34138 East Asia Update November 2005 November 2005 Countering Global Shocks Special Focus: What Can East Asia Expect from the Doha Development Round? East Asia and Pacific Region The World Bank CONTENTS East Asia and Pacific Regional Update ...................................................... 1. Summary ........................................................................................................ 3 2. East Asia – Countering Global Shocks ........................................................ 8 Growth – the cyclical outlook...................................................................... 8 Poverty reduction and human development ............................................... 9 Avian and human influenza risks ............................................................. 12 3. The international and regional environment ........................................... 15 Developed country growth ........................................................................ 15 China.......................................................................................................... 17 Commodity markets .................................................................................. 18 Trade policy developments ...................................................................... 23 Balance of payments and financial markets .............................................. 26 4. Domestic trends and policy challenges....................................................... 31 Financial sector trends and reforms..................................... ...................... 31 Corporate sector trends and reforms .......................................................... 33 Country Sections .................................................…………………………35 Appendix Tables…………………………………...…..…….....…………51 Special Focus: What Can East Asia Expect from the Doha Development Round? ..................................................................................... 60 Key Indicators Tables ........................................................................................ 65 This Regional Update was prepared by Milan Brahmbhatt, Lead Economist, East Asia PREM, with the assistance of Antonio Ollero and Santiago Gomez, drawing on inputs and comments from country economists and sector specialists throughout the East Asia and Pacific Region of the World Bank. The report was prepared under the general guidance of Homi Kharas, Chief Economist, and Jemal-ud-din Kassum, Regional Vice President, East Asia and Pacific Region. East Asia Update 3 EAST ASIA AND PACIFIC REGIONAL UPDATE Summary credibility with the public to implement politically sensitive cuts in or removal of subsidies on fuel products, Growth in the Emerging East Asia region is allowing fuel users to respond more effectively to signals expected to reach a little over 6 percent in 2005, down from world markets. In Indonesia the cuts have been modestly from the exceptionally strong 7.2 percent pace combined with bold moves to alleviate the impact of the of 2004. 1 With growth in China continuing to run at subsidy cuts on the poor through a new cash transfer robust rates over 9 percent, the recent easing in growth program, combined with increased health, education and has affected mainly the high income Newly Industrialized infrastructure spending. Central banks in the region have Economies and the middle income economies in South also been tightening monetary policy to prevent the rise in East Asia, primarily reflecting the impact of higher oil oil prices and headline inflation from becoming prices, higher dollar interest rates and slower demand embedded in higher trend rates of core price and wage growth in global high technology markets. Recent data inflation. While the tightening cycle may tend to suggests that the slowing may be relatively limited in moderate the cyclical recovery in domestic demand in the scope, and that the pace of activity around the region was region in the near term, it will, by helping ensure already reviving in the third quarter of the year. Among moderate inflation and macroeconomic stability, also help the developing economies in the region, growth of 7-8 promote more sustainable growth in the medium term. percent this year will help secure a further robust reduction in the number of poor at the $2 a day level by International trade has long been a great source around 37 million in 2005, close to a 6 percent decline. of productivity gains and growth in East Asia. Last year’s over 10 percent gain in world trade was paced by a 15-20 Looking forward, much attention is rightly being percent gain in East Asian real exports and imports. The given to some key risks, including high oil prices, a weak first part of this year saw an easing in trade growth, in outcome to the Doha trade talks, global macroeconomic part because of a cyclical slowing in global high tech imbalances and the specter of a human influenza demand and a downturn in Chinese import growth. The pandemic. However it is worth observing that there are high tech cycle this year has been relatively mild, with also solid positive developments that augur well for global orders and sales tending to reach a plateau rather growth and development in the region. These include than falling sharply, and starting to show signs of an evidence of underlying resilience in domestic activity, upturn during the third quarter. In China some easing in improvements in some external trends, as well as mature domestic demand and a run down in inventories appear to and well-considered changes in domestic policies that have been the drivers for a significant slowing in import should help countries better adapt to changing growth. However it appears that any slowing in the pace circumstances. of China’s economic growth is going to be gradual, with One of the clearly most fortunate developments GDP growth now projected at over 9 percent in 2005 and of the last two years is the unexpectedly limited effect on close to 9 percent in 2006. Extended growth at these rates economic growth of the more than doubling of crude oil will undoubtedly be accompanied by further strong gains prices. Some of the reasons for this are discussed later in in imports, and there were already signs of an upturn in this report. While a further large rise in oil prices would import growth in the third quarter. Finally, in one of the obviously have a more serious effect on growth, there is most positive recent developments for the East Asia also evidence that markets are beginning to respond to the region, there are increasing signs that, after a decade or signal of high prices by fostering greater demand more of stagnation, Japan’s economy is achieving a efficiency and expansion of supply capacity. Thus, robust and self-sustaining economic expansion. Over barring dramatic new supply shocks, consensus forecasts time, healthier growth in Japan will provide a basis for envision that oil prices, while remaining high for the next further trade and financial integration and engagement 1-2 years, should be gradually easing from the dramatic with Emerging East Asia. levels reached during the 2005 U.S. hurricane season. In the longer run, prospects for trade hinge to a Meanwhile East Asian governments have also significant degree on the maintenance and strengthening been taking actions to help economies better adapt to this of an open, rules based trading system. A striking period of high and volatile oil prices. In particular several example of the gains from global trade liberalization has governments have had the political confidence and in fact been unfolding this very year, with the phase out of the Agreement on Textiles and Clothing. As was expected, exports of textiles and clothing from China to 1 Emerging East Asia comprises Developing East Asia (China, major markets have surged, accompanied by lower prices, Indonesia, Malaysia, Philippines, Thailand, Vietnam and some substantial welfare gains for the world’s consumers and smaller economies) and four Newly Industrialized Economies or increased growth for efficient producers. Importantly, NIEs (Hong Kong, Korea, Singapore and Taiwan, China). East Asia Update 4 textile and apparel exports from many low income Developments at the country level are discussed in the countries (e.g. Cambodia) have also seen significant “Country Sections� at the back of the report, while fuller gains, while exports from higher cost producers (e.g. Country Briefs are available at the website associated Korea) have declined. Such a move out of low cost with this report 2 segments by high and middle income economies is consistent with the longer term process of upgrading skills • Growth. Given that growth in China has shown and productivity in these countries. Looking forward, hardly any deceleration from last year’s 9.5 percent pace, much now depends on progress that members are able to the recent easing in growth has occurred mainly among make at the upcoming WTO Ministerial in Hong Kong on the region’s high income Newly Industrialized December 13-18, so as to achieve a successful conclusion Economies (NIEs) and the middle income economies of to the Doha Round of multilateral talks. However, based South East Asia, driven, principally, by external factors. on the very limited progress over the past year, there is a (Table 1). Exports in nominal dollar terms slowed from significant risk that only a limited outcome may emerge, around 30 percent growth in mid 2004 to around 16-17 something that would be far from in the long run interests percent by mid 2005, driven in part by a cyclical of East Asian economies. The Special Focus in this downswing in global high technology markets, and by a Update on “What can East Asia Expect from the Doha temporary slowing in China’s import growth. The other Development Round?� looks in more detail at the issues main force behind the recent slowing in East Asian at stake for the region. growth is the doubling in world oil prices over the last two years, which has generated terms of trade income Among broad issues facing the world and the losses of perhaps 0.7 percent of regional GDP in 2004 region is the need to address the problem of growing and 2005, although the impact on realized growth has global macroeconomic imbalances. The U.S. current likely been more muted. The recent flow of data account deficit will reach another record this year, suggests, however, that the slowing may be relatively matched by growing surpluses in oil exporting regions, as limited in scope, and that the pace of export and well as in East Asia, where China’s current account domestic activity around the region was already reviving surplus has surged higher and foreign exchange reserves during the third quarter of the year. The package of around the region mostly continue to rise. Addressing the monetary and fiscal policies should be broadly neutral problem of global imbalances entails collaborative efforts with respect to growth, with a tightening of monetary by many economies, including efforts to strengthen policy offset by more expansionary public spending on savings in the United States and policies to foster stronger infrastructure. domestic demand growth in areas such as the Euro area, Japan and Emerging East Asian economies other than Table 1. East Asia Economic Growth China. While progress in addressing imbalances is 2003 2004 2005 2006 decidedly mixed, there are also some clearly positive developments. The emerging recovery in Japan is based Emerging East Asia 6.0 7.2 6.2 6.2 to a significant degree on stronger investment and Develop. E. Asia 8.0 8.2 7.7 7.5 consumption growth, and should, over time, establish a S.E. Asia 5.5 5.9 5.0 5.4 new growth pole in Asia, reducing the world economy’s Indonesia 4.9 5.1 5.7 6.0 over-dependence on U.S. demand growth in recent years. Malaysia 5.4 7.1 5.0 5.3 China’s move towards a more flexible exchange rate Philippines 4.5 6.0 4.8 5.0 system this summer, while limited, is also clearly a step in Thailand 6.9 6.1 4.2 5.0 the right direction. Elsewhere in East Asia reforms to Transition Econ. improve the investment climate and expand infrastructure China 9.5 9.5 9.3 8.7 services are increasingly at the center of the policy Vietnam 7.3 7.7 7.5 7.5 agenda, while progress also continues to be made in Small Economies 4.8 5.6 4.9 4.9 strengthening the financial sector and capital markets, all Newly Ind. Econ. 3.0 5.9 4.0 4.4 of which are important priorities in achieving more robust Korea 3.1 4.6 3.8 4.6 investment growth. 3 other NIEs 2.9 6.9 4.3 4.3 Japan 1.4 2.6 2.3 1.8 Last but very far from least is the risk from avian World Bank East Asia Region; October 2005. Consensus influenza, which, if it expands to a widespread human Forecasts for NIEs other than Korea. influenza, could exact a dreadful toll in human life and economic losses both in Asia and around the world. The threat and the urgent policy responses that are needed are • Poverty. Poverty continues to fall in most parts of the discussed later in this report. East Asia region. For the region as a whole, poverty at The rest of this Summary highlights the cross- country trends and policy issues discussed in this Report. 2 http://www.worldbank.org/eapupdate/ . East Asia Update 5 the $2 a day level is estimated to have fallen to just less through a reduction in the size and productivity of the than 32 percent of regional population in 2005, down world labor force due to illness and death, as well as from just over 34 percent in 2004, or from 50 percent in heavy medical and hospitalization costs. Policy makers 1996, just before the financial crisis. The number of everywhere need to give the influenza threat top political poor at the $2 level is estimated at some 596 million in attention and priority, to avert, delay or mitigate what 2005, down by 37 million from the previous year. A could be a major global disaster. At the political level an notable feature of recent developments is the success in honest, transparent public information policy will be reducing poverty among the region’s transition critical in winning the trust and confidence of the economies. Recent evidence suggests that poverty population, so as to minimize panic and disruption. The reduction in Vietnam has been even more rapid than FAO, OIE and WHO have set out detailed previously thought, while poverty reduction has also recommendations on animal and human health policies been more rapid in some economies where it had been and preparations that should be implemented at national previously thought sluggish, such as Cambodia and and international levels. There is clearly a priority on Mongolia. Another important trend is the explicit curbing avian flu “at source�, in the agricultural sector, attention being given to issues of social protection in the through implementation of strong animal and human formulation of overall development strategies. An health surveillance, disease control and mitigation example is Indonesia’s recent initiative to alleviate the measures, thereby reducing the probability of a far more impact on the poor of its decision to remove subsidies on costly human epidemic. Since in the present crisis fuel. Fiscal savings will be used to establish a new cash animal and human health considerations are closely transfer program for poor and near poor families, as well linked, the response to the influenza threat needs an as expanded basic education, health and infrastructure integrated cross-sectoral approach that brings together programs aimed at benefiting low income families. agriculture, animal health, human health, finance and other key agencies and experts, with strong support and • The avian and human influenza threat. Since the leadership at the highest political level. spring, outbreaks of avian influenza A (H5N1) among wild birds and poultry have spread to Central Asia and Eastern Europe, while new outbreaks have also occurred The international and regional environment this year in several East Asian countries. The confirmed number of human cases reported to the WHO since the • Developed economies. Projections for overall growth end of 2003 has increased to 121, of whom just over half in developed economies are little changed from six have died. While the bulk of human cases so far are months ago, suggesting a modest easing in OECD thought to be the result of transmission of the virus from growth from 3 percent in 2004 to 2.4-2.5 percent in animals, there is great concern that genetic changes will 2005-06, reflecting the impact of high oil prices and allow the H5N1 virus to achieve the capacity for efficient monetary tightening in the United States, among other and sustained transmission among humans, leading to a factors. Within the OECD, 2005 projections for the human influenza pandemic, with high levels of illness, hurricane-battered United States have been modestly death and other human, economic and social costs in lowered compared to six months ago, while those for the East Asia and around the world. So far, the main Euro area have also been shaved down to only 1.1 economic impacts are occurring in the rural areas of percent growth in 2005, due to unexpected weakness in several East Asian economies. At the overall domestic demand. Offsetting these downward revisions, macroeconomic level, costs so far have been fairly projections for Japan have been boosted by 1 ½ limited – on the order of 0.1-0.2 percent of GDP in percentage points compared to six months ago, as a Vietnam, for example - but could rise significantly going stream of evidence strengthens expectations that a self- forward, and have already been high for specific sectors sustaining and robust Japanese economic recovery has and communities. There are great uncertainties about the finally arrived. Japanese recovery comprises one of the timing, virulence, and general scope of a future human most important positive new developments for the East flu pandemic but all agree it could lead to at least several Asian regional outlook. million human deaths. The most immediate economic impacts of a pandemic might arise – as in SARS - not • China. Growth in the third quarter of 2005 was 9.4 from actual death or sickness but from the uncoordinated percent, little changed from 9.5 percent in the first half of efforts of private individuals to avoid becoming infected, the year, or, indeed, from 9.5 percent in 2003 and 2004. as well as public policy actions like quarantines and Especially in the first half, growth was underpinned by a travel restrictions, leading to severe demand shocks for rise in the contribution of net exports, offsetting a services sectors such as tourism, mass transport, retail, softening in domestic demand. The third quarter saw hotels and restaurants etc, as well as supply shocks due some reversal of this pattern with stronger investment to workplace disruption. A global flu pandemic would and imports. For the year as a whole, though, lower also entail a sizeable loss of potential world output import growth combined with still strong exports has led East Asia Update 6 to a surge in China’s trade surplus, likely totaling around Guinea have scored significant net income gains, while $100 billion, and continued fast growth in its foreign net importers like Korea, Philippines and Thailand have exchange reserves. Notwithstanding the modest upward experienced significant income losses of 1-2 percent per revision of its exchange rate band this August, year. The impact of terms of trade losses on growth has macroeconomic pressures for appreciation of China’s tended to be muted so far. Economies have been able to currency remain strong. Policy discussions among the support domestic spending through some reduction in authorities are looking at how to move to a less capital national savings rates and running down of current and resource-intensive, more knowledge-driven, and account surpluses, while in some cases fuel subsidies more equally-shared pattern of growth. This could be have shielded consumers from high world prices. achieved by rebalancing growth in the direction of However such subsidies have discouraged energy sectors that require less capital, energy and resources but efficiency, while their fiscal cost has soared alongside oil which generate more urban employment and use capital prices. Countries such as Indonesia, Thailand and more efficiently. Such changes could be fostered by Malaysia have therefore acted to reduce or eliminate fuel financial sector reform, better corporate governance, a subsidies, while smaller economies like Cambodia and larger role for private sector firms, less restrictions Lao PDR are also generally allowing a full pass-through hindering the development of the services industry, and to users. This may curb growth to some extent in the near greater use of markets and taxes to determine prices of term, as well as create a temporary bulge in headline energy and resources, strengthening service delivery in inflation. Estimates suggest that higher oil prices may education and health, and pension reform.. reduce growth by somewhere around 0.8 percent in 2005-06. However the reforms of energy pricing should • Textiles and Apparel Phase Out. The phasing out of bolster growth over the medium term by improving global quotas on textiles and clothing trade at the start of efficiency of resource use and putting fiscal policies on a this year has already had a substantial impact on more sustainable footing. international markets for these products. U.S. imports of textiles and clothing from China increased by 64 percent • Balance of payments. East Asian foreign exchange (or $6 billion) in the first 8 months of 2005, versus a 9.1 reserves continued to accumulate in 2005, rising to $1.65 percent (or $4.9 billion) increase in total imports of these trillion in September 2005 from $1.46 trillion at the end products from the world. European Union imports of of 2004, an increase of $196 billion, up from a $175 textiles and clothing from China rose 67 percent in the billion increase in the first nine months of 2004. The first six months of the year. Importantly, a range of other regional picture was dominated by China, where reserves developing countries also managed to increase their increased by $161 billion in the first 9 months, sharply market share under the new more open trade regime. US up from $111 billion in the previous year. Unlike last imports from Jordan, India and Bangladesh increased by year, when it was primarily driven by capital inflows, 20 per cent or more in the first 8 months of 2005, while this year’s reserve increase in China mainly reflects a imports from Indonesia and Cambodia rose by around 15 surge in its trade surplus, which will likely increase to percent. On the other hand, U.S. textile and clothing around $100 billion from $33 billion in 2004. Reserves imports from higher income economies such as Hong were also rising in most other economies, though often Kong, Korea, Taiwan (China), Macao and Singapore fell less quickly than last year. The rapid reserve buildup in by 20 percent or more. A similar situation occurred in the East Asia over the last four years reflects both large EU market, where imports from developing countries increases in current and capital account inflows to the such as India, Sri Lanka, Turkey, Malaysia, Cambodia, region, as well as the policy decision of most economies Laos, Thailand and Vietnam have all increased. Both the to intervene in currency markets so as to limit exchange US and EU have invoked ‘safeguard’ restrictions on rate appreciation. Thus even the economies with some selected clothing and textile imports from China, which form of floating exchange rate have experienced only an may at least temporarily cushion the adjustment process average 6-7 percent appreciation against the US dollar for other producers. since the end of 2001. The large reserve buildup has complicated management of domestic monetary policies, • Oil. Crude oil prices have more than doubled since by creating pressure for expansion of domestic money the end of 2003. Given a gradual pull back from current supply, which central banks have to offset through levels, oil prices are projected to average $54 in 2005 sterilization operations. It was to improve their ability to and $56 in 2006.3 Higher oil prices have generated terms conduct their own monetary policy that economies such of trade income losses in East Asia of perhaps 0.7 as China and Malaysia undertook changes in their percent per year in 2004-05. Within the total, substantial exchange rate regimes announced in July. The de facto net oil exporters like Malaysia, Vietnam and Papua New US dollar peg was in China replaced by “a managed floating exchange rate regime with reference to a basket 3 This reference price is an average of Brent, Dubai and West of currencies,� and entailed an initial 2 percent Texas Intermediate (WTI) crudes. appreciation against the dollar. While important as a East Asia Update 7 first step, the modest initial appreciation may not reduce international norms. Macroeconomic developments this exchange rate pressures or the need for intervention and year may provide a somewhat more challenging sterilization sufficiently. Given the continued large environment in many economies, with profits tending to balance of payments inflows, further well-prepared steps be affected by the easing in the pace of domestic demand towards greater exchange rate flexibility are likely to and export market growth in the first six months prove advisable. (especially for high technology firms), higher fuel costs and the turn towards monetary policy tightening and • Inflation and Interest Rates. East Asian central higher interest rates this year. The pace of fixed banks began tightening monetary policy over the course investment spending growth eased in the first half of the of the past year. The change of course in monetary policy year, most notably in Singapore and Philippines. The responds to a recent pick up in headline inflation in improvement in firms’ balance sheets in recent years several economies around the region, and to concerns should however generally put them in a good position to that, if left unaddressed, price pressures could become ride through these conditions without too great difficulty. embedded in underlying core inflation and in higher Over the medium term the maintenance of inflationary expectations. Headline inflation has been macroeconomic stability, growing regional and global pushed higher by rising oil prices and policy decisions to integration and continued policy reforms to improve the allow greater pass through of fuel costs to consumers. In investment climate, strengthen corporate governance and addition, monetary policy tightening in the United States foster the development of deep and well regulated has reduced the spread between East Asian and U.S. financial markets should all contribute to reviving interest rates, which has contributed to some depreciation investment and continued gains in corporate sector of exchange rates against the dollar during 2005, creating productivity and growth. pressure for higher import prices. While core inflation rates are in general running significantly below headline • Financial sector trends and issues. In recent years rates, there are some indications that core rates are also banks in previously crisis affected East Asian economies picking up. Thus the turn to monetary tightening is have experienced substantial improvements in key timely. While higher rates may temporarily moderate the indicators of asset quality, capital adequacy and buoyancy of recovery in domestic demand in the region profitability. These trends have generally continued in in the near term, by helping to ensure moderate inflation 2005. Non performing loans, in particular, have and macroeconomic stability, it will help promote more continued to edge lower (although the stated NPL ratio in sustainable growth in the medium term. Indonesia rose during the June quarter, due to more stringent loan classification rules, which boosted the Domestic trends and policy issues estimate of NPLs at state owned banks in particular). • Corporate sector trends and issues. The profitability Countries continue to address tasks of financial sector and balance sheet position of East Asian firms saw a restructuring and consolidation left over from the significant improvement during 2003 and 2004, financial crisis, as well as longer term financial sector providing a more secure foundation for an emerging strengthening and development, including issues such as upswing in investment spending in several economies in proper enforcement of prudential regulations, 2004. Profitability has rebounded from the low points supervisory independence, alignment of capital adequacy seen after the financial crisis in 1998, supported by requirements with the international standard, stronger economic growth and by continued progress in consolidated supervision, prompt corrective action debt restructuring, which, combined with the low interest provisions, effective bankruptcy arrangements and rates that have prevailed in recent years, has also resulted transparency. in sharply lower interest expenses. Progress on debt restructuring, and equity infusions have also led to lower leverage ratios, which are now broadly in line with East Asia Update 8 EAST ASIA AND PACIFIC REGIONAL UPDATE East Asia regional outlook trade is that, even though its GDP has continued expanding at around 9.5 percent, China’s import growth slowed rather Growth sharply in the latter part of 2004 and the first part of 2005, The economic outlook for Emerging East Asia in generating a slowdown in exports from other East Asian 2005-06 is broadly similar to that presented in last April’s economies to this increasingly important regional market. East Asia Update. Growth in the region is expected to reach The other main factor behind the recent slowing in a little over 6 percent in both 2005 and 2006, down Emerging East Asian growth is the doubling in world oil modestly from the exceptionally strong 7.2 percent pace of prices between the end of 2003 and August-September 2004. (Table 1 above; Exhibit 1). Given that growth in 2005. For the region as a whole higher oil prices are China has shown hardly any deceleration from last year’s estimated to have generated a cumulative terms of trade 9.5 percent pace, it is among the region’s high income income loss of around 1.4 percent of GDP in 2004-05, or Newly Industrialized Economies (NIEs) and the middle about 0.7 percent per year. Within the total, substantial net income economies of South East Asia that the recent easing in growth has occurred. As Table 2 indicates, the simple Exhibit 1 average of growth in these 8 economies slipped from 6.4 percent in 2004 to 4.5 percent in the first half of 2005. The East Asia - Quarterly GDP Growth recent flow of data suggests, however, that the slowing may (% Change Year Ago) 12.0 be relatively limited in scope, and that the pace of activity around the region was already reviving during the third quarter of the year. The divergence in growth should 9.0 narrow somewhat in 2006, as China achieves a modest cooling to 8-9 percent growth, while a moderately stronger pace of activity takes hold in the region’s other major 6.0 economies. The recently slower pace of growth in parts of the 3.0 region this year has been principally driven by external factors, in particular slower export growth, higher oil prices and higher international interest rates. Exports in nominal 0.0 dollar terms slowed from around 30 percent growth in mid Q 1 1999 Q 3 1999 Q 1 2000 Q 3 2000 Q 1 2001 Q 3 2001 Q 1 2002 Q 3 2002 Q 1 2003 Q 3 2003 Q 1 2004 Q 3 2004 Q 1 2005 2004 to around 16-17 percent by mid 2005, with a more marked slowdown among the NIEs and South East Asian -3.0 economies. In real terms exports of good and services E. Asia NIEs among the latter economies slowed from around 15 percent SE Asia China growth in 2005 to only about 6 percent in the first half of -6.0 2005. (Table 2). The main factors behind slower exports include a cyclical downswing in demand growth in global high technology markets from mid 2004 through mid 2005, causing a deceleration in East Asian high technology exports and industrial production. Another factor affecting Table 2. Growth in Real GDP and Components of Aggregate Demand (% change year ago) Indonesia Malaysia Philippines Thailand Hong Kong Korea Singapore Taiwan, Average* China GDP -2004 5.1 7.1 6.0 6.1 8.2 4.6 8.4 5.7 6.4 2005 H1 5.9 4.9 4.7 3.9 6.5 3.0 4.0 2.8 4.5 Priv.Consump. -2004 4.9 10.5 5.8 6.2 6.8 -0.5 8.6 3.1 5.5 2005 H1 3.3 8.7 4.9 4.6 3.5 2.0 2.5 3.1 4.1 Investment. - 2004 15.7 3.1 4.2 14.0 4.1 1.9 8.4 15.4 8.4 2005 H1 13.6 4.5 -2.9 14.7 2.0 1.2 -4.9 10.2 4.8 Exports . -2004 8.5 16.3 14.1 11.1 15.3 19.7 .. 15.3 14.3 2005 H1 10.2 8.6 2.2 2.0 9.8 6.2 .. 1.6 5.8 * Simple average of 8 economies. East Asia Update 9 oil exporters like Malaysia, Vietnam and Papua New Guinea pace of regional activity. These included an upturn in have scored significant net income gains, while net indicators of global high tech demand and in Chinese import importers like Korea, Philippines and Thailand have growth, as well as in both high tech and overall exports and experienced significant income losses of 1-2 percent per industrial production in several East Asian economies year. outside China. Third quarter growth in China continued at a solid 9.4 percent. In Singapore the year on year pace of real The impacts of these terms of trade losses on GDP growth picked up to 6 percent from 4 percent in the growth have been more muted, though, in part because in first half, while in Korea it rose to 4.4 percent from 3 places the pass through of higher oil prices to final users has percent in the first half. been limited by government interventions to subsidize fuel use. Many economies have also been able to support Exhibit 2 domestic spending through some reduction in national savings rates, running down of current account surpluses East Asia - Quarterly GDP Growth and moderation in the pace of foreign reserve accumulation. (% Change Quarter Ago, SAAR) As Table 2 indicates, the combined impact of lower export 18.0 growth and higher oil prices has been to slow growth in NIEs SE Asia both private consumer spending and fixed investment. In 15.0 the 8 main economies outside China, consumer spending growth slowed to around 4 percent on average in the first 12.0 half of 2005, from 5.5 percent in 2004, while fixed investment growth slipped from 8.4 percent to just below 5 9.0 percent. These average consumption and investment growth rates in 2005 seem rather resilient given the adverse external 6.0 circumstances, and seem to suggest that the underlying trend in regional growth remains rather robust. 