fscal and monetary
stimulus, the economy picked up over the rest of the year (Figure 3.31.1),
putting full-year growth at 5.3%, the slowest since 1999.
On the demand side, the expansionary fscal and monetary policies
supported both consumption and domestically fnanced investment.
Net exports improved because imports fell more steeply than exports
(though the country is still a net importer in real terms). But foreign-
fnanced investment declined owing to a downturn in foreign direct
investment (FDI) infows.
As for the sectors of production, agriculture (including forestry and
fsheries) expanded by 1.8%, weaker than its average growth of about
4% in 20042008. Te main cause was a poor summerautumn rice
harvest, which largely ofset an abundant winterspring harvest.
Industry grew by 5.5%, slowing from rates of about 10% in most
recent years. Declining demand for exports as a result of the global
recession acted as a drag on manufacturing production. However,
construction got a boost from the governments policy stimulus, and
output of crude oil rose by 9.8% to 16.4 million metric tons, as new
felds came on stream.
Services expanded by 6.6%, the pace easing a little from recent years.
Te expansionary policies and generally buoyant consumption bolstered
fnancial services and domestic trade. At the same time, declines in
foreign trade and tourist arrivals hurt the transport industry as well as
tourism-linked services such as hotels.
Businesses shed labor early in 2009 as the economy sagged, then,
as many reversed course, employment picked up in the second half.
Te proportion of people living below the ofcial poverty line declined
to an estimated 12.3% in 2009 (from 13.4% in 2008), despite the global
recession, suggesting the positive impact of government support
programs.
Infation pulled back abruptly last year, suppressed by the domestic
This chapter was written by Dao Viet Dung, Yumi Tamura, Chu Hong Minh,
and Nguyen Luu Thuc Phuong of the Viet Nam Resident Mission, ADB, Ha Noi.
0
2
4
6
8
Q4 Q3 Q2 Q1
09
Q4 Q3 Q2 Q1
2008
%
Source: Ceneral Statlstlcs 0ce of vlet Nam. http://www.
gso.gov.vn (accessed , Varch zoo).
..z Month|y |nat|on
-10
0
10
20
30
-2
0
2
4
6
Month on month Year on year
Jan
10
Oct Jul Apr Jan
09
Oct Jul Apr Jan
2008
% %
Source: Ceneral Statlstlcs 0ce of vlet Nam. http://www.
gso.gov.vn (accessed , Varch zoo).
economic slowdown and lower world commodity prices. Year-average
infation slowed to 6.9% from 23.0% in 2008 (Figure 3.31.2). Toward the
end of 2009, though, rapid growth of money supply and a depreciation
of the exchange rate stoked infation again, and by March 2010 the
consumer price index was rising at a year-on-year rate of 9.5%.
When the global recession hit the economy in late 2008, the State
Bank of Viet Nam (SBV), the central bank, loosened monetary policy
signifcantly. It slashed the base rate from 14.0% in October 2008 to
7.0% in February 2009 and reduced the reserve-requirement ratio for
banks domestic currency deposits with a less than 1 year maturity from
11.0% in October 2008 to 3.0% in March 2009. Late in 2009, however,
the SBV raised the base rate to 8.0% (Figure 3.31.3) in an efort to reduce
devaluation pressure on the dong.
Lending interest rates fell to single digits in early 2009. Te lower
rates, coupled with interest-rate subsidies launched in February 2009
as part of the stimulus package, prompted rapid growth of credit and
money supply. Bank credit to the economy expanded by 39.6% and M2
money supply by 29.0% in 2009 (Figure 3.31.4). Many banks started
experiencing a shortage of liquidity in late 2009, partly a result of a
slowdown in growth of deposits due to expectations of rising infation.
A subsequent tightening of bank credit continued into 2010.
Expansionary fscal measures adopted in the frst half of 2009
included tax reductions and deferrals, additional fnancial assistance
to poor households, a 4 percentage point interest-rate subsidy on short-
and medium-term bank loans for certain sectors, and a hike in capital
expenditure. Te measures, as approved, totaled the equivalent of
s8., billion, oi 8.8 of GDP. About ,o of these measuies weie actually
implemented, given fnancing and other constraints. Still, the overall
fscal defcit jumped to an estimated 11.8% of GDP, from 4.1% in 2008
(Figure 3.31.5).
Viet Nams foreign exchange market remained turbulent in 2009.
Declines in exports, tourist arrivals, remittances, and capital infows
reduced the supply of foreign exchange, while rapid growth of credit
increased demand for it. Te shortage of foreign currency in the formal
market that had emerged in late 2008 persisted, despite extensive
interventions by the central bank. Te SBV widened the dongs trading
band against the United States (US) dollar to 5% around its reference
rate in March 2009, but kept the rate itself roughly unchanged until
November 2009 (Figure 3.31.6).
Sales of foreign exchange by the central bank, as well as a
deterioration in the balance of payments, cut into ofcial foreign
reserves, raising expectations of a devaluation. Exporters began
hoarding foreign currency, and capital fight (mostly in the form of
speculative imports and residents shifing their portfolio toward gold
and US dollar-denominated assets) intensifed. Te spread between the
black market rate and the SBVs reference rate increased to more than
15% in November 2009.
In response, the SBV devalued its reference rate by 5.4% and
narrowed the trading band to +/-3.0% in November 2009. In February
2010, it devalued the reference rate by another 3.4%, lowered the reserve-
requirement ratio for foreign exchange deposits, and introduced a 1%
.. |nterest rates
4
8
12
16
Discount rate Refnancing rate Base rate
Jan
10
Oct Jul Apr Jan
09
Oct Jan
2008
% per annum
Source: State ank of vlet Nam.
.. urowth of money and bank|ng
|nd|cators
10
20
30
40
50
60
Total liquidity (M2)
Banking system net domestic credit
Reserve money
Q3 Q1
09
Q3 Q1
08
Q3 Q1
2007
%
Source: State ank of vlet Nam.
.. uovernment nance
-20
0
20
40
Overall fscal balance
Expenditure and on-lending
Revenue and grants
09 08 07 06 05 2004
% of GDP
Note: 0ata lnclude expendlture nanced by oclal
development asslstance and by lssuance of soverelgn debt
but exclude amortlzatlon of debt and lendlng through the
vlet Nam 0evelopment ank and ank for Soclal Pollcles.
Source: Vlnlstry of llnance of vlet Nam.
Southeast Asia Viet Nam 235
cap on dollar deposit rates for non-individuals. Te SBV also ordered
that gold-trading foors in Viet Nam and residents gold trading
accounts abroad be closed by 30 March 2010. Te government instructed
several large state-owned enterprises to sell their foreign exchange (to
the government). Tese measures reduced capital fight and improved
the availability of foreign exchange. Te spread between the black
market rate and the SBVs reference rate decreased to 3.5% in February
2010.
Weaker external demand reduced exports in 2009, particularly
for rice, cofee, rubber, and shoes. Total exports fell by 8.9% in US
dollar terms, and imports by 13.3%, the latter brought down by weaker
economic activity and lower global commodity prices. (Te start of
domestic oil refning contributed to declines in exports of crude and
imports of refned products.)
A sharply narrower trade defcit reined in the current account
defcit to 7.4% of GDP in 2009 from 11.8% in 2008 (Figure 3.31.7).
Te overall balance of payments recorded a defcit, and gross ofcial
ieseives diopped to an estimated s:, billion (equivalent to :.8 months
of imports, the lowest since 2004 on this basis) (Figure 3.31.8), from
s:,.o billion a yeai eailiei.
In the business environment, Viet Nams ranking in the World
Banks Doing Business 2010 report declined to 93 of 183 countries listed,
from 87 in 2008. Aware of shortcomings, the government took steps
to improve governance and the business environment in 2009. On the
former, it adopted a national anticorruption strategy and consolidated
most public debt management in one department within the Ministry of
Finance.
On the latter, it strengthened the regulatory framework for small
and medium-sized enterprises, simplifed procedures for business
registration, and eased some restrictions on foreign investment.
Equitization (partial privatization) of VietinBank was completed
in 2009 and equitization plans for Vietnam National Petroleum
Company and Vietnam Steel Corporation were approved in early 2010.
Government eforts to reduce administrative procedures by about a
third should beneft the business climate.
Lconom|c prospects
As Viet Nam completes the Socio-Economic Development Plan 2006
2010, aimed at raising the economy to middle-income status (Box 3.15.1),
the challenge is to ratchet up economic growth while safeguarding
macroeconomic stability.
Fiscal policy has been tightened somewhat: the 2010 budget targets
a narrower overall fscal defcit of 8.3% of GDP. On the monetary
side, interest rate subsidies on short-terms loans have been ended, but
subsidies are maintained for medium-term loans to selected sectors at
a reduced level of 2 percentage points. Te central bank also removed
interest rate caps on medium- and long-term loans in February 2o1o,
enabling banks to raise lending rates. In addition to the increase in the
central banks base interest rate in late 2009, the authorities set a target
3.15.1 Ach|ev|ng m|dd|e-|ncome
status
Under the World Banks
classifcation, developing countries
graduate from low income to
lower middle income when per
capita gross national income reaches
$976. In Viet Nam it stood at $890
in 2008, according to the World
Bank.
.. Lxchange rates
15,000
16,000
17,000
18,000
19,000
20,000
Black market exchange rate
Lower bound of the trading band
Upper bound of the trading band
Reference rate of the State Bank of Viet Nam
Jan
10
Oct Jul Apr Jan
09
Oct Jul Apr Jan
2008
Dong/$
Sources: State ank of vlet Nam, A0 observatlons.
../ 1rade |nd|cators
-60
-30
0
30
60
90
-8
-4
0
4
8
12
Trade balance Import growth
Export growth
Q3 Q1
09
Q3 Q1
08
Q3 Q1
2007
% $ billion
Sources: State ank of vlet Nam, A0 estlmates.
..8 Current account and reserves
-13
0
13
26
-13
0
13
26
Gross ofcial reserves
09 08 07 06 2005
% of GDP $ billion
Sources: State ank of vlet Nam, A0 estlmates.
for credit growth in 2010 at 25%, below the actual growth rate of 39.6%
last year.
Forecasts are based on the assumption that the government will
do the following: tighten monetary and fscal policies further during
2010 to limit infation and devaluation pressures, and keep the policies
moderately tight in 2011; not resort to administrative measures to
control infation; and maintain stability of the banking system.
On these assumptions, GDP growth is projected to accelerate
to 6.5% in 2010 and to 6.8% in 2011 (Figure 3.31.9). Expected
increases in remittance infows and incomes will speed up growth
of private consumption. Improvement and consolidation of global
fnancial conditions will bring about an upturn in FDI infows and
foreign-fnanced investment. At the same time, growth of public
consumption and domestically fnanced investment will moderate due
to the decline in budget spending and tighter bank credit.
Te strengthening of external demand is set to spur growth of
agriculture and manufacturing in both 2010 and 2011. Oil output will
likely stay at about 16.5 million metric tons in 2010 but slip in 2011
as output at old felds declines. Construction will be damped by the
weakening of domestically fnanced investment. Te services sector will
beneft from the projected expansion of foreign trade and increase in
tourist arrivals.
Infation in 2010 is forecast to accelerate to average about 10.0%,
on account of the rapid growth of money supply in 2009, the dong
devaluations, and projected pickup in economic activity and world
commodity prices in 2010. Infation rose to 8.5% year on year in the frst
quarter of 2010. Assuming monetary and fscal policies are tightened
this year, infation could ease to about 8.0% in 2011 (Figure 3.31.10).
Exports will pick up in 2010 as external demand strengthens.
Tourism and remittance fows are projected to rise in line with
improvements in the performance of industrial economies. However,
imports will rise more than exports because of the projected
acceleration of domestic growth and higher import prices.
Trade with the Peoples Republic of China is expected to expand
rapidly now that a free trade agreement between the PRC and the
Association of Southeast Asian Nations has come into force from 1
January this year.
On these factors, the current account defcit is forecast to widen
slightly to 7.6% of GDP in 2010.
FDI infows will rebound, as global fnancial conditions improve.
Infows of portfolio investment will likely remain small and outfows
of short-term capital will probably moderate. Te capital account is
expected to be in surplus and the overall external position to be close to
balanceprovided that confdence about medium-term macroeconomic
stability is restoredleaving ofcial reserves little changed.
In 2011, an expected quickening of growth in exports, tourism,
and remittances will pull the current account defcit back to about
5.5% of GDP (Figure 3.31.11). Capital infows should also pick up as the
global recovery gathers momentum. Te overall balance of payments is
expected to be in surplus in 2011, lifing ofcial reserves.
Domestic risks to the outlook are mostly on the downside. If
2010 2011
C0P growth 6.5 6.8
lnatlon 10.0 8.0
(share of C0P)
-7.6 -5.5
..p u0P growth
0
3
6
9
11 10 09 08 07 06 2005
%
Forecast
..o |nat|on
0
5
10
15
20
25
11 10 09 08 07 06 2005
%
Forecast
Southeast Asia Viet Nam 237
monetary and fscal policies are not tightened adequately, infation
could spurt above the forecast rate and the current account defcit
would deteriorate (GDP growth in 2010 would likely exceed the
forecast). Sharply rising infation and a worsening external position
might well require an abrupt tightening of policies in 2011, pulling GDP
growth below the forecast. Inevitably, two episodes of high infation
within 3 years (it averaged 23% in 2008) would erode business and
consumer confdence, and hinder poverty reduction.
Tere have been some ofcial proposals to use administrative
measures such as price controls and import restrictions to curb infation
and devaluation pressures. Controls might limit price rises and imports,
although they, too, might damage foreign investor confdence (and
would likely lead to shortages).
Te end of subsidies on short-term loans and expected tightening of
monetary policy will squeeze some borrowers and could lead to a rise
in nonperforming loans, which would add to stresses in the banking
system. It will be important to manage the slowdown in growth of
credit and money supply through an orderly rise in interest rates, rather
than a shortage of liquidity in the banking system. In this context, the
elimination of caps on interest rates on medium- and long-term loans
was a step in the right direction.
Shortages of foreign exchange in the formal market, which
undermine confdence in the currency, fuel infation, and hurt
investment, should be addressed through a combination of tighter
monetary policy and increased exchange-rate fexibility.
It will be important to improve the legal and institutional
framework for monetary policy over the medium term. Maintaining
price stability should be the primary goal of monetary policy, and the
SBV should be given enough operational autonomy to pursue this goal
efectively.
Large strides have been taken to raise the efciency of the economy
and ease supply-side constraints to growth, but more needs to be done.
Infrastructure bottlenecks, defciencies in the legal and regulatory
framework for the private sector, and shortages of labor skills remain.
It is estimated that investment in infrastructure over the next
10 years will cost the equivalent of 11% of GDP each year. Only about
half could be met from the budget. Clearly it would be helpful to create
policy and legal frameworks that encourage private sector participation
in infrastructure through publicprivate partnerships.
Improvements in economywide efciency also require greater eforts
to restructure state-owned enterprises, which employ a substantial
proportion of available resources in this economy but do not always use
them efciently.
.. P|sca| and current account dec|ts
-15
-10
-5
0
5
Current account Fiscal
11 10 09 08 07 06 2005
% of GDP
Forecast
The Pacifc
Fiji Islands
Papua New Guinea
Democratic Republic of Timor-Leste
Cook Islands
Kiribati
Republic of the Marshall Islands
Federated States of Micronesia
Nauru
Republic of Palau
Samoa
Solomon Islands
Tonga
Tuvalu
Vanuatu
P|[| |s|ands
Jhe pace of economlc contractlon accelerated last year owlng to damage done by oods, the lmpact
of the global recesslon on tourlsm and exports, and polltlcal uncertalntles. Productlon of sugar, a major
export, fell for a thlrd year. Jhe outlook remalns subdued, wlth a small contractlon ln C0P forecast for
2010, but growth may resume at low levels ln 2011. lnatlon ls expected to be moderate ln both years.
Reforms to encourage lnvestment are a prerequlslte for stronger and sustalned growth.
GDP contracted for a third year in a row in 2009, with the pace of
contraction accelerating to an estimated 2.5% (Figure 3.32.1). In addition
to the impact of the global recession, which hurt tourism and exports,
severe fooding in January 2009 did damage to crops and infrastructure
that cost around 5.3% of GDP, and further discouraged tourism.
Tese setbacks hit an economy already facing low investor confdence
and a loss of assistance from traditional donors and multilateral agencies,
resulting from a military coup in December 2006 that installed an
interim government. Te extended decline in GDP also refects longer-
term constraints to economic growth arising from problems with access
to land, weaknesses in the public sector, and a decline in the important
sugar industry.
Ofcial estimates show that most sectors contracted in 2009,
including wholesale and retail trading by nearly 16%; transport, storage,
and communications by just under 9%; agriculture and forestry by about
5%; and even education, public administration, and defense by about 3%.
Sugar production dropped further (Figure 3.32.2), by an estimated
19% in 2009, mainly owing to continuing land tenure issues that have led
to a reduction in sugarcane output and technical failures in upgrading
sugar mills. Te fnancial viability of the mill upgrades depends on cane
throughput of 4.2 million tons, but in 2009 only about 2.2 million tons
was crushed.
Tourist arrivals fell by about 25% early in 2009, refecting weakness
in global travel, the foods across a third of the country, and increased
competition from other Pacifc destinations. Full-year arrivals declined
by nearly 8%, and tourism revenue fell by an estimated 12% on account of
aggressive price discounting.
On the fscal side, the interim government cut operating expenditure
(nearly 80% of total outlays) by 10%, assisted by reductions in civil service
jobs. Capital expenditure remained far below target (around half in
2009), due to defciencies in civil service implementation capacity. While
revenue fell by 5.6% due to the fall in economic activity, the aggressive
cuts in spending kept the budget defcit to 2.5% of GDP, or below target.
.z. u0P growth
-3
0
3
6
09 08 07 06 05 2004
%
Sources: lljl lslands ureau of Statlstlcs. http://www.
statsjl.gov.q, Vlnlstry of llnance. Economic and Fiscal
Update: Supplement to the Budget Address. http://www.
mfnp.gov.q
This chapter was written by Emma Ferguson of the Pacic Subregional Oce, ADB,
Suva.
.z.z Sugar product|on
-80
0
80
160
240
320
-25
0
25
50
75
100
Change Volume
09 08 07 06 05 04 2003
Thousand tons Year-on-year
Source: lljl Sugar Corporatlon -Year Statistical Review.
http://www.fsc.com.q, Reserve ank of lljl. zoo. Economic
Review. lebruary. http://www.rbf.gov.q
When foieign exchange ieseives fell in eaily :oo to about USs,oo
million, the Reserve Bank of Fiji responded by tightening exchange controls
and, to encourage exports of goods and services, devalued the Fiji dollar
by 20% in April. Te central bank also directed commercial banks to cap
lending interest rates at December 2008 levels. However, lending slowed
as banks became more cautious in the context of political and economic
uncertainties. Later in 2009, the central bank removed the ceilings on
lending rates and credit ceilings that had been in place since 2006.
Weak external markets caused a 28% fall in merchandise exports
in US dollar terms in 2009. Declines in exports of clothing, sugar, and
timber more than outweighed gains in shipments of fsh and gold.
Merchandise imports dropped even more steeply, by 35%, with falls
in most major categories including fuels (due to lower oil prices) and
manufactured goods (due to the weak domestic economy).
Te trade defcit shrank, contributing to a narrowing in the current
account defcit to an estimated 8.7% of GDP. Foreign exchange reserves
iecoveied by yeai-end to USs,o8 million, equivalent to ,., months of
impoit covei (Figuie ,.,:.,). Reseives weie bolsteied by USs, million
from the general allocation of special drawing rights last year by the
International Monetary Fund, and by a pickup in remittances that was
stimulated by the devaluation.
Lower prices for imported food and fuel brought infation down to
an average of 3.7% from 7.7% in 2008. By December, however, year-on-
year infation had increased to 6.8% (Figure 3.32.4), largely a result of the
devaluation.
Government debt rose (Figure 3.32.5), to the equivalent of about 52% of
GDP. Most is domestic debt owed to the national pension fund. But once
contingent liabilities of government-owned enterprises, such as Fiji Sugar
Corporation, are included, debt is much higher, at around 70% of GDP.
Te Bureau of Statistics last year rebased GDP data for 20062008 to
refect structural changes in the economy. It reduced the weighting for
agriculture and increased that for communications and manufacturing,
leading to revisions in the 2006 growth outcome to 1.9% (from 3.4%), and
in the 2007 GDP contraction to 0.5% (from 6.6%).
Lconom|c prospects
Any signifcant rise in sugar output depends on extensive replanting to
improve the quality of the sugarcane, on a substantial increase in the
area planted, and on a successful upgrading of the sugar mills. However,
land tenure problems for tenant cane-growers have yet to be resolved. Te
outlook for tourism income is also subdued this year. Furthermore, the
interim governments position that elections will not be held until 2014
remains a hurdle for improvement of relations with development partners.
A preliminary assessment of damage inficted by Cyclone Tomas,
which hit northern areas of the country in March 2010, indicated that it
had little impact on GDP but put some upward pressure on prices.
