69840 WORLD BANK EAST ASIA AND PACIFIC ECONOMIC UPDATE 2012, VOLUME 1 Capturing New Sources of Growth WORLD BANK EAST ASIA AND PACIFIC ECONOMIC UPDATE 2012, VOLUME 1 Capturing New Sources of Growth © May 2012 The International Bank for Reconstruction and Development / The World Bank 1818 H Street NW Washington DC 20433 Telephone: 202-473-1000 Internet: www.worldbank.org All rights reserved 1 2 3 4 13 12 11 10 This volume is a product of the staff of the International Bank for Reconstruction and Development / The World Bank. The findings, interpretations, and conclusions expressed in this volume do not necessarily reflect the views of the Executive Directors of The World Bank or the governments they represent. The World Bank does not guarantee the accuracy of the data included in this work. 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All other queries on rights and licenses, including subsidiary rights, should be addressed to the Office of the Publisher, The World Bank, 1818 H Street NW, Washington, DC 20433, USA; fax: 202-522-2422; e-mail: pubrights@worldbank. org. ISSN: 2079-5874 Key title: World Bank East Asia and Pacific Economic Update … (Print) Abbreviated key title: World Bank East Asia Pac. Econ. Update (Print) Cover photo: Hoang Ha. WORLD BANK EAST ASIA AND PACIFIC ECONOMIC UPDATE 2012, VOL. 1 iii Preface and acknowledgments The East Asia and Pacific Economic Update was prepared by a team led by Bryce Quillin and included: Douglas Addison, Antonio Ollero, Juan Feng, Jennifer Golan, Marek Hanusch, Tehmina Khan, and Rohan Dinanath Singh. The team worked under the guidance of Sudhir Shetty (Director, Poverty Reduction and Economic Management, East Asia and Pacific Region) and Bert Hofman (Chief Economist, East Asia and Pacific Region). World Bank country economists throughout the East Asia and Pacific region provided country write-ups and tables and assisted with the analysis. The report was edited by Damian Milverton and designed and typeset by Budy Wirasmo. Developing East Asia as used in this report includes China, Indonesia, Malaysia, Philippines, Thailand, Cambodia, Lao People’s Democratic Republic, Mongolia, Papua New Guinea, Timor-Leste, Vietnam, and the island economies in the Pacific. The Newly Industrialized Economies (NIEs) include Hong Kong, SAR China, the Republic of Korea, Singapore, and Taiwan, China. Middle-income countries (MICs), as used in this report, refer to China, Indonesia, Malaysia, Philippines, and Thailand. Low-income countries as used in this report include Cambodia and Lao, PDR. The ASEAN member countries are Brunei Darussalam, Cambodia, Indonesia, Lao PDR, Malaysia, Myanmar, Philippines, Singapore, Thailand, and Vietnam. For the purposes of cross-regional comparison, the report also makes reference to the World Bank country delineations of the Europe and Central Asia (ECA) and Latin America and Caribbean (LAC) regions. CAPTURING NEW SOURCES OF GROWTH iv contents Preface and Acknowledgments....................................................................................................................................iii Abbreviations ............................................................................................................................................................... vi Executive Summary 1 I Growth has remained strong, though has been slowing from its post-crisis peaks  3 Growth remained strong in 2011, but moderated from the 2010 rebound .................................................. 4 Labor markets were stable .......................................................................................................................... 8 Poverty continues to fall, though at a slower rate ......................................................................................... 9 East Asian exports slump on falling G-3 external demand… ..................................................................... 10 … and may weaken further from a slowdown in China ............................................................................. 13 Portfolio flows revive, while bank credit is holding up ................................................................................ 15 The financial sector has been stable but risks are rising ............................................................................. 19 II Fundamentals are strong, but there are limits to resilience  22 Central banks ease as growth slows and inflation decelerates… ............................................................... 23 …but upside risks to inflation cannot be overlooked .................................................................................. 25 A revival in capital flows may pressure exchange rates again..................................................................... 26 Fiscal policy needs to walk a fine line ......................................................................................................... 27 III Rebalancing in a Changing World 33 For most EAP countries, growth will be stable in 2012 but downside risks remain .................................. 34 The greatest uncertainty: Europe ................................................................................................................ 36 Long-term prospects tied productivity and integration ............................................................................... 37 Country Pages and Key Indicators  44 Cambodia .................................................................................................................................................... 44 China ........................................................................................................................................................... 48 Fiji ................................................................................................................................................................ 51 Indonesia ..................................................................................................................................................... 54 Lao PDR ...................................................................................................................................................... 58 Malaysia ...................................................................................................................................................... 61 Mongolia ..................................................................................................................................................... 64 Papua New Guinea...................................................................................................................................... 67 Philippines ................................................................................................................................................... 71 Small Pacific Islands .................................................................................................................................... 74 Solomon Islands .......................................................................................................................................... 77 Thailand ....................................................................................................................................................... 80 Timor-Leste ................................................................................................................................................. 83 Vietnam ....................................................................................................................................................... 85 WORLD BANK EAST ASIA AND PACIFIC ECONOMIC UPDATE 2012, VOL. 1 CONTENTS v Appendix Tables 88 Appendix Table 1. Real GDP Growth .......................................................................................................... 88 Appendix Table 2. Real GDP and Components of Aggregate Demand ...................................................... 89 Appendix Table 3. East Asia - Merchandise Export Growth ....................................................................... 90 Appendix Table 4. East Asia and the Pacific: GDP Growth Projections ...................................................... 90 Appendix Table 5. Regional Aggregates for Poverty Measures in East Asia ............................................. 91 Appendix Table 6. East Asia: Exchange Rates ............................................................................................ 92 Appendix Table 7. East Asia: Foreign Reserves Minus Gold ....................................................................... 93 Appendix Table 8a. East Asia: Balance of Payments .................................................................................. 94 Appendix Table 8b. East Asia: Financial Account Components .................................................................. 94 Appendix Table 9. East Asia: Nonperforming Loans ................................................................................... 95 Appendix Table 10. East Asia: Financial Market Indicators ......................................................................... 96 Appendix Charts  97 Appendix Chart 1. East Asia: Stock Market Price Indices ........................................................................... 97 Appendix Chart 2. East Asia: Local-Currency 10-Year Government Bond Yields ....................................... 98 Appendix Chart 3. East Asia: Foreign-Currency Government Bond Spreads.............................................. 99 Appendix Chart 4. East Asia: Sovereign Credit Default Swap (CDS) Spreads .......................................... 100 Appendix Chart 5. East Asia: Foreign Exchange Reserves and Exchange Rates ..................................... 101 Appendix Chart 6. East Asia: Real and Nominal Exchange Rates* ........................................................... 102 CAPTURING NEW SOURCES OF GROWTH vi abbreviations ASEAN Association of Southeast Asian UN COMTRADE United Nations Commodity Trade Nations Statistics ASEAN-4 Indonesia, Malaysia, Philippines, and VAT Value-added tax Thailand WB World Bank bbl oil barrel WDI World Development Indicators BI Bank Indonesia BIS Bank for International Settlements BOP Balance of payments Countries CEIC CEIC Data Company, Ltd BRN Brunei Darussalam CPI Consumer price index CHN China EAP East Asia and Pacific region, World FJI Fiji Bank classification HKG Hong Kong SAR, China ECA Europe and Central Asia region, IDN Indonesia World Bank classification KHM Cambodia ETF Exchange traded funds KOR Republic of Korea EPFR Emerging Portfolio Funds Research LAO Lao People’s Democratic Republic EU European Union (PDR) FDI Foreign direct investment MMR Myanmar G-3 European Union, United States, and MNG Mongolia Japan MYS Malaysia GDP Gross domestic product PHL The Philippines IDR Indonesian Rupiah PLW Palau ILO LABORSTA International Labor Organizaton PNG Papua New Guinea Labor Statistics databases SLB Solomon Islands IMF International Monetary Fund SGP Singapore LAC Latin America and Caribbean region, THA Thailand World Bank classification TMP Timor Leste LICs Low income countries TON Tonga M&A Mergers and acquisitions TWN Taiwan, China MENA Middle East and North Africa Region, VNM Vietnam World Bank classification VUT Vanuatu MICs Middle income countries MSCI Morgan Stanley Capital International NIE Newly-industrialized economies NPL Non-performing loan OECD Organization for Economic Cooperation and Development PMI Purchasing Manager Index PPP Purchasing power parity RMB Chinese Renminbi RRR Required reserve ratio SITC Standard International Trade Classification SSA Sub-Saharan Africa Region, World Bank classification WORLD BANK EAST ASIA AND PACIFIC ECONOMIC UPDATE 2012, VOL. 1 1 ExEcutivE Summary Growth in developing East Asia and the Pacific remained strong in 2011, although it slowed from its post-crisis peaks. Strong domestic demand offset weaker external demand from the United States and Western Europe. Looking ahead, the external environment is likely to remain weak. The best prospects for the region to maintain high rates of growth, job creation, and poverty reduction are through rebalancing towards domestic demand and investing in productivity increases and further international integration. Developing East Asia grew by 8.2 percent in 2011 (4.3 percent excluding China), a sharp decline from the nearly 10 percent growth rate recorded in 2010 (7.0 percent excluding China). This slowdown was largely due to lower-than- expected growth in manufacturing exports and supply disruptions in the wake of the Japan earthquake and tsunami and the severe flooding in Thailand, Lao, PDR, and Cambodia. Domestic demand and investment compensated for these factors and were aided by monetary policy loosening in some countries. Yet, for many countries, this pace of growth was a return to pre-crisis growth trends following the 2010 rebound that followed the global financial and economic crisis. East Asian growth remained impressive on a global scale. In 2011, growth was around a percentage point higher than in South Asia and around 3 percentage points higher than in Eastern Europe and Latin America. Poverty continued to fall across the region with the number of people living on less than US$2 a day expected to decrease to 513 million by 2012 from 565 million in 2010. Yet much of this is driven by gains in China, and the rate of poverty reduction seems to be slowing in step with moderating economic expansion in China and other parts of the region. Employment growth also continues to be sluggish though stable. For 2012, we expect that East Asia will remain the strongest performer among developing regions. However, growth will moderate slightly as a result of a continued weak external environment. Developing East Asia will grow by 7.6 percent in 2012 with slower expansion in China pulling down much of the regional aggregate. Excluding China, annual growth will increase by around a percentage point to 5.2 percent in 2012. But much of this will reflect Thailand’s return to normal levels of production, while most of the region will see growth rates lower or unchanged from last year. The region remains vulnerable to the continued uncertainty in Europe through trade and financial linkages. Although last December’s fiscal pact and liquidity support from the European Central Bank helped stabilize financial markets, recent political events and market developments point to continued challenges. Renewed market volatility and a further slowdown in European economies cannot be ruled out. The EU, along with the US and Japan, accounts for over 40 percent of the region’s direct export shipments and an estimated 60 percent if intraregional trade linked to production networks is taken into account. A serious disruption in the EU would also have knock-on effects on East Asia’s exports and growth by lowering growth in other regions, particularly Eastern Europe. Moreover, European banks provide a third of trade and project finance in Asia. Yet, most developing East Asian economies are well positioned to weather renewed volatility. Domestic demand has proved resilient to shocks; most countries have current account surpluses and hold high levels of reserves; and banking systems are generally well-capitalized. However, there are limits to this resilience. While some countries may have space for further policy stimulus in the event of another major disruption in the external environment, public debt remains above pre-crisis levels in many countries, limiting options for expansionary fiscal policy, while overheating concerns may limit further monetary loosening. Commodity exporters, many of which experienced strong growth in 2011, may be particularly vulnerable to a faster slowdown in China for which growth has been an important factor in CAPTURING NEW SOURCES OF GROWTH 2 ExECUTIVE SUMMARY driving up commodity prices. A quicker than anticipated slowing of the Chinese economy could trigger an unexpected drop in commodity prices, which could force some commodity exporters to adjust rapidly. With external demand likely to remain weak for the foreseeable future, East Asia’s continued high growth rates will need to be linked less to an export-oriented model. While East Asian economies are already relying more on domestic demand to support economic growth, there is further scope for rebalancing. Some countries will need to stimulate household consumption, while in others, higher investment (particularly in infrastructure) offers the potential to sustain growth, provided this does not exacerbate domestic demand pressures that still characterize economies such as Mongolia and Vietnam. With a changing financial sector in the aftermath of the financial crisis and in anticipation of Basel III, new ways to finance higher levels of investment will also need to be found. Governments could usefully focus on accelerating the preparation of infrastructure projects, as the availability of bankable projects rather than financing is the key constraint in most countries. In the medium term, higher investment will enhance productivity and drive growth by facilitating a shift to higher value-added activities and more innovation. Although labor productivity gains have been large across the region since the 1997/98 regional financial crisis, there is significant potential for further increases. Labor productivity levels in 2010 in Emerging Europe and Latin America were about twice East Asian levels, while the gap between East Asia and the US, the global leader in labor productivity, has narrowed only modestly since 1990. Policies to support the movement of labor among countries can contribute to higher productivity. Migration in developing East Asia has helped fill labor shortages in host countries and remittance flows have contributed to poverty reduction and macroeconomic stability in home countries. Yet, as in other parts of the world, existing bilateral and regional migration policies do not always allow migrants to move efficiently to where returns are highest or allow firms to obtain the workers they need, and these policies may contain incentives for undocumented migration. Improved regional migration policies could enhance the gains from regional economic integration and allow those countries facing a negative demographic drag on economic growth in the next generation to obtain much-needed labor inputs. WORLD BANK EAST ASIA AND PACIFIC ECONOMIC UPDATE 2012, VOL. 1 3 I. Growth has remained strong, though has been slowing from its post-crisis peaks Growth in developing East Asia and Pacific remained strong in 2011, though slowed down from the rates that followed the global financial and economic crisis. Strong domestic demand and investment benefited from the easing of monetary policy in several countries and was the core driving force of growth in the second half of 2011, partly offsetting weaker external demand from developed economies. Export performance was anemic in 2011 and has weakened further in early 2012: growth in electronics exports has been flat as a result of slowing demand in Western Europe, the destination of 20 percent of direct electronics shipments. Commodities exports held up better as a result of high prices, and commodity exporting countries tended to grow faster last year. Yet slowing growth in China will likely cap the gains recently made by commodity and industrial material suppliers to the Chinese market. Renewed risk aversion in international financial markets resulted in capital outflows in the second half of last year, but portfolio and foreign direct investment returned this year and syndicated lending continued to be strong. The resilience of domestic demand should continue to drive growth this year, but may be tested by persistent uncertainty in developed markets, which may fuel further financial market volatility and lead to a sharp contraction in demand for exports from East Asia. CAPTURING NEW SOURCES OF GROWTH 4 I. GROWTH HAS REMAINED STRONG, THOUGH HAS BEEN SLOWING FROM ITS POST-CRISIS PEAKS Growth remained strong in 2011, but moderated from the 2010 rebound Growth remains strong in the developing economies in the East Asia and Pacific region although it is slowing. Economic growth in the region was 8.2 percent in 2011 (4.3 percent excluding China), a sharp decline from the almost 10 percent recorded in 2010 (7.0 percent excluding China). Excluding Thailand and China, the region grew by 5.6 percent in 2011 (Figure 1), comparable to average pre-crisis growth of 5.7 percent between 2002 and 2007. Outside of China and Thailand, growth recovered in the second half of the year after slowing in the first and second quarters. In Thailand, output collapsed as a result of heavy flooding in key industrial areas in late 2011. East Asian growth remains impressive on a global scale, as it was about one percentage point higher than in South Asia and about 3 percentage points higher than in Eastern Europe and Latin America (Figure 2). Figure 1. Growth slowed in China but stabilized in other parts of Figure 2. The region as a whole still exhibits the strongest Developing East Asia, though output in Thailand collapsed in Q4 regional economic performance in the world, heavily powered as a result of the floods by China real GDP growth, in percent, year on year real GDP growth, in percent, year on year 15 10 9 10 8 7 5 6 5 0 4 3 -5 2 1 -10 0 East Asia South Asia Europe & Sub-Saharan Latin America Middle East OECD Q1-07 Q4-07 Q3-08 Q2-09 Q1-10 Q4-10 Q3-11 & Pacific Central Asia Africa & Caribbean & North Africa Developing East Asia excluding China & Thailand China Thailand 2010 2011e Sources: Haver Analytics and World Bank staff calculations. Sources: World Bank Global Economic Prospects, January 2012. Regional aggregates calculated using 2005 dollars GDP weights. Growth was in line with our Spring 2011 forecasts Figure 3. Annual growth slowed in many countries but tended to for the region as a whole, yet excluding China, be more robust in commodity exporters real GDP growth, in percent, year on year individual forecasts tended to be overly optimistic. 