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Navigating Turbulence,
Sustaining Growth
WORLD BANK EAST ASIA AND PACIFIC ECONOMIC UPDATE 2011, VOLUME 2
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WORLD BANK EAST ASIA AND PACIFIC ECONOMIC UPDATE 2011, VOLUME 2
Navigating Turbulence,Sustaining Growth
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November 2011 The International Bank or Reconstruction and Development / The World Bank
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ISSN: 2079-5874
Key title: World Bank East Asia and Pacic Economic Update (Print)
Abbreviated key title: World Bank East Asia Pac. Econ. Update (Print)
Cover photo: Mr. You Ji, The World Bank.
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Preface and acknowledgments
The East Asia and Pacifc Economic Updatewas prepared by a team led by Ekaterina Vostroknutova with guidance
rom Bert Homan (East Asia and Pacic Regional Chie Economist) and Ahmad Ahsan (Acting Sector Director,
Poverty Reduction and Economic Management, East Asia and Pacic Department). Team members were Antonio
Ollero, Douglas Addison, Marek Hanusch, Tehmina Khan, Manohar Sharma, Juan Feng, Trang Van Nguyen, and
Chul Ju Kim. Inputs were also provided by Ivailo Izvorski, Ashley Taylor, Frederico Gil Sander, Aira Maria Htenas, andHironori Kawauchi. World Bank country economists throughout East Asia and Pacic region provided country write-
ups and data, and assisted with the analysis.
Developing East Asia as used in this report includes China, Indonesia, Malaysia, Philippines, Thailand, Cambodia, Lao
Peoples Democratic Republic, Mongolia, Papua New Guinea, Timor-Leste, Vietnam, and the island economies in the
Pacic. The Newly-Industrialized Economies (NIEs) include Hong Kong SAR, China; the Republic o Korea; Singapore;
and Taiwan, China. Middle-income countries, as used in this report, reer to China, Indonesia, Malaysia, Philippines,
and Thailand. Low-income countries as used in this report include Cambodia and Lao PDR. The ASEAN member
countries are Brunei Darussalam, Cambodia, Indonesia, Lao PDR, Malaysia, Myanmar, Philippines, Singapore,
Thailand, and Vietnam.
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contents
Preace and Acknowledgments....................................................................................................................................iii
Abbreviations ............................................................................................................................................................... vi
Summary 1
I Weak External Demand Slows Growth 3
Growth moderated, driven by weak eternal demand, especially in manuacturing ....................................4
Manuacturing employment ollowed output ................................................................................................ 8
Poverty is epected to decline urther ..........................................................................................................9
East Asian eports were supported by Chinas domestic demand ...............................................................9
Foreign investors sold regional equities and bonds as market volatility was rising globally........................ 12
II Policies Reocus on Sustaining Growth 15
Monetary policy: waiting to ease? .............................................................................................................. 16
Currencies under pressure, central banks losing reserves .......................................................................... 20
Fiscal policy: ne-tuning needed? ............................................................................................................... 21
III New Risks Add to Old Challenges 25
A challenging global environment ...............................................................................................................26
Increased uncertainty highlights vulnerabilities ........................................................................................... 27
Poverty reduction eorts could be hampered by ood price shocks i incomes stagnate ..........................33
Focusing on long-term growth ....................................................................................................................37
Country Pages and Key Indicators 42
Cambodia ....................................................................................................................................................42
China ...........................................................................................................................................................45
Fiji ................................................................................................................................................................48
Indonesia ..................................................................................................................................................... 51
Lao PDR ......................................................................................................................................................55
Malaysia ......................................................................................................................................................58
Mongolia .....................................................................................................................................................61
Papua New Guinea ......................................................................................................................................64
Philippines ...................................................................................................................................................67
Small Pacic Islands .................................................................................................................................... 70
Solomon Islands ..........................................................................................................................................73Thailand .......................................................................................................................................................77
Timor-Leste .................................................................................................................................................80
Vietnam .......................................................................................................................................................82
Appendi Tables .........................................................................................................................................................85
Appendi Table 1. Real GDP Growth .......................................................................................................... 85
Appendi Table 2. Real GDP and Components o Aggregate Demand ...................................................... 86
Appendi Table 3. East Asia: Merchandise Eport Growth ........................................................................ 87
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Appendi Table 4. East Asia and the Pacic: GDP Growth Projections ......................................................87
Appendi Table 5. Regional Aggregates or Poverty Measures in East Asia ............................................. 88
Appendi Table 6. East Asia: Echange Rates ............................................................................................89
Appendi Table 7. East Asia: Foreign Echange Reserves Ecluding Gold ................................................. 90
Appendi Table 8a. East Asia: Balance o Payments .................................................................................. 91Appendi Table 8b. East Asia: Capital Account Components .....................................................................91
Appendi Table 9. East Asia: Nonperorming Loans ...................................................................................92
Appendi Table 10. East Asia: Financial Market Indicators ......................................................................... 93
Appendi Charts .........................................................................................................................................................94
Appendi Chart 1. East Asia: Stock Market Price Indices ...........................................................................94
Appendi Chart 2. East Asia: Local-Currency 10-Year Government Bond Yields .......................................95
Appendi Chart 3. East Asia: Foreign-Currency Government Bond Spreads..............................................96
Appendi Chart 4. East Asia: Sovereign Credit Deault Swap (CDS) Spreads ............................................97
Appendi Chart 5. East Asia: Foreign Echange Reserves and Echange Rates .......................................98
Appendi Chart 6. East Asia: Real and Nominal Echange Rates* .............................................................99
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CONTENTS
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abbreviations
APEC Asia-Pacic Economic Cooperation
ASEAN Association o Southeast Asian
Nations
ASEAN+3 Association o Southeast Asian
Nations plus China, Japan, andRepublic o Korea
BAAC Bank or Agriculture and AgriculturalCooperatives (Thailand)
BI Bank Indonesia
BIS Bank or International Settlements
BOP Balance o payments
CBOE Chicago Board o Options Echange
CEIC CEIC Data Company Ltd.
CPI Consumer price inde
DOTS Direction o Trade Statistics
EAP East Asia and Pacic Region, WorldBank classication
ECA Eastern Europe and Central Asia
Region, World Bank classication
EFSF European Financial Stability Facility
EPFR Emerging Portolio Funds Research
ETFs Echange traded unds
FDI Foreign direct investment
GDP Gross domestic product
GFSR Global Financial Stability Report
IDR Indonesian Rupiah
IMF International Monetary Fund
KSEI Indonesian Central SecuritiesDepository
LAC Latin America and the CaribbeanRegion, World Bank classication
LICs Low-income Countries
MENA Middle East and North Arica Region,World Bank classication
MICs Middle-income countries
MSCI Morgan Stanley Capital International
NIEs Newly-industrialized economiesOECD Organization or Economic
Cooperation and Development
PMI Purchasing manager indices
SAS South Asia Region, World Bankclassication
SBIs Indonesia central bank bills
SOE State-owned enterprise
SSA Sub-Saharan Arica Region, World
Bank classication
SUNs Indonesia local currency bonds
TFP Total actor productivity
UN COMTRADE United Nations Commodity Trade
statisticsWB World Bank
WDI World Development Indicators
WEO World Economic Outlook
Y-o-y Year-on-year changes are changes
in levels epressed over thecorresponding period (month orquarter in relation to the requency o
the data) o the previous year
Countries
CHN China
HKG Hong Kong SAR, China
IDN Indonesia
KHM Cambodia
KOR Republic o Korea
LAO Lao Peoples Democratic Republic(PDR)
MNG Mongolia
MYS Malaysia
PHL The Philippines
PNG Papua New Guinea
SLB Solomon Islands
SGP Singapore
THA Thailand
TMP Timor Leste
TWN Taiwan, China
VNM Vietnam
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Summary
Growth in developing East Asia in the rst hal o 2011 remained strong, but continued to moderate, mainly due to
weakening eternal demand. Global growth was also aected by supply shocks rom geopolitical disturbances in the
Middle East, supply chain disruptions ollowing the earthquake and tsunami in Japan, and a slower-than-epectedrecovery o private demand in crisis-aected countries. More recently, uncertainties over scal sustainability in the U.S.
and sovereign debt in the Eurozone ed nancial volatility and aected investor and consumer sentiment. Domestic
demand in East Asian economies has also been sotening, driven by the normalization o scal and monetary policy,
although it remained robust and the largest contributor to growth. We project that real GDP in developing East Asia
will increase by 8.2 percent in 2011 (4.7 percent ecluding China), while growth will slow to 7.8 percent in 2012. Risks
are on the downside, however.