Te 2010 budget, which targets a defcit of 3.5% of GDP (Figure 3.32.6),
aims to stimulate growth through infrastructure spending and tax breaks
to encourage investment, including a value-added tax refund system for
tourists as well as investment incentives. Implementation of the budget
.z. Pore|gn exchange reserves
0
1
2
3
4
Oct Jul Apr Jan
09
Oct Jul Apr Jan
2008
Months of import cover
Source: Reserve ank of lljl. http://www.reservebank.gov.q
.z. Monetary |nd|cators
-3
0
3
6
9
12
Oct Jul Apr Jan
09
Oct Jul Apr Jan
2008
%
Infation
Credit growth
Source: Reserve ank of lljl. http://www.reservebank.gov.q
.z. uovernment debt
0
600
1,200
1,800
2,400
3,000
External Domestic
09 08 07 06 05 04 2003
F$ million
Note: lxternal debt comprlses debts of the government,
statutory bodles, and the prlvate sector.
Source: Reserve ank of lljl. zoo,. Quarterly Review.
0ecember. http://www.rbf.gov.q
.z. 8udget pos|t|on
-6
-4
-2
0
2
Actual Government target
10 09 08 07 06 2005
%
Note: lxcludes loan repayments.
Sources: Vlnlstry of llnance. Economic and Fiscal Update:
Supplement to the Budget Address. http://www.mfnp.
gov.q, Reserve ank of lljl. Quarterly Review. varlous lssues.
http://www.reservebank.gov.q
The Pacific Fiji Islands 241
depends heavily on meeting revenue targets (the tax breaks could erode
revenue) and on improving civil service capacity to undertake capital
projects (given recurring problems in meeting capital spending targets).
Eforts by the interim government to reform the civil service and
inefcient public enterprises should beneft the economy over the medium
term, but in the short term will likely lead to more job losses.
In view of these factors, GDP is forecast to decline by 0.5% in 2010.
Growth could resume at low levels next year (about 0.5%), if the problems
in the sugar industry start to be resolved and if global trade and tourism
pick up as expected. (Analysis of the prospects, and of policy options,
is hampered by restrictions on publicly available data, including budget
information.)
Te planned removal of price controls on many basic food items
during 2010 should beneft the food processing industry, though their
removal needs to be ofset by targeted assistance to the poor. (Around
40% of the population is now below the income level needed to provide
for essential consumption.)
Imports are forecast to grow faster than exports this year (higher
prices for imported oil will be a factor), pushing out the trade defcit. Tis
will contribute to a forecast widening in the current account defcit to
about 11.0% of GDP in 2010. Tat gap could narrow to about 8.0% in 2011
as exports of goods and services beneft from the expected acceleration in
global trade and tourism.
Infation will moderate from the end-2009 rate, as the devaluations
impact on prices fades. Weak domestic demand will limit the upward
pressure on infation arising from higher prices for oil and commodities
and from the removal of price controls on food. Year-average infation is
forecast at just over 3% in the next 2 years.
Over recent years, the country has lost its preferential treatment in major
export markets for clothing and sugar, owing to the expiration of trade
agreements. A major challenge is to attract investment that will broaden
the economic base to compensate for declines in those two industries.
However, private investment is discouraged by political uncertainty
(four coups since May 1987) and defciencies in the regulatory and legal
environments, as well as by a lack of skilled labor. Te investment-
to-GDP ratio has generally been low, at around 15%.
Foreign investment regulations were revised in February 2010 to allow
for 100% foreign ownership of certain businesses. However, it will be
important to address the defciencies in the investment climate to achieve
a sustained rise in foreign direct investment.
Increases in investment by the government require not only higher
allocations for development outlays, as compared with operating
expenses, but also improvements in budget implementation capacity.
Capital expenditure needs to be protected at a time that fscal
consolidation eforts are being pursued to ensure macroeconomic stability
and to stabilize public debt. In regard to the latter, the International
Monetary Fund has urged the authorities to target a reduction in public
debt to 45% of GDP by 2014.
2010 2011
C0P growth -0.5 0.5
lnatlon 3.4 3.1
(share of C0P)
-11.0 -8.0
Papua New uu|nea
lower global commodlty prlces trlmmed economlc growth ln 2009. Jhe government provlded a large
scal stlmulus and ran down publlc trust fund savlngs. lnatlon decelerated, but remalns relatlvely hlgh.
C0P growth ls projected to plck up thls year and next, llfted by the planned constructlon of a large
resource project. Jhe surge ln revenue from thls project ln the years ahead helghtens the need to put
ln place systems to smooth government expendlture over tlme and to provlde for transparent and well-
deslgned publlc programs to reduce poverty.
Te economy proved fairly resilient to the global recession last year,
even though it depends heavily on exports of minerals, crude oil, and
agricultural commodities. Several factors cushioned the impact of the
global iecession: expectations that a s:, billion liquefed natuial gas
(LNG) project will in fact go ahead, a recovery in commodity prices in
the second half of 2009 from a price plunge that started in late 2008,
and a strong fscal stimulus last year. GDP growth was estimated at
4.5%, marking 8 consecutive years of expansion averaging about 3%.
Services grew by an estimated 7.0%, mainly refecting expansion in the
communications and construction subsectors; industry grew by 4.6%, and
agriculture by 2.3%.
Private investment was bolstered as planning moved forward for the
large LNG project, which will generate business opportunities across
the economy. Government expenditure increased by 3.0% in real terms
(despite a 20% drop in revenue caused by lower export commodity prices),
as the government drew down heavily on savings accumulated in trust
funds during the commodity boom years. Private consumption, however,
likely sofened because lower prices for agricultural commodities dented
household incomes.
Te decline in prices for export commodities (Figure 3.33.1) reduced
the value of merchandise exports in United States (US) dollars by 26%
in 2009. Mining (mainly copper and gold) and oil exports together
fell by about 25% in value (Figure 3.33.2), despite an increase in export
volumes of metals. Te value of oil exports dropped by over 50%; the
price fell by about 37% and volumes by about 13%. Agricultural exports
declined in value by an estimated 30%: palm oil by 34%, cofee by 19%,
cocoa by 6%, and copra by 66% (from largest to smallest in terms of
2009s export crop value). Most export commodity prices rallied in the
second half of the year.
Employment in the private nonmining formal sector increased by
3.7% in the year to September 2009. Te services sector saw particularly
.. Lxport |ndexes
60
120
180
240
300
Volume (agriculture and logs)
Price (agriculture and logs)
Volume (mining and oil)
Price (mining and oil)
Dec
09
Dec
08
Dec
07
Dec
06
Dec
05
Dec
04
Dec
2003
Dec 2003 = 100
Sources: ank of Papua New Culnea. Quarterly Economic
Bulletin. varlous lssues. http://www.bankpng.gov.pg, A0
estlmates.
This chapter was written by Dominic Mellor of the Papua New Guinea Resident
Mission, ADB, Port Moresby.
..z Lxports
0
400
800
1,200
1,600
Copper Gold Crude oil Agriculture
Dec
09
Dec
08
Dec
07
Dec
06
Dec
2005
$ million
estlmates.
The Pacific Papua New Guinea 243
strong jobs growth, and employment in mining also rose. However, this
formal sector accounts for only one ffh of the labor force. Many people
are farmers who produce mainly for their own consumption, with some
cash-crop production.
Te government adopted a very expansionary fscal policy stance in
2009, even with the economy continuing to grow moderately. Te defcit
likely exceeded 10% of GDP, including of-budget items (Figure 3.33.3).
(Excluding of-budget spending from the trust funds, the budget showed a
near-balanced outcome.) Gross and external public debt levels were little
changed from 2008, at about 32% and 14% of GDP, respectively.
Following a sharp rise in private sector credit during the commodity
boom years, credit growth pulled back in 2009, from 40% in November
2008 to about 20% a year later (Figure 3.33.4). Infation eased to average
7.6% over the year, as the impact of lower global commodity prices
slightly ofset upward domestic pressure on prices.
Afer raising its monetary policy indicator interest rate in 2008, the
central bank kept it steady until December 2009, when, afer infation
eased, it lowered the rate by 1 percentage point to 7.0%. Te kina exchange
rate depreciated by 15% in 2009 against a trade-weighted basket of
currencies.
Te drop in the value of exports, coupled with a small rise in the
value of imports, cut the trade surplus in 2009, and the current account
fell into defcit (estimated at about 5% of GDP), the frst external
defcit since 2002. Gross foreign exchange reserves at year-end totaled
s:. billion, equivalent to about :o months of impoits of goods and
services (Figure 3.33.5).
Lconom|c prospects
Project fnancing for the LNG project was secured in March 2010.
Tapping natural gas from the Highlands region, the project will have
the capacity to produce 6.6 million tons of LNG a year for export,
contributing as much as 20% of annual GDP when it starts operation,
which could be as early as 2013.
Construction is expected to start this year. During this construction
phase, up to 1,500 local workers will be employed, and when the plant
starts operating it will directly employ about 850 people, mostly locals.
However, given that the project could yet be delayed by landowner
compensation issues, the LNG projects contribution to growth this year
might well be less than the ofcially forecast 3.0 percentage points of
GDP.
In the construction sector, other projects associated with the LNG
project are scheduled to start this year, likely keeping overall construction
activity high but growth capped, since many frms are already operating
at full capacity.
Oil production will continue to decline owing to lower extraction
rates from maturing oil felds, but mining output will be boosted midyear
by production from a new Ramu nickelcobalt mine. Te Hidden
Valley gold mine started operating last year and is expected to increase
production, while the existing gold mines of Ok Tedi, Porgera, and Lihir
are all expected to raise production this year.
.. 8udget ba|ance
-14
-7
0
7
ADB estimates (including trust funds)
Ofcial estimates (excluding trust funds)
11 10 09 08 07 06 2005
% of GDP
Forecast
Sources: 0epartment of Jreasury. Budget. volume .
http://www.treasury.gov.pg, A0 estlmates.
.. Cred|t growth to the pr|vate sector
-10
0
10
20
30
40
Real interest rate
Private credit growth
Dec
08
Dec
07
Dec
06
Dec
05
Dec
2004
%
Bulletin. varlous lssues. http://www.bankpng.gov.pg.
.. keserves
0
2
4
6
8
10
Dec
09
Dec
08
Dec
07
Dec
06
Dec
2005
Months of imports
Note: lmports excludlng mlnlng and oll commodltles.
Source: ank of Papua New Culnea. Quarterly Economic
Bulletin. varlous lssues. http://www.bankpng.gov.pg.
Higher prices for agricultural commodities should stimulate their
production, particularly as last years cocoa crop was damaged by pod
borer and cofee was hit by foods in the Highlands early in 2009.
Business confdence is underpinned by high levels of government
expenditure and expectations that the LNG project will push through
and generate spillover benefts. In addition, two competing mobile
telephone service providers plan further investments to increase network
coverage.
Fiscal policy will likely be less stimulatory in 2010. Te government
is expected to moderate its drawdowns from the trust funds, so that the
fscal defcit, including of-budget spending, is forecast to narrow sharply
to just under 3% of GDP. (Te government targets a balanced budget,
excluding of-budget items.)
On the balance of these factors, GDP growth is forecast to accelerate
to 5.5% in 2010 and to 7.7% in 2011, when construction of the LNG project
is stepped up (Figure 3.33.6).
Merchandise exports will increase in value terms, as will imports,
given high levels of public expenditure and imports of machinery and
equipment needed for the LNG project. Te current account defcit
is projected to widen to 15.0% of GDP in 2010 and then to 30.0% in
2011 (Figure 3.33.7). Tis gap will be largely fnanced by foreign direct
investment.
Infation is projected to remain relatively high at 7.1% and 7.7%
over the next 2 years (Figure 3.33.8) in the context of higher global
commodity prices and rising domestic demand. Shortages of residential
and commercial properties in the main urban centers also are causing
upward pressure on infation through signifcant rent increases. Infation
pressures will constrain further easing of interest rates.
Domestic risks to the 2010 forecasts are largely on the upside: GDP
growth could be higher than forecast if landowner compensation disputes
for the LNG project are settled quickly and the equipment, materials, and
skilled labor are available to ramp up plant construction. Tere are risks,
too, for the 2010 infation forecast if the momentum from last years high
fscal expenditures is greater than anticipated.
Even with 8 consecutive years of economic growth, poverty incidence
remains high (at about 50%), much public infrastructure is in poor
condition, and human development indicators are low: Papua New
Guinea is ranked 148 out of 182 countries in the human development
index compiled in 2009 by the United Nations Development
Programme.
When substantial revenue from the LNG project starts to fow, the
government will have an opportunity to fund development projects that
improve living standards. Managing the revenue fows prudently and
sharing the benefts widely through well-designed public programs will
be critical to avoiding the resource curse that mining- and energy-
exporting countries ofen bear. Tis will require a fscal framework
that saves part of the resource revenue so that it can be spent over time,
transparently and accountably.
2010 2011
C0P growth 5.5 7.7
lnatlon 7.1 7.7
(share of C0P)
-15.0 -30.0
.. kea| u0P growth
0
2
4
6
8
10
LNG impact GDP growth
11 10 09 08 07 06 2005
Forecast
Growth impact of LNG Project
%
../ Current account ba|ance
-40
-20
0
20
11 10 09 08 07 06 2005
% of GDP
Forecast
..8 |nat|on
0
4
8
12
11 10 09 08 07 06 2005
%
Forecast
estlmates.
The Pacific Papua New Guinea 245
Although elements of such a framework are spelled out in existing
policy statements and were previously followed, the system broke down
in 2009 when large drawdowns were made from trust funds. Stronger
governance arrangements and enhanced public fnancial management
systems are now needed (Box 3.33.1).
Improvements to the business climate are required to pave the
way for developing the private sector. Tey include a more secure legal
environment for doing business and encouragement of competition
throughout the economy. Te World Banks Doing Business 2010 ranks
Papua New Guinea overall at 102 of 183 countries, down from 89 in 2008.
Inefcient state-owned enterprises hold dominant market positions
in many sectors and are a drag on economic growth. Competition in the
telecommunications and aviation sectors shows what can be achieved: a
new frm in the mobile telephone market led to notable improvements
in phone services in rural areas, while a new airline servicing the route
between Papua New Guinea and Australia has cut airfares.
However, more needs to be done, particularly with those state-owned
enterprises that will see considerable increases in demand from the LNG
project. Still, the governments commitment to implementing a public
private partnership policy is encouraging and could potentially facilitate
signifcant private investment in infrastructure. Tere is scope for such
partnership investments in the utility and transport sectors, both critical
to reducing the costs of doing business.
Te 1990s are ofen referred to as the lost decade in
Papua New Guinea because the country did not translate
signifcant public mineral revenue into improved living
standards for the majority of people. In an efort to
manage volatile resource revenue, the government set
up a Mineral Revenue Stabilization Fund. But a lack of
transparency and accountability caused those savings to be
largely wasted.
During the recent commodity boom, disciplined fscal
policies enabled the government to accumulate windfall
revenue, which was saved in trust funds earmarked for
development purposes and public debt repayment. In
2009, though, this discipline weakened. Drawdowns from
trust funds were far above a limit set in the medium-term
fscal strategy and did not appear justifed given that the
economy was maintaining solid growth.
Net expenditure from trust funds in 2009 equaled about
10% of GDP, and represented almost two-thirds of total
trust fund expenditure since 2005. Moreover, spending was
channeled outside the national budget and not integrated
into the macroeconomic framework. A signifcant amount
of trust fund monies is currently channeled through local
administrations, which have limited capacity to implement
development projects. It is unlikely that all the spending
went on development priority projects, given the rapid pace
of drawdowns and lack of transparency in the spending.
Public revenue to fow from the liquefed natural gas
project will provide the country with another chance to
increase the productive capacity of the economy and raise
living standards. Tis time, development objectives are
more likely be achieved, and macroeconomic stability
maintained, if the rules of the medium-term fscal strategy
are followed strictly, monetary and fscal policy are closely
coordinated, and a sovereign wealth fund is established
and then integrated into the policy framework.
Te government plans to channel LNG project revenue
into three funds: a stabilization fund, an infrastructure
fund, and a future fund. Tese funds should be saved
ofshore, to help minimize currency appreciation that
would hurt domestic producers, including farmers. It
is vital for drawdowns from all funds to be channeled
through the national budget, strengthening stabilization
eforts and helping ensure higher-quality spending aligned
with development priorities. Te rate of drawdown should
also be calibrated on the capacity of the public and private
sectors to efciently and efectively utilize funds.
3.33.1 Manag|ng revenue vo|at|||ty
0emocrat|c kepub||c of 1|mor-Leste
llgh government expendlture, largely funded by revenue from petroleum productlon, supported moderate
but slower growth ln 2009. Jhe economy ls forecast to plck up ln 2010, agaln drlven by government
spendlng. lnatlon ls llkely to rlse from last years low levels. Jhe government plans to borrow, for the
rst tlme, to accelerate lnvestment ln lnfrastructure. Sound lnvestment of borrowed funds and prudent
management of natlonal savlngs are central to the achlevement of sustalnable economlc growth.
Momentum from a buildup in government spending over recent years
underpinned economic growth in 2009. GDP, excluding ofshore
petroleum production, expanded by 5.0% (Figure 3.34.1). Tat was around
half the 10.5% average expansion in the preceding 2 years because the rate
of increase in government expenditure slowed.
Government spending dominates this economy, with its ratio to
nonpetroleum GDP close to 168% (Figure 3.34.2). A large portion of
the buildup in public outlays has been in public sector wages, minor
capital works, and cash transfers to the elderly, internally displaced
persons, ex-combatants, and others. Such expenditure has fed quickly
into the economy and generated multiplier efects that have further lifed
aggregate demand. Poverty, however, remains widespread.
Up-to-date economic data are limited, though the uptrend in various
indicators of demand suggests a signifcant rise in private consumption in
recent years. For example, there was one cell phone subscriber for every
9.3 adults in mid-2007; by end-2009, there was one for every 1.7 adults.
Over 11,000 new motor vehicles were registered in 2009, more than
double the number in 2008. Private electricity consumption is also on a
rising trend (Figure 3.34.3).
While aggregate demand rose on average in 2009 relative to 2008, it
sofened during the year, as illustrated by a trending down in imports
(Figure 3.34.4). By December 2009, their real value was down by 38.1%
from the prior-year period. Te value of merchandise exports, mainly
cofee and excluding petroleum, fell by around a third, as the volume
of cofee exports fell sharply. Exports are less than 3% of the value of
merchandise imports, leaving a huge trade defcit.
Te goveinment allocated so8: million of its own funds foi budget
spending in 2009, up 23% from its own-funded spending in 2008. But
continuing problems in carrying out budget projects meant that actual
spending, of about s,oo million, fell shoit of the allocation. Including
donor-funded activities, total government expenditure is estimated to
have declined slightly in 2009 from 2008.
.. u0P growth
-6
0
6
12
18
09 08 07 06 2005
%
Note: Nonpetroleum, non-unlted Natlons, annual C0P
growth.
Source: Vlnlstry of llnance. General Budget of the State.
varlous lssues. http://www.mof.gov.tl
This chapter was written by Craig Sugden of the Pacic Department, ADB, Manila.
..z Pub||c spend|ng
0
200
400
600
800
0
50
100
150
200
Total expenditure Donor-funded
Own-funded
09 08 07 06 2005
$ million % of GDP
Source: A0 estlmates based on Vlnlstry of llnance. zoo,.
General Budget of the State and State Plan for . 0ctober.
http://www.mof.gov.tl
The Pacific Democratic Republic of Timor-Leste 247
2010 2011
C0P growth 7.0 7.0
lnatlon 3.2 3.8
(share of C0P)
271.7 -
Income to the government from ofshore petroleum production
of s:.o, billion in :oo lifed savings held in the nation's Petioleum
Fund to almost s,. billion by yeai end, equivalent to about nine times
annual GDP (excluding petroleum production). Te annual sustainable
diawdown is estimated at about s,oo million, which is enough to fund
80% of the governments own contribution to the budget. Still, the
authorities budgeted to draw down more than the sustainable income in
2009. In the event, the estimate of sustainable income was revised up later
in the year as higher energy prices were factored in, to levels close to the
2009 drawdown rate.
Owing to the large infows of petroleum income, the budget surplus
was about 145% of nonpetroleum GDP in 2009, and the external current
account recorded a very large surplus equivalent to nearly 300% of GDP.
Lower global oil and food prices suppressed infation to just 0.1% on
average last year, as it decelerated from about 8% in 2008. Te consumer
price index fell on a year-on-year basis from May through November.
Te direction of infation has generally followed that of Indonesia,
Timor-Lestes primary trading partner, in the past 2 years (Figure 3.34.5).
Large deposits by international agencies and rising incomes continued
to inject liquidity into the banking system. Broad money supply expanded
by about 30% in 2009. Bank lending, however, was sluggish and the
ratio of nonperforming loans remained high at about 28% of total loans.
(Banks hold adequate provisions against the nonperforming loans.)