20 100 Growth in China remained well above growth rates elsewhere in the region, driven mainly by the industrial 80 sector, even as it eased to 9.2 percent in 2011 from 15 10.4 percent in 2010. Broadly speaking, the World 60 Bank’s growth forecast was overly pessimistic for 10 some commodity exporters and too optimistic for 40 some manufacturers (Figure 3). Modest external 5 20 demand growth and supply disruptions, due to the Japan earthquake and tsunami and the floods in 0 0 Thailand, Cambodia and Lao, PDR, resulted in lower- KHM CHN PHL THA MYS VNM IDN FJI LAO MNG PNG 2010 2011 Spring 2011 Forecast Commodity Share of Exports 2007–10 (rhs) than-anticipated growth in the region’s manufacturers. Source: World Bank staff estimates. Taken together, these effects partly cancel each other out and overall growth was consistent with our forecast from a year ago for developing East Asia as a whole. WORLD BANK EAST ASIA AND PACIFIC ECONOMIC UPDATE 2012, VOL. 1 I. GROWTH HAS REMAINED STRONG, THOUGH HAS BEEN SLOWING FROM ITS POST-CRISIS PEAKS 5 When China is excluded from the aggregate, growth in 2011 was 4.3 percent, a full percentage point below our forecast in Spring 2011.1 Manufacturing output growth has fallen fairly steadily since the post-crisis peak in early 2010. On the upside, manufacturing output growth, which had slumped in the first half of 2011, began to improve in the third quarter in Indonesia and Malaysia (Figure 4). Relative to 2007 levels, capacity utilization in late 2011 was about 3.5 percent higher in the Philippines and 2 percent higher in Malaysia while China and Indonesia were just at pre-crisis utilization levels. Thailand saw capacity utilization fall sharply due to fourth-quarter floods, to about 70 percent of 2007 levels, and subsequently recover robustly to just under the pre-crisis average by the first quarter of 2012. Growth continued to slow in China as the authorities took action to cool overheated property markets and external demand decelerated. Real growth in the Philippines was held back by declining net exports, caused by slowing world demand for electronics and supply chain disruptions (specifically, two large typhoons 2 plus the Japan tsunami in the first quarter and the Thai flooding in the fourth quarter). The electronics sectors were particularly hard-hit. Production at the Yazaki plant in Samoa seems to have been permanently scaled down relative to levels prior to the global economic crisis. The manufacture and export of computer hard-drives was particularly hard hit. More recently, the Purchasing Manager Indices (PMI) in the newly-industrialized countries have improved (Figure 5), after having fallen in the fourth quarter of 2011, with indices above 50 percent in March for each country except China. This points to the potential for a recovery of manufacturing in the months ahead. Figure 4. Growth in manufacturing was modest and eased in Figure 5. The Purchasing Managers Index improved in the newly- Thailand and the Philippines in late 2011 industrialized economies and in China real growth in manufacturing output, in percent, year on year index 25 65 20 60 15 55 10 50 5 45 0 40 below 50 -5 indicates 35 contraction -10 -15 30 Q1-07 Q4-07 Q3-08 Q2-09 Q1-10 Q4-10 Q3-11 Jan-10 Apr-10 Jul-10 Oct-10 Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Indonesia Malaysia Philippines Thailand MICs China China Hong Kong SAR, China Korea, Rep. Singapore Taiwan, China Source: Haver Analytics. Source: Markit/HSBC/SIPM/Haver Analytics. Note: Real growth in manufacturing output for China. Weighted values for Indonesia, Malaysia, Philippines, and Thailand. The lines display real growth rates yoy while the bars display contributions to regional growth rates. Domestic demand benefited from an easing of monetary policy in several countries. Domestic demand from consumption and investment continued to be the core driving force within the middle-income economies in the second half of 2011, except in Thailand, where private domestic consumption was hit especially hard by the floods in the final quarter of 2011 (Figure 6). Inventories became a drag on growth in Malaysia following an extended 1 World Bank (2011) “Securing the Present, Shaping the Future,� East Asia and Pacific Economic Update, Volume 1. 2 In 2009, Typhoons Pepeng and Ondoy were ranked first and fourth, respectively, as most destructive typhoons to hit the Philippines in the last century. In 2011, Typhoons Pedring and Sendong were ranked second and seventh, respectively, with Sendong recording the highest number of deaths in recorded history. CAPTURING NEW SOURCES OF GROWTH 6 I. GROWTH HAS REMAINED STRONG, THOUGH HAS BEEN SLOWING FROM ITS POST-CRISIS PEAKS period of inventory restocking, following a sharp drawing down during the global financial crisis in 2008 (Figure 7). By contrast, inventories increased in the Philippines as firms were unable to sell their goods given weaker external demand, as well as the impacts of supply chain disruptions, and weaker construction demand. Domestic demand in China was more important to growth in the fourth quarter of 2011 than net exports (Figure 6 and Figure 10). If this pattern continues over the next several quarters, the outcome would be consistent with a move towards external rebalancing. A move towards internal rebalancing may be in evidence as well; real consumption in the fourth quarter grew to 11 percent from 10 percent in the third quarter, while real investment growth slowed to 11 percent from 19 percent in the third quarter (Figure 8 and Figure 9). Figure 6. Domestic demand in H2 2011 remained relatively Figure 7. …and was the main source of growth in H2 2011 buoyant… except in flood-affected Thailand real growth, in percent, year on year real growth, in percent, year on year 25 10 20 8 6 15 4 10 2 5 0 0 -2 -5 -4 -10 -6 Q1-07 Q4-07 Q3-08 Q2-09 Q1-10 Q4-10 Q3-11 Thailand Philippines Indonesia Malaysia Consumption Gross Fixed Capital Form Increase in Stocks Indonesia Malaysia Philippines Thailand ASEAN-4 China Net Exports GDP Source: Haver Analytics Source: Haver Analytics. Note: The lines display real growth rates yoy while the bars display contributions to Note: The composition of the bars display contributions to real growth. regional growth rates. Figure 8. Consumption growth maintained its inertia in the Figure 9. …investment growth expanded in the ASEAN4 but fell second half of 2011… in China real growth, in percent, year on year real growth, in percent, year on year 25 50 20 40 15 30 10 20 5 10 0 0 -5 -10 Q1-07 Q4-07 Q3-08 Q2-09 Q1-10 Q4-10 Q3-11 Q1-07 Q4-07 Q3-08 Q2-09 Q1-10 Q4-10 Q3-11 Indonesia Malaysia Philippines Thailand ASEAN-4 China Indonesia Malaysia Philippines Thailand ASEAN-4 China Source: Haver Analytics Source: Haver Analytics Note: The lines display real growth rates yoy while the bars display contributions to Note: The lines display real growth rates yoy while the bars display contributions to regional growth rates. regional growth rates. While private consumption in China had already slowed in the first half of 2011, there was a small uptick in the fourth quarter. By contrast, consumption growth had been steadily increasing each quarter within the other middle-income countries through the third quarter of 2011, with a deceleration in the following quarter (Figure 8). This can be wholly attributed to the impact of the flooding in Thailand. Excluding Thailand, the fourth quarter would WORLD BANK EAST ASIA AND PACIFIC ECONOMIC UPDATE 2012, VOL. 1 I. GROWTH HAS REMAINED STRONG, THOUGH HAS BEEN SLOWING FROM ITS POST-CRISIS PEAKS 7 have shown an additional acceleration in consumption, driven primarily by gains in Malaysia (boosted by larger-than- expected government consumption), and in the Philippines. The rate of increase in Chinese gross fixed capital formation jumped to 19 percent in the third quarter of 2011 and then slowed to 11 percent in the fourth quarter. The slowdown of gross fixed capital formation was particularly noted in infrastructure and real estate, which responded to various policy measures including tighter monetary policy, stronger prudential controls, and stricter qualification requirements for mortgages (Figure 9). Even so, China’s rate of real gross fixed capital formation growth matched that of real consumption and remained well above growth rates elsewhere. By contrast, investment growth increased in the fourth quarter in Indonesia, Malaysia, and the Philippines, and likely would have done so in Thailand but for the flooding. With the exception of China’s strong rebound in Figure 10. Net exports did not contribute to growth in the second the second quarter of 2010, the contribution of net half of 2011 real growth, in percent, year on year exports to growth has been declining since 2010 250 in most middle-income countries. As global demand for exports slumped (see trade section below) and 200 demand for imports was supported by relatively robust 150 domestic demand, real growth in net exports in the 100 second half of 2011 (Figure 10) slowed to 7 percent 50 for China and 5 percent for the ASEAN-4 countries. Indonesia turned in the best performance for the 0 second half, growing almost 13 percent year-on-year. -50 The Philippines, the economy most dependent on -100 electronics exports, posted the region’s poorest export Q1-07 Q4-07 Q3-08 Q2-09 Q1-10 Q4-10 Q3-11 China ASEAN-4 performance last year, contracting by almost 7 percent Source: Haver Analytics. in nominal terms in 2011. The impact of severe flooding in Thailand also hit exports from the electronics sector, notably for computer hard-drives, but the average export growth rate for the second half remained positive, slowing from 14 percent in the first half of 2011 to 5.4 percent in the second half. There are some prospects for future growth, following the recovery in import demand by the US and from reconstruction efforts in Japan. Commodity exporters saw growth accelerate. The distribution of growth typically favors manufactures exporters as long as world demand is strong and changes in terms of trade are close to neutral. This pattern was broken in 2008 and again in 2011 as commodity prices boomed to the benefit of commodity exporters. Mongolia and Timor- Leste were clear examples with real GDP growth rates of 17.3 percent and 10.6 percent respectively. Indonesia and Malaysia, with substantial commodity exports, were also able to benefit. For example, in Malaysia, manufacturing output was outperformed by growth in agriculture, driven by palm oil and rubber. Mining output in Papua New Guinea (PNG) and Malaysia would have been a major contributor to growth in 2011 as well but for continued operational problems. In the case of PNG, mineral and energy production continue to wane as existing mines and oil wells reach the end of their productive capacity and the opening of new mines is delayed. In the case of Malaysia, the problems are natural depletion in existing mature fields and major issues with a deepwater oil reservoir. The smaller commodity exporters, other than Timor-Leste, are all Pacific Island economies and face unique challenges beyond the volatility of world commodity prices. Key among these are the absence of economies of scale, dispersed populations, remoteness from world markets, and vulnerability to geological and weather- CAPTURING NEW SOURCES OF GROWTH 8 I. GROWTH HAS REMAINED STRONG, THOUGH HAS BEEN SLOWING FROM ITS POST-CRISIS PEAKS related natural disasters. These realities are substantial constraints on private sector development. Donor-supported government expenditures therefore often loom large in growth outcomes. A few countries such as Fiji also see growth strongly driven by tourist arrivals that picked up in 2011. Labor markets were stable Job creation and wage growth were relatively stable in 2011. In line with the relatively slow growth in GDP, employment growth was fairly flat although overall it did fall modestly across the region in 2011 (Figure 11). Similarly, real wage growth in 2011 remained subdued after experiencing some growth in 2010. Most notably, wages in Cambodia have not yet returned to their pre-crisis levels (Figure 12). In Thailand, wages were about unchanged in 2011 from 2010 levels as the return of some post-flood productive capacity in the fourth quarter of 2011 produced a sharp spike that largely offset the declines earlier in the year. Real wage growth in China slowed in 2012 as the manufacturing wages in state-owned firms grew by 9 percent year-on-year to the third quarter of 2011 after growing in the double digits for the past three years and wages barely grew over the course of last year. Figure 11. Unemployment fell across the region... Figure 12. …while real wage growth was generally slow. unemployment rate, in percent index, Q1 2007=100 12 160 150 10 140 130 8 120 6 110 100 4 90 80 2 70 0 60 China Indonesia Malaysia Mongolia Philippines Thailand Q1-07 Q4-07 Q3-08 Q2-09 Q1-10 Q4-10 Q3-11 2008 2009 2010 2011 Cambodia China Indonesia Malaysia Mongolia Thailand Source: CEIC. Source: World Bank staff calculations using data from CEIC, Haver Analytics, Cambodia Note: There was a change in the sampling weight for Indonesia between February and Ministry of Commerce, and Cambodia National Institute of Statistics. August 2011. Note: The lines display manufacturing wages. China’s wage only reflects state-owned manufacturing jobs. Cambodia’s wage only reflects garment workers’ wages. Growth in manufacturing employment was generally sluggish, with some exceptions. Manufacturing employment growth slowed in China to 2.7 percent in 2011, about half the pace of 2010. Thailand saw another year of negative growth though, reflecting the impact of the floods in the fourth quarter; the decline was twice as large in 2011 as in 2010. One exception to this negative pattern was Malaysia where export growth in petroleum, palm oil, and rubber-based products was sustained and most manufacturing sub-industries, such as rubber gloves, semi-conductors, electronic valves and printed circuits, televisions, and wooden furniture recorded employment growth (Figure 13) 3 . Another exception was Indonesia, where a 6.2 percent growth in manufacturing employment in 2011 was its fastest pace of expansion since 2004.4 Manufacturing employment remained below pre-crisis levels in Cambodia and Mongolia as well as Thailand. 3 World Bank (2011) Malaysia Economic Monitor: Smart Cities, World Bank, November. World Bank (2012) Malaysia Economic Monitor Modern Jobs, April. 4 World Bank (2012) Indonesia Economic Quarterly: Redirecting Spending, World Bank, April. WORLD BANK EAST ASIA AND PACIFIC ECONOMIC UPDATE 2012, VOL. 1 I. GROWTH HAS REMAINED STRONG, THOUGH HAS BEEN SLOWING FROM ITS POST-CRISIS PEAKS 9 The bright spot has been employment in services. Services expanded in the aftermath of the financial crisis, both in absolute terms and as a share of total employment (Figure 14). Industry, on the other hand, has not yet recovered from the financial crisis and the shocks to production caused by the Tohoku earthquake and Thailand floods. Agricultural employment has declined or been comparatively stable in most of the countries. Figure 13. Manufacturing employment growth slowed for some Figure 14. …though the service sector emerged with strength countries and was negative in Thailand in early 2011… from the crisis annual employment growth by sector, in percent change in employment by sector and change in employment share by sector, 2007–11 20 25 20 MYS IDN 15 CHN PHL IDN 15 MYS THA 10 10 IDN CHN PHL 5 5 PHL THA 0 0 MYS MYS -5 -10 -5 -15 CHN -10 -20 09 10 11 09 10 11 09 10 11 09 10 11 09 10 11 China Indonesia Malaysia Philippines Thailand -30 -20 -10 0 10 20 change in employment share, by sector Agriculture Industry Services Agriculture Industry Services Source: CEIC. Sources: CEIC, Cambodia Ministry of Commerce and Cambodia National Institute of Statistics. Poverty continues to fall, though at a slower rate Despite lower economic growth in the near term, poverty is expected to decrease further (Figure 15). The number of people living on less than US$2 a day is estimated to fall to 513 million by 2012, roughly half the number of people living in poverty in 2002. The region has already met its Millennium Development Goal of halving the population Figure 15. Poverty is expected to decrease further… Figure 16. ...but at a slowing pace… Poverty Headcount Ratio reduction in number of people living on less than $2 a day (million) (This measures the proportion of the population with a standard of living below $2 a day measured in constant 2005 PPP prices) 60 0 55 54 51.2 -20 48.6 50 -40 51.9 46.2 43.8 45 47.4 41.8 -60 40.7 39.7 40 43.3 37.3 -80 36.2 35.1 39.6 34 35 37.1 -100 34.8 30 32.9 -120 31.1 28.8 25 27.2 -140 25.8 24.4 20 -160 2002 2004 2006 2008 2010 2012 2002–04 2004–06 2006–08 2008–10 2010–12 East Asia East Asia excl. China EAP EAP excl. China Sources: PovcalNet and World Bank staff calculations. Source: PovcalNet and World Bank staff calculations. Note: Poverty estimates from PovcalNet are used to generate the poverty projections. PovcalNet provides data until 2008. The projections are based on the latest poverty estimate, the elasticity of growth, which is defined as a function of the change in poverty relative to the change monthly per capita income/consumption during 2005 and 2008, and real GDP per capita growth or growth projections. CAPTURING NEW SOURCES OF GROWTH 10 I. GROWTH HAS REMAINED STRONG, THOUGH HAS BEEN SLOWING FROM ITS POST-CRISIS PEAKS living under US$1.25 a day and the region has reduced poverty faster than in any other part of the world.5 However, the large number of people escaping poverty in China accounts for a big part of this reduction, as the headcount of those living on less than US$2 is ten percentage points higher in the region outside of China. Moreover, the gains in poverty reduction across East Asia, including China, may be expected to slow as the rate of poverty reduction tends to become incrementally less sensitive to economic growth as countries grow wealthier (Figure 16). East Asian exports slump on falling G-3 external demand… After rebounding sharply in 2010, emerging East Asia’s exports have slowed considerably since mid-2011. Slower economic growth globally, and weaker external demand by the EU (Figure 17), US, and Japan (the market for 43 percent of emerging East Asia’s direct export shipments 6 ) dragged down the region’s export growth rate to 4.7 percent in constant US dollar terms last year, from 23.6 percent in 2010 and an annual average 13.2 percent in the years before the crisis in 2005–07. The region’s export performance, which lagged that of the Europe and Central Asia Figure 17. European Union imports, a third of world total, have Figure 18. Emerging EAP exports have lagged the global total deteriorated sharply since mid-last year recently imports, year-on-year growth rates of constant (upper panel) and current (lower exports, year-on-year growth rates of constant (upper panel) and current (lower panel) US dollar values, three-month moving average panel) US dollar values, three-month moving average 30 40 20 30 10 20 0 10 -10 0 -20 -10 -30 -20 -40 -30 Jan-07 Nov-07 Sep-08 Jul-09 May-10 Mar-11 Jan-12 Jan-07 Nov-07 Sep-08 Jul-09 May-10 Mar-11 Jan-12 40 60 30 40 20 20 10 0 0 -10 -20 -20 -40 -30 -40 -60 Jan-07 Nov-07 Sep-08 Jul-09 May-10 Mar-11 Jan-12 Jan-07 Nov-07 Sep-08 Jul-09 May-10 Mar-11 Jan-12 World United States European Union Japan World Emerging EAP ECA LAC Source: World Bank. Source: World Bank. 5 United Nations (2011) The Millennium Development Goals Report. 