3.0 To some extent the impact of higher oil prices will also be delayed and stretched out into 2006, in part as 0.0 economies such as Indonesia, Thailand and Malaysia have Q1 2001 Q3 2001 Q1 2002 Q3 2002 Q1 2003 Q3 2003 Q1 2004 Q3 2004 Q1 2005 started reducing or have eliminated fuel subsidies. This -3.0 may curb growth to some extent in the near term, but, by putting fiscal policies on a more sustainable footing in the -6.0 medium term, should help guarantee macroeconomic stability and sustained growth in the medium term. This is especially to the point in Indonesia, where concerns about subsidies and a potential worsening in the fiscal deficit led Poverty Reduction and Human Development to significant capital outflows and weakening of the currency in August, leading the government to implement a Poverty continues to fall in most parts of East Asia. bold package of reforms to cut subsidies, while For the region as a whole, poverty at the $1 a day level fell implementing new transfer programs that aim to soften the to a little over 8 percent of the population in 2005 (some impact on the poor. 157 million people), down from around 15 percent in 1996, just before the financial crisis. At the $2 a day level, Central banks in the region have also been poverty is estimated to have fallen to just less than 32 tightening monetary policy to prevent the rise in oil prices percent of regional population in 2005, down from just over and headline inflation from becoming embedded in higher 34 percent in 2004. The number of poor at the $2 level is rates of core price inflation and wage inflation. Here too, estimated at some 596 million in 2005, down by 37 million although real interest rates are low by historical standards, from the previous year. (Exhibit 3; Appendix Table 7). the move higher may moderate the buoyancy of cyclical recovery in regional domestic demand in the near term. A notable feature of recent developments is the However, by helping ensure moderate inflation and success in reducing poverty among the region’s transition macroeconomic stability, the monetary tightening will help economies. The drastic reduction in poverty in China promote more sustainable growth in the medium term. during the last two and half decades of reforms is well known. Recent evidence suggests that poverty reduction in Quarter on quarter growth rates indicate that the Vietnam has been even more rapid than previously thought. first quarter of 2005 was likely the low point in the current Recent survey results also suggest that poverty has fallen cycle of regional growth, with some strengthening already more quickly in some economies where it had been apparent in the second (Exhibit 2). By the end of third quarter there were further promising indications of an previously thought sluggish, such as Cambodia and improvement in external conditions and an upturn in the Mongolia. Another important trend in the region is the East Asia Update 10 increasing and explicit attention being given to issues of benefiting farmers. Last but not least, rapid poverty social protection in the formulation of overall development reduction in rural areas in recent years is likely to be related strategies. A recent example is Indonesia’s initiative to to a rise in the world market prices of agricultural export offset the adverse impact on the poor from a reduction in commodities such as coffee and rice, which are important public fuel subsidies, by using fiscal savings to establish a sources of income for many of the rural poor. new cash transfer program for poor and near poor families, Poverty reduction continues to be widespread as well as expanded basic education, health and across the country. In the past six years, rural poverty has infrastructure programs aimed at benefiting low income decreased at 3.4 percentage points per year which is faster families. than for the country as a whole (3.0 percentage points per Exhibit 3 year). However, with rural poverty now at 25 percent, compared to 4 percent for urban areas, poverty in Vietnam Poverty - Headcount Index remains overwhelmingly rural. And while there has been ($2 a day poverty line. Percent) progress across all eight regions, the poverty rate remains EAP China much higher in the North West (59 percent), the Central Highlands (33 percent) and the North Central Coast (32 Vietnam SE Asia 4 80 percent), compared to the South East (5 percent) and the Other small * Red River Delta (12 percent). Cambodia. The recently released 2003-5 65 Cambodia Socio Economic Survey has finally made available a nationally representative household survey of high quality. Other data releases also now make it possible 50 for the first time to compare consumption and poverty in the same geographical areas over the last decade, dispelling the misperception that Cambodia saw little poverty reduction over this period.4 The new evidence suggests that in fact 35 poverty headcount indexes fell from 39 to 28 percent * Cambodia, Lao PDR and Papua between 1993/94 and 2004 in comparable areas of the New Guinea country. This conclusion is supported by evidence on 20 improvements in living standards among the poor, as 1990 1996 1999 2000 2001 2002 2003 2004 2005 2006 indicated by rising ownership of consumer durables, improvements in housing and access to electricity. (Table 3). Vietnam. Recent poverty data collected through the Vietnam Household Living Standard Survey (VHLSS) Mongolia: Recently released household survey 2004 shows a continuation of rapid poverty reduction in data confirm that Mongolia experienced a substantial Vietnam. Since 1993, the general poverty rate has decreased reduction in poverty in recent years in both income and non- on average by 3.5 percentage points per year, leading to a income terms.5 A consumption-based measure of poverty current general poverty rate of 19.5 percent compared to fell by 21 percent between 1998 and 2002 for comparable 58.1 percent in 1993. The poverty rate is defined using a areas of the country. Per capita real household national poverty line as the proportion of the population consumption increased by 18 percent on average, with the whose consumption, including food and non-food items, is largest increases occurring for lower income quintiles. not sufficient to ensure an intake of 2,100 calories per day. Access to electricity increased sharply among households in The proportion of poor people therefore is now a little more the two poorest income quintiles, while the proportions of than one third of what it was 11 years ago. The sustained reduction in poverty is consistent 4 Due to security problems at the time, the 1993-94 Socio with high economic growth, at a rate exceeding 7 percent Economic Survey of Cambodia covered only 56 percent of since 2002 and slightly increasing over time. The rural villages. Subsequent surveys covered more of the acceleration in poverty reduction might also reflect the relatively poorer rural areas. Comparisons of official increasing size of budget transfers to poorer provinces, poverty estimates over the 1990s, which were based on non- especially since tax-revenue sharing arrangements and comparable geographical areas, created the misperception of equalization grants were introduced. The public investment little change in poverty at the national level.. program, with its greater emphasis in remote areas during 5 the current five-year plan, might have contributed as well. The 2003-3 Mongolia LSMS-HIES. The latest survey is A fast rise in the rural access indicator for Vietnam not strictly compatible in design with the earlier 1998 (currently at about 83 percent compared to 76 percent two survey. Nevertheless an attempt was made to create a years ago) also suggests that rural infrastructure subset of data for which meaningful comparisons could be development has led to increased access to markets made. East Asia Update 11 out-of-school children or children who had to work fell households throughout Indonesia, especially isolated areas, significantly among poor households. (Table 3) is an enormous task, which will be undertaken through the Post Office. Going forward, effective monitoring and evaluation will play an important role in ensuring that the Table 3. Living Standards Among Poor Households targeting of households is appropriate and that the intended in Two Low Income Economies beneficiaries receive the correct amount of funds. (% of households with) This cash-transfer program is in addition to Poorest Quintile Next Poorest interventions introduced to mitigate the impact of the fuel Cambodia price increases last March, including programs in education, 1993/94 2004 1993/94 2004 health and infrastructure. In the education sector, part of the Television 3.4 36.1 6.6 45.2 fuel subsidies savings will be used to provide block grants for operational aid to primary and junior secondary schools. Motorcycle 7.7 15.5 7.7 24 In return for receiving the block grant, the participant Roof - improved * 25.3 57.5 38.3 73.2 schools are required to stop collecting fees from poor Electric Light ** 1.6 28.4 2.8 40.9 students and lower the fees for all other students. The Mongolia government has also moved to reallocate savings to provide 1998 2002 1998 2002 free of charge basic health services at most community Electricity 28.3 56.2 23.9 45.3 health clinics and free inpatient treatment at third class 10-14 yr olds at work 5.3 4.7 10.9 4.6 hospitals for the poor. Additional funding will also be 13-17 out of school 27.5 21 21.1 9.0 provided to district and provincial health offices. One good use of this funding would be to improve the disease * Tiled, galvanized metal, concrete or fibrous cement. surveillance system and health information system (HIS) at ** City power, generator or battery. † Open land/none. the sub-district and district levels. Local health surveillance World Bank estimates from national household surveys. systems have deteriorated in recent years, as an unfortunate byproduct of government decentralization, at a time when Indonesia. Over the course of 2005 Indonesia has their importance is increasing, because of the resurgence of undertaken bold steps to both reduce the heavy fiscal burden diseases such as polio that had been thought eradicated from and economic distortions caused by its system of fuel Indonesia, as well as the threat of new diseases such as subsidies, as well as to mitigate the adverse economic avian and possible human pandemic influenza. A sizeable impact on the poor of the removal of subsidies. The portion of the fuel subsidy savings has been allocated to removal of subsidies (discussed further in the section on oil programs intended to support infrastructure development price developments below) began in March, continued in and employment creation in some 12,000 villages. Again, July-August and took a big step forward on October 1, when given the size and scope of these programs, it is essential fuel prices were raised by a weighted average 114 percent. that some of the savings are used to establish adequate The price of household kerosene, an important element in monitoring systems to supervise program implementation, the budget of poor households, was increased 186 percent, grievance and complaints resolution mechanisms, and but even then remains only one third of international prices. evaluation systems to assess whether the programs have achieved their stated goals. To mitigate the impact of the fuel price increases on the poor and near poor, the Indonesian government has In Thailand more complete data for the whole of launched a cash transfer program for 15.5 million poor and 2004 confirm that robust economic growth, favorable farm near-poor families, or over 28 percent of all households. prices and the government's grassroots policies continued to With over 60 million people covered, this cash transfer help reduce poverty. Based on a new series of upward- program is the largest such program in the world. The cash adjusted national poverty lines, poverty in the Kingdom fell transfer is intended to at least cover income loses due to the from 15.5 percent to 11.3 percent between 2002 and 2004. direct and indirect impacts of fuel price increases. Each This implies that 2.5 million people were lifted out of beneficiary family is to receive Rp.300,000 on a quarterly poverty, leaving around 7.3 million people below the basis. The total amount budgeted for the program in 2005 is poverty line. Progress covered both rural and urban areas, estimated at Rp.4.7 trillion (or close to 20 trillion on an and extended to all regions, but disparities remain large. annual basis). To ensure proper targeting Indonesia’s Poverty incidence varied from 17.2 percent in the Northeast Central Statistics Bureau has undertaken a massive effort to to 1.6 percent in Bangkok, and from 14.3 percent in rural develop a roster of poor and near poor households, drawing areas to 4.9 percent in urban areas. on interviews with village leaders, past household surveys Philippines. Partial poverty estimates using a and a fresh survey to ascertain key economic and social revised methodology reveal a modest decline in the characteristics that can help establish a proxy means test for incidence of poverty in the Philippines between 2000 and participation in the program. Delivery of cash to eligible 2003. Based on annual per capita income thresholds of East Asia Update 12 P12,267 in 2003, the number of poor declined from 25.4 human pandemic influenza in Geneva on November 7-9. million in 2000 to 23.5 million in 2003, or from 33 percent (Box 1). The following comments look at potential to 30.4 percent of the population. Both rural and urban economic impacts and policy responses in East Asia and the poverty are reported to have declined over this period: rural world. from 18.6 million (47.7 percent) to 17 million (43.6 percent); urban from 6.8 million (17.8 percent) to 6.2 Box 1. Partners Meeting on Avian Influenza and million (16.5 percent). Poverty incidence remains high in Human Pandemic Influenza. Mindanao and low in Metro Manila and the surrounding November 7-9. Geneva, Switzerland. regions. Inequality, as measured by the Gini coefficient, also declined from 0.4822 to 0.4678 in the same period. This meeting is cosponsored by the World Health The new methodology, however, makes time series Organization, the Food and Agriculture Organization, the comparison with pre-2000 figures difficult, as pre-2000 World Organization for Animal Health, and the World figures have not yet been adjusted. Bank. The meeting will include members of the sponsoring organizations, country representatives, donors, and regional organizations involved in the influenza issue. The Avian and Human Influenza Threat The objectives are: Last April’s East Asia Update noted the threat to • To confirm a two-pronged strategy: control avian regional and global public health from outbreaks of avian influenza at source in animals in the short and medium term, influenza A (H5N1) in East Asia. Since then outbreaks and simultaneously prepare for pandemic influenza; among wild birds and poultry have spread to Russia, • To support national plans in line with this strategy Kazakhstan, Turkey, Romania and Croatia, while, in East through commitment at national, regional and global levels; Asia, new outbreaks this year have occurred in Cambodia, • To discuss shared responsibilities of the China, Indonesia, Lao PDR, Thailand and Vietnam. The international community, technical organizations and confirmed number of human cases reported to the WHO agencies in assisting affected countries and countries at since the end of 2003 has increased to 121, of whom just risk; over half have died. (Table 4). • To assess national, regional, and global needs with indications of resources required in the short and medium Table 4. Human Cases of Avian Influenza A (H5N1) term, and to review current bilateral and multilateral Cases Deaths % Fatality initiatives to avoid duplication and identify potential Cambodia 4 4 100.0 synergies; Indonesia 7 4 57.1 • To discuss and outline coordination mechanisms Thailand 19 13 68.4 necessary at national, sub-regional, regional and global Vietnam 91 41 45.1 levels to ensure effective mobilization of resources and oversee progress in implementation and impact; Total 121 62 51.2 Cumulative number of confirmed cases reported to WHO. • To identify key next steps based on an agreed-to October 24, 2005. strategy with political support and backing from the international community. While the bulk of human cases so far are thought to be the result of transmission of the virus from animals to Avian flu in East Asia humans, there is great concern that genetic changes will allow the H5N1 virus to achieve the capacity for efficient So far, with the principal transmission of the virus and sustained transmission among humans, leading to a occurring among poultry and other birds, the main economic human influenza pandemic, with high levels of illness, death impacts are occurring in the rural areas of several East and other human, economic and social costs in East Asia Asian economies. At the overall macroeconomic level, and around the world.6 As a result the question of how to costs so far have been fairly limited, but could rise prevent or prepare for such a pandemic is quickly vaulting significantly going forward, and have already been high for to a top priority for governments around the world. In specific sectors and communities. October alone inter-governmental meetings of officials and Economic costs that need to be considered include policy makers from affected and concerned countries took direct costs such as losses of poultry due to the disease and place in the United States, Canada and Australia, to be to control measures such as culling birds, with impacts followed by a partners meeting on avian influenza and extending not only to farmers but also to upstream and downstream sectors such as poultry traders, feed mills, breeding farms etc. The largest declines have occurred in 6 Writing Committee of the WHO Consultation on Human Vietnam and Thailand, where they were equal to 15-20% of Influenza A/H5. “Avian Influenza A (H5N1) Infection in the stock of poultry. Other but relatively smaller losses of Humans.� New England Journal of Medicine. 353: 1374- 85. September 29, 2005. East Asia Update 13 poultry have also occurred in other economies such as Threat of a human influenza pandemic Indonesia, China, Cambodia and Lao PDR. There are great uncertainties about the timing, The size of the poultry sector in the national virulence, and general scope of a future human flu economies of the region before the epidemic ranged from pandemic. The WHO observes that “Best case scenarios, around 0.6 percent of GDP at the low end in countries like modeled on the mild pandemic of 1968, project global Vietnam and Thailand, to a high of a little over 2 percent in excess deaths in the range 2 million to 7.4 million. Other the Philippines, with most countries centering a little over 1 estimates that factor in a more virulent virus, similar to that percent of GDP. In an economy like Vietnam, where responsible for the deadly 1918 pandemic, estimate much poultry output is down by around 15 percent, this part of higher numbers of deaths. Both scenarios are scientifically economic loss is worth about 0.1 percent of GDP or about valid. The differences arise from the assumptions about the $45 million. Additional losses have occurred because of inherent lethality of the virus, which past experience has lower egg production and reduced activity in distribution shown to vary greatly.� 8 Other experts go further to argue channels. On the other hand there have also been important that “Clinical, epidemiologic, and laboratory evidence substitution effects, especially towards production of pork. suggests that a pandemic caused by the current H5N1 strain Combining these effects, the direct cost in Vietnam may be would be more likely to mimic the 1918 pandemic than around 0.12 percent of GDP.7 If similar declines in poultry those that occurred more recently. If we translate the rate of numbers were to occur in an economy like Indonesia where death associated with the 1918 influenza virus to that in the the poultry sector plays a somewhat larger part in the current population, there could be 1.7 million deaths in the economy, these direct costs could amount to 0.2 percent of United States and 180 million to 360 million deaths GDP. globally.� 9 These losses, while perhaps limited in overall Interestingly, the most immediate economic macroeconomic terms, have been severe in the poultry impacts of a pandemic might arise not from actual death or sector and on associated input and distribution channels. In sickness but from the uncoordinated efforts of private economies like Vietnam where the bulk of poultry individuals to avoid becoming infected. This at least was production is still by backyard producers, the impact has the experience during SARS, when people tried to avoid been felt by individual rural households, and has only partly infection by minimizing face-to-face interactions, resulting been offset by government compensation to farmers. in a severe demand shock for services sectors such as Survey data show that in Vietnam the poorest quintile of tourism, mass transportation, retail sales, hotels and households relies more than 3 times as much on poultry restaurants, as well as a supply shock due to workplace income than does the richest quintile, so there are also absenteeism, disruption of production processes and shifts adverse distributional effects. On the other hand, in to more costly procedures. To these results of private action economies like Thailand and Indonesia, where production is could be added economic disruption and costs caused by largely undertaken by industrial and large commercial emergency public policy measures such as quarantines and producers, the impact may be felt in greater unemployment restrictions on domestic and international travel and trade. of wage laborers and in corporate bankruptcies. Obviously, a highly trade dependent economy such as East Asia could be severely affected by these kinds of Secondary or indirect economic costs could also restrictions. arise, for example, if there is a fall in international tourism because of disease fears or travel restrictions. This does not It is no doubt foolhardy to even try and estimate appear to have occurred so far, with tourist numbers the economic costs arising from such deeply disruptive and continuing to grow in 2004 and so far in 2005. But this far-reaching shocks. However one can note that the could change, since it is only recently that global media disruptions associated with SARS led to an immediate have started prominent reporting on avian influenza. economic loss of perhaps 2 percent of East Asian regional GDP in the second quarter of 2003, even though only about Finally, the costs of prevention and control also 800 people ultimately died from this disease. Note that a 2 need to be taken into account, including costs to the percent loss of global GDP during a global influenza government of purchase of poultry vaccines, medications pandemic would represent around $200 billion in just one and other inputs, hiring workers for culling and cleanup, quarter (or $800 billion over a whole year), and it is fair to surveillance and diagnosis, hire of transportation etc. assume the immediate shock during a flu epidemic could be Governments also face the need to pay compensation to even larger and last longer than SARS. The 1918 epidemic, poultry owners, which is important in inducing owners not for example, came in three waves, spread over two years. to conceal that a bird flu outbreak has occurred. While such payment is in the nature of a transfer payment for the economy as a whole, it can impose a significant fiscal burden on the government. 8 World Health Organization. “Avian Influenza: Assessing the Pandemic Threat.� January, 2005. WHO/CDS/2005.29. 9 Michael T. Osterholm. “Preparing for the Next 7 World Bank. “The Costs of Avian Influenza in Vietnam.� Pandemic.� New England Journal of Medicine. 352: 1839- Policy Note. Hanoi. October 11, 2005. 42. May 5, 2005. East Asia Update 14 There is evidence that during SARS the costs and the danger of a human influenza pandemic, including arising from panic and disruption were magnified by an planning, training, surveillance, monitoring and diagnostic initial lack of public information, contributing to a large systems, public communications, establishment of over-estimation by private individuals of the perceived stockpiles of medications and equipment, preparation of probabilities of infection and death, a fact documented in national health care systems and facilities, implementation opinion survey data. This could have led to over-reactions of control measures (culling, vaccination, use of anti-virals, in the preventive actions taken by the population at large. A quarantines etc.), compensation and other incentives to key policy question for government is therefore how to win complement control measures, relevant research etc. 11 the trust and confidence of the population, minimize panic Many affected East Asian countries are still at the and disruption and indeed mobilize the public as a key stage of preparing national animal and human health plans. partner in beating the disease. Here an honest, transparent Since in the present crisis animal and human health public information policy is likely to be critical. considerations are closely linked, the response to the In addition to these immediate costs of disruption, influenza threat needs an integrated cross-sectoral approach, a global flu pandemic would also entail a sizeable loss of that brings together agriculture, animal health, human potential world output through a reduction in the size and health, finance and other key agencies and experts, with productivity of the world labor force due to illness and strong support and leadership at the highest political level. death. The effect of disease on the size of the labor force Again, many East Asian countries still have a way to go in would depend on the virulence and spread of the disease and developing multi-sector planning and coordination with top on how it affected different age groups, among other factors. political support. There would also be a general decline in labor productivity There is clearly a priority on curbing avian flu “at due to illness among the labor force at large, as well as costs source�, in the agricultural sector, through implementation of hospitalization and medical treatment. of strong animal and human health surveillance, disease There is a dearth of detailed studies of what these control and mitigation measures, thereby reducing the costs of a flu pandemic might amount to at a global level. probability of a far more costly human epidemic. In However one 1999 study of the United States calculated addition it is also important to strike a balance between that, based on the disease patterns of post World War 2 short and long term measures. Avian flu is becoming pandemics, a new flu pandemic could lead to between endemic in parts of East Asia and will require a long effort 100000 and 200000 deaths in the US, together with 700000 to suppress. Meanwhile a human pandemic may still or more hospitalizations, up to 40 million outpatient visits emerge from some quite different strain of flu virus. Other and 50 million additional illnesses.10 The present value of zoonoses and pathogens continue to emerge. Thus it makes the economic losses associated with this level of death and sense to also undertake broader long term measures to sickness was estimated at between $100 and $200 billion for strengthen the institutional, regulatory and technical the US alone (in 2004 dollars). If we extrapolate from the capacity of the animal health, human health and other US to all high income countries, there could be a present relevant sectors. These will be valuable investments both in value loss of $550 billion. The loss for the world would of the short and long run. course be significantly larger, because of the impact in the Since a human influenza pandemic would rapidly developing world. Note however that it would be spread all over the world, stopping or controlling avian flu inappropriate to make a simple extrapolation from studies of is therefore a true global public good, which all countries rich countries to poor countries, where health systems are have an interest in acquiring. Thus, while country level much less developed and mortality could be much higher. leadership and engagement is essential for success, it must Note also that these estimates for the US arose from a be backed by global resources. Even though the benefits of projected mortality rate of less than 0.1 percent of the US containing a pandemic are overwhelming, individual population, much lower than the mortality rates in either the governments may still be daunted by the social, political and US or the world as a whole in the 1918-19 pandemic. economic costs of various policy measures, especially when Policy issues these measures are in the nature of global public goods that benefit many more than just the people of that nation. By any account, the benefits of preventing or even mitigating or delaying a global influenza pandemic are likely to be large indeed. The FAO, OIE and WHO have set out detailed recommendations on animal and human health policies and preparations that should be implemented at national and international levels to control avian influenza 11 10 Martin I. Meltzer, Nancy J. Cox and Keiji Fukuda. FAO/OIE. A Global Strategy for the Progressive Control (1999). “The Economic Impact of Pandemic Influenza in the of Highly Pathogenic Avian Influenza (HPAI). May 2005. United States: Priorities for Intervention.� Emerging WHO. Global Influenza Preparedness Plan. 2005. Infectious Diseases. Volume 5, No. 5. Sept.-Oct. WHO/CDS/CSR/GIP/2005.5 http://www.cdc.gov/ncidod/EID/vol5no5/meltzer.htm East Asia Update 15 The international and regional environment Developed country trends Emerging East Asian export growth slowed from Projections for overall growth in developed an exceptionally strong year on year pace near 30 percent in economies are little changed from six months ago, mid 2004 to a still healthy pace around 18 percent in the suggesting a modest easing in OECD growth from 3 percent third quarter of 2005 (in nominal dollar terms, Exhibit 4). in 2004 to 2.4-2.5 percent in 2005-06. (Table 5). The main Most of the slowdown was concentrated among the Newly negative for OECD (and world) growth in the near term is Industrialized Economies and South East Asian economies, undoubtedly the high level of oil prices, which are now where export growth slowed to 11 percent. Export growth projected to average $54 in 2005 and $56 in 2006. Still, from China has been less affected, however, still running at high oil prices have had an unexpectedly limited impact on around 30 percent in the third quarter. growth, at least so far. As the later discussion on oil markets notes, the world economy is less energy intensive Among factors affecting exports, growth in the than in earlier decades. Inflation expectations have developed world has slowed modestly this year. More remained well anchored, requiring less monetary restraint importantly, high tech markets experienced a downswing in by central banks. In fact monetary policies generally remain demand growth from the middle of 2004 onwards, supportive of activity, with short and long term interest rates generating a downturn in East Asian high tech industrial remaining unusually low by historical standards. production and exports. Fortunately the recent global high tech cycle has been relatively muted and signs of an upturn were becoming apparent by the end of the third quarter. Table 5. International Economic Environment Lastly, although economic growth in China has continued to 2003 2004 2005 2006 run a strong pace of around 9.5 percent, the pace of its % Change from previous year, except interest rates import growth in nominal dollar terms slowed from 40-50 GDP Growth percent year on year rates in the first half of 2004 to 10-15 World 2.5 3.8 3.1 3.1 percent in the first half of 2005. Growth in exports from World (PPP Weights) 3.9 5.0 4.4 4.3 other East Asian economies to China also slowed, including OECD 1.8 3.0 2.4 2.5 in the crucial machinery, equipment, parts and components categories that are at the core of intra East Asian trade. United States 2.7 4.2 3.5 3.5 However China’s import growth was also picking up by the Japan 1.4 2.6 2.3 1.8 end of the third quarter, reaching 23 percent in September. Euro Area 0.7 1.7 1.1 1.4 With global high tech demand and Chinese import growth World Trade both starting to turn up, prospects for East Asian exports (Volume) 5.8 10.3 6.4 7.0 appear to be brightening. CPI Inflation - G7 a/ 1.5 1.7 2.2 2.0 Oil Price - $/bbl 28.9 37.7 54.0 56.0 - % Change 15.9 30.6 43.1 3.7 Exhibit 4 Non-oil Commodity Prices 10.2 17.5 12.6 -3.5 East Asia - Export Growth LIBOR (US$. 6 Mo.) 1.2 1.7 3.8 5.0 (US$ 3Mo. Mov. Averages - % Change Year Ago) Source: World Bank DEC Prospects Group update Oct. 25, 2005. a/ In local currency, aggregated using 1995 weights. E. Asia SE Asia China NIEs 40 The relatively steady and gradual rise in oil prices over the course of two years has also tended to prevent sudden shocks to consumer and business confidence, although the spike in prices associated with the hurricanes in the US Gulf in September has provoked more serious 20 worries on this score. A temporary slowing of OECD growth in the fourth quarter of 2005 is widely expected. Headline inflation rates have also picked up in a number of major economies due to higher fuel costs. Although core inflation rates have generally remained subdued so far, 0 Jan- Jun- Nov- Apr- Sep- Feb- Jul- Dec- May- Oct- Mar- Aug- central banks are on alert to prevent a broader pass-through 2001 2001 2001 2002 2002 2003 2003 2003 2004 2004 2005 2005 into the general price level, wages and inflationary expectations. Consensus forecasts assume that over the next year central banks will be able to skillfully tighten monetary policy by enough to keep core inflation in check without -20 derailing the global expansion. They also assume that oil prices have now seen their peak and will be gradually falling over the next year. Within this sort of scenario East Asia Update 16 continued productivity improvements, strong corporate households and businesses will still feel some pain this profits and balance sheets, and continued improvements in winter. Perhaps more importantly, consumer confidence labor markets are expected to help keep OECD growth slumped dramatically in September. The impact on moving forward at moderate rates. consumer spending so far has been mixed. Retail sales of gasoline and autos fell in September while sales of other Within the OECD, 2005 projections for the items held up surprisingly well. Nevertheless more hurricane-battered United States have been modestly significant impacts on consumer spending are expected over lowered compared to six months ago, while those for Japan the course of the fourth quarter. have been boosted by 1 ½ percentage points, as a continued stream of evidence has strengthened expectations that a self- Lastly, headline consumer price inflation in sustaining and robust Japanese economic recovery has September jumped by 1.2 percent from the previous month, finally arrived. Japanese recovery comprises one of the or by 4.7 percent from a year earlier. Although core CPI most important positive new developments for the East inflation remained surprisingly subdued in the month, the Asian regional outlook. spike in headline inflation has raised the possibility of a more aggressive tightening of monetary policy in the Turning to the major OECD economies in more coming year. detail: In the United States, growth had been running at robust rates averaging 3.5 percent in the first half of 2005, Exhibit 5 accelerating to 3.8 percent in the third quarter, before the NYMEX Gasoline and Heating Oil Prices impact of hurricanes Katrina and Rita had been fully US cents/gallon experienced. Growth has been broad based, drawing on 260 expansion in private consumption, residential investment, business investment and net exports, backed by improving Gasoline employment and wages, strong corporate profits, still low real interest rates and the lagged competitive effects of the 220 dollar’s devaluation in 2003 and 2004. Hurricanes Katrina and Rita are expected to slow U.S. growth in the fourth quarter by a percentage point or 180 more, through several main channels. First, the hurricanes temporarily shuttered 1.2 mbd of US Gulf Coast oil production, as well as significant fractions of U.S. natural Heating Oil gas and refining capacity, as well as physically disrupting 140 other economic production activity on the Gulf coast, reflected in a 1.3 percent month-on-month fall in industrial production at the national level in September. U.S. employment dropped from recent monthly gains of close to 100 5 5 5 5 5 5 5 5 5 5 200,000 to a fall of 35000 in September, reflecting the loss /0 /0 /0 /0 /0 /0 /0 /0 /0 /0 / 03 / 03 / 03 / 03 / 03 / 03 / 03 / 03 / 03 / 03 of jobs in the affected areas. 