Based on the still robust current growth projections, the proportion o people living on less than US$2 a day in
developing East Asia is epected to decrease to about 24 percent in 2011, down two percentage points rom 2010,
and an estimated 38 million people are projected to move out o poverty. However, poverty reduction eorts would
be hampered in the event o another sudden increase in ood prices against a backdrop o slowing income growth.
The growth slowdown was particularly pronounced in industrial production. Eports o major regional industrial supply
chains, especially electronics, have started to decline. Demand or commodities and raw materials remained strong,
helping resource-rich economies maintain high levels o eport and GDP growth. East Asia, and China in particular,
is gaining importance as a source o global demand, while rising consumer goods imports in China are beneting the
regions manuacturing eporters.
In the short- to medium-term, East Asias growth prospects are constrained by global uncertainty and by the impact
o natural disasters. The slow progress towards resolution o debt problems in the Eurozone intensied investors
concerns over global growth and stability. As capital fowed out o emerging markets into relatively saer havens,
portolio investments reversed and stock markets lost value in East Asia. Markets remain jittery, even ater the
Eurozone countries agreed on a solution or the sovereign debt and banking problems. Fiscal and nancial consolidation
in the Eurozone is likely to reduce growth in Europe, and could lead to renewed nancial outfows rom East Asia
as banks shore up their capital coverage. Credit outstanding rom European banks to developing East Asia amounts
to US$427 billion, or si percent o GDP. But high reserves and current account surpluses protect most East Asian
countries against the impact o possible renewed nancial stress.
The eects o fooding in several countries are likely to take a toll on growth this year. Because o widespread fooding,
Thailands GDP growth or 2011 was revised down to 2.4 percent, although the nal tally o the damage done is yet
to be made. Losses in production are being elt in the entire region, as the impact o the disaster is spreading through
the industrial supply chains. While reconstruction ater the food in 2012 is likely to contribute to growth, the resilienceo East Asias production networks is being tested once more. Earlier in the year, ater the March 11 earthquake and
tsunami in Japan, East Asian countries suered production losses rom disrupted supply chains in electronics and
automotive industries. However, these returned to their pre-disaster growth rates and production levels shortly ater
Japanese industry recovered in June. This time, recovery o production to pre-disaster levels in the region will also
depend on the strength o global demand or electronics and cars.
With growing recognition that the current global economic slowdown could continue into the long-term, policymakers
in East Asia are rethinking their policy options. With a ew eceptions, notably Vietnam and Mongolia, the emphasis
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has shited rom ghting infation and dealing with ecess capital infows to sustaining growth, now the dominant
concern.
In the short-term, striking a balance between stimulating growth and ghting the eects o global uncertainty is the
primary challenge. Policymakers are likely to hold o urther policy tightening and stand ready to act should urthernegative shocks to growth occur or in the etreme case o a disorderly resolution o the Eurozone debt problem.
Monetary policy normalization has already been on hold in most countries in recent months and some central banks
have started to cut ocial interest rates. In countries where the recent nancial turbulence resulted in signicant
pressures on echange rates, policymakers have also intervened in the currency markets. In this scenario it will also
be important to take precautionary steps against nancial risks arising rom sudden downward movements in asset
prices. Fiscal positions, while not as strong as beore the 2008 crisis, leave sucient space or scal stimulus in most
middle-income countries should this become necessary.
Stimulus alone will not be enough to address the likely prolonged weakness in the global economy. Slow global growth
presents an opportunity or East Asian governments to reocus on reorms that will enhance growth in the medium-
and long-term. Increasing productivity and moving toward higher value-added production can be achieved through
higher investment, including in productive inrastructure, education, and in building social security systems in most
countries. Where levels o investments are already high, increasing the quality and eciency o these investments
should be the rst priority alongside rebalancing growth towards domestic consumption. Improvements in public
investment programs and regulatory rameworks will improve the quality o investments and increase investment
rates. Further investment in disaster management and prevention is also becoming increasingly important or the
region. Any scal stimulus should promote these structural reorms that support rebalancing and domestic sources
o growth.
Once volatility in global nancial markets recedes, capital fows are likely to return to East Asia. When that happens,
a concerted eort in the region to use echange rate feibility to gain more independence in monetary policy, as
well as to shit demand towards domestic sources, could become an option yet again. Eorts to deepen regional
integration through eisting regional initiatives can boost regional trade and demand and help establish the East Asia
and Pacic regions new role in leading the global economy.
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I. Weak External Demand Slows Growth
Developing East Asia continued to grow strongly, but economic growth
slowed in 2011 due to lower demand or its exports rom the developed
economies, and scal retrenchment and monetary tightening in the East Asian
Economies. Industrial production, notably in the electronics sector o the
middle-income countries, has been aected more severely than other sectors,
and manuacturing employment growth has slowed too. The slow progresstowards resolution o the debt situation in Europe intensied investors
concerns over growth and stability, while recent market volatility triggered
capital outfows as investors focked to saer havens, including U.S. treasury
bonds. Portolio investments in East Asia have started to reverse and stock
markets have lost value. Bank fows kept up well, but could yet turn lower as
European banks will need to absorb losses and increase capital coverage in
the wake o any denitive Eurozone settlement. At this critical juncture, Chinas
robust domestic demand is supporting growth in the region, particularly
through imports o manuactured goods as well as commodities. China is also
importing more consumer goods, which presents a new opportunity or the
regions exporters.
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Growth moderated, driven by weak external demand, especially in manuacturing
Slower expansion in demand in developed countries, the withdrawal o scal stimulus in the region, and
tighter monetary policy combined to put a brake on growth in developing East Asia in 2011. Real GDP growth
in the developing economies in the region, ecluding China, slowed to 4.5 percent in the second quarter o 2011, rom5.7 percent in the ourth quarter o 2010 (Figure 1). For developing East Asia as a whole, growth ell rom 9.1 percent
in the last quarter o 2010 to 8.5 percent in the second quarter o 2011. Where third quarter data became available,
the same trend as in the rst hal o 2011 persisted. In China, growth slowed to 9.6 percent in the rst hal and even
urther to 9.1 percent in the third quarter o 2011, down rom 9.8 percent in the last quarter o 2010. In Indonesia,
the year-on-year growth rate in the third quarter was the same as in the rst hal o 2011. Growth in resource-rich
economies was more robust than in those that eport manuacturing products (Figure 2).
Slower growth refects weakening external demand. Growth in the Association o Southeast Asian Nations
(ASEAN) countries was constrained by weak eternal demand (Figure 3). For China, eternal demand growth slowed
down rom nearly 40 percent in early 2010 to 10 percent in the third quarter o 2011 (Figure 4). Driven by the same
actors, Hong Kong SAR, China, has narrowly missed a recession in the third quarter, contracting in the second and
barely growing in the third quarter.
While weakening recently, domestic demand in the middle-income countries was still the largest contributor
to growth. Growth in domestic demand also slowed, but remained more robust than eternal demand in 2011. Thiswas especially true in China, where domestic demand grew by 10.7 percent in the third quarter, slightly higher than
9.7 percent growth in the same quarter o 2010 (Figure 4, Figure 5).1 Chinas investment growth has returned to
its pre-crisis level, as stimulus was withdrawn. Real consumption growth also was waning, most notably in 2011,
reaching pre-2008 crisis growth rates (Figure 5). Domestic demand in ASEAN has been slowing gradually ater
reaching a peak o 12 percent in rst quarter o 2010, easing to just under ve percent in the second quarter o 2011.
1 Domestic demand was calculated as GDP less net trade and is defated by the GDP defator.
Fi 1. Real GDP growth moderated in most o developing EastAsia...
Real GDP growth, in percent, year on year
Developing East Asia excluding China China
Sources: Haver Analytics and World Bank sta calculations.Note: The developing countries included the gure are Indonesia, Malaysia, Philippines,Thailand and Vietnam. Not seasonally adjusted.
Fi 2. ...especially, among manuacturing exporters
Real growth rates, in percent
Manuacturing Resource rich.
Sources: World Development Indicators (WDI) and World Bank sta.Notes: 2011 data are rom World Bank projections. Manuactures include Cambodia,Malaysia, Thailand, Philippines, and Thailand. Resource rich countries include Indonesia,Laos, Mongolia, PNG, Timor-Leste, and Vietnam.