6 It is estimated that the European Union, United States, and Japan receive a much larger share of East Asia exports --- as much as 61 percent rather than 43 percent of East Asian exports --- if the final destination of intra-regional trade in parts and components that are part of global and regional production networks were considered. See ADB (2007), “Uncoupling Asia: Myth and Reality� in “Growth Amid Change�, Asian Development Outlook, March 2007, Manila. WORLD BANK EAST ASIA AND PACIFIC ECONOMIC UPDATE 2012, VOL. 1 I. GROWTH HAS REMAINED STRONG, THOUGH HAS BEEN SLOWING FROM ITS POST-CRISIS PEAKS 11 (6.7 percent real export growth rate) and Latin American (5.1 percent) regions last year (Figure 18), will likely weaken further as growth slows in China, the destination for 18 percent of the region’s commodity exporters. Customs data through April show that current growth in trade is a fraction of those a year ago. China’s exports crawled to a 6.9 percent growth rate in January-April from 27.4 percent in the same period a year ago, exacting second-round effects on parts and components exporters throughout the regional manufacturing value chain. China’s imports came to a virtual standstill in April, barely rising 0.3 percent, affecting suppliers to the China’s domestic economy as well. Overall exports by Indonesia, Malaysia, the Philippines, Thailand and Vietnam slowed to a 6.8 percent growth rate in the first quarter from 25.4 percent a year ago, and by the newly-industrializing economies, to 1.4 percent from 25.1 percent. Trade in electrical and electronic products—almost 40 percent of the region’s exports globally as well as intra-regionally—accounted for much of the weakness in 2011. In particular, exports of computers and office machines remained almost flat, growing 2.4 percent in nominal value terms in 2011 compared to an average 15.1 percent in 2005–06. Electrical machinery and appliances and telecommunications apparatus and equipment performed marginally better, but still at rates 40–60 percent of their pre-crisis average. Over two-fifths of the region’s electronics exports are shipped directly to the G-3, about one-fifth to the EU alone. Another two-fifths are traded intra-regionally, a substantial portion of that—more than a third7 —as parts and components that feed into regional and global production networks. Weakness in the G-3 final product markets therefore dampens intra-regional trade in this sector as well. The Philippines, the economy most dependent on electronics exports (Figure 19), posted the region’s poorest export performance last year. The sector’s weakness may persist this year on continued softness in the European electronics market (Figure 20). Figure 19. Overall Philippine exports dropped 7 percent last year Figure 20. Surveys point to a continued weakness in the EU as electronics exports contracted 23 percent electronics business a half-year forward electrical and electronic product exports*, in US dollar billions and as a electrical and electronic product exports, year-on-year growth rates of current percentage of total country exports, 2010 US dollar values and the US National Electronics Manufacturers Association’s Electronic Business Conditions Index 60 800 60 100 700 50 40 80 600 40 20 500 60 30 400 0 300 40 20 -20 200 20 10 -40 100 0 0 -60 0 PHL MYS CHN SGP KOR THA HKG VNM IDN Jan-07 Nov-07 Sep-08 Jul-09 May-10 Mar-11 Jan-12 $ billion (rhs) percent of total exports (lhs) Emerging EAP electrical and electronic product exports, percent growth yoy (lhs) Electronic Business Conditions Index, North America (rhs) Electronic Business Conditions Index, Europe (rhs) Source: U.N. COMTRADE. Source: CEIC and Haver Analytics. Note: *Computers and office machines (SITC 75) + Telecommunications apparatus and equipment (SITC 76) + Electrical machinery and appliances ( SITC 77) Apparel and textiles—about 10 percent of the region’s total exports—fared much better than electronics, growing 17.3 percent in nominal value terms in 2011, compared with 21.3 percent in 2010. China’s apparel 7 World Bank (2009) “Transforming the Rebound into Recovery�, East Asia and Pacific Economic Update, Volume 2. CAPTURING NEW SOURCES OF GROWTH 12 I. GROWTH HAS REMAINED STRONG, THOUGH HAS BEEN SLOWING FROM ITS POST-CRISIS PEAKS and textile exports, three-quarters of the regional total, expanded 20.5 percent last year, which is about the average rate from before the crisis in 2005–07. The region’s principal low-income producers have much lower textiles trade volumes, but the sector is more crucial for their exports (Figure 21). Vietnam reported a 25.3 percent rise in total apparel and textile exports last year and Cambodia, 31.7 percent 8 . A recovery of consumer confidence in the US, the market for one-fourth of the region’s exports, is likely to support the region’s apparel exports in the near term (Figure 22). Figure 21. Apparel and textiles have a big role in Figure 22. A recovery in US consumer confidence likely to Cambodian trade support the region’s apparel exports apparel and textile exports*, in US dollar billions and as a percentage of total apparel and textile exports, year-on-year growth rates of current US dollar values country exports, 2010 and the US Consumer Confidence Index 90 250 80 120 80 60 100 70 200 40 60 80 150 20 50 0 60 40 100 -20 30 40 20 -40 50 20 10 -60 0 0 -80 0 KHM VNM CHN LAO FJI HKG IDN Jan-07 Nov-07 Sep-08 Jul-09 May-10 Mar-11 Jan-12 $ billion (rhs) percent of total exports (lhs) Emerging EAP apparel and textile exports, percent growth yoy (lhs) Source: U.N. COMTRADE Conference Board’s Consumer Confidence Index, US (rhs) Note: *Apparel and clothing accessories (SITC 84) + Textile fibers (SITC 26) + Textile Source: CEIC. yarn and fabrics (SITC 65) Commodity exports—just under 14 percent of Figure 23. Commodity exports are large for Mongolia and many the region’s total—provided some impetus to small economies in the region commodity exports*, in US dollar billions and as a percentage of total country emerging East Asia’s trade performance last year, exports, 2010 supported by high prices. Indonesia, Malaysia and 100 120 Vietnam earned US$36.2 billion from crude oil and 100 petroleum product shipments, 26 percent higher than 80 in 2010 (although on lower volumes across the board), 80 60 and close to the US$38.9 billion earned when oil prices 60 peaked in mid-2008. Singapore and Korea combined for 40 US$161.5 billion in petroleum product export receipts, 40 49 percent higher than in 2010. Mongolia (Figure 23) 20 20 nearly doubled its mineral exports from US$2.2 billion in 2010 to US$4.3 billion last year, due to both an 0 0 PNG MNG LAO FJI TMP IDN VNM MYS SGP THA PHL KOR KHM increase in copper and gold prices as well as expanding Food, $b (rhs) Agriculture raw materials, $b (rhs) Ores & minerals, $b (rhs) Fuels, $b (rhs) Commodities, percent of total exports (lhs) shipments of coal to China. Energy and metals prices Source: U.N. COMTRADE corrected in April (Figure 24) and projections are that Note: *Food (SITC 0 + SITC 22 + SITC 4) + Agricultural raw materials (SITC 2, excluding 22, 27 and 28) + Ores and metals (SITC 27 + SITC 28 + SITC 68) + Fuels (SITC 3) 8 Recent research shows that the abolition of the MFA quotas in 2005, while hugely beneficial to China, has not been deleterious to Cambodia or Vietnam as earlier feared. Rather, Cambodia has increased its share of the global market from 0.5 percent in 2004 to 0.7 percent in 2010 and Vietnam from 1.1 percent to 2.0 percent, the latter because of policies that promoted apparel sector upgrading (Lopez- Acevedo and Robertson (2012), Sewing Success? Employment, Wages and Poverty Following the End of the Multi-Fibre Arrangement, World Bank, Washington DC). WORLD BANK EAST ASIA AND PACIFIC ECONOMIC UPDATE 2012, VOL. 1 I. GROWTH HAS REMAINED STRONG, THOUGH HAS BEEN SLOWING FROM ITS POST-CRISIS PEAKS 13 they will be 4.6 percent and 6.2 percent lower this Figure 24. Energy prices gained 30 percent last year, and metal year than last in current dollar terms (0.1 percent and and mineral prices, 14 percent World Bank Commodity Price Index for Emerging Countries, 2005=100 1.8 percent in constant dollar terms) as the global 300 economy slows, near-term economic prospects remain uncertain, and global supplies improve. 250 200 … and may weaken further from a slowdown 150 in China 100 Chinese imports have buttressed global trade 50 during the crisis, declining the least among major 0 importers during the downturn in 2009 and gaining Jan-07 Nov-07 Sep-08 Jul-09 May-10 Mar-11 Jan-12 Petroleum Metals and minerals robustly during the recovery in both 2010 and 2011 Source: World Bank. (Figure 25). At the end of last year, Chinese imports comprised 10.3 percent of global imports, up from 7.2 percent in 2007 and close to triple the 3.7 percent Figure 25. Increases in overall Chinese imports in 2011 almost matched that in 2010 at the beginning of the decade in 2000. China’s growth annual change in imports, in US dollar trillions during the crisis played a role in supporting international 2 commodity prices (Box 1). At the same time, the rest 1.5 of emerging East Asia has increasingly integrated with 1 China, sending 21 percent of its exports to the mainland 0.5 in 2010, from 8.8 percent in 2000. The extent and pattern 0 -0.5 of dependence on the Chinese market, however, varies -1 across countries (Figure 26). Mongolia ships practically -1.5 all of its commodity exports (which themselves -2 comprise 89 percent of its total exports) to China. The -2.5 Philippines sends 27 percent of its electronics exports -3 (electrical and electronics are around 50 percent of all 2007 2008 2009 2010 2011 U.S.A. EU Japan China Philippine exports) to China. None of the Pacific Island Sources: World Bank and CEIC. economies, however, other than Solomon Islands, has any significant trade exposure to China. Figure 26. Some small economies exceed the region’s average trade exposure to China exports to China, in percent of total exports, 2010 A cyclical adjustment in China will likely cap the gains Mongolia recently made by many commodity and industrial Solomon Islands Lao PDR Korea, Rep. material suppliers in the Chinese market. Chinese Philippines Malaysia Hong Kong SAR, China imports for the domestic market skyrocketed during Thailand Indonesia the recovery, doubling from US$532 billion in 2009 to Papua New Guinea Singapore US$1.0 trillion in 2011 (Figure 27), as the government Vietnam Micronesia, Fed. Sts. Cambodia responded to the global financial crisis with aggressive Marshall Islands East Timor fiscal and monetary stimulus. A winding down of the Palau Fiji Vanuatu stimulus measures, coupled with base effects, as well Tonga Samoa as efforts to cool down the property market, likely will Kiribati Tuvalu dampen China’s non-processing import growth rates 0 20 40 60 80 100 this year and next. While non-processing imports are Source: U.N. COMTRADE. CAPTURING NEW SOURCES OF GROWTH 14 I. GROWTH HAS REMAINED STRONG, THOUGH HAS BEEN SLOWING FROM ITS POST-CRISIS PEAKS Box 1 A slow-down in Chinese demand would dampen commodity prices As a global center of production, China has become an increasingly important source of commodity demand. In 2000, most of its exports were consumption goods, yet by 2009 capital goods accounted for about half of its exports (IMF, 2011). These goods tend to require larger quantities of natural resources as production inputs, explaining part of the surge in its appetite for commodities. Another source of Chinese commodity demand is investment in infrastructure and housing as the country moves up the income ladder. Demand is particularly strong for energy and metals. Chinese consumption of liquid fuels is a major driver of global energy demand (Figure 1). China accounted for 6.4 percent of global demand in 2000 but by 2011 it had almost doubled to 11.2 percent. The IMF’s most recent energy forecasts anticipate that Chinese energy consumption is going to double by 2017 and triple by 2025 from its 2008 level. Given its weight as a major global consumer of raw materials, China has a considerable effect on commodity prices. Jenkins (2011) estimates that, for the period 2002 to 2007, China’s growth in demand for oil (at 42.1 percentage points above global demand growth) translated into an increase in global oil prices in the range of 10.8 percent to 27.1 percent. Between 2001 and 2011, China’s consumption of metals soared by 350 percent.9 Its effect on global prices is particularly pronounced in copper, tin, aluminum, and nickel (Figure 2).10 However, although pressure on commodity prices from China has intensified significantly, it does not yet reach the same levels as pressures from the US. Box Figure 1. China’s appetite for energy is a key driver of global Box Figure 2. China’s effect on commodity prices is consumption of liquid fuels considerable—yet it still trails the US contributions and year-on-year growth, in percent contribution of variation in China’s demand to variation in commodity prices, in percent 4 14 3 12 2 10 1 8 0 6 -1 4 -2 2 -3 0 2001 2003 2005 2007 2009 2011 2013f Zinc Lead Nickel Oil Aluminium Tin Copper China U.S.A. Other OECD (incl. Japan Other Asia & Oceania China U.S.A. Rest of World Total Source: IMF (2011) Source: Energy Information Administration. Note: 4-quarter variance decomposition shock of one standard deviation in industrial output, showing the contribution of variation in China’s demand to variation in commodity prices. Data for 2000-2010. As China’s growth outlook moderates, global commodity prices will ease. The persistent fragility of the global economy still dampens demand for Chinese exports. Domestic investment is likely to slow as tighter credit conditions curb activity in residential real estate and manufacturing. Moreover, restocking in the aftermath of the financial crisis of 2009 is coming to an end as Chinese companies have rebuilt their inventories. Jointly, these factors are likely to reduce demand for many commodities; indeed, prices have started to stabilize after their most recent rally (Figure 24 in the text). They remain, however, at high levels and may even fall slightly. How will weaker commodity prices affect the rest of developing East Asia? Commodity exporters in the region will see export and fiscal revenues fall. These twin declines will especially affect metals exporters, most notably Mongolia, but also oil exporters, such as Malaysia. On the other hand, weaker pressures on energy prices will benefit consumers, and ease the burden on the public purse in countries where subsidies are in place to cushion hikes in transport costs. It is important to bear in mind that while Chinese demand for commodities related to export manufacturing and investment is weaker, private consumption growth remains strong. This will support prices for imports such as palm oil, vegetables, fish and meat, rubber for the production of tires, and other consumption-related commodities. 9 Source: World Metal Statistics. 10 Lu and Li (2009) estimate that the average ratio of China’s contribution to world incremental consumption between 2001 and 2007 was 51 percent for copper and 56 percent for aluminum. They also document a high contribution for iron ore at 89 percent. WORLD BANK EAST ASIA AND PACIFIC ECONOMIC UPDATE 2012, VOL. 1 I. GROWTH HAS REMAINED STRONG, THOUGH HAS BEEN SLOWING FROM ITS POST-CRISIS PEAKS 15 not projected to deteriorate to the extent processing imports have, they will likely grow at slower rates of 15 percent year-on-year in 2012 and 2013. For commodity suppliers to the Chinese market, including the countries of emerging East Asia, this would imply both lower Chinese commodity import volumes and lower international commodity prices (Figure 28). Figure 27. China’s non-processing imports remained robust Figure 28. Chinese demand has driven copper prices higher by at in 2011 least 40 percent Imports, in US dollar trillions Demand* and price** effects, in percent, 2007 1.2 45 180 40 160 1 35 140 0.8 30 120 25 100 0.6 20 80 0.4 15 60 10 40 0.2 5 20 0 0 0 2005 2006 2007 2008 2009 2010 2011 Oil Iron Ore Copper Aluminum Ordinary imports Imports in processing mode Exports in processing mode China demand effect (lhs) China price effect - minimum (rhs) China price effect - maximum (rhs) Source: CEIC. Source: Jenkins (2011), “The China Effect on Commodity Prices and Latin American Export Earnings�, CEPAL Review 103, April 2011. Note: *China demand effect = how much greater global demand was in 2007 than it would have been had demand by China grown at the same rate as the rest of the world’s in 2002–07. **China price effect = how much higher the global price was in 2007 than it would have been had demand by China grown at the same rate as the rest of the world’s in 2002–07. Portfolio flows revive, while bank credit is holding up Overall capital flows to emerging East Asia fell in net terms last year. The capital and financial account, net of errors and omissions, contracted from US$238 billion in 2010 (2.5 percent of regional GDP) to US$102 billion last year (0.9 percent of GDP) (Figure 29). Portfolio inflows into the region shrank (Figure 30) and FDI inflows remained essentially stable, as they did in most years, except during the downturn in 2009. This year, portfolio capital flows have started to return. Investors bought into US$10.8 billion of emerging East Asian equity funds in the first quarter this year, after selling off US$12.8 billion in the third and fourth quarters last year, taking their holdings to US$439.2 billion in mid-April (Figure 31). They also purchased US$2.7 billion of emerging East Asian bond funds in the first quarter, more than twice the US$1.1 billion in the same period last year, keeping their holdings at US$47.1 billion in mid-April. The pattern is roughly similar across most other developing regions but contrasts sharply with that in the advanced economies. Investors withdrew US$45.7 billion from advanced economy equity funds in the second half last year and US$1.5 billion in the first quarter this year. Bonds are thriving. Developing East Asia floated US$46.6 billion of new bonds in 2011, up from US$38.9 billion in 2010. Issuances of new bonds by China and by the other the middle-income countries have been robust. New issuances of US$19.0 billion in January-March this year exceed those in the same period last year by nearly half (Figure 32). Issues of new equities have disappointed, however, both in the region and globally. New share sales by developing East Asia of US$33.2 billion last year were half the yearly volume in 2007, 2009, and 2010. Share sales by all developing economies amounted to US$74.8 billion in 2011, two-thirds the level the year before. CAPTURING NEW SOURCES OF GROWTH 16 I. GROWTH HAS REMAINED STRONG, THOUGH HAS BEEN SLOWING FROM ITS POST-CRISIS PEAKS Figure 29. After rising in 2010, net capital flows into emerging Figure 30. …led by foreign portfolio investment in the region’s East Asia declined last year… risk assets Balance of Payments, in US dollar billions Capital and Financial Account, by category, in US dollar billions 800 1,000 inflows 600 500 400 0 200 -500 0 -200 -1,000 outflows 2007 2008 2009 2010 2011 2007 2008 2009 2010 2011 Current account balance Capital & finance account balance FDI Portfolio investment Net errors & omissions Overal balance Other investment & financial derivatives Capital & financial account Sources: IMF, Haver Analytics, and CEIC. Sources: IMF, Haver Analytics, and CEIC. Figure 31. Investors return to East Asian and other emerging Figure 32. Bonds are thriving market funds estimated investment in emerging East Asia equity and bond mutual and new issuances by developing East Asia of equities and bonds, monthly, in US exchange-traded (ETF) funds, in US dollar billions dollar billions 600 25 500 20 400 15 300 10 200 5 100 0 0 5-Jan-11 20-Apr-11 3-Aug-11 16-Nov-11 29-Feb-12 Jan-07 Nov-07 Sep-08 Jul-09 May-10 Mar-11 Jan-12 Equity bonds Bond funds Equities Bonds Source: EPFR, via Haver Analytics. Source: Dealogic. Figure 33. Equities are cycling back to their post-crisis peaks Figure 34. Bond returns are up in the region and elsewhere, helped by low discount rates emerging market stock price indices, by region, in US dollar terms, January 2007 emerging market bond total return indices, by region, January 2007 = 100 = 100 180 180 160 160 140 140 120 120 100 100 80 80 60 60 40 40 20 20 0 0 Jan-07 Nov-07 Sep-08 Jul-09 May-10 Mar-11 Jan-12 Jan-07 Nov-07 Sep-08 Jul-09 May-10 Mar-11 Jan-12 MSCI EM-Far East MSCI EM-Latin America MSCI EM-Europe, Middle East and Africa JPM EMBIG-Asia JPM EMBIG-Europe JPM EMBIG-Latin America Source: MSCI Inc., via Thomson Datastream. Source: JPMorgan, via Thomson Datastream. WORLD BANK EAST ASIA AND PACIFIC ECONOMIC UPDATE 2012, VOL. 1 I. GROWTH HAS REMAINED STRONG, THOUGH HAS BEEN SLOWING FROM ITS POST-CRISIS PEAKS 17 Supported in part by foreign buying, stock markets have recovered. The regional composite index is up by a quarter in April from its two-year low in