01 02 03 04 05 06 07 08 09 10 Second, sharp increases in various fuel product prices will take a bite of as much as 1.5-2 percent out of While the economic outlook for the U.S. has household disposable income, causing some moderation in weakened, at least in the near term, that for Japan has consumer spending. Higher input costs could also crimp improved substantially over the last six months. Strong business profits and output. Retail prices for premium GDP growth in the first two quarters of 2005 of 5.8 and 3.3 gasoline jumped from 243 cents per gallon in July to a peak percent respectively owed much to a revival in business of 313 cents in early October, before starting to fall back. confidence and capital outlays. (Exhibit 6). Private Wholesale prices on the NYMEX exchange give a more investment spending rallied at a 14 percent annualized pace sensitive picture of underlying trends and these show during these quarters contributing more-than 2 points to gasoline prices already dropping back below July levels, in overall growth. The recent Tankan release for the third part as releases from reserves have helped push crude oil quarter shows continued improvement in corporate prices lower, and as refining capacity has come back on assessment of business conditions, with smaller firms stream. (Exhibit 5). However heating oil prices have fallen joining in more forcefully. Double-digit profit gains, major back more sluggishly. Natural gas prices surged from improvements in corporate balance sheets (after a major pay around $7 per million BTUs at the end of July to over $14 down of corporate debt over the last several years), low in late September, and were still around $13.50 in mid interest rates, a bottoming out of bank lending after many October. Overall, recent declines in gasoline prices indicate years of decline, a deceleration in and likely end to the bite out of consumers’ wallets may be less than initially deflation, an upturn in export growth, the weaker yen and feared, but high heating oil and natural gas prices suggest the recent lower house electoral win for the LDP - these are East Asia Update 17 among the factors boosting business enthusiasm and pick up in the pace of domestic demand and import growth. prompting expectations for further capital spending this (The trade surplus and exchange rate are discussed further in year. Consumer spending also scored solid gains in the first the balance of payments section below). half of the year, based on steady jobs growth, rising wages Given the fact that GDP growth has been stable and strong consumer confidence. Monthly indicators while net exports have risen, it seems to be implied that suggest that consumer spending and GDP growth are likely domestic demand growth in China must have slowed to have weakened from the second to the third quarter. significantly during 2005. However it is difficult to pin More generally, though, the prospects for sustained medium down the precise source of the implied slowdown, due to a term recovery in the Japanese recovery have brightened lack of detailed quarterly national income accounts, considerably this year. although a number of other monthly and quarterly data Projections for growth in the Euro area have been series provide some indication of domestic demand trends. shaved down to only 1.1 percent in 2005 and 1.4 percent in Monthly and quarterly data on nominal fixed asset 2006. A modest recovery in activity in the last part of 2004 investment differ from the gross fixed capital investment faltered in early 2005, as unexpected weakness in domestic concept used in national accounts in both concept and demand left only growth in net exports as a stimulus for coverage.12 These data indicate that while the policy activity. tightening measures undertaken in May 2004 have slowed nominal fixed asset investment growth from the Exhibit 6 exceptionally high rates close to 50 percent seen briefly in OECD Real GDP Growth the first quarter of 2004, current growth rates are similar to the annual rates seen in 2003 and 2004 as a whole. Growth (% Change on previous quarter, SAAR) 8 ran at 26.4 percent in the first half of 2005, before picking United States up to 28.5 percent in the third quarter, with growth in 2005 7 Japan year to date generally similar to 26.7 percent and 25.8 Euro Area percent respectively in 2003 and 2004. 6 Exhibit 7 5 East Asia - Import Growth 4 (US$ 3Mo. Mov. Averages - % Change Year Ago) 60 3 E. Asia 2 SE Asia China 1 40 NIEs 0 2003 2003 2003 2003 2004 2004 2004 2004 2005 2005 -1 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 20 -2 China 0 Economic growth in China continues to run at a Jan-2001 Jul-2001 O ct-2001 Jan-2002 Jul-2002 O ct-2002 Jan-2003 Jul-2003 O ct-2003 Jan-2004 Jul-2004 O ct-2004 Jan-2005 Jul-2005 Apr-2001 Apr-2002 Apr-2003 Apr-2004 Apr-2005 strong pace. GDP growth in the third quarter of 2005 was 9.4 percent, little changed from 9.5 percent in the first half of the year, or, indeed, 9.5 percent in 2004. However, -20 although top line growth has been remarkably stable, there are likely to have been some noteworthy shifts in the composition of aggregate demand, notably a significant rise Consumer spending appears to have strengthened in the contribution of the net export sector in the first half of in 2005. Retail sales growth in nominal terms has been 2005, due in particular to a sharp slowing in import growth, steady at 12.5-14 percent (yoy) since May 2004. However, including imports from East Asian trading partners. Lower household survey data on “living expenditure� may be a import growth, combined with still strong exports, has led to better proxy for private consumption. Urban households’ a surge in China’s trade surplus, and continued fast growth “living expenditure�, which had been affected by the in its foreign exchange reserves. The latter point suggests tightening measures of 2004, recovered early this year and that, notwithstanding the modest upward revision of its band this August, macroeconomic pressures for exchange rate 12 appreciation remain strong. The third quarter saw some They include expenditures for land acquisition, for example. East Asia Update 18 has been growing at around 10-11 percent per-capita in Asia showed some acceleration in the third quarter, in line recent months. Given that fixed investment and consumer with the overall pickup in China’s imports at this time. spending growth appear to have held up quite well, the sharp fall in imports this year would be consistent with a steep destocking cycle in industrial inventories, one Commodity markets following a major inventory buildup which contributed to the exceptionally strong import growth rates seen in 2004. High tech cycle In the nature of the case, though, inventory cycles are World high tech markets experienced slower generally short in duration, and so one can expect a recovery demand growth from the middle of 2004 onwards, in China’s import growth, which did indeed appear to be generating a downturn in East Asian high tech industrial occurring in the third quarter. production and exports. As Exhibit 9 indicates, the recent Exhibit 8 cycle in global demand has been relatively muted. After running up from late 2002 through the first part of 2004, the China: Imports from East Asia level of world semiconductor sales and high technology (% Change Year Ago) orders in the G3 countries have reached a plateau, rather 100 than falling steeply, as in previous cycles. Importantly, the China Imports from East Asia 2005 H1 2003 US$ Bill. % of total nominal dollar level of high tech orders in the G3 countries Korea 35.5 11.7 2004 is still well below not just the cyclical peak in 2000 – which 80 Taiwan, China 33.3 11.0 was inflated by the ‘millennium bug’ problem and the high 2005 H1 Indonesia 3.9 1.3 tech stock market boom – but also the preceding cyclical Philippines 5.5 1.8 2005 M7-8 peak in 1997. The 2005 level of orders will represent Thailand 6.3 2.1 60 perhaps 1.3 percent of world GDP, well below 1.8 in 1997 (or around 2 percent in 2000). This suggests in a broad way that, if the current world economic expansion continues, 40 there may well be room for a second upward leg in the global high tech demand cycle. 20 Exhibit 9 High Tech Orders and Semiconductor Sales (US$ Billions. Jan.1993-Aug.2005. 3 mo. averages) 0 60 20 Korea Taiwan, Indonesia Philippines Thailand China 55 18 As it was, China’s import growth in nominal dollar 50 16 terms slid from 40-50 percent year on year rates in the first half of 2004 to 10-15 percent in the first half of 2005, before 45 14 recovering to near 20 percent in the third quarter. (Exhibit 40 12 7). (Import growth in other main economies of Emerging East Asia also slowed quite sharply over the past year, 35 10 falling in nominal terms from around 30 percent in mid 2004 to 10-20 percent during much of 2005 so far.). The 30 8 slowdown in China’s imports was broad based, including oil G3 High Tech Orders (left hand scale) and non-oil primary commodity imports (discussed further 25 World Semiconductor Sales (right hand scale) 6 in the section in oil and commodities below), as well as manufactures. Growth in China’s imports of machinery and 20 4 transport equipment, (which also includes all types of 93 93 94 94 95 95 96 96 97 97 98 98 99 99 00 00 01 01 02 02 03 03 04 04 05 05 intermediate industrial and electronics parts and n- u l- n- u l- n- u l- n- u l- n- u l- n- u l- n- u l- n- u l- n- u l- n- u l- n- u l- n- u l- n- u l- J a J J a J Ja J Ja J Ja J J a J Ja J Ja J J a J J a J Ja J Ja J J a J components), which are by far the largest category of imports, slowed from a 41 percent pace in 2003 and a 31 percent pace in 2004 to only about 11 percent in the first Recent monthly indicators, while mixed, contain half of 2005. These types of products are however also the some positive signals. New factory orders for computers largest part of exports from the rest of East Asia to China, and electronic equipment in the United States jumped from especially in the case of the Newly Industrialized a 1.3 percent decline in June to a gain of 15 percent (saar) in Economies. Growth in China’s imports from the rest of August, with computers up 19 percent and telecomm East Asia has therefore also seen a marked slowdown from equipment ratcheting 68 percent higher. North American 2003-04’s pace of 35-40 percent to a still healthy pace of orders for semiconductor equipment stabilized in the second about 15-20 percent on average in the first eight months of quarter and turned higher in August, pushing the book to 2005. As Exhibit 8 indicates, China’s imports from East bill ratio over 1 for the first time this year (Exhibit 10). In East Asia Update 19 Japan, technology orders breached positive ground, rising Exhibit 11 2.9 percent (saar) from a decline of 6.5 percent in the second quarter. Worldwide semiconductor sales advanced a sharp Non-oil Commodity Prices 9.9 percent (saar) in August, driven wholly by sales growth (Dollar Indexes. Jan.1999-Sep.2005. Jan.2003=1) 2.10 in East Asia (ex-Japan), which was up 33 percent. Reflecting these signs of revival in final markets, high tech Non-oil commodities exports from key East Asian developing-and-Newly 1.90 Food Industrialized Economies have turned up, showing a 24 Agri.raw materials percent gain (saar) in the three months through July on the 1.70 Metals & Minerals preceding three months. Exhibit 10 1.50 Semiconductor Equipment Orders and Billings (N. America. Mill.US$. 3 Mo. Mov.Averages. Jul-98 to Aug-05). 3500 1.6 1.30 3000 1.4 1.10 1.2 2500 0.90 1 2000 Ja 9 Ja 0 Ja 1 Ja 2 Ja 3 Ja 4 5 99 00 01 02 03 04 05 l- 9 l- 0 l- 0 l- 0 l- 0 l- 0 l- 0 n- n- n- n- n- n- n- Ju Ju Ju Ju Ju Ju Ju Ja 0.8 1500 0.6 Exhibit 12 1000 0.4 China: Imports of Non-oil Commodities 500 Billings 0.2 (% change year ago in nominal dollar value) Bookings 200 Book-to-Bill (Right Scale) 0 0 Food & Live Animals 8 8 9 9 9 0 0 0 1 1 1 2 2 2 3 3 3 4 4 4 5 5 Animal and Vegetable Oils l- 9 -9 - 9 l- 9 -9 - 0 l- 0 -0 - 0 l- 0 -0 - 0 l- 0 -0 - 0 l- 0 -0 - 0 l- 0 -0 - 0 l- 0 J u N ov M ar J u N ov M ar J u N ov M ar J u N ov M ar J u N ov M ar J u N ov M ar J u N ov M ar J u 150 All non-energy primary Source: Semiconductor Equipment and Materials International Metals & Minerals Energy 100 Non oil commodity markets Non-oil commodity prices were generally stable or modestly declining in the six months through September 50 2005, after having run up on average by around 60 percent in dollar terms since the start of 2002, the beginning of the present cyclical upswing in prices. (Exhibit 11). The recent 0 stabilization in non-oil prices seems broadly consistent with 2004 Q1 2004 Q2 2004 Q2 2004 Q4 2005 Q1 2005 Q2 prevailing global macroeconomic trends. Global growth has modestly slowed from 2004’s exceptional pace. Perhaps -50 more significantly, large increases in China’s consumption of metals and other raw materials have been an important factor underpinning commodity price increases in the last two years. However this year, while China’s overall Among the main categories of commodities, metals economic growth has continued to run strongly at over 9 and minerals prices have seen the largest increases in the percent, growth in its imports of non-oil primary current cycle, and remained quite buoyant in the last six commodities has slowed, falling, in nominal dollar terms, months. Even though its growth rate has fallen this year, from 45 percent in 2003 and 59 percent in 2004 to around China’s demand for metals continues to rise from the high 16 percent in the first half of 2005. (Exhibit 12). Fresh levels reached last year, keeping specific markets under commodity price increases are also likely to be restrained by pressure. Copper prices in particular approached $4000 a the rising trend in US short term interest rates, and, at least ton in September, on very low global inventories and lower in dollar terms and in the near term, by the mild than expected supply gains, while earlier in the year iron ore strengthening of the dollar against other main currencies this contracts for 2005 were able to secure price increases of year. about 70 percent. An exporter of both minerals and oil like Papua New Guinea has therefore enjoyed multiple terms of East Asia Update 20 trade gains from higher mineral on top of higher oil prices. Prices are expected to stay near current levels for In a mineral exporting oil importer like Mongolia, on the the rest of the year and then gradually pull back over the other hand, high copper prices have helped defray the bill course of 2006, resulting in average prices of $54 in 2005 for more costly oil, though to a lesser extent this year than in and $56 in 2006. Sharp increases in long dated futures 2004. In industrial economies like Korea that import both prices suggest that market participants view the price minerals and oil, higher prices have added to the income increases as the result of significant structural changes that losses arising from higher oil prices. (Appendix Table 4). are likely to persist. In particular the sharp increases in oil consumption in fast growing emerging economies such as Among agricultural raw material exports of interest China and India are expected to keep providing a strong to East Asian economies such as Indonesia, Malaysia, underpinning for market demand in the longer term. Thailand and Vietnam, rubber prices have remained buoyant, running about 20 percent ahead of year earlier levels in September, supported by weather related supply Exhibit 13 shortages in Thailand, continued growth in demand from China and high oil prices, which have pushed synthetic Monthly Average Crude Oil Price ($/bbl) rubber prices higher. Among other major commodity (Jan 1990 - Sept 2005) groups, world food prices overall have tended to ease in 70.0 recent months due to ample supplies. Price movements for food commodities of particular interest to East Asian 60.0 economies have been mixed in the recent period. Prices for rice, a significant export item in economies such as Thailand 50.0 and Vietnam, have been running about 20 percent ahead of Average Sept. 1999 - year earlier levels. Prices for edible oils, a significant Sept 2003 - $26.2 export item in economies such as Indonesia, Malaysia and 40.0 Average Jan. 1990 - Thailand have, on the other hand, been easing lower. The Aug 1999 - $18 overall impact of commodity prices changes on the incomes 30.0 of East Asian economies are assessed in the subsequent discussion of oil prices. 20.0 Oil markets 10.0 World average crude oil prices rose by almost 60 990 J a n-1 2 993 995 996 998 999 001 002 004 9 90 9 93 9 96 9 99 0 02 0 05 9 91 9 94 9 97 0 00 0 03 99 percent between the end of 2004 and August-September this Oc t -1 A p r-1 Oc t -1 A p r-1 Oc t -1 A p r-1 Oc t -1 A p r-2 Oc t -2 A p r-2 J a n-1 J a n-1 J a n-1 J a n-2 J a n-2 J u l-1 J u l-1 J u l-1 J u l-2 J u l-2 year, when they averaged about $61.50.13 (Exhibit 13). Prices have now more than doubled since the end of 2003. Spot prices for West Texas Intermediate briefly reached as high as $70 as Hurricane Katrina threatened U.S. Gulf Coast Exhibit 14 production facilities, before falling to just over $60 by mid Average Real Oil Price October, pushed down by release of IEA emergency stocks, (1970 Q1 - 2005 Q3. Real is Constant 2004 Dollars) loans from the US strategic reserve, and reduced demand. 100 In real terms (relative to the U.S. consumer price index) Real oil price - constant crude oil prices in the third quarter of 2005 were still over 2004 dollars per barrel 25 percent less than the previous record levels in 1979-80. 80 (Exhibit 14). Nevertheless they were about the same as in 3 year average of real oil price late 1982, the recessionary aftermath of the 1979-80 price shock, and certainly high enough to provoke concerns about US$ per Barrel 60 a significantly greater adverse impact on world growth than has been felt so far. 40 13 This reference price is an average of Brent, Dubai and West 20 Texas Intermediate (WTI) crudes. This average has generally been lower than the more widely reported WTI price, which averaged over $65 in September, for example. Exceptionally strong demand for light crudes like WTI over the past two years, limited light 0 crude production capacity among OPEC Arab members and 98 9 99 1 99 2 99 4 99 6 99 8 99 9 00 1 00 3 00 5 97 0 97 1 97 3 97 5 97 7 97 8 98 0 98 2 98 4 98 5 98 7 limited refining capacity for light crudes have boosted the price Q1 -1 Q4 -1 Q3 -1 Q2 -1 Q1 -1 Q4 -1 Q3 -2 Q2 -2 Q1 -2 Q1 -1 Q4 -1 Q3 -1 Q2 -1 Q1 -1 Q4 -1 Q3 -1 Q2 -1 Q1 -1 Q4 -1 Q3 -1 Q2 -1 differential for light crudes over heavier crudes like Dubai. The WTI-Dubai differential was over $9 a barrel in September, compared to a more normal $3-4 East Asia Update 21 It is true that the 1.35 million barrel per day (mbd) this is because until recently oil prices have been mainly increase in world demand projected by the IEA in 2005 will pulled higher by strong world growth rather than pushed up be less than half the demand increase in 2004, and that oil by supply shocks. In addition, the world economy is less import growth in China has also slowed sharply this year. energy intensive than in earlier decades. Global inflation (Exhibit 15). However, even with a smaller increase, the expectations have remained well anchored, requiring less projected level of world demand of around 83.5 mbd monetary restraint by central banks. The relatively steady remains high, continuing to keep OPEC spare production and gradual rise in prices over the course of two years has capacity (excluding Iraq) under pressure, running at only also tended to prevent sudden shocks to consumer and about 1.4 mbd in August, unusually low by historical business confidence. However there are concerns that the standards. Demand in 2006 is projected to rise by a more impact may be larger going forward. For one thing, as solid 1.75 mbd, with the largest increase coming from noted, the causal forces underpinning high oil prices have China, where demand is expected to grow more closely in shifted during 2005 from strong demand more towards line with strong overall output growth. negative supply shocks. The recent hurricanes and the associated spikes in US gasoline, heating oil and natural gas Exhibit 15 prices have finally put a large dent in US consumer World Oil Demand Growth confidence. (Million Barrels per Day) 3 Exhibit 16 Income gains/losses due to selected 2.5 Others commodity price changes (As % of GDP) N.America Other Asia 2 7.0 China Average Actual & Forecast 2004-05 Price Changes (%): 1.5 2004 2005 2006 5.0 2006 Oil 30.6 43.1 3.7 Rice 20.3 19.9 -3.5 1 Coconut Oil 41.4 -4.7 -4.5 Iron Ore 18.6 71.5 0.0 3.0 Copper 61.1 25.6 -11.1 0.5 Rubber 20.4 10.4 -17.3 1.0 0 2000 2001 2002 2003 2004 2005 2006 -0.5 o G a a a si a si a ia d s m -1.0 La in re PN o li ne an Source: IEA Oil Market Report. Sept. 2005 and earlier issues. od na Ch l ay ne Ko ng ai l pi et mb do il i p Ma Mo Th Vi Ca In Unexpected supply shortfalls have also played a Ph key role in the recent price increases, even more so in 2005 -3.0 than in 2004. Non-OPEC oil production is now expected to increase by only about 0.2 mbd in 2005, down from about 1 mbd in the last two years. A large part of the decline is due In East Asia higher oil prices are estimated to have to the impact of Hurricanes Katrina and Rita, which have generated a cumulative income loss due to worse terms of temporarily shuttered 1.2 mbd of US Gulf Coast oil trade of about 1.4 percent of regional GDP in 2004-05, or production, as well as significant fractions of U.S. natural around 0.7 percent a year. Within the region net oil gas and refining capacity. But output has also been exporters such as Malaysia, Vietnam and Papua New unexpectedly low in Russia, the North Sea and other non- Guinea are estimated to have received windfall gains from OPEC producers. Recent difficulties in expanding non- 0.8 percent of GDP a year (Malaysia) to 3 percent a year OPEC oil production have fostered concerns that longer (Papua New Guinea). These gains were further augmented term supply expansion outside OPEC may remain more by rising prices for these economies’ non-oil commodity difficult due to a slower pace in discovery of new reserves, exports. (Exhibit 16). On the other hand significant net oil low investment over the last decade and unstable political importers like Cambodia, Korea, Lao PDR, Philippines and conditions in many parts of the world with reserve potential. Thailand are estimated to have experienced terms of trade This provides another factor underpinning expectations that losses from higher oil prices of 1.5-2 percent of GDP in oil prices will tend to remain at high levels for some time. each of the two years. For an economy like Thailand, there was some offset from higher prices for its non-oil The impact of higher oil prices on the world commodity exports. China is estimated to have experienced economy has been relatively muted so far. The IMF’s more moderate income losses of about 0.5 percent of GDP World Economic Outlook estimates that higher oil may per year. The ultimate impacts on growth, while significant, reduce world growth by about 0.8 percent in 2005. In part are likely somewhat more muted than these first order terms East Asia Update 22 of trade effects. The pass through of higher oil costs to including energy prices, taxes, regulations and policies consumers has been limited, in part because of government affecting energy use, per-capita income levels and evolving interventions to subsidize fuel use in a number of economies demands for products (household appliances, personal (discussed in more detail below). Most economies are also transportation, air-conditioning etc), the industrial structure able to support expenditures through some reductions in of the economy, geographical and climatic conditions, and national savings rates, running down of current account the application of energy saving technological innovations, surpluses, drawing on foreign reserves or access to foreign among others. In China the transition from a planned financing. Thus private consumption growth in the region socialist economy to a market oriented one has induced has eased, rather than slowing sharply. For the eight main huge improvements in energy efficiency over the last two economies other than China, private consumption growth and a half decades. The surge in industrial demand for slowed from a simple average 5.5 percent in 2004 to 4.1 energy in 2003-04 was indeed the first time since the mid percent in the first half of 2005. Similarly, fixed investment 1970s that China’s energy intensity rose rather than fell slowed from an average 8.4 percent growth in 2004 to a from one year to the next. In several other East Asian more modest but still expanding 4.8 percent in the first half economies that did not start out burdened with an inefficient of 2005. Overall, estimates suggest that in 2005-06 higher socialist economic structure, energy intensity has been oil prices might reduce growth in the region by somewhere relatively flat or has risen in the period since 1980. In in the region of 0.8 percent a year. The precise impact in economies like Indonesia, Malaysia and Thailand, for each country would be affected by the speed with which example, energy intensity has tended to be underpinned by a price increases were passed through, and other mitigating rise in the GDP share of the relatively energy intensive measures such as the redeployment of subsidies for industrial sector. (Exhibit 17). infrastructure or social spending. Exhibit 17 Looking forward, the prospect of sustained high oil prices puts more focus on the need for energy efficiency in Share of Industry in GDP (%) the region. Table 6 summarizes the level of energy and oil 60 consumption in East Asia per dollar of real GDP (in PPP Indonesia Japan terms), as well as the changes in this measure of energy Korea, Malaysia Philippines Thailand intensity between 1980 and 2003. With the exception of the USA China Philippines, energy intensity in East Asia is clustered 50 around a regional average of about 0.22 kilograms of oil equivalent per dollar of GDP. This is about the same as in the U.S. but significantly higher than in Japan or in the OECD as a whole (about 0.18 kg). 40 Table 6. Energy and Oil Consumption Total Energy Use Oil Use Kg per % Kg per % 30 $ of Change $ of Change GDP * 1980-03 GDP * 1980-03 China 0.231 -71.1 0.044 -62.8 Indonesia 0.234 -9.2 0.084 -13.6 20 Korea 0.242 8.3 0.121 -16.3 19 80 19 81 19 82 19 83 19 84 19 85 19 86 19 87 19 88 19 89 19 90 19 91 19 92 19 93 19 94 19 95 19 96 19 97 19 98 20 99 20 00 20 01 20 02 03 Malaysia 0.254 16.5 0.124 -17.5 19 Philippines 0.128 25.3 0.048 -12.7 The extent of energy efficiency is also clearly Thailand 0.200 1.7 0.091 -7.9 affected by energy tax and subsidy policies. The recent rise Vietnam ** 0.231 -30.9 0.056 66.4 in world oil prices has encouraged governments to look East Asia *** 0.217 -8.5 0.081 -9.2 again at their energy sector policies. There are several Japan 0.156 -10.9 0.077 -35.2 economies where the impact of higher oil prices has been USA 0.231 -34.6 0.091 -42.1 delayed because of significant government interventions in W. Europe 0.157 -20.7 0.064 -39.7 energy markets through restrictions on prices and explicit or Latin America 0.180 -2.4 0.086 -18.1 implicit fuel subsidies. Table 7 indicates the evolution of * Kilograms of oil equivalent per constant 2000 $ PPP GDP in retail prices for premium gasoline in East Asia compared to 2003. **Vietnam growth is 1989-03. *** Simple average. that in the US, which is often taken as a benchmark for a Source: International Energy Agency and World Bank. market determined and unsubsidized fuel price. As the fiscal burden of subsidies has increased, several governments have begun adjustments to bring retail prices While current energy intensity levels in the region for fuels closer to those implied by world market prices. As are similar, their paths in recent decades are more diverse. a result, rather than having been felt largely over the past 18 The level of energy intensity is the result of many factors, East Asia Update 23 months, consumer reactions to higher oil prices will be up from an initial projection of -0.7 percent. CPI inflation spread out over a longer period. rose to 9.1 percent in September, with core inflation running at 6.7 percent. Econometric evidence suggests that inflation Table 7: Prices for Premium Gasoline may rise by 0.5 to 0.6 percent per 10 percent increase in Price: US c./liter % of US price administered fuel prices, implying an overall impact on Dec- Aug- % Dec- Aug- headline inflation from the year’s fuel price increases of 6 to 02 05 Change 02 05 7 percentage points, most of it in the next few months. The China 42 53 26.2 105.0 74.6 central bank is tightening monetary policy to keep core Indonesia* 20 45 125.0 50.0 55.3 inflation in check. SBI interest rates were stable until Korea 109 150 37.6 272.5 211.3 March at 7.3 percent, before gradually increasing to 9.25 Malaysia 35 43 22.9 87.5 60.6 percent in September and 12.1 percent for 3 month SBI by Philippines 35 60 71.4 87.5 84.5 October. Thailand 36 67 86.1 90.0 94.4 Malaysia. As a result of subsidies and sales tax Vietnam 34 63 85.3 85.0 88.7 exemptions, fuel product prices in Malaysia are now among USA 40 71 77.5 100.0 100.0 the lowest in the world, even after three price increases Crude Oil 16 40 150.0 40.0 56.3 implemented this year. As Table 7 indicates, premium gas *Indonesia is October 2005. prices in August were some 40 percent below those in the U.S., a gap that had increased significantly since the end of 2002. Total subsidies remained relatively low in 2001- China. As noted, growth in China’s energy 2003, averaging RM1.7 billion. They rose by 163 percent demand in 2003 and 2004 was so strong that energy to RM4.8 billion in 2004. The Government projects that consumption per dollar of real GDP rose for the first time even after the recent price increases, the total subsidy bill since the late 1970s. China does not directly subsidize fuel will rise to RM6.6 billion, equivalent to 7.4 percent of costs. However wholesale and retail prices for gasoline are operating expenditure and 23.3 percent of budgeted administratively set, and, although prices have been raised development expenditure. Meanwhile, foregone sales tax several times in the last year and a half, they still lag revenue has increased from an average of RM4.4 billion market-determined prices. As table 6 indicates retail during 2001-2003, to RM7.9 billion for 2005 as a whole, gasoline prices were even a little higher than in the U.S in equivalent to 8 percent of total revenue. The overall cost of December 2002, but by August 2005 were about 25 percent subsidies and tax exemptions is projected to increase to lower. As a result of price controls on refined gasoline RM14.5 billion in 2005, equivalent to 3.1 percent of products, the burden of rising crude oil costs has fallen on projected GDP. This is not expected to have an adverse refining companies, which have swung into significant impact on the fiscal situation, because tax revenues from the losses this year, and which have also cut back production, country’s oil production and exports have also surged. resulting in gasoline shortages in various locales. In There is of course a general case to be made for September the authorities banned exports of refined discouraging wasteful consumption of oil products by products and removed tax rebates on exports of petrol and allowing domestic prices to come closer to world market naptha. prices. Indonesia. Until recently Indonesia had the largest Thailand removed ceilings on petrol retail prices in fuel product subsidies in the region, costing about 3 percent October 2004 and on diesel prices in July 2005. World of GDP in 2004. Concerns about rising world oil prices prices are now essentially being passed on to consumers. causing a further sharp rise in the fiscal cost of subsidies Smaller economies in the region such as Cambodia and Lao provoked capital outflows and downward pressure on the PDR have also generally allowed a full pass through of currency. (It is estimated that, without change, subsidies higher prices to users. While Lao PDR does not subsidize would have cost 5 percent or more of GDP this year). The fuel prices, it has reduced taxes on fuel imports, but, given government had already begun revising fuel prices, with the adverse impact on tax revenues, the government has increases in December 2004, March and August 2005. announced its intention to gradually phase out the tax Finally, a major package of measures was launched on reductions. September 30, combining fuel price increases, a cash compensation program for the poor (see discussion of poverty issues above) and a variety of tariff reductions and Trade policy developments other tax incentives for industry, agriculture and consumers. After the September 30 package, the cumulative price While in recent years East Asian trade ministers increases this year amount to 186 percent for kerosene, 149 have often been preoccupied by policies and developments percent for gasoline and 161 percent for automotive diesel. regarding regional trading arrangements, they may well be The government estimates that the October fuel price focusing more intently on multilateral trade arrangements in increase will reduce fuel subsidies by about Rp.25 trillion to the next few months, in the lead up to the discussions on the Rp.89 trillion (or 3.4 percent of GDP) in 2005. The overall Doha Round at the December 2005 WTO Ministerial in budget deficit is projected at -0.9 percent of GDP in 2005, Hong Kong. A weak or failed Doha Round would damage East Asia Update 24 the prospects for sustaining a rules-based global trading development perspective, a “good� outcome from the Doha system, a development that would seriously damage the round should contain three elements. First, developed long term interests of the trade oriented East Asia region. economies should undertake significant market openings in The Special Focus later in this report asks in more detail agriculture by eliminating export subsidies and substantially “What Can East Asia Expect from the Doha Development reducing applied tariffs and trade-distorting domestic Round?