16
14
12
10
8
6
4
2
0
-2
Q1-07 Q3-07 Q1-08 Q3-08 Q1-09 Q3-09 Q1-10 Q3-10 Q1-11 Q3-11
n/a
2000
8
7
6
5
4
3
2
1
0
-1
-2
2 00 1 2 00 2 2 00 3 2 00 4 2 00 5 2 00 6 2 00 7 2 00 8 2 00 9 2 01 0 2 01 1
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Nevertheless, domestic demand was the key driver o growth, more than osetting the negative contribution rom
net eports in Malaysia and the Philippines in the rst hal o 2011 (Figure 6).
The growth slowdown was more pronounced in the industrial sector o the middle-income countries,excluding China. Output among the low-income countries is responding to the global malaise with a lag (Figure
7). Real growth in industrial value-added goods produced by the middle-income countries in East Asia (ecluding
China), slowed by 1.9 percentage points in the rst quarter o 2011, and by another 2.7 percentage points in the
second quarter (Figure 8). Some o this sotening was due to supply chain disruption ater the devastating earthquake
and tsunami that hit Japan in March. For eample, production o small cars ell by seven percent between April and
August 2011 due to these disruptions (see Bo 1). Industry growth remained relatively stable in China during the rst
hal o this year.
Fi 3. Domestic and external demand in ASEAN moderatedater peaking in 2010...
Percent change, constant prices, year-on-year
Developing East Asia excluding China China
Sources: Haver Analytics and World Bank sta calculations.
Fi 4. ...but growth in external demand or Chinas exportshas slowed even aster
Percent change, constant prices, year-on-year
Manuacturing Resource rich.
Sources: Haver Analytics and World Bank sta calculations.
40
30
20
10
0
-10
-20
Q1-07 Q3-07 Q1-08 Q3-08 Q1-09 Q3-09 Q1-10 Q3-10 Q1-11 Q3-11 Q1- 07 Q3- 07 Q1- 08 Q3- 08 Q1- 09 Q3- 09 Q1- 10 Q3- 10 Q1- 11 Q3- 11
40
30
20
10
0
-10
-20
Fi 5. Real growth in consumption and investment has beenslowing in the middle-income countries...
Real real growth, rom indices, year-on-year, in percent
Consumption, China Consumption, Other MICs
Investment, China Investment, Other MICs
Sources: Haver Analytics and World Bank sta calculations. MICs include Indonesia,Malaysia, the Philippines, and Thailand.Note: Chinas consumption is retail sales (NSA, 100 Mln Yuan) defated by the CPI(NSA). Chinas investment is rom nominal, cumulative NSA, 100 Mln Yuan, convertedto incremental, and defated by the GDP price inde (NSA).
Fi 6. ...but still drove growth in the rst hal o 2011
Real growth contributions, year-on-year, in percent o GDP
Consumption Gross Fixed Captial Form. Incr. in Stocks
Net Exports GDP
Sources: Haver Analytics, IMF, and World Bank sta calculations.
40
30
20
10
0
-10
Q 1- 07 Q 3- 07 Q 1-08 Q 3- 08 Q 1- 09 Q 3- 09 Q 1-1 0 Q3 -1 0 Q 1- 11
8
4
6
2
0
-2
-4
Indonesia MalaysiaPhilippinesThailand
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I. WEAK ExTERNAL DEMAND SLOWS GROWTH
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Growth in the second hal o 2011 is expected to be
more modest than earlier in the year, especially in
the manuacturing sector. Manuacturers sentiment
remains weak and refects lingering uncertainty about
nancial problems and slow economic recovery in
the developed economies, and the impact o natural
disasters on economic prospects domestically. Output
in the Eurozone contracted by 2 percent in September,
and the purchasing manager indices (PMI) declined in
October indicating that a stronger contraction could
ollow in the ourth quarter. PMIs in China, newly-
industrialized economies, and the U.S. (each major
eport markets or East Asia countries), dropped
through the 50 percent threshold in the third quarter,
indicating that a contraction in the near uture is possible
(Figure 9).2 In addition, capacity utilization was close to
its pre-crisis peak in most middle-income countries, and may act as a brake on epansion as well. As predicted in
the previous issue3 o the Regional Update, the economic impacts o the Tohoku earthquake in Japan have mostly
dissipated (see Bo 1) but the lingering eects o fooding will take a toll on growth this year. In Thailand, eceptionally
strong fooding is epected to reduce growth by one percent o GDP in 2011 (see Bo 1). However, reconstruction in
2012 is likely to contribute to growth (see Chapter III or growth projections).
2 Preliminary monthly data indicate that in October 2011 Chinas PMI has increased to just above 50.
3 Securing the Present, Shaping the Future, EAP Economic Update, March 2011, World Bank, Washington DC.
Fi 7. The slowdown in the middle-income countries,excluding China, is more pronounced...
Real GDP growth, in percent, year on year
MICs excluding China 4 LICs Pacic Islands
Sources: Haver Analytics and World Bank sta calculations.Note: Low-income countries are: Cambodia, Laos, Mongolia, and East Timor. MiddleIncome countries are: Indonesia, Malaysia, Philippines, Thailand and Vietnam.
Fi 8. ...because o weakening industrial production
Industrial production growth, in percent, year on year
Middle Income and Vietnam, exclud ing China China
Sources: Haver Analytics and World Bank sta calculations.Note: The developing countries included the gure are Indonesia, Malaysia, Philippines,Thailand and Vietnam. For China, gross industrial value added inde is used, 2005=100.
2000
12
10
8
6
4
2
0
-2
-4
2 00 1 2 00 2 2 00 3 2 00 4 2 00 5 2 00 6 2 00 7 2 00 8 2 00 9 2 01 0 2 01 1
20
10
0
-10
Q1 -0 7 Q3 -0 7 Q 1-0 8 Q3 -0 8 Q1 -0 9 Q3 -0 9 Q 1-1 0 Q 3-10 Q1 -1 1
Fi 9. Manuacturers sentiment deteriorated in the thirdquarter
Purchasing Manager Indices
China Hong Kong SAR, China Korea, Rep.
Singapore Taiwan, China
Source: Markit.
65
60
55
50
45
40
35
30
3/07 9/07 3/08 3/09 3/10 3/119/08 9/09 9/10 9/11
below 50indicatescontraction
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Box 1 Natural disasters are aecting growth and regional production networks
In Thailand, widespread fooding has reached Bangkok and surrounding provinces, which together produce close to
40 percent o Thailands GDP. As a result o the food, GDP growth in 2011 was revised down rom an earlier orecast
o 3.4 percent to 2.4 percent. The damages are estimated to be up to our percent o GDP, including two percent
in industrial estates that are part o the regional supply chains, 0.4 percent in agriculture, and 0.6 percent in retailindustry and tourism.
As this report is going to print in mid-November, the fooding has aected over 1,000 manuacturing plants in si
industrial estates. Several international rms have warned that they will have to increase prices as a result o anticipated
shortages. Several actories have closed, and Western Digital Corporation (a major producer o hard drives, with
60 percent o its production situated in Thailand) has warned that current supplies will last or only one month. The
food is also aecting automotive supply chains. Plant shutdowns had already cut carmaker Hondas world output by
ve percent and halted its production in Malaysia, due to lack o parts.
It is not the rst time this year that the resilience o East Asian supply chains has been tested by natural disaster.
Japan was struck by a magnitude 9.0 undersea earthquake on March 11, 2011. It was the most powerul earthquake
to have hit Japan, and one o the ve most powerul earthquakes in history. The earthquake was accompanied by
etremely powerul tsunami waves that devastated many low-lying areas in Japan and resulted in tremendous human
loss (15,824 dead and 3,824 missing, as o October 18, 2011). Many adverse economic consequences ollowed,
including the loss o some power generating capacity and concern over nuclear contamination. Consumer condence
and several sectors o production have suered as a consequence. The automotive industry was hit particularly hard
when the Renesas plant in Tohoku, which produced 40 percent o the worlds microcontrollers, was destroyed,
halting car production around the world. Other East Asian countries suered economic loss rom the disrupted supply
chains in electronics and automotive industries. In Thailand, or eample, small car manuacturing swung rom growth
at 46 percent in February 2011 to a 40 percent decline in April. Some other industries were similarly aected, such as
the manuacture o galvanized metal sheets.
By June 2011, however, the aected industries in Japan had recovered to their pre-disaster levels o output (Bo
Figure 1). Shortly ater that, the aected sectors in other countries returned to their pre-disaster growth rates and
production levels (Bo Figure 2). Whether the levels o production in Thailand can recover in the coming months
remains to be seen, and will depend on demand or electronics and cars, which in turn is linked the global growth.