Te climate for development of the private sector remains very difcult.
Timor-Leste is one of the weakest performers in the World Banks Doing
Business 2010 report, with a rank of 164 out of 183 countries in 2010 (a slight
improvement from 170 in 2009). Issues concerning land, credit, contracts,
and setting up a business are paramount concerns. In one area, tax reform,
considerable progress has been made. A reduction in taxes on business
boosted the ranking in this indicator from 79 in 2009 to 19 in 2010.
Lconom|c prospects
Te economic outlook remains highly dependent on the budget. In
this context, a budgeted increase of 27.3% in own-funded government
expenditure (all funding excluding donor support) in 2010 over actual
spending last year (Figure 3.34.6) is expected to more than ofset a decline
in donor funding, leaving a small overall increase in budgeted expenditure.
As in earlier years, the own-funded part of the budget is unlikely
to be fully spent. But the higher level of funding, coupled with gradual
improvements in implementation capacity, will likely lead to an increase
in spending in 2010. Tis is forecast to lif economic growth slightly to
about 7.0% this year. Capital expenditure by the government is expected
to gather momentum in 2011, helping to maintain growth at about 7.0%.
Te presence of international police and security forces in
Timor-Leste under the auspices of the United Nations has been extended
until at least early 2011. Tis will help safeguard security, and spending
by the United Nations forces will support aggregate demand. Next year,
though, their presence is scheduled to decline, with a reduction in the
number of police personnel from 1,608 to 1,280 by midyear.
Higher prices of imported commodities are forecast to contribute to a
.. |nd|cators of pr|vate consumpt|on
0
200
400
600
800
Private electricity consumption
Vehicle registrations
Cell phone subscribers
Q4 Q3 Q2 Q1
09
Q4 Q3 Q2 Q1
08
Q4 Q3 Q2
2007
Index, Q2 2007 = 100
Source: A0 estlmates based on the Natlonal Statlstlcs
0lrectorate. Quarterly Statistical Indicators. varlous lssues.
http://dne.mof.gov.tl
.. kea| va|ue of |mports
0
10
20
30
40
Nonpetroleum
Total
Dec Sep Jun Mar
09
Dec Sep Jun
2008
$ million
Notes: uSs mllllon deated by consumer prlce lndex,
,-month movlng averages.
Source: A0 estlmates based on the Natlonal Statlstlcs
0lrectorate. Quarterly Statistical Indicators. varlous lssues.
http://dne.mof.gov.tl
.. |nat|on
-4
0
4
8
12
Indonesia
Democratic Rep. of Timor-Leste
Dec Sep Jun Mar
09
Dec Sep Jun Mar
2008
%
Sources: Natlonal Statlstlcs 0lrectorate. Consumer Price
Index. varlous lssues. http://dne.mof.gov.tl, ank lndonesla.
http://www.bl.go.ld (accessed ) lebruary zoo).
step up in infation to 3.2% in 2010 and to 3.8% in 2011. Infows of petroleum
income will produce another large current account surplus in 2010.
Savings in the Petroleum Fund are projected to rise steadily to about
s billion by :o:, (Figuie ,.,.,), pioviding substantial funding foi the
budget in the years ahead. Initial steps were taken last year to increase the
return from the Fund by diversifying a small part of its investments from
US government bonds into other governments bonds and into various
other currencies.
Te main challenge is to use revenue generated from petroleum
production to develop the human and physical capital needed to
generate private sectorled growth, which should expand employment
and reduce poverty. At the same time, substantial national saving of
petroleum revenue need to be preserved for future generations. A national
strategic plan being prepared will provide for an integrated approach
to development, and will be central to guiding decisions on the use of
petroleum revenue.
Te latest national poverty survey shows that the share of the
population living below the poverty line increased to about 50% in 2007,
from 36% in 2001. Most of the population relies on agriculture, but low
output, high postharvest losses, and limited alternative sources of income
have resulted in rising numbers of poor people in rural areas. High
population growth rates of over 3% annually, rapid urbanization, and a
small formal sector have resulted in slow rates of job creation in urban
areas and have also pushed up poverty rates there.
In an efort to bring forward public investment and accelerate the rate
of development, the government has initiated plans to secure concessional
loans. In September 2009, Parliament approved legislative amendments
that enable the government to borrow. (Assets in the Petroleum Fund
cannot be used as security, however.)
Also in September, the government agreed to a credit line from
the Government of Portugal. Te 5-year line will, with parliamentary
approval, enable concessional borrowing of up to 100 million a year. Te
funds will be used for construction and rehabilitation of health care and
education facilities and for infrastructure. Te 2010 budget foreshadows
total boiiowing of as much as s, billion ovei the medium to long teim.
Projections of petroleum revenue suggest that future budgets will
have the capacity to service a prudent level of concessional borrowing. To
ensure that the fscal and debt positions are sustainable, borrowed funds
must be used efciently to raise the productive capacity of the economy,
and not for consumption purposes.
Achieving this outcome will require a sound process for selecting
high returning investment projects; an emphasis on investment in human
capital and productive physical capital; and eforts that investments pay
for themselves through user charges, as much as feasible. Te formulation
of the national strategic plan provides an opportunity to lock in these
three elements of a successful fscal and debt strategy.
.. 0wn-funded government
expend|ture
0
300
600
900
Capital/development
Transfers
Goods and services
Wages and salaries
11 10 09 08 07 2006
$ million
Budget Projection
Source: A0 estlmates based on Vlnlstry of llnance. zoo,.
General Budget of the State and State Plan for . 0ctober.
http://www.mof.gov.tl
../ Petro|eum Pund ba|ance
0
2
4
6
8
10
13 12 11 10 09 08 07 06 05 2004
$ billion
Budget Projection
Sources: Vlnlstry of llnance. zoo,. General Budget of
the State and State Plan for . 0ctober. http://www.
mof.gov.tl, lnternatlonal Vonetary lund. zoo,. Article IV
Consultation. July. http://www.lmf.org
Sma|| Pac|c countr|es
Jhe global recesslon hurt these 11 small economles by erodlng thelr tourlsm recelpts, remlttances,
commodlty export earnlngs, and tax revenues. C0P shrank sllghtly, or was at, ln most of them (and for
half of them lt was the second year of contractlon). lnatlon decelerated from 2008s exceptlonally hlgh
levels, when these lmport-dependent economles faced surges ln global oll and food prlces, but stlll came
ln above 5 for the majorlty.
Jhe outlook ls brlghter for 2010, as a result of better global prospects. Nearly all the countrles are
forecast to grow thls year, although by just 2 or less (except for vanuatu, whlch ls an outperformer).
lncouraglngly, ln 2011 growth ls forecast to qulcken. lnatlon ls seen easlng for elght of the countrles thls
year and staylng at around these levels ln 2011.
lor the longer term, the small Paclflc countrles need to renew thelr efforts to boost growth by
strengthenlng the envlronment for prlvate sector development.
Cook |s|ands
Tis economy has contracted over the past 2 years (Figure 3.35.1),
signaling the end of a growth dividend from earlier economic reforms.
Te pace of contraction in GDP slowed to an estimated 0.1% in 2009,
from 1.2% in 2008.
Refecting the decline in GDP, commercial bank lending to business
fell by 10% in the third quarter of 2009 from the year-earlier period, and
value-added tax receipts in real terms declined by about 8% in the frst
3 quarters.
Te slightly better performance last year compared with 2008 was
partly a result of a 6.7% increase in tourist arrivals (Figure 3.35.2). Tourism
was buoyed by some special events held in the country and extra tourism
marketing eforts abroad. Arrivals from Australia and New Zealand grew
by 7.8%, but those from the northern hemisphere fell by 2.2%. Tourism
receipts grew by an estimated 7.9% in 2009.
Lower fuel prices brought down costs of transportation and electricity
in the second half. Infation eased to 6.6%, and is forecast to slow further,
to 3.5% in 2010.
Economic growth is projected to resume at 1.0% in 2010, supported
by infrastructure construction, which will be fnanced by development
partners. Growth is forecast to pick up to about 2.0% in 2011 as external
demand improves and as infrastructure construction gathers pace.
Increased seat capacity on the Rarotonga to Los Angeles air route, and
the expected start of a direct air link to Sydney, should assist tourism.
.. u0P growth, Cook |s|ands
-3
0
3
6
9
12
11 10 09 08 07 06 2005
Forecast
%
Sources: Cook lslands Statlstlcs 0ce, A0 estlmates.
This chapter was written by Craig Sugden and Raquel Tabanao of the Pacic
Department, ADB, Manila; Emma Ferguson of the Pacic Subregional Oce, ADB, Suva;
and Milovan Lucich of the Pacic Liaison and Coordination Oce, ADB, Sydney; and
Vivian Francisco, Joel Hernandez and Rommel Rabanal, consultants.
Tese routes, however, rely on government subsidies, and this dependence
poses a risk to their long-term sustainability. Te need to fund the
subsidies also imposes a cost on other parts of the economy.
Increased government capital spending in FY2009 (ended 30 June
2009) resulted in a fscal defcit estimated at nearly 12% of GDP. A large
budget defcit is also planned for FY2010, to be fnanced by loans that will
increase government net debt to 25% of GDP. Tis funding may add to
productive capacity if it is spent on the priority investment set out in the
infrastructure master plan.
To provide a lif to the economy, the government adopted an
economic recovery support program in October 2009, committing to
support infrastructure expenditure, to maintain a responsible fscal
stance, and to take targeted actions so as to support vulnerable groups in
society. Nonetheless, it has extended the practice of directly negotiating
airline subsidies, instead of adopting an open, competitive process for
allocating subsidies which, as advocated by the support program, would
ofer better prospects for ensuring the best value for public moneys.
K|r|bat|
GDP contracted by an estimated 0.7% in 2009, as copra prices fell,
demand waned for the countrys seafarers due to the global downturn
(reducing remittances from them), and returns declined on investments
held ofshore in the Revenue Equalization Reserve Fund. Subsectors to
contract included transport and storage, manufacturing, and hotels and
restaurants.
Unsustainable fscal defcits over several years have required large
drawdowns from the reserve fund. Coupled with the global decline
in asset values, the fund has dropped below the governments 1996
benchmaik level of As,,oo in ieal pei capita teims (Figuie ,.,,.,).
Te economy is forecast to pick up a little in 2010, benefting from
higher copra prices, an expected increase in demand for seafarers, and
better returns from the ofshore investments. GDP growth is forecast at
0.8% this year, accelerating to 1.2% in 2011 as global demand continues
to improve and recent reforms in economic management start to show
benefts.
A decline in international fuel prices paved the way for infation to
slow to 6.6% in 2009, from double-digit rates in 2008. In 2010, infation is
forecast to subside further, to 5.9%.
Improving the economic outlook over the medium and longer term
will depend in large part on better management of the reserve fund. In
this regard, an Australian-funded study will look at ways to improve the
funds governance.
kepub||c of the Marsha|| |s|ands
Afer a 2.0% contraction in FY2008 (ended 30 September 2008), GDP was
estimated to be fat in FY2009 (Figure 3.35.4). Tis outcome was partly the
result of new construction work, the opening of a fsh-loining factory, and
some increase in remittances.
Consumption benefted from a sharp deceleration in infation, to
.. kevenue Lqua||zat|on keserve Pund
ba|ance, K|r|bat|
0
2,000
4,000
6,000
10 09 08 07 2006
A$, real, per capita
Forecast
Source: A0 estlmates based on zoo budget.
.. u0P growth, kepub||c of the Marsha||
|s|ands
-2
0
2
4
11 10 09 08 07 06 2005
%
Forecast
Sources: uS 0epartment of the lnterlor 0ce of lnsular
Aalrs. zoo,. Republic of Marshall Islands Fiscal Year
Economic Review. August, A0 estlmates.
..z v|s|tor arr|va|s, Cook |s|ands
-10
0
10
20
30
Australia and New Zealand Total
Dec Jun
09
Dec Jun
08
Dec Jun
2007
% change, year on year
Source: Cook lslands Statlstlcs 0ce.
The Pacific Small Pacific countries 251
2.8% in FY2009 from a high 14.8% in the prior year, as prices of imported
fuel and food fell. Tese positives were partly ofset by job losses due to a
reduction in personnel at the United States (US) military base in Kwajelein.
In the fscal accounts, additional grants from donors and higher
income from ship registration fees eased pressure on the budget from
weak tax collections and a high level of budget assistance provided to
state-owned enterprises. Te fscal balance remained in defcit, though,
equivalent to 0.3% of GDP.
Grants from the US under the Compact of Free Association, the
main source of government revenue, are being phased down ahead of the
expiration of the Compact agreement in 2024. Last year, however, the
value of assets in both the Compact Trust Fund and the Social Security
Fund rose when global fnancial markets recovered.
Te economy is projected to grow slightly this year, by about 0.5%.
Underpinning the forecast is an expected further expansion of fsh
processing and additional government expenditure made possible by
grants from Taipei,China and the European Union. Te FY2010 budget
piovides foi a inciease in spending to USs:,,., million.
To avert a fscal crisis when the Compact agreement expires, fscal
surpluses equal to about 5% of GDP are needed during the period
20142023 (Figure 3.35.5). Tis would allow for savings to be accumulated
in the Compact Trust Fund, which could then be drawn on to provide
a sustainable source of budget fnancing. Achieving those surpluses will
require cuts in operating expenditure and a more efcient tax system. In
this area, a large government payroll that absorbs 22% of the budget is a
concern.
Pederated States of M|crones|a
For a fourth consecutive year, GDP contracted in FY2009 (ended
30 September 2009), by an estimated 1.0% (Figure 3.35.6). Te decline
primarily refected delays in the disbursement of infrastructure grants
under the Compact of Free Association with the US. High infation
(estimated at 7.4%) damped consumption spending.
On the positive side, tourist arrivals and remittances rose and a new
fsh-processing plant generated some jobs in FY2009.
Te government contained the fscal defcit to 1.0% of GDP in
FY2009, assisted by tighter controls on spending in the states of Chuuk
and Kosrae, increased revenue from fshing licenses, and a new fnancial
management information system.
Still, more needs to be done to secure long-term fscal sustainability,
given that the Compact with the US expires in 2024 and that Compact
grants are declining. Te budget needs to move into surplus soon, if
savings in the Compact Trust Fund are to reach target levels and provide
a replacement for US grants when the Compact ends.
Te economy is forecast to grow by about 0.5% in FY2010, supported
by donor-funded construction, including extension to the airport runway
in Pohnpei, and refurbishment of tuna-processing facilities (with a
concessional loan from the Peoples Republic of China). Te airport will
assist tourism by enabling larger, charter aircraf from Japan to land.
Infation in FY2010 is forecast to be a moderate 3.5%.
.. P|sca| ba|ance, kepub||c of the
Marsha|| |s|ands
-3
0
3
6
Actual Required
24 22 20 18 16 14 12 10 08 2006
% of GDP
Annual fscal surpluses
required to ofset expiring
Compact grants
Source: lnternatlonal Vonetary lund.
.. u0P growth, Pederated States of
M|crones|a
-3.0
-1.5
0.0
1.5
3.0
11 10 09 08 07 06 2005
%
Forecast
Sources: uS 0epartment of the lnterlor 0ce of lnsular
Aalrs. zoo,. Federated States of Micronesia Fiscal Year
Economic Review. August, A0 estlmates.
Nauru
Te introduction of a mobile telephone service last year ofset a reduction
in phosphate exports, leaving GDP fat. Within 2 weeks of the mobile
phone starting operations, more than 40% of the almost 10,000 residents
had bought a phone. As for phosphate exports, they took a hit from
weaker demand and from storm damage at the port.
Economic growth is projected to resume in 2010, at about 2.0%,
following an anticipated recovery in phosphate demand and repairs to the
port scheduled for May 2010. In 2011, growth is forecast to rise to 4.0%,
if planned improvements in the dilapidated infrastructure allow for a
further increase in phosphate exports.
Infation slowed sharply in the second half of 2009, mainly owing to
the decline in international fuel prices. Te average infation rate for the
year was estimated at 2.2%. Slightly higher infation is projected for 2010
and 2011, on the back of higher fuel prices.
Although the GDP performance has been weak in recent years
(Figure 3.35.7), the economy has potential for growth in the medium term.
Primary phosphate reserves are estimated to be enough for 34 years
of production, and deeper, secondary reserves might last 20 years. An
intergenerational trust fund is being established so that income from
phosphate mining can be saved for when the reserves are exhausted.
However, full exploitation of the phosphate requires considerable
investment to refurbish the necessary infrastructure. Improved governance,
especially of the state-owned enterprises that dominate the economy, is also
needed to encourage the public and private investment required.
kepub||c of Pa|au
Visitor arrivals fell by 10% last year as a result of recession in some of the
main markets. Delays in planned private investment in tourism facilities
further eroded the contribution from the important tourism industry.
Consumption spending was subdued, as refected in a declining value
of monthly food imports from the US, and government revenue fell by
about 10%. A reduction in public infrastructure outlays, from recent high
levels, also damped economic activity. Consequently, GDP fell by about
3.0% in 2009, following a 1.0% contraction the previous year. Infation
eased to 2.4% in 2009 as fuel prices declined.
Economic recoveries in Japan and Taipei,Chinatwo important
tourist markets for Palaubode well for 2010. Indeed, arrivals from the
latter market rose steadily from September 2009, on a year-on-year basis.
As of February 2010, arrivals were close to levels seen prior to the global
recession (Figure 3.35.8). Tis recovery in tourism in expected to support
economic growth of 0.5% in 2010. Higher global fuel and commodity
prices are expected to lif infation to 3%4% in the next 2 years.
Te budget for 2010 proposed a 10% cut in public spending and new
revenue measures. Fiscal reforms adopted included actions to reduce
operating expenditure, to increase utility rates, and to ofer a tax amnesty
that would bring errant taxpayers back into the tax base. Temporary
relief of the fscal pressure was subsequently provided by the preparation
of an updated fnancial agreement with the US. Te agreement, which
would extend grant assistance under the Compact of Free Association
../ u0P growth, Nauru
-28
-21
-14
-7
0
7
11 10 09 08 07 06 2005
%
Forecast
Sources: Aslan 0evelopment ank. zoo). Country Economic
Report. August, A0 estlmates.
..8 v|s|tor arr|va|s, kepub||c of Pa|au
-80
-40
0
40
80
120
From Japan From Taipei,China Total arrivals
Jan
10
Oct Jul Apr Jan
09
Oct Jul Apr Jan
2008
Source: Palau vlsltors Authorlty. http://www.vlslt-palau.
com.
until 2024, is awaiting US Congressional approval. It would see grants
rise in 2010, but then gradually decline. Te agreement prompted the
government to propose a partial reversal of the 10% spending cut. Given
US grants will soon decline, however, it would be prudent to proceed with
fscal reforms as a step toward achieving fscal sustainability.
Samoa
A weakening in exports and construction, lowered GDP by an estimated
0.8% in 2009 (Figure 3.35.9).
A tsunami in September 2009 caused 143 deaths and displaced more
than 5,000 people, or 1 in 40 of the population, from their homes. Te
fscal cost of infrastructure rehabilitation, resettlement, and additional
social services was estimated at about 25% of GDP. One of Samoas most
popular tourist destinations bore the full brunt. About 10% of tourist
accommodation was damaged and up to 20 kilometers of beach and reef
degraded. Tourism is a key economic driver, with tourism receipts ofen
accounting for 20% of GDP.
Te government responded to the tsunami with a supplementary
budget in December 2009. Tis provides additional expenditure
equivalent to USs:, million foi piioiity tsunami ielief and ieconstiuction,
to be largely funded through additional grants.
Tourist arrivals rose before the tsunami, then fell, to be up 6% for the
year. Arrivals are expected to grow by about 4% in 2010. A contributing
factor to this slower rate of growth is that many family reunion visits
appear to have been brought forward to 2009 in response to the tsunami.
Remittances rose in the last 3 months of 2009 (Figure 3.35.10) in
response to the tsunami, but probably at the expense of some remittances
this year. National foreign exchange reserves remain at comfortable levels,
assisted by USs., million in balance-of-payments suppoit fiom the
International Monetary Fund (IMF).
GDP is forecast to grow by about 0.5% this year, buttressed by
reconstruction spending. Next year should see it rise further on the back of
continued reconstruction eforts and a stronger global tourism and trade
environment. Infation is expected to slow to 2.5% in 2010, from 6.6%.
Budget defcits of about 10% of GDP are planned for each of the
next 3 fscal years. Tese will need to be fnanced through debt, which
will raise public debt above the governments target ceiling of 40% of
GDP. While large defcits are necessary to fund reconstruction, the fscal
position will only be sustainable if the defcit is reined in to around 3% of
GDP in the medium term.
So|omon |s|ands
Declines in exports of logs, copra, and fsh caused a sharp economic
slowdown in 2009. Afer several years of economic growth in the 5%10%
range, GDP last year was estimated to be fat.