� support. Second, all economies need to make reform commitments. Middle income and (more selectively) poor WTO developments economies need to make offers to open services markets, Trade has consistently been a critical driver for the bring down high tariffs in manufactured products, and global economy and for developing countries’ growth reduce barriers in heavily protected agricultural markets, prospects. Growing at over 10 percent in real terms, trade while expressing willingness to trade “special and provided a crucial underpinning for last year’s strong global differential treatment� for increased market access in growth. To a significant extent the prospects for global agriculture and elsewhere to spur their own development. development and poverty elimination hinge on the Finally, “aid for trade� will be valuable - that is, maintenance and strengthening on an open rules-based international assistance to help poor countries address global trading system. supply constraints that hinder their participation in international markets, as well as aid to cope with possible It is therefore important that the ongoing adjustment costs associated with trade liberalization. multilateral trade negotiations, the Doha Round, are concluded as ambitiously as possible and on time. Much While a minimalist Doha outcome could lead to now depends on progress that members are able to make at disenchantment amongst developing countries and the upcoming WTO Ministerial in Hong Kong on December significantly weaken the system, a failed Doha round would 13-18, 2005. However, based on the very limited progress be even worse as it would be likely to seriously damage the over the past year, there is a significant risk that only a WTO. This is not in the interests of developing countries, limited outcome may emerge. The WTO General Council who have a real stake in a strong rules-based multilateral meeting at the end of July confirmed that negotiations are trading system, irrespective of new market access gains stalled in almost areas of the Doha agenda: from the Doha round. In particular WTO rules lock in existing market access on a non-discriminatory basis, which • Agriculture. Despite intense efforts by negotiators, is a valuable asset at a time when protectionist forces appear no agreement has been reached on the formula for to be gaining strength in some countries. The WTO dispute reducing tariffs on agricultural products, in the market settlement system also levels the playing field for access area of the negotiations. developing countries, which can – and have – used it to • Non-Agricultural Market Access (NAMA). There is defend their interests against larger and richer trading broad recognition that progress on NAMA will require partners. real progress on agriculture, which many developing Textile and Apparel Phase out countries view as key to their interests. There has been an emerging consensus on adopting a ‘Swiss formula’ The phasing out of global quotas on textiles and approach to cutting non-agricultural tariffs, but major clothing trade at the start of this year has already had a differences remain on detailed specifics. substantial impact on international trade in these products, as well as provoking renewed trade restrictions in major • Services. Even though the number of offers has importing economies. U.S. imports of textiles and clothing been increasing, their quality is rated as generally poor. from China increased by 64 percent (or $6 billion) in the In other words, if these offers came into force there first 8 months of 2005, versus a 9.1 percent (or $4.9 billion) would be few if any new opportunities for services increase in total imports of these products from the world. providers. European Union imports of textiles and clothing from China • Other. Negotiations on trade facilitation are rose 67 percent in the first six months of 2005. moving broadly on schedule, with more concrete In response, both the US and EU introduced new discussions on operationalizing technical assistance and trade restrictions on clothing and textile imports from capacity building. Despite renewed negotiations, no China. In May the US invoked the Textile Safeguard Safety consensus has been reached on proposals for Special and Clause (TSSC), a provision under agreements with China Differential Treatment for least developed countries. In under its WTO Accession Protocol. The TSSC restricts negotiations on Rules, there is still little consensus on growth in imports of safeguarded items to 7.5 percent per Anti-Dumping and fisheries subsidies. There has been year, but must be resubmitted for review and approval on a more progress on reaching consensus about rules for per year basis until 2008. More products are under Regional Trading Agreements. investigation and may also become subject to safeguards. Failure to reach a successful conclusion of the Consultations between the European Union and China Doha Round would greatly reduce the potential of trade to culminated in the Shanghai Agreement of June 10, 2005. help development. It could imply a further hollowing out The agreement limits textile exports in ten categories, and erosion of the multilateral trading system. From a allowing for growth between 8 percent and 12.5 percent per East Asia Update 25 year in 2005-07. A large overflow of stopped clothing and show a decline in imports from China this year. US imports textile imports piled up at European ports. Further of t-shirts from China increased by around 350 percent in negotiations led to a further agreement in September to the first six months of this year but imports of certain woven enable the entry of blocked goods into the EU. cotton fabrics fell. A surge in US imports of t-shirts from China was accompanied by an increase in imports of t-shirts The impact of the phasing out of global quotas from countries such as Indonesia and Thailand, but a decline under the Agreement on Textiles and Clothing on other for Vietnam. Several categories of US textile and clothing developing country exporters has been quite diverse. imports from Indonesia grew as China’s were also growing. (Exhibit 18). While China’s share of US imports of Exhibit 20 shows correlations in the US import market clothing and textiles increased from 17 percent in the first 8 between China’s import volume growth and import volume months of 2004 to 26 percent in the same period of 2005, a growth of ASEAN and South Asian countries in specified number of other developing countries also managed to product categories. The occurrence of positive correlations increase their market share in US imports. US imports from indicates that, while the removal of quotas has led to a much Jordan, India and Bangladesh increased by 20 per cent or more competitive global market for textiles and clothing, more in the first 8 months of 2005. In East Asia, US there remain opportunities for efficient suppliers in other imports from Indonesia and Cambodia rose by around 15 countries to expand output and exports. percent, while imports from Thailand and Vietnam were flat. On the other hand, imports from higher income Exhibit 19 countries in East Asia fell sharply. U.S. textile and clothing imports from Hong Kong, Korea, Taiwan (China), Macao Growth in EU Textile and Clothing Imports (First half 2005/First half 2004.% Change year ago) and Singapore fell by 20 percent or more. China India Exhibit 18 Sri Lanka Turkey Growth in US Clothing and Textile Imports Malaysia Egypt (Jan-Aug.2005 % Change year ago) Cambodia Korea South Africa Macao Bulgaria Taiwan (China) Bangladesh Lao Hong Kong Madagascar Malaysia Vietnam Mexico Mauritius Dominican Rep. Pakistan Turkey Tunisia Philippines Indonesia El Salvador Taiwan Italy Brazil Vietnam Belarus Gautemala South Korea Honduras Iran Thailand Philippines World Syria Pakistan Russia Sri Lanka Hong Kong Macao Indonesia Cambodia Peru -60 -40 -20 0 20 40 60 80 Bangladesh India Jordan It is still too early to determine with confidence the China ultimate impact of the ATC phase on developing country -40 -20 0 20 40 60 80 exporters of textiles and clothing. Buyers in developed Source: U.S. OTEXA countries may be postponing decisions to switch suppliers to China whilst there is uncertainty about the extent and A similar situation occurred in the EU market duration of safeguard protection against Chinese imports in (Exhibit 19). Imports from China have increased strongly in the EU and US markets. Nevertheless, the fact that a the first six months of 2005, but imports from a number of number of countries have managed to increase exports to the other developing countries have also increased, including EU and the US even in product categories where Chinese from India, Sri Lanka and Turkey, and, in East Asia, from exports have grown the fastest suggests that there remain Malaysia, Cambodia, Laos, Thailand and Vietnam. On the export opportunities for a range of developing countries. other hand there were significant declines in EU imports Whilst global buyers will review their sourcing strategies, from East Asian economies such as Hong, Kong, Macao, many have indicated that they will not risk placing all their Korea and the Philippines. orders with China and will seek to maintain a more It is clear from the available trade data that the diversified sourcing structure. In addition, China cannot fill initial response to the removal of quotas in the US and the each and every market niche in the vast and diversified EU is far from homogenous. Imports from China have global textiles and clothing market. Securing even a small increased substantially in many product categories but they share of a small niche of the US or European markets can have also fallen in others. Of the 15 detailed categories in have a substantial economic impact on a small developing the classification for women’s and girls’ suits, nearly half country. East Asia Update 26 Exhibit 20 period. The regional picture was dominated by China, where reserves increased by $161 billion in the first 9 Correlation of US Import Growth from China with months, sharply up from $111 billion in the same 2004 Other Regions period. In other parts of the region, though, there a slowing in the pace of reserve accumulation, as in Korea and Taiwan Silk and vegetable products (China), or even some fall in reserve levels, as in Indonesia and Thailand. Movements on trade and current account Man-made fiber balances are generally playing a larger role in driving products reserve trends than they did last year, when capital account S. Asia movements were paramount. ASEAN Wool products Exhibit 21 East Asia - Foreign Reserves Cotton products 1,800 (US$ Bill. 1/1996 - 9/2005) China Indonesia Malaysia Cotton and man- 1,600 Philippines Korea Taiwan (China) made fiber Singapore Thailand Hong Kong 1,400 Aggregate MFA % Increase in reserves: 1,200 2001: 10.4% 2002: 21.1% 1,000 -0.4 -0.2 0 0.2 0.4 0.6 0.8 1 2003: 26.4% 800 2004: 30.0% Beyond the ‘safeguard’ restrictions recently put in 9/2005 27.6% place, the main trade restrictions on imports of textiles and 600 clothing are now tariffs, which remain relatively high in 400 both developed and developing countries. Average clothing and textile tariffs of about 11 percent in the US and EU 200 were more than twice the average tariffs on all products. In 0 developing economies like Brazil and India, for example, J an -1 99 6 M a r -1 99 7 O c t-1 99 7 M ay -1 9 98 D ec -1 9 98 J u l-1 99 9 F eb -2 00 0 N ov -2 0 01 J un -2 00 2 J an -2 00 3 M a r -2 00 4 O c t-2 00 4 M ay -2 0 05 S e p- 2 00 0 A ug - 19 96 A pr - 2 0 01 A ug - 20 03 average clothing and textile tariffs run as high as 21 and 38 percent respectively. Future levels of these tariffs will largely depend on progress achieved at the WTO discussions on non-agriculture product market access under the Doha Round. There are several proposals on the table Table 8. Change in Reserves (US$ Bill.) on how can tariffs be reduced. Agreement by the Hong 2003 2004 2004 2005 Kong WTO Ministerial Meeting will determine the final Q1-3 Q1-3 outcome. East Asia 234.1 335.7 174.7 195.7 China 117.0 206.3 110.9 160.5 Balance of payments trends and financial markets S.E. Asia 18.0 28.9 12.1 10.6 Last April’s Update reviewed the very large Indonesia 4.3 0.0 -1.5 -6.0 increase in Emerging East Asia’s overall balance payments Malaysia 10.4 21.8 12.0 13.9 surplus in 2004, resulting in a record increase in the region’s Philippines 0.3 -0.5 -0.9 2.9 foreign exchange reserves of some $336 billion, up from Thailand 3.0 7.6 2.6 -0.1 $234 billion in 2003. Last year’s pickup in the pace of NIEs 99.1 100.5 51.7 24.6 reserve accumulation was the product of an increase in the Hong Kong 6.5 5.2 0.0 -0.7 region’s current account surplus, and, even more Korea 33.9 43.7 19.1 7.7 significantly, of a surge in net capital inflows to the region. Singapore 13.7 16.5 6.2 5.6 Regional foreign reserves continue to accumulate in 2005, Taiwan, China 45.0 35.1 26.4 12.0 rising to $1.65 trillion in September 2005 from $1.46 trillion at the end of 2004. (Exhibit 21). However there are indications that, while reserves are still increasing rapidly in In China, last year’s acceleration in reserves was China, the pace of accumulation is moderating in some driven primarily by a surge in short term capital inflows, other parts of the region. complemented by moderate increases in foreign direct investment and the current account surplus. This year the Overall, as Table 8 indicates, East Asian reserves most notable driver is a large increase in the current rose by $196 billion in the first nine months of 2005, up account, most notably in the trade surplus, which will likely modestly from a $175 billion increase in the same 2004 increase to well over $100 billion from $33 billion in 2004, East Asia Update 27 a result of continued strong export growth combined with a of reserves in 2005 was mainly linked to outflows of slowdown in imports. (Exhibit 22). The higher trade portfolio and short term lending flows, due to an initial lag surplus will likely be complemented by further increases on in raising local interest rates (when U.S. rates were rising), the capital account. as well as concerns about potential fiscal difficulties facing the government. The government’s policy actions to tighten monetary policy and to reduce oil fuel subsidies at the end Exhibit 22 of September are likely to have a positive impact on China: Trade Balance. sentiment, however. Balance of payments pressures were also alleviated by a sharp upturn in net FDI inflows to (US$ Bill. 4 Quarter Sums. Customs Clearance) 100 Indonesia, motivated by perceptions of an improved political climate and the likelihood of accelerated reforms and improvements in the investment climate in the medium 80 term. Exhibit 23 60 Net PortfolioCapital Flows (US $ Bill.) 8.0 40 2003 6.0 2004 20 2005 H1 4.0 0 4- 1 3- 1 2- 2 1- 3 4- 4 3- 4 2- 5 1- 6 4- 7 3- 7 2- 8 1- 9 4- 0 3- 0 2- 1 1- 2 4- 3 3- 3 2- 4 05 Q 99 Q 99 Q 99 Q 9 Q 99 Q 99 Q 99 Q 99 Q 9 Q 99 Q 9 Q 99 Q 00 Q 00 Q 00 Q 0 Q 00 Q 00 Q 00 19 19 19 20 20 2.0 1 1 1 1 1 1 1 1 1 2 2 2 2 2 2 1- Q -20 Table 9. Current Account Balances (US$ Bill.) 0.0 2003 2004 2004 2005 ea si a si a es an d r in a H1 H1 -2.0 don e a la y pin ha il Ko h M i lip T n ,C In Ph East Asia* 161.3 186.6 62.3 104.5 wa T ai China * 45.9 68.7 .. .. -4.0 (Memo-China-trade bal.) 25.5 32.8 -6.7 40.1 S.E. Asia 30.8 27.5 10.2 5.9 Indonesia 8.1 3.1 0.0 0.9 Exhibit 24 Malaysia 13.3 14.9 7.1 10.2 Philippines 1.4 2.4 0.4 0.9 Net FDI Flows (US$ Bill.) Thailand 7.9 7.1 2.8 -6.2 4.0 NIEs 84.6 90.5 39.9 39.7 Hong Kong 16.5 16.4 3.1 8.1 Korea 11.9 27.6 13.2 8.7 2.0 Singapore 26.9 27.9 12.1 16.8 Taiwan, China 29.3 18.6 11.4 6.1 * China publishes only annual balance of payments data. Figures for East Asian current account in 2004 H1 and 2005 H1 are estimates, 0.0 including estimates of China’s current balance in the two periods. ia a d a es s ia re an ys h in p in As noted, reserve accumulation has slowed in the Ko ne a il al a ,C i lip Th do -2.0 M majority of East Asian economies other than China. In an In Ph iw Newly Industrialized Economies such as Korea and Taiwan, Ta China the principal cause is a decline in current account 2003 surpluses due to higher oil prices (Table 9), while net -4.0 2004 portfolio capital and foreign direct investment inflows have also slackened. (Exhibits 23 and 24). Higher oil prices and 2005 H1 a swing into current account deficit were also the principal factors behind a small decline in the level of reserves in -6.0 Thailand. In Indonesia, on the other hand, a fall in the level East Asia Update 28 a recovery which continued at a more modest pace in the first half of 2005. (Table 10). Over half of the increase in Foreign Direct Investment Inflows 2004 was accounted for by just three economies, China and The preceding discussion noted net foreign direct the two regional financial centers, Hong Kong and inflows as an element of the balance of payments. FDI Singapore. However the other main economies in the flows are not only financial flows, however, but are also region also experienced a jump in FDI inflows to about $20 typically linked with flows of new technology, knowledge billion, albeit from an unusually depressed $10 billion in and management skills, as well as with changes in 2003. Nearly every individual economy received higher management control. To focus on this aspect of FDI, it inflows in 2004. Growth continued in the first half of 2005, helps to look at gross inflows and outflows of FDI rather but at a more moderate pace, and with more diverse than net inflows alone. outcomes at the individual country level. FDI inflows in the first half were higher compared to the first half of 2004 in World FDI inflows rose to $648 billion in 2004 from just over half the economies, and lower in the rest. $633 billion in 2003.14 That was the first upturn in world Indonesia stood out among economies with rising FDI. Last FDI after three years in which it had fallen by over half, year’s elections have boosted hopes of a strong, reforming from a peak of $1.39 trillion in 2000. Of particular interest, administration and have contributed to a marked the entire upturn in global flows was accounted for by improvement in investor confidence. FDI inflows of $2.6 higher inflows to developing economies, which rose by $86 billion in the first half of 2005 exceeded inflows in all of billion to $287 billion, exceeding their previous peak of 2004. $280 billion in 2000. The upturn in FDI inflows to these economies was widespread, with substantial increases in The recovery of FDI in the region over the last 18 inflows to East Asia and the Pacific, Latin America, South months may alleviate concerns sometimes expressed that the Asia and the transition economies. On the other hand gross large volumes of FDI flowing to China may be “diverting� inflows to developed economies fell for a fourth year, FDI that might otherwise go to other developing economies. dropping $70 billion to $361 billion. This was entirely However, at a general level, the available supply of FDI is accounted for by a sharp fall in FDI inflows to Europe, not a fixed sum, so that more for one country does not primarily due to large repayments of intra-company loans necessarily means less for others. In addition, the notion of from some host economies. “competition for FDI� is less relevant for some types of FDI than for others. For example, FDI in the services sector aimed at serving the domestic market of one country Table 10. FDI Inflows (US$ Bill.) (“market-seeking FDI�) does not compete very directly with 2005 % FDI to serve the domestic services market in another. 2000 2003 2004 H1 Change Competition may be more relevant with “efficiency East Asia 138.5 88.3 130.3 55.0 16.1 seeking� FDI, where multinationals choose between different locations to establish production facilities to serve China 40.7 53.5 60.6 18.6 21.7 a given global market. Even here, though, FDI in one Ex-China 97.8 34.8 69.7 36.4 13.4 country may stimulate FDI in others, in particular in Hong Kong 61.9 13.6 34 19.8 43.6 industries such as electronics and automobiles, where Singapore 17.2 11.4 16 7.6 -23.2 production processes can be fragmented into discrete stages Ex HK, Sing. 18.7 9.8 19.7 8.9 7.1 and located in different countries according to comparative Indonesia -4.6 -0.6 1.0 2.6 343.1 advantage.15 Korea 8.6 3.8 8.2 2.7 -34.6 Also, the volume of FDI flowing to China in recent Malaysia 3.8 2.5 5 2.1 -11.0 years is not disproportionate to the size of its economy and Philippines 1.3 0.3 0.5 0.4 .. population. While China accounted for about 21 percent of Taiwan gross FDI inflows to developing countries in 2004, its GDP (China) 4.9 0.5 2.0 0.5 -30.7 was also 17 percent of developing world GDP. Exhibit 25 Thailand 3.4 1.8 1.1 0.7 18.2 shows that FDI inflows to China did surge in the early Vietnam 1.3 1.5 1.9 1990s as the country opened itself to the outside world, briefly reaching over 6 percent of GDP, but, as foreign investors have gradually achieved the target levels of capital FDI gross inflows to Emerging East Asia stock they wish to have invested in China, annual inflows of rebounded to $130 billion in 2004 from $88 billion in 2003, 15 The growth of export oriented FDI in China has already stimulated a rapid growth in China’s imports of capital 14 UNCTAD: World Investment Report 2005. Note that equipment, parts and components from other East Asian UNCTAD now classifies Central and Eastern European economies. It is not unreasonable to think that the growth countries that recently entered the European Union as of such regional production networks centered on China developed economies. For the discussion in this paragraph will, going forward, provide the basis for stronger flows of they have been included among developing economies. FDI to the other East Asian economies as well. East Asia Update 29 FDI have gradually declined as a share of GDP. The pattern respectively. Among later movers, Korea raised its policy of FDI inflows to other East Asian economies is quite rate by 25 basis points in October, the first increase in diverse, but, in general, visual inspection of Exhibit 25 several years. suggests that there was little correlation between these flows and those to China. Zhou and Lall (2005) undertake a more systematic econometric analysis and find that, after Table 11. Inflation controlling for other relevant factors, flows to China in (% change year ago) 1986-2001 had no significant association with flows to the 2004 2005 2005 2005 Latest other economies. During the more recent period 1992-2001 Q4 Q1 Q2 Q3 Month they find a positive association which is significant at the 10 percent level (rather than the negative association implied “Headline� Consumer Price Inflation by the diversion hypothesis). China 3.2 2.8 2.8 1.3 0.9 Indonesia 6.3 7.8 8.0 8.4 9.1 Exhibit 25 Korea 3.4 3.2 3.0 2.3 2.7 FDI Inflows to East Asia Malaysia 2.3 2.4 2.5 3.4 3.4 12.0 (as % of GDP) Philippines 8.1 8.4 8.5 7.1 7.0 S.E. Asia * Thailand 3.2 2.8 3.1 5.6 6.0 China “Core� Inflation 10.0 NIEs ** China 0.6 0.3 0.9 1.1 1.0 Malaysia Vietnam Indonesia 6.8 7.1 6.9 6.6 6.7 8.0 Korea 3.1 3.0 2.5 2.0 1.9 Philippines 7.4 8.0 7.5 6.6 6.5 6.0 Thailand 0.6 0.7 1.1 2.2 2.3 4.0 Exhibit 26 2.0 Interest Rates (%) 0.0 90 9 1 92 9 3 94 95 9 6 97 9 8 99 0 0 01 02 0 3 04 4.0 19 1 9 19 1 9 19 1 9 19 19 19 19 2 0 20 2 0 20 2 0 * Simple average of Indonesia, Philippines, Thailand. ** Simple average of Korea and Taiw an (China). 3.0 As Exhibit 25 indicates, some economies, like Korea and Taiwan (China) have traditionally followed an economic strategy with relatively little reliance on FDI. Others, such as Malaysia and Vietnam, have relied heavily 2.0 on FDI, and have generally had FDI inflows higher than China as a share of GDP, a position that was also true in East Asia overnight interbank rates * 2004. Perhaps the economies of most concern are those like 1.0 US Fed Funds Indonesia, Philippines and Thailand, where FDI inflows ran at 2-3 percent of GDP or higher in the mid 1990s, fell * Simple average of Hong Kong, Indonesia, Korea, Malaysia, Philippines, Singapore, Taiwan (China), Thailand. sharply after the financial crisis and have remained at less than 1 percent of GDP so far in this decade. Here efforts to 0.0 foster investment by improving the investment climate are 04 4 5 4 5 4 5 04 05 04 05 00 00 00 00 00 00 20 20 20 20 20 likely to prove helpful. l-2 l-2 -2 -2 -2 -2 v- n- n- p- p- ay ay ar ar Ju Ju No Ja Ja Se Se M M M M The change of course in monetary policy responds to Financial markets a recent pick up in headline inflation in several economies Most East Asian central banks began tightening around the region (Table 11), and to concerns that, if left monetary policy over the course of the past year. Among unaddressed, price pressures could become embedded in the early movers, Thailand began raising rates after summer underlying core inflation and in higher inflationary 2004, since when its policy rate has increased by some 250 expectations. “Headline� inflation has been pushed higher basis points. Indonesia and Philippines began tightening by rising oil prices and policy decisions to allow greater after the first quarter this year, since when policy rates in pass through of fuel costs to consumers. In addition, these economies have risen by 350 and 75 basis points monetary policy tightening in the United States has reduced East Asia Update 30 the spread between East Asian and U.S. interest rates is not expected, at least for most East Asian economies, so (Exhibit 26), which has contributed to some depreciation of long as the macroeconomic position of economies remains exchange rates against the dollar during 2005, creating favorable and policies are perceived as broadly prudent. pressure for higher import prices. In addition, while growth has slowed this year among economies outside China, it Exhibit 28 remains quite robust, in particular in South East Asia, where Stock Market Indices growth has now averaged over 5 percent for some four (Jan 2003 = 1) years, raising concerns that ‘cost push’ pressures may be 2.1 complemented by rising ‘demand pull’ pressures. While core inflation rates are in general running significantly 1.9 Korea Singapore below headline rates, there are some indications that core Hong Kong China rates are also picking up. Thus the turn to monetary 1.7 tightening is timely. In an environment of somewhat higher interest 1.5 rates and inflation, and somewhat lower economic growth, it is not too surprising that equity markets in the region were 1.3 somewhat less buoyant than in 2003 and 2004. (Exhibits 27 and 28). Stock markets in the main South East Asian 1.1 economies rose about 6 percent on average in the year to September, after gains of 61 percent in 2003 and 18 percent 0.9 in 2004. Equity market gains were somewhat more robust among the NIEs, especially in Korea, where hopes that the 0.7 economy may be starting to pullout of an extended period of 20 0 1 20 0 2 20 0 3 20 0 4 20 0 5 0 01 2 0 01 0 02 2 0 02 0 03 2 0 03 0 04 2 0 04 0 05 2 0 05 sluggish growth stimulated a 38 percent equity market gain J a n- 2 J a n- 2 J a n- 2 J a n- 2 J a n- 2 M a y- M a y- M a y- M a y- M a y- S e p- S e p- S e p- S e p- S e p- in the year to September. Exhibit 27 Exhibit 29 Stock Market Indices Emerging Market Bond Spreads (Jan 2003 = 1) 1/2001-9/2005 3.4 900 China 800 3.0 Indonesia Malaysia Malaysia Thailand Philippines 700 Thailand 2.6 Indonesia 600 Philippines 2.2 500 1.8 400 1.4 300 200 1.0 100 0.6 0 20 0 1 20 0 2 20 0 3 20 0 4 20 0 5 0 01 0 02 0 03 0 04 0 05 2 0 01 2 0 02 2 0 03 2 0 04 2 0 05 20 M01 20 M05 02 9 20 M01 02 5 20 M09 20 01 03 5 20 M09 04 1 20 M05 05 9 20 M01 20 05 09 20 M0 20 M0 20 0 20 M0 20 M0 J a n- 2 J a n- 2 J a n- 2 J a n- 2 J a n- 2 M a y- M a y- M a y- M a y- M a y- M M M M S e p- S e p- S e p- S e p- S e p- 01 01 01 02 03 03 04 04 05 05 20 Spreads on emerging market debt have been broadly stable this year, after having fallen to exceptionally Exchange Rates low levels in the previous several years, as a result of the After three years of broad decline against most ‘search for yields’ among global investors and currencies, the US dollar reversed some of its losses during improvements in underlying conditions in many economies. 2005. Asian economies with floating exchange rates mostly (Exhibit 29.) Now, with rising interest rates in the shared in this trend, depreciating by 3.4 percent on average developed world, the process of yield compression appears against the dollar in the year to September. (Exhibit 29). As to have ended and spreads have been in a steady range since a result, these currencies have experienced an overall late last year. On the other hand a large reversal in spreads nominal appreciation against the dollar since the start of East Asia Update 31 2002 totaling a grand 6.6 percent. Apart from Korea, no accumulation of foreign reserves, with the attendant major East Asian economy saw its currency appreciate monetary complications. Given the de facto peg to the US against the dollar by more than about 8 percent in nominal dollar, the authorities have attempted to prevent the build up terms over this period of almost four years. However this in reserves from causing an excessive increase in domestic was also a period when most economies in the region were money supply by increasing sterilization, issuing running large current account surpluses, and were also the government bills to mop up new liquidity. However, the recipients of substantial capital inflows. In general growing volume of outstanding central bank bills has economies in the region have undertaken substantial quickly changed the structure of the central bank’s balance intervention in foreign exchange markets to limit the extent sheet, making it increasingly vulnerable to interest rate and of currency appreciation that might otherwise have taken exchange rate changes. place. As a result, the region’s foreign exchange reserves The initial move entailed a 2 percent appreciation increased from $761 billion in January 2002 to $1651 against the US dollar. The new arrangement uses a basket of billion in September 2005. currencies as a “reference�, rather than a precise As last April’s East Asia Update discussed in more determinant, for the central parity that will be announced at detail the accumulation of reserves creates pressure for an the end of each previous trading day. A band around the expansion in the domestic monetary base, and, in general, central parity allows the RMB to appreciate or depreciate a complicates the country’s ability to pursue an independent maximum of 0.3 percent per day. The PBC announced it monetary policy. To avoid these side effects of would “readjust the exchange rate band when necessary. intervention, central banks in the region have then tried to The change in China's exchange rate regime is mop up or sterilize the potential expansion of domestic base clearly a move in the right direction, giving the authorities money and credit, through sales of government or central more room for maneuver in conducting independent bank. However the effectiveness of sterilization appears to monetary policy. Given the size of the balance of payment erode over time and can also have a variety of unwanted surpluses, the modest step towards more flexibility is not side effects. Given these complications, it is plausible that likely to reduce the exchange rate pressures by much, and greater exchange rate flexibility can play a positive role in the need for intervention and sterilization may remain facilitating adjustment in some East Asian economies while substantial. Moreover, the modest appreciation will have also permitting policy makers to pursue key domestic goals, only a small impact on the trade balance. On the other principally by allowing more autonomy in monetary policy. hand, the “two way risk� associated with the new regime, the ambiguity about the composition of the exchange rate Exhibit 29 basket the PBC uses as reference, and the daily variation that the PBC allows should work in the direction of Exchange Rates vs. US$ discouraging speculative inflows. In addition, with the (Rise=appreciation, Jan 2002=1) increased flexibility, the PBC has the leeway to accept more 1.6 Indonesia of the incoming foreign exchange pressure by appreciation Korea rather than intervention, if needed. 1.5 Philippines Over time, more flexibility would make the Thailand 1.4 associated advantages more pronounced. Monetary policy Yen should become more independent; perceptions of two way Euro Taiwan risk should mitigate speculative capital flows; and the 1.3 China foreign exchange market should become deeper and more developed. However, the exchange rate move by itself does 1.2 not remove the increasing structural imbalance between saving and investment that cause China’s current account 1.1 surpluses. This will have to be addressed by structural policies to foster greater consumption. 1.0 0.9 Domestic trends and policy challenges Ap 002 Ap 0 3 Ap 004 Ap 0 5 O 00 2 J a 00 2 O 00 3 J a 00 3 O 00 4 J a 00 4 5 J u 02 J u 03 J u 04 J u 05 00 Recent corporate sector trends and issues 20 20 0 0 0 0 2 l- 2 2 l- 2 2 2 l- 2 2 l- 2 r-2 r-2 r-2 r-2 n- n- n- n- ct- ct- ct- Ja The profitability and balance sheet positions of Perhaps the most closely watched exchange rate East Asian firms saw a significant improvement during event in the region has been the change in the exchange rate 2003 and 2004, providing a more secure foundation for an regime in China announced in July. The de facto US dollar emerging upswing in investment spending in several peg was replaced by “a managed floating exchange rate economies in the region in 2004. Profitability has regime with reference to a basket of currencies.