October last year (Figure 33), although its performance continues to lag that of the LAC region, among emerging markets. The performances for individual countries vary: Thailand and the Philippines lead with 23 percent and 15 percent improvements from September to April in free-float US dollar terms and excluding dividends. Fixed-income assets have also performed better recently. The total return index on the region’s bonds is 9 percent up in April, from October last year (Figure 34). Vietnam leads with an 18 percent gain from October, followed by Indonesia with 10 percent. East Asia ducks the trend in syndicated bank lending. After strengthening in the first three quarters last year, international syndicated bank lending to developing countries has been falling. Aggregate syndicated lending to developing countries in January-March is almost 45 percent down from the same period last year. In contrast, in developing East Asia, international syndicated bank lending rose by more than a third to US$34.7 billion in 2011 on significantly higher borrowing by the middle-income countries, particularly Indonesia (Figure 35). The early January- March 2012 numbers for the region also show an improvement over the same period last year, largely due to higher borrowing by China and Vietnam (Figure 36). Figure 35. Syndicated bank loans revived in early 2011… Figure 36. …but gains this year appear to be less robust international syndicated bank loans, by borrower, in US dollar billions international syndicated bank loans, by borrower, in US dollar billions 60 350 12 50 300 10 250 40 8 200 30 6 150 20 4 100 10 50 2 0 0 0 2007 2008 2009 2010 2011 Jan-07 Nov-07 Sep-08 Jul-09 May-10 Mar-11 Jan-12 China (lhs) EAP MICs excl. China EAP LICs (lhs) All developing countries (rhs) China MICs excl. China LICs Source: Dealogic. Source: Dealogic. Borrowers globally have been feeling the effects of deleveraging by European banks since early 2008. Consolidated foreign credit outstanding from European banks stood at US$18.9 trillion in September last year, down 25 percent from the pre-crisis peak of $25.5 trillion in March 2008 (Figure 37). Credit outstanding from US and Japanese banks, up a combined US$2 trillion over the same period, has covered only a fraction of the credit contraction by the European banks. In the region, credit outstanding from European banks amounted to US$457 billion or 6 percent of GDP in September last year for developing East Asia and US$1.3 trillion or 13 percent of GDP for emerging East Asia (Figure 38), the latter figure arising from active credit intermediation by Hong Kong SAR, China, and Singapore. Credit from the European banks had been gradually building up in the region since the recovery in 2009, before turning downward again from June to September last year. Amid the turmoil in the world economy, global foreign direct investment (FDI) inflows managed to rise 17 percent to US$1.5 trillion in 2011, modestly advancing the recovery from 2009. Most of the gains were loaded in the first half of the year, with inflows beginning to slow in the third quarter. Developing economies received half the FDI inflows (roughly the same share as in 2010), driven by greenfield investments rather than cross-border CAPTURING NEW SOURCES OF GROWTH 18 I. GROWTH HAS REMAINED STRONG, THOUGH HAS BEEN SLOWING FROM ITS POST-CRISIS PEAKS Figure 37. European banks have been deleveraging globally since Figure 38. …although, they managed to rebuild their emerging March 2008… East Asian loan book consolidated foreign claims* of BIS-reporting banks on all countries, by nationality consolidated foreign claims of BIS-reporting banks on emerging East Asia, by of reporting bank, in US dollar trillions nationality of reporting bank, in US dollar trillions 3.5 30 0.5 1.6 3 1.4 25 0.4 1.2 2.5 20 0.3 1 2 15 0.8 1.5 0.2 0.6 10 1 0.4 0.1 0.5 5 0.2 0 0 0 0 Mar-07 Dec-07 Sep-08 Jun-09 Mar-10 Dec-10 Sep-11 Mar-07 Dec-07 Sep-08 Jun-09 Mar-10 Dec-10 Sep-11 US banks (lhs) Japanese banks (lhs) European banks (rhs) US banks (lhs) Japanese banks (lhs) European banks (rhs) Source: BIS. Source: BIS. Note: *Consolidated foreign claims = International claims (cross- border claims in all currencies and local claims in non-local currencies) + Local currency positions of reporting banks’ foreign affiliates with local residents + Net risk transfers merger and acquisition (M&A) transactions, the chief mode of FDI inflows into the advanced economies in the past two years. Emerging East Asia led all developing regions with US$387 billion in inflows (Figure 39), roughly 3 percent of regional GDP. As in previous years, China accounted for over half the inflows into the region (Figure 40). At the same time, China added to its FDI abroad, climbing to an average US$54.9 billion in 2010–11, up from US$11.3 billion in 2005. Similarly, Malaysia and Thailand raised their direct investments overseas by a combined US$25.4 billion in 2011, strengthening their role as net FDI investors abroad like Korea and Taiwan, China. The uncertain outlook in the global economy implies mixed prospects for FDI flows in the year. With M&A announcements weak in the fourth quarter last year, FDI flows to the advanced economies will likely soften further this year, while FDI flows to developing economies may level out or rise only moderately. Nonetheless, most of emerging East Asia is expected to hold up well. In China, FDI project approvals and FDI utilization were roughly Figure 39. Emerging East Asia netted 43 percent of FDI inflows Figure 40. China remains the developing world’s largest to developing areas in 2011 FDI destination FDI inflows, by region, in US dollar trillions, BOP basis FDI inflows and outflows to emerging East Asia, by country, in US dollar billions, BOP basis 1.4 400 foreign investment in country 1.2 300 1 200 0.8 100 0.6 0 0.4 -100 0.2 -200 0 -300 resident investment abroad 2000–06 2005 2006 2007 2008 2009 2010 2011 ave. 2007 2008 2009 2010 2011 Emerging East Asia ECA LAC MENA SAS SSA Advanced economies China MICs excl. China NIEs Source: Haver Analytics and UNCTAD, “Global Investment Trends Monitor No. 8: Global Sources: Haver Analytics and IMF. Flows of FDI Exceeding Pre-Crisis Levels in 2011�, January 2012. WORLD BANK EAST ASIA AND PACIFIC ECONOMIC UPDATE 2012, VOL. 1 I. GROWTH HAS REMAINED STRONG, THOUGH HAS BEEN SLOWING FROM ITS POST-CRISIS PEAKS 19 Figure 41. China approved 384 more new FDI projects last year Figure 42. FDI flows are 72 percent of fixed investment in than in 2010 Mongolia, 43 percent in Cambodia and 21 percent in Vietnam new FDI project approvals, in number of contracts signed and FDI utilization, in FDI inflows and Gross fixed investment, in percent of GDP, 2010 US dollar billions 4,000 16 50 35 3,500 14 45 30 40 3,000 12 35 25 2,500 10 30 20 2,000 8 25 20 15 1,500 6 15 10 1,000 4 10 500 2 5 5 0 0 0 0 Jan-07 Nov-07 Sep-08 Jul-09 May-10 Mar-11 Jan-12 HKG MNG SGP VNM KHM VUT LAO TON FJI MYS CHN THA IDN PLW PHL TWN PNG FDI project approvals, number (lhs) FDI utilization, US billion (rhs) Gross fixed capital formation, percent of GDP (rhs) Source: Haver Analytics. Foreign direct investment, net inflows, percent of GDP (lhs) Sources: World Bank, ADB. running at last year’s pace through February, but have slackened off through March (Figure 41). In Vietnam, the number of foreign investment projects granted licenses and the capital invested in these projects are on a downtrend, numbering half of last year’s through March. The impact of any downward revision in global flows will vary, as FDI itself varies in importance across the region. FDI inflows and outflows are high relative to GDP in Hong Kong SAR, China, and in Singapore, the region’s offshore financial centers, which intermediate regional and global capital flows. More importantly, FDI inflows are high relative to fixed investment in Mongolia, Cambodia, and Vietnam and low in Indonesia and the Philippines, implying a higher dependence on FDI and a greater risk exposure to FDI flow volatility in the former group of countries (Figure 42). In Mongolia’s case, high levels of FDI inflows over the past few years reflect efforts to build a copper mining complex and once this comes closer to completion, FDI inflows should taper off. The financial sector has been stable but risks are rising Figure 43. Liquidity risks are contained in the region in percent East Asia’s banking systems have remained 110 resilient to the ongoing uncertainty in the global 100 economic environment. Compared to those in the 90 Europe and Central Asia and Latin America regions, 80 70 EAP banks are generally well-capitalized, profitability 60 is high, non-performing loan (NPL) ratios are low, and 50 there do not appear to be any significant liquidity risks 40 on bank balance sheets (Figures 43–45). 30 20 10 Despite this, challenges remain. Monetary policy is 0 EAP ECA LAC still highly accommodative, and a return to more normal SGP KOR PHL MNG IDN CHN HKG MYS ave. ave. ave. Liquid assets to total assets (liquid asset ratio) Liquid assets to short term liabilities policy could affect the banks. Rapid credit expansion has Source: Finstats, Bank of Mongolia, World Bank staff calculations. Notes: Data is from Q2 and Q3 2011, with the exception of China for which data is from also started to affect credit quality in some countries. 2010. CAPTURING NEW SOURCES OF GROWTH 20 I. GROWTH HAS REMAINED STRONG, THOUGH HAS BEEN SLOWING FROM ITS POST-CRISIS PEAKS Figure 44. Bank capital buffers are large and NPL ratios low… Figure 45. …and banks are making healthy returns in percent return on assets, in percent 18 30 3 30 16 25 14 25 12 20 10 2 20 15 8 6 10 15 4 5 2 1 10 0 0 -2 5 -5 -4 -6 -10 0 0 EAP ECA LAC EAP ECA LAC MYS IDN PHL SGP HKG MNG KOR CHN ave. ave. ave. MNG IDN MYS PHL KOR SGP CHN HKG ave. ave. ave. Tier 1 (lhs) Regulatory Capital to Risk-Weighted Assets (lhs) Return on Assets (lhs) Return on Equity (rhs) Non-performing Loans to Total Gross Loans (lhs) Non-performing Loans Net of Provisions to Capital (rhs) Sources: Finstats, Bank of Mongolia, World Bank staff calculations. Sources: Finstats, Bank of Mongolia, World Bank staff calculations Notes: * Data is from Q2 and Q3 2011, with the exception of China for which data is Notes: * Data is from Q2 and Q3 2011, with the exception of China for which data is from 2010. from 2010. Regional central banks have yet to unwind fully the interest rate cuts made during the 2008-09 crisis and credit is expanding rapidly in a number of countries (see the below section on monetary policy). In Vietnam, although the pace of credit expansion has fallen into the low single digits mainly due to aggressive policy tightening in 2011, past high rates of lending growth have contributed to a deterioration in the quality of bank assets, with exposure to loss-making state-owned enterprises and real estate of particular concern. Banks in Thailand remain financially sound because of the effective credit risk management practices in place. However, the impact of the floods of late 2011 is yet to be fully assessed, with commercial banks expecting NPLs to rise. In China, concerns linger about the legacy of the Figure 46. Bank in East Asia rely much less than other countries stimulus in 2009. This was supported through state- on wholesale markets for funding 100 directed credit expansion, some of which found its way into the real estate sector. In addition, the use of 40 Local Government Financing Platforms (LGFPs) as key 59 61 70 70 67 vehicles for credit expansion has raised concerns over 77 78 74 87 85 84 82 89 credit quality and, more broadly, over medium-term 50 financial stability in China. Tighter policy is helping steer 19 a soft landing in real estate markets, but stress tests 17 indicate that although the financial system is capable of absorbing isolated shocks, a combination of adverse 0 concurrent developments including deteriorating asset EAP ECA LAC KHM PHL TWN IDN MYS CHN THA SGP VNM ave. ave. ave. UK US Other Derivatives Trading Liabilities quality and sharper real estate correction, could put L/T funding Other deposits & S/T borrowings considerable stress on China’s financial sector.11 Bank deposits Retail deposits Sources: BankScope World Bank staff calculations. LAC countries consist of Argentina, Brazil, Chile, Peru, Paraguay, Uruguay and Mexico. ECA countries comprise Bulgaria, Czech Rep, Estonia, Hungary, Latvia, Poland, Slovenia and Slovakia. 2011 Data on the Banks in East Asia are generally less reliant on largest ten banks (by asset size) was used. wholesale funding markets, although exposures are high in some economies. On average, retail 11 IMF (2011), “People’s Republic of China: Financial Sector Stability Assessment�, Washington DC. WORLD BANK EAST ASIA AND PACIFIC ECONOMIC UPDATE 2012, VOL. 1 I. GROWTH HAS REMAINED STRONG, THOUGH HAS BEEN SLOWING FROM ITS POST-CRISIS PEAKS 21 deposits account for 77 percent of total liabilities in the region, much higher than in ECA and LAC. But there are large interbank exposures in Vietnam and Singapore amounting to nearly one- fifth of banking liabilities (Figure 46) and, while important for helping banks manage liquidity, they also indicate the potential for systemic risks in case of stress in wholesale markets. In Vietnam, these exposures reflect difficulties in accessing deposit funding because of caps on deposit interest rates, with banks turning to short term price sensitive funding and other interbank funding to support asset growth.12 Retail funding is also not without risk if it is mostly short-term—as it is in Indonesia, where the bulk of bank funding comprises short-term deposits with maturities that are less than one month.13 In addition, liquidity is generally lower than in other countries in the region and is particularly hard for smaller banks to obtain. 12 http://www.fitchratings.com/web/en/dynamic/articles/Vietnam-Bank-Consolidation-Is-Much-Needed-Positive-Step.jsp 13 Over 90 percent of the banks’ funding structure is short, with maturities of less than one month and at call. However, the rolling over of short-term deposits has been a common practice since the 1997/8 financial crisis. CAPTURING NEW SOURCES OF GROWTH 22 II. Fundamentals are strong, but there are limits to resilience Most developing East Asian economies are well positioned to weather renewed volatility in global markets. Domestic demand has proved resilient to shocks, most countries have current account surpluses and hold high levels of international reserves, and banking systems are generally well-capitalized. However, there are limits to this resilience. In response to slowing growth and falling inflation, a number of central banks have eased this year after tightening through much of 2010 and the first half of 2011, but overheating concerns may limit further monetary loosening in some countries. While some countries may have space for further fiscal policy stimulus in the event of another major disruption in the external environment, public debt remains above pre-crisis levels in many countries, limiting options for expansionary policy. Commodity exporters, many of which experienced strong growth in 2011, may be particularly vulnerable to a slowdown in China. China’s growth has been an important factor in driving up commodity prices. A faster than anticipated slowing of the Chinese economy could trigger an unexpected drop in commodity prices, which could force some commodity exporters to adjust rapidly. WORLD BANK EAST ASIA AND PACIFIC ECONOMIC UPDATE 2012, VOL. 1 II. FUNDAMENTALS ARE STRONG, BUT THERE ARE LIMITS TO RESILIENCE 23 Central banks ease as growth slows and inflation decelerates… Inflation slows in most countries. Headline inflation slowed to 3.4 percent (year-on-year) in April in China from an average 5.4 percent in 2011 (Figure 47). Consumer prices eased for the sixth consecutive month in Malaysia (to 2.1 percent year-on-year in March from 3.4 percent in September last year), and in Vietnam (Figure 48) for the eight consecutive month (to 10.5 percent year-on-year in April from 23.0 percent in August last year). In the Philippines, consumer price inflation fell to a thirty-month low of 2.6 percent year-on-year in March. In Indonesia, the parliament postponed a fuel subsidy reform program planned for April that would have helped ameliorate the rising fiscal cost of the subsidy but would have also likely added two percentage points to headline inflation in the year. Indonesia’s headline rate in April gained 0.6 percent month-on-month, seasonally-adjusted, from March. Mongolia is an exception to the regional trend, with the headline rate rising to 17.3 percent year-on-year in March from an average 9.5 percent last year, prompting a 50 basis-point rate hike in March to 12.8 percent on top of the 75 basis-point rate increase in the second half last year. Figure 47. Headline inflation has decelerated across the region… Figure 48. …although it remains elevated in some low- income countries CPI inflation, in percent year-on-year CPI inflation, in percent year-on-year 14 40 12 35 10 30 8 25 6 20 4 15 2 10 0 5 -2 0 -4 -5 -6 -10 Jan-07 Nov-07 Sep-08 Jul-09 May-10 Mar-11 Jan-12 Jan-07 Nov-07 Sep-08 Jul-09 May-10 Mar-11 Jan-12 China Indonesia Malaysia Philippines Thailand Cambodia Lao, PDR Mongolia Vietnam Source: IMF IFS. Source: IMF IFS. Figure 49. Lower food price inflation led to lower Figure 50. Core inflation has flattened in recent months headline inflation Food and CPI inflation, in percent year-on-year Core inflation*, in percent year-on-year 30 80 25 25 60 20 20 40 15 15 20 10 10 0 5 5 0 -20 0 -5 -40 -5 Jan-07 Nov-07 Sep-08 Jul-09 May-10 Mar-11 Jan-12 Jan-07 Nov-07 Sep-08 Jul-09 May-10 Mar-11 Jan-12 Food price inflation, Developing EAP simple average (lhs) EAP Headline Inflation, median (lhs) Developing EAP simple average Mongolia Thailand Food Commodity Price Index for developing countries, percent change year-on-year (rhs) Source: Haver Analytics Source: Haver Analytics and World Bank. Note: *Excludes food and energy. CAPTURING NEW SOURCES OF GROWTH 24 II. FUNDAMENTALS ARE STRONG, BUT THERE ARE LIMITS TO RESILIENCE A decline in food price inflation drove down headline inflation. Across most of East Asia, food price inflation has retreated from its annual highs mid-last year (Figure 49). In China, food prices dropped to 7.5 percent year-on-year in March from an average 11.8 percent last year. In the Philippines, adequate supplies of rice, vegetables, and sugar drove the deceleration in the February and March headline rates. In Thailand, the government has sought to address food price risk by administering price controls, and in Vietnam, where food prices have a 40 percent weighting in the headline rate, food price inflation, though still comparatively high, halved from 34.1 percent year-on-year in August last year to 17.8 percent in March. Meanwhile, core inflation has remained stable through most of the region from late last year (Figure 50), in line with global and domestic slowdowns. Figure 51. Two reserve ratio reductions by China likely added Figure 52. In some countries, central banks have started cutting more than RMB 750 billion to interbank liquidity interest rates commercial bank required reserve ratios, in percent central bank policy rates, in percent p.a. 30 16 14 25 12 20 10 15 8 6 10 4 5 2 0 0 Jan-07 Nov-07 Sep-08 Jul-09 May-10 Mar-11 Jan-12 Jan-07 Nov-07 Sep-08 Jul-09 May-10 Mar-11 Jan-12 China Malaysia Taiwan, China Vietnam Indonesia China Philippines Vietnam (CB VND demand deposits, less than 12 months) Thailand Korea, Rep. Malaysia Vietnam (CB FX demand deposits, less than 12 months) Source: Haver Analytics. Source: Haver Analytics. Amid subdued inflation, several central banks have started loosening monetary policy to encourage growth. After tightening through much of 2010 and 2011, China lowered the required reserve ratio (RRR) on bank deposits for the third time in six months to 20.0 percent in May from 21.5 percent in November last year (Figure 51). Indonesia, the Philippines, Thailand, and Vietnam cut their policy rates in the first quarter this year (Figure 52). Indonesia lowered its overnight deposit rate (the FASBI rate) by 50 basis points in January and cuts its benchmark interest rate (the BI rate) 25 basis points in February, citing weak external demand and poor exports. Subsequently, with the decision to allow a potential rise in subsidized fuel prices and move up in inflation, BI has indicated it is adjusting its stance to contain short-term inflationary pressures, for example through liquidity operations and raising rates on medium- and long-term monetary operation instruments. In the Philippines, the central bank added a 25 basis point cut in March to the 25 basis point cut in January to send the overnight reverse repo rate to a historically low 4 percent. The Philippines also reduced its bank deposit RRR from 21 percent to 18 percent in April. Thailand trimmed its benchmark one-day repo rate 25 basis points from 3.25 percent to 3.0 percent in January amid a slow recovery from record floods last year. Vietnam slashed its refinance rate twice, by 100 basis points each in March and April, as growth weakened to 4.1 percent in the first quarter. Policy easing has begun to turn the credit cycle in China. Net new RMB lending topped RMB1.0 trillion in March 2012, from about RMB635 billion in March 2011, exceeding market expectations by about one-fifth. Credit growth fell substantially in China in the last two years, slowing to 15 percent year-on-year in 2011 from 33 percent in 2009 (Figure 53), following months of policy tightening. The credit rebound should provide support to investment spending going WORLD BANK EAST ASIA AND PACIFIC ECONOMIC UPDATE 2012, VOL. 1 II. FUNDAMENTALS ARE STRONG, BUT THERE ARE LIMITS TO RESILIENCE 25 forward into the second quarter. In the Philippines and Figure 53. Policy easing lifted credit growth in China in March Thailand, which recently cut rates, credit growth has Bank RMB loans outstanding, year-on-year percent change, and Bank total loans outstanding, month-on-month increase in RMB billions yet to reflect policy easing (Figure 54). In Mongolia, 40 2.5 tightening last year has helped reverse credit growth, 35 but clearly much more is necessary. 