Te volume of log exports dropped by 33%, copra by 39%, and fsh
by 25% in the frst 11 months of 2009 from the prior-year period. Palm
oil export volumes continued to rise, while cocoa volumes were little
changed. Te fall in logs refected both a weakening in external demand
..p u0P growth, Samoa
-4
0
4
8
11 10 09 08 07 06 2005
%
Forecast
Sources: Samoa ureau of Statlstlcs, Central ank of Samoa.
Selected Economic Indicators. varlous lssues, A0 estlmates.
..o kem|ttances, Samoa
-20
0
20
40
60
Real (3-month moving average)
Nominal (3-month moving average)
Oct Jul Apr Jan
09
Oct Jul Apr Jan
2008
Note: Real remlttances are nomlnal remlttances deated by
consumer prlce lnatlon ln Samoa.
Source: Central ank of Samoa.
and the phasing out of logging in the depleted original forests. Floods
early in 2009 inficted damage in some agricultural areas.
While the government raised its payroll spending by more than 5%
in 2009, it sharply cut other spending, including that for infrastructure
maintenance and some social services. Overall spending on both the
recurrent and development budgets fell in 2009, exacerbating the impact
of the economic slowdown. Bank lending to the private sector slowed
markedly during the year.
Infation eased from a peak of 25% year on year in August 2008
(Figure 3.35.11), averaging 8.3% in 2009, a result of lower fuel and food
prices and the slack economy. Higher oil prices in 2010 are expected to
keep infation relatively high, at 7.3%.
Te current account defcit widened further to an estimated 20% of GDP
in 2009, in part a result of weakness in exports. But foreign reserves rose to
the equivalent of nearly 5 months of imports, owing to a general allocation
of special drawing rights by the IMF last year and a one-time transaction
between one of the commercial banks onshore and ofshore operations.
Stronger international commodity markets will underpin growth in
exports this year, and the rate of decline in logging is expected to slow
from the 2009 rate. A pickup in building approvals points to a likely
increase in construction. Government expenditure, too, is expected to rise
in real terms, helped by additional support from development partners.
Tese factors will contribute to forecast growth of 2.0% in 2010, rising to
3.0% in 2011 (Figure 3.35.12) as a result of expected increased investment
in mining and telecommunications.
Progress has been slow on reopening the Gold Ridge gold mine, such
that production is not expected to resume until 2012.
Te 2010 budget goes some way to reversing last years cuts in spending
on social services and infrastructure. It gives priority to education, health,
and law and order, and to national elections this year. Te governments
contribution to the development budget also increased substantially.
However, there are risks to the budgetthe revenue projection is
at the upper end of plausible estimates, and there may be pressures
ahead of the ballot to raise spending. Some early slippage is evident. Te
budget provided for a 5.0% general increase in public service wages, but
the independent Trade Disputes Panel issued a 7.5% pay raise afer the
budget was sent to Parliament. Tight expenditure management will be
required if such a pay increase is to be absorbed by the budget without
compromising service delivery.
1onga
Remittances fell by nearly 20% in real terms last year as a result of weak
labor markets in source countries, particularly the US and New Zealand,
reducing household incomes. Earnings from tourism declined, too, by
about 6%, even though visitor arrivals rose by 4%. Moreover, a rise in
nonperforming loans in 2008 prompted banks to tighten lending in 2009.
Tese factors contributed to a 0.4% decline in GDP in FY2009 (ended
30 June 2009).
Declines in electricity consumption, new car registrations, and imports
(which fell by 10% in the frst half of the year) illustrated the overall
.. |nat|on, So|omon |s|ands
0
10
20
30
Sep May Jan
09
Sep May Jan
08
Sep May
2007
%
Source: Central ank of Solomon lslands.
..z u0P growth, So|omon |s|ands
0
2
4
6
8
10
11 10 09 08 07 06 2005
%
Forecast
Source: lnternatlonal Vonetary lund, A0 estlmates.
weakness in the economy. Key subsectors contracted agriculture (by
1.3%), construction and commerce (7.8%), and restaurants and hotels (4.1%).
Lower food prices helped bring down infation to 5.0% in FY2009, and
then to 0.4% in November 2009. Te central bank began to ease monetary
policy in June 2009 to facilitate credit to business. However, lending
to the private sector remains low (Figure 3.35.13), refecting the weak
economic climate and deterioration in bank loan portfolios.
In the external accounts, the current account defcit widened to 12.9%
of GDP in FY2009. Ofcial reserves rose to the equivalent of 5.3 months
of impoits, in pait owing to a USs:o million geneial allocation of special
drawing rights by the IMF.
A slight rebound of 0.4% of GDP is expected in FY2010 as the
injection of budget support from development partners helps to improve
domestic demand.
Public debt (estimated at 37% of GDP in February 2010) and other
debt indicators are above threshold levels set by the IMF and World Bank,
which restricts the governments options for managing the fscal defcit.
Capacity to service the public debt would be improved if eforts to
reform the public sector and public enterprises were pursued vigorously,
and if loans secured for the reconstruction of areas damaged during civil
unrest in 2006 were to increase the productive capacity of the economy.
1uva|u
Economic growth of about 1.5% in 2009 was in line with the historical trend,
a worthy performance given the weak global environment. Government
spending on administration, construction, and social development more
than ofset a decline in remittances from the countrys seafarers.
Cash reserves in the Consolidated Investment Fund (CIF),
acccumulated during the years prior to the global crisis, allowed the
government a considerable degree of fexibility to manage fscal shocks.
Sustainable CIF drawdown helped fnanced budget shortfalls in 2008 and
2009, that were kept to high levels by fshing license revenues and donor
contiibutions. Revenue collections foi :o:o aie foiecast at As:. million
and the goveinment's coie expendituie piogiam at As,:., million (an
inciease of o.o ovei the :oo budget), giving a budget defcit of As,.o
million. Te estimate of the budget defcit, that factois in As., million in
fnancing fiom the CIF is As,.: million foi FY:o:o.
Te economy is forecast to grow by 1.6% in 2010, supported by global
economic recovery that will increase demand for seafarers (raising
remittances) and planned increases in government spending. Infation is
seen at about 3.5% this year, a touch lower than is estimated for 2009.
Tere are risks to the fscal position, given the volatility of fshing
license income in particular, and, on the spending side, from persistent cost
overruns in the governments scholarship and medical insurance programs.
Moreover, the CIF relies in the medium term on distributions from
the Tuvalu Trust Fund, which is mainly invested in ofshore fnancial
markets. Tere was no distribution from the fund last year because
of low investment valuations and exchange rate fuctuations. Indeed,
distributions are unlikely for some years.
Te cumulative impact of projected budget defcits (Figure 3.35.15)
.. Pr|vate sector cred|t, 1onga
-20
0
20
40
60
To business
To households
Private sector credit

Oct Jul Apr Jan
09
Oct Jul Apr Jan
2008
Source: Natlonal Reserve ank of Jonga.
.. u0P growth, 1onga
-2
-1
0
1
2
11 10 09 08 07 06 2005
%
Forecast
Sources: Vlnlstry of llnance. Budget Statements: Review
of the Tongan Economy and Outlook. varlous lssues, A0
estlmates.
is likely to completely drain the CIF by 2012. Yet without the fnancing
bufer that this fund provides, the economy will be more vulnerable to
even relatively small economic or fscal shocks.
vanuatu
In a seventh consecutive year of growth, the economy expanded by an
estimated 3.8% in 2009, driven by tourism and construction. However,
agriculture and retailing were sof. Te net efect was that the pace of
growth was well below the average of 6.5% recorded in the previous 5
years (Figure 3.35.16), driven largely by private sector investment and
underpinned by policy reforms that included the opening of the aviation
and telecommunications markets.
Te number of cruise-ship visitors increased by 43% to 90,920 and
air arrivals by 12% to 63,359 in the frst 9 months of 2009, compared
with the prior-year period. Tis refected a relatively buoyant economy
in Australia, the main source of tourists, as well as fooding and other
problems in the Fiji Islands, which prompted some tourists to vacation
instead in Vanuatu.
Construction received a fllip from projects funded by the US
Millennium Challenge Corporation, and from refurbishment of tourism
facilities. Growth in agriculture, fshing, and forestry slowed to an
estimated 1.7%, from over 5% in 2008. Production of copra, coconut oil,
cofee, and beef all fell in the frst 9 months of 2009. Cocoa and kava
increased, encouraged by high prices and strong local demand.
Infation moderated in the second half of 2009 to average 5.6% for the
year. Nevertheless, this was above the Reserve Bank of Vanuatus target to
keep infation under 4.0%. Te current account defcit likely narrowed to
3.7% in 2009, as tourism receipts rose while imports eased.
In 2010, growth is forecast to accelerate to 4.6%, based on tourism
(bookings are strong) and a pipeline of planned construction projects.
Agriculture and retailing are expected to pick up modestly. Emerging
capacity constraints in tourism will likely see economic growth ease to
about 4.0% in 2011.
Infation is projected to remain above the central banks target, held
up by higher oil prices. Te current account defcit is expected to widen
in 2010 and 2011, as the pickup in domestic demand lifs imports.
Te government forecasts a near-balanced budget for 2010, afer small
surpluses in recent years. Total recurrent revenue is expected to increase
by more than 12% in real terms. Donor budget support has also increased,
allowing for an almost 20% real increase in total spending, including the
introduction of fee-free education. Budget papers describe the expenditure
and revenue estimates as being at the limits of the level consistent with
fscal prudence, given targets of balanced or surplus budgets.
Despite success in raising the pace of growth in recent years, progress
toward the Millennium Development Goals has tended to lag. With public
debt below 20% of GDP (Figure 3.35.17) and generally favorable economic
prospects, the country now has the fscal capacity to increase borrowing for
investment and accelerate progress toward those goals.
.. u0P growth, vanuatu
0
2
4
6
8
11 10 09 08 07 06 05 2004
Forecast
%
Sources: vanuatu Natlonal Statlstlcs 0ce, Covernment of
the Republlc of vanuatu. zoo,. Budget Volume Fiscal
Strategy Report. 0ecember, A0 estlmates.
../ Pub||c debt, vanuatu
0
10
20
30
10 09 08 07 06 2005
Forecast
% of GDP
Source: vanuatu government budget papers.
.. 8udget ba|ance, 1uva|u
-20
-10
0
10
Including trust funds drawdowns
Overall budget balance
11 10 09 2008
% of GDP
Forecast
Source: Vlnlstry of llnance and lconomlc Plannlng.
Budget Speech.
Statistical appendix
Statistical notes and tables
Te statistical appendix presents selected economic indicators for 44
developing member economies of the Asian Development Bank (ADB)
and for Brunei Darussalam, an unclassifed regional member in a total
of 23 tables. Te economies are grouped into fve subregions: Central
Asia, East Asia, South Asia, Southeast Asia, and the Pacifc. Most of the
tables contain historical data for 2005 to 2009; some have forecasts for
2010 and 2011.
Te data were standardized to the degree possible in order to
allow comparability over time and across economies, but diferences
in statistical methodology, defnitions, coverage, and practices make
full comparability impossible. Te national income accounts section is
based on the United Nations System of National Accounts, while the
balance-of-payments data are based on International Monetary Fund
(IMF) accounting standards. Historical data were obtained from ofcial
sources, statistical publications and databases, and documents of the
ADB, IMF, and World Bank. Projections for 2010 and 2011 are generally
staf estimates made on the basis of available quarterly or monthly data,
although some projections are from governments.
Most countries report on a calendar-year basis. Some economies
record their government fnance data on a fscal year basis, such as:
Armenia; Azerbaijan; Hong Kong, China; Cook Islands; Kazakhstan;
Kyrgyz Republic; Lao Peoples Democratic Republic (Lao PDR); Samoa;
Singapore; Taipei,China; Tajikistan; Tailand; and Uzbekistan. Federated
States of Micronesia; Nauru; Republic of Marshall Islands; and Republic
of Palau (hereafer Palau) report government fnance and balance-of-
payments data on a fscal year basis. South Asian countries (except for
Maldives and Sri Lanka), Myanmar, and Tonga report all variables on a
fscal year basis.
Regional and subregional averages/totals are provided for nine tables
(A1, A2, A8, A10, A11, A12, A13, A14, and A15). For tables A1, A2, A8,
and A15, the averages are computed using weights derived from levels
of gross national income (GNI) in current United States dollars (US$)
following the World Bank Atlas method. Te GNI data for 20052008
were obtained from the World Banks World Development Indicators
online. Weights for 2008 were carried over through 2011. Te GNI data
for Cook Islands and Tuvalu were estimated using the Atlas conversion
Statistical appendix 259
factor. Myanmar and Nauru have no GNI data. For Tables A10 and A12,
the regional and subregional averages were computed on the basis of a
consistent sum, which means that if there are missing country data for
a given year, the sum of the prior year used for computing the growth
rate excludes the corresponding country data. Data for Myanmar and
Nauru are excluded from the computation of all subregional averages/
totals.
Tables A1, A2, A3, A4, A5, and A7. Tese tables show related data on
output growth, production, and demand. Changes to the national income
accounts series for some countries have been made owing to a change
in source, methodology, and/or base year. Te series for Bhutan refects
fscal rather than calendar year data, while those for Timor-Leste refects
non-oil, non-United Nations GDP. Te constant GDP series for India were
rebased from 1999/2000 to 2004/05.
Table A1: Growth rate of GDP (% per year). Te table shows annual
growth rates of GDP valued at constant market prices, factor costs, or
basic prices. GDP at market prices is the aggregation of the value added
of all resident producers at producers prices including taxes less subsidies
on imports plus all nondeductible value-added or similar taxes. Constant
factor cost measures difer from market price measures in that they
exclude taxes on production and include subsidies. Basic price valuation
is the factor cost plus some taxes on production, such as property and
payroll taxes, and less some subsidies, such as labor-related subsidies
but not product-related subsidies. Most countries use constant market
price valuation. Fiji Islands, India, Pakistan, and Sri Lanka use constant
factor costs, while Maldives and Nepal use basic prices. Te series for
Azerbaijan has been revised due to a change in source. Te series for
Myanmar has been changed to refect ADB estimates.
Table A2: Growth rate of per capita GDP (% per year). Te
table provides the growth rates of real per capita GDP, which is defned as
GDP at constant prices divided by the population. Te series for most of
the Pacifc countries were revised due to a change in source of population
data. Data on per capita gross national product in US$ terms for 2008,
sourced from the World Bank, World Development Indicators online, are
also shown.
Table A3: Growth rate of value added in agriculture (% per year).
Te table shows the growth rates of value added in agriculture and
its corresponding share in 2008. Te agriculture sector comprises
agricultural crops, livestock, poultry, fsheries, and forestry.
Table A4: Growth rate of value added in industry (% per year).
Te table provides the growth rates of value added in industry and its
corresponding share in 2008. Tis sector comprises manufacturing,
mining and quarrying, construction, and utilities. However, construction
in Uzbekistan is included in the services sector.
Table A5: Growth rate of value added in services (% per year). Te
table gives the growth rates of value added in services, as well as its
corresponding share in 2008. Subsectors generally include trade, banking,
fnance, real estate, public administration, and other services.
Table A6: Unemployment rate (%). Te unemployment rate is
the percentage of the labor force that actively seeks work but is unable to
fnd work at a given time. Te age of the working population ranges from
15 to 65, except for Bangladesh where the labor force covers those aged
10 and above. Te unemployment rates of the Peoples Republic of China
(PRC) and Viet Nam refer to unemployment in urban areas only.
Table A7: Gross domestic investment (% of GDP). Tis table provides
the ratio of gross domestic investment (GDI) to GDP. GDI is the sum
of gross fxed capital formation plus changes in inventories. Gross
fxed capital formation is measured by the total value of a producers
acquisitions, less disposals, of fxed assets in a given accounting period.
Additions to the value of nonproduced assets, e.g., land, form part of
gross fxed capital formation. Inventories are stocks of goods held by
institutional units to meet temporary or unexpected fuctuations in
production and sales. For India, GDI includes valuables and errors and
omissions.
Table A8: Infation (% per year). Data on infation rates represent
period averages. Except for India, which reports the wholesale price
index, infation rates presented are based on consumer price indexes.
Te consumer price indexes of the following countries are for a given
city or group of consumers only: Afghanistan is for Kabul, Cambodia is
for Phnom Penh, Marshall Islands is for Majuro, Solomon Islands is for
Honiara, and Nepal is for urban consumers.
Table A9: Growth in money supply (% per year). Tis table tracks the
annual percentage change in the end-of-period supply of broad money as
represented by M2 (for most countries). M2 is defned as the sum of M1
and quasi-money where M1 denotes currency in circulation plus demand
deposits and quasi-money consists of time and savings deposits including
foreign currency deposits.
Tables A10, A12, A13, A14, A15, and A16. Balance of payments.
Tis set of tables shows selected international economic transactions of
countries as recorded in the balance of payments (BOP). Tese items
cover annual fows, except for some countries which show data as of a
specifed period only.
Tables A10 and A12: Growth rates of merchandise exports and
imports (% per year). Te annual growth rates of exports and imports,
in terms of merchandise goods only, are shown in these tables. Data
are in million US$, primarily obtained from the balance-of-payments
accounts of each country. Exports are reported on a free-on-board (f.o.b.)
basis. Import data are generally reported on an f.o.b. basis, except for
Afghanistan, Bhutan, Cambodia, India, Lao PDR, Myanmar, Philippines,
Samoa, Singapore, Solomon Islands, and Tailand, which value them on a
cost, insurance, freight (c.i.f.) basis.
Table A11: Direction of exports (% of total). Tis table shows the
exports of developing Asian economies. Data are sourced from IMF,
Direction of Trade and Statistics, CD-ROM (January 2010), except for
Taipei,China, which were sourced from CEIC Data Company, Ltd. Tis
table shows the percentage share of exports of each economy to other
economies in developing Asia excluding the PRC; PRC only; US; Japan;
European Union (EU); and others (or rest of the world). Exports to the
rest of the world are derived as total exports to the world minus exports
among themselves, and to US, Japan, and EU.
Table A13: Trade balance (US$ million). Te trade balance is the
diference between merchandise exports and merchandise imports.
Figures in this table are based on the exports and imports levels used to
generate Tables A10 and A12.
Table A14: Current account balance (US$ million). Te current
account balance is the sum of the balance of trade for merchandise, net
trade in services and factor income, and net transfers. In the case of
Cambodia, Lao PDR, and Viet Nam, ofcial transfers are excluded from
the current account balance.
Table A15: Current account balance (% of GDP). Te values reported
in Table 14 are divided by GDP at current prices in US$.
Table A16: Foreign direct investment (US$ million). Foreign direct
investment refers to equity capital, reinvested earnings, investment in
debt securities, and other capital associated with the transactions of
the enterprises, net of repatriations and intercompany loan repayments.
For the PRC, foreign direct investment refers to investments of
foreign enterprises, economic organizations, and individuals through
joint ventures and cooperation; reinvested earnings; and enterprises
borrowings from abroad under approved investment projects. Te 2009
data for Kyrgyz Republic cover only the frst 3 quarters of the year while
that for India refers to data for the frst 6 months of the fscal year. Te
full year fgures for Tajikistan and Turkmenistan are staf estimates.
Table A17: External debt outstanding (US$ million). For most
economies, external debt outstandingpublic and privateincludes
medium- and long-term debt, short-term debt, and IMF credit. For
Cambodia, Georgia, and Lao PDR, only public external debt is reported.
For Azerbaijan; India; Kazakhstan; Kyrgyz Republic; Malaysia,
Philippines; and Singapore the fgures for 2009 are as of end-September.
Table A18: Debt service ratio (% of exports of goods and services). Tis
table generally presents the total debt service payments of each economy,
which comprise principal repayments (excluding on short-term debt) and
interest payments on outstanding external debt, as a percentage of exports
of goods and services. For Cambodia and Lao PDR, debt service refers
to external public debt only. For Papua New Guinea, Samoa, and Viet
Nam, exports of goods are used as the denominator in the calculation of
the ratio; for the Philippines, exports of goods, services, and income are
used as the denominator. For Bangladesh, the ratio represents debt service
payments on medium- and long-term loans as a percentage of exports of
goods, nonfactor services, and workers remittances; while for Azerbaijan,
the ratio represents public and publicly guaranteed external debt service
payments as a percentage of exports of goods and nonfactor services.
Table A19: Exchange rates to the US dollar (annual average).
Te annual average exchange rates of each economy are quoted in
local currencies per US dollar. Te rate for 2009 for India is for the
period 1 April 200922 January 2009. Te Turkmenistan Manat was
redenominated on 1 January 2009 from TMM 14,250 to TMM 2.8 per
US dollar.
Table A20: Gross international reserves (US$ million). Gross
international reserves are defned as the US$ value of holdings of
foreign exchange, special drawing rights (SDR), reserve position in the
IMF, and gold at the end of a given period. For Turkmenistan, gold is
excluded in the computation. For Marshall Islands; Samoa; Solomon
Islands; Taipei,China; Tonga; and Vanuatu, this heading refers to foreign
exchange reserves only. In some countries, the rubric comprises foreign
assets and reserves of national monetary authorities and national oil
funds, i.e., foreign assets of the Maldives Monetary Authority, net
foreign reserves of the State Bank of Pakistan, assets of the National Oil
Fund of Azerbaijan, and ofcial external assets of Kiribati. Te data for
India is as of 12 February 2010 while that for Kyrgyz Republic is as of
end-September 2009.