� As noted rebounded from the low points seen after the financial crisis earlier, China is the economy experiencing the most rapid in 1998, supported, at the operating level, by stronger East Asia Update 32 economic growth, and, at the after-interest level, by private enterprises have also seen profitability improve, continued progress in debt restructuring, which, combined from 3.1 percent during 2003:H1 to 4.0 percent in 2005:H1. with the low interest rates that have prevailed in recent By contrast, the profitability of foreign-invested enterprises years, has also resulted in sharply lower interest expenses fell from 6.4 percent during 2003:H1 to 5.1 percent during Progress on debt restructuring, and equity infusions have 2005:H1. As a result the overall 5.7 percent profitability also led to lower leverage ratios, which are now broadly in ratio of China’s corporate sector in the first half of this year line with international norms. was virtually the same as in the first half of 2003. Macroeconomic developments this year may provide a somewhat more challenging environment in many • Indonesia. The last two years have been a period of economies, with profits tending to be affected by slower revival in the private corporate sector, reflected in domestic demand and export market growth in the first six strengthening corporate profitability, improved balance months (especially for high technology firms), higher fuel sheets and rising investment. In the first half of 2005 fixed costs, and by the turn towards monetary policy tightening investment on a national accounts basis was up around 14 and higher interest rates this year. As noted in earlier percent on a year earlier. The Investment Coordinating sections, the pace of fixed investment spending growth Board reported that realized FDI, in particular, rose 70 eased in the first half of the year. The improvement in percent to $3.35 billion in the first half of 2005, while firms’ balance sheets in recent years should however approvals rose 71 percent to $5.93 billion. Many large generally put in them a good position to ride through these publicly traded companies were reporting substantial profit conditions without too great difficulty. Over the medium increases in the first half of 2005. According to term the maintenance of macroeconomic stability, growing calculations by J.P. Morgan, operating margins of non- regional and global integration and continued policy reforms bank firms increased by around three percentage points to improve the investment climate, strengthen corporate over the course of 2004. Looking forward, some erosion in governance and foster the development of deep and well profitability is expected due to rising fuel and import costs. regulated financial markets should all contribute to reviving However, as recent business sentiment surveys indicate, investment and continued gains in corporate sector firms retain a generally positive outlook over the medium productivity and growth. to longer term. Among developments in individual economies: • Philippines. Corporate profitability improved in the • China. One of the most important ongoing changes in first half of 2005 in the Philippines.. The average return on the fast-changing Chinese economy is the rapid equity of companies included in the MSCI Index is transformation of ownership structures. Between mid-2003 projected to be 12.6 percent in 2005 as compared to 11.2 and mid-2005, the number of manufacturing enterprises in percent in 2004. Firms in the services sector and in the country increased 34 percent to over 250,000. Within particular in the transport and communications sector the total, state-owned enterprises (SOEs) decreased by 21 recorded the best improvements in sales and profitability. percent, to about 29,000. Almost 8,000 state-owned There was little significant change in the financial health of manufacturers were privatized, merged, or wound-up listed companies during the year. For all listed companies during the last two years. The number of collectively taken together, the debt-equity ratio and current ratio owned enterprises also fell 30 percent to 17,314. remained stable at around 0.7 and 1.33 respectively. Meanwhile there was an increase of 44 percent in the However prospects for private investment led growth have number of foreign-invested manufacturers, to almost been lackluster.. Total investments decreased 3.2 percent 53,000, and 71 percent in the number of domestic-private year on year in the second quarter of 2005 with investments manufacturers, to almost 152,000. The number of foreign in durable equipment declining 4.4 percent during the invested and domestic private enterprise as a share of all quarter, Makati Business Club surveys of private business firms increased from 67 percent in 2003 to 81 percent in investment intentions and confidence suggest that business’ 2005. remain cautious on account of structural impediments such as poor infrastructure and an uncertain regulatory Interestingly, while many small and medium size environment, as well as short term political and fiscal risk SOEs have been privatized, the remaining state firms tend to factors. be large. While representing only 12 percent of manufacturing enterprises, SOEs account for 58 percent of • Thailand. The profitability of publicly listed firms has fixed assets, 37 percent of sales, and 49 percent of profits in improved substantially in the last four years. The Return manufacturing. Like their share in the number of firms, on Equity of firms increased from a negative figure in year though, the share of SOEs in sales, profits and assets is 2000 to over 21 percent in 2004. Similarly, the interest falling over time. They are now also the most profitable type coverage ratio has increased from a negative ratio to over 3 of enterprise. State-owned manufacturers saw their net times during the same period. In 2005, the corporate sector profitability rise to 7.7 percent during the first half of 2005 is growing moderately as compared to 2004, resulting (2005:H1) from 6.9 percent in the first half of 2003. This partly from a slowdown in Thailand’s economic growth reflects high profits in basic materials, for instance oil and rate, the impact of the tsunami disaster, the higher oil gas, non-ferrous mining, and other mining. Domestic prices, and the unresolved civil unrest and uncertainty in East Asia Update 33 the southern region. In the first half of 2005, private sector agreements with foreign strategic investors who are to take growth is still driven mainly by a combination of higher ownership stakes of 5-10 percent and to nominate a director government spending and buoyant exports, higher capacity to the bank boards, which is expected to help strengthen utilization in some sectors such as food processing, corporate governance. Concerns remain about a continued electronics and petrochemical. As a result, private growth in NPLs, however. According to statistics disclosed investment growth for 2005 is expected to be significantly by the CBRC, NPLs appear to have increased between the less than the levels of 15 percent in 2003 and 16 percent in end of 2004 and June 2005, once account is taken of 2004. previously carved out NPLs. Recent financial sector trends and issues • In Indonesia the central bank introduced a Blue Print for the Financial System Architecture in April 2005. The In recent years banks in previously crisis affected plan covers banks, non bank financial institutions (NBFIs) East Asian economies have experienced substantial and the overall financial system architecture, including improvements in key indicators of asset quality, capital creation of a new integrated supervisory and regulatory adequacy and profitability. These trends have generally agency for NBFIs. Another element of the Blue print was continued in 2005. (Exhibit 30). Non performing loans, in implemented in October with the creation of the Indonesian particular, have continued to edge lower (although the stated deposit insurance company (LPS), with an initial capital of NPL ratio in Indonesia rose during the June quarter, due to Rp.4 trillion. Bank Indonesia also took fresh steps to more stringent loan classification rules, which boosted the encourage consolidation as a means of strengthening the estimate of NPLs at state owned banks in particular). viability of the banking system. It announced criteria for Countries continue to address tasks of financial sector anchor banks (i.e. banks that can acquire other banks) and restructuring and consolidation left over from the financial also issued regulations requiring banks to increase their crisis, as well as longer term financial sector strengthening minimum capital to Rp.80 billion by end of 2007 and and development, including issues as proper enforcement of Rp.100 billion by end of 2010. Banks unable to achieve this prudential regulations, supervisory independence, alignment level of minimum capital will be offered the option of of capital adequacy requirements with the international merger or being acquired. standard, consolidated supervision, prompt corrective action provisions, effective bankruptcy arrangements and • In Korea the average bank non-performing loan ratio transparency. fell to 1.6 percent in June from 1.9 percent at the end of 2004, with declines for all main classes of loans, including Exhibit 30 corporate, household and credit card receivables. The Commercial Bank Non-performing Loans average capital adequacy ratio rose to a record 12.6 percent (% of Total Loans) in June from 12.1 percent in 2004. The six credit card 25 companies have also improved performance, achieving a Indonesia * Korea Malaysia combined net income of Won 597 billion in the second quarter of 2005. The average delinquency ratio declined to Philippines Thailand * 7.6 percent at the end of June 2005 from 9.0 percent at the 20 end of 2004, while the average capital adequacy ratio rose to 17.6 percent at the end of June 2005 from 9.8 percent at the 15 end of 2004. • In Malaysia non-performing loans of the banking 10 system edged down to 6.7 percent in July 2005 from 6.9 percent at the end of December. Though, both the risk- weighted capital ratio and core capital ratio of commercial 5 banks in August 2005 declined to 13.6 percent and 10.9 percent, respectively (from 14.3 percent and 11.3 percent at end-2004), the decline was due primarily to the inclusion of 0 market risk in the capital adequacy framework implemented 2000 2001 2002 2003 2004 Jun-05 earlier in the year. Pre-tax profits of the banking system * Indonesia increase in 2005 and Thailand increase in 2002 due to change in definition. rose by 10.9 percent in the second quarter, reflecting higher investment and net interest income. Among developments in individual economies: • In the Philippines the non-performing loan ratio for • In China, banks are undergoing significant changes in commercial banks returned to single digits for the first time capital and ownership structure. Three of the four state- in seven years, as banks continued to finalize sale owned commercial banks (SCBs) have been recapitalized by transactions approved by the central bank before the SPV the government, with US$ 75 billion. All three have signed Act expired in April 2005. The NPL ratio had peaked at East Asia Update 34 18.8 percent in October 2001. It fell to 9.2 percent in June 2005 from 11 percent in May. This year’s political volatility has delayed enactment of proposals to establish a credit information bureau (which is expected to lower transaction and lending costs and improve access to credit), and to amend the central bank Charter, which is expected to strengthen legal protection for bank supervisors in performing their duties and improve the framework for resolving problem banks. It is expected that these two bills, along with the bill for the extension of the SPV Act, may be passed into law by the end of 2005. • In Thailand, non performing loans edged down to 10.6 percent in June from 11.6 percent at the end of 2004. NPLs declined in most economic sectors except construction and real estate. The profitability of Thai commercial banks has continued to improve. Net interest margins reached 2.8 percent, the highest level in seven years. On the policy side the central bank has tightened regulations on consumer lending. It is preparing for the implementation of the New Basel Capital Accord (Basel II), which is to be fully completed by the end of 2008. East Asia Update 35 COUNTRY SECTIONS Major Economies16 direction by rebalancing growth in the direction of sectors that require less capital, energy, and resources but generate China more urban employment, while improving the efficiency of capital. This requires financial sector reform, better Economic growth in the third quarter of 2005 has corporate governance, a dividend policy for state been higher than expected, at least in part due to more rapid enterprises, a larger role for private sector firms, and domestic demand. Reversing the pattern of the first half of liberalizing restrictions hindering the development of the 2005, domestic demand appears to have rebounded in the services industry. These measures need to be flanked by third quarter - reflecting both stronger investment and public finance measures: strengthening the role of stronger consumption - while the contribution of net government in education, health, and the social safety net external trade declined. As a result, GDP growth slowed and using the tax system to adjust demand for energy and very slightly to 9.4 percent, after 9.5 percent in the first half. resources. Recent developments strengthen the case for a very soft landing. Against a background of favorable macro economic and financial conditions, we project GDP growth Indonesia of 9.3 percent in 2005 and 8.7 percent in 2006, low The government moved to address ballooning fuel inflation, and - with domestic demand driving growth again subsidies and exchange rate instability with a bold policy - a decline in the current account surplus in 2006, after a package on October 1st. The package included (i) a dramatic projected record surplus of over 6 percent of GDP in 2005. increase in domestic fuel prices, (ii) the launch of an However, a two-way risk is formed by the considerable unprecedented cash compensation program for the poor and uncertainty about enterprises’ investment behavior. (iii) and a broad based incentive package. Administered fuel prices were raised by a weighted average of 114 percent and Under current circumstances, more rapid growth in household kerosene prices by 186 percent.17 Budgetary credit and investment would be unwelcome. Stronger saving from the October fuel price hikes in 2005 alone are domestic demand from either consumption or investment approximately Rp.25 trillion (equivalent to US$2.5 billion), would reduce the current account surplus that is and could be US $8-10 billion in 2006, depending on complicating monetary policy (and trade relations). international oil prices. In order to mitigate the impact of the However, investment is already considered too high and it price increase on poor households the government is was concerns about overinvestment that triggered the policy providing cash transfers of Rp.300,000 a quarter. The first tightening measures in 2004. Recent indicators suggest that quarterly tranche of payments target 15.5 million poor and the renewed pick up in domestic demand is at least in part near-poor households. Other measures are aimed at due to stronger investment, including in industries with mitigating the impact on workers, businesses and especially downward price pressures. Indeed, investment is likely to transport costs. Despite a second Bali bombing, which continue to grow faster than consumption into 2006, and claimed more than 20 lives the day of the hike, the rupiah new policy measures may be required to dampen exchange rate appreciated by 3 percentage points and stock investment. Capital inflows appear to have eased in the index improved by more than 2 percent the first week of wake of the change in the exchange rate regime in July, due October. in part to a PBC policy of allowing foreign surpluses to spill The second Bali bombing is likely to have a more over in bank liquidity in order to drive down market interest limited impact than the earlier Bali bombing given the rates. So far, the increased bank liquidity has not spilled restrained response and the fact that Bali’s economy over into increased credit growth. But there is a risk that the accounts for only 1.3 percent of the total Indonesian additional liquidity could lead to another investment surge. economy.18 However, the bombing does hurt Indonesia’s Changing the pattern of growth is high on the image and enhancing security, to re-assure investors, was announced as an administration priority. agenda. The 5th plenary session of the 16th Central Committee of the CPC held in October discussed changing Underlying economic growth and key China’s pattern of growth, moving to less resource- macroeconomic/financial indicators parted company in mid- intensive, more knowledge-driven, and more equally-shared 2005. GDP grew by 5.9 percent in the first half of 2005 and growth. The pattern of growth can be transformed in this 17 Fuel prices on sales to industry had already been 16 More detailed individual Country Briefs for the major increased so the weighted average increase as calculated by economies can be found at the World Bank website: the government is 87 percent. http://www.worldbank.org/eapupdate/ 18 2003 data. East Asia Update 36 the non-oil economy grew a robust 7.0 percent. Investment payment agency. The agency will draw funds from BRI (a growth has surpassed 10 per cent for six quarters now. In state bank), consistent with the number of designated poor Q2, investment growth continued as a key driver with a households in each area. Cards are distributed to each growth of 13.2 percent. Most underlying economic beneficiary household entitling them to receive the cash indicators remain strong. Exports were up 15 percent (yoy), transfer at their nearest Post Office or designated cash post. consumer durables were growing 10 to 20 percent and Initial reports include mis-targeting and abuse by local motorcycles sales were 30 percent above last year’s sales. government heads but while the extent is not clear the In contrast, macroeconomic uncertainty accelerated government indicates that it remains in the 5 percent range. in Q3 triggering a rapid depreciation in the rupiah, a However, the government will need to ensure continued substantial turn-around in interest rates and a correction in proper delivery, monitoring and oversight mechanisms to the stock market. The rupiah had been under pressure ensure transparency, credibility and control of fraud. It will throughout 2005, gradually depreciating while Bank also be important to quickly evaluate the effectiveness of Indonesia reserves declined. Overall imports, especially this program while designing a road map toward a capital, grew rapidly, while the oil and gas balance declined comprehensive social protection system. and the current account moved into deficit by the second quarter. The rapid increase in imports was not supported by After a year in office, there are frustrations about private capital inflows, perhaps due to lagging investment inadequate progress on investment climate reforms. Despite climate reforms, resulting in continuing pressure on the on-going efforts and the widely regarded Infrastructure currency. Domestic interest rates were not raised Summit, the government has little to show for its efforts on sufficiently to offset hikes in global interest rates and oil improving the investment climate. New laws on investment, prices rose into the high US$60 dollar range causing taxes and regional taxes and charges are nearing completion, concerns to mount. Market confidence fell in late August but few concrete measures have been taken and some issues early September with players reacting strongly to the within these laws, especially the tax law, remain perception that higher oil prices would put further pressure controversial. On the plus side, the new investment law is on the exchange rate and Indonesia’s fiscal position. meant to simplify procedures by moving from an approval to a registration regime (which will reduce time and Fiscal policy has become key market and national uncertainty), and clarify the negative list. The tax law will concern. The government submitted a proposed second cut corporate and individual marginal tax rates by 2 percent revision to the 2005 budget and the original 2006 budget to (from 30 and 35 percent respectively) in 2007 and reduce Parliament in mid-August and neither signaled any change marginal rates further to 25 and 30 percent by 2010. The in fuel prices. This added to the general uncertainty. Law on Regional taxes and charges will move from a However, the Government and Parliament have now agreed negative to a positive list and allow local governments more on an explicit subsidy level of Rp.89.2 trillion for 2005 after flexibility on property taxes. Nevertheless, concrete a substantial fuel price increase on October 1. Various progress is limited. Most of these laws have not been government statements indicate that premium and diesel presented to Parliament. There have been no initiatives to subsidies would be phased out by the end of 2006 and cut the amount of days, often quoted as 151, required to kerosene by 2007. Plus domestic fuel prices would be linked register a firm, many of which do not require a change in to Singapore levels as in 2002. Revised macroeconomic law. The business community remains concerned about a assumptions for 2006 and a second revised budget for 2005 lack of progress on assessment, audit and payment have now been agreed on with Parliament. In the 2005 procedures in the tax administration law, especially in the second budget revision, the government projects a budget context of increased powers for tax officials. There is some deficit of 0.9 percent of GDP at an average international oil progress on infrastructure, although the pace is also much price at US$54/bbl, an average exchange rate at Rp.9,800, slower than desired. A long-awaited committee to lower oil production and higher domestic fuel consumption. coordinate infrastructure is operational, the government is For 2006 the Government and Parliament have agreed on a nearing completion of the government regulation on public crude oil prices (ICP) of US$57/bbl, an exchange rate of private partnerships and there is a commitment to develop a Rp.9,900, an inflation rate 8.0 percent and interest rates (3 risk-sharing framework at the Ministry of Finance. month SBI) at 9.5 percent. Nevertheless, of the 91 projects committed at the Summit only 6 toll-roads were tendered, and two of them did not Post fuel price hike, the government is going ahead receive bids. In conclusion, it is important for the with a nation-wide program to transfer cash to the poor. government to accelerate policy reform to reduce costs and Approximately 15.5 million poor and near-poor households uncertainty for the business community in general, and are being given a cash transfer of 100,000 rupiah per month, infrastructure in particular. distributed quarterly, starting in October. Beneficiary households were designated by community heads and The Highly Pathogenic Avian Influenza (HPAI) verified by the Statistics Agency through a questionnaire on virus is an area of rising concern as Indonesia reported its household economic and welfare characteristics, fifth confirmed case from the virus, with increasing reports expenditures and assets. PT Pos has been selected as the of infections in other regions. After a slow initial response and an over-dependence on poultry vaccination, the East Asia Update 37 government announced a stronger focus on culling chickens had slowed to a 2.7 percent year-on-year rate in the first (including at higher compensation per chicken), following quarter, affected by soaring oil prices and the strengthening increased human infections. of the won. Growth rebounded to 3.3 percent in the second quarter due to recovery of private consumption, and the Public health awareness campaigns are being recovery gathered momentum to 4.4 percent growth in the carried out in infected areas, and in other areas throughout third quarter, thanks to a surge in exports. On the other the country. International support is rising and the country is hand, recovery of investment has remained subdued, due to stock-piling anti-viral drugs. So far, the economic impact continued balance sheet adjustment in small and medium has been relatively limited with 10.3 million poultry deaths, enterprises and a worsening of corporate profits due to 4.8 percent of Indonesia’s stock of poultry, by end August. higher oil prices and the substantial exchange rate The costs of the vaccination program were largely born by appreciation through April this year. Meanwhile, the the national government in 2005 but next year local stronger external position of the country, the strengthening governments are expected to play a bigger role. There are of bank balance sheets and North Korea’s commitment to risks that such a decentralization strategy will undermine the abandon its nuclear program in the six-party talks have all efficiency of the response. It is also important that Indonesia been positive for confidence. phase out high-risk farming practices such as the integrated livestock system that is still being promoted. In spite of higher oil prices, inflation has been kept in check, in part due to import prices that were subdued by Economic momentum is likely to slow in the the strengthening of the won until April. Core inflation rates aftermath of the macroeconomic uncertainty in August and have been below the Bank of Korea’s medium term target September, the hike in domestic fuel prices and associated range of 2.5-3.5 percent since June. However, it remains to inflation. Growth for 2005 is now estimated to be 5.7 be seen whether price stability will persist, as the continued percent, and inflation could peak at 13 to 14 percent by the run-up of oil prices and a weaker won since May could end of the year. Meanwhile the hike in fuel prices and slow result in higher import prices. On the other hand, housing budget spending should keep the budget deficit below 1 prices, which had been stabilized by earlier government percent of GDP. Growth prospects in 2006 depend crucially measures to restrain speculative transactions, started to on the government’s ability to recycle spending from surge again in the first half of this year, due to a chronic subsidies to more productive uses. However, the adjustment shortage of housing supply in Seoul and a prolonged low process to higher domestic fuel prices and a slow transition interest rate environment. Against this background the to increased capital and social spending are likely to slow government announced new measures in August to impose growth rates in early 2006 before accelerating later in the an ownership tax on real estate, raise capital gains tax on year to between 5.5 to 6.0 percent. Bank Indonesia should real estate transactions, and secure new housing sites in the work to rein in inflation to the 8 percent range by the end of Seoul Metropolitan area. 2006. Amid higher oil and real estate prices, the Bank of Longer term prospects are more bullish as concrete Korea (BOK) raised its target for the benchmark call rate by investment reforms impact decisions and subsidy spending 25 basis points from 3.25 percent to 3.5 percent in October, is reallocated into infrastructure and social spending. for the first time since May 2002. Meanwhile the Korean Growth should rise to the 7 percent range in the medium government has maintained a proactive fiscal stance by term, still constrained by infrastructure shortfalls, while the frontloading expenditures; government spending rose by 15 debt to GDP ratio would fall below 30 percent by 2010. The percent in the first half of 2005. In the second half, the President in his speech of September 15, 2004 to the Global government has been increasing investment by state Investment Forum outlined his commitment to achieve companies, and stimulating private investment by Indonesia’s Millennium Development Goals. He indicated introducing “build-transfer-lease� transactions with private that it would involve “pro-growth�, “pro-job creation� and developers. “pro-poor� strategy. He focused especially on the need to create jobs and attract investment while acknowledging his The country’s external position has been further understanding of the problems investors face. The key strengthened, as its foreign exchange reserves have challenge facing Indonesia now is the positive but difficult exceeded US$ 200 billion. At the same time, it raises a challenge of reallocating US$8-10 billion from fuel policy challenge of how to manage the country’s reserves in subsidies to “pro-growth�, “pro-job creation� and “pro- more profitable and strategic manner. In July, the poor� uses, and therefore delivering on Indonesia’s MDG government launched the Korea Investment Corporation Goals. (KIC), which will invest an initial total amount of US$ 20 billion of foreign exchange reserves in foreign bonds and stocks. As well as raising returns on foreign exchange Korea reserves, the KIC is expected to contribute to development of the asset management industry, to which management of Led by recovery of private consumption and a funds will be entrusted. In addition, the BOK has surge in global electronics demand, Korea’s economy has introduced currency swap contracts to lend foreign been rebounding since the second quarter of 2005. Growth exchange reserves to commercial banks. East Asia Update 38 Korea’s domestic banks have continued to and plants for maintenance purposes. The growth in the strengthen their financial positions. The average capital production of natural gas also slowed, and the construction adequacy ratio rose to a record 12.6 percent at the end of sector continued to contract, reflecting fewer infrastructure June 2005, as a result of a surge in profits. Meanwhile, projects. rising foreign ownership of Korean commercial banks has Domestic demand remained buoyant in H1 2005, been exerting competitive pressures on domestic banks, underpinned by continued strong private consumption and which is expected to help raise productivity and diversify higher gross fixed capital formation. Gross inward foreign business lines of domestic banks in the medium-term. Credit direct investment increased to US$2¼ billion in Q2, and card companies have been returning to financial health. All was channeled mainly into financial, insurance, and of the six credit companies posted profits in the second business services as well as wholesale and retail trade, and quarter of this year for the first time since the third quarter hotels and restaurants. Merchandise exports of of 2003. Consequently, the average capital adequacy ratio manufacturing goods expanded by only 10.6 percent, rose to 17.6 percent at the end of June 2005. compared with 19.1 percent in H1 2004, while exports of A continued recovery of both external and agricultural products recorded an even sharper decline in domestic demands is expected to result in overall GDP growth. The value of exports of minerals expanded strongly growth of 4.6 percent in 2006, compared to 3.8 percent in (by 33.1 percent), although this largely reflected the 40 2005. However lengthy balance sheet adjustments in the percent increase in the price of Malaysian Tapis crude oil household sector and SMEs will continue to weigh on the (to an average of about US$55 per barrel), as the volume of economic expansion. External shocks including persistent crude oil exported actually declined by 3.2 percent. Within high oil prices and reversal of demand for IT-related manufactured exports, the growth E&E exports slowed to products could pose a substantial downside risk to the 9.3 percent, reflecting the contraction of export growth of highly open economy. However, once external factors semiconductors in Q2 and sharply lower growth in the become favorable, improved business confidence could export of electrical appliances, which more than offset the result in a sharp recovery of corporate spending, supported pick-up in exports of electronics. The growth in imports by the highly strengthened financial position of large firms declined in all main categories. The growth in imports of and banks. intermediate goods slowed to 8 percent (25.6 percent in H1 2004), that in imports of consumption goods fell to 7.2 percent (21.5 percent in H1 2004), and that in imports of Malaysia capital goods declined to 9.2 percent (34 percent in H1 2004). Looking ahead, private consumption is projected to The Malaysian economy slowed sharply in the first expand by 8.9 percent, following the measures announced in half (H1) of 2005, but the outlook remains broadly the 2006 Budget to support domestic demand; total favorable. Growth of real GDP declined to 4.9 percent in H1 investment (excluding changes in stocks) by 4.9 percent; 2005, from 7.1 percent in H1 2004, reflecting the exports of goods and services by 7.7 percent, as exports of contraction of the mining and construction sectors, and E&E products and tourism both recover in the second half sharply lower manufacturing output. A recovery in external of the year; and imports of goods and services by 6.7 demand is expected in H2 2005, and domestic demand will percent, reflecting the anticipated pick-up in economic receive a further mild boost from the recently announced activity. Net international reserves of Bank Negara 2006 Budget. The economy expected to grow by 5 percent Malaysia increased to $80.3 billion by end-September 2005, in 2005, 5¼-5½ percent in 2006, and 5½-6 percent through equivalent to 9 months of retained imports and over 6 times 2008. short-term external debt. Total external debt declined to Economic developments $51.6 billion at end-June 2005. In H1 2005, growth was driven mostly by services. Consumer price inflation rose to 3.7 percent (year- Within services, the highest contributions were made by on-year) in August, and average inflation in the first eight transport, storage, and communications (8.1 percent); months of 2005 rose to 2.8 percent. The increase in inflation wholesale and retail trade, hotels and restaurants (7.4 was driven mainly by the higher prices for transportation (7 percent); and the three utilities (5.9 percent). The sector was percent), reflecting the hikes in fuel prices (May 5 and also supported by a modest increase in tourist arrivals (4.6 August 1) from the reduction in subsidies, and food (3.7 percent in Q1 and 2.5 percent in Q2, respectively). Growth percent). Producer price inflation increased at an annual in value added in the manufacturing sector continued to rate of 8.6 percent in July. slow, to 3.2 percent in Q2 2005, reflecting sharply lower Preliminary figures indicate that the overall budget growth of output of export-oriented industries, especially balance of the Federal Government registered a small electrical and electronic (E&E) products, but also a deficit in the first half of 2005, and the budget target of contraction in the output of domestic-oriented industries. limiting the deficit to 3.8 percent of GDP for the year (from Agricultural output grew by 4.5 percent. Mining output 4.3 percent of GDP in 2004) remains achievable. The 2006 growth was flat, as the production of crude oil and Budget targets a further decline, to 3½ percent of GDP. On condensates contracted following the shutdown of oil fields July 21, 2005, in response to the move by the Chinese East Asia Update 39 authorities that same day to sever the link of the remninbi to foreign securities that are listed of foreign exchanges the U.S. dollar, the Malaysian authorities quickly announced recognized by Bursa Malaysia; “sophisticated investors� that the ringgit peg to the U.S. dollar, which was introduced need no longer seek SC approval to execute secondary in September 1998, was abandoned in favor of a managed trades in non-ringgit bonds; primary issues of foreign float. Since the announcement, the ringgit has appreciated currency-denominated bonds can now be offered to slightly. The stance of monetary policy has remained “sophisticated investors�; and offerings of foreign shares in unchanged. The Overnight Policy Rate (OPR) was Malaysia are now allowed, subject to SC approval. In maintained at 2.70, where it has been since it was essence, these measures will give investors greater freedom introduced on April 26, 2004, and the daily weighted in switching to higher-yielding assets and diversify their average interbank overnight rate has remained stable, within assets, and may help reduce the excess liquidity in the a narrow margin of 2.67 percent – 2.73 percent. financial system of around RM175 billion ($46.4 billion) at end-June 2005. Also, two foreign stock broking companies Financial and corporate developments and one foreign fund management company have started At end-July 2005, total non-performing loans operations; three more stock broking companies are (NPLs) of the banking system declined to RM56.2 billion, expected to begin operations before the end of the year; and equivalent to 6.7 percent of total loans.19 Though, both the three foreign futures brokers have obtained approval to risk-weighted capital ratio (RWCR) and core capital ratio trade. Finally, under the Compliance and Risk-based (CCR) of commercial banks declined to 13.6 percent and Supervision (CRS) initiative, introduced in December 2003, 10.9 percent, respectively, at end-August 2005 (from 14.3 the SC has developed Key Risk Scorecards (KRS) and percent and 11.3 percent at end-2004), the decline was due corporate governance benchmarks for the asset management primarily to the inclusion of market risk in the capital industry to improve corporate governance standards and adequacy framework that was made effective on April 1, practices. In addition, the SC has recommended that asset 2005. Pre-tax profits of the banking system rose by 10.9 management companies with risk elements classified as percent in Q2 2005, to RM3.1 billion (RM5.8 billion for the “high-risk� submit mitigating action plans to the SC, while first half of 2005), reflecting higher investment and net companies with “elevated risk� would be subject to close interest income. Consistent with the Financial Sector Master and continuous monitoring by the SC. The individual key Plan, the BNM has recently put in place (i) the “Baffin� risk profiles will be used as a basis to identify key risk areas framework for the merger of commercial banks and finance and subsequently implement the necessary mitigating companies within the same banking group;20 (ii) the controls. The CRS initiative will be extended to unit trusts, framework for the establishment of Islamic subsidiaries, stockbroking, and futures broking companies, with a view to reflecting the expansion of Islamic banking in the last five using the KRS to developing an Industry-Wide Key Risk years; and (iii) the establishment, effective September 1, Scorecard. 