2 30 1.5 Lower inflation could enable some countries to 25 undertake reforms in energy pricing and subsidies. 20 1 China is implementing a market-based mechanism by 15 0.5 which retail fuel prices are adjusted when crude oil 10 fluctuates more than 4 percent over a 22-day period. 0 5 The authorities are also extending nationwide a 5–10 0 -0.5 percent value added tax (VAT) on oil and natural gas Jan-07 Nov-07 Sep-08 Jul-09 May-10 Mar-11 Jan-12 Increase in Total loans outstanding, RMB billion (rhs) sales and are considering raising electricity prices for RMB loans outstanding, percent change, year-on-year (lhs) heavy residential consumers after increasing them for Source: IMF IFS. businesses late last year. In Indonesia, the government may have missed an opportunity to address the rising Figure 54. Credit risks are emerging in countries, particularly in fiscal cost of its fuel subsidy and redirect subsidy Mongolia where lending is growing at a much faster pace than in the rest of the region spending, estimated at US$19 billion in 2011, to more Bank total loans outstanding, year-on-year percent change productive uses. Indonesia’s reform plan allows a price increase of IDR 1,500 (16 US cents) per liter should the VNM six-month average Indonesian crude oil price rise 15 MNG percent above the US$105 per barrel price assumed in the government budget. Implementation of the plan IDN would have lowered the fiscal deficit from as high as KHM 3.1 percent of GDP this year to 2.5 percent of GDP, assuming oil prices stayed at US$120 per barrel. With THA 40 percent of the subsidy going to the richest 10 PHL percent of households, the execution of the plan would have also allowed redirecting spending to development 0 20 40 60 80 2010 2011 Jan–Feb 2012 needs including education and infrastructure. Source: IMF IFS. …but upside risks to inflation cannot be overlooked Oil price shocks pose upside risks to inflation. Even as the region’s monetary authorities seek to advance growth with policy loosening, inflation risks cannot be overlooked. Energy prices pose such risk, considering the recent run-up in global oil prices and the potential for an oil price shock given current geopolitical tensions. China raised gasoline and diesel prices by 3.3 percent and 3.6 percent in February and by 7 percent and 7.8 percent in March. Vietnam raised fuel prices in March, triggering a wave of transport fare increases. The government is now under pressure to allow adjustment in gas, coal and electricity prices as well. The Philippines hiked transport (jeepney) fares in March after petroleum firms increased pump prices. The energy pricing reforms in China and the subsidy reforms in Indonesia, should they be implemented, will also pose inflationary risks, although the direct impact of lowering subsidies should be temporary. Oil futures have tumbled recently, helped in part by renewed Euro zone worries, the mid-April talks between Iran and the six world powers about Iran’s nuclear program, and the earlier-than-scheduled CAPTURING NEW SOURCES OF GROWTH 26 II. FUNDAMENTALS ARE STRONG, BUT THERE ARE LIMITS TO RESILIENCE reversal of the US Seaway pipeline that delivers crude oil to the Gulf Coast refineries. But volatility remains and the potential for a significant supply disruption looms large as US and EU sanctions against Iran come into effect in the coming months. An uptick in activity, aided by accommodative monetary policies, also poses an upside risk to inflation, so policy-makers should be prepared to reverse recent easing. In some countries, inflation rates, while they have eased, are at the high end of explicit or implicit target ranges. The Philippines’ 4.8 percent average inflation rate last year was at the top of the central bank’s 3–5 percent inflation target. China set a target of 4 percent this year, against which April inflation stands at 3.4 percent. Vietnam is aiming for a less than 10 percent inflation rate this year, but the April rate is running at 10.5 percent. In Mongolia, more tightening is clearly needed with the inflation rate racing to 17.3 percent in March on an average 60 percent year-on-year credit growth in the first quarter. Overall, the region’s authorities should remain flexible to shift monetary policy gears should growth gain traction and inflationary pressures build up. A revival in capital flows may pressure exchange rates again Reserve buildup returns. Emerging East Asia drew down reserves starting mid-last year, as capital flows either weakened or reversed, while current account surpluses narrowed. International reserves in non-China emerging East Asia declined by US$30.7 billion in the third quarter, and in China, by US$20.2 billion in the fourth. The region, however, has since resumed accumulating reserves as capital flows have revived. China added US$102 billion to reserves in the first quarter, and non-China emerging East Asia, US$38 billion (Figure 55). Currencies could return to an appreciating path. Weaker global trade and higher global risk aversion weighed down on currencies last year. Many developing East Asian currencies depreciated or only weakly appreciated in the year, dissipating the nearly uniform and strong appreciation posted in 2010 (Figure 56). While early 2012 data show that most currencies may be set to return to an appreciation path, it will most likely be the case that currencies will be volatile in the immediate term, weakening or strengthening with rising or falling tail risk in Europe. Figure 55. Total reserves topped US$5 trillion at end-March Figure 56. Most of the region’s currencies depreciated last year after rallying in 2010 change in reserves, monthly, in $ billions, and Total reserves excluding gold, Change in nominal effective exchange rate, in percent over the period in $ trillions 200 6 MNG THA 150 5 MYS SGP 100 4 LAO 50 KHM 3 PHL 0 TWN 2 CHN -50 IDN 1 HKG -100 KOR VNM -150 0 Jan-09 Oct-09 Jul-10 Apr-11 Jan-12 -20 -10 0 10 20 30 Indonesia Malaysia Philippines Thailand Jan–Dec 2010 Jan–Dec 2011 Jan–Feb 2012 Hong Kong SAR, China Korea, Rep. Singapore Taiwan, China China Total Reserves (rhs) Source: Haver Analytics. Source: Haver Analytics. WORLD BANK EAST ASIA AND PACIFIC ECONOMIC UPDATE 2012, VOL. 1 II. FUNDAMENTALS ARE STRONG, BUT THERE ARE LIMITS TO RESILIENCE 27 China’s shrinking current account surplus recasts Figure 57. The real value of the RMB has appreciated 20 percent questions around exchange rate valuation. Among from January 2003 to January 2012 real effective exchange rate, 2005=100 the region’s currencies, the RMB strengthened last 140 year, as it did in 2010. Over the last ten years, the RMB 130 has appreciated 20 percent in real effective terms (Figure 57). The current account surplus, however, 120 which trebled between 2003 and 2007 and topped 110 10.1 percent of GDP in 2007, has fallen steeply to 100 2.7 percent of GDP in 2011 (Figure 58), and may likely 90 stay down in the next few years as China rebalances 80 amid weak global demand. A current account surplus 70 below 3 percent of GDP seems to suggest that the real 60 value of the RMB is closer to equilibrium than it was Jan-03 Jan-04 Jan-06 Jan-07 Jan-09 Jul-10 Jan-12 in the past decade, when the country increased the Source: IMF. flexibility in the exchange rate. Recently, the authorities Figure 58. China’s current account surpluses have come down further increased the daily trading band of the RMB to considerably current account balance, in percent of GDP, Trade balance, in percent of GDP, and 1 percent each way, and the RMB has been trading the RMB/USD exchange rate on the weaker side of the central rate. On the other 12 9 hand, it is not clear whether China’s external surplus 10 8 will remain in check once global growth revives. 8 7 Meanwhile, China continues to take additional steps 6 6 aimed at eventually attaining the convertibility and internationalization of the RMB. Most initial measures 4 5 promoted the use of the RMB for trade invoicing and 2 4 settlement, starting with the mid-2009 experiment allowing companies in Shanghai and Guangdong to 0 3 2003 2004 2005 2006 2007 2008 2009 2010 2011 Q1-12 settle cross-border trade with Hong Kong SAR, China, Current account balance, in percent GDP (lhs) Trade balance, in percent GDP (lhs) RMB/USD, period average (rhs) Macau SAR, China, and ASEAN countries in RMB. Sources: Haver Analytics. More recently, China has also been actively promoting the use of the RMB for international investment. Late last year, China entered into an agreement with Japan allowing the direct exchange of the RMB and the yen without the use of US dollars. Recently, as authorities more than doubled the amount that qualified foreign institutional investors (under the QFII program) can invest in the onshore capital market from US$30 billion to US$80 billion, they also tripled the total amount of RMB that foreign investors can raise in Hong Kong SAR, China for investment back in the mainland from US$3.2 billion to US$11.2 billion. Fiscal policy needs to walk a fine line Fiscal policy has been balancing support for short-term growth and concerns over medium-term sustainability. Changes in the fiscal stance in 2011 were less driven by concerns for short-term growth prospects, as previous rounds of fiscal stimulus in response to the crisis have required a more cautious stance in some countries. Notwithstanding a growing output gap in most manufacturing exporters, most tightened their fiscal position (Figures 59 and 60). This contrasts with some commodity exporters, most of whom saw their output gap tighten, but despite rising revenues, saw their fiscal position deteriorate (Figures 61 and 62). CAPTURING NEW SOURCES OF GROWTH 28 II. FUNDAMENTALS ARE STRONG, BUT THERE ARE LIMITS TO RESILIENCE Figure 59. Output gaps for manufacturing exporters generally Figure 60. …while improving for most commodities exporters worsened in 2011… 5 50 40 0 30 -5 20 -10 10 0 -15 -10 -20 -20 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 China Indonesia Malaysia Philippines Fiji Lao, PDR Mongolia Papua New Guinea Thailand Vietnam Cambodia Samoa Timor Leste Solomon Islands Sources: World Bank development Indicators and staff calculations. Output gaps are Sources: World Bank development Indicators and staff calculations. Output gaps are defined as the percent difference between potential GDP and actual GDP, where defined as the percent difference between potential GDP and actual GDP, where potential GDP is calculated by extrapolating the 2000–07 real GDP growth rate to potential GDP is calculated by extrapolating the 2000–07 real GDP growth rate to 2008–11. 2008–11. Figure 61. Revenue gains in 2011 were therefore lower in the Figure 62. …yet the fiscal position of several manufacturing manufacturing countries and… countries became tighter in 2011 change in revenues, from 2010 to 2011, as share of GDP change in primary balance, from 2010 to 2011, as share of GDP 3 VNM 5 2 LAO KHM PHL 4 1 CHN MYS SLB 0 3 PNG THA IDN -1 FJI 2 -2 1 -3 MNG -4 0 -5 -1 -10 -5 0 5 10 change in output gap, as percent of potential GDP VNM KHM CHN IDN PHL MYS THA FJI LAO PNG SLB MNG Manufacturing exporters Commodities exporters Manufacturing exporters Commodities exporters Sources: Government accounts and World Bank staff estimates. Sources: Government accounts and World Bank staff estimates. Output gap is defined here as the percentage gap between potential GDP and actual GDP, where potential GDP is calculated from the average growth rate from 2000–07 extrapolated to 2008–11. In Vietnam, since the onset of the stabilization policy in February last year, maintaining fiscal discipline has been a government priority to support monetary policy in stabilizing the economy, and to maintain debt sustainability over the medium-term. In contrast, in Mongolia, fiscal policy has been highly pro-cyclical in a booming economy, resulting from large mineral deposits development. Substantial revenue gains were met by even more ambitious spending as parliamentarians sought to maximize spending before a new Fiscal Stability Law becomes binding in 2013. The result has been a deterioration in the primary balance and a rapid increase in inflation. Primary balances for 2012 could become more negative in Cambodia, Lao PDR, and Thailand as governments pursue reconstruction following the damaging floods of 2011. The withdrawal of fiscal stimulus in 2011 has been more tentative than expected, relative to the forecast in our previous update. Fiscal policy continued to normalize in China and the Philippines (Figure 63) but discretionary spending increased in Malaysia and Thailand. Overall, cyclically adjusted primary balances were still more negative than before the global crisis (Figure 64). WORLD BANK EAST ASIA AND PACIFIC ECONOMIC UPDATE 2012, VOL. 1 II. FUNDAMENTALS ARE STRONG, BUT THERE ARE LIMITS TO RESILIENCE 29 Figure 63. Withdrawal of fiscal stimulus has been tentative… Figure 64. …and cyclically adjusted fiscal deficits remain larger than before the crisis primary balance, in percent of GDP cyclically-adjusted primary balances, in percent of potential GDP 5 3 4 2 3 1 2 1 0 0 -1 -1 -2 -2 -3 -3 -4 -4 -5 -5 China Indonesia Malaysia Philippines Thailand China Indonesia Malaysia Philippines Thailand 2006–07 2009 2010 2011 2006–07 2011 Source: IMF Fiscal Monitor, April 2012. Sources: IMF Fiscal Monitor, April 2012. Note: Cyclically adjusted primary balances (CAPB) are general government primary balances adjusted to filter out cyclical movements associated with changes in output, thus allowing a focus on the underlying fiscal stance and the impact of discretionary policy. Figure 65. Oil prices remain high despite some recent easing… Figure 66. ...public balance are affected by rising oil prices because of domestic price regulations or subsidies international commodity prices, Dec 2005=100 change in budget balance measured as % of GDP from a $10 increase in oil prices 250 0 -1 200 -1.5 -2 150 -2.5 -3 100 -3.5 50 -4 -4.5 0 -5 Dec-05 Dec-06 Dec-07 Dec-08 Dec-09 Dec-10 Dec-11 Thailand Indonesia Natural gas - Henry Hub Crude oil - Brent Coal - Newcastle Source: World Bank Staff Source: Datastream . No data for coal prices prior to mid-2008. Note: Estimates from an OLS regression of quarterly deficit to GDP ratios on oil prices (Brent US $/ bbl) with controls for the output gap using quarterly data from 2001-2011. Recent increases in oil prices contributed to spending pressures as countries in the region, other than Malaysia, are net oil importers, and several subsidize fuel prices. Although the international price of oil has eased slightly after climbing to nearly US$126/bbl in late February, it is still some 11 percent higher than the average price last October (Figure 65). Oil accounts for typically 40 percent or more of energy consumption in East Asia, with the exception of China, which relies on coal for meeting 70 percent of its energy needs. The region is largely a net importer of oil, and only a few net exporters will benefit from an increase in oil prices. However even for these countries, an increase in oil prices is a mixed blessing, since fuel (including oil) tends to account for a large share of the consumption basket and will affect the purchasing power of households. In addition, unlike for food or agricultural commodities, the benefits of a boom in mining are much less widely-shared, because mining sectors typically have few linkages to the rest of the economy and account for a smaller share of employment. Some governments have sought to shield consumers from price increases through fuel subsidies that cannot always be sustained as world prices increase. In Malaysia for example, fuel subsidies more than doubled to nearly RM18 billion in 2008, which eventually led to a restructuring of those subsidies and an increase in fuel prices of 40.4 percent. Despite this CAPTURING NEW SOURCES OF GROWTH 30 II. FUNDAMENTALS ARE STRONG, BUT THERE ARE LIMITS TO RESILIENCE restructuring, a similar amount has been budgeted for fuel subsidies this year. Indonesia has also recently approved a revised budget that allows for a rise in subsidized fuel prices, but only if the oil price is sufficiently high (Box 2). The Philippines has negligible direct fuel subsidies, but there is an indirect impact on the budget from rising oil prices as a result of subsidies provided to oil powered electricity generation. Box 2 Subsidy reform in Indonesia—a missed opportunity for redirecting spending The rise in international oil prices in early 2012 refocused attention on the fiscal burden of Indonesia’s energy subsidies. The average Indonesian crude oil price was US$122 per barrel in the first quarter of 2012, up from an average of US$111 in the final quarter of 2011. In response to this price increase, and the weakening global environment, the government of Indonesia brought forward its revision of the 2012 budget and included a proposal to increase the price of subsidized fuel. To cushion the impact of higher energy prices, two compensation schemes were proposed, one focusing on targeted cash transfers to the poor and one on lowering public transportation costs. Eventually, the legislature passed a conditional reform, allowing for the option of an increase in the subsidized fuel price of one-third (IDR 1,500 per liter) provided that the average Indonesia Crude Price over a six month period was 15 percent above the budget assumption of US$105 per barrel—in other words US$120.8 per barrel. The current system of fuel subsidies does pose a risk to the budget. The deficit in the proposed and approved revised 2012 budget was 2.2 percent of GDP, up from 1.5 percent in the original budget as a result primarily of higher energy subsidies. The World Bank estimates that if oil prices average US$120 over the year, the deficit could rise to 3.1 percent of GDP if there is no subsidized fuel price adjustment or 2.5 percent of GDP if a fuel price rise were to be implemented in the third quarter of 2012. From the perspective of fiscal sustainability a higher deficit is, however, manageable given Indonesia’s strong initial debt position. Nevertheless, the risk of hitting Indonesia’s three percent of GDP deficit limit may prompt a tightening in spending in key development areas. The greater uncertainty and complexity of the approach to fuel price adjustment also clouds the inflation and macro-policy outlook for investors. Furthermore, while recognizing the progress made on such a politically sensitive topic, the decision not to increase prices now represents a missed, or delayed, opportunity to redirect spending at a time when risks remain in the global environment. Indeed, perhaps more important than the fiscal risk, the fuel subsidies spending has a considerable opportunity cost. For example, in 2011, Indonesia spent 3.4 percent of GDP on energy subsidies, of which 2.2 percent were spent on fuel and 1.2 percent on electricity. This compares to only 1.6 percent on capital and 1.0 percent on social expenditures. Subsidies are also an inefficient way of assisting the poor and vulnerable, and reduce incentives for efficient fuel usage. Due to subsidies, Indonesian fuel prices are low by regional standards. Yet since more affluent households have generally higher fuel consumption, subsidies benefit the rich disproportionately. For example, a car owner purchasing 50 liters of subsidized fuel per week would receive the equivalent benefit of IDR 1,115,000 per month, which is tenfold the IDR 111,000 per month for a motorcycle owner purchasing only 5 liters per week. A poor person without a motorbike or car would see very little direct benefit, although may benefit indirectly