Tables A21, A22, and A23: Government fnance. Tis set of tables
refers to the revenue and expenditure transactions as well as the fscal
balance of the central government expressed as a percentage of GDP
in nominal terms. For Cambodia (since 2006), Georgia, India, Kyrgyz
Republic, Mongolia, PRC, Tajikistan, Turkmenistan, and Uzbekistan,
transactions are those reported by the general government. For the
Republic of Korea, government revenues exclude social security
contributions.
Table A21: Central government expenditures (% of GDP). Central
government expenditures comprise all nonrepayable payments to both
current and capital expenses, plus net lending. Tese amounts are
computed as a share of GDP at current prices. For Tailand, expenditures
refer to budgetary expenditures excluding externally fnanced
expenditures and corresponding borrowing; while that for Tajikistan
includes externally fnanced public investment programs. One-time
expenditures are excluded for Pakistan.
Table A22: Central government revenues (% of GDP). Central
government revenues comprise all nonrepayable receipts, both current
and capital, plus grants. Tese amounts are computed as a percentage of
GDP at current prices. For the Republic of Korea, revenues incorporate
the repayment on government-guaranteed debts but exclude social
security contributions. For Singapore, revenues refer to receipts credited
to the three accounts listed for the previous table, including investment
income, capital receipts, and investment adjustments. Grants are excluded
in Cambodia, Lao PDR, Malaysia, Singapore, and Tailand; revenues
from disinvestment are included for India; only current revenues are
included for Bangladesh; and grants and privatization proceeds are
excluded for Sri Lanka. For Cambodia, the proceeds of the IMF debt
relief program are refected in their revenues for 2006.
Table A23: Fiscal balance of central government (% of GDP). Fiscal
balance is the diference between central government revenues and
expenditures. Te diference is also computed as a share of GDP at
current prices. Data variations may arise due to statistical discrepancies,
e.g., balancing items for both central and local governments, and
diferences in the concept used in the individual computations of
revenues and expenditures as compared with the calculation of the fscal
balance. For Tailand, the fscal balance is a cash balance composed of
the budgetary and nonbudgetary balances.
Table A1 Growth rate of GDP (% per year)
2005 2006 2007 2008 2009 2010 2011
Central Asia 11.4 13.3 12.0 6.1 2.7 4.7 5.9
Armenia 13.9 13.2 13.8 6.8 -14.4 1.5 3.0
Azerbaijan 26.4 34.5 25.1 10.8 9.3 9.5 9.7
Georgia 9.6 9.4 12.3 2.3 -3.9 2.0 4.0
Kazakhstan 9.7 10.7 8.9 3.3 1.2 2.5 3.5
Kyrgyz Republic -0.2 3.1 8.5 8.4 2.3 5.5 6.0
Tajikistan 6.7 7.0 7.8 7.9 3.4 4.0 5.0
Turkmenistan 13.0 11.4 11.6 10.5 6.1 6.5 11.0
Uzbekistan 7.0 7.2 9.5 9.0 8.1 8.5 9.0
East Asia 8.2 9.4 10.4 7.3 5.9 8.3 7.7
China, Peoples Rep. of 10.4 11.6 13.0 9.6 8.7 9.6 9.1
Hong Kong, China 7.1 7.0 6.4 2.1 -2.7 5.2 4.3
Korea, Rep. of 4.0 5.2 5.1 2.3 0.2 5.2 4.6
Mongolia 7.3 8.6 10.2 8.9 -1.6 7.0 6.5
Taipei,China 4.7 5.4 6.0 0.7 -1.9 4.9 4.0
South Asia 9.1 9.0 8.7 6.4 6.5 7.4 8.0
Afghanistan, Islamic Rep. of 16.1 8.2 12.1 3.4 15.1 7.6 6.8
Bangladesh 6.0 6.6 6.4 6.2 5.9 5.5 6.3
Bhutan 7.5 6.7 13.5 11.8 6.0 6.0 6.5
India 9.5 9.7 9.2 6.7 7.2 8.2 8.7
Maldives -4.6 18.0 7.2 6.3 -3.0 3.0 3.5
Nepal 3.1 3.7 3.3 5.3 4.7 3.5 4.5
Pakistan 9.0 5.8 6.8 4.1 2.0 3.0 4.0
Sri Lanka 6.2 7.7 6.8 6.0 3.5 6.0 7.0
Southeast Asia 5.8 6.1 6.5 4.3 1.2 5.1 5.3
Brunei Darussalam 0.4 4.4 0.2 -1.9 -1.2 1.1 1.5
Cambodia 13.3 10.8 10.2 6.7 -2.0 4.5 6.0
Indonesia 5.7 5.5 6.3 6.0 4.5 5.5 6.0
Lao Peoples Dem. Rep. 6.8 8.7 7.8 7.2 6.5 7.0 7.5
Malaysia 5.3 5.8 6.2 4.6 -1.7 5.3 5.0
Myanmar 4.5 7.0 5.5 3.6 4.4 5.2 5.5
Philippines 5.0 5.3 7.1 3.8 0.9 3.8 4.6
Singapore 7.6 8.7 8.2 1.4 -2.0 6.3 5.0
Thailand 4.6 5.1 4.9 2.5 -2.3 4.0 4.5
Viet Nam 8.4 8.2 8.5 6.2 5.3 6.5 6.8
The Pacific 3.1 1.7 5.0 5.4 2.3 3.7 5.0
Cook Islands 0.0 0.7 9.5 -1.2 -0.1 1.0 2.0
Fiji Islands 0.6 1.9 -0.5 -0.1 -2.5 -0.5 0.5
Kiribati 3.9 1.9 0.4 -1.1 -0.7 0.8 1.2
Marshall Islands, Rep. of 0.7 2.4 3.3 -2.0 0.0 0.5 1.5
Micronesia, Fed. States of 3.0 -0.4 -0.1 -2.9 -1.0 0.5 1.0
Nauru -14.5 6.3 -27.3 1.0 0.0 2.0 4.0
Palau, Rep. of 5.9 4.8 2.1 -1.0 -3.0 0.5 2.0
Papua New Guinea 3.9 2.3 7.2 6.7 4.5 5.5 7.7
Samoa 5.4 0.4 6.8 -3.0 -0.8 0.5 2.0
Solomon Islands 5.4 6.9 8.7 6.9 0.0 2.0 3.0
Timor-Leste, Dem. Rep. of 6.2 -5.8 8.0 13.0 5.0 7.0 7.0
Tonga -1.0 0.6 -1.4 2.0 -0.4 0.4 1.2
Tuvalu -4.1 6.6 4.9 1.3 1.5 1.6 1.6
Vanuatu 6.5 7.4 6.8 6.3 3.8 4.6 4.0
Average 8.0 8.9 9.6 6.6 5.2 7.5 7.3
- = not available.
Table A2 Growth rate of per capita GDP (% per year)
2005 2006 2007 2008 2009 2010 2011 Per capita GNP,
US$, 2008
Central Asia 10.3 11.8 10.8 4.8 1.6 3.9 5.0
Armenia 13.7 13.1 13.6 6.5 -14.6 1.4 2.9 3,350
Azerbaijan 25.2 31.6 23.6 9.6 8.3 9.3 9.5 3,830
Georgia 9.4 7.4 12.5 2.6 -4.0 2.7 4.7 2,470
Kazakhstan 8.6 9.4 7.7 1.9 0.2 1.4 2.4 6,140
Kyrgyz Republic -1.1 2.1 7.8 6.8 1.1 4.2 4.8 740
Tajikistan 4.5 5.4 5.5 4.7 1.6 2.2 3.1 600
Turkmenistan 11.2 9.7 9.8 8.8 4.5 5.1 9.8 2,840
Uzbekistan 5.8 6.0 7.9 7.4 6.2 7.3 7.5 910
East Asia 7.6 8.4 9.8 6.7 5.3 7.8 7.2
China, Peoples Rep. of 9.6 10.3 12.3 8.9 8.0 9.2 8.5 2,940
Hong Kong, China 6.6 6.3 5.3 1.4 -3.0 4.5 3.6 31,420
Korea, Rep. of 3.7 4.8 4.8 2.0 -0.1 4.9 4.4 21,530
Mongolia 6.0 7.3 8.7 6.2 -3.5 5.3 6.5 1,680
Taipei,China 4.3 5.0 5.5 0.4 -2.2 4.3 3.7 17,930
South Asia 7.5 7.4 7.2 4.8 4.9 6.0 6.4
Afghanistan, Islamic Rep. of 13.3 5.9 10.3 1.4 -0.4 4.8 4.0 -
Bangladesh 4.6 5.2 5.1 4.8 4.6 4.1 4.9 520
Bhutan 6.1 5.3 11.9 10.2 4.5 - - 1,900
India 7.8 8.1 7.7 5.2 5.7 6.8 7.2 1,070
Maldives -6.2 15.3 5.7 4.6 -4.5 1.3 1.8 3,630
Nepal 0.7 2.2 0.9 3.3 1.9 2.1 2.8 400
Pakistan 7.9 3.9 5.3 2.0 0.4 1.3 2.3 980
Sri Lanka 5.1 6.5 6.1 4.9 2.3 5.0 6.0 1,780
Southeast Asia 4.0 4.7 4.7 2.3 -0.4 3.6 3.8
Brunei Darussalam -2.4 0.9 -1.6 -3.9 - - - -
Cambodia 11.0 8.2 7.8 5.1 -4.0 4.1 4.3 600
Indonesia 3.4 4.8 5.0 4.7 3.3 5.0 4.9 2,010
Lao Peoples Dem. Rep. - 6.0 5.8 5.2 4.4 5.0 5.5 740
Malaysia 3.1 3.8 4.1 2.5 -3.6 3.2 3.5 6,970
Myanmar - 4.9 3.4 2.3 3.1 3.4 - -
Philippines 2.9 3.3 5.0 1.8 -1.0 1.8 2.5 1,890
Singapore 5.1 5.3 3.8 -3.9 -4.9 3.1 1.8 34,760
Thailand 4.6 4.9 4.2 1.6 -3.1 2.1 3.9 2,840
Viet Nam 7.0 6.9 7.1 5.0 3.5 5.1 5.4 890
The Pacific 1.2 -0.1 3.3 3.4 0.4 1.9 3.1
Cook Islands -5.6 -8.6 23.6 -6.1 -2.8 -1.8 -0.8 -
Fiji Islands 0.2 1.3 -1.4 -0.5 -2.9 -0.9 0.0 3,930
Kiribati 1.5 0.1 -1.4 -2.5 -2.4 -1.0 -0.6 2,000
Marshall Islands, Rep. of -0.3 1.4 2.3 -3.0 -1.0 -0.2 0.5 3,270
Micronesia, Fed. States of 2.6 -0.8 -0.5 -3.3 -1.4 0.1 - 2,340
Nauru -12.7 8.6 -28.7 -0.9 -1.9 0.0 1.9 -
Palau, Rep. of 5.0 4.0 1.5 -1.6 -3.6 -0.1 - 8,650
Papua New Guinea 1.6 0.1 4.8 4.4 2.3 3.3 5.4 1,010
Samoa 5.0 0.2 6.3 -3.4 -1.1 0.2 - 2,780
Solomon Islands 2.9 4.3 6.1 4.4 -2.2 -0.4 0.8 1,180
Timor-Leste, Dem. Rep. of -0.3 -8.8 4.6 9.5 1.8 3.8 - 2,460
Tonga -1.2 0.2 -1.8 1.6 -0.7 0.1 0.9 2,560
Tuvalu -6.9 5.1 -1.7 2.2 1.0 1.1 1.1 -
Vanuatu 3.9 4.8 4.2 3.6 1.0 1.8 1.2 2,330
Average 7.0 7.7 8.6 5.7 4.3 6.8 6.5
- = not available.
Table A3 Growth rate of value added in agriculture (% per year)
2005 2006 2007 2008 2009 Sector share 2008, %
Central Asia
Armenia 11.2 0.5 10.4 1.4 -0.1 19.4
Azerbaijan 7.5 0.9 4.0 6.1 3.5 6.7
Georgia 12.0 -11.7 3.3 -4.4 -5.7 11.9
Kazakhstan 6.9 5.9 9.7 -6.1 13.8 7.0
Kyrgyz Republic -4.2 1.7 1.6 0.9 7.3 28.9
Tajikistan - - - - - -
Turkmenistan - - - - - -
Uzbekistan 5.6 6.2 6.1 4.5 5.7 32.8
East Asia
China, Peoples Rep. of 5.2 5.0 3.7 5.5 4.2 9.3
Hong Kong, China -1.0 -5.0 -6.4 -18.8 1.1 0.0
Korea, Rep. of 1.3 1.5 4.0 5.6 1.6 3.3
Mongolia 10.7 7.5 15.8 5.8 1.5 25.5
Taipei,China -4.2 13.8 -2.4 0.6 -3.1 1.5
South Asia
Afghanistan, Islamic Rep. of - - - - - -
Bangladesh 2.2 4.9 4.6 3.2 4.6 20.8
Bhutan 1.5 2.5 1.9 0.4 6.0 17.5
India 5.2 3.7 4.7 1.6 -0.2 15.7
Maldives 11.8 -0.3 -14.9 -4.5 -16.4 6.2
Nepal 3.5 1.8 1.0 4.7 2.2 35.7
Pakistan 6.5 6.3 4.1 1.1 4.7 21.3
Sri Lanka 1.8 6.3 3.4 7.5 3.3 12.1
Southeast Asia
Brunei Darussalam 1.3 -9.9 -4.5 3.8 - 1.1
Cambodia 15.7 5.5 5.0 5.7 4.1 28.4
Indonesia 2.7 3.4 3.5 4.8 4.1 13.7
Lao Peoples Dem. Rep. 0.7 2.5 8.6 2.0 2.3 34.5
Malaysia 2.6 5.2 1.4 4.0 0.4 7.3
Myanmar - - - - - -
Philippines 2.0 3.8 4.8 3.2 0.1 18.3
Singapore -1.2 15.5 -3.0 -4.0 -1.0 0.1
Thailand -1.8 5.4 0.9 3.5 -0.6 8.8
Viet Nam 4.0 3.7 3.8 4.1 1.8 17.6
The Pacific
Cook Islands -3.5 -4.6 -11.9 -3.7 - 10.2
Fiji Islands -11.6 5.0 -5.0 2.1 2.0 14.1
Kiribati -5.4 7.9 0.2 1.8 1.4 24.8
Marshall Islands, Rep. of -0.7 11.8 4.2 -2.0 - 10.0
Micronesia, Fed. States of 2.0 0.5 1.8 - - -
Nauru - - - - - -
Palau, Rep. of 12.6 2.9 2.7 - - -
Papua New Guinea 5.6 1.0 4.2 4.3 2.3 35.8
Samoa 5.4 -4.1 6.9 -8.7 - 10.6
Solomon Islands 2.2 6.2 - - - -
Timor-Leste, Dem. Rep. of 6.3 0.3 -5.6 - - -
Tonga -4.8 -0.3 1.7 0.6 -1.3 19.6
Tuvalu 0.9 7.2 3.0 0.4 - 20.6
Vanuatu -4.4 2.4 2.2 5.0 1.7 16.1
- = not available.
Table A4 Growth rate of value added in industry (% per year)
2005 2006 2007 2008 2009 Sector share 2008, %
Central Asia
Armenia 14.8 16.6 11.7 5.4 -31.0 43.7
Azerbaijan 43.4 49.8 32.9 9.7 10.6 70.4
Georgia 12.0 13.5 14.5 -3.9 -4.2 25.9
Kazakhstan 11.3 14.2 9.2 2.7 -0.3 45.1
Kyrgyz Republic -9.8 -6.9 10.3 14.0 -3.4 20.3
Uzbekistan 8.9 7.4 8.3 12.7 11.2 37.0
East Asia
Hong Kong, China -1.7 -2.5 -0.5 0.8 -1.5 7.6
Korea, Rep. of 4.8 6.6 6.0 2.0 -0.6 38.2
Mongolia 5.2 6.9 7.0 -1.4 -1.9 30.5
Taipei,China 6.9 7.8 9.0 -0.2 -4.6 32.9
South Asia
Bangladesh 8.3 9.7 8.4 6.8 5.9 29.7
Bhutan 5.6 5.4 28.1 21.0 6.0 45.5
India 9.3 12.7 9.5 3.9 8.2 28.0
Maldives 2.9 15.8 10.1 8.4 -8.1 17.2
Nepal 3.0 4.5 3.9 1.9 1.8 16.3
Pakistan 12.1 4.1 8.8 1.7 -3.6 25.7
Sri Lanka 8.0 8.1 7.6 5.9 3.6 28.4
Southeast Asia
Brunei Darussalam -1.8 2.9 -5.6 -5.4 - 54.8
Cambodia 12.7 18.3 8.4 4.0 -13.0 29.5
Indonesia 4.7 4.5 4.7 3.7 3.5 42.1
Malaysia 3.4 4.5 3.0 0.9 -7.1 39.1
Myanmar - - - - - -
Philippines 3.8 4.5 6.8 5.0 -2.0 32.8
Singapore 8.1 10.7 7.1 -1.0 -1.1 30.2
Thailand 5.4 5.6 5.9 3.3 -4.3 48.0
Viet Nam 10.7 10.4 10.2 6.1 5.5 41.6
The Pacific
Cook Islands -12.3 1.5 29.6 -0.5 - 10.3
Fiji Islands -20.0 0.7 -5.2 -1.1 3.5 17.9
Kiribati -7.7 11.0 12.7 -7.1 -1.6 7.4
Marshall Islands, Rep. of -0.7 -4.2 4.2 -2.0 - 21.4
Micronesia, Fed. States of 2.0 0.5 -4.2 - - -
Nauru - - - - - -
Palau, Rep. of -3.6 12.7 19.8 - - -
Papua New Guinea 4.1 1.5 7.3 7.2 4.6 32.7
Samoa 4.7 -2.9 13.3 -10.4 - 28.3
Timor-Leste, Dem. Rep. of 10.6 -18.1 28.7 - - -
Tonga -6.3 -0.9 -2.0 1.7 3.0 18.9
Tuvalu -18.6 28.3 30.8 -8.2 - 11.4
Vanuatu 7.1 7.0 10.4 13.1 6.9 10.7
- = not available.
Table A5 Growth rate of value added in services (% per year)
2005 2006 2007 2008 2009 Sector share 2008, %
Central Asia
Armenia 14.7 15.5 13.8 9.1 0.7 36.9
Azerbaijan 9.6 17.4 12.4 14.0 9.1 22.9
Georgia 8.6 14.5 13.0 7.4 -3.6 62.2
Kazakhstan 9.7 10.1 12.8 4.7 -0.2 48.0
Kyrgyz Republic 8.4 9.0 12.6 11.0 2.4 50.8
Uzbekistan 7.1 8.8 17.4 13.5 14.0 30.7
East Asia
Hong Kong, China 7.5 7.1 7.0 2.5 -2.3 92.4
Korea, Rep. of 3.5 4.4 5.1 2.8 1.0 58.5
Mongolia 9.0 6.1 10.7 16.5 2.0 44.0
Taipei,China 4.0 4.4 4.6 1.2 0.1 65.6
South Asia
Bangladesh 6.4 6.4 6.9 6.5 6.3 49.5
Bhutan 12.7 11.0 6.8 7.8 6.0 37.0
India 11.1 10.2 10.5 9.8 8.7 56.4
Maldives -8.2 21.3 9.1 6.7 -0.9 76.6
Nepal 2.5 6.4 4.5 7.0 5.8 48.0
Pakistan 8.5 6.5 7.0 6.6 3.6 53.0
Sri Lanka 6.4 7.7 7.1 5.6 3.5 59.5
Southeast Asia
Brunei Darussalam 4.1 7.4 9.2 2.6 - 44.1
Cambodia 13.1 10.1 10.1 9.0 1.5 42.1
Indonesia 7.9 7.3 9.0 8.7 5.7 44.3
Malaysia 7.2 7.4 9.6 7.2 2.6 53.6
Myanmar - - - - - -
Philippines 7.0 6.5 8.1 3.3 3.2 48.9
Singapore 7.2 7.8 8.3 5.2 -2.0 69.7
Thailand 5.2 4.6 4.8 1.3 -0.4 43.2
Viet Nam 8.5 8.3 8.9 7.2 6.6 40.8
The Pacific
Cook Islands 2.3 1.5 11.2 -0.9 - 79.5
Fiji Islands 12.1 1.5 1.8 -0.3 -5.0 68.0
Kiribati 5.8 0.5 -0.1 2.6 -2.2 67.8
Marshall Islands, Rep. of 1.6 4.6 4.2 -2.0 - 68.6
Micronesia, Fed. States of 2.8 0.5 2.5 - - -
Nauru - - - - - -
Palau, Rep. of 7.8 0.8 -1.5 - - -
Papua New Guinea 1.6 4.8 10.7 8.9 7.0 31.5
Samoa 5.7 2.9 3.6 2.0 - 62.3
Timor-Leste, Dem. Rep. of 4.9 -5.9 11.9 - - -
Tonga 1.7 1.5 -1.9 2.2 -0.7 61.5
Tuvalu -5.1 4.9 1.0 3.9 - 68.0
Vanuatu 9.5 8.7 7.4 4.3 3.8 73.2
- = not available.