Like in the case o Tohoku, reconstruction ater the Thai food is likely to be benecial or growth in 2012.
Production networks are serving the region well, as they reduce costs o production through diversication and
specialization. But their resilience has been tested by a series o natural disasters, eposing the vulnerability o these
comple production processes to eternal shocks. As the reconstruction ater the Tohoku earthquake is ongoing,
international companies are developing strategies to make their operations more resilient to catastrophes. They are
planning to increase inventories, develop technologies that are easier to substitute in case o a disaster, andmost
importantlyintensiy their connections to other economies in the region to diversiy supplies.
Bx Fi 1. Production recovered in Japan
2011 Volumes change, as percent o 2010 volumes
Semiconductor or devices Passenger cars Chemicals Manuacturing, total
Source: Ministry o Economy, Trade and Industry o Japan.
Bx Fi 2. Six months ater the Japan disaster, Thaiautomotive industry was growing at pre-disaster ratesGrowth (percent)
Manuacturing o small cars (
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Manuacturing employment ollowed output
Growth in manuacturing employment began slowing, ollowing dissipation o stimulus eects and global
easing o manuacturing trade.4 Ecepting Malaysia, growth in manuacturing employment has started to slow,
which is also a natural consequence o capacity utilization that is reaching pre-crisis levels. However, employmentgrowth remained below pre-crisis levels in the low-income countries (Figure 10, Figure 11). In the Philippines, this
was due to the act that the electronics sector, which contributes over a hal o gross eports, has not recovered
rom the recent crisis, and workers moved into service sector jobs, which serve as a saety net during downturns.5
Contraction in manuacturing employment in Thailand was due to a shit o unskilled workers toward the agriculture
4 See Chapter II or scal policy analysis.
5 See Securing the Present, Shaping the Future, EAP Economic Update, April 2011, World Bank, Washington DC.
Fi 10. Manuacturing employment growth is slowing, andwas negative in Thailand in the rst hal o 2011...
Annual employment growth by sector, percent
Agriculture Industry Services
Source: CEIC.
Fi 11. ...and is still below pre-2008 crisis levels in manycountries
Inde, 2007=100
2008 2009 2010 H1 2011
Sources: CEIC, Cambodia Ministry o Commerce, and Cambodia National Institute oStatistics.Note: Cambodias manuacturing employment is measured as employment in thegarment industry.
20
15
10
5
0
-5
-10
-15
China09'H1
Malaysia Philippines Thailand10' 11' 09' 10' 11' 09' 10' 11' 09' 10' 11'H1 H1 H1 H1 H1 H1 H1 H1 H1 H1 H1
115
110
105
100
95
90
85
80
Cambodia China Indonesia Malaysia Mongolia Philippines Thailand
Fi 12. Unemployment rates continued to decline across themiddle-income countries...
Unemployment rate (percent)
2008 2009 2010 H1 2011
Sources: World Bank sta calculations using data rom CEIC, Haver Analytics, andThailand National Statistical Oce.Note: Mongolias unemployment rate is the annual average rom the Labor ForceSurveys by the National Statistical Oce o Mongolia.
China Indonesia Malaysia Mongolia Philippines Thailand
12
10
8
6
4
2
0
Fi 13. ...while real wages continued to trend up
Inde, Q1 2007=100
Cambodia China Indonesia
Malaysia Mongolia Thailand
Sources: World Bank sta calculations using data rom CEIC, Haver Analytics,Cambodia Ministry o Commerce, and Cambodia National Institute o Statistics.Note: Only garment workers wages or Cambodia.
160
150
140
130
120
110
100
90
80
70
60
Q1 -0 7 Q3 -0 7 Q 1-0 8 Q3 -0 8 Q1 -0 9 Q3 -0 9 Q 1-1 0 Q 3-10 Q1 -1 1
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sector, which has been eperiencing strong growth ater the crisis. Total employment continued to grow, however,
perorming best in Indonesia, Malaysia, and Thailand (Figure 12).
Real manuacturing wages kept growing, albeit at slower rates than in 2010. Wages in most countries in the
region have recovered to their pre-crisis levels and have continued on an upward trend (Figure 13). In China, realmanuacturing wages trended up, although there was some cyclical slowdown in the second quarter o 2011. In
Mongolia, however, surveys o inormal sector workers show that their real wages stagnated ater the crisis, so that
earnings were insucient to meet basic needs.
Poverty is expected to decline urther
Based on the projected GDP growth, the proportion o the population living on less than US$2 a day in
developing East Asia in 2011 is expected to decrease by 2.2 percentage points to 24.3 percent rom 26.5 percent
in 2010. Based on current growth orecasts (see Chapter III), it is estimated that 38 million people in developing East
Asia will emerge out o poverty by the end o 2011 (Figure 14, Figure 15). However, poverty reduction eorts would
be hampered in the event o another increase in ood prices, i incomes stagnate.
East Asian exports were supported by Chinas domestic demand
As a result o sluggish external demand or their nal products, exports o the three major regional industrialsupply chains, especially electronics, have experienced a severe slowdown. Advanced economies imports
have grown by just two-to-our percent a year, while European imports contracted in the third quarter o 2011 (Figure
16). As these major sources o global demand are slowing, they particularly aect eports o the main production
networks in East Asia, most importantly electronics eports which ell in September, ollowing contractions in apparel
and oce machines earlier in the year (Figure 17). Monthly eports o electronics rom the Philippines contracted by
40 percent on average (compared to a year earlier) since the start o 2011; eports o telecommunications equipment
rom Thailand ell by 30 percent in September, and eports o oce machines and computers in Malaysia and
Indonesia contracted by over 20 percent during some months in 2011 compared to a year earlier.
Fi 14. Poverty is projected to urther decline, despite slowinggrowth...
Poverty headcount ratio (percent o population)
East Asia East Asia excluding China
Source: PovcalNet and World Bank sta calculations.
Fi 15. ...and 38 million people will escape pover ty in 2011
Millions o persons living on less than US$2 a day
East Asia Developing China
Source: PovcalNet and World Bank sta calculations.
60
55
50
40
45
35
30
25
20
2 00 2 2 00 3 2 00 4 20 05 20 06 2 00 7 2 00 8 2 00 9 2 01 0 20 11 2 01 2
54.1
50.7
47.9
46.1 46.8
41.8
39.738.4
36.3 3533.4
52
47.1
42.7
39.1
34.3
32.1
29.4
26.5
24.322.4
37.4
2007 2008 2009 2010 2011 2012
633
412
597
551
499
461428
384
342
300
268242
NAVIGATING TURBULENCE, SUSTAINING GROWTH
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Demand or commodities and raw materials remained strong, however, helping resource-rich economies
achieve high levels o export growth. While combined East Asian eports grew on average by 20 percent in 2010,
there has been variation across countries (Figure 18). Commodity eporters registered higher eport growth rates
than other countries, most notably Mongolia which eports nearly all its commodities to China (mostly coal and
copper, Figure 19).
East Asia, and China in particular, continued to grow in importance as a source o global demand. Since the
nancial crisis battered developed economies, Chinas share in world imports has consistently grown, approaching
its share o 10 percent in global GDP (Figure 20). It now imports almost as much as the European Union, the worlds
largest single market. Chinas trade surplus also dropped by about 30 percent between 2007 and 2010 (Figure 21).
Chinas growing demand or imports, especially o consumer goods, presents a new opportunity or the
regions exporters. As its trade surplus declined, Chinas imports or domestic needs grew aster than imports
Fi 19. ...driven by strong perormance in the ore, metal, andenergy sectors
Resource eports, growth rate and resource eports to China, in percentage ototal resource eports
Ore, metal and uel exports, growth rate, 2010/2009 Total exports, growth rate, 2010/2009
Ore, metal and uel exports t o China, % o ore, metal and uel exports (R HS)
Source: U.N. COMTRADE.
Fi 16. External demand is barely growing...
Imports, US$ terms, change, in percent, year-on-year
United States European Union Japan
Source: Haver.
Fi 17. ...and it is dragging down exports o electronics
Eports, US$ terms, change, in percent, year-on-year
Oce machines and computers (SITC 75) Telecommunications equipment (SITC 76)
Electrical machinery and apparatus (SITC 77) Road vehicles and parts (SITC 78)
Apparel and clothing accessories (SITC 84)
Source: CEIC.