from lower transport costs. Accordingly, the 2009 household survey reveals that 40 percent of the benefits from fuel subsidies accrued to the richest ten percent—compared to 1 percent of the benefits that went to the poorest 10 percent. Source: Indonesia Economic Quarterly, April 2012 Public debt levels have generally improved or continue to improve across the region, yet remain elevated in a number of countries and limit fiscal policy flexibility. Improved fiscal positions, coupled with strong or adequate growth, have pushed public debt below pre-crisis levels in a number of countries. In 2011, further debt reduction was seen in Indonesia, China, Mongolia, Philippines, Papua New Guinea, Solomon Islands, Thailand, and Vietnam (Figure 67). Yet, several countries have rather high debt burdens, in excess of 40 percent of GDP, and Cambodia and Malaysia saw debt rise in 2011 and will need to focus on consolidation (Figure 68). Cambodia, Lao PDR, and Thailand will all need to boost spending on reconstruction following the severe flooding in 2011. Cambodia lacks a market for treasury notes and thus cannot easily borrow; the government there will need to reduce the primary deficit in WORLD BANK EAST ASIA AND PACIFIC ECONOMIC UPDATE 2012, VOL. 1 II. FUNDAMENTALS ARE STRONG, BUT THERE ARE LIMITS TO RESILIENCE 31 Figure 67. Public debt levels have fallen in many countries though Figure 68. …and only a few countries appear to be well remain elevated above pre-crisis levels in several others… positioned for fiscal stimulus, percent of GDP, percent of revenue and grants primary balance as percent of GDP 70 8 SLB 60 6 4 50 2 PNG 40 IDN PHL 0 FJI 30 CHN THA VNM -2 LAO 20 MNG MYS -4 10 -6 KHM 0 -8 IDN CHN KHM THA VNM PHL MYS SLB PNG MNG LAO FJI 20 30 40 50 60 2007 2010 2011 Interest as % revenue total public debt as percent of GDP Source: National sources and WB staff calculations. Source: National sources and WB staff calculations. Note: Data are for the national (central or federal) level of government. Note: Data are for the national (central or federal) level of government. Figure 69. …yet sovereign risk in Asia is falling again… Figure 70. …as is the cost of insuring against default Emerging Markets Bond Index Global, stripped spreads, basis points Average CDS spreads on 5-year sovereigns, in basis points 1,200 250 1,000 200 800 150 600 100 400 50 200 0 0 Jan-08 Sep-08 May-09 Jan-10 Sep-10 May-11 Jan-12 Indonesia Philippines Thailand China Malaysia Vietnam Philippines Malaysia Indonesia China Q3-11 Q4-11 Q1-12 Source: JPMorgan, via Thomson Datastream. Source: Thomson Datastream. Figure 71. Prior to the global crisis, the bond market was only Figure 72. The market is now more reactive to risks arising from somewhat sensitive to debt positions public debt relationship between 5-year Sovereign CDS spreads (Q1 2008) and Public Debt relationship between 5-year Sovereign CDS spreads (Q1 2012) and Public Debt (2007) (2011) 3 3 2.5 2.5 VNM VNM KOR THA THA 2 2 CHN KOR HKG CHN HKG 1.5 1.5 1 1 0.5 1 1.5 2 2.5 0.5 1 1.5 2 2.5 log general government public debt, % GDP, 2007 log general government public debt, % GDP, 2011 ECA LAC EAP Fitted values ECA LAC EAP Fitted values Source: Thomson Datastream and World Bank staff calculations. Source: Thomson Datastream and World Bank staff calculations CAPTURING NEW SOURCES OF GROWTH 32 II. FUNDAMENTALS ARE STRONG, BUT THERE ARE LIMITS TO RESILIENCE order to build its stock of government deposits as a buffer. Fiji, Indonesia, and the Philippines have fairly high interest obligations relative to revenues. However, falling interest rates and reduced risk premiums might offer some scope fiscal flexibility for some countries (Figure 69 and Figure 70). In deciding on fiscal policy stance, policy makers need to be aware that global bond markets have become more discerning in their reaction to government fiscal positions. The costs of insuring government debt are much more closely-tied to public debt levels now than prior to the crisis as investors focus more on underlying policy (Figure 71 and Figure 72). In terms of recent developments, Vietnam has been making good progress in narrowing its very high risk premium of 662 basis points in October 2011 to 338 basis points by the end of March 2012. Continued efforts by the authorities could bring the spread down to levels enjoyed by other regional borrowers. Conversely, while the Chinese risk premium ticked down in the first quarter after a period of rising since mid-2010, the risk premiums in several countries fell faster. As a consequence, the Chinese risk premium is now higher than what the market confers upon Indonesia, Malaysia, and the Philippines in terms of bond spreads. Overall, fiscal risks within Emerging East Asia appear to be lower than in other regions (Figure 71 and Figure 72) and have fallen in 2011 somewhat on the strength of reduced credit default swap spreads and lower debt burdens. WORLD BANK EAST ASIA AND PACIFIC ECONOMIC UPDATE 2012, VOL. 1 33 III. Rebalancing in a Changing World With external demand likely to remain weak for the foreseeable future, East Asia’s continued high growth rates will need to rely less on an export-oriented model. While East Asian economies are already relying more on domestic demand to support economic growth, there is further scope for rebalancing. In some countries such as China this means higher consumption. For most, h igher investment can add to economic activity and jobs in the short run, while in the medium term it will enhance productivity and drive growth by facilitating a shift to higher value-added activities and more innovation. There is still much scope for productivity growth , as the gap between East Asia and the US, the global leader in labor productivity, has narrowed only modestly since 1990. Policies to support the movement of labor among countries can contribute to higher productivity. Migration in developing East Asia has helped fill labor shortages in host countries and remittance flows have contributed to poverty reduction and macroeconomic stability in home countries. Yet, as in other parts of the world, existing bilateral and regional migration policies do not always allow migrants to move efficiently to where returns are highest or allow firms to obtain the workers they need, and these policies may contain incentives for undocumented migration. Improved regional migration policies could enhance the gains from regional economic integration and allow those countries facing a negative demographic drag on economic growth in the next generation to obtain much-needed labor inputs. CAPTURING NEW SOURCES OF GROWTH 34 III. REBALANCING IN A CHANGING WORLD For most EAP countries, growth will be stable in 2012 but downside risks remain Prospects for East Asia are, as in other developing table 1. Annual GDP growth in percent regions, weighed down by the persistent tepid Forecast Forecast recovery of the US and, most particularly, the 2010 2011 2012 2013 uncertainty in Europe. Recent improvements in some East Asia 9.3 7.0 6.3 7.0 recent economic data releases in the US are promising, Developing East Asia 9.7 8.2 7.6 8.0 but there remain big questions about the durability China 10.4 9.2 8.2 8.6 Indonesia 6.2 6.5 6.1 6.4 of a broader recovery in the short-term. Uncertainly Malaysia 7.2 5.1 4.6 5.1 in Europe, however, continues to pose the biggest Philippines 7.6 3.7 4.2 5.0 threat to our forecasts. Though the risks of a disorderly Thailand 7.8 0.1 4.5 5.0 deleveraging appeared to recede from some of the Vietnam 6.8 5.9 5.7 6.3 Cambodia 6.0 6.9 6.6 6.7 worst-case, short-run scenarios, as the agreement on Fiji -0.2 2.0 1.5 1.7 a managed Greek default and the European Central Lao PDR 8.5 8.0 8.3 7.5 Bank’s injection of €1 trillion into the banking system Mongolia 6.4 17.3 17.2 11.8 helped relieve liquidity constraints, events of the past Papua New Guinea 7.5 9.0 7.0 5.0 Solomon Islands 7.0 9.0 6.0 4.0 few weeks heightens our concerns. There remains Timor-Leste 9.5 10.6 10.0 10.0 great uncertainty over the short-run solvency of a Developing EAP excl. China 7.0 4.3 5.2 5.6 number of southern European countries and whether Assumptions about external environment there will be sufficient adjustment and liquidity in World 4.2 2.8 2.6 3.0 High-income countries 3.1 1.6 1.5 1.9 the medium-term to obviate further sovereign debt Developing countries 7.3 6.2 5.5 5.7 restructuring and restore growth. It is for this reason that Source: World Bank. we devote another section in our update to discussing the potential impact of various trajectories of European developments. The uncertainty in the global environment is reflected in leading indicators. Some of these show positive trends for the US and Japan and a more negative picture for Europe (Figure 73 and Figure 74). Most of East Asia is tilting up on these leading indicators as well, but as this region’s leading indicators are highly correlated with those of developed economies, further instability in the US and Europe will impact East Asian prospects. Figure 73. Leading indicators for the US and Japan are looking Figure 74. …most major Emerging Markets are seeing an uptick up though Europe continues to be weak… in sentiment OECD Composite Leading Indicator, April 2007–February 2012 OECD Composite Leading Indicator, April 2007–February 2012 104 104 102 102 100 100 98 98 96 96 94 94 92 92 Apr-07 Mar-08 Feb-09 Jan-10 Dec-10 Nov-11 Apr-07 Mar-08 Feb-09 Jan-10 Dec-10 Nov-11 United Kingdom United States Euro Zone Japan Brazil China India Indonesia Source: OECD. Source: OECD WORLD BANK EAST ASIA AND PACIFIC ECONOMIC UPDATE 2012, VOL. 1 III. REBALANCING IN A CHANGING WORLD 35 We expect that developing East Asia will see growth fall to 7.6 percent in 2012, down from 8.2 percent last year. The expected one percentage point decline to growth in China, to a forecast 8.2 percent, weighs on the regional aggregate (Table 1). When China is excluded, East Asian growth accelerates to 5.2 in 2012, from 4.3 last year, but much of this is driven by the rebound in Thailand. Most countries will not see 2012 growth rates significantly different from those in 2011 and significant accelerations are only forecast for the Philippines and Thailand. Yet, as discussed earlier, seen in the context of the pre-crisis growth trends, these projected rates are still fairly robust. One outlier in the general forecast is that growth in Mongolia is expected to remain above 17 percent, reflecting a structural shift in the economy as large mining projects come onstream. Given the uncertainty on prospects in the external environment, there are a number of large risks to this forecast. The prospects for growth in developed markets, and the potential impact that a renewed global recession would have on trade and capital flows, has heightened uncertainty about the growth prospects in Europe, Japan, and much of East Asia as reflected in the increased uncertainty among economic forecasts (Figure 75 and Figure 76). Figure 75. Divergence among economic forecasters about the Figure 76. …and we also see increasing uncertainty about growth prospects for Europe has grown since 2009… growth in East Asia in 2012, outside of China where most agree on slower growth variance in Consensus Economics analysts’ forecasts variance in Consensus Economics analysts’ forecasts 1.8 1.8 1.6 1.6 1.4 1.4 1.2 1.2 1 1 0.8 0.8 0.6 0.6 0.4 0.4 0.2 0.2 0 0 U.S. U.K. Eurozone Japan China Indonesia Malaysia Thailand 2007 2008 2009 2010 2011 2012 2007 2008 2009 2010 2011 2012 Source: Consensus Economics. Source: Consensus Economics. Note: The bars illustrate the standard deviation of the forecasts made by the analysts Note: The bars illustrate the standard deviation of the forecasts made by the analysts surveyed by Consensus Economics for the listed year. For example, the red 2007 bar surveyed by Consensus Economics for the listed year. For example, the red 2007 bar reflects the variance of forecasts for 2007 reported in January 2007. A taller bar reflects reflects the variance of forecasts for 2007 reported in January 2007. A taller bar reflects more uncertainty. more uncertainty. Though China’s use of stimulus could mitigate against the risk of significant drop in output, growth will slow on the back of weakening exports and investments, particularly in infrastructure and real estate. A slowing China—which comprises 80 percent of developing East Asia’s GDP—is a drag on growth across much of the region given China’s growing role as an export destination and source of foreign investment. In particular, a slowing in Chinese investment will primarily hurt demand for commodity and capital goods and particularly impact natural resource exporters that are heavily reliant on Chinese demand: Mongolia, Solomon Islands, Lao PDR, and Malaysia. Despite the persistent risks emerging from developed markets and China, there is continued appetite for East Asian assets by international investors, and in many countries there is room for further policy stimulus. Macroeconomic policy is also aided by the slowing in inflation. International commodity prices have stabilized, with geopolitics and ongoing proposals to facilitate more pass-through of energy prices to consumers in a couple of countries now representing the biggest threat to short-run energy price risks. With slowing growth and receding CAPTURING NEW SOURCES OF GROWTH 36 III. REBALANCING IN A CHANGING WORLD price pressures, monetary policy is becoming more accommodative in a number of countries. As we have discussed, low interest rates have already translated into higher credit growth in some economies. In China, fiscal easing that is less credit-fueled, less local government-funded and less infrastructure-oriented is likely to be given more priority given the legacy of the last credit based stimulus The greatest uncertainty: Europe There are strong direct connections between European developments and East Asian prospects. The real impact of financial, funding, and trade linkages with the EU was amply evident in the second half of last year when there was a retreat to safer havens in financial markets so that regional currency and equity markets came under pressure, and exports stagnated in the face of declining demand from advanced economies. With the Euro area expected to experience a recession this year, core issues regarding the sustainability of the monetary union are yet to be fully addressed, while the banking sector is expected to deleverage to the tune of some US$2.6 trillion. Trade finance remains an important transmission mechanism from the Euro area. Although East Asia is the least exposed to the ongoing deleveraging by European banks, with total claims by those banks amounting to around 5 percent of the region’s GDP, a large portion of these are short-term loans financing trade to the non-bank private sector. Euro area banks are estimated to provide one-third of trade and project finance in Asia14 and they have repatriated money from the region to meet higher capital ratios. The pullback in trade finance lending and its cost is also likely to have been affected by new regulations under Basel III that are due to be phased in during 2013, which require higher quality capital to be set against such loans. So far regional banks have been able to help bridge the financing gap left by retreating European banks, unlike 2008-9 when trade finance collapsed, but continued expansion in funding is not guaranteed. This is also confirmed in loan officer surveys of emerging markets, which indicate that the tightening of trade credit supply conditions has been less severe in Asia over the past year compared to other regions, and the subsequent easing of credit conditions in first quarter stronger (Figure 77). Nonetheless, continued supply of trade finance, which is usually denominated in dollars, by local banks without increasing asset and liability currency mismatches will depend on the extent to which they can increase growth in foreign currency deposits or access foreign currency funding in wholesale markets. With regard to the latter, international funding conditions are only marginally improving in Asia and are still tightening in other emerging market economies (Figure 78). With the EU accounting for one-third of global import demand, a recession there will inevitably take its toll on East Asia. Developing East Asia exported some US$592 billion in goods to the EU last year, much more than it exported to countries within the region (Figure 79). China accounted for about two-thirds of these exports, but that reflects its role as a manufacturing hub within the region. EU import demand has been shrinking since November of last year resulting, in a sharp deceleration in the region’s export growth; indeed exports in the more trade-oriented economies contracted in March in year-on-year terms. Even though exports to the EU account for about one-tenth of total exports for most of developing East Asia, indirect spillovers through China will also have important second order effects. Certainly, the sensitivity of demand for the region’s export to the EU through China has increased over the past decade and is fairly high in Malaysia, Thailand, and Korea (Box 3). Exports to the EU are also heavily 14 IMF Global Financial Stability Report, January 2012 Update. WORLD BANK EAST ASIA AND PACIFIC ECONOMIC UPDATE 2012, VOL. 1 III. REBALANCING IN A CHANGING WORLD 37 Figure 77. The supply of trade credit supply has eased the most Figure 78. …but funding conditions in international markets in Emerging Asia… remain tight Supply of Trade Finance, Diffusion Index, 50=neutral, below 50 indicates Funding Conditions in International Markets, Diffusion Index, 50=neutral, below tightening, above 50 represents easing 50 indicates tightening, above 50 represents easing 75 70 70 60 65 50 60 40 55 30 50 45 20 40 10 Q1-11 Q2-11 Q3-11 Q4-11 Q1-12 Global Latin America Europe Asia Global Latin America Europe Asia Q1-11 Q2-11 Q3-11 Q4-11 Q1-12 Source: International Institute of Finance. The surveys are directed to loan officers or Source: International Institute of Finance. The surveys are directed to loan officers or other equivalent officers in banks based in emerging market economies. other equivalent officers in banks based in emerging market economies. Figure 79. EAP exported more than US$500 billion of goods to Figure 80. The region’s base for exports to the EU is the EU in 2011 concentrated in textiles or electronic goods, both of which are sensitive to consumer demand Destination of EAP and China originated exports (US$ bn) export volume, year-on-year percent change, three-month moving average 1,400 50 1,202 1,200 40 30 1,000 20 800 592 10 600 526 0 400 356 325 236 -10 181 147 209 200 -20 0 -30 Dev. & Emerging China Markets E.U. Japan U.S. Apr-07 Apr-08 Apr-09 Apr-10 Apr-11 Apr-12 Exports from EAP excl. China Exports from China China ASEAN-5 NIEs Source: IMF Direction of Trade Statistics. Source: WITS and IMF Direction of Trade Statistics using data from Jan–Nov 2011. Notes: Data for first 11 months of 2011. focused on textile and electronic goods that are sensitive to consumer demand (Figure 80). Close vertical integration of Asian production networks centered upon China, for which the EU is its largest export market, will also help to amplify and transmit shocks to exporters of electronic goods and manufactured items which, evidence suggests, are increasingly shipped to Europe via China. Finally, although the region exports only a small share of its commodities to the EU directly, the main transmission channel will be through the increased volatility in prices that could stem from an intensification of the Euro area crisis and a slowdown in China itself, which consumes a large portion of the region’s commodities. Long-term prospects tied productivity and integration The possibility that the US and Western Europe will continue to experience sub-trend growth for a number of years ahead requires that East Asia, a heavily trade dependent region, focus on improving innovation and CAPTURING NEW SOURCES OF GROWTH 38 III. REBALANCING IN A CHANGING WORLD Box 3 China bolsters its centrality in East Asian trade with Europe At first sight, direct trade exposures of East Asia to Western Europe seem limited. Measured against total exports, the percentage of developing East Asian countries’ exports to the Euro zone in 2011 ranged from 6 percent in Thailand to 11 percent in Vietnam, while China exported 14 percent of total exports to this region. Yet given the size of the Chinese economy, this means that in absolute US dollar terms, China’s goods exports to the Euro zone in 2011 were 14 times those of Malaysia, 18 times those of Thailand, 24 times those of Vietnam, and 60 times those of the Philippines. China thus remains the main exporter to Europe in developing East Asia. Dependence on trade with the Euro zone has increased only moderately in the region in the last decade. Compared to the early 2000s, the sensitivity of East Asian exports to European global demand, as measured by changes in trade elasticities over time, has increased most in Vietnam—which reflects its increasing role in the international trading system—followed by South Korea and Indonesia (Figure 1).15 For some East Asian countries, including Japan, the Philippines, and Hong Kong SAR, China, this sensitivity even declined. On the other hand, with the exception of Hong Kong SAR, China, sensitivity of trade with China rose considerably across the region bolstering China’s increasingly central position in world trade. Box Figure 1. Trade between East Asian countries and China Box Figure 2. China remains a major reloading site for East intensified—more than trade with Europe Asian exports to Europe difference in elasticities between 2000–07 and 2010–11 elasticities 0.12 1 0.10 0.8 0.08 0.06 0.6 0.04 0.02 0.4 0 0.2 -0.02 -0.04 0 HKG JPN PHL KOR THA IDN MYS VNM VNM HKG PHL IDN THA MYS KOR JPN China EU Trade with EU through China Trade with China Trade with EU China trade with EU Source: Eurostat, CEIC, and World Bank staff calculations. Source: Eurostat, CEIC, and World Bank staff calculations. Note: Elasticities were estimated with OLS and measure the percentage change in Note: Estimated with OLS, the bars show the elasticity of Chinese imports from EAP demand for imports from a given region (China or the EU) for a given change in overall countries vs. Chinese exports to Eurozone (EU); diamonds show the elasticity of total import demand. The figure depicts the difference between average elasticities for Chinese imports from EAP countries vs. total imports; triangles show the elasticity of the periods 2000-2007 and 2010-2011 for China and the Eurozone respectively. EU imports from EAP countries vs total imports; lines show the elasticity of EU total imports and imports from China. Data for 2010 and 2011. 