Table A6 Unemployment rate (%)
2005 2006 2007 2008 2009
Central Asia
Armenia 8.1 7.4 7.1 6.3 6.7
Azerbaijan 1.4 1.3 1.2 1.0 1.0
Georgia 13.8 13.6 13.3 16.5 -
Kazakhstan 8.1 7.8 7.3 6.6 7.2
Kyrgyz Republic 8.1 8.3 8.2 8.2 -
Tajikistan 2.0 2.3 2.8 4.8 -
Turkmenistan - - - - -
Uzbekistan 0.3 - - - -
East Asia
China, Peoples Rep. of 4.2 4.1 4.0 4.2 4.3
Hong Kong, China 5.6 4.8 4.0 3.6 5.2
Korea, Rep. of 3.7 3.5 3.2 3.2 3.6
Mongolia 3.3 3.2 3.0 3.0 3.3
Taipei,China 4.1 3.9 3.9 4.1 5.9
South Asia
Afghanistan, Islamic Rep. of - - - - -
Bangladesh - 4.2 - - -
Bhutan 2.5 2.3 3.2 3.7 4.0
India - - - - -
Maldives - - - - -
Nepal - - - - -
Pakistan 7.7 6.2 5.3 5.2 -
Sri Lanka 7.2 6.5 6.0 5.4 5.9
Southeast Asia
Brunei Darussalam 4.1 4.0 3.4 3.7 -
Cambodia - - - - -
Indonesia 11.2 10.3 9.1 8.4 -
Lao Peoples Dem. Rep. - - - - -
Malaysia 3.6 3.3 3.2 3.3 3.7
Myanmar 4.0 4.0 4.0 - -
Philippines 11.5 8.0 7.3 7.4 7.5
Singapore 3.1 2.7 2.1 2.2 3.0
Thailand 1.8 1.5 1.4 1.4 1.5
Viet Nam 5.3 4.8 4.6 4.7 2.9
The Pacific
Cook Islands - - - - -
Fiji Islands 6.6 7.3 - - -
Kiribati 6.1 - - - -
Marshall Islands, Rep. of 30.9 30.9 30.9 - -
Micronesia, Fed. States of - - - - -
Nauru - - - - -
Palau, Rep. of - - - - -
Papua New Guinea - - - - -
Samoa - 4.0 - - -
Solomon Islands - - - - -
Timor-Leste, Dem. Rep. of - - - - -
Tonga - - - - -
Tuvalu - - - - -
Vanuatu - - - - -
- = not available.
Table A7 Gross domestic investment (% of GDP)
2005 2006 2007 2008 2009
Central Asia
Armenia 30.5 35.9 43.7 40.8 31.8
Azerbaijan 41.5 29.9 21.3 18.7 21.3
Georgia 33.5 30.9 32.1 26.0 12.1
Kazakhstan 31.0 33.9 35.5 27.5 -
Kyrgyz Republic 16.4 24.2 26.6 24.8 -
Tajikistan 13.1 - - - -
Turkmenistan 23.0 23.9 - - -
Uzbekistan 23.0 - - - -
East Asia
Hong Kong, China 20.6 21.7 20.9 20.5 22.5
Korea, Rep. of 29.7 29.9 29.4 31.2 25.9
Mongolia 36.9 35.1 40.3 38.3 39.0
Taipei,China 22.7 22.7 22.1 22.7 17.2
South Asia
Afghanistan, Islamic Rep. of 44.6 42.0 36.7 32.0 28.2
Bangladesh 24.5 24.7 24.5 24.2 24.2
Bhutan 53.9 48.4 - - -
India 34.3 36.0 37.6 35.6 34.5
Maldives - - - - -
Nepal 26.5 26.9 28.2 31.8 29.7
Pakistan 19.1 22.1 22.5 22.0 19.7
Sri Lanka 26.8 28.0 28.0 27.5 25.6
Southeast Asia
Cambodia 18.5 20.6 20.8 18.5 -
Indonesia 25.1 25.4 24.9 27.8 31.0
Lao Peoples Dem. Rep. - - - - -
Malaysia 20.0 20.5 21.7 19.1 14.0
Myanmar - - - - -
Philippines 14.6 14.5 15.4 15.2 14.0
Singapore 19.9 20.3 20.7 30.1 27.6
Thailand 31.4 28.3 26.4 28.9 21.9
Viet Nam 35.6 36.8 43.1 41.1 -
The Pacific
Fiji Islands 19.0 - - - -
Kiribati - - - - -
Marshall Islands, Rep. of 56.9 57.0 - - -
Micronesia, Fed. States of 38.0 38.0 73.2 - -
Nauru - - - - -
Samoa - - - - -
Solomon Islands - - - - -
Timor-Leste, Dem. Rep. of 21.9 22.5 32.9 - -
Tonga 19.9 17.1 16.1 17.2 -
Tuvalu - - - - -
Vanuatu 21.5 23.9 25.8 - -
- = not available.
Table A8 Inflation (% per year)
2005 2006 2007 2008 2009 2010 2011
Central Asia 8.1 9.0 11.2 16.5 5.9 6.7 6.6
Armenia 0.6 2.9 4.4 9.0 3.4 4.5 5.0
Azerbaijan 9.6 8.3 16.7 20.8 1.5 5.8 6.0
Georgia 8.3 9.2 9.2 10.0 1.7 6.0 6.0
Kazakhstan 7.6 8.6 10.8 17.3 7.3 6.8 6.5
Kyrgyz Republic 4.4 5.6 10.2 24.5 6.9 8.5 9.0
Tajikistan 7.3 10.0 13.2 20.4 6.5 10.8 9.5
Turkmenistan 10.7 8.2 6.3 14.5 0.1 3.5 5.0
Uzbekistan 10.0 14.2 12.3 12.7 12.5 9.3 9.0
East Asia 2.0 1.6 3.9 5.4 0.0 3.3 3.0
China, Peoples Rep. of 1.8 1.5 4.8 5.9 -0.7 3.6 3.2
Hong Kong, China 1.0 2.0 2.0 4.3 0.5 2.2 2.8
Korea, Rep. of 2.8 2.2 2.5 4.7 2.8 3.0 3.0
Mongolia 9.5 4.5 8.2 26.1 6.3 7.9 6.0
Taipei,China 2.3 0.6 1.8 3.5 -0.9 1.5 1.6
South Asia 5.3 5.9 5.6 9.3 5.6 6.0 6.0
Afghanistan, Islamic Rep. of 12.3 5.1 13.0 26.8 -10.0 8.4 4.5
Bangladesh 6.5 7.2 7.2 9.9 6.7 7.5 7.8
Bhutan 4.8 4.9 5.2 6.4 7.1 5.0 5.0
India 4.4 5.4 4.8 8.3 3.6 5.0 5.5
Maldives 3.3 3.5 7.4 12.3 4.0 4.0 3.0
Nepal 4.5 8.0 6.4 7.7 13.2 10.0 8.0
Pakistan 9.3 7.9 7.8 12.0 20.8 12.0 8.0
Sri Lanka 11.0 10.0 15.8 22.6 3.5 6.5 8.0
Southeast Asia 6.2 7.1 4.1 8.8 2.7 4.5 4.5
Brunei Darussalam 1.2 0.2 0.3 2.7 1.8 1.7 1.5
Cambodia 5.9 6.1 7.7 25.0 -0.7 5.0 5.0
Indonesia 10.5 13.1 6.4 9.8 5.0 5.6 6.2
Lao Peoples Dem. Rep. 7.2 6.8 4.5 7.6 0.0 5.6 6.0
Malaysia 3.1 3.6 2.0 5.4 0.6 2.4 3.0
Myanmar 10.7 26.3 32.9 22.5 7.9 8.5 9.0
Philippines 7.6 6.2 2.8 9.3 3.2 4.7 4.5
Singapore 0.5 1.0 2.1 6.6 0.6 2.3 2.0
Thailand 4.5 4.7 2.2 5.4 -0.9 3.5 3.0
Viet Nam 8.3 7.5 8.3 23.0 6.9 10.0 8.0
The Pacific 2.5 3.0 3.6 9.5 5.2 5.1 5.4
Cook Islands 2.5 3.4 2.5 7.8 6.6 3.5 4.2
Fiji Islands 2.4 2.5 4.8 7.7 3.7 3.4 3.1
Kiribati -0.4 -1.5 4.2 11.0 6.6 5.9 4.9
Marshall Islands, Rep. of 3.5 5.3 2.7 14.8 2.8 3.8 4.4
Micronesia, Fed. States of 4.1 4.4 3.6 6.8 7.4 3.5 3.0
Nauru 2.7 3.5 2.3 4.5 2.2 2.3 2.4
Palau, Rep. of 3.9 4.5 3.2 12.0 2.4 3.8 3.4
Papua New Guinea 1.8 2.4 0.9 10.6 7.6 7.1 7.7
Samoa 1.9 3.8 5.5 11.5 6.6 2.5 4.0
Solomon Islands 7.3 8.4 7.6 17.3 8.3 7.3 6.0
Timor-Leste, Dem. Rep. of 1.8 4.0 8.7 7.6 0.1 3.2 3.8
Tonga 10.8 7.0 5.1 9.8 5.0 3.0 3.0
Tuvalu 3.2 3.8 2.2 5.3 3.8 3.5 3.2
Vanuatu 1.2 2.1 4.0 4.8 5.6 5.0 4.2
Average 3.4 3.3 4.4 6.9 1.5 4.0 3.9
- = not available.
Table A9 Change in money supply (% per year)
2005 2006 2007 2008 2009
Central Asia
Armenia 27.8 32.9 42.5 2.3 15.1
Azerbaijan 22.3 86.8 71.4 44.0 -0.3
Georgia 26.5 39.7 49.7 6.9 8.2
Kazakhstan 25.2 78.1 25.9 35.4 17.9
Kyrgyz Republic 9.9 51.6 33.3 12.6 20.4
Tajikistan 30.2 63.3 78.8 6.3 10.9
Turkmenistan 27.9 55.9 72.2 62.8 -4.4
Uzbekistan 55.5 37.8 46.9 35.6 34.0
East Asia
Hong Kong, China 5.1 15.4 20.8 2.7 5.3
Korea, Rep. of 7.0 12.5 10.8 12.0 9.9
Mongolia 26.0 34.8 56.3 -5.5 26.9
Taipei,China 6.6 5.3 0.9 7.0 5.7
South Asia
Bangladesh 16.7 19.3 17.1 17.6 19.4
Bhutan 10.7 41.4 8.6 2.3 24.6
India 21.1 21.7 21.4 18.6 12.1
Maldives 10.6 18.9 24.1 21.8 12.5
Nepal 8.3 15.4 14.0 25.2 27.0
Pakistan 19.3 14.9 19.3 15.3 9.6
Sri Lanka 19.1 17.8 16.6 8.5 18.6
Southeast Asia
Brunei Darussalam 6.8 -3.9 4.6 21.6 -
Cambodia 16.1 38.2 62.9 4.8 36.8
Indonesia 16.3 14.9 19.3 14.9 12.4
Lao Peoples Dem. Rep. 8.2 30.1 38.7 18.3 23.0
Malaysia 15.6 17.1 9.5 13.4 9.5
Myanmar 25.1 27.1 20.9 23.4 22.3
Philippines 10.3 22.7 10.6 15.6 8.3
Singapore 6.2 19.4 13.4 12.0 11.3
Thailand 6.1 8.2 6.3 9.2 6.5
Viet Nam 29.7 33.6 46.1 20.3 29.0
The Pacific
Cook Islands -4.9 22.4 -5.8 4.0 65.9
Fiji Islands 15.0 19.8 10.4 -6.9 5.3
Kiribati - - - - -
Marshall Islands, Rep. of 14.9 - - - -
Micronesia, Fed. States of 1.6 -8.5 4.6 - -
Nauru - - - - -
Papua New Guinea 29.5 38.9 27.8 11.2 7.4
Samoa 15.7 13.7 11.0 5.8 9.1
Solomon Islands 42.4 25.9 23.3 6.1 3.1
Timor-Leste, Dem. Rep. of 26.3 8.6 0.9 29.9 29.6
Tonga 12.1 14.4 14.1 8.3 -1.9
Tuvalu - - - - -
Vanuatu 11.6 7.0 21.7 8.0 -0.4
- = not available.
Table A10 Growth rate of merchandise exports (% per year)
2005 2006 2007 2008 2009 2010 2011
Central Asia 36.1 39.3 34.6 43.1 -28.4 30.2 12.1
Armenia 36.1 2.1 16.7 -7.1 -35.0 5.2 11.8
Azerbaijan 104.4 70.1 63.4 43.8 -31.0 31.8 7.6
Georgia 34.8 13.2 25.3 16.3 -22.0 12.2 14.3
Kazakhstan 37.4 37.0 24.7 48.9 -38.9 29.9 12.8
Kyrgyz Republic -6.3 31.9 47.7 38.1 -11.3 10.0 10.0
Tajikistan -68.2 1.2 10.0 -6.8 -1.4 8.8 10.4
Turkmenistan 28.3 44.7 33.8 26.8 8.0 45.6 -
Uzbekistan 11.6 18.0 42.9 44.2 1.7 18.9 18.6
East Asia 19.0 19.7 18.9 13.5 -15.5 13.3 11.5
Hong Kong, China 11.2 9.7 8.9 5.6 -11.9 13.0 6.3
Korea, Rep. of 12.1 14.8 14.2 14.2 -13.7 12.0 11.0
Mongolia 22.2 44.8 26.3 29.9 -24.9 - -
Taipei,China 8.8 12.8 10.1 3.4 -20.2 19.6 8.5
South Asia 21.0 20.7 24.5 14.1 -12.6 13.1 11.4
Afghanistan, Islamic Rep. of 9.2 0.9 1.3 18.9 -2.4 - -
Bangladesh 14.0 21.5 15.8 17.4 10.1 5.0 11.0
Bhutan 34.5 47.2 83.7 4.4 -23.8 - -
India 23.4 22.6 28.9 13.7 -15.0 16.0 12.0
Maldives -10.7 39.4 1.2 45.2 -50.7 - -
Nepal 11.4 2.4 2.6 9.3 -4.7 - -
Pakistan 16.2 14.9 4.4 18.2 -6.4 -1.4 4.2
Sri Lanka 10.2 8.5 11.0 6.5 -12.9 5.0 15.0
Southeast Asia 15.8 17.1 12.2 14.5 -17.0 15.9 14.0
Brunei Darussalam 23.3 22.1 0.5 37.5 - - -
Cambodia 12.4 26.9 10.7 15.1 -17.0 5.0 8.0
Indonesia 22.9 19.0 14.0 18.3 -14.4 10.8 9.2
Lao Peoples Dem. Rep. 30.3 62.6 16.6 24.1 -10.0 15.0 13.0
Malaysia 12.3 12.9 9.6 13.1 -21.1 11.0 8.5
Myanmar 21.7 47.4 23.9 15.5 4.8 9.0 12.0
Philippines 3.8 15.6 6.4 -2.5 -22.3 15.2 12.7
Singapore 17.0 18.0 10.1 13.0 -20.3 19.5 14.0
Thailand 15.2 17.0 18.2 15.9 -13.9 16.0 18.0
Viet Nam 22.5 22.7 21.9 29.1 -8.9 9.0 14.0
The Pacific 19.3 20.0 13.6 - - - -
Cook Islands 14.8 8.1 35.7 -3.7 - - -
Fiji Islands -4.4 -2.6 9.0 20.4 -27.8 - -
Kiribati 67.8 -39.3 21.9 23.1 - - -
Marshall Islands, Rep. of 39.3 -49.0 31.2 21.4 - - -
Micronesia, Fed. States of 6.1 0.6 22.2 27.0 -11.4 - -
Nauru -81.6 85.6 618.6 - - - -
Palau, Rep. of 128.1 1.3 -25.8 - - - -
Papua New Guinea 26.5 26.8 13.2 21.4 -26.0 - -
Samoa 0.6 -13.7 33.7 -28.8 - - -
Solomon Islands 6.3 9.1 41.2 33.9 - - -
Timor-Leste, Dem. Rep. of - 12.5 -22.2 100.0 -28.6 30.0 -
Tonga 15.9 -6.1 -10.2 -5.8 -55.0 - -
Tuvalu -54.0 59.4 -7.0 - - - -
Vanuatu 0.1 -1.1 -21.8 41.6 - - -
Average 18.5 19.5 17.8 14.6 -16.2 14.4 12.1
- = not available.
Table A11 Direction of exports (% of total)

To
From
Developing
Asia
China ,Peoples
Rep. of
Japan United States European
Union
Others
2000 2008 2000 2008 2000 2008 2000 2008 2000 2008 2000 2008
Central Asia 9.2 9.4 4.1 6.5 0.5 1.0 1.7 6.6 28.1 45.6 56.4 30.9
Armenia 7.8 9.7 0.2 0.2 0.1 0.0 12.6 5.0 36.9 54.2 42.5 30.9
Azerbaijan 7.1 12.6 0.3 1.0 0.0 0.3 0.5 12.5 63.6 56.0 28.6 17.5
Georgia 16.2 26.2 0.3 0.6 0.1 0.0 2.2 6.8 24.0 22.2 57.2 44.3
Kazakhstan 5.4 4.0 6.8 13.4 0.1 1.5 2.1 2.9 23.0 46.0 62.6 32.2
Kyrgyz Republic 29.0 31.1 8.8 2.7 0.1 0.2 0.6 0.3 37.6 11.7 23.9 54.0
Tajikistan 16.5 8.5 0.4 5.6 - 0.0 0.1 0.0 30.1 41.9 52.9 43.9
Turkmenistan 6.4 7.6 0.3 0.3 - 0.0 0.5 1.4 21.5 27.0 71.3 63.8
Uzbekistan 23.6 22.1 0.5 4.3 3.2 4.1 1.5 3.8 26.8 10.4 44.3 55.3
East Asia 25.9 27.4 11.7 13.3 11.4 7.0 21.8 14.9 15.2 17.0 13.9 20.3
China, Peoples Rep. of 32.9 32.8 - - 16.3 8.0 20.4 17.3 16.1 20.1 14.3 21.8
Hong Kong, China 10.2 10.7 34.1 48.3 5.5 4.3 23.0 12.7 15.5 13.6 11.8 10.4
Korea, Rep. of 23.8 21.9 10.2 20.8 11.3 6.4 20.9 10.6 13.7 13.3 20.2 27.0
Mongolia 4.0 1.4 49.8 64.5 1.5 1.1 24.3 4.5 7.7 17.1 12.6 11.3
Taipei,China 38.2 30.1 2.9 26.2 11.2 6.9 23.6 12.0 15.2 10.7 8.8 14.1
South Asia 17.3 20.8 1.6 4.8 3.6 1.7 24.2 12.9 26.3 23.5 26.9 36.3
Afghanistan, Islamic Rep. of 46.0 55.1 3.4 0.5 0.3 0.1 1.9 16.5 35.3 12.8 13.1 15.0
Bangladesh 5.4 5.8 0.2 0.7 1.2 0.6 31.7 20.7 40.1 48.1 21.5 24.1
Bhutan - - - - - - - - - - - -
India 19.2 22.2 1.8 5.4 4.1 1.8 21.1 11.6 24.1 21.1 29.8 38.0
Maldives 32.0 48.0 - 0.7 4.1 2.7 44.0 1.9 18.5 42.6 1.4 4.1
Nepal 44.5 66.0 - 0.6 1.4 1.2 27.4 9.6 23.0 13.6 3.7 8.9
Pakistan 18.5 19.4 2.6 4.2 2.6 1.8 24.9 16.0 27.7 22.4 23.6 36.2
Sri Lanka 8.6 10.4 0.1 0.6 4.2 2.2 40.1 22.0 28.2 38.6 18.9 26.1
Southeast Asia 37.4 41.8 3.7 8.8 12.6 10.5 18.2 10.4 14.4 11.5 13.7 17.0
Brunei Darussalam 36.2 44.0 1.8 0.7 40.7 40.4 12.0 1.0 3.6 0.2 5.8 13.6
Cambodia 8.2 10.1 2.1 0.8 0.9 2.6 65.4 54.3 20.5 22.8 2.9 9.4
Indonesia 33.1 38.1 4.2 8.1 22.1 19.2 13.0 9.1 13.7 10.7 13.7 14.9
Lao Peoples Dem. Rep. 43.4 54.9 1.5 8.4 2.8 1.0 2.2 2.5 26.0 11.2 24.1 22.0
Malaysia 40.3 41.4 2.9 9.2 12.3 10.4 19.5 12.1 13.3 10.9 11.7 16.0
Myanmar 35.2 74.1 5.6 8.7 5.4 4.3 22.0 - 16.4 3.7 15.5 9.1
Philippines 30.5 33.4 1.6 10.6 13.4 15.0 27.3 16.0 16.5 16.6 10.7 8.3
Singapore 44.1 51.7 3.8 9.0 7.3 4.9 16.7 7.0 13.5 10.2 14.7 17.2
Thailand 30.8 34.7 3.9 9.1 14.2 11.2 20.5 11.2 15.7 12.7 15.0 21.2
Viet Nam 25.8 22.6 10.3 7.1 17.2 13.4 4.9 18.6 20.0 16.9 21.9 21.5
The Pacific 11.2 14.3 5.2 5.8 10.3 8.1 5.3 2.6 11.1 9.1 56.9 60.1
Cook Islands - - - - - - - - - - - -
Fiji Islands 14.3 16.4 0.0 0.1 4.1 4.1 21.1 15.2 16.5 12.8 44.0 51.5
Kiribati - - - - - - - - - - - -
Marshall Islands, Rep of - - - - - - - - - - - -
Micronesia, Fed. States of - - - - - - - - - - - -
Nauru - - - - - - - - - - - -
Palau, Rep. of - - - - - - - - - - - -
Papua New Guinea 7.6 9.6 6.5 5.1 11.2 9.2 1.3 1.1 10.2 9.1 63.2 65.9
Samoa 18.1 11.5 0.1 1.4 0.3 0.5 10.6 2.8 3.0 0.3 67.9 83.5
Solomon Islands 42.3 23.4 12.0 48.1 20.7 2.7 0.7 0.4 10.6 9.6 13.6 15.8
Timor-Leste, Dem. Rep. of - - - - - - - - - - - -
Tonga 6.3 30.6 - 0.1 48.5 10.3 30.0 25.4 6.5 5.2 8.7 28.5
Tuvalu - - - - - - - - - - - -
Vanuatu 60.7 88.1 0.4 0.1 18.7 5.9 9.7 0.3 5.7 2.7 4.8 2.9
Developing Asia 29.2 30.2 8.4 11.4 11.3 7.5 20.3 13.3 15.6 16.8 15.1 20.8
- = not available.