8
6
4
-2
-4
2
0
-6
-8
-10
-12
-14
1/08 8/08 3/09 5/1010/09 12/10 7/11 1/08 7/08 1/09 7/09 1/10 7/117/10 1/11
80
60
40
20
0
-20
-40
-60
Fi 18. Commodity exporters recovered aster to their pre-crisis export growth rates than other countries...
Average year-on-year monthly growth in eports
200608 H1 2009 H1 2010 H1 2011 H1
Source: CEIC.
100
80
60
40
20
0
-20
-40
-60
KHM MYS VNM THA CHN IDN MNGPHL
120
100
80
60
40
20
0
-20
-40
MNG MYS PHL IDN LAO THA VNM
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or processing and re-eport (Figure 22). Its imports
o consumer goods have also been growing rapidly,
with emerging East Asian countries currently holding
18 percent o this market (Figure 23, Figure 24).
Chinas growing consumer goods market represents a
potentially signicant new opportunity or East Asian
eporters, i it continues to epand rom its low base o
just two percent o the world consumer goods market.
Raising Chinas private consumption by ve percentage
points o GDP is estimated to be associated with an
improvement in the trade balance o Chinas regional
trading partners by between 0.1 percentage points
o GDP (in Indonesia) and 0.5 percentage points (in
Malaysia).6 Highlighting Chinas importance to the
region, its trade balance with developing East Asia
improved in East Asias avor during the recovery
(Figure 21).
Regional domestic demand is expected to support export growth going orward, but it cannot ully
compensate or the eects o global slowdown and uncertainty. Even though broad trade indicators have been
upbeat in the rst hal o 2011, some worrisome signs have emerged. In September, eports rom Hong Kong SAR tomainland China contracted by 7.3 percent, compared to a year earlier. Due to its position at the center o production
chains, this could be an indication o rockier times ahead or regional trade.
Remittances into developing East Asia have remained resilient at mid-year, helping recipient countries
maintain current account surpluses. However, economic weakness in the U.S. and in the Eurozone, which are
6 IMF, 2011, China: Spillover Report or the 2011 Article IV Consultation and Selected Issues, Washington DC.
Fi 20. Chinas rising share in worlds imports puts it oncourse to surpass Europe as the second largest importer...
Percent
China impor ts, % world impor ts China impor ts, % o EU impor ts (R HS)
Source: CEIC.
Fi 21. ...and Chinas imports rom developing East Asia havealmost recovered to pre-crisis levels
Merchandise trade, US$ billions
Chinas tr ade balanc e wit h world Dev. EAs trade balance wit h wor ld
Dev. EAs trade balance with China (RHS)
Source: U.N. COMTRADE.
12
10
8
6
4
2
0
90
80
70
60
50
40
30
20
10
0
2007 2008 2009 2010 JanAug 2011
350
300
250
200
150
100
50
0
30
25
20
15
10
5
0
2004 2006 2008 201020022000
Fi 22. Chinas imports or domestic needs grew aster thanthose or processing and re-export
Imports, US$ billions per month
Ordinary trade Processing trade
Source: Haver.
100
90
80
70
60
50
40
30
20
10
0
1/08 8/08 3/09 10/09 12/105/10 7/11
NAVIGATING TURBULENCE, SUSTAINING GROWTH
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the biggest hosts to migrant workers rom developing economies, may depress remittance fows this year. In the
Philippines, the worlds ourth-largest remittance recipient ater India, China, and Meico, remittances stood at
US$13 billion through August, growing by 6.9 percent compared to a year earlier. Healthier fows rom Asia and the
core Eurozone countries compensated or weaker fows rom the U.S. However, remittances growth in the region is
projected to settle at around si-to-seven percent this year, below its historical average, with lower fows rom the
Middle East also playing a part.
Foreign investors sold regional equities and bonds as market volatility was rising globally
Portolio investment in East Asia continued to grow
through the rst hal o 2011, but in August and
September, international equity and bond unds
sold o an estimated three percent o their portolio
positions in emerging East Asia. Risk aversion grew,
driven by the debt crisis in the Eurozone, and the stock
market slide in September triggered a rush by investors
to relatively sae assets, notably U.S. government
bonds (Figure 25). East Asian markets were recently
dealing with high infows o hot capital (Figure 26).
But they also were among the most aected by thisfight to saety, and the subsequent outfow o these
short-term unds highlighted the vulnerability o the
region to the events in Europe. During August and
September, international mutual unds and echange
traded unds (ETFs) unloaded around US$13.1 billion o
their holdings o emerging East Asian equities and bonds, equal to about three percent o their holdings in the region
(Figure 27). Fund fows rom mutual and ETFs represent, on average, about one-third o equity fows and one-th o
bond fows reported on balance o payments basis.
Fi 23. Chinas imports o consumption goods grew at anaverage annual rate o 14 percent in the past 15 years, comparedwith the world average o 6 percent...Imports o consumption goods, percent change year-on-year
World China
Source: U.N. COMTRADE.
Fi 24. ...and most countries in the region have at least a onepercent share o this market
Chinas imports o consumer goods rom selected sources, in US$ billions, and inpercent o Chinas total consumer goods imports
In US $ billions (L HS) In per cent o C hines e c onsump tion goods impor ts (R HS)
Source: U.N. COMTRADE.
40
30
20
10
0
-10
-20
2001 2004 2007 201019981995
6
5
4
3
2
1
0
14
10
12
8
6
4
2
0
USA DEU KOR THA HKG VNM SGP IDN M YS P HLJPN
Fi 25. As market volatility increased ater an escalationo the Greek debt crisis in May, investors rushed to the relativesaety o U.S.Treasury bondsMarket volatility inde and bond yields
Market volatil ity index (CBOE VIX) (LHS) U.S. Treas., 10-yr, y ie ld (RHS)
German govt., 10-yr, yield (RHS)
Source: Chicago Board o Options Echange (CBOE) and Thomson Datastream.
60
50
40
30
20
10
0
4
2.5
3
3.5
2
1.5
1
0.5
0
1/3/11 6/3/11 11/3/11
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Capital market indices in the region dropped sharply. While capital fows to the region had helped deepen and
broaden some o the local equity markets, they also increased the sensitivity o the regions equities to global events
(see Chapter III). Share prices have become more volatile, and some East Asian markets ell more sharply than those
in the advanced economies (Figure 28, Figure 29). Since the Greek crisis intensied in May this year, the losses in
the region varied, alling by between 21 percent (Hang Seng in Hong Kong SAR, China) and three percent (Philippine
PSEi) between May and November.
Foreign direct investments (FDI) remained strong in the rst hal o the year. These are driven by structural,
rather than cyclical, actors and are thereore the least volatile o all investment fows. FDI infows increased in
the second quarter and outward FDI fows have also held relatively steady as residents in Malaysia, Thailand, and
Indonesia invested abroad earlier in the year. Chinas outward investments are still remarkably small relative to its
Fi 26. Ater buoyant portolio infows during the rst hal othe year...
Net capital infows, BOP terms, US$ billions
FDI, net Portolio investment, net Other investment, net
Source: IMF.
Fi 27. ...oreign investors withdrew at least 3 percent o totalportolio investment in August and September
Net equity and bond purchases by international mutual and ETF unds, weekly, inUS$ millions
Indonesia Malaysia Korea Philippines China
Thailand Singapore Hong Kong SAR, China Vietnam Taiwan, China
Source: Emerging Portolio Fund Research (EPFR).
2003 2005 2007 20091 99 9 20 011 99 5 19 97
300
250
200
150
100
50
0
-50
-100
-150
-200
H1-
2011
H1-
2010
4,000
3,000
2,000
1,000
0
-1,000
-2,000
-3,000
-4,000
-5,000
1/5/11 3/9/11 5/11/11 7/13/11 9/14/11
Fi 28. The regions equity prices dropped by more than aquarter rom their May high...
Equity price indices, in U.S. dollar terms
MSCI Far East excluding Japan MSCI All-country world
Source: Morgan Stanley Capital International (MSCI), via Thomson Datastream.
Fi 29. ...as more volatile emerging markets ell sharper thanthose in the advanced economies
Stock price indices, percent change
Years peak-to-date (Apr/MayNov)
Source: Thomson Datastream.