2005, of a deposit insurance system. Financing of the private sector through the equity market (shares) recovered in H1 2005, rising by RM4.4 Philippines billion. The bulk of the funds were raised through a number The Philippine economy has been buffeted by a of Initial Public Offerings (IPOs). Meanwhile, the total number of shocks in 2005, including: political uncertainties, number of listings rose from 963 at end-2004 to 997 at end- the related resignation of key cabinet level economic July. Gross financing through private debt securities (PDS), officials on July 8 and impeachment charges filed against excluding Cagamas, rose by RM2.8 billion in H1 2005, to President Arroyo—that were dismissed by the House of RM12.1 billion, supported by the prevailing low yields in Representatives on September 6; rising global energy prices; the Government bond market.21 In an effort to expand the and sharply lower, El Nino related, growth in farm output. corporate bond market, as at end-June 2005, the Securities Economic growth has understandably slowed under these Commission (SC) had approved a total of 31 asset-backed conditions, to 4.7 percent in the first half of 2005 from over securities (ABS) amounting to RM22.4 billion ($5.9 6 percent in the same period last year. billion), including residential mortgage-backed securities (RMBS), recently issued by Cagamas, based on receivables Notwithstanding these shocks, the economy has from Government staff housing loans. exhibited considerable resiliency. Third quarter growth picked up to 5 percent, aided by a rebound in agriculture. A The SC also announced, on September 15 2005, an surge in worker remittances has limited the slowdown in easing of restrictions on both local investors and foreign personal consumption and boosted the current account companies. Domestic investors are now allowed to invest in surplus. Foreign direct and portfolio investment have increased significantly relative to 2003-04, and gross 19 reserves have risen to record highs in recent months. The Outstanding gross loans overdue more than three months, net of public sector deficit has been reduced, and following interest in suspense and specific provisions. uncertainty over the implementation of the expanded VAT 20 The “Baffin� framework was described in Malaysia Economic (EVAT), the Supreme Court’s rejection in October of all Update (April 2005). 21 Cagamas is the national mortgage corporation. East Asia Update 40 challenges to the law has improved the prospect of a more constitutionality of the EVAT with finality, paving the way robust tax effort in 2006. for its implementation. Despite these setbacks, the national government deficit appears on track to fall below the P180 Growth in the first half of 2005 was driven by the billion target (3.4 percent of GDP) for the year; the deficit service sector, which accounted for about half of total through September was P108.5 billion, well below the output, and grew by 6.6 percent followed by industry (4.4 comparable 2004 deficit. The adjustment in the deficit percent) and agriculture (0.9 percent). Each of the three appears primarily the result of declining expenditure in real sectors exhibited growth below last year’s levels. Within terms, lower than anticipated interest rates, and an increase services, the major drivers of growth were in non-tax revenue. telecommunications, business process outsourcing, and financial services. The non-performing loan ratio in the The consolidated public sector deficit (CPSD) fell banking system returned to single digits after nearly seven significantly to P41.6 billion in the first half, aided by years amidst greater consolidation and restructuring, and a upward adjustments in electricity tariffs in late 2004 by pickup in lending to consumers and the service sector. nearly one peso per kWh and a smaller adjustment in April Within industry, mining growth jumped to 13.9 percent in 2005 that helped to reduce the deficit of the 14 monitored the second quarter of 2005 following a Supreme Court government-owned and controlled corporations (GOCCs). ruling upholding liberalization in the mining sector. On the The first half CPSD was also reduced by surpluses incurred demand side, personal consumption slowed to 4.9 percent by the BSP, government financial institutions, pension compared to 5.8 percent last year, with strong growth of funds, and local government units. Another rate increase of remittances countering the adverse impact of surging oil 0.71 per kWh before the end of the year has been filed prices. Fixed capital growth swung from 5.1 percent in 2004 before the Energy Regulatory Board, targeted to eliminate to -5.5 percent in the first half of 2005. Growth in export the National Power Corporation’s operational deficit in and import volume also slowed, the former reflecting a 2006. Non-financial public sector debt, which increased decline in electronics demand. rapidly during 2001-03, fell from about 101 percent of GDP in 2003 to about 96 percent in 2004. Inflation had risen to about 8.5 percent year-on- year during February through May before falling to 7 Gross international reserves had reached a record percent by September. The central bank (BSP) has of $18.6 billion by September, as the balance of payments responded by raising its key policy rates by 25 basis points recorded a $2.7 billion surplus through September 2005. on three occasions in 2005 (April, September, and most The current account surplus rose sharply in the first half of recently, October 20). Its overnight borrowing and lending 2005 driven by remittances, cushioning the slowdown in rates now stand at 7.5 percent and 9.75 percent, electronics exports. For the first half, the trade deficit rose respectively. The market determined 91-day Treasury-bill slightly to $3.7 billion, whereas remittances from overseas rate however remains below 6 percent. Filipino workers jumped 28 percent through August 2005 to $7 billion. The current account surplus in the first half rose Enhancing tax revenue remains of major concern to to $1.12 billion from $152 million in the first half of 2004. the government, and a series of corrective measures have Portfolio investments recorded the biggest jump in the first been initiated to this effect: a law increasing the excise tax half with net inflows of $2.1 billion compared to $114 on cigarettes, tobacco, and alcohol, lateral attrition for million last year. Foreign direct investment also jumped to revenue agencies (which aims to strengthen incentives for $495 million in the first half from $170 million a year ago. improving collection), and the comprehensive tax reform package of 2005 which includes, inter alia, the removal of Spreads on bond issues rose in the middle of 2005 exemptions from the VAT of oil, power, medical and legal after credit rating agencies downgraded the Philippine credit services, an increase in corporate income tax from 32 rating outlook from stable to negative citing heightened percent to 35 percent (reverting to 30 percent in 2009), and political uncertainty and the failure of the government to gives the president authority to increase the VAT rate from implement the EVAT. Additional global bond issuances in 10 percent to 12 percent in January 2006 upon satisfaction May and September of $750 million and $1 billion, of certain conditions prescribed by law. Certain excise, respectively, effectively completed the national franchise and common carrier taxes were repealed in favor government’s external commercial borrowing for 2005. The of the expanded VAT (EVAT). The government also recent 10-year global bond issue in September was priced at launched tax evasion and anti-corruption campaigns which a spread of 410 basis points over the 10-year U.S. Treasury aimed to regularly file high profile tax evasion and bond, indicating the considerable potential in interest corruption charges. savings from lowering investor concerns. Implementation of the EVAT was, however, The unemployment rate fell to 7.7 percent in July suspended by the Supreme Court on July 1 after some (10.9 percent under the old definition, down from 11.7 legislators and business groups petitioned to declare the law percent a year ago) but underemployment rose to 20.5 unconstitutional. In September, the Supreme Court upheld percent from 17.6 percent. The number of additional jobs in the legality of the EVAT but petitioners filed another the year to July was 900,000 of which 540,000 were created appeal. On October 18, the Supreme Court upheld the in the farm sector. Partial and official poverty estimates East Asia Update 41 using a revised methodology revealed a decline in the higher oil prices, were effective on August 1, 2005. Interest incidence of poverty between 2000 and 2003. The number rates are also being adjusted upwards. of poor declined from 25.4 million in 2000 to 23.5 million in 2003, or from 33 percent to 30.4 percent of the Higher oil prices will however, dampen GDP population. Both rural and urban poverty are reported to growth next year too, as households and firms need time to have declined over this period: rural from 18.6 million (47.7 adjust fully to this increase. Given the high oil intensity of percent) to 17 million (43.6 percent); urban from 6.8 million GDP in Thailand, both consumption and investment will (17.8 percent) to 6.2 million (16.5 percent). The Gini continue to be affected adversely beyond this year, as coefficient declined from 0.4822 to 0.4678 in the same consumers and investors seek to make efficient use of oil period. The new methodology, however, makes time series particularly, and energy more generally. In 2005, retail comparison with pre-2000 figures difficult as the latter have prices of diesel rose by 41 percent and of gasoline by 28 not yet been adjusted. Provincial-level statistics are not yet percent, together raising the average retail prices of oil available while poverty gap and severity figures are still products by 30 percent in Thailand. Compared to 2003, the preliminary. average retail price of oil products in 2005 is more than 40 percent higher, and is likely to stay there. The higher cost of production for service providers like those in transport Thailand and power, as well for manufacturers in Thailand that use oil, power and transport as production inputs, will result in Economic growth is forecast at 4.2 percent in 2005, reduced output; this is already evident because growth in significantly lower than 6.1 percent last year. The tsunami, manufacturing production index has slowed in the first 8 drought, the unrest in the South and a large rise in oil prices months in 2005 relative to the same period in 2004. have all taken their toll on the confidence of consumers and Consumption is also down and is likely to remain depressed investors, and thus on growth in domestic demand. Growth given the reduction in real disposable income. in exports, a key factor in the strong recovery so far, also fell off sharply this year. While the effects of the tsunami The imperative for firms in Thailand to become and drought will wear off, and export demand is expected to more efficient and more productive is considerably more pick up, the effects of the large increase in oil prices will urgent. Even as firms seek to become more efficient users continue to depress GDP growth in 2006 as the full of oil and energy, they can address quickly known sources adjustment to higher oil prices takes time to work itself out. of weakness and inefficiency. Also the Government can GDP is expected to grow by 5 percent next year. address constraints to productivity improvements identified by firms in the recent survey of more than 1300 firms. Thailand has judiciously decided to fully pass- through higher oil prices to users. As a result, average retail Private investment slowed this year, which is not prices in 2005 are more than 40 percent higher than the surprising given the shocks to confidence indicated above. average price in 2003; the largest increase this year was for Foreign direct investment inflows, which have grown diesel because last year’s subsidy on it was removed22. This strongly during recovery over the last few years, have is already contributing to a more sustainable macro-situation declined by about 20 percent in the first half of this year. than would otherwise have been the case, given the large Next year, private investment should pick up but only increase in world oil prices . The Oil Fund, which ran up a slightly from this year as firms face a profit squeeze with the deficit of nearly Baht 90 billion in a little more than a year, prices of oil and other inputs rising faster than output prices. will not be adding to the consolidated fiscal deficit. Also, It will take time for firms to fully adjust and return to their growth of oil consumption has slowed noticeably, reducing pre-oil-price-increase production and investment behavior. the pressure on the current account balance. In fact, growth With the implementation of the mega projects, in gasoline consumption, falling since last year, has turned public investment will expand at double digit rates and negative this year while growth in diesel consumption, support higher total investment and domestic demand. The though still brisk, has fallen from 12 percent a year in 2004 implementation of the Bt 1.7 billion (US$42.5 million) 5- to around 7 percent this year. year public infrastructure mega projects began this year. The Government also adopted a few fiscal There has been some downward adjustment in “non-mega� measures to alleviate some of the impact of the shocks. For public investment. Nevertheless, public investment’s share tsunami relief, Bt400 million from the central government’s in GDP would rise from 6 percent last year in 2005 to 7 budget was approved to create the Tsunami Regional Trust percent this year and around 9.5 percent by 2008. This Fund. Moreover, higher daily minimum wages, aimed at expansion in public investment in infrastructure is much helping workers amidst higher living costs as a result of needed following more than five years of retrenchment since the crisis. The strategic importance of the investments as well as their priorities need to be well worked out to 22 Diesel retail price is floating; there is only an exemption ensure that the public investments help to increase private of 1 Baht per liter for excise tax. East Asia Update 42 sector competitiveness and investments, while also being and parts as well as machinery & parts; wearing apparel, consistent with the medium-term macro-economic stability. textile and food processing has been contracting or grown slightly in recent years. Tourism receipts continued to be Nearly a fifth of the larger public investment depressed following the tsunami in December 2004, and the program is planned to be financed by external borrowing, southern unrest has not helped this situation either. this can be done without weakening the macroeconomic situation. More than half of the Bt1.7 billion public Thailand’s current account will experience a deficit infrastructure mega-projects will be financed by the of around US$3.5 billion or 2 percent of GDP in 2005, Government’s budget and the state-owned enterprises’ following many years of surplus. The first half of this year revenues. The remaining 24 percent will be financed by saw a large rise in the import bill driven largely by a jump in domestic borrowing and 18 percent by foreign borrowing. oil and steel imports prompted by speculation about future The import content of the mega projects are around 35 devaluation and demands from implementation of mega- percent, implying an addition to the current account deficit. projects program. Import growth is expected to slow in the Also increasing private investment will add as well. second half; but the current account deficit will be However, given existing external debt and the overall fiscal significant and unavoidable given slow growth in export situation, this appears quite manageable. earnings and gradual recovery in tourism receipts. Even though tourism receipts should recover next year, the The public investments can help alleviate the current account will remain in deficit next year with problem of inadequate infrastructure services, a key continued growth in the private investment and public constraint identified by firms in Thailand in addition to investments. regulatory burden and skills shortages. The recent Thailand Productivity and Investment Climate Study, done jointly by Nevertheless, Thailand’s external and fiscal the World Bank and the National Economic & Social situation remains strong. It has reserves of US$48 billion (3 Development Board (NESDB) found, based on survey of times of short term external debt), and total external debt more than 1300 firms in Thailand, that regulatory burden, has fallen to around 27 percent of GDP as of June 2005. shortage of skilled labor and infrastructure weaknesses were The government is committed to continue running a constraining total factor productivity growth and private balanced budget which it has this year. Public debt as a investment. Thus streamlining of regulations (in respect of share of GDP is now below 50 percent and is projected to investment, labor, tax, customs, etc) will be an important decline over the next 5 years. step for raising rates of return for firms. Similarly, The Government remains focused on improving improvements in secondary education, vocational education, Thailand’s competitiveness. The Government is preparing English skills and IT skills will contribute a lot to removing the 10th Five Year National Development Plan (FY2007- the constraint of skill-availability and the firms’ expansion 2011), which is now called the National Development of ICT-use. Also, investments in infrastructure and changes Strategy. The Strategy includes 5 pillars: (1) Coping with in policy framework for infrastructure service delivery will the changing development context; (2) Economic be important to enhance productivity, strengthen restructuring; (3) Enhancing value-added through value & competitiveness and raise private investment. knowledge creation; (4) Pursuing social development; and Improving the investment climate would help to (5) Enhancing global and regional linkages. The Office of reduce costs and improve firms’ productivity and the National Economic and Social Development Board is competitiveness, and given the oil-price-increase, responsible for drafting the Strategy. The first draft of the addressing them has become more urgent. Private National Strategy is planned for February 2006 and the final investment recovery since the crisis, especially domestic, draft for September and issuance in October 2006. has been sluggish relative to past recoveries as well as in Poverty reduction also remains high on the terms of levels. It has remained below 20 percent of GDP, National Agenda. Thailand has recently revised its poverty lower than the average of the 1980s, even before the pre- line upwards to more accurately reflect the consumption crisis investment boom. Capacity utilization is now past the patterns of the poor. With these new poverty lines, poverty pre-crisis levels and in over half of the exporting sectors it headcount has fallen from 21.3 percent in 2000 (14.2 exceeds 80 percent this year. A supply constraint may be percent in 2000 based on the old poverty line) to 11.3 emerging. percent in 2004. The decline in the national poverty Export earnings are growing this year at half the headcount was mainly contributed by the reduction in the rate of last year, with much more modest export volume number of poor in the Northeast. The Northeast, which is growth. Export volume has grown slightly and only robust the most populous region and houses more than half of export prices increasing by 12 percent in the first 8 months Thailand’s poor, has seen a reduction in headcount ratio of the year, has kept export values up. More than 85 percent from 35 percent in 2000 to 17.2 percent in 2004. of exports are manufactures, and recent growth in exports has been most rapid in respect of electronics, automobiles East Asia Update 43 Reforms continued in the areas of trade, financial rating for government debt to Ba3 from B1. The and corporate sector and public governance. The Bank of government’s first ever sovereign bond issue has received a Thailand (BOT) is continuing its financial sector strong response from international investors, and has consolidation and rationalization as well as gearing up reportedly raised $750 million compared with an initial preparation for the implementation of Basel II which will proposal of $500 million. The ten-year dollar-denominated be fully effective in 2008. Non-performing loans in June bonds carry a coupon of 6.875 percent, or 256.4 basis points 2005 still remained at doubled digits of 10.3 percent of over corresponding US Treasuries. total loans, a minimal decline of 0.58-percentage point In the first nine months, agricultural production from December 2004. Corporatization of additional state- expanded by 4.1 percent despite a resurgence of avian owned enterprises (SOEs) has taken place in 2005, namely, influenza and drought conditions in parts of the country. the Telephone Organization of Thailand (TOT) GDP originating in the industrial sector recorded a rise of 10 Corporation, CAT Telecom, and Electricity Generating percent in the first nine months, with the manufacturing and Authority of Thailand (EGAT). This year regulations on construction sub-sectors growing by 11 percent and 8.9 consumer lending has been implemented to curb excessive percent respectively. consumer indebtedness. The corporatization of some state- owned enterprises (SOEs) has taken place in 2005, namely, In the first eight months, exports grew by 18.7 the Telephone Organization of Thailand (TOT), the CAT percent y-o-y. Strong prices led to crude oil exports Telecom, and the Electricity Generating Authority of increasing by 29.6 percent y-o-y in value terms, despite a Thailand (EGAT). The recently completed Thailand fall in volume of 11.3 percent y-o-y. The other major Report on Standards and Codes (ROSC) on corporate export, garments, grew only by 0.7 percent in the first eight governance showed that two-thirds of listed companies months. The expiry of the Agreement on Textiles and largely observes the six key corporate governance Clothing marked the onset of quota free trade in the standards set under the Organization for Economic Co- garments sector for WTO member countries. Vietnam, not operation and Development (OECD), while the remaining currently a WTO member, continued to face quotas in the one-third partially observes the standards. The Free Trade US market which accounts for over 50 percent of its Agreements (FTAs) are continuing, helping to increase garment exports. The slow growth of garment exports competition and encourage firms to raise their productivity reflects both increased international competition, as well as and competitiveness. The Thailand-Australia FTA, the problems with domestic allocation of quotas for exports to ASEAN-China FTA, and the Thailand-New Zealand FTAs the US. Vietnam’s exports are once again facing potential are effective this year leading to preferential tariff anti-dumping actions. The items currently under threat are reductions. The Government has also adopted the footwear, bicycles, and wood products. Over the first eight Government Fiscal Management Information System months imports grew 20 percent y-o-y in value terms. (GFMIS) since March 2005 to be able to better monitor Higher prices for commodities such as refined petroleum budget execution on a monthly basis. The Cabinet has also products and steel have been the main drivers of this approved the E-Government Action Plan (2005-2007) increase, rising 44 percent y-o-y and 34 percent y-o-y which focuses on providing services on-line, respectively in this period. Imports of machinery which had improving/amending laws to facilitate such services, picked up in the first four months of the year have since building infrastructure to accommodate the services, and flattened out, showing almost no change compared with the establishing the E-Government Agency (EGA) as an first eight months of 2004. oversight agency. In the first six months of 2005 the trade deficit widened to around 8 percent compared with 5.4 percent in the same period last year. The current account deficit, which Vietnam stood at 4.7 of GDP in 2003, is estimated to have declined GDP growth is estimated to have risen by 8.1 to around 4 percent of GDP in 2004, aided by strong percent y-o-y in the first nine months of the year owing to a remittances that reached $3.2 billion. The deficit is mainly strong pick-up in economic activity in the second and third financed through ODA and non-debt-creating FDI inflows. quarters. The government expects GDP to rise by 8.4 Foreign exchange reserves have risen from $7 billion at end- percent for the entire year, slightly below its original target 2004 to $8.3 billion in April 2005, representing around 12 of 8.5 percent. Throughout the year, while policy makers weeks of imports of goods and non-factor services. have reiterated their desire to meet the growth target, they Steady progress has been made towards WTO have been mindful of its potential inflationary impacts, membership, but recent statements by negotiating parties especially as international commodity prices have remained suggest that chances of full, non-conditional accession by high. Central bank announcements have suggested a December 2005 appear limited. Of the 28 countries or reluctance to apply strong monetary restraints to rein in the groups with which bilateral negotiations are to be supply shock-induced inflation as it may entail an unduly conducted, 21 have been finalized. But Vietnam’s ability to high cost in terms of foregone output. The international wrap up accession by the Hong Kong Ministerial ratings agency, Moody's, raised the foreign-currency Conference in December 2005 hinges crucially on reaching country ceiling for bonds and notes and the foreign-currency East Asia Update 44 agreement with the US. For non-conditional accession, expanding credit has been its quality. In recent months the Vietnam would need to be provided Permanent Normal central bank has particularly highlighted risks related to Trade Relations (PNTR) status, but the schedule for its property loans. Credit quality has been hard to assess as consideration and potential approval by the US congress is banks, till recently, were required to report NPLs based on not yet clear. standards that were significantly weaker than internationally acceptable ones. The central bank’s Decision 493 of April, Strong growth in oil-related revenues, which have 2005 raised the classification and reporting on NPLs to already attained 93 percent of their annual target, should international standards. The first reports are expected to be help keep the deficit below the budgeted level of 2.3 percent available at the end of 2005. of GDP in 2005. However, rising oil prices have had an upward impact on the expenditure side as well. Since An important decision in banking sector reform domestic oil price adjustments have lagged behind relates to the much awaited approval of a plan for the international prices, the government has had to compensate equitization of Vietcombank, one of the four large state domestic oil distribution companies. Such expenditure is owned commercial banks (SOCBs). The state’s estimated to have attained 0.5 percent of GDP in 2004, but shareholding in the bank is to be gradually reduced to the figure could be higher for 2005. Another factor leading around 70 percent first and eventually to 51 percent by to higher expenditures is the recently announced increase in 2010. Total foreign holding of shares will be limited to 30 government salaries and social insurance payments. The percent with a single institutional investor allowed to hold a estimated cost to the budget for the last quarter of 2005 is maximum of 10 percent. Recently, it has also been VND 4.1 trillion or around 0.5 percent of annual GDP, and announced that equitization will be extended to other large about VND 13 trillion will be required in 2006. SOCBs as well. The government is likely to step up off-budget infrastructure investment that has been financed through the issuance of bonds. Earlier plans to issue bonds worth US$ 4 Smaller Economies billion till 2010 could be revised upwards by as much as 75 percent. While the enhanced spending program is justifiable on the basis of infrastructure requirements, its Cambodia implementation needs to be accompanied by improvements Cambodia’s economic prospects for 2005 have in project evaluation and moving such expenditure on- improved considerably, mostly as a consequence of garment budget. exports being higher than originally expected, in part due to The supply side shocks that sparked inflation in the imposition of restrictions on Chinese textile imports in 2004 have not abated. These shocks are the outbreak of the US and EU markets. Though increased competition avian influenza, bad weather conditions, and hardened after expiry of the MFA is putting downward pressure on international prices of key imports such as oil, fertilizer, garment export prices and higher oil prices are dampening cement and steel. Inflation had trended downwards from other sectors of the economy, Cambodia’s projected growth 10.3 percent y-o-y in October 2004, to around 7.3 percent y- for 2005 will be around 6.1 percent, mainly due to strong o-y in August 2005, but ticked up to 8.3 percent in October. growth in tourism, telecommunications, and the The government’s original target of 6.5 percent y-o-y for construction sectors. This follows a better than expected end-2005 will thus be exceeded. While food price inflation performance in 2004, which posted a growth rate of 7.7 which stood at 18.4 percent in October 2004, has come percent, the highest since 2001. Growth is expected to down to 7.6 percent a year later, the prices of non-food continue to at about 6 percent in 2006. items have crept upwards. Total garment exports during the first half of 2005 Domestic interest rates have faced upward pressure reached US$ 820 million, rising by 1.4 percent in nominal due to inflation as well as increases in US interest rates as terms over the same period in 2004, suggesting significantly bankers perceive that depositors will switch to US dollar slower growth this year compared to prior years. The deposits if dong rates are left unchanged. Interest rates on garment industry, the single largest foreign exchange earner, one year dong deposits currently range between 8.4 percent grew by 25 percent in 2004, with 65 percent shipped to the and 8.76 percent. US, 29 percent to the EU, and 6 percent to other markets. Credit growth accelerated in 2004 reaching 42 The continued though moderated expansion of percent y-o-y by December. This pace was roughly maintained in early 2005, as the growth rate only fell to 39 Cambodia’s garment exports coupled with soaring oil prices percent by May 2005. In 2004, lending in foreign currency in 2004-2005 has led to deterioration in the country’s terms- rose by 60 percent compared with 38 percent for loans of-trade as the cost of oil imports has risen considerably. denominated in domestic currency. Expectations of a slow Average oil and diesel prices in Cambodia grew by 19.3 depreciation of the dong combined with lower interest rates percent and 26.8 percent, respectively, in June 2005 as on foreign currency lending, appears to have made such compared to June 2004. Consumers were buffered from the lending more attractive. The main concern with fast full world market price hike by the Government’s East Asia Update 45 intervention, which lowered the effective petroleum tax rate. government, and, perhaps most importantly, through By applying taxes and duties to an administrative price (set improved tax and customs administration. equal to market prices in January 2004), for example, the On the structural reform front there has been an Government reduced the effective tax on gasoline by 36 acceleration of pace as compared with 2004. Recent percent to provide relief for consumers. However, progress has been made in enhancing the investment climate Cambodia, a low-income oil importing country, suffered an through reducing the costs of commercial registration and estimated terms-of-trade loss of 0.8 percent of GDP in 2004. time spent for export-import clearance and inspection. In As a result the current account deficit (excluding official related developments the Law on Commercial Enterprises transfers) is expected to worsen slightly from 10 percent in was passed by the National Assembly in May and the draft 2004 to 11 percent in 2005. The current account deficit is Law on Concessions and the sub-decree for the Law on likely to remain at around 10.5 percent of GDP next year as Investment (LOI) were passed by the Council of Ministers average world oil prices are projected to be slightly higher in July and September, respectively, and are among a than this year. number of key laws aimed at fostering private sector Tourism and construction, the source of much of development. The Law on Concessions promises to improve Cambodia’s non-garment growth, has continued to expand. economic governance by installing greater transparency in Visitor arrivals rose by 41 percent in 2004 over 2003, the management of state assets, including by subjecting though higher oil prices will likely dampen expansion in contracts for state assets to greater scrutiny and competition. 