Table A12 Growth rate of merchandise imports (% per year)
2005 2006 2007 2008 2009 2010 2011
Central Asia 20.7 27.4 40.2 24.7 -15.2 31.1 12.4
Armenia 33.1 20.6 45.6 35.0 -25.4 4.7 5.1
Azerbaijan 21.4 21.1 14.7 25.3 -14.0 70.7 10.6
Georgia 33.8 37.2 35.2 25.6 -31.4 11.6 8.5
Kazakhstan 30.1 34.2 37.9 15.6 -25.2 39.7 13.4
Kyrgyz Republic 22.3 62.1 45.8 43.6 -24.3 15.0 12.0
Tajikistan -21.9 38.0 54.0 37.6 -23.3 4.4 7.4
Turkmenistan -6.4 -13.2 93.0 55.9 19.2 19.8 -
Uzbekistan 8.1 16.0 49.2 31.0 25.8 16.5 15.5
East Asia 14.4 16.6 15.8 15.8 -15.7 15.4 12.5
Hong Kong, China 10.2 11.6 10.3 6.2 -10.2 11.0 6.2
Korea, Rep. of 16.4 18.6 15.4 21.8 -25.7 20.0 12.0
Mongolia 20.0 20.8 42.3 57.1 -34.5 - -
Taipei,China 8.5 11.5 8.2 9.4 -27.0 26.5 11.9
South Asia 30.2 21.3 29.6 20.7 -15.1 16.7 16.9
Afghanistan, Islamic Rep. of 20.5 10.0 16.2 12.1 3.5 - -
Bangladesh 20.6 12.1 16.6 25.6 4.2 4.0 14.0
Bhutan 75.5 -5.6 21.1 27.4 -10.5 - -
India 32.1 21.4 35.1 19.4 -17.0 20.0 18.0
Maldives 16.1 24.4 18.3 26.6 -30.4 - -
Nepal 12.5 17.5 13.9 24.1 8.3 - -
Pakistan 37.8 33.3 8.0 31.2 -10.3 -2.4 7.1
Sri Lanka 10.8 15.7 10.2 24.0 -29.4 20.0 20.0
Southeast Asia 18.4 13.6 13.0 22.1 -22.1 20.4 16.4
Brunei Darussalam 5.6 12.2 25.6 22.5 - - -
Cambodia 19.8 21.8 13.8 19.8 -16.3 17.0 10.0
Indonesia 37.2 6.3 15.4 36.9 -27.7 16.1 16.0
Lao Peoples Dem. Rep. 20.3 25.1 35.7 30.6 -13.0 10.0 10.0
Malaysia 9.2 13.9 12.7 6.5 -21.0 16.5 11.5
Myanmar 0.6 48.0 88.0 25.6 8.4 16.7 13.9
Philippines 8.0 10.9 8.7 5.6 -24.1 16.0 10.6
Singapore 16.4 18.3 10.5 22.9 -23.3 21.0 15.0
Thailand 25.8 7.9 9.1 26.5 -24.9 26.0 22.0
Viet Nam 21.3 22.1 38.5 27.9 -13.3 10.2 10.0
The Pacific 10.2 18.0 17.9 - - - -
Cook Islands 7.9 11.7 45.3 -2.0 - - -
Fiji Islands 13.4 12.1 0.3 25.2 -35.4 - -
Kiribati 29.0 -19.0 10.5 8.7 - - -
Marshall Islands, Rep. of 18.3 -3.8 3.6 4.0 - - -
Micronesia, Fed. States of -2.2 2.5 3.4 10.6 8.5 - -
Nauru -8.2 17.1 11.1 - - - -
Palau, Rep. of -2.0 9.6 -20.8 - - - -
Papua New Guinea 4.4 30.6 32.5 18.6 4.2 - -
Samoa 20.6 16.7 3.7 10.4 - - -
Solomon Islands 67.5 45.3 33.7 13.1 - - -
Timor-Leste, Dem. Rep. of -8.2 -9.8 85.0 43.7 9.9 6.6 -
Tonga 27.6 12.9 -8.2 29.9 -5.0 - -
Tuvalu 13.3 4.4 4.1 - - - -
Vanuatu 16.4 7.4 23.7 39.3 - - -
Average 16.9 16.4 16.8 18.1 -17.3 17.1 13.9
- = not available.
Table A13 Trade balance (US$ million)
2005 2006 2007 2008 2009 2010 2011
Central Asia 14,222 23,971 29,801 54,166 28,523 36,471 31,596
Armenia -588 -896 -1,600 -2,664 -2,095 -2,190 -2,250
Azerbaijan 3,299 7,745 15,224 23,012 14,583 16,680 17,600
Georgia -1,214 -2,019 -2,896 -3,833 -2,400 -2,665 -2,767
Kazakhstan 10,322 14,642 15,091 33,519 15,187 16,900 18,800
Kyrgyz Republic -419 -886 -1,276 -1,907 -1,203 -1,466 -1,678
Tajikistan -622 -986 -1,673 -2,472 -1,816 -1,881 -2,009
Turkmenistan 1,997 4,598 4,635 4,441 3,934 8,093 -
Uzbekistan 1,447 1,774 2,296 4,069 2,333 3,000 3,900
East Asia 178,597 255,955 354,243 361,088 309,196 312,346 326,914
China, Peoples Rep. of 134,189 217,746 315,381 360,682 249,300 273,316 293,978
Hong Kong, China -7,631 -14,029 -19,699 -23,128 -26,863 -23,381 -24,467
Korea, Rep. of 32,683 27,905 28,168 5,669 56,128 37,500 37,800
Mongolia -100 136 -52 -613 -157 - -
Taipei,China 19,456 24,197 30,445 18,478 30,789 24,911 19,602
South Asia -68,340 -83,656 -116,821 -154,802 -125,368 -141,377 -178,056
Afghanistan, Islamic Rep. of -4,335 -4,933 -6,002 -6,607 -6,971 - -
Bangladesh -3,297 -2,889 -3,458 -5,330 -4,708 -4,740 -5,895
Bhutan -249 -123 47 -72 -144 - -
India -51,904 -61,782 -91,467 -118,651 -94,699 -120,065 -152,858
Maldives -494 -590 -737 -890 -687 - -
Nepal -1,193 -1,528 -1,837 -2,410 -2,733 - -
Pakistan -4,352 -8,441 -9,711 -14,970 -12,626 -12,150 -13,625
Sri Lanka -2,517 -3,370 -3,656 -5,871 -2,799 -4,421 -5,677
Southeast Asia 74,332 107,913 114,334 80,714 105,898 90,962 84,162
Brunei Darussalam 4,834 6,041 5,677 8,104 - - -
Cambodia -1,008 -1,078 -1,343 -1,802 -1,541 -2,272 -2,581
Indonesia 17,532 29,661 32,753 22,916 35,199 34,556 31,136
Lao Peoples Dem. Rep. -573 -456 -835 -1,177 -975 -999 -1,048
Malaysia 34,034 37,428 37,141 51,167 40,149 38,126 37,274
Myanmar 1,547 2,266 924 506 284 -269 -468
Philippines -7,773 -6,732 -8,391 -12,885 -8,878 -10,599 -10,815
Singapore 36,432 42,565 46,065 26,559 30,549 32,878 34,555
Thailand -8,254 994 12,782 108 19,416 9,376 4,438
Viet Nam -2,439 -2,776 -10,438 -12,782 -8,306 -9,836 -8,330
The Pacific 215 341 176 350 -213 -429 11
Cook Islands 21 19 13 9 10 10 11
Fiji Islands -774 -969 -914 -1,179 -695 - -
Kiribati -73 -60 -66 -72 - - -
Marshall Islands, Rep. of -63 -72 -71 -71 - - -
Micronesia, Fed. States of -104 -107 -108 -116 -131 -138 -
Nauru 21 25 35 - - - -
Palau, Rep. of -92 -102 -81 - - - -
Papua New Guinea 1,793 2,216 2,126 2,655 1,018 - -
Samoa -175 -208 -213 -241 - - -
Solomon Islands -17 -63 -75 -52 - - -
Timor-Leste, Dem. Rep. of -104 -92 -180 -255 -285 -302 -
Tonga -89 -104 -96 -129 -129 - -
Tuvalu -13 -13 -14 - - - -
Vanuatu -93 -103 -145 -201 - - -
Total 199,027 304,524 381,733 341,516 318,037 297,973 264,627
- = not available.
Table A14 Current account balance (US$ million)
2005 2006 2007 2008 2009 2010 2011
Central Asia 1,074 6,345 5,754 25,583 10,439 26,489 31,842
Armenia -52 -117 -589 -1,382 -1,342 -1,000 -850
Azerbaijan 167 3,708 9,019 16,454 10,173 14,839 16,199
Georgia -710 -1,174 -2,009 -2,915 -1,274 -1,545 -1,626
Kazakhstan -1,056 -1,999 -8,322 6,279 -3,405 2,830 4,550
Kyrgyz Republic -38 -287 -228 -603 -458 -602 -685
Tajikistan -62 -79 -414 -453 -522 -460 -443
Turkmenistan 875 3,360 4,030 3,553 3,329 7,470 8,436
Uzbekistan 1,949 2,933 4,267 4,650 3,938 4,958 6,262
East Asia 213,644 308,110 436,478 474,247 387,355 390,901 412,018
China, Peoples Rep. of 160,818 253,268 371,833 426,107 284,100 324,914 353,621
Hong Kong, China 20,180 22,935 25,530 29,297 18,397 17,094 17,344
Korea, Rep. of 14,981 5,385 5,876 -5,776 42,668 15,000 11,000
Mongolia 88 222 265 -503 -382 -263 -
Taipei,China 17,578 26,300 32,975 25,122 42,572 34,156 30,053
South Asia -13,391 -15,752 -23,365 -45,300 -31,740 -28,146 -43,839
Afghanistan, Islamic Rep. of -182 -379 83 -192 -462 - -
Bangladesh -557 824 936 702 2,536 1,787 551
Bhutan -235 -38 145 -27 -113 - -
India -9,902 -9,565 -15,737 -28,728 -24,699 -22,065 -34,858
Maldives -273 -302 -438 -647 -420 -404 -
Nepal 161 197 -13 366 541 - -
Pakistan -1,753 -4,990 -6,878 -13,874 -9,251 -6,562 -8,070
Sri Lanka -649 -1,499 -1,464 -2,900 128 -901 -1,461
Southeast Asia 44,794 84,808 106,372 74,140 96,100 81,799 86,078
Brunei Darussalam 4,038 5,232 4,805 7,183 - - -
Cambodia -618 -577 -705 -1,260 -1,051 -1,763 -2,047
Indonesia 277 10,860 10,492 125 10,582 8,930 4,643
Lao Peoples Dem. Rep. -526 -452 -723 -815 -660 -586 -688
Malaysia 20,693 26,179 29,210 38,855 31,975 29,914 32,009
Myanmar 444 1,032 112 -697 -272 -630 -758
Philippines 1,984 5,347 7,119 3,633 8,552 5,940 6,240
Singapore 26,704 35,035 47,311 36,189 33,838 36,337 46,365
Thailand -7,642 2,315 15,682 1,633 20,291 11,406 5,959
Viet Nam -560 -164 -6,931 -10,706 -7,156 -7,748 -5,644
The Pacific 540 260 742 1,974 292 -309 -
Cook Islands 21 19 13 9 10 10 11
Fiji Islands -293 -589 -475 -633 -264 - -
Kiribati -20 -3 -1 -59 - - -
Marshall Islands, Rep. of 1 -2 -8 -8 -19 - -
Micronesia, Fed. States of -2 -9 11 2 -36 -49 -
Nauru -7 -5 -2 - - - -
Palau, Rep. of -5 -21 10 - - - -
Papua New Guinea 648 443 186 791 -403 -1,312 -3,002
Samoa -20 -45 -23 -42 -76 -82 -74
Solomon Islands -12 -25 -76 -120 -135 -133 -
Timor-Leste, Dem. Rep. of 261 539 1,167 2,104 1,272 1,282 -
Tonga -6 -23 -24 -32 -35 - -
Tuvalu - - - - - - -
Vanuatu -34 -24 -37 -39 -21 -26 -30
Total 246,661 383,771 525,980 530,645 462,446 470,735 483,005
- = not available.
Table A15 Current account balance (% of GDP)
2005 2006 2007 2008 2009 2010 2011
Central Asia 1.0 3.4 1.9 9.1 3.4 7.0 7.5
Armenia -1.1 -1.8 -6.4 -11.6 -15.4 -12.0 -10.5
Azerbaijan 1.3 17.7 27.3 33.7 23.6 23.0 21.7
Georgia -11.1 -15.2 -19.7 -22.8 -11.9 -14.0 -14.0
Kazakhstan -1.8 -2.5 -7.9 4.7 -3.2 2.3 3.3
Kyrgyz Republic -1.6 -10.1 -6.0 -11.7 -10.0 -12.0 -12.0
Tajikistan -2.7 -2.8 -11.2 -8.8 -9.7 -8.3 -7.1
Turkmenistan 5.1 15.7 15.5 18.7 17.8 30.0 30.0
Uzbekistan 14.3 17.2 19.1 16.7 12.0 13.0 14.0
East Asia 5.9 7.3 8.4 7.4 6.2 5.1 4.7
China, Peoples Rep. of 7.1 9.3 10.6 9.4 5.8 5.7 5.3
Hong Kong, China 11.4 12.1 12.3 13.6 8.7 7.6 7.2
Korea, Rep. of 1.8 0.6 0.6 -0.6 5.1 1.5 1.0
Mongolia 3.8 11.8 4.4 -14.0 -9.1 -16.1 -21.2
Taipei,China 4.8 7.0 8.4 6.2 11.2 8.2 6.7
South Asia -1.3 -1.3 -1.6 -3.0 -2.0 -1.5 -2.1
Afghanistan, Islamic Rep. of -2.8 -4.9 0.9 -1.6 -3.6 -1.8 -2.1
Bangladesh -0.9 1.3 1.4 0.9 2.8 1.8 0.5
Bhutan -30.3 -4.4 14.0 -2.0 -9.4 0.0 0.0
India -1.2 -1.0 -1.3 -2.5 -1.9 -1.5 -2.0
Maldives -36.4 -33.0 -41.5 -51.4 -28.5 -25.0 -25.0
Nepal 2.0 2.2 -0.1 2.9 4.3 -0.5 1.0
Pakistan -1.6 -3.9 -4.8 -8.4 -5.6 -3.6 -4.2
Sri Lanka -2.7 -5.3 -4.5 -7.1 0.3 -2.0 -3.0
Southeast Asia 4.9 8.1 8.3 5.1 7.3 5.7 5.6
Brunei Darussalam 42.4 45.6 39.6 50.4 35.0 33.0 31.0
Cambodia -9.8 -7.9 -8.2 -12.2 -10.7 -16.3 -17.0
Indonesia 0.1 2.9 2.4 0.0 2.0 1.4 0.6
Lao Peoples Dem. Rep. -17.4 -12.8 -17.2 -15.4 -11.8 -10.0 -11.0
Malaysia 15.0 16.7 15.7 17.6 16.7 14.0 13.8
Myanmar 3.7 7.1 0.6 -2.5 -1.0 -1.8 -2.1
Philippines 2.0 4.5 4.9 2.2 5.3 3.3 3.2
Singapore 22.0 24.9 27.6 19.2 19.1 18.0 21.0
Thailand -4.3 1.1 6.3 0.5 7.7 4.0 2.0
Viet Nam -1.1 -0.3 -9.8 -11.8 -7.4 -7.6 -5.5
The Pacific 8.0 12.8 40.6 89.9 47.2 39.5 -
Cook Islands 11.5 10.4 6.5 4.7 4.7 4.3 4.3
Fiji Islands -9.7 -19.0 -14.0 -17.7 -8.7 -11.0 -8.0
Kiribati -18.5 -2.9 -1.1 -43.6 - - -
Marshall Islands, Rep. of 0.8 -1.6 -5.5 -5.3 -12.1 - -
Micronesia, Fed. States of -0.7 -3.8 4.2 0.7 -13.2 -17.4 -
Nauru -25.5 -18.4 -10.3 - - - -
Palau, Rep. of -3.3 -13.3 6.0 - - - -
Papua New Guinea 13.3 8.0 2.9 9.9 -5.1 -15.0 -30.0
Samoa -4.5 -9.9 -4.1 -7.7 -14.4 -15.3 -12.9
Solomon Islands -2.8 -5.5 -14.3 -18.6 -20.0 -18.0 -
Timor-Leste, Dem. Rep. of 83.1 179.0 345.3 516.2 297.0 271.7 -
Tonga -2.5 -9.3 -9.1 -10.6 -12.9 - -
Tuvalu - - - - - - -
Vanuatu -9.2 -5.7 -7.4 -6.9 -3.7 -4.1 -4.3
Average 4.4 5.8 6.5 5.4 4.9 4.1 3.6
- = not available.
Table A16 Foreign direct investment (US$ million)
2005 2006 2007 2008 2009
Central Asia
Armenia 233 450 701 925 700
Azerbaijan 1,680 -584 -4,749 15 472
Georgia 542 1,186 1,675 1,523 765
Kazakhstan 2,117 6,663 7,966 14,783 9,526
Kyrgyz Republic 43 182 208 232 67
Tajikistan 54 66 160 190 100
Turkmenistan 418 731 804 820 1,355
Uzbekistan 88 195 739 1,000 1,500
East Asia
China, Peoples Rep. of 72,406 72,715 83,521 108,312 94,065
Hong Kong, China 33,627 45,058 54,343 59,622 48,453
Korea, Rep. of 6,309 3,586 1,784 3,311 1,506
Mongolia 185 191 360 586 243
Taipei,China 1,625 7,424 7,769 5,432 2,804
South Asia
Afghanistan, Islamic Rep. of 271 238 243 300 185
Bangladesh 800 743 793 748 941
Bhutan 9 6 73 30 -
India 3,034 28,995 34,729 34,991 20,977
Maldives 10 14 15 12 10
Nepal 2 -6 5 5 24
Pakistan 1,459 3,450 5,026 5,335 3,695
Sri Lanka 234 451 548 691 155
Southeast Asia
Brunei Darussalam 176 70 260 237 -
Cambodia 375 475 820 815 593
Indonesia 8,337 4,914 6,929 9,318 5,300
Lao Peoples Dem. Rep. 500 650 770 906 681
Malaysia 4,065 6,060 8,460 7,240 1,607
Myanmar - - - - -
Philippines 1,854 2,921 2,916 1,544 1,948
Singapore 15,458 29,055 35,777 10,912 16,346
Thailand 8,048 9,460 11,330 8,570 6,148
Viet Nam 1,430 1,757 6,550 9,279 6,900
The Pacific
Fiji Islands - - - - -
Kiribati 1 1 0 0 -
Marshall Islands, Rep. of 3 2 8 5 -
Micronesia, Fed. States of - - - - -
Nauru - - - - -
Samoa - - - - -
Solomon Islands 18 19 57 112 -
Tonga - - - - -
Tuvalu - - - - -
Vanuatu - - - - -
- = not available.
