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Page 1: Overheating in Emerging Markets: An Asian Perspective Carnegie Endowment For International Peace February 16, 2010 Anoop Singh Director, Asia and Pacific.

Overheating in Emerging Overheating in Emerging Markets:Markets:

An Asian PerspectiveAn Asian Perspective

Carnegie Endowment For Carnegie Endowment For International PeaceInternational Peace

February 16, 2010February 16, 2010

Anoop SinghAnoop SinghDirector, Asia and Pacific Department, Director, Asia and Pacific Department,

IMFIMF

Page 2: Overheating in Emerging Markets: An Asian Perspective Carnegie Endowment For International Peace February 16, 2010 Anoop Singh Director, Asia and Pacific.

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Plan of the presentationPlan of the presentation

Overheating in Asia: A Look at Overheating in Asia: A Look at the Evidencethe Evidence

Policy Challenges Policy Challenges

ConclusionsConclusions

Page 3: Overheating in Emerging Markets: An Asian Perspective Carnegie Endowment For International Peace February 16, 2010 Anoop Singh Director, Asia and Pacific.

Asia continues to lead an uneven global Asia continues to lead an uneven global recovery and output gaps are closing fast recovery and output gaps are closing fast

across the regionacross the regionWorld GDP Growth

(Year-on-year; in percent)

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Overheating in Asia

Asia: Estimated Output Gap Closing Dates

Page 4: Overheating in Emerging Markets: An Asian Perspective Carnegie Endowment For International Peace February 16, 2010 Anoop Singh Director, Asia and Pacific.

Yet, macroeconomic policies are still very Yet, macroeconomic policies are still very accommodativeaccommodative

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Asia: Real Policy Rates

(In percent)

Asia: Cyclically Adjusted General Government Balance

(In percent of GDP)

Overheating in Asia

Page 5: Overheating in Emerging Markets: An Asian Perspective Carnegie Endowment For International Peace February 16, 2010 Anoop Singh Director, Asia and Pacific.

Inflationary pressures are emerging in Asia, Inflationary pressures are emerging in Asia,

fuelled by higher food prices…fuelled by higher food prices…

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Overheating in Asia

Asia: Headline CPI1

(Year-on-year percent change)

1 Wholesale prices used for India.

Asia: Headline and Food Price Inflation(Year-on-year; in percent)

Page 6: Overheating in Emerging Markets: An Asian Perspective Carnegie Endowment For International Peace February 16, 2010 Anoop Singh Director, Asia and Pacific.

……but there are also growing signs of but there are also growing signs of spillovers to generalized inflationspillovers to generalized inflation

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Overheating in Asia

Asia: Core CPI1

(3-month percent change of 3-mma)Selected Asia: Real wage/earnings(2008:Q1=100; seasonally adjusted)

Page 7: Overheating in Emerging Markets: An Asian Perspective Carnegie Endowment For International Peace February 16, 2010 Anoop Singh Director, Asia and Pacific.

Credit growth is generally brisk, and Credit growth is generally brisk, and property prices are still growing fast in a property prices are still growing fast in a

few regional economiesfew regional economies

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Overheating in Asia

Selected Asia: Property Prices(Year-on-year percent change)

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

Page 8: Overheating in Emerging Markets: An Asian Perspective Carnegie Endowment For International Peace February 16, 2010 Anoop Singh Director, Asia and Pacific.

Upward pressures on equities have abated Upward pressures on equities have abated and valuations are generally in line with and valuations are generally in line with

historical normshistorical norms

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Overheating in Asia

Asia: Stock Markets(October 1, 2010 = 100)

Asia: 12-month Forward P/E Ratios(Relative to long-run average)

Page 9: Overheating in Emerging Markets: An Asian Perspective Carnegie Endowment For International Peace February 16, 2010 Anoop Singh Director, Asia and Pacific.

But capital flows to EM Asia will need to be But capital flows to EM Asia will need to be managed carefullymanaged carefully

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Policy Challenges

Emerging Markets: Net Capital Flows

(In billions of U.S. dollars)

Selected EM Asia: Net Portfolio Flows

(In percent of GDP; 4qma)

Page 10: Overheating in Emerging Markets: An Asian Perspective Carnegie Endowment For International Peace February 16, 2010 Anoop Singh Director, Asia and Pacific.

Stronger currencies will be needed across the region

Foreign Exchange Reserves(In billions of US dollars)

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Policy Challenges

REER Change(In percent; between September 2007 and December 2010; GDP weighted )

Page 11: Overheating in Emerging Markets: An Asian Perspective Carnegie Endowment For International Peace February 16, 2010 Anoop Singh Director, Asia and Pacific.

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Macro-prudential measures can be useful if Macro-prudential measures can be useful if tailored to country-circumstancestailored to country-circumstances

Policy Challenges

Measures ExampleTighter ceilings on L-T-V ratios China, Hong Kong SAR,

Singapore, Peru, Turkey

Higher stamp duties on resale of properties

China, Hong Kong SAR, Singapore

Reserve requirements on non-resident deposits, and on FX deposits

Indonesia, Peru

Limits on ratio of banks FX loans and securities to FX borrowing

Korea

Tax on equity and bond inflows Brazil

Withholding tax on foreigners’ bond purchases

Korea

Withholding tax on state bonds Thailand

Minimum holding period on investment in CB bills

Indonesia

Asia and Other EMs: Recent Macro-Prudential Measures

Page 12: Overheating in Emerging Markets: An Asian Perspective Carnegie Endowment For International Peace February 16, 2010 Anoop Singh Director, Asia and Pacific.

Overheating pressures are also emerging in Latin America, but with important

differences with Asia

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Comparing Asia with Latin America

Current Account Balance(In percent of GDP)

Domestic Demand and GDP growth

(In percent)

Note: Latin America includes: Brazil, Chile, Colombia, Mexico, and Peru.

Page 13: Overheating in Emerging Markets: An Asian Perspective Carnegie Endowment For International Peace February 16, 2010 Anoop Singh Director, Asia and Pacific.

A longer-term view: prevent the return of A longer-term view: prevent the return of global imbalances and make growth more global imbalances and make growth more

inclusiveinclusive

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Longer term challenges

Global Imbalances(Percent of World GDP)

Vulnerable Employment (In percent of total employment,

2008)

Page 14: Overheating in Emerging Markets: An Asian Perspective Carnegie Endowment For International Peace February 16, 2010 Anoop Singh Director, Asia and Pacific.

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ConclusionsConclusions Asia is still firmly leading the global recovery, Asia is still firmly leading the global recovery,

but overheating pressures have surfaced in a but overheating pressures have surfaced in a few regional economiesfew regional economies

Dealing with these pressures requires a quick Dealing with these pressures requires a quick normalization of both fiscal and monetary normalization of both fiscal and monetary stancesstances

Stronger currencies should be part of this Stronger currencies should be part of this policy mixpolicy mix

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


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