1,600
1,400
1,200
1,000
800
600
400
200
0
1/00 9/01 5/03 1/05 5/089/06 1/10 9/11
0
-5
-10
-15
-20
-25
HKG TWN KOREUROPE
(STOXX 600) THAJPN
(NIKKEI 225) SGPUSA
(S&P500) MYS IDNCHN PHL
NAVIGATING TURBULENCE, SUSTAINING GROWTH
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GDP and are concentrated in the natural resource sector.7 However, the projected US$8 billion o outfows in 2011
include investments in high-tech rms in Europe, most recently in Swedens Volvo Group.
Bank credit fows remained stable through the rst hal o 2011 but represent an important risk, should
European banks start deleveraging. As discussed in Chapter III, even i a denitive Eurozone settlement isimplemented successully, European banks would likely need to deleverage and could reduce eposure to emerging
markets. During the 2008 crisis, international banks reduced their eposure to developing East Asias non-bank private
sector by US$36 billion between mid-2008 and the rst quarter o 2009 (Figure 31). An impact o similar proportions
now could mean that over US$30 billion dollars fow out, constraining credit available to the private sector.
7 See Robust Recovery, Rising Risks, East Asia and Pacic Economic Update, November 2010, World Bank, Washington DC.
Fi 30. Inward FDI fows were robust in the rst hal o 2011
Inward and outward FDI fows, balance o payments basis, in US$ billions
Indonesia Malaysia Philippines Thailand China (RHS)
Source: Haver Analytics.
Fi 31. International bank fows to East Asia are vulnerable topotential reversals should European banks start deleveraging
Changes in eternal claims o BIS reporting banks on non-bank private sector,echange rate adjusted, in US$ billions
China Indonesia Malaysia Philippines Thailand Vietnam
Source: BIS, Locational Banking Statistics.
15
10
5
0
-10
-5
-15
80
40
60
20
0
-20
-40
Q4-09 Q2-10 Q4-10 Q2-11
Inward FDI
Outward FDI
30
20
10
0
-20
-10
-30
3/07 9/07 9/08 3/09 9/09 9/10 3/113/103/08
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II. Policies Reocus on Sustaining Growth
The global economic malaise has led policymakers to rethink their policies
during the last six months. Fighting infation and dealing with excess capital
infows that drove currency appreciation was a key priority beore. Now
the emphasis is on supporting growth. Monetary tightening is on hold, and
currencies have weakened in nominal terms. A tapering in capital infows
will initially help central banks manage infation. While real interest rates arenegative in nearly all East Asian countries, some are preparing or a round o
monetary easing to cushion the impact o global weakness. Others will likely
balance global risks against those rom easing too soon and will be reluctant
to cut interest rates unless there is an abrupt deterioration in growth. When
capital fows return, however, a concerted eort in the region to use exchange
rate fexibility to gain more independence in monetary policy and shit
demand more towards domestic sources could be an option o choice. The
current global slowdown could continue into the long- term, and as such, the
case or a stimulus is weaker this time around. Should the need arise, however,
scal space is available to promote the structural transormation needed
to sustain more domestically-driven growth. With or without the stimulus,
policymakers will need to sharpen their ocus on addressing the challenges o
long-term growth.
NAVIGATING TURBULENCE, SUSTAINING GROWTH
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Monetary policy: waiting to ease?
Ater months o tightening, central banks in the region have halted interest rate hikes. During the last si
months, infation was accelerating rapidly, orcing authorities to raise interest rates and cash reserve requirements
(Figure 32, Figure 34). Curbing credit growth, an eective instrument o monetary policy in many countries, hasalso been employed to ease infationary pressures (Figure 33). Some space or monetary tightening still remains, as
nominal rates are below their peaks and real rates are negative (Figure 35). But sustaining growth seems to be the
dominant concern among policy makers at this time.
Indonesia was the rst country to cut interest rates as it moved to protect growth in the ace o a weakening
external environment. The authorities cut interest rates both in October and November, by 75 basis points in total,
to si percent. The move was somewhat ahead o market epectations, especially because Indonesia was aected
by outfows o portolio investments in August and September (see Chapter I), but infation has been trending
Fi 32. Monetary tightening has not reached pre-crisis levels(except in Vietnam)...
Nominal policy rates
Vietnam Indonesia China Philippines
Thailand Korea Malaysia
Source: Haver.
Fi 33. ...but authorities were able to slow credit growth, akey instrument in controlling infation
3-month moving average y-o-y growth, percent
China Indonesia Malaysia Philippines
Sources: Finstats, World Bank, and Datastream.
16
14
12
10
8
6
4
2
0
1/07 9/07 5/08 1/09 5/109/09 9/111/11
40
35
30
25
20
15
10
5
0
1/07 10/07 7/08 4/09 10/101/10 7/11
Fi 34. Infation is rebounding...
Infation, in percent p.a.
2008 max 2009 min Sep-11
Source: Haver Analytics.Note: August data or Malaysia. 2008 ma is the highest value in 2008, and 2009 min isthe lowest value in 2009.
Fi 35. ...and real policy rates dropped and became negative
in most countriesPolicy rates, infation-adjusted, average in percent p.a.
Jan-10 Sep-11
Source: CEIC.
30
25
20
15
10
5
0
-5
Vietnam China Philippines MalaysiaIndonesia Thailand
6
4
2
0
-2
-4
-6
-8
China Indonesia Malaysia VietnamPhilippines Thailand
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downwards and Indonesia has the highest real policy rates among the middle-income countries in the region (Figure
35). Although infation appears to have peaked in the region, negative real interest rates mean some countries will
likely remain reluctant to use interest rate cuts to pre-empt the impact o a global slowdown (Figure 34, Figure 35).
In Mongolia, which grew by 20.8 percent in the third quarter compared to a year earlier, overheating concerns still
dominate, with the central bank increasing interest rates in October, the third hike this year.
Food prices were the main driver o infation in
many countries, and remain a risk. International
ood prices were stuck near their 2008 peaks this
year, and rice prices were a particular concern earlier in
the year. Domestically-produced oods, such as meat
and vegetables, were also increasingly strong drivers
o infation due to supply disruptions rom foods and
animal disease. In China, monthly pork price infation
grew rom 20 percent to nearly 60 percent compared
to a year earlier since January 2011, due to the above
actors, as well as because o temporary decits
resulting rom a supply-demand mismatch and high
prices o eed (Figure 36). Chapter III o this report
takes an in-depth look at ood prices and their impact
on the poor during the 2008 crisis.
New risks have emerged as capital fows adjust to continuing uncertainty in Europe. These include increased
risks o capital fow reversals, more volatility in the equity and bond markets, as well as a possible reversal in bank
fows, should the European banking sector start deleveraging. These potential risks are discussed in more detail in
Chapter III. So ar, measures to reduce liquidity included raising reserve requirements (oten to their pre-crisis levels,
like in Malaysia) and emphasizing the use o macro-prudential measures. For eample, Indonesia earlier in the year
etended the holding period on short-term Central Bank debt instruments. It also introduced mechanisms to support
the domestic government bond market in case o a shock and in September reduced the lower band o the interest
rate corridor or monetary operations to stimulate
transactions in the domestic money market (see Bo
2). Countries have also allowed their currencies to
depreciate somewhat.
A slowing or reversal in capital infows will initially
help central banks manage monetary policy. Earlier
this year, authorities aced a challenge o maintainingstability without losing competitiveness. With capital
infows surging, high asset prices and credit growth
raised overheating concerns in some countries. In the
open economies, the reversal in fows will help. In
China, housing markets have already cooled somewhat,
driven by decisive policy interventions. But the share o
real estate loans in total bank lending is high (especially
i inormal lending is included) and a sharp all in house
Fi 36. Food prices are a large part o CPI
Shares o ood in CPI, percent
Food Energy
Source: WDI.
50
40
30
20
10
0Philippines Indonesia Thailand U.S.Malays ia China
Fi 37. Banks in Indonesia and the Philippines have limitedexposure to the housing markets
US$ billions
Real estate loans as % o total loans, 2010 Households mortgage debt as % o GDP, 2008
Total households debt as % o GDP, 2009
Sources: ADB Asian Economic Monitors, Dec 2010 and July 2009. Household debt dataor Thailand is rom the Bank o Thailand and is or 2009.
80
70
60
50
40
30
20
10
0
KOR IDN PHL CHN THA HKG MYS TWN SGP
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Box 2 Capital outows during periods o international market turbulence: Indonesias recentexperience
As has been the case or many emerging economies, Indonesias eposure to global risk sentiment has risen in recent
years as oreign investors have taken on increasing holdings o domestic portolio assets (Bo Figure 1). Non-resident
investors hold roughly one-third o Rupiah government bonds (SUNs) and central bank bills (SBIs), compared to just10 percent and 25 percent in Thailand and Malaysia respectively. While reserves have been boosted by these infows,
the increased asset holdings o oreign investors also leave the economy vulnerable to outfows due to changes in
sentiment, as seen in late 2008 and May 2010.