Table A17 External debt outstanding (US$ million)
2005 2006 2007 2008 2009
Central Asia
Armenia 1,099 1,206 1,449 1,577 2,967
Azerbaijan 1,651 1,852 2,442 3,001 3,423
Georgia 1,735 1,697 1,790 2,691 3,413
Kazakhstan 43,249 74,014 96,893 107,713 111,730
Kyrgyz Republic 2,003 2,213 2,388 2,339 2,919
Tajikistan 897 924 1,247 1,486 1,843
Turkmenistan 907 712 627 - -
Uzbekistan 4,133 3,853 3,913 3,740 4,325
East Asia
China, Peoples Rep. of 283,986 325,260 373,773 378,245 470,000
Hong Kong, China 454,623 516,415 711,103 659,973 659,548
Korea, Rep. of 187,882 260,061 383,152 377,944 401,922
Mongolia 1,312 1,414 1,529 1,610 1,937
Taipei,China 86,732 85,833 94,525 90,361 -
South Asia
Afghanistan, Islamic Rep. of 11,940 11,971 2,010 2,163 -
Bangladesh 18,416 18,603 19,355 20,266 20,831
Bhutan 596 689 725 780 -
India 134,002 139,114 172,360 224,413 242,822
Maldives 397 575 840 968 -
Nepal 3,104 3,157 3,341 3,197 3,493
Pakistan 34,037 35,889 39,008 44,467 50,759
Sri Lanka 11,354 12,214 14,252 15,077 -
Southeast Asia
Brunei Darussalam - - - - -
Cambodia 2,120 2,254 2,571 2,773 3,170
Indonesia 134,504 132,633 141,180 155,080 172,871
Lao Peoples Dem. Rep. 2,209 2,471 2,853 2,564 2,903
Malaysia 52,301 52,245 56,690 68,182 68,307
Myanmar - - - - -
Philippines 54,186 53,367 54,938 53,856 53,255
Singapore 233,435 273,807 340,996 420,461 412,504
Thailand 52,162 61,027 61,873 65,225 70,016
Viet Nam 17,322 19,140 23,086 25,205 -
The Pacific
Fiji Islands 285 445 461 449 564
Kiribati 11 13 13 10 10
Marshall Islands, Rep. of 94 112 124 99 90
Micronesia, Fed. States of 65 68 68 68 68
Nauru - - 310 - -
Palau, Rep. of 19 18 23 - -
Papua New Guinea 1,244 1,189 1,065 1,053 1,063
Samoa 167 161 182 229 216
Solomon Islands 145 155 149 135 134
Tonga 81 82 84 86 -
Tuvalu - - - - 15
Vanuatu 73 69 71 102 89
- = not available.
Table A18 Debt service ratio (% of exports of goods and services)
2005 2006 2007 2008 2009
Central Asia
Armenia 4.4 3.9 2.9 3.1 5.5
Azerbaijan 2.2 1.5 0.6 0.9 1.3
Georgia 5.1 7.8 3.5 3.4 5.8
Kazakhstan 36.2 28.5 49.0 41.6 63.5
Kyrgyz Republic 23.4 11.0 14.0 14.5 9.3
Tajikistan 10.0 9.5 6.5 12.5 13.9
Turkmenistan 5.6 4.6 - - -
Uzbekistan 14.1 12.7 8.6 7.2 5.5
East Asia
Hong Kong, China - - - - -
Korea, Rep. of 7.9 7.4 7.5 10.2 11.3
Mongolia 2.8 1.8 2.4 2.4 4.2
Taipei,China 5.4 3.2 1.7 4.3 -
South Asia
Bangladesh 4.8 4.1 3.6 3.2 3.1
Bhutan 11.9 7.6 3.6 18.5 39.6
India 10.1 4.7 4.8 4.4 4.9
Maldives 6.4 4.1 4.5 5.1 5.8
Nepal 9.4 9.3 10.1 10.1 8.3
Pakistan 14.9 13.8 12.9 12.2 18.7
Sri Lanka 7.9 12.7 13.0 14.3 -
Southeast Asia
Brunei Darussalam - - - - -
Cambodia 1.3 1.1 0.6 0.8 0.8
Indonesia 17.3 24.8 19.4 18.1 22.7
Lao Peoples Dem. Rep. 7.4 4.5 4.3 - -
Malaysia 6.6 7.3 2.6 3.1 6.8
Myanmar - - - - -
Philippines 13.5 12.0 10.1 9.6 10.6
Singapore - - - - -
Thailand 10.8 11.3 11.7 7.0 6.7
Viet Nam 5.3 5.3 5.5 6.5 7.5
The Pacific
Fiji Islands 1.2 1.8 4.1 2.7 -
Kiribati 1.8 1.1 2.9 2.1 -
Marshall Islands, Rep. of 13.6 32.1 65.0 27.6 -
Micronesia, Fed. States of 6.8 8.6 6.3 6.2 6.2
Nauru - - - - -
Palau, Rep. of 1.5 1.1 1.0 - -
Papua New Guinea 2.9 2.9 3.6 3.0 1.4
Samoa 4.0 3.2 3.2 3.6 3.9
Solomon Islands 7.2 4.3 4.3 - -
Tonga 8.6 9.3 10.5 8.5 -
Tuvalu - - - - -
Vanuatu 1.0 1.7 1.4 - -
- = not available.
Table A19 Exchange rates to the US dollar (annual average)
Currency Symbol 2005 2006 2007 2008 2009
Central Asia
Armenia Dram AMD 457.7 416.0 342.1 306.0 363.3
Azerbaijan Azerbaijan new manat AZN 0.9 0.9 0.9 0.8 0.8
Georgia Lari GEL 1.8 1.8 1.7 1.5 1.7
Kazakhstan Tenge T 132.9 126.1 122.6 120.3 147.5
Kyrgyz Republic Som Som 41.0 40.2 37.3 36.6 42.9
Tajikistan Somoni TJS 3.1 3.3 3.4 3.4 4.1
Turkmenistan Turkmen manat TMM 5,200.0 5,200.0 5,200.0 14,250.0 2.8
Uzbekistan Sum SUM 1,112.9 1,218.9 1,263.5 1,319.6 1,465.6
East Asia
China, Peoples Rep. of Yuan CNY 8.2 8.0 7.6 6.9 6.8
Hong Kong, China Hong Kong dollar HK$ 7.8 7.8 7.8 7.8 7.8
Korea, Rep. of Won W 1,024.2 955.3 929.4 1,100.1 1,277.2
Mongolia Togrog MNT 1,205.3 1,177.4 1,170.4 1,166.1 1,437.5
Taipei,China NT dollar NT$ 32.2 32.5 32.8 31.5 33.1
South Asia
Afghanistan, Islamic Rep. of Afghani AF 49.7 49.9 49.8 51.0 49.8
Bangladesh Taka Tk 61.4 67.1 69.0 68.6 68.8
Bhutan Ngultrum Nu 44.6 44.7 44.2 40.4 47.9
India Indian rupee/s Re/Rs 44.3 45.2 40.1 46.5 48.0
Maldives Rufiyaa Rf 12.8 12.8 12.8 12.8 12.8
Nepal Nepalese rupee/s NRe/NRs 71.9 72.0 70.2 64.7 76.6
Pakistan Pakistan rupee/s PRe/PRs 59.4 59.9 60.6 62.5 78.5
Sri Lanka Sri Lanka rupee/s SLRe/SLRs 100.5 104.0 110.6 108.3 114.9
Southeast Asia
Brunei Darussalam Brunei dollar B$ 1.7 1.6 1.5 1.4 1.5
Cambodia Riel KR 4,097.0 4,107.0 4,060.0 4,068.0 4,144.6
Indonesia Rupiah Rp 9,712.0 9,020.0 9,136.2 9,678.3 10,398.6
Lao Peoples Dem. Rep. Kip KN 10,655.2 10,159.9 9,603.2 8,740.0 8,516.0
Malaysia Ringgit RM 3.8 3.7 3.4 3.3 3.5
Myanmar Kyat MK 5.8 5.8 5.6 5.4 5.5
Philippines Peso P 55.1 51.3 46.1 44.5 47.6
Singapore Singapore dollar S$ 1.7 1.6 1.5 1.4 1.5
Thailand Baht B 40.2 37.9 34.5 33.3 34.3
Viet Nam Dong D 15,858.9 15,994.3 16,105.0 16,302.0 17,066.0
The Pacific
Cook Islands New Zealand dollar NZ$ 1.4 1.5 1.4 1.4 1.5
Fiji Islands Fiji dollar F$ 1.7 1.7 1.6 1.6 2.0
Kiribati Australian dollar A$ 1.3 1.3 1.2 1.2 1.3
Marshall Islands, Rep. of US dollar US$ 1.0 1.0 1.0 1.0 1.0
Micronesia, Fed. States of US dollar US$ 1.0 1.0 1.0 1.0 1.0
Nauru Australian dollar A$ 1.3 1.3 1.2 1.2 1.3
Palau, Rep. of US dollar US$ 1.0 1.0 1.0 1.0 1.0
Papua New Guinea Kina K 3.1 3.1 3.0 2.7 2.8
Samoa Tala ST 2.7 2.8 2.6 2.6 2.7
Solomon Islands Sol. Islands dollar SI$ 7.5 7.6 7.7 7.8 8.0
Timor-Leste, Dem. Rep. of US dollar US$ 1.0 1.0 1.0 1.0 1.0
Tonga Paanga T$ 1.9 2.1 1.9 1.8 -
Tuvalu Australian dollar A$ 1.3 1.3 1.2 1.2 1.3
Vanuatu Vatu Vt 109.2 110.5 103.2 101.4 -
- = not available.
Table A20 Gross international reserves (US$ million)
2005 2006 2007 2008 2009
Central Asia
Armenia 669 1,072 1,659 1,407 2,003
Azerbaijan 1,178 2,500 4,273 6,467 5,364
Georgia 479 931 1,361 1,480 2,110
Kazakhstan 7,070 19,127 17,629 19,872 23,218
Kyrgyz Republic 612 817 1,177 1,225 1,588
Tajikistan 91 111 107 169 125
Turkmenistan 4,457 8,059 13,222 - -
Uzbekistan 2,895 4,459 7,413 10,145 11,000
East Asia
China, Peoples Rep. of 821,514 1,068,490 1,540,000 1,980,000 2,430,000
Hong Kong, China 124,280 133,210 152,702 182,539 255,816
Korea, Rep. of 210,391 238,956 262,224 201,223 269,995
Mongolia 333 718 972 637 1,251
Taipei,China 253,290 266,148 270,311 291,707 348,198
South Asia
Afghanistan, Islamic Rep. of 1,700 2,040 2,784 3,462 3,781
Bangladesh 2,930 3,484 5,077 6,149 7,471
Bhutan 367 479 600 646 -
India 145,108 191,924 299,230 251,985 278,193
Maldives 186 232 308 241 261
Nepal 1,493 1,789 1,999 2,477 2,871
Pakistan 9,805 10,765 13,345 8,577 9,118
Sri Lanka 2,735 2,837 3,508 1,753 5,097
Southeast Asia
Brunei Darussalam 492 514 667 751 1,357
Cambodia 915 1,097 1,616 2,164 2,367
Indonesia 34,724 42,586 56,920 51,639 66,105
Lao Peoples Dem. Rep. 234 327 535 622 644
Malaysia 70,175 82,237 101,532 91,648 96,756
Myanmar 1,026 2,503 3,638 4,042 5,102
Philippines 18,494 22,967 33,751 37,551 44,243
Singapore 116,173 136,261 162,957 174,196 187,809
Thailand 52,066 66,985 87,455 111,008 138,418
Viet Nam 8,557 11,483 21,000 23,000 15,000
The Pacific
Fiji Islands 520 520 618 431 568
Kiribati 481 531 586 412 414
Marshall Islands, Rep. of 5 5 3 2 -
Micronesia, Fed. States of 50 47 50 45 -
Nauru - - - - -
Papua New Guinea 763 1,415 2,109 2,093 2,399
Samoa 75 74 88 89 133
Solomon Islands 78 104 118 88 144
Timor-Leste, Dem. Rep. of 524 -70 136 - -
Tonga 43 40 47 48 68
Tuvalu - - - - -
Vanuatu 70 102 110 87 82
- = not available.
Table A21 Central government expenditures (% of GDP)
2005 2006 2007 2008 2009
Central Asia
Armenia 18.6 18.1 20.2 22.2 26.1
Azerbaijan 17.1 20.2 21.4 26.8 30.6
Georgia 24.9 29.7 34.0 37.0 38.5
Kazakhstan 27.0 22.1 24.1 27.2 25.2
Kyrgyz Republic 28.1 28.9 31.0 29.2 37.7
Tajikistan 23.0 21.9 27.8 27.5 28.0
Turkmenistan 19.7 14.9 13.4 12.3 -
Uzbekistan 32.5 30.9 30.2 32.7 31.4
East Asia
Hong Kong, China 16.9 15.5 14.5 18.8 18.0
Korea, Rep. of 21.7 22.7 21.5 23.3 25.1
Mongolia 27.5 33.3 38.0 41.0 38.3
Taipei,China 14.4 13.4 12.8 12.7 14.4
South Asia
Bangladesh 13.8 13.9 13.4 15.8 15.3
Bhutan 37.2 35.4 34.4 33.6 44.6
India 25.6 25.9 26.1 29.5 30.2
Maldives 59.0 59.4 61.4 63.1 57.7
Nepal 14.9 14.5 15.9 17.4 20.0
Pakistan 17.2 18.4 20.8 22.1 19.3
Sri Lanka 23.8 24.3 23.5 22.6 24.7
Southeast Asia
Cambodia 12.8 14.2 14.7 16.1 17.6
Indonesia 18.4 20.0 19.2 19.9 17.0
Malaysia 23.9 24.8 25.1 26.5 30.6
Myanmar 10.0 11.9 11.1 10.0 10.4
Philippines 17.7 17.3 17.3 17.1 18.5
Singapore 14.6 15.0 13.6 17.0 18.8
Thailand 17.6 17.6 18.3 17.3 20.4
Viet Nam 32.1 30.9 33.1 32.3 35.6
The Pacific
Cook Islands 33.0 33.8 38.2 41.9 46.6
Fiji Islands 31.7 31.9 31.4 25.1 26.5
Kiribati 55.1 72.5 66.6 62.5 55.0
Marshall Islands, Rep. of 65.1 64.2 71.4 70.7 68.1
Nauru 56.8 92.8 82.9 125.2 85.8
Palau, Rep. of 52.6 58.4 57.3 49.6 -
Papua New Guinea 35.2 34.2 34.9 34.9 30.9
Samoa 36.3 31.8 35.4 34.4 42.7
Solomon Islands 45.0 46.1 50.1 48.9 47.4
Tonga 25.8 38.5 33.3 26.5 32.8
Tuvalu 84.9 107.5 120.7 68.9 87.8
Vanuatu 19.6 21.4 22.9 26.5 25.0
- = not available.
Table A22 Central government revenues (% of GDP)
2005 2006 2007 2008 2009
Central Asia
Armenia 16.7 16.6 18.7 21.5 21.4
Azerbaijan 16.4 20.6 21.2 26.8 29.9
Georgia 23.4 26.7 29.3 30.7 29.3
Kazakhstan 27.6 22.9 22.5 25.1 22.1
Kyrgyz Republic 24.7 26.4 30.2 29.8 35.9
Tajikistan 20.1 23.6 21.6 21.3 21.0
Turkmenistan 20.5 20.2 17.3 23.6 -
Uzbekistan 30.4 34.1 35.4 41.5 35.8
East Asia
Hong Kong, China 17.9 19.5 22.2 18.9 18.9
Korea, Rep. of 19.2 20.1 21.9 21.2 21.2
Mongolia 30.1 36.6 40.9 36.1 32.9
Taipei,China 12.6 12.6 12.7 12.9 13.4
South Asia
Bangladesh 10.5 10.7 10.2 11.1 11.2
Bhutan 30.3 34.6 35.1 34.4 41.8
India 19.1 20.5 22.1 21.1 20.6
Maldives 48.1 52.5 56.1 46.2 31.6
Nepal 14.1 12.9 14.1 15.3 18.0
Pakistan 13.8 14.1 15.0 14.6 14.1
Sri Lanka 15.5 16.3 15.8 14.9 14.6
Southeast Asia
Cambodia 10.3 11.5 11.9 13.3 11.7
Indonesia 17.9 19.1 17.9 19.8 15.4
Malaysia 20.3 21.5 21.9 21.6 23.5
Myanmar 6.7 7.7 7.3 6.6 6.7
Philippines 15.0 16.2 17.1 16.2 14.6
Singapore 15.3 15.0 16.5 17.1 17.7
Thailand 17.7 17.4 17.2 16.9 16.0
Viet Nam 28.4 29.7 27.6 28.2 23.7
The Pacific
Cook Islands 37.0 38.0 40.0 42.8 37.4
Fiji Islands 24.4 25.6 25.6 25.6 24.0
Kiribati 51.2 73.1 70.2 64.3 56.7
Marshall Islands, Rep. of 61.7 65.6 71.7 70.4 67.8
Nauru 28.6 56.6 87.7 125.8 86.2
Palau, Rep. of 51.8 52.5 52.5 44.8 -
Papua New Guinea 35.3 37.4 37.4 32.7 30.5
Samoa 36.1 32.3 36.5 32.8 35.3
Solomon Islands 46.9 47.3 50.6 47.1 47.4
Tonga 28.1 33.7 34.9 28.3 36.5
Tuvalu 78.1 91.7 101.7 60.6 80.5
Vanuatu 22.9 21.8 23.1 28.8 25.7
- = not available.
Table A23 Fiscal balance of central government (% of GDP)
2005 2006 2007 2008 2009
Central Asia
Armenia -1.9 -1.5 -1.5 -0.7 -4.7
Azerbaijan -0.7 0.4 -0.2 0.0 -0.7
Georgia -1.5 -3.0 -4.7 -6.3 -9.2
Kazakhstan 0.6 0.8 -1.7 -2.1 -3.1
Kyrgyz Republic -3.4 -2.5 -0.8 0.6 -1.8
Tajikistan -2.9 1.7 -6.2 -6.2 -7.0
Turkmenistan 0.8 5.3 3.9 11.3 3.0
Uzbekistan 1.2 5.2 5.1 10.5 4.4
East Asia
China, Peoples Rep. of -1.2 -0.8 0.6 -0.4 -2.8
Hong Kong, China 1.0 4.0 7.7 0.1 0.8
Korea, Rep. of -2.5 -2.6 0.4 -2.0 -3.9
Mongolia 2.6 3.3 2.9 -4.9 -5.4
Taipei,China -1.7 -0.8 -0.1 0.2 -1.1
South Asia
Afghanistan, Islamic Rep. of 1.0 -2.9 -1.8 -3.7 -2.1
Bangladesh -3.3 -3.2 -3.2 -4.7 -4.1
Bhutan -6.9 -0.8 0.6 0.8 -2.8
India -6.5 -5.4 -4.0 -8.5 -9.7
Maldives -10.9 -6.9 -5.3 -16.9 -26.1
Nepal -0.8 -1.6 -1.8 -2.1 -1.9
Pakistan -3.3 -4.3 -5.8 -7.6 -5.2
Sri Lanka -8.4 -8.0 -7.7 -7.7 -10.2
Southeast Asia
Cambodia -2.5 -2.7 -2.9 -2.8 -5.9
Indonesia -0.5 -0.9 -1.3 -0.1 -1.6
Lao Peoples Dem. Rep. -6.9 -5.6 -5.5 -5.0 -5.9
Malaysia -3.6 -3.3 -3.2 -4.8 -7.0
Myanmar -3.3 -4.3 -3.8 -3.4 -3.7
Philippines -2.7 -1.1 -0.2 -0.9 -3.9
Singapore 0.7 0.0 3.0 0.1 -1.1
Thailand 0.2 0.1 -1.1 -0.3 -4.8
Viet Nam -3.6 -1.2 -5.5 -4.1 -11.8
The Pacific
Cook Islands 2.6 2.6 0.1 -0.8 -11.7
Fiji Islands -7.3 -2.8 -5.8 0.5 -2.5
Kiribati -3.9 0.6 3.6 1.8 1.7
Marshall Islands, Rep. of -3.4 1.3 0.2 -0.3 -0.3
Micronesia, Fed. States of -5.3 -6.4 -3.3 -2.0 -1.0
Nauru -28.3 -36.3 4.8 0.6 0.4
Palau, Rep. of -0.8 -5.9 -4.9 -4.8 -
Papua New Guinea 0.1 3.2 2.5 -2.2 -0.4
Samoa 0.3 -0.5 1.1 -1.6 -7.5
Solomon Islands 1.9 1.2 0.5 -1.7 0.0
Tonga 2.3 -4.8 1.6 1.8 3.7
Tuvalu -6.8 -15.8 -19.0 -8.3 -7.3
Vanuatu 3.2 0.4 0.3 2.3 0.7
- = not available.

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