2005. The construction sector contributed 10.4 percent to The LOI sub-decree would reduce uncertainty over economic growth in 2004. Growth of residential investment procedures and approval processes, thereby construction in Phnom Penh was remarkably strong in 2004, instilling greater confidence on the part of investors. rising by 31 percent over 2003, and commercial In public resource management the Government construction also increased markedly. Growth in the has made progress in a number of areas. Procurement construction sector is projected to remain strong in 2005 at authority to the line ministries has been deconcentrated, about 11 percent. Overall agricultural growth is expected to which should reduce delays in the provision of goods and be below average in 2005, owing in part to weakness in the services to citizens. In addition the use of checks and fisheries sub-sector. FDI is expected to recover this year transfers for the payment of taxes has been expanded and after a disappointing performance in 2004. During the first further measures to reduce reliance on cash transactions are half of 2005, 66 new investment and expansion projects under preparation. Moreover, a new pilot merit-based pay were approved by the CDC; this was a highest number ever initiative has been developed and established in the Ministry approved since 1999 for a 6-month period. of Economy and Finance; this should improve civil External developments have been on track with the servants’ incentives and therefore performance. The continued expansion of international trade, a fairly stable adoption of the initiative by other ministries is currently exchange rate, and rising gross foreign reserve (reaching under discussion. In natural resources management, there US$ 809 million by end of 2004). was a recent agreement on disclosure of information on fishing lots and land concessions, and some progress on new Macroeconomic performance has been favorable sub-decrees on State Land Management and Economic Land with prudent monetary and fiscal policies. The 2005 end of Concessions. However, given their direct impact on period inflation rate is expected to remain at the 2004 level economic growth and poverty, as well as their high of 5 to 6 percent, while inflation in 2006 will likely decline visibility, accelerating recent initiatives and redressing to the 3 to 4 percent range as result of continued prudent illegal practices in natural resources management are macroeconomic policy. critical. The overall fiscal situation looks to remain broadly New data suggest that poverty has fallen over the stable in 2005. The revenue-to-GDP ratio is projected to last decade but remains high, matched by poor human reach 11.3 percent in 2005. Further gains are expected to development indicators (HDI rank of 130). In the core raise revenues to 12 percent of GDP in 2006. At the same provinces, poverty has declined from a high base at the end time the expenditure-to-GDP ratio is projected to increase of the civil war and embargo (from 39 percent in 1993/4 to from 16.3 percent in 2004 to 16.8 percent of GDP in 2005, 28 percent in 2004: unofficial Bank estimates) and life and to 17.5 percent in 2006. The government has made expectancy has improved (to 60 years for men, 64 for greater efforts to expand the revenue base, including women). However, Cambodia’s GNI p.c. ($350 in 2004, through the introduction of the income tax to garment Atlas method) is the lowest in the region; the poverty workers (effective June 1, 2005), the creation of Unused headcount remains high at 35 percent (this includes the Land Appraisal and Valuation Sub-Commission (June 3, poorer peripheral provinces not surveyed in 1993/4); and 2005) to implement tax collection of the unused land, inequalities are widening. The Government is now identify unused lands and estimate taxes to be paid to the preparing a National Strategic Development Plan 2006- East Asia Update 46 2010, which will hopefully help consolidate the poverty The policy was due to be publicly launched in September reduction focus and outcomes already achieved most 2005. notably in the social sectors, and start to improve focus and In early 2005, the Government prepared a outcomes in other sectors. reconciliation bill, (the Reconciliation, Tolerance and Unity Bill) aimed at healing divisions caused by the 2000 coup. The draft bill has been the subject of widespread public Fiji criticism, however, as it is perceived to be too generous to Economic growth in 2004 at 4.1 percent was higher those involved in the coup. The bill is expected to be tabled than earlier expected due to the strong performance of the in the House of Representatives in the last quarter of 2005. agriculture, construction and services, sectors. Growth in Formal preparations for the 2006 General Elections 2005 is forecast by the Government at 1.2 percent, mainly commenced in September with nation-wide voter reflecting the effects of the loss of preferential trade registration. arrangements in the garment industry. Future economic prospects are uncertain due to the impending expiration of preferential price agreements for sugar with the European Lao PDR Union. Recent negotiations, however, resulted in a The economy is projected to grow at 7.3 percent in postponement of the expiration of the trade agreement from 2005 and to continue growing steadily at 7 percent in 2006. 2005 to 2006-07. As a result sugar prices in 2005 will only A large part of this growth comes from increased foreign decline by 5 percent compared to the earlier scheduled cut investment flows in hydropower and mining: without of 20 percent. Progressive reductions would be spread over increased investment and exports in these sectors real a longer period to 2010, with sugar prices lower by a growth would have been about 4.2 percent in 2003, 6 cumulative 30 percent by then. percent in 2004, and projected at 4.8 percent in 2005 and Inflation eased to 3 percent in the first quarter of 2006. Therefore, promoting growth in sectors other than 2005, and continued to decline to 2.1 percent in the second mining and hydropower is increasingly important for quarter. The effects of higher oil prices are, however, ensuring stable growth in the long-run. expected to lead to an increase in inflation and the Real growth in Lao PDR reached 6.4 percent in Government’s forecast for the year-end is 4.5 percent. 2004, up from 5.8 in 2003. Agriculture recovered from Fiji's booming tourism industry continues its 2003, growing at above 3 percent in 2004 and 2005 momentum into 2005 with tourist arrivals forecast to (projected), in comparison to 1.8 in 2003; this increase came increase by 7-10 percent). A surge in new tourism related mainly from recovery in crops after a drought. projects has also contributed to the robust performance in Manufacturing picked up on the back of strong domestic the building and construction sector (value of work put-in- demand. Private investment and exports performed better place increased by 74 percent in the first quarter of 2005 too. Rapid growth in the neighboring countries and compared to the corresponding period last year). In the year increasing foreign investment and trade provide a base for to March 2005, total garment exports declined by about 32 keeping this performance in the future. percent over the corresponding period the previous year, The macroeconomic situation remains stable. reflecting the expiration of the preferential trade agreement Inflation continues to decline, having fallen from 15.5 with the U.S. in early-2005. The sugar industry has percent in 2003 to 10.5 percent in 2004 and is now projected performed well with production levels significantly higher to fall to 5.9 percent in 2005. End-of-period inflation rates in June this year over the comparable period last season. were halved from 12.4 percent in May 2004 to only 6 Remittances have also been growing strongly: they overtook percent in May 2005. This was made possible by the fiscal sugar revenues in 2004 and are estimated to overtake adjustment in 2003/04 and by steady revenue collection tourism revenues this year. Fiji may soon revise its growth levels above 11 percent of GDP. The kip has also remained forecast upward in light of this. stable, with the nominal exchange rate of 10,613 kip per The fiscal deficit for 2004 was 3.3 percent of GDP, dollar in 2004, only a slight depreciation from the previous down from the earlier estimate of 4.8 percent of GDP. The year’s exchange rate of 10,572 kip per dollar. The reserves more favorable outcome was a result of higher than forecast have remained above 3 months of imports and are not revenue collections and lower capital expenditure. A projected to fall in the near future. With higher foreign slightly higher deficit of 4.3 percent of GDP is forecast for investment and exports, the balance of payments should 2005. Total public sector debt remains at about 50 per cent remain buoyant into 2006. of GDP. Nevertheless, continued vigilance will be needed to A land use policy has recently been endorsed by sustain macroeconomic stability, especially on three fronts. the Fiji Cabinet (the first Pacific island country to do so) to First, pressures to increase public sector wages need to be guide the sustainable development of its land resources. managed in a fiscally sustainable manner. Wages are being increased gradually, albeit from very low levels. The total East Asia Update 47 wage bill is expected to rise from 4.3 percent of GDP in been taking stock of the program’s impact and in addition to 2003/04 to 4.5 percent in 2004/05 and 4.7 percent in modifying the ‘Governance Agreements for SCBs and 2005/06. Second, revenue collection also needs to be completing the 2004 international standard audits, options strengthened to compensate for a decline in forestry on introducing strategic investors into these SCBs is also royalties, non-tax revenues and a decline in revenues from being considered by the Government. lower tariffs related to AFTA. Third, steps to improve Further steps were taken to open up the private revenue collection are also important to ensure fiscal sector and trade. The recent revision of the investment laws sustainability of debt-servicing over the medium-term. provides for equal tax incentives for local and foreign Commercial banks remain vulnerable to pressures to extend investors, removes remaining biases favoring SOEs, and credit on a non-commercial basis and at a rapid pace; this strengthens dispute resolution and contract enforcement has to be managed carefully as failure to do so will generate mechanisms. However, the legal framework and inflationary pressures as well as build up contingent implementation still fall short of that in Vietnam and liabilities. Thus reaching the revenue collection target of 12 Cambodia and the Government plans further improvements. percent of GDP is important for fiscal sustainability This In trade, the government is working on a comprehensive will require implementation of reforms to strengthen tax strategy to improve competitiveness and increase exports. collection and the adoption of new revenue measures. In Steps were taken to continue implementation of the AFTA particular, the government should work on centralizing agreement and the bilateral trade agreement with the US custom duties collection, improving management of following the granting of normal trade relations (NTR) in provincial large tax-payer units, improving finance ministry November 2004. Lao PDR continues efforts for regional and monitoring of provincial revenue collection and better international integration, hosting the Tenth ASEAN summit control of granting of tax exemptions. As a part of revenue in Vientiane last year. reforms, the government has recently submitted to the National Assembly a major reform agenda that includes the introduction of a single rate VAT in 2006/07. Mongolia Lao PDR has continued implementation of reforms Real gross industrial output fell 3.0 percent in the in public expenditure management, state-enterprises, and first semester of 2005, with a 20 percent drop in textile and banking. These reforms will be implemented in parallel garment industry production (following the expiration of the with ongoing reforms to address the competitive challenges Agreement on Textile and Clothing ) offsetting strong 10.7 of regional integration, including trade reform, the percent real growth in the mining sector. Overall GDP development of infrastructure and human resources, and the growth is projected to reach 5 percent in 2005, led by the mining sector, including the newly started zinc industry, strengthening of the investment climate. The Five-Year with further contributions from agriculture, and, in the Socio-Economic Development Plan articulating key goals services sector, transportation and trade. During the first for the country and a medium term program of reforms and semester, signs of inflationary pressure were perceived. As public spending programs to achieve them is being drafted. of June 2005, CPI increased by 13.6 percent from the The plan will incorporate key parts of the National Growth beginning of the year, almost double previous year inflation and Poverty Eradication Strategy (NGPES) and will be done over the corresponding period. This significant increase in in consultation with various stakeholders, including donors, inflation was mainly caused by high oil import prices, issues private sector and civil society. A comprehensive five-year in domestic meat supply, and adjustments in heating and Public Expenditure Management Strengthening Program electricity administered prices. In addition, an (PEMSP) is now under way; and the State Audit Office accommodative monetary policy has accompanied the price (SAO) is being strengthened to help with its timely increase, thereby fueling inflation. As of June 2005, M1 and implementation. Restructuring actions for the 4 large state- M2 increased respectively by 9.0 percent and 24.3 percent. owned-enterprises (SOEs) were also implemented, albeit at Credit to the private sector continued to expand with strong a slower pace than originally expected. demand in the mining, construction and trade sectors. In the banking sector, non-performing loans (NPLs) continue to The government’s program of reform of the grow, with a ratio of NPLs to total loans rising to more than banking sector begun some years has had disappointing 11 percent in the middle of 2005. results. The financial health of SCBs has improved marginally, but non-performing loans remain high and Overall, in early 2005, high prices for copper and directed lending remains substantial, though lending to gold have sustained export revenue growth, despite market SOEs has declined significantly. The number of losses in the textile and garment sector. During the first international banking advisors -- put in place in 2003 to semester, export increased by 29 percent. Imports rose by advise the two state commercial banks (SCBs) on credit 4.2 percent compared to the same period of 2004, boosted policy and on risk-assessment of individual loans -- has also by higher oil prices. Mongolia’s main export partner is China (49 percent of total export). By commodity, copper been reduced without significant increases in the capacity of concentrate represented 32 percent and gold 28 percent of SCBs to assess credit risk. The IMF, ADB and WB have East Asia Update 48 total exports respectively. Its main import partner is Russia Recent improvements in budget management were (30 percent of total imports). Mongolia imported intensified in 2004 and these efforts combined with windfall USD104.2mln of oil products from Russia which revenue receipts, from both the mineral and non-mineral represented 21 percent of total imports. The floating sectors resulted in a budgetary surplus of 1.4 percent of exchange rate remained stable at the end of June 2005, at GDP. A reduction in domestic interest rates also 1193 togrog per USD. The recent lifting of quotas under the contributed to this outcome. The revenue windfall was Agreement on Textile and Clothing has hurt the small utilized to reduce payments arrears from earlier periods, garment sector. The government has approached the United repay and restructure domestic debt and to pay the States and the European Union (EU) to obtain favorable government’s share of deferred superannuation liabilities. bilateral treatment, especially in the face of the removal of Due mainly to the booming mineral sector which quotas on garment imports into the US and EU. The led to a large trade surplus, the current account of the Government has recently reached an agreement with the EU balance of payments registered a surplus estimated at to export 7000 listed goods to Europe at a preferential tax around 8 percent of GDP in 2004. A similar outcome is rate. anticipated in 2005, although the size of the surplus will Fiscal performance remained strong in 2005. likely be lower if imports recover as expected. The kina Through end June 2005, total budget revenue collection remained stable, appreciating by about 5 percent against the increased 13.4 percent compared to same period of 2004, U.S. dollar during 2004. Through the first three-quarters of when total government expenditure had increased by 5.5 2005 it has maintained that trend appreciating by less than percent. As a result, the government budget recorded a 0.5 percent against the U.S. dollar. surplus of 41.6bln togrog at the end of June 2005. Overall Inflation abated as a result from 8.4 percent in revenue growth in 2005 could slow from the recent strong 2003 to an estimated 2.4 percent in 2004. The downward pace due in particular to a decrease in excise tax revenue. trend in inflation has continued in 2005, with the CPI Expenditures as a ratio of GDP should remain the same, recording a cumulative increase of 0.3 percent through taking into account a broadening of the child allowance September, and inflation at an annualized rate of 1.4 percent program and pension adjustments. As a result, the overall (quarter-on-quarter). These developments facilitated a deficit could exceed the target of 3.3 percent of GDP in monetary easing throughout 2004, which saw Treasury bill 2005. Tax reform has been debated within the government yields decline from 16 percent to just under 5 percent over and parliament in recent months, although no decision has the year. These levels have been maintained through the been taken yet. first three quarters of 2005. External reserves increased in Mongolia’s external debt remains high, even after 2004 to end at about US$600 million, equivalent to the settlement of pre-1991 Russian debt, which was approximately six months of non-mineral imports. Reserve equivalent to 11 times GDP. The outstanding stock of levels have been maintained in the year to date. external debt was equivalent to 91 percent of GDP as of Medium term economic prospects received a end-2004, or 55 percent in Net Present Value terms (NPV). significant boost in early 2005, through the announcement 98 percent of external debt is concessional and publicly that the Front End Engineering Design work on the Papua owned, while domestic public debt remains small at 8.1 New Guinea Gas Project was proceeding and the present percent of GDP at the end of 2004. In July, a report on the high global energy prices will almost certainly mean that the late-2003 Russian Debt Settlement was released by the project will proceed. Parliamentary review committee, thereby officially bringing to an official close the settlement of Mongolia’s pre-1991 Political Developments. The coalition government debt to Russia. appears to have consolidated its position and now stands to be the first since independence to complete its term in office. The Enhanced Cooperation Program with Papua New Guinea Australia—which was designed to provide direct personnel support to Papua New Guinea to stem the long term The economic recovery which commenced in 2003 deterioration in law and order and to strengthen economic was maintained in 2004 when real GDP expanded by an management—was dealt a blow in May through a supreme estimated 2.7 percent with the non-mineral economy court ruling which declared it unconstitutional. The main growing at 3.2 percent. Principal factors behind this were basis for the ruling stemmed from the immunities granted to strong world market prices for its primary exports Australian personnel in Papua New Guinea. Following the comprising oil, gold, copper, timber, vanilla cocoa, coffee ruling most of the 160 strong police contingent were and palm oil which account for over 70 percent of exports. withdrawn with the civilian component comprising some 43 Consumer confidence has also recovered, evidenced in an Australian advisors providing direct support to the central emerging boom in commercial and residential construction. agencies of government mainly Treasury and Finance, On the strength of growing domestic demand real GDP is Personnel Management and the Prime Ministers expected to expand by about 3 percent in 2005. Department, as well as the law and justice areas remaining in place. Subsequent efforts to revive the program have East Asia Update 49 resulted in an agreement which steps up the civilian surplus of 12.5 percent of GDP in 2004. However, the component, with an emphasis on anti-corruption efforts and current account is expected to revert to a large deficit in a scaled back program of support to the police, mainly 2005 reflecting higher oil prices and non-oil imports, the administrative and training in nature. latter boosted by investment projects. Gross reserves amounted to US$79 million at end-2004, nearly 6 months of projected import cover. Despite the projected current Solomon Islands account deficit in 2005, foreign exchange reserves are expected to remain relatively stable, aided by an increase in With restoration of law and order and stabilization FDI linked to the two major projects underway. of economic and social conditions, attributable to a large degree to the Regional Assistance Mission to Solomon Structural reforms remain critical to sustaining Islands (RAMSI), the external military presence in the economic growth. The proposed Foreign Investment Bill is country has been cut back. A review of RAMSI conducted a step towards regulatory reform aimed at promoting private by the Pacific Islands Forum Eminent Persons Group in investment, and is especially important given the uncertain early-2005, recommended greater Pacific representation in contribution of logging to growth over the medium term. the ongoing policing and civilian components of RAMSI. The report also suggested that while it is imperative that RAMSI maintains its leadership in various sectors, Timor Leste conscious effort should be given to the capacity building of Since restoring independence on May 20, 2002, Solomon Islanders where possible. Timor-Leste has made solid progress in nation-building, There is still pressure for federalization especially maintaining peace and unity, and restoring public services leading up to the national elections scheduled for early and private sector activity. The country now faces the 2006. Concerns remain regarding the viability of a federal challenges of building on this early progress in the context system given the fragility of central government finances of very limited human resources, embryonic institutions, a and limited capacity of provincial governments. stagnant economy, and high levels of poverty and unemployment. The National Development Plan, prepared Economic growth is estimated at 5.5 percent in shortly before the restoration of independence, outlines 2004 (for the second year in a row), boosted in part by Government’s development and poverty reduction unsustainably high logging levels. Somewhat lower growth objectives. rates of below 5 percent are projected for 2005 and 2006, reflecting an anticipated slowdown in logging. However, Subsequent to the ratification of the Timor Sea new activities—such as the reopening of the palm oil Treaty in March 2003, development of the Bayu-Undan oil plantations and the rehabilitation of a gold mine which took and gas field has proceeded and liquids production began in place earlier this year—should improve non-logging growth. April 2004. Following the July 2005 promulgation of a The annual inflation rate for 2005 is projected to persist at Petroleum Act and Petroleum Tax Law and a September around 7 percent, largely due to the flow-on effects of high 2005 “road show� in Singapore, London, Calgary and oil prices. Houston, the Government also plans to start licensing near- shore oil exploration in early 2006. In a context of The Government budget enjoyed a surplus of about historically high oil prices, Timor-Leste’s petroleum 8 percent of GDP in 2004, resulting from a sharp increase in revenues have risen much more rapidly than expected, from tax collection, the termination of militia payments, and US$ 41 million in FY04 to about US$ 265 million in FY05, restricted spending due to capacity constraints. External almost twice the budgeted level of US$ 130 million (as grants also increased in 2004 to about 22 percent of GDP, compared to budgeted expenditures of about US$ 79 and were not fully matched by rising development million). Medium-term projections indicate that petroleum expenditure. The budget in 2005 is expected to be closer to revenues will remain at more than US$ 200 million for the balance reflecting significant increases in both recurrent and next four years. In the interest of prudently managing the development expenditure. influx of revenues, the Government will save the bulk of Public debt has declined since 2003 but the debt petroleum revenues in a Petroleum Fund modeled after situation remains fragile. Central government debt Norway’s, allocating to the budget only the sustainable (including arrears) fell from 122 percent of GDP in 2003 to portion of the income. The Government embraced the about 92 percent in 2004, and its external debt also declined principles of transparency on petroleum revenues well from 71 to 62 percent of GDP in the same period. The before the Extractive Industries Transparency existed, and Government is proceeding with plans to restructure the Petroleum Fund Act promulgated in July 2005 is elements of its external debt and is seeking debt relief from consistent with EITI for which Timor-Leste is a pilot external creditors. A “Honiara Club� meeting was held in country. The Fund was created in September 2005, with October for this purpose. deposits at end-September amounting to about US$250 million. High growth in timber and fish exports and an almost doubling of transfers contributed to a current account East Asia Update 50 While petroleum GDP is thus growing rapidly, forestry, there has been little new investment thus far. non-petroleum GDP is stagnating. After declining around 6 However, financial sector activity continues to expand. percent per year for two years, non-petroleum GDP grew Bank deposits increased further to 26 percent of non- only modestly at 2 percent in 2004 and is expected to grow petroleum GDP at end-July 2005 and bank loans reached 23 at around 3 percent in the medium term. Given that the percent of non-oil GDP. Non-oil exports are estimated to population is growing at well over 3 percent, per capita have risen to US$ 10 million in 2005, a 20 percent increase GDP has steadily declined to USD 366 in 2004. The overall from 2004, of which US$ 8 million is expected to be coffee. wage level remains relatively high in comparison with Inflation fell further to 1.2 percent on a year on year basis in neighboring countries, undermining competitiveness and August 2005 in response to moderate domestic demand and limiting job creation for unskilled labor. At the same time, the continued downsizing of the international presence and unemployment rates are high. In 2001, unemployment stable non-oil import prices. Inflation is expected to remain reached 20 percent in the urban areas of Dili and Baucau, at around 2.5 percent on the basis of low international compared to 5 percent nationwide. Unemployment has most inflation and the continued absence of domestic demand probably increased since then, particularly as members of pressures. the rapidly growing youth population approach working age. While some interest has been shown in concessions for exploitation of natural resources, such as fisheries and East Asia Update 51 APPENDIX TABLES Appendix Table 1. Quarterly Real GDP Growth - % Change Year Ago China Hong Indonesia Korea Malaysia Philippines Singapore Taiwan Thailand East Kong (China) Asia Q1 2000 8.1 16.1 4.1 13.1 11.7 5.3 9.6 7.9 6.5 9.3 Q2 2000 8.3 12.4 4.5 9.4 8.5 6.1 8.2 5.2 6.1 7.9 Q3 2000 8.2 12.5 5.3 8.2 8.4 7.2 10.0 6.6 2.4 7.8 Q4 2000 7.6 9.3 7.5 4.3 7.1 5.3 9.7 3.6 4.0 6.3 Q1 2001 8.4 2.4 4.4 3.5 2.9 1.3 4.1 0.7 1.7 4.8 Q2 2001 8.0 1.6 6.1 3.7 0.2 2.0 -1.3 -3.2 2.2 4.1 Q3 2001 7.1 -0.3 3.9 3.4 -1.2 1.4 -5.6 -4.9 2.1 2.9 Q4 2001 6.9 -1.0 1.0 4.6 -0.5 2.3 -5.0 -1.4 2.7 3.3 Q1 2002 8.0 -1.0 3.4 6.5 1.3 4.2 -0.4 1.1 4.4 5.0 Q2 2002 8.4 0.4 4.1 7.0 4.2 4.6 5.0 4.0 5.2 6.1 Q3 2002 8.5 2.9 5.2 6.8 6.0 3.3 4.7 5.8 5.7 6.6 Q4 2002 8.3 4.8 4.7 7.5 5.8 5.5 2.8 4.9 5.9 6.7 Q1 2003 9.9 4.3 5.2 3.8 4.9 4.5 2.7 3.2 6.6 6.4 Q2 2003 7.9 -0.7 5.1 2.2 4.7 4.1 -3.0 -0.1 6.3 4.3 Q3 2003 9.6 4.0 4.3 2.3 5.3 4.8 3.2 4.2 6.8 6.0 Q4 2003 9.9 4.8 4.9 4.1 6.7 4.6 6.9 5.9 7.7 7.0 Q1 2004 9.8 7.4 4.4 5.3 7.8 6.3 7.9 6.7 6.7 7.5 Q2 2004 9.6 12.0 4.4 5.5 8.4 6.5 12.3 7.9 6.4 8.1 Q3 2004 9.1 6.7 5.1 4.7 6.7 6.2 7.2 5.3 6.1 6.9 Q4 2004 9.5 7.2 6.7 3.3 5.8 5.3 6.5 3.3 5.3 6.5 Q1 2005 9.4 6.2 6.2 2.7 5.8 4.6 2.7 2.5 3.3 5.9 Q2 2005 9.5 6.8 5.5 3.3 4.1 4.8 5.2 3.0 4.4 6.2 Q3 2005 9.4 4.4 5.0 6.0 Source: Haver Analytics and national sources Appendix Table 2: East Asia: Merchandise Export Growth (US $; % change form a year ago) 2003 2004 Q2 Q3 Q4 Q1 Q2 Mar- Apr- May- Jun- Jul- Aug- 2004 2004 2004 2005 2005 05 05 05 05 05 05 East Asia (9) 19.0 25.6 28.6 26.9 23.5 19.3 17.6 19.1 17.4 18.4 17.0 16.1 21.1 SE Asia 10.9 17.6 16.9 22.7 18.1 15.9 13.4 20.8 13.8 15.5 11.0 12.0 16.0 Indonesia 6.6 14.7 7.5 24.7 23.6 32.2 25.7 44.8 28.7 30.7 18.2 23.2 11.4 Malaysia 11.3 20.8 22.3 27.5 16.1 13.7 10.8 16.3 9.8 10.9 11.7 3.2 13.8 Philippines 2.9 9.5 11.1 8.7 11.6 3.3 3.3 -3.2 8.3 0.9 1.2 11.4 0.8 Thailand 17.9 21.3 19.7 21.4 19.6 12.9 12.3 21.5 11.1 16.8 9.2 16.5 29.3 China 34.6 35.4 37.2 34.7 35.6 35.0 30.9 32.8 31.9 30.2 30.6 28.6 31.9 NIEs 14.2 22.8 28.1 23.4 17.6 11.4 10.3 9.8 9.1 12.2 9.8 9.0 15.4 Hong Kong 11.8 15.8 17.7 17.0 14.9 10.3 12.6 3.5 7.8 17.0 12.9 8.4 13.1 Korea 19.3 31.0 38.9 28.9 21.2 12.7 9.0 13.1 6.5 11.0 9.5 10.7 18.1 Singapore 15.2 24.6 29.0 28.5 22.3 14.7 13.4 16.9 12.7 15.7 11.9 11.2 23.0 Taiwan 10.4 20.7 28.8 21.5 11.9 7.8 6.0 6.9 11.2 4.0 3.1 5.3 7.6 (China) East Asia Update 52 Appendix Table 3. East Asia and the Pacific: GDP Growth Projections Forecast Forecast 1998 1999 2000 2001 2002 2003 2004 2005 2006 East Asia -0.1 6.3 7.7 3.8 6.1 6.0 7.2 6.2 6.2 Developing East Asia 1.7 5.8 7.1 5.7 7.0 8.0 8.2 7.7 7.5 South East Asia -9.3 3.3 5.7 2.6 4.7 5.5 5.9 5.0 5.4 Indonesia -13.1 0.8 5.4 3.8 4.4 4.9 5.1 5.7 6.0 Malaysia -7.4 6.1 8.9 0.3 4.4 5.4 7.1 5.0 5.3 Philippines -0.6 3.4 4.4 3.0 4.4 4.5 6.0 4.8 5.0 Thailand -10.5 4.4 4.8 2.2 5.3 6.9 6.1 4.2 5.0 Transition China 7.8 7.1 8.0 7.5 8.3 9.5 9.5 9.3 8.7 Vietnam 5.8 4.8 6.8 6.9 7.1 7.3 7.7 7.5 7.5 Small Economies 0.8 8.6 3.0 1.7 2.6 4.8 5.6 4.9 4.9 Cambodia 5.0 12.6 8.4 5.5 5.2 7.0 7.7 6.3 6.1 East Timor 13.7 16.5 -6.7 -6.2 2.0 2.5 3.0 Lao PDR 4.0 7.3 5.8 5.8 5.9 5.8 6.4 7.3 7.0 Mongolia 3.5 3.2 1.1 1.0 4.0 5.6 10.6 5.0 6.0 Fiji 1.4 9.2 -2.8 2.7 4.3 3.0 4.1 1.2 0.8 Kiribati 12.6 9.5 1.6 1.8 1.0 2.5 .. .. .. Marshall Islands 0.8 0.6 0.9 -1.3 4.0 2.0 1.5 .. .. Micronesia, Fed. Sts. -2.3 1.1 8.4 0.3 1.1 5.1 -3.8 0.3 .. Palau 2.0 -5.4 0.3 4.5 1.1 1.5 2.0 2.0 2.0 Papua New Guinea -3.8 7.5 -1.2 -2.3 -0.8 2.8 2.7 3.0 3.0 Samoa 2.4 2.5 6.8 7.1 4.4 1.8 3.1 3.0 3.0 Solomon Islands 1.1 -0.5 -14.3 -9.0 -2.4 5.6 4.2 4.4 4.7 Tonga 1.6 2.2 5.2 1.8 2.1 2.9 1.6 2.0 2.5 Vanuatu 2.2 -2.7 2.7 -2.7 -4.9 2.4 3.0 2.8 2.6 East Asia NIEs -2.8 7.0 8.5 1.0 4.9 3.0 5.9 4.0 4.4 Hong Kong (SAR) -5.0 3.4 12.4 0.6 1.8 3.1 8.2 5.5 4.4 Korea -6.9 9.5 8.5 3.8 7.0 3.1 4.6 3.8 4.6 Singapore -0.8 6.8 9.6 -2.0 3.2 1.4 8.4 4.1 4.7 Taiwan (China) 4.3 5.3 5.8 -2.2 3.9 3.3 5.7 3.6 4.1 Japan -1.2 0.2 2.8 0.2 -0.3 1.4 2.6 2.3 1.8 Source: World Bank data and staff estimates. East Asia is the sum of Developing East Asia and the Newly Industrialized Economies. East Asia Update 53 Appendix Table 4: Primary Commodity Prices (US Dollars - % change from a year ago) Actual Projections 1980 1991 Commodity -90 -98 1999 2000 2001 2002 2003 2004 2005 2006 Crude oil average 0.0 -5.7 38.3 56.2 -13.7 2.4 15.9 30.6 43.1 3.7 Non-Energy Commodities -0.8 0.4 -11.2 -1.4 -9.1 5.3 10.2 17.5 12.6 -3.5 Agriculture -1.9 0.8 -13.9 -5.7 -9.1 8.6 9.6 10.5 7.1 -3.3 Cocoa -7.3 4.0 -32.3 -20.2 18.0 66.4 -1.5 -11.5 0.0 4.5 Coffee, arabica -3.6 12.6 -23.2 -16.2 -28.5 -1.2 4.3 25.3 45.4 -6.2 Coconut oil -1.4 10.6 12.0 -38.9 -29.4 32.4 11.0 41.4 -4.7 -4.5 Palm oil -3.0 12.3 -35.0 -28.8 -7.9 36.6 13.6 6.3 -10.9 0.0 Rice, Thai, 5% 0.8 2.1 -18.3 -18.5 -14.6 11.0 3.0 20.3 19.9 -3.5 Sugar, world 16.4 -2.8 -29.8 30.6 5.6 -20.3 3.0 1.1 32.9 -4.8 Logs, Malaysia 1.9 3.4 15.2 1.5 -16.3 2.7 14.5 5.4 3.9 7.3 Sawnwood, Malaysia 4.1 -0.1 24.1 -1.0 -19.1 9.4 4.6 5.5 11.8 3.8 Rubber, RSS1, Singapore -1.7 0.5 -12.9 6.2 -13.8 33.0 41.5 20.4 10.4 -17.3 Metals and minerals 2.9 -2.6 -2.3 12.6 -9.6 -3.1 12.7 37.1 25.9 -4.1 Tin -6.7 -0.7 -2.5 0.6 -17.5 -9.5 20.5 73.9 -11.9 -6.7 Copper 4.3 -4.1 -4.9 15.3 -13.0 -1.2 14.1 61.1 25.6 -11.1 Source: Wold Bank DEC Prospects Group. Projections as of 10/27/05 East Asia Update 54 Appendix Table 5: East Asia: Exchange Rates (LCU/$) China Indonesia Korea Malaysia Philippines Singapore Taiwan, Thailand Yen China Oct-2004 8.2765 9090.00 1126.00 3.80 56.35 1.66 33.44 41.04 106.13 Nov-2004 8.2765 9018.00 1047.90 3.80 56.23 1.64 32.21 39.54 103.18 Dec-2004 8.2765 9290.00 1043.80 3.80 56.27 1.63 31.92 39.07 104.12 Jan-2005 8.2765 9165.00 1026.40 3.80 55.11 1.64 31.79 38.58 104.00 Feb-2005 8.2765 9260.00 1008.10 3.80 54.72 1.63 31.18 38.32 104.73 Mar-2005 8.2765 9480.00 1024.30 3.80 54.79 1.65 31.53 39.15 107.35 Apr-2005 8.2765 9570.00 1002.50 3.80 54.35 1.65 31.28 39.57 105.89 May-2005 8.2765 9495.00 1002.50 3.80 54.37 1.66 31.36 40.51 108.08 Jun-2005 8.2765 9713.00 1024.40 3.80 55.92 1.68 31.62 41.29 110.40 Jul-2005 8.1080 9819.00 1028.30 3.75 56.11 1.66 32.00 41.73 112.22 Aug-2005 8.0973 10240.00 1031.00 3.77 56.16 1.68 32.75 41.34 111.30 Sep-2005 8.0930 10310.00 1038.00 3.77 56.06 1.69 33.19 40.96 113.19 Appendix Table 6: East Asia: Foreign Reserves Minus Gold (US$ Billion) China Indonesia Malaysia Philippines Thailand Hong Korea Singapore Taiwan, Total Kong China (SAR) Dec-1996 107.039 19.281 27.009 9.905 37.810 63.808 33.201 76.847 88.038 462.938 Dec-1997 142.762 17.396 20.788 7.178 26.254 92.804 20.369 71.289 83.502 482.341 Dec-1998 149.188 23.516 25.559 9.116 28.825 89.650 51.975 74.928 90.341 543.098 Dec-1999 157.728 27.257 30.588 13.282 34.063 96.236 73.987 76.843 106.200 616.185 Dec-2000 168.278 29.394 29.523 13.090 32.016 107.542 96.131 80.132 106.742 662.848 Dec-2001 215.605 28.016 30.474 13.476 32.363 111.155 102.753 75.375 122.211 731.428 Dec-2002 291.128 32.039 34.222 13.329 38.055 111.896 121.343 82.021 161.656 885.689 Dec-2003 408.151 36.296 44.607 13.655 41.077 118.360 155.282 95.746 206.632 1119.806 Dec-2004 614.500 36.320 66.418 13.116 48.665 123.540 198.994 112.232 241.738 1455.523 Sep-2005 775.000 30.318 80.300 15.974 48.528 122.800 206.658 117.854 253.750 1651.181 Source: Haver Analytics, Datastream East Asia Update 55 Appendix Table 7: Regional Aggregates for Poverty Measures in East Asia $1 –a-day $2-a-day Mean Headcount Number of Headcount Number of Population Consumption Index Poor (mill.) Index (%) Poor (mill.) (mill.) (1993 (%) PPP$/month) EAP 1990 68.03 28.8 456.2 66.9 1,059.3 