15 It should be borne in mind that the estimated elasticities are only rough measures given the complexity of international trade. productivity. Productivity growth contributed heavily to the rapid growth rates experienced by many countries in the region since the 1997/98 regional economic crisis.18 In fact, over the past 20 years, labor productivity growth doubled and was the fastest of any developed or developing region. (Figure 81 and Figure 82). There were large productivity gains across the region during this period, with biggest gains seen in China and in some of the less productive lower- and middle-income economies, such as Vietnam and the Philippines. However, the gap between most developing East Asian economies and other regions is large with 2010 productivity levels nearly twice as high in Emerging Europe and Latin America. Though developing East Asia’s median annual average compound productivity growth rate was nearly twice that of the US in the past 20 years and three times as fast in the past 10, its gap with US levels is still twice as large Emerging Europe and Latin America. The challenges for enhancing productivity will be country-specific, but are linked to improvements in combining capital, labor, and technology. Previous editions of the EAP regional update have found: 18 World Bank (2011) “Navigating Turbulence, Sustaining Growth,� East Asia and Pacific Economic Update, Volume 2, pps. 37–38. WORLD BANK EAST ASIA AND PACIFIC ECONOMIC UPDATE 2012, VOL. 1 III. REBALANCING IN A CHANGING WORLD 39 On the surface, dependence on trade with the Euro zone for East Asian countries is about half the magnitude of trade with China, and lower than China’s direct exposure to demand from the Euro zone (Figure 2). This, however, conceals important indirect effects. The East Asian region is a closely-knit supply network and China functions as a form of advanced reloading site, where intermediate parts are assembled for export and for final consumption, largely in Europe and the US. The elasticity (measuring sensitivity) of East Asian countries’ exports to China to Chinese exports to Europe is even higher than the elasticity of trade with China. This suggests that the advanced economies, proxied by Euro zone member countries in this case, are a considerably larger source of demand for East Asian exports through indirect effects, in addition to the direct trade channels. While direct dependence on trade with Europe Box Figure 3. Electronics from more sophisticated exporters find is relatively constant across the region, there is a their way through China to Europe noticeable degree of variation in indirect dependence elasticity, index (Figure 3). The Northeast Asian countries, South Korea 1 KOR JPN and Japan, have particularly high indirect exposure, 0.9 MYS significantly more so than Southeast Asian countries like Vietnam. According to Yukon Huang, a former 0.8 THA PHL World Bank Country Director for China, the reason 0.7 y= -0.5 + 2.0x for this is that ‘these countries export technology- HKG 2 R =0.75 0.6 intensive components to China, which possesses IDN the scale required for assembling them into finished 0.5 products finally sold to the West.’16 Southeast 0.5 0.6 0.7 0.8 Asian countries, on the other hand, compete with sophistication of exports index China’s comparative advantage, making China a less Source: CEIC, and World Bank staff calculations. Note: Elasticity of Chinese E&E exports to Europe vs Chinese E&E imports from EAP favorable reloading site for them. Indeed, plotting countries. Sophistication of exports index based on Lall et al. (2006). elasticities of electrical and electronics exports to the Euro zone through China against an index of export sophistication17 confirms this relationship; the more sophisticated the exports, the more trade with Europe is channeled through China (Figure 3). Less sophisticated goods may indeed remain in China for domestic consumption. Source: World Bank staff. 16 Lall, Sanjaya, John Weiss, and Jinkang Zhang (2006) ‘The �sophistication� of exports: A new trade measure’ World Development 34(2)222-237. 17 Huang, Yukon (2012) ‘In the Middle Kingdom’s Shadow’ The Wall Street Journal March 26. Figure 81. Labor productivity has grown across the region with Figure 82. …yet, labor productivity still lags other China experiencing explosive growth… developing regions GDP per person employed (Index, 1990=100) GDP per person employed (constant USD 1990 PPP) as a percentage of the US level 550 80 9 500 70 8 450 60 7 400 6 50 350 5 40 300 4 30 250 3 200 20 2 150 10 1 100 0 0 EAP LAC ECA OECD 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 KHM VNM PHL IDN median CHN THA median median MYS median Cambodia China Indonesia Malaysia Philippines 1990 2010 Average annual compound growth, %, 1990–2010 (rhs) Thailand Vietnam ECA, median LAC, median OECD, median Sources: ILO Key Indicators of the Labor Market. World Bank staff calculations. Sources: ILO Key Indicators of the Labor Market. World Bank staff calculations. CAPTURING NEW SOURCES OF GROWTH 40 III. REBALANCING IN A CHANGING WORLD • Improving the quality and quantity of investment will be crucial to boasting productivity. The share of investment to output is below 1997 levels in many countries while only a few countries meet or exceed the global middle-income average in the quality in public investment management.19 • Infrastructure investment will need to be a big part of this story. For many countries in developing East Asia, stocks of infrastructure per capita are below lower- to middle-income country averages. 20 Many countries have fiscal space to increase government spending, even if it is less than before the 2007/08 crisis (see fiscal section), yet it will be key to ensuring that increased public expenditure is directed towards productive investment and does not crowd out private sector activity. • Productivity is built on the skills of the workforce. Tertiary education enrollment is the region’s middle-income economies are on par with countries of similar incomes yet below that of the OECD. Quality may need to be addressed in many countries; the performance of East Asian students in middle-income countries is below international average in reading and science. 21 Enhancing productivity must be linked with enhanced regional integration so that firms have the ability to trade and obtain financing, and acquire skills from abroad. Generally, the region has done relatively well on moving towards enhanced financial and trade integration, though much more could be done in the area of labor. Looking first at finance, the median level of developing East Asia’s financial openness—measured by the sum of foreign exchange assets and liabilities as a share of GDP—has increased by over 33 percentage points of GDP over the past 10 years, led by big jumps in Malaysia and China (Figure 83). This rate of increase is about double that of Latin American countries but still below that of Emerging Europe. Market-driven integration has supported efforts to strengthen institutions and arrangements for more comprehensive regional economic cooperation. In particular, the impetus for financial integration strengthened in the face of the economic crisis through the launch of the Chiang Mai Initiative, a US$120-billion multilateral currency swap arrangement among ASEAN nations, China, Japan, and Korea. 22 Trade integration in developed East Asia has been higher than other developing regions Regional trade and investment are reasonably intense, intra-regional exports, as a portion of total exports, was 36 percent in 2010 and grew, on average, by 16 percent per year from 2000 to 2010 (Figure 84). This has been strongly driven by the emergence of regional production networks that are largely centered on China. There are still sizeable gains to be made, however; as we argued in a previous update, a re-balancing of the Chinese economy has the potential to enhance the intensity of these intra-regional flows with an increase of China’s private consumption by five percentage points of GDP will improve the trade balances of some EAP countries by as much as 0.5 percentage points of GDP. 23 Increasing the gains from labor migration represents another opportunity to increase the benefits of regional integration as well as improve the lives of the region’s labor migrants. 24 Remittance flows in the region are huge and expanding faster than those to the developing world as a whole. Between 1989 and 2009, remittances 19 See World Bank (2011) “Navigating Turbulence, Sustaining Growth.� East Asia and Pacific Economic Update, Volume 2. 20 Ibid. 21 Data reported from Trends in International Mathematics and Science Study (TIMSS) in World Bank (2011) “Securing the Present, Shaping the Future,� East Asia and Pacific Economic Update, Volume 1. 22 World Bank (2011) “Securing the Present, Shaping the Future,� East Asia and Pacific Economic Update, Volume 1. 23 International Monetary Fund (2011) “China: Spillover Report for the 2011 Article IV Consultation and Selected Issues,� Washington DC. 24 This section is based on World Bank (forthcoming) International Migration and Development in the East Asia and Pacific Region, Washington DC. WORLD BANK EAST ASIA AND PACIFIC ECONOMIC UPDATE 2012, VOL. 1 III. REBALANCING IN A CHANGING WORLD 41 Figure 83. Financial integration in East Asia increased in some Figure 84. …while the region has been a leader in countries, but not all, since the 1997/8 crisis… trade integration foreign exchange assets plus liabilities (% GDP) exports plus imports (% GDP PPP) 250 120 100 200 80 150 60 100 40 50 20 0 0 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 1997 1999 2001 2003 2005 2007 2009 ECA, median LAC, median China Indonesia China Indonesia Malaysia Thailand Malaysia Thailand EAP, median ECA, median LAC, median EAP, median Sources: World Bank World Development Indicators. Assets and liabilities data from Source: World Development Indicators. Lane and Milesi-Ferretti (2007). to East Asia grew at an average annual rate of 15.8 percent as compared with 7.8 percent for the developing world. Remittances make up a sizeable proportion of the GDP in several of the countries of developing East Asia; the share of remittances in GDP range from a low of 1 percent in large countries like China or Indonesia to around 10 percent in the Philippines, and a very substantial 20 percent-to-30 percent of GDP in small island nations like Samoa and Tonga (Figure 85). Figure 85. The region is home to some of the most remittances Figure 86. Remittances have helped some countries manage dependent economies in the world macroeconomic imbalances leading 25 global recipients of migrants’ remittances and compensation of remittances, % of Past Five-Year Average Values employees (% GDP), 2010 45 30 600 40 400 25 35 200 30 20 25 0 15 20 -200 15 10 -400 10 5 -600 5 0 0 -800 LSO WSM TON HTI LBN KOSOVO GMB JAM NIC BGD PHL ALB TJK KGZ MDA BMU NPL HND SLV GUY JOR ARM BIH TGO GTM Tonga Samoa Philippines Vietnam Indonesia China GDP Current account (rhs) Source: World Bank World Development Indicators. Source: World Bank (forthcoming) International Migration and Development in the East Asia and Pacific Region, Washington DC. Migration has significant development impacts at the household level and is critical for macroeconomic management. International remittances play a critical role in stabilizing the external account and thereby reducing economic volatility. At the household level, there is evidence that remittances lead to increases in consumption and reduction in poverty rates. In Indonesia, for instance, the receipt of international remittances reduces the probability of a household being poor by 28 percent. There is also evidence of significantly higher investment in education in both Indonesia and the Philippines and in housing in the Philippines among households receiving remittance transfers. In terms of macroeonomic management, remittances financed 5 percent of imports in China and up to 99 percent of CAPTURING NEW SOURCES OF GROWTH 42 III. REBALANCING IN A CHANGING WORLD imports in Tonga. Remittances, in some years, were also more than twice the current account deficits of countries such as Vietnam and more than five times the deficits of Tonga and Samoa (Figure 86). In Vietnam, annual remittances were about half of foreign exchange reserves and around 30 percent of gross reserves in the Philippines. Migration in East Asia will become an even more salient issue in the future given the shrinking labor force in many countries. First, along with intra-regional trade and finance, international migration will become part of the resurgent drive towards the “deep� economic integration in East Asia taking place through ASEAN and various ASEAN Plus agreements. This is most explicitly recognized in the ASEAN Economic Community Goals, which include liberal labor mobility requirements for skilled workers by 2015. Second, East Asia is currently facing the onset of one of the most rapid demographic changes in history. Growth in the region has benefited from the growing the in the size of the working age population (Figure 87). However, most of the region will see this demographic contribution to growth disappear over coming decades. Rapidly-maturing working-age populations in several labor-receiving countries—such as Japan, South Korea, and even Thailand – will reduce labor supply. On the other hand, rising demand for services and non-tradable goods will increase labor demand from a number of labor-sending countries—such as Indonesia and Vietnam (Figure 88). Taken Figure 87. Growth has benefitted from a ‘demographic Figure 88. …yet much of the region will experience a decline in dividend’…. the working age population and will need to increase immigration flows average annual growth rate in GDP per capita and its components, 1997–2008 Change in working age (15–64 years) population to total population forecast for 2010–25 and net migration rate per 1000 population for 2005–10 10 20 TMP 8 10 LAO TON KHM 6 PHL 0 FJI IDN MYS 4 MMR MNG BRN -10 VNM 2 CHN JPN THA -20 0 KOR HKG SGP -2 -30 China Vietnam Mongolia Thailand Malaysia Philippines Indonesia -20 -10 0 10 20 30 GDP/EMP EMP/Working age pop Working age pop/pop GDP/pop Sources: ILO LABORSTA and World Bank World Development Indicators. Source: UN Population Prospects. Note: Growth in GDP per capita is decomposed into (1) growth in GDP per employed Note: Population forecasts reflect the medium fertility variant. person or aggregate labor productivity (GDP/EMP), (2) growth in employment as a share of the working age population or the employment rate (EMP/Working Age POP, (3) growth in the share of the working age population in the total population (Working Age POP/POP). together, these forces will create important labor shortages in a number of countries, which, if unmet, will lower economic growth and sharply increase fiscal and health costs. Moreover, it is notable that some of the countries that have benefited most from a positive demographic contribution to growth—China, Vietnam, and Mongolia—are among those expected to experience the steepest declines in their working age population over the next 38 years. Persistent income differentials between labor-sending and labor-receiving countries in the region will also add to the flow of migrant workers between countries. Given these factors, the key question concerning international migration in East Asia is not whether it is desirable, but how policies should be designed so as to positively enhance the returns of international labor flows for sending and receiving countries and migrants. WORLD BANK EAST ASIA AND PACIFIC ECONOMIC UPDATE 2012, VOL. 1 III. REBALANCING IN A CHANGING WORLD 43 However, a number of market failures make it difficult to realize these positive returns to international migration. Much of the legal migration in the region is facilitated through bilateral agreements designed to encourage temporary or circular migration. However, there are large information asymmetries between the knowledge of recruiting agencies, employing firms, potential workers, and governments. These information gaps and the demand for longer- term, rather than temporary, migration in many countries produce large incentives for undocumented migration; for example, in Malaysia, undocumented workers comprise half of the 2 million migrants, and in Thailand, it is estimated that only 47 percent (1.3 million) of migrant workers are documented or partially regularized through the registration process. Undocumented migration is very costly, as it exposes migrants to potential abuse, directs many of the gains of migration away from migrants, firms, and governments to migrant traffickers, and may produce incentives for migrants to stay longer than they would otherwise because of the absence of legal options for emigrating again once they have returned home. Improved multilateral and regional agreements that promote legal migration have significant advantages and should remain goals to work towards. Regional charters, such as the ASEAN Declaration on the Protection and Promotion of Migration, provide useful and constructive guidelines, but remain only an aspiration for now. At present, bilateral agreements on the temporary movement of persons and labor across countries provide the best prospects for enhancing international labor mobility, yet they must recognize that the labor market needs to balance supply as well as demand by allowing firms to hire the workers that they need through legal and transparent channels. CAPTURING NEW SOURCES OF GROWTH 44 country PagES and KEy indicatorS C a mb o di a like Cambodia. Cambodia experienced an 18 percent increase in the number of garment factories in 2011. Milled rice exports expanded rapidly in 2011, recording annual of growth of 250 percent and reaching 180,000 tons last year. Despite the floods, rice production is anticipated to increase on the back of increased yields in both wet and dry season production and increased planted-areas. Milled rice exports were also supported by the establishment of new mills that increased milling capacity. Population 14.1 million Foreign and private (including local) investment Population growth 1.17 percent approvals shot up by 160 percent in 2011, and continued attracting new entrants such as Japanese GDP (PPP, int’l US$ billions) 31.0 investors. Foreign direct investment approvals for GDP per capita (PPP, int’l US$) 2,078 Japanese investors accounted for US$6.4 million in Surface area 181,040 sq. km. fixed assets (three projects) compared with none in Capital Phnom Penh 2010. Cambodia’s top five investors in 2011 were the Source: World Development Indicators. UK, China, Vietnam, Malaysia, and Korea. The Cambodian economy has continued its high growth Cambodia released its first Economic Census in path as real GDP expanded by 6.9 percent in 2011 and March 2012, which showed that the country’s private is expected to grow by 6.6 percent in 2012. Cambodia sector is growing rapidly, with more than one-third has been one of the fastest growing countries in the (36 percent) of new establishments being created in world over the past ten years, experiencing average the last two years. This was reflected in a growing annual growth of over 8 percent since 2000. number of new businesses being registered with the Ministry of Commerce in 2011, where registrations The economy’s performance in 2011 was strong grew by 21 percent. About 97 percent of these firms despite destructive floods hitting the agricultural sector were microenterprises and small economic activities during the last quarter. Growth came in higher than of between 1–9 employees, while 2.6 percent were projected as a result of a recovery in the damaged medium-sized (10–99 employees), and 0.2 percent agricultural sector (which grew by 3.3 percent in 2011 were large businesses (100 or more employees). compared with an earlier forecast of 1.5 percent) and the robust expansion of exports, private investment, Private consumption represents 85 percent of GDP and and consumption. grew by an estimated 13.5 percent in 2011. Imports of cars rose by 27 percent in 2011 (car import volume rose The risks of an impact of an economic slowdown in the by 9 percent but the value of these imports increased US and EU, the two largest destinations of Cambodia’s by 27 percent, reflecting an influx of higher-end autos) key garment and textile exports, have not so far and imports of consumer goods grew by 23 percent. materialized: merchandise exports in 2011 jumped by Cambodia’s per capita expenditure rose by 37 percent 36 percent, with exports of garments and textiles up between 2004 and 2009 25 . 