This vulnerability was again highlighted during August and September 2011 when international market turbulence,
associated with the debt crisis in the Eurozone and a downgrade in global growth epectations, triggered a sharp
sello by oreign investors (Bo Figure 2). In total, oreign investors reduced their holdings o SUNs by US$3.3 billion
over September and o SBIs, on which there is a minimum si-month holding period, by US$1.6 billion. Overall, net
portolio outfows amounted to US$4.7 billion, prompting intervention by Bank Indonesia in the currency market and in
the domestic government bond market. This intervention drained oreign reserves by US$10 billion, or eight percent,
over September to US$114.5 billion. This decline in reserves compares with a drop o 10 percent to US$50.6 billion
during the market turmoil o October 2008.
While equity markets ell sharply (by 15 percent rom end-August to early October), the central banks intervention
helped limit the Rupiahs depreciation against the U.S. dollar to 4.3 percent to IDR 8,960 over this period. In contrast,
although one-year domestic currency government bond yields rose by over 100 basis points over the period, longer-
dated bond yields remained relatively stable and well below the levels seen in other recent periods o market stress.
For eample, ve- and ten-year yields in late September reached 6.7 percent and 7.5 percent respectively. By
comparison, in late 2008 the echange rate reached IDR 12 thousand per U.S. dollar and ve-year government bond
yields peaked at just over 20 percent.
Indonesias recent eperience highlights a dilemma or countries that intervene to support domestic bond markets
during periods o oreign investor outfows. This could smooth ecess volatility in nancial markets, which can inject
uncertainty and raise the costs o borrowing or the economy. But it could also implicitly put a foor on potential
losses or investors, creating stronger incentives or short-term infows. Continued feibility in the echange rate
can minimize any perceptions o one-way bets. Over the medium- to long-term, a urther deepening in domestic
capital markets and a widening o the domestic investor base can help to urther diversiy unding sources or both
governments and local corporations. It can also, in addition to structural reorms and investments that attract urther
FDI, play a role in reducing dependence on short-term portolio infows.
Bx Fi 1. Reserves have increased in parallel with the rise innon-resident portolio holdings
2011 Volumes as percent o 2010 volumes
Sep-08 May-10 July-11 Sep-11
Sources: BI, KSEI, CEIC and World Bank.Note: Short-term eternal debt by remaining maturity.
Bx Fi 2. Non-resident portolio outfows rose sharply inSeptember
Growth (percent)
Equities SUN SBI Reserves (LHS)
Sources: BI, CEIC and World Bank.Note: Flows or SUN (local currency government securities) and SBI (BI certicates)indicate changes in holdings.
0 5025 17510075 150125
Non-residentSBI holdings
Non-resident localgov. securities
Non-residentequity holdings
Short-termexternal debt*
Total FX Reserves
150
125
100
75
50
25
5
0
2.5
-2.5
-5
-7.5
1/08 1/09 1/10 1/11
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Box 3 What kind o landing or China?
As the industrialized countries ear dipping into another recession, much o the prospects or inter-dependent East
Asia continue to rest on Chinas resilience. Concerns have been resuracing that this engine o regional growth might
be heading towards a sudden slowdownoten called a hard landingthat might result in a large negative growth
shock or the region and the world.
The epansionary policies that supported strong growth in the atermath o the nancial crisis also have ed a real
estate boom. Rapid credit growth may also have undermined the portolio quality o banks.More recently, successul attempts have been made
to cool parts o the economy: interest rates were
raised several times, statutory reserve ratios or
commercial banks were raised, o-balance-sheet
lending was included or determining capital and
reserve requirements, andmost importantly
growth in ormal bank lending has been constrained.
As a result, broad money growth slowed sharply,
and real estate prices have started to ease in some
markets. Because real estate is usually used by
ormal and inormal lenders as collateral or as an
investment, it is a growing risk or the banking
system and or inormal creditors. Moreover, localgovernments may be put under pressure given their
revenues rely to a considerable etent on selling land
leases or real estate development. Weakening o
land revenues could also impact local government
borrowing. Reportedly, over 30 percent o GDP has
been borrowed by local governments through special purpose vehicles, with most o it guaranteed by land and
invested in inrastructure. Because Chinese households tend to put more money down and have smaller mortgages,
a deleveraging o the magnitude seen in the U.S. is unlikely. Even so, real estate price corrections would still have
a strong impact on domestic demand and consumer sentiment. As o mid-November 2011, real estate prices had
already started declining in Wenzhou province.
Across China, residential properties are about ve-times households annual earnings, which is comparable to the
U.S. In Beijing and Shanghai, property prices eceed annual earnings thirteen- to seventeen-old, although these
markets have cooled recently (Bo Figure). The government would be reluctant to ease monetary policy to supportgrowth while infation is high. Nonetheless, markets have been worried that, should monetary conditions be tightened
urther, or growth slow more than epected, alling housing prices would result in a decline in construction activity,
and a deleveraging by ormal and inormal banking system and local governments.
Some relie could come in the planned social housing construction. Additionally, central and local governments are
working to increase land supply, and new construction starts data remains strong. Chinas economy is projected to
grow by above eight percent in 2011. The government also has ample scal space and room or monetary policy
normalization should such a need arise, more so now that infation seems to be on the wane again. As such, while
adjustments in the property markets may well happen, there could still be a sot landing or China.
prices could undermine bank balance sheets, construction and associated sectors, and household spending (see
Figure 37 or ocial lending only). I these risks were to materialize, Chinas growth could slow substantially. However,
with the scal and monetary space available and given that markets have been cooling gradually, its impacts can be
mitigated (Bo 3). The deterioration in the global environment is not helping authorities in Vietnam who have been
trying to stabilize the economy. They have slowed credit growth, tightened public spending, and raised interest ratesabove any other countrys in the region, yet infationary pressures eased only slightly (Figure 35).
Bx Fi. Housing prices cooled in large cities
Percent quarterly growth based on inde
Shanghai Beijing Hong Kong SAR, China
Source: Haver.
40
30
20
10
0
-10
-20
-30
9/05 9/06 9/07 9/08 9/09 9/10 9/11
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Currencies under pressure, central banks losing reserves
Ater the European debt crisis intensied in May, currencies depreciated quickly against the U.S. dollar,
easing concerns about competitiveness. Echange rates in East Asia depreciated in nominal terms, eectively
erasing the appreciation that took place during rst hal o the year (Figure 38). Most middle-income countriescurrencies appreciated in comparison to their trading partners since beore the most recent crisis (Figure 39). Chinas
echange rate appreciated by 6.1 percent in nominal terms against the dollar, and by ve percent in real eective
terms between January 2010 and August 2011.
Foreign exchange reserves declined in September, but are still very substantial. As capital fows started
reversing and valuation adjustments took place, reserves declined (Figure 40). For eample, in Indonesia, reserves
ell by 8 percent or US$10.1 billion over September as authorities intervened in support o local currency and bond
markets (see Bo 2). Reserves in the region remain substantial, however, and should be sucient to withstand
Fi 38. Most currencies have depreciated against the US$since mid-year
Changes in local currency rates to the US$, in percent
Jul 29Nov 3 Jan 3Jul 29
Source: Haver Analytics.
Fi 39. Middle-income countries real exchange rates hadappreciated relative to their trading partners since beore the2008 crisisAppreciation o real eective echange rate, in percent
J an 20 05 S ep 20 11 J an 20 07 Se p 2 011 J an 20 09 S ep 2011
Source: IMF.
Korea
Singapore
Malaysia
Taiwan, China
Indonesia
Thailand
Philippines
Vietnam
Hong Kong, SAR China
China
-10 -5 100 5Depreciation Appreciation
35
30
25
20
15
10
5
0
-5
-10China Philippines Indonesia MalaysiaVietnam Thailand
Fi 40. Reserves declined in September in all countries,including China...
Changes in international reserves, ecluding gold, in US$, billions
Indonesia Malaysia Philippines Thailand Hong Kong SAR, China
Korea Singapore Taiwan, China China
Source: Haver Analytics.
200
150
100
50
0
-50
-100
1/10 5/10 9/10 1/11 9/115/11
Fi 41. ...but levels o reserves still provide a strong buer incase o a sudden stop
International reserves, in percent o total eternal liabilities, and in percent o GDP
Reser ves, % o ex ternal liabilities Reser ves, % o GDP
Source: Haver Analytics.