1583.5 1996 99.84 14.7 251.7 49.6 850.0 1713.7 1999 101.97 15.5 274.9 49.9 885.1 1773.3 2000 113.34 13.8 248.0 45.8 820.1 1790.8 2001 121.55 12.9 233.9 43.2 780.4 1807.0 2002 131.86 11.7 212.6 40.1 731.7 1822.9 2003 140.02 10.5 192.2 37.3 686.1 1838.4 2004 150.75 9.2 169.7 34.1 633.0 1853.8 2005 161.40 8.4 156.5 31.9 595.9 1869.2 2006 172.44 7.7 144.5 29.7 559.8 1884.9 EAP less China 1990 96.56 21.7 95.6 59.0 259.8 440.2 1996 136.42 10.4 50.9 44.6 218.5 489.8 1999 123.69 11.0 56.5 50.7 261.5 515.5 2000 131.89 10.2 53.1 48.3 252.8 523.3 2001 135.74 9.6 50.9 47.3 250.8 530.7 2002 143.97 8.4 45.1 43.9 236.5 538.3 2003 146.94 7.3 40.0 41.3 225.4 546.1 2004 153.34 6.6 36.5 39.2 217.3 553.9 2005 158.26 6.2 35.0 37.6 211.4 561.7 2006 164.58 5.7 32.3 35.6 202.7 569.6 S.E.Asia 4 1990 82.29 17.8 55.7 60.3 188.8 313.1 1996 111.26 7.8 27.2 43.6 151.6 347.8 1999 97.28 10.1 36.9 52.8 193.7 366.7 2000 102.92 9.2 34.4 49.9 185.5 372.5 2001 104.32 8.6 32.4 48.7 183.7 377.8 2002 111.40 7.0 26.9 44.7 171.3 383.4 2003 115.48 6.3 24.5 41.8 162.9 389.2 2004 121.50 5.6 22.1 39.6 156.6 395.0 2005 125.66 5.4 21.7 38.1 152.7 400.8 2006 131.07 5.0 20.1 35.9 146.0 406.8 Lower Income EA (Cambodia, Laos, PNG, Vietnam) 1990 45.50 47.3 39.9 84.2 71.0 84.3 1996 64.66 24.6 23.7 69.3 66.9 96.5 1999 68.68 19.2 19.6 66.5 67.8 101.9 2000 71.71 18.1 18.8 64.9 67.2 103.6 2001 74.37 17.5 18.5 63.7 67.0 105.3 2002 75.68 17.0 18.2 61.0 65.2 106.9 2003 80.26 14.3 15.5 57.6 62.6 108.6 2004 83.93 13.0 14.3 55.0 60.7 110.4 2005 87.58 11.9 13.3 52.3 58.7 112.1 2006 91.38 10.7 12.2 49.8 56.7 113.9 East Asia Update 56 Appendix Table 8: Poverty in East Asia - Country Estimates $1 –a-day $2-a-day Mean Headcount Number of Headcount Number of Gini Population Consumption Index (%) Poor Index Poor Coefficient (mill.) (1993 (mill.) (%) (mill.) PPP$/month) Cambodia 1990 58.71 29.2 2.9 73.0 7.3 -- 10.0 1996 66.71 23.7 2.8 68.7 8.1 -- 11.8 1997 69.00 21.6 2.6 66.6 8.1 -- 12.2 1998 67.93 22.2 2.8 67.6 8.4 -- 12.5 1999 70.60 21.5 2.7 66.5 8.5 -- 12.8 2000 70.44 22.7 3.0 67.8 8.9 -- 13.2 2001 71.69 21.8 2.9 67.0 9.0 -- 13.5 2002 70.43 24.0 3.3 68.4 9.4 -- 13.8 2003 74.26 18.8 2.7 64.5 9.1 -- 14.1 2004 76.55 19.0 2.8 63.9 9.3 41.7 14.5 2005 78.30 18.4 2.7 63.1 9.4 -- 14.8 2006 80.39 17.4 2.6 61.9 9.4 -- 15.2 China 1990 57.05 31.5 360.6 69.9 799.6 36.0 1,143 1993 67.24 29.0 343.9 65.0 769.8 41.2 1,185 1996 85.20 16.4 200.8 51.6 631.6 39.3 1,224 1998 91.32 16.1 201.2 49.8 620.8 41.0 1,248 1999 93.07 17.4 218.4 49.6 623.6 42.6 1,258 2000 105.69 15.4 194.8 44.8 567.4 43.9 1,267 2001 115.65 14.3 183.0 41.5 529.6 44.9 1,276 2002 126.79 13.0 167.4 38.5 495.2 45.7 1,285 2003 137.09 11.8 152.2 35.7 460.7 -- 1,292 2004 149.65 10.3 133.2 32.0 415.7 -- 1,300 2005 162.75 9.3 121.5 29.4 384.4 -- 1,308 2006 175.84 8.5 112.2 27.2 357.1 -- 1,315 Indonesia 1984 49.80 36.7 58.7 80.0 128.1 30.3 160.1 1987 55.63 25.7 43.4 74.2 125.4 33.1 169.0 1990 61.58 20.6 36.7 71.1 126.7 28.9 178.2 1993 68.54 14.8 27.8 61.6 115.5 31.7 187.6 1996 86.62 7.8 15.4 50.5 99.4 36.5 196.8 1999 66.80 12.0 24.9 65.1 135.0 31.0 207.4 2000 72.53 9.9 20.9 59.5 125.3 -- 210.5 2001 73.44 9.2 19.7 58.7 125.2 -- 213.2 2002 81.72 7.2 15.5 53.5 115.6 34.3 216.2 2003 86.30 5.8 12.8 49.5 108.6 -- 219.4 2004 90.33 5.2 11.5 46.7 104.0 -- 222.7 2005 94.42 5.1 11.5 44.6 100.9 -- 226.1 2006 99.21 4.7 10.8 42.2 96.8 -- 229.5 Laos 1990 39.16 53.0 2.2 89.6 3.7 -- 4.2 1992 41.35 48.8 2.1 88.1 3.9 32.7 4.4 1996 48.27 41.3 2.0 83.1 4.1 -- 4.9 1997 50.36 38.4 1.9 81.3 4.1 36.5 5.0 1998 49.46 39.8 2.0 81.9 4.2 -- 5.1 1999 51.56 36.6 1.9 80.5 4.2 -- 5.3 2000 53.31 33.9 1.8 79.4 4.3 -- 5.4 2001 55.48 31.3 1.7 77.4 4.3 -- 5.5 2002 56.91 28.1 1.6 75.0 4.2 34.6 5.7 2003 58.86 25.8 1.5 73.3 4.3 -- 5.8 2004 61.22 23.0 1.4 71.3 4.2 -- 5.9 2005 64.23 20.0 1.2 68.6 4.2 -- 6.1 2006 67.20 17.7 1.1 66.0 4.1 -- 6.2 East Asia Update 57 Appendix Table 8: Poverty in East Asia (Continued) $1 –a-day $2-a-day Mean Headcount Number of Headcount Number of Gini Population Consumption Index Poor Index Poor Coefficient (mill.) (1993 (%) (mill.) (%) (mill.) PPP$/month) Malaysia 1984 172.09 8.9 1.4 29.5 4.5 50.5 15.3 1987 170.88 4.8 0.8 25.0 4.2 47.0 16.6 1989 176.21 3.2 0.6 22.4 4.0 46.2 17.7 1990 195.32 2.0 0.4 18.5 3.4 -- 18.2 1992 219.48 1.5 0.3 17.6 3.4 47.7 19.1 1995 253.64 1.0 0.2 14.0 2.9 48.5 20.6 1996 261.87 0.8 0.2 13.1 2.8 -- 21.1 1997 315.95 < 0.5 -- 8.8 1.9 49.1 21.7 1998 269.00 < 0.5 -- 12.9 2.9 -- 22.2 1999 271.70 < 0.5 -- 12.6 2.9 -- 22.7 2000 304.27 < 0.5 -- 9.7 2.3 -- 23.3 2001 304.09 < 0.5 -- 9.7 2.3 -- 23.8 2002 310.00 < 0.5 -- 9.2 2.2 -- 24.3 2003 326.68 < 0.5 -- 8.0 2.0 -- 24.7 2004 353.26 < 0.5 -- 6.3 1.6 -- 25.1 2005 365.87 < 0.5 -- 5.5 1.4 -- 25.5 2006 380.03 < 0.5 -- 4.8 1.2 -- 25.9 PNG 1990 82.18 29.7 1.2 59.4 2.3 -- 3.9 1996 93.15 24.6 1.1 54.4 2.5 48.4 4.6 1997 88.62 25.6 1.2 56.0 2.7 -- 4.7 1998 83.15 27.8 1.4 59.0 2.9 -- 4.9 1999 78.37 30.7 1.5 61.6 3.1 -- 5.0 2000 71.90 35.3 1.8 65.0 3.3 -- 5.1 2001 66.41 38.0 2.0 69.2 3.6 -- 5.3 2002 63.41 39.2 2.1 70.4 3.8 -- 5.4 2003 63.94 38.7 2.1 70.5 3.9 -- 5.6 2004 64.44 38.5 2.2 69.9 4.0 -- 5.7 2005 64.62 38.8 2.3 69.9 4.1 -- 5.9 2006 64.79 38.8 2.3 69.5 4.2 -- 6.0 Philippines 1985 74.92 22.8 12.4 61.3 33.3 41.0 54.2 1988 82.77 18.3 10.7 55.6 32.4 40.7 58.3 1990 90.32 19.1 11.7 53.5 32.6 -- 61.0 1991 87.75 19.8 12.3 55.0 34.3 43.8 62.4 1994 89.10 18.4 12.3 53.1 35.5 42.9 66.8 1996 107.15 14.8 10.4 46.5 32.5 -- 69.9 1997 110.21 12.1 8.6 45.2 32.3 46.0 71.5 1998 108.77 13.7 10.0 46.6 34.1 -- 73.1 1999 107.20 13.5 10.1 46.9 35.0 -- 74.7 2000 106.93 13.5 10.3 47.2 36.0 46.2 76.3 2001 106.10 13.5 10.5 46.7 36.3 -- 77.9 2002 109.12 12.4 9.9 45.1 35.9 -- 79.5 2003 106.37 13.1 10.6 45.5 36.9 44.5 81.1 2004 111.39 11.5 9.5 43.2 35.7 -- 82.6 2005 114.09 10.8 9.1 42.0 35.4 -- 84.2 2006 117.36 9.9 8.5 40.5 34.7 -- 85.8 East Asia Update 58 Appendix Table 8: Poverty in East Asia (Continued) $1–a-day $2-a-day Mean Headcount Number of Headcount Number of Gini Population Consumption Index Poor Index Poor Coefficient (mill.) (1993 (%) (mill.) (%) (mill.) PPP$/month) Korea 1990 301.09 < 0.5 -- < 0.5 -- 29.88 42.87 1991 330.38 < 0.5 -- < 0.5 -- 29.85 43.27 1992 362.09 < 0.5 -- < 0.5 -- 29.85 43.66 1993 383.03 < 0.5 -- < 0.5 -- 29.36 44.06 1994 411.09 < 0.5 -- < 0.5 -- 29.36 44.45 1995 440.03 < 0.5 -- < 0.5 -- 29.11 45.00 1996 480.46 < 0.5 -- < 0.5 -- 29.71 45.55 1997 483.84 < 0.5 -- < 0.5 -- 28.97 45.99 1998 400.86 < 0.5 -- < 0.5 -- 29.42 46.43 1999 450.06 < 0.5 -- < 0.5 -- 29.54 46.86 2000 492.04 < 0.5 -- < 0.5 -- -- 47.28 2001 520.54 < 0.5 -- < 0.5 -- -- 47.64 2002 556.59 < 0.5 -- < 0.5 -- -- 47.97 2003 551.00 < 0.5 -- < 0.5 -- -- 48.24 2004 570.89 < 0.5 -- < 0.5 -- -- 48.48 2005 589.16 < 0.5 -- < 0.5 -- -- 48.72 2006 613.32 < 0.5 -- < 0.5 -- -- 48.96 Thailand 1988 90.42 17.9 9.6 54.1 29.0 43.8 53.7 1990 102.88 12.5 7.0 47.0 26.1 43.8 55.6 1992 129.75 6.0 3.5 37.5 21.6 46.2 57.6 1996 143.92 2.2 1.3 28.2 16.9 43.4 59.9 1998 121.73 3.3 2.0 34.1 20.9 40.6 61.2 1999 123.50 3.1 1.9 33.6 20.8 -- 61.8 2000 125.42 5.2 3.2 35.6 22.0 43.2 62.4 2001 131.21 3.6 2.2 32.0 19.9 -- 62.9 2002 139.38 2.4 1.5 27.7 17.6 42.2 63.5 2003 145.46 1.6 1.1 24.0 15.3 -- 64.0 2004 151.76 1.8 1.2 23.7 15.3 42.5 64.5 2005 155.04 1.7 1.1 23.1 15.1 -- 65.1 2006 162.27 1.2 0.8 20.1 13.2 -- 65.6 Vietnam 1990 41.73 50.8 33.6 87.0 57.6 -- 66.2 1993 48.85 39.9 28.3 80.5 57.2 35.0 71.0 1996 63.66 23.6 17.7 69.4 52.2 -- 75.2 1998 68.54 16.4 12.8 65.4 50.9 35.4 77.7 1999 68.90 16.9 13.4 65.9 52.0 -- 78.9 2000 73.16 15.2 12.1 63.5 50.7 -- 79.9 2001 76.62 14.6 11.8 61.8 50.1 -- 81.0 2002 78.67 13.6 11.2 58.2 47.7 37.5 82.1 2003 83.86 11.1 9.2 54.5 45.3 -- 83.2 2004 88.12 9.5 8.0 51.4 43.3 -- 84.3 2005 92.43 8.3 7.1 48.1 41.1 -- 85.4 2006 96.90 7.0 6.1 45.1 39.1 -- 86.5 East Asia Update 59 Notes for Appendix Tables 7 and 8 The poverty lines in Tables 7 and 8 are set at $1.08 and $2.15 per person per day (in 1993 PPP$) for all countries. For most countries, 1993 World Bank PPP estimates are used. The PPP for the Philippines is from the Penn World Tables, while that for PNG is the 1996 World Bank PPP. PPPs for Vietnam, Lao PDR and Cambodia have been further adjusted using a calorie price ratio between Indonesia and Vietnam. Projections are based on World Bank growth rate forecasts for 2003-2004. Wherever possible, the projections utilize information on sectoral GDP growth rates, changes in the food CPI relative to the general CPI, changes in the GDP deflator relative to the CPI, and changes in the consumption-income ratio. The projections assume that there is no change in relative inequalities within sectors. For China, the projections are done separately for rural and urban China, and then aggregated using population shares. Estimates for all countries except Malaysia and China are based on surveys of household consumption. The estimates for Malaysia and China use income surveys. For China, a survey-based estimate of mean consumption is used in conjunction with the income Lorenz curves to derive poverty estimates. These poverty estimates differ from those commonly found in national poverty assessments for two main reasons. First, country assessments use national poverty lines that differ from the uniform international poverty lines used here. Second, national poverty lines also typically allow for spatial cost of living differentials within countries, but such adjustments are omitted here to maintain a consistent methodology across countries. For instance, in the case of Thailand, these differences explain why the above estimates indicate a small increase in poverty between 1998 and 2000 (in spite of adjusting the CPI by the change in the national poverty lines over this period), while national poverty line-based estimates indicate a decline. Also for Thailand, the 2002 estimate is based on a longer consumption module, which could lead to a small overestimation of consumption relative to 2000. Poverty estimates for the Philippines for the years 2001 and 2002 are an average of a “forward� projection using survey data for 2000 and a “backward� projection using survey data for 2003. Appendix Table 9: NPLs in the Commercial Banking System of the Crisis-Affected Countries (% of total loans) 1997 1998 1999 2000 2001 2002 2003 2004 2005 Dec Dec Dec Dec Dec Dec Dec Sep Dec Mar Jun Indonesia a/ 7.2 48.6 32.9 18.8 12.1 7.5 6.8 5.6 4.5 4.4 7.0 Korea b/ 6.0 7.3 13.6 8.8 3.3 2.4 2.2 2.1 2.0 1.9 1.7 Malaysia c/ 10.6 11.0 9.7 11.5 10.2 9.0 8.1 7.5 7.2 6.7 Philippines d/ 4.7 10.4 12.3 15.1 17.3 15.0 14.1 13.9 12.7 11.3 9.2 Thailand e/ .. 45.0 41.5 29.7 29.6 34.2 30.6 28.2 28.0 27.3 26.7 excl. AMCs .. 45.0 39.9 19.5 11.5 18.1 13.9 12.1 11.6 11.1 10.6 (a) Excludes IBRA's AMC; (b) Excludes KAMCO/KDIC. The NPL ratio increased in 1999 due to the introduction of stricter asset classification criteria (forward looking criteria); (c) Excludes Danaharta. This NPL series, used by Bank Negara Malaysia, is net of provisions and excludes interest in suspense; (d) From September 2002 onwards, the NPLs ratios are based on the new definition of NPLs under BSP Circular 351 which allows banks to deduct bad loans with 100 percent provisioning from the NPL computations; (e) Includes transfers to AMCs but excludes write-offs. (Note that the jump in headline NPLs in December 2002 was a one-off increase, reflecting a change in definition and did not affect provisioning requirements). Special Focus What Can East Asia Expect from the Doha Development Round? Introduction negotiations; (iii) predictability, through binding (whereby countries “bind� their commitments to open In advance of the upcoming Hong Kong their markets in goods or services) and transparency; and Ministerial Meeting of the World Trade Organization in (iv) fair competition, by regulating dumping (exporting at December to attempt to reach a deal on key issues related below cost to gain market share) and subsidies (that to the Doha Development Agenda launched in 2001, this reduce the cost of production). By being rules-based in special focus section attempts to provide a primer of some this fashion, the multilateral trading system would be less of the basic issues for developing countries going into the effective if the rules could not be enforced. The WTO’s upcoming talks. Starting with an overview of the dispute settlement body is thus a central pillar of the multilateral trading system and how it can potentially multilateral trading system and the WTO’s unique benefit developing countries, the section also reviews the contribution to the stability of the global economy. issues critical to the success of the Doha Development Round. Finally, we look at ways that East Asian countries Most developing countries view the multilateral stand to benefit from further progress on the Doha trade system as driven mainly by developed countries and Development Agenda, as well as progress they can make working to the benefit of developed countries. There is on their own to improve their own trade prospects. some truth to this. Developed countries indeed played an important role in initiating the multilateral trade framework because they were the world’s largest traders. The multilateral trading system: a two-way street They were ready to lower barriers to trade because they for developing countries had much to gain. When the General Agreement on Trade and Tariffs (GATT), the precursor to the World Trade More and more developing countries are Organization (WTO), was initiated developing countries realizing the importance of freer international trade as a were not prepared to offer the same degree of deep tariff vehicle for achieving a higher standard of living and cuts and chose to keep their domestic markets relatively employment. The importance of trade in the global protected. Even now, average tariffs for many products in economy is well known. In the past 10 years, the share of developing countries remain higher than in the developed trade in the global economy has increased from 33 to 41 world, although they have been coming down in recent percent of the world’s gross domestic product (GDP). years. Overall, the average tariff in the developed world More rapid trade growth has been an important economic is just 3 percent versus 10 percent in developing driver for developing countries. Per capita GDP growth countries, although this difference is much smaller in for developing countries who have been trading more in selected sectors such as agriculture.1 the global marketplace has accelerated from 2.9 percent a year in the 1970s to 5.0 percent in the 1990s (Dollar and In the new round of trade talks there is a Kraay, 2001). determination to involve more countries in the process, especially developing countries. But with more countries Trade benefits producers and consumers alike. determined to play an active role in negotiations, it is Consumers benefit from lower prices, a greater variety of harder to get agreement. There are several issues that products, and better quality products. Producers benefit developing countries have emphasized: from increased productivity and efficiency from lower prices for raw materials, technological improvements, and First, poor developing countries feel unfairly treated access to larger markets. by developed countries’ subsidies in agriculture, trade restrictions in non-agriculture products, , and rules on The world’s multilateral trade system benefits intellectual property rights. In agriculture, which has most countries, as the system mandates that all countries high potential for developing country exporters, only should have equal access to freer trade. The key principles limited progress has been made to reduce developed to the multilateral trading system are: (i) trade without countries’ trade-distorting subsidies. Access for discrimination—this includes the Most Favored Nation agricultural products from poor developing countries (MFN) clause (whereby a member country is required to to developed markets and to other developing extend any liberalization steps to all other members) and countries remains limited. Developed countries also the national treatment (whereby foreigners and locals are treated equally); (ii) freer trade, gradually and through 1 Anderson, Martin, and van der Mensbrugghe, (2005). -1- often impose cascading tariffs that raise protection for What is the Doha Development Round? their own processors of commodities like coffee and cocoa, forcing developing countries to only export the At the 2001 Ministerial Conference of the WTO lower value, unprocessed crops. In the area of in Doha, Qatar, 142 countries agreed to start a new trade intellectual property rights, the introduction of patent negotiation round known as the Doha Development rights in pharmaceutical products could undermine the Round, that takes more into account concerns of access for medicines in developing countries, developing countries. The Doha Development Round is including drugs to fight diseases such as HIV/AIDS important because it puts development at the center of the and Avian flu. multilateral trade negotiation with the willingness to negotiate sensitive issues such as agricultural trade, Second, while several countries have been enjoying critical for developing country access to global markets. an increasing share in global trade, including many in The Doha Round is important in many aspects because it the East Asia region, some poor developing countries sets the scope for global trade negotiations for the next feel marginalized as their share of global exports has decade. shrunk. The share of global exports from Sub-Saharan Africa has diminished from 1 to 0.7 percent in the last The general issues being negotiated in the Doha 10 years. With limited capacity to engage in Development Round are: multilateral trade negotiations and uncertainties about I. To improve market access for agricultural trade by the potential benefits, poor developing countries have reducing agricultural tariffs, reducing agricultural less incentive to lower high tariffs and integrate into subsidies, and reforming domestic agricultural the global trading system. support systems. This is indeed the most important issue Third, some poor developing countries have been considering that almost two-thirds of the gains from the disadvantaged by exports from other more competitive reduction of trade barriers and distortion globally are developing countries which have managed to benefit expected to come from agriculture (Anderson and Martin, from freer trade. The end of the multi-fiber 2005). Although there are still many disagreements on arrangement (MFA) in textiles and garments, for how to proceed, the inclusion of the agricultural trade example, has so far benefited developing countries in agenda as a condition for multilateral trade to expand sets East and South Asia but potentially at the expense of the stage for developing countries to actively participate other poor countries which used to enjoy preferential in negotiations. access to developed countries under the quota system. II. To improve non-agricultural market access through reduction of tariff barriers. The important issues are reducing average tariffs, reducing the number of tariffs Despite the challenges ahead, the multilateral that are significantly higher than the average (tariff trading system has made significant progress in enabling peaks), and reducing higher tariffs for processed items participating countries to contest unfair trade issues. From (called “cascading tariffs�). These tariff schemes often the developing country perspective, the creation of the disadvantage developing countries’ exports because they World Trade Organization (WTO) should bring the hope are mostly concentrated in agricultural and food products, that a rules-based multilateral trade could redress the trade and labor intensive sectors such as textiles and apparel imbalances caused by unfair practices. One recent (Hoekman, Ng, Olarreaga, 2001). Countries are example is the case brought by Brazil which lead to the negotiating the adoption of a Swiss formula-type of WTO Appellate Body ruling that the United States’ cotton approach i.e., applying steeper cuts to higher tariffs, with subsidies were against WTO agreements. Another different coefficients for developed and developing example is the WTO ruling brought by Australia, Brazil, countries.2 and Thailand, against the European Union (EU) sugar subsidy regime. The system also enables developing countries to address imbalances caused by other developing countries. Recently, developing countries in Latin America successfully contested EU preferential 2 The generic Swiss formula is given as t1 = α * t 0 treatment for banana exports from the Caribbean. These (α + t 0 ) rulings should send a strong message to developing where α is tariff objective parameter, t0 and t1 are the countries on the benefits of working within the current and final (after cut) tariff. The formula implies the multilateral trading system. higher the current tariff t0, the higher is the cut for a given parameter α. For example, for α=25 and current tariff of 100 and 150 percent, the formula dictates new tariff of 20 and 21.4 percent, where the latter implies higher reduction (from 150 to 21.4 percent as compared to 100 to 20 percent). -2- III. To bring in issues of trade facilitation where the developing countries. focus will be to reform border procedures in developing countries. This follows a recognition that (ii) Regional trade agreements: to clarify and good infrastructure for trade is as important as trade improve disciplines and procedures under existing policies in getting full participation by countries in the WTO rules on regional trading agreements. global trading system. The discussion on trade facilitation has evolved to the point where international (iv) Antidumping measures: to clarify and improve development agencies have adopted an aid for trade disciplines, while preserving the basic concepts, approach. With aid for trade, developing countries may principles, and effectiveness of these agreements and receive development and technical assistance to improve their instruments and objectives. trade facilitation in return for their effort in joining the multilateral trading system. An enhanced aid for trade Services: to liberalize services sector and modes of package is currently under discussion. supply. IV. To strengthen the rules-based foundation of the TRIPS (Trade-related aspects of intellectual property multilateral trading system is another key aim. WTO rights): to establish a multilateral system of notification members agreed at the Doha Ministerial Conference to and registration of geographical indications for wines launch negotiations in the area of WTO rules. These and spirits. Protection of geographical indications of negotiations relate to the agreement on anti-dumping, the other products addressed under review of agreement on subsidies and countervailing measures, and implementation of the TRIPS agreement. WTO provisions applying to regional trade agreements. As part of the Doha Round, member governments are also Special and differential treatment: to negotiate on negotiating to improve the trade dispute settlement how to implement special and differential (S&D) mechanism (the negotiations are continuing without a treatment for developing countries. deadline). . V. To address service-sector liberalization in both developed and developing countries. For developing Progress in the Doha Round countries, the progress on this issue seems conditional upon the success in negotiating agricultural market In 2003, the Doha Development Agenda was access. Developing countries are also particularly dealt a severe blow after the Ministerial Conference in interested in Mode 4 (temporary movement of people). Cancun, Mexico, failed spectacularly to agree upon how Other issues that will be negotiated in the Doha Round to proceed with the round. Without the willingness of include intellectual property rights, such as rules about developed countries to commit to decreased agricultural importing generic drugs, and use of geographical protection and subsidies and of developing countries to appellation in product advertising and branding. engage in the Singapore issues (which include investment, competition policy, government procurement, and trade facilitation) , the meeting failed to deliver any consensus. Box 1. Major negotiations offered in Doha The deadlock was broken in Geneva when the Development Round General Council agreed on the “July package� in the early hours of August 1st, 2004. The main achievements of the Market access : (i) Agriculture market access: to improve market meeting include a road map for the future elimination of access; phase out all forms of export subsidies; and agriculture export subsidies, new commitments to reduce trade-distorting domestic support. discipline trade-distorting farm subsidies, and commitment to reduce agriculture tariffs to achieve substantial improvements in market access while allowing (ii) Non-agriculture product market access (NAMA): to reduce tariffs, including tariff peaks, high for flexibility in the treatment of sensitive products. There tariffs, and tariff escalation, as well as non-tariff was also agreement to initiate negotiations on trade barriers, particularly on products of export interest to facilitation, with the objective to expedite the movement, developing countries. release, and clearance of goods to substantially reduce red-tape and improve customs procedures around the Trade facilitation: to negotiate better border procedures world. The other Singapore issues were dropped. The and facilities to expedite the flow of export and import. delay in reaching agreement meant that the original January 1st, 2005, deadline for finishing the talks could not be met. Unofficially, members aimed to complete the Rules and mechanisms: (i) Dispute settlement mechanism: to improve the next phase of the negotiations at the Hong Kong implementation of rulings and participation of Ministerial Conference in December 2005, including full -3- “modalities� in agriculture and market access for non- agriculture products, and to finish the talks by the end of Exhibit 1. Shares in Global Trade (%) the following year. 70 The next Ministerial Conference is scheduled in Hong Kong for the 13-18 of December. The 148 60 participant countries are expected to resolve key issues 50 brought by the July package ranging from domestic support for agriculture, the formula for tariff reductions, 40 non-agricultural market access, and treatment of sensitive % 30 and special products. Success in Hong Kong will send an important message to the world that the multilateral 20 trading system is about making mutual sacrifices for 10 mutual benefit. On the other hand, failure will send a bleak message on the future of multilateral trade. More 0 2002-04 importantly, developing countries, including most of East 1994-96 Quad (EU, Asia, who expect to gain from the advance of freer trade US, Japan, Low & East Asia will lose the most if the Hong Kong meeting collapses. Canada) middle Sub- income Saharan countries Africa Potential Benefits for East Asia East Asia is likely to benefit more from global trade liberalization than any other region because of its open markets and the role trade already plays in driving Agriculture growth. The share of the region’s trade to GDP reached an average 80 percent in 2002-04.3 The region also has East Asia can gain from the success of become one of the major players in global trade as its agricultural trade talks in Doha Round for at least two share in world exports reached 18 percent in the same reasons: period.4 At the same time, more than one third of East First, is trade on rice. Rice cultivation is Asian trade has been within the region with several important in East Asia not only for its contribution to the sectors, such as parts and components which fuel regional agricultural sector but also because rice production is supply-chain networks, showing increased integration largely in rural areas where most of the population lives over the last decade. However, the extent to which the (80 percent in Cambodia and Vietnam, for example). Doha Development Round offers significant benefits to Studies suggest that trade should benefit rice producers in East Asia depends on the issues and sectors being Cambodia and Vietnam by following Thailand’s success negotiated. in catering to foreign consumers’ demand (Arulpragasam et.al, 2004). However, access to other regional markets is limited by protectionist policies in favor of domestic producers. For example, access to the nearest OECD countries, Korea and Japan, is limited since rice imports are subject to import quotas and high specific tariffs for over-quota import (400¥/kg in Japan). 5 Given the sensitivity and difficulties in negotiating these issues, it is still unclear whether much progress will be made from negotiations on agricultural subsidies and market access. The negotiation process will likely face resistance from the European Union and Japan which are still very defensive in reforming their agricultural policy. Second is processing of agricultural products such as coffee and cocoa. Developed countries such as the EU and the US impose cascading tariffs for the import of 3 5 Trade/GDP = (export + import)/GDP UNCTAD, Trade Analysis and Information System 4 Twelve countries in East Asia excluding Japan. (TRAINS) database, 2002. -4- processed agricultural products. For example, East Asian main priorities for services reform are domestic, and processed cocoa exports to the EU are subject to a 30 much can and should be achieved unilaterally, percent tariff compared to a zero percent tariff for raw international negotiations can help develop and create cocoa. Similarly, the export of processed coffee beans to commitment to good services policy. However, while the EU is subject to a 12 percent tariff compared to a zero multilateral liberalization is likely to produce larger gains tariff for raw coffee beans. The cascading tariffs constrain than preferential liberalization within the context of a East Asian exporters from moving into higher-value regional agreement, the latter may be more feasible. processed agricultural products. Trade facilitation Non-agricultural products The Doha Development Round calls for more The success of the Doha Round in improving efficient border procedures, clarification, and market access can benefit competitive East Asian exports improvement of WTO rules governing customs protocols and enable East Asian countries to export higher-value to expedite clearance of goods. Both imports of materials items. East Asian countries should negotiate lower tariffs for important products such as textiles, apparel, furniture, and tariff peaks. This is likely to be the main source of and exports are often subjected to slow or antiquated gains for regional economies. customs procedures at ports. Industries in low income East Asia such as Cambodia, Lao PDR, and Vietnam can Services gain significantly from improvements in their border Despite increases in domestic competition, the procedures to reduce the cost of delivering inputs and raw services sector in East Asia is for the most part still highly materials and therefore increase the profit margin for regulated with few foreign competitors. Air exporters. transportation, logistics, financial services, and Trade in intellectual property rights and geographical telecommunications are regulated in favor of domestic indications players. By opening up the services sector, East Asia can potentially benefit not only from the inflow of foreign The Doha Round has decided to provide waivers direct investment but also from more efficient service to developing countries who do not have drug providers, including increased efficiency for domestic manufacturing capacity to import generic drugs. Thus providers. For example, one study suggests that restricting success of negotiations on this issue can benefit the East foreign firms from being able to establish logistics Asia region which is currently facing serious risks from services in Malaysia and Indonesia is estimated to have the spread of infectious disease such as HIV/AIDS and increased distribution costs by 4 percent (Dee, 2004, the potential for the human spread of Avian Flu. With citing Kalijaran, 2000). Similarly, a study of commercial respect to geographical indications (GIs), developing banking services in East Asia also indicates that countries could demand geographical recognition for their increasing foreign ownership improves the performance products’ distinctive quality and characteristics. The Doha of the commercial banking sector (Laeven, 2005). In this Round will address the issue of registering GIs through a respect, countries in East Asia have full control of the multilateral system and enhancing GIs to cover items results from liberalizing their own services sector. In beyond wine and spirit. Thus East Asia’s local knowledge other words, with or without the Doha Round, East Asian and cultural richness embedded in certain products such countries should consider unilaterally liberalizing their as food and manufactured items can potentially benefit services sector. from GI’s (for example, see Luthria and Maskus, 2004). Regional trade agreements The success of the Doha Round will also help bring discipline to regional trade agreements (RTAs) References which have proliferated worldwide since 1995. There are several RTAs in the region such as the Asean Free Trade Anderson, Kym and Will Martin (2005) “Agricultural Area (AFTA), AFTA and China, and other bilateral talks market access: the key to Doha success�, World such as Thailand and the US. The concern about RTAs is Bank, International Trade Department, Trade that they risk diverting trade away from an efficient non- Note 23. member. Also, too many involvements in different RTAs Anderson, Kym, Will Martin, and Dominique van der can lead to difficulties in complying with different Mensbrugghe (2005) “Market and Welfare protocols and arrangements.6 While recognizing that the Implications of Doha Reform Scenarios.� in Agricultural Trade Reform and the Doha 6 The prominent trade economist Jagdish Bhagwati refers arrangements as a “spaghetti bowl�. (Far Eastern to the potential complications from regional trade Economic Review, January 2005). -5- Development Agenda. World Bank and Palgrave Macmillan, forthcoming. Dee, Philippa. (2004) “Cost of services, trade restrictions in Thailand.� Background paper for “Productivity and investment climate in Thailand.� World Bank. Dollar, David and Art C. Kraay (2001) “Trade growth and poverty�, Finance and Development, vol 38 no. 3. Hoekman, Bernard, Francis Ng, Marcelo Olarreaga (2001). “Tariff peaks in the Quads and Least Developed Countries exports.� World Bank, mimeo. Laeven, Luc, (2005) “Banking sector performance in East Asian countries: the effect of competition, diversification, and ownership.� World Bank, mimeo. Arulpragasam, Jehan, Fransesco Goletti, Tamar Manuelyan Atinc, and Vera Songwe (2004) “Trade in sectors important for the poor: rice in Cambodia and Vietnam and Cashmere in Mongolia� in East Asia Integrates, World Bank, Oxford University Press. Luthria, Manjula and Keith Maskus (2004) “Protecting industrial inventions, authors’ rights, and traditional knowledge: relevance, lessons, and unresolved issues.� in East Asia Integrates, World Bank, Oxford University Press. This Special Focus was prepared by Sjamsu Rahardja of the World Bank East Asia and Pacific Region Poverty Reduction and Economic Management team. -6-