140
120
100
80
60
40
20
0
China Taiwan, China Thailand IndonesiaPhilippines Malaysia Korea, Rep.
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urther shocks. For the median economy in mid-2011, they were equivalent to 50.4 percent o GDP, 8.9 months o
imports, and 35.9 percent o eternal liabilities as measured at end-2010 (Figure 41).
Fiscal policy: fne-tuning needed?
Even though policy continued to normalize, scal balances have not yet returned to their pre-crisis levels. As
countries implemented stimulus packages, primary balances ell sharply between 2006-07 and 2009. In the middle-
income countries, these declines ranged rom 1.9 percentage points in Indonesia to 4.8 percentage points in Thailand
(Figure 42). Fiscal balances improved as the stimuli were withdrawn between 2009 and 2011, but cyclically-adjusted
scal decits8 still remain at levels higher than beore the crisis (Figure 43).
Should the need arise, there is space or a new scal stimulus in most middle-income countries. General
government balances are mostly epected to improve in 2011 (Figure 44). The scal stance in the Philippines is
improving due to better ta compliance, but also due to under-spending. Vietnam is pursuing scal consolidation
as a part o macroeconomic stabilization program. Indonesias epected decit or 2011 has been revised upwards
mainly due to higher energy subsidies, but with other spending likely to all below target, the movement will likely be
moderate. The Thai government decit is also orecast to worsen, due to the impact rom the fooding and because
o higher-than-epected uel subsidies (see also Bo 1). The Mongolian scal balance is set to weaken largely due to
the introduction o universal cash transers. Debt burdens also came down in Indonesia and the Philippines between
2007 and 2011. In the Philippines, however, the debt service-to-revenue ratio remains high at 26 percent (Figure 45).Public debt burdens in Malaysia, Mongolia, and Vietnam are high and rising. In Malaysia, this refected increases
in the wage and subsidy bills that went unmatched by non-oil revenue growth, but measures have been recently
taken to address the situation. While o-budget borrowing by subnational authorities complicates the measurement
o overall (central and subnational) public debt in China, statistics are beginning to include subnational debt which
increased by 10 percentage points o GDP to 26 percent o GDP in 2010 rom 17 percent in 2007; a conservative
8 Cyclically adjusted primary balances (CAPB) are general government primary balances adjusted to lter out cyclical movements associatedwith changes in output, thus allowing a ocus on the underlying scal stance and the impact o discretionary policy.
Fi 42. Fiscal policy continued to normalize as the stimuliwere slowly withdrawn...
Primary balances, in percent o GDP
200607 2009 2010 2011
Source: IMF Fiscal Monitor, September 2011.
Fi 43. ...but cyclically adjusted scal decits are still higherthan beore the crisis
Cyclically adjusted primary balances, in percent o potential GDP
200607 2011 Change 200607 to 2011
Source: IMF Fiscal Monitor, September 2011.
43
2
1
0
-1
-2
-3
-4
-5
PhilippinesChina Indonesia Malaysia Thailand
43
2
1
0
-1
-2
-3
-4
-5
PhilippinesChina Malaysia Indonesia Thailand
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estimate o the central and local government debt was thereore at around 44 percent o GDP in 2010. In the low-
income countries, there is less scal space or renewed interventions. Especially small countries, like the Pacic
islands, are not scally well-placed to deal with new eternal shocks.9 Overall, scal risks appear to be lower than in
other regions (Figure 46).
Growing costs o external borrowing could,
however, add to scal pressures in the uture. The
European debt crisis is negatively impacting emerging
markets spreads (Figure 47). As perceptions o risk
changed, spreads have grown, as have the costs o
insuring against deault (Figure 48). While spreads on
East Asian bonds are still lower than in other emerging
markets (or eample, in Latin America), sovereign
issuers with lower credit ratingssuch as Vietnam and
Mongoliacould eperience problems in obtaining
eternal nancing going orward. These risks need to
be kept in mind in designing any stimulus programs.
The slowdown in East Asias growth has already
prompted some governments to adjust their scal
strategies. Indonesia has introduced some feibilityinto its 2012 budget and allocated contingent unds
to acilitate responses to any potential slowdown. Leveraging on improved revenue collection, the Philippines
announced a US$1.7 billion disbursement acceleration plan which is speeding up eisting programs and projects,
ater alling short on programmed spending in the rst three quarters o the year. Malaysia is considering increasing
social cash transers and boosting transportation spending within the eisting scal envelope. Thailand increased
9 See specic country pages at the end o this report or more detail.
Fi 44. General government balances are mostly expected toimprove
General government balances, percent o GDP
2007 2010 2011
Source: World Bank.
Fi 45. Debt burdens are manageable in most middle-incomecountries
Percent o GDP, percent o revenue and grants, percent change
Debt 2007 Debt 2011 Interests as % revenues and grants 2011
Source: World Bank.Note: Data are or the national (central or ederal) level o government only.
1
0
-1
-2
-3
-4
-5
-6
-7Indonesia China Philippines MalaysiaThailand Vietnam
60
50
40
30
20
10
0PhilippinesChina Indonesia MalaysiaVietnamThailand
Fi 46. Fiscal risks in Emerging Asia grew compared to 2006,but are the lowest in the world
Fiscal indicators inde
Latin America Emerging Asia Emerging Europe Advanced Europe
Source: IMF Fiscal Monitor 2011.Note: Larger value o the scal indicators inde suggests higher scal risk. The inde isbased on 12 indicators that provide early warning signals about etreme governmentunding diculties, such as hyperinfation, sovereign bond spreads, debt deaults orrestructuring, or access to IMF support.
0.5
0.4
0.3
0.2
0.1
0
2 00 1 2 00 2 2 00 3 20 04 20 05 2 00 6 20 07 20 08 2 00 9 20 10 2 011
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minimum wages, lowered corporate income taes, and introduced a rice mortgage scheme to support armers (see
Bo 4). The devastating food that has reached Bangkok would increase government spending through recovery
and reconstruction programs, raising the scal decit in 2012 to 4.5 percent o GDP. Should ood or energy prices
increase, consumer subsidieswhere they are in placecould lead to wider increases in the scal decit.
But any possible stimulus needs to be more long-term and structurally oriented. Even presuming an orderly
resolution o the crisis in Europe, the weaknesses in the global economy are likely to continue into the medium- to
long-term. In this case, it is timely to rethink whether new stimulus is the answer. Given the outlook or protracted
low global growth, should the authorities decide in avor o a new round o stimulus programs they should be
scally sustainable, well-targeted, and directed at promoting the structural transormation needed to sustain stronger,
domestically-driven growth.
Much o the emphasis should be on stimulating investment. In low-income countries that were less aected by
the global economic weakness, programs or poverty reduction and growth should take priority over the short-term
considerations o stimulating demand. Higher investments are particularly important or the middle-income countries
where investment shares have yet to recover to pre-Asian crisis levels and particularly where the quality or quantity o
inrastructure lags behind middle-income averages (see discussion in Chapter III). Improving the investment climate,
including through more or better public investment in productive inrastructure, would attract private investment.
This would be a priority or the Philippines, or eample, where the quality o inrastructure had been lagging other
middle-income countries in the region.
Encouraging higher consumption spending might be a more appropriate target or other countries whereinvestment levels are already high. Better targeted, and more productive, investment or long-term growth will
mean increasing the eciency o public investment programs in China, Vietnam, and Mongolia. Continued and closer
attention to pension and social security systems is also a useul way to increase consumption, ght poverty, and
prepare or uture crises. Further improvements in the covered share o the labor orce and the ratio o retirement to
pre-retirement income will be especially important in China, Indonesia, Thailand, and Vietnam.10
10 Park, Donghyun, 2009. Ageing Asias Looming Pension Crisis, Working Paper Series No. 165, Asian Development Bank.
Fi 47. Sovereign borrowing costs in Asia are rising...
EMBI global stripped spreads, basis points
Vietnam Philippines Malaysia
Indonesia China Latin America
Source: JPMorgan, via Thomson Datastream.
Fi 48. ...as is sovereign risk and thus the costs o insuringagainst deault
Change in CDS spreads on ve-year sovereigns bonds, July 29Nov 3, 2011, inbasis points
Source: Thomson Datastream.
1,200
1,000
800
600
400
200
0
1/07 9/07 5/08 1/09 5/109/09 9/111/11
300
250
150
200