32 percent and reaching US$4 billion. Garment exports appear to have benefitted from a shift of labor intensive industries from China to lower wage cost countries 25 CSES 2009. WORLD BANK EAST ASIA AND PACIFIC ECONOMIC UPDATE 2012, VOL. 1 COUNTRY PAGES AND KEY INDICATORS 45 The agriculture sector proved to be resilient after the in Cambodia. Core inflation fell to 3.3 percent year- floods and production expanded by 3.3 percent in 2011. on-year after hitting a year-high point of 4 percent in Industry and service sectors grew by 14.3 percent June. In terms of tax policy, since January 1, 2011, the and 5.0 percent respectively. At the same time, real government has applied an “ad valorem tax� policy estate rose by 4.3 percent and construction was up for petroleum imports, while reducing its import duty by 6.1 percent, reflecting solid rebounds from the sag rate significantly, as opposed to a “fixed-price� tax on in demand during a financial crisis of 2010 that had petroleum imports. This would mean that any price triggered a contraction in these sectors. fluctuations are now a reflection of world markets. Any policy to reduce the tax rate on petroleum imports Tourist arrivals in 2011 rose 15 percent to 2.9 million would benefit public consumers as a whole, but would visitors, with the temple complex of Angkor Wat alone benefit high-income households disproportionately as drawing 60 percent of these visitors. The country’s Cambodia’s wealthiest consume 15 times more than tourism receipts were estimated to grow by 7 percent that the poorest quintile 26 . However, the consumer to nearly US$2 billion in 2011. price inflation rate in Cambodia remains within the government target of 5 percent annual increase. Overall, Prospects for 2013 are very positive, with GDP growth price inflation is projected at around 5 percent in 2012. expected to come in at 6.7 percent. Growth will be driven by vibrant private sector activities, mainly in the service The nominal exchange rate has been very stable for sector (trade, banking, real estate, and construction), nearly a decade, and is traded at 4,039 riel per US dollar some agriculture activities (rice milling), and industry. at the end of 2011. Cambodia’s exchange rate policies In terms of the latter, the export-oriented textiles and continue to pursue price stability; the National Bank of garments manufacturers are likely to continue to record Cambodia (Cambodia’s central bank) has intervened strong performances. in currency markets, injecting some US$240 million of local currency into the market during 2011. By the The external sector has improved. The 2011 trade end of 2011, local currency in circulation accounted deficit fell to 12.4 percent of GDP from 14.1 percent of for nearly US$950 million, or 31 percent of its gross GDP in 2010, reflecting stronger net exports. The trade reserves. Exchange rate stability has been a key factor deficit-to-GDP ratio is expected to edge down further in leading the central bank to keep the riel tightly linked in 2012. Inflows of foreign direct investment registered to the US dollar, with fluctuations limited to a band of dynamic gains last year, accounting for 10.3 percent of plus or minus one percent. GDP, as a result of strong investment in tourism and industry (led by light manufacturing). Gross foreign The financial sector has continued to expand in spite of reserves expanded 14 percent, reaching US$3 billion the high level of dollarization. New commercial banks (23.4 percent of GDP or 4.5 months of imports) by continue to enter the market, with 35 institutions the end of 2011, and this momentum is expected to operational by the end of 2011. While dollarization has continue in 2012 with reserves projected to reach played an important role in maintaining the confidence US$3.4 billion. of depositors, the degree of dollarization actually edged down slightly, by 0.5 percentage points in 2011 in terms Price stability was maintained in 2011 despite the of the ratio of foreign currency deposits to broad money recent volatility of global food prices. There has been in 2011. some recent inflationary pressure as a result of higher imported oil prices, however Cambodia’s consumer price inflation cooled a little to 4.9 percent year-on- year in 2011, due to lower food prices; food prices account for nearly half of the consumer price inflation 26 CSES 2009. CAPTURING NEW SOURCES OF GROWTH 46 COUNTRY PAGES AND KEY INDICATORS Bank lending has also gained momentum after a The government also has strengthened fiscal slowdown through 2009 and 2010, reflecting the management. After expansionary fiscal policy was recovery of private sector vibrancy. Credit to the private introduced during the 2009 crisis, fiscal consolidation sector rose by an average of 28 percent per month proceeded in 2010 and 2011 with better-than- over the past 12 months. The ratio of loans-to-deposits anticipated reductions in deficits, and more aggressive rose from 74 percent in 2010 to 82 percent in 2011, cutbacks in non-essential current expenditures. The indicating stronger growth of private sector activities pace of fiscal performance in 2011 has been consistent last year. Noticeably, this lending increase was mainly with macroeconomic stability, with the fiscal deficit directed to sectors such as agriculture, manufacturing, (excluding grants) gradually reduced from 7.5 percent construction, and mortgages (home loans). The growth of GDP in 2010 to an estimated 6.0 percent of GDP in potential of Cambodia’s banking and financial markets 2011, and with higher spending on priority (productive) is expected to become more dynamic this year, as sectors. The fiscal deficit for 2012 is projected to be the Cambodian Securities Exchange (CSx) officially similar to the level of 2011. However, achieving better launched on July 11, 2011, and a first listing was fiscal consolidation in the medium-term remains scheduled for an initial public offering in April 2012. a challenge for the country, particularly in 2012 as Cambodia addresses reconstruction spending needs The Credit Bureau Cambodia was launched in March due to the floods, as well as commune elections 2012, to reduce credit risk and support the growth of the in June 2012. As a chair of ASEAN 2012, it hosts a banking system. It boasts a new centralized computer number of meetings including the ASEAN summits in information system that contains data on all loans and April and November this year, and also general elections credit issued by all banks and microfinance institutions in 2013. (MFIs) in Cambodia. The credit bureau will allow banks and MFIs to access borrowers’ credit histories, helping It is important to rebuild fiscal space through revenue banks to better gauge their credit risk. measures to cope with these expected outlays. The first priority in this regard is to enhance revenue collection, Flexible fiscal and economic policy helped mitigate the reduce the fiscal deficit, and rebuild the stock of effects of internal and external shocks. Government government deposits. Government deposits with the policy has proven to be fast and nimble in response central bank fell from US$732 million (or 7.1 percent to past crises and shocks: the response to the 2009 of GDP) at the end of 2008 to US$540 million (or financial crisis and 2011 floods included expansionary 5.2 percent of GDP) at the end of 2009. This reflected fiscal policy (including the introduction of appropriate the impact of the government’s response to the fiscal stimulus through amending the Budget Law financial shocks and floods. As the economy recovers in May 2009 to stimulate spending to mitigate the and growth accelerates, it is imperative to rebuild this downside risk of the external shock) and supportive reserve to its pre-crisis level to restore this important social program spending (reallocations from non- cushion. Government reserves stood at 4 percent of priority to priority and flood-affected sectors). In the GDP (equivalent to US$526 million) at the end of 2011. 2012 Budget Law, a retrospective approval was made for budget responses to the floods in 2011. WORLD BANK EAST ASIA AND PACIFIC ECONOMIC UPDATE 2012, VOL. 1 COUNTRY PAGES AND KEY INDICATORS 47 Cambodia Key Indicators 2008 2009 2010 2011e 2012f 2013f Year Year Year Year Year Year Output, Employment and Prices Real GDP (% change y-y) 6.7 0.1 6.0 6.9 6.6 6.7 Domestic demand (% change y-y) 18.3 2.7 10.7 12.5 13.0 13.4 Industrial production index (2000=100) 256 231 263 300 323 349 (% change y-y) 4.0 -9.5 13.6 14.3 7.5 8.0 Unemployment (%) 1.7 .. .. .. .. .. Consumer price index (% change y-y) 12.5 5.3 3.1 4.9 5.0 5.0 Public Sector Government revenues (% GDP) 12.0 12.0 13.1 13.1 13.4 13.5 Government expenditures (% GDP) 14.8 20.4 20.6 19.1 19.2 19.1 Government balance (% GDP) -2.8 -8.4 -7.5 -6.0 -5.8 -5.6 Foreign Trade, BOP and External Debt Trade balance (millions US$) -1,584 -1,494 -1,582 -1,603 -1,736 -1,793 Exports of goods (millions US$) 3,493 2,996 3,884 5,277 5,831 6,530 (% change y-y) 7.6 -14.2 29.7 35.8 10.5 12.0 Key export (% change y-y) 1/ 3.3 -19.0 24.4 31.7 15.0 15 Imports of goods (millions US$) 5,077 4,490 5,466 6,879 7,567 8,324 (% change y-y) 12.4 -11.6 21.7 25.9 10.0 10.0 Current account balance (millions US$) -1150 -1,066 -1,171 -912 -1,400 -1,500 (% GDP) -11.1 -10.2 -10.4 -7.0 -9.9 -9.7 Foreign direct investment (millions US$) 2/ 795 525 762 1,332 1,399 1,407 External debt (millions US$) 2,776 2,946 3,206 3,611 3,992 4,336 (% GDP) 27 28 29 28 28 28 Short-term debt (millions US$) 323 265 262 264 268 270 Debt service ratio (% exports of g&s) 1.2 1.5 1.4 1.2 1.2 1.4 Foreign exchange reserves, gross (millions US$) 2,164 2,367 2,653 3,032 3,395 3,803 (months of imports of g&s) 4.3 4.4 4.5 4.5 4.5 4.5 Financial Markets Domestic credit (% change y-y) 51.1 19.9 35.3 37.7 25.0 25.0 Short-term interest rate (% p.a.) 15.8 15.0 15.0 15.0 15.0 15.0 Exchange rate (Riel/US$, eop) 4,081 4,169 4,053 4,039 4,100 4,100 Real effective exchange rate (2000=100) 122.8 123.0 122.5 123.0 124.0 .. (% change y-y) 17.1 0.2 -0.4 0.4 0.8 .. Memo: Nominal GDP (millions US$) 10,352 10,402 11,242 12,949 14,075 15,468 Sources: National data sources, IMF, and World Bank staff estimates e = estimate p = projection 1/ Garments 2/ From 2011, includes FDI related to public-private power sector projects CAPTURING NEW SOURCES OF GROWTH 48 COUNTRY PAGES AND KEY INDICATORS C hin a China’s overall inflation over past years—receded as one-off factors faded. Non-food inflation eased in line with the global and domestic slowdowns. As a result, consumer price inflation slowed from 6.5 percent in July 2011 to 3.6 percent in March 2012, while producer prices have stabilized. Wage growth remained robust, but the continued rapid rise in labor productivity acted to dampen growth of unit labor costs. The balance of payments position softened as manufacturing exports slowed, while commodity prices remained high. The trade balance fell from Population 1.338 billion 4.4 percent of GDP in 2010 to 3.4 percent in 2011, and Population growth 0.5 percent even registered a slight deficit in early 2012. Foreign direct investment weakened as uncertainty built. These GDP (PPP, int’l US$ billions) 10,169.5 developments curbed foreign exchange accumulation, GDP per capita (PPP, int’l US$) 6,863 as well as the pace of nominal and real exchange rate Surface area 9,598,088 sq. km. appreciation. Capital Beijing Source: World Development Indicators. The near-term outlook is expected to remain dominated by external weakening and further property market The Chinese economy continued to cool during the adjustment. As a result, GDP growth is projected to latest period, with GDP growth falling from 10.4 percent fall further to 8.2 percent in 2012, before rebounding in 2010 to 9.2 percent in 2011. Weaker investment and somewhat to 8.6 percent in 2013. Domestic demand net exports trimmed 0.6 and 1.5 percentage points will contribute around 8.4 percentage points to growth respectively from the 2011 GDP expansion, while in 2012 as consumption growth slows slightly and consumption partly offset their decline by adding investment growth decelerates rather sharply. As world 1.0 percentage point. This slowdown has continued trade is expected to remain weak, external demand will into early 2012, with growth for the first quarter coming subtract some 0.3 percentage points from growth. The in at only 8.1 percent year-on-year. projected rebound remains modest, as these trends are likely to weigh on 2013 as well. Slow growth in the Euro area and a sluggish US recovery limited the contribution of net exports, as Consumer price inflation is projected to slow from export growth slowed more rapidly than import growth. 5.4 percent in 2011 to 3.2 percent in 2012, as growth Domestically, tighter monetary and credit policies aimed eases, commodity-price impulses fade, and asset values at containing inflation (particularly assets and goods) deflate further. China’s external terms of trade will likely worked to dampen growth in investment, particularly in improve as import prices dependent on commodities infrastructure and real estate. In contrast, consumption decelerate by more than export prices dominated by growth remained robust as consumer confidence manufactures. Exchange rate appreciation is expected remained buoyant, labor market fundamentals were to slow as long as the weak external environment strong, and household income continued to grow continues to weigh on export volumes and prices. rapidly. The current account surplus should increase slightly Inflation, a key policy concern over 2011, is back on a from 2.8 percent of GDP in 2011 to 3.0 percent in 2012, declining trend. Food inflation—the key contributor to and 3.3 percent in 2013. In 2012, beneficial terms of WORLD BANK EAST ASIA AND PACIFIC ECONOMIC UPDATE 2012, VOL. 1 COUNTRY PAGES AND KEY INDICATORS 49 trade changes offset an initially lower trade balance Monetary policy could also be adjusted on the margin. driven by export weakness and import robustness. Reserve requirements could be tweaked further to Stronger growth in trade volumes and further terms of ease the availability of credit, with policy rate action trade improvements would drive the increase in 2013. best reserved for downside scenarios given already- Despite continued net capital inflows, foreign exchange accommodative real rates. Ongoing administrative reserves are seen accumulating more slowly. efforts have been helpful in cooling the property market, but would preferably be phased out in favor of While our central projection shows a gradual slowdown, market-based measures that raise the cost of capital risks are tilted towards the downside and concentrated and expand the range of investment opportunities. in two areas. First, while financial market concerns have recently eased, a key external risk remains the China’s longer-term challenge is to continue steering ability of high-income countries to avert a deeper its economy towards a more sustainable path. As the economic downturn. A further slowing of demand traditional engines of growth weaken, GDP growth among countries in the Organization for Economic should gradually slow. China will see major demographic Cooperation and Development (OECD) would ripple change over time, with the labor force expected to soon quickly through East Asia’s production and trade shrink. Investment rates are already extremely high networks, where China occupies a central position. and cannot be increased much further without adverse Second, the main domestic downside risk arises from social and environmental consequences. Finally, total the ongoing correction in China’s property markets, factor productivity growth would likely soften as even though such an adjustment has so far remained efficiency gains from first-generation reforms wane and gradual and orderly. technology gaps with high-income economies narrow. China’s near-term policy challenge is to sustain growth Given the anticipated slowdown, policies should aim to through a soft landing. The ongoing slowdown is partly reinvigorate the underlying drivers of growth through welcome to the extent that it reflects a deceleration in more efficient allocation and use of factors, reform, growth from above-potential levels. While the prospects and enhanced competition in the enterprise sector, as for a gradual slowdown remain high, there are concerns well as further improvements in China’s human capital, that growth could slow too quickly. However, sufficient and efforts to progressively shift from low-cost to policy space exists to respond to downside risks. In higher-value, supported by innovation. In view of the addition, given heightened levels of uncertainty, policy social, environmental, and external imbalances that should remain highly flexible, with frequent but gradual have accompanied rapid growth and structural change, adjustments as new data become available. this would also require sustaining the ongoing shift in focus from the rate of growth towards the quality of Given China’s still significant fiscal space and the already development. accommodative monetary stance, the burden of any countercyclical response should fall on fiscal policy. The 12th Five-Year Plan supports these directions and The policy response would need to be crafted with lays out an ambitious agenda of structural reform. The longer-term effects and objectives in mind. Relative to recent China 2030 study by the Development Research previous episodes, fiscal stimulus would ideally be less Center and the World Bank builds on these strategic credit-fueled, less local government-funded, and less directions and provides ideas on how they could be infrastructure-oriented. Fiscal measures to support undertaken. consumption, such as targeted tax cuts, social welfare spending and other social expenditures, should be viewed as the first priority. CAPTURING NEW SOURCES OF GROWTH 50 COUNTRY PAGES AND KEY INDICATORS China Key Indicators 2009 2010 2011 2012f 2013f 2011 2012 2011 2012 Year Year Year Year Year Q1 Q2 Q3 Q4 Q1 Dec Jan Feb Mar Apr Output, Employment and Prices Real GDP (% change y-y) 9.2 10.4 9.2 8.2 8.6 9.7 9.5 9.1 8.9 8.1 .. .. .. .. .. Industrial production index /1 .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. (% change y-y) 8.7 12.1 .. .. .. 14.3 13.9 13.8 18.1 17.5 12.8 11.4 11.4 11.9 9.3 Unemployment (%) 2/ 4.3 4.1 .. .. .. 4.1 4.1 .. 4.0 4.0 .. .. .. .. .. Real wages (% change y-y) 12.4 9.7 .. .. .. .. .. .. .. .. .. .. .. .. .. Consumer price index (% change -0.7 3.3 5.4 3.2 3.6 7.1 6.9 .. 2.6 4.4 4.1 4.5 3.2 3.6 3.4 y-y) Public Sector Government revenues (% GDP) 20.1 20.7 22.0 22.1 22.2 .. .. .. .. .. .. .. .. .. .. Government expenditures (% GDP) 22.4 22.4 23.1 23.9 23.7 .. .. .. .. .. .. .. .. .. .. Government balance (% GDP) -2.8 -1.7 -1.1 -1.9 -1.5 .. .. .. .. .. .. .. .. .. .. Domestic public sector debt (% 17.7 16.8 20.0 .. .. .. .. .. .. .. .. .. .. .. .. GDP) /3 Foreign Trade, BOP and External Debt Trade balance (billions US$) 198.2 184.5 157.9 .. .. -0.7 46.7 62.9 73.2 76.0 16.5 27.3 -31.5 5.3 18.4 Exports of goods (billions US$) 1,202.0 1,578.4 1,899.3 .. .. 399.7 474.8 518.3 331.6 339.8 174.7 149.9 114.5 165.7 163.2 (% change y-y) 4/ -15.9 31.3 20.3 .. .. 26.4 22.0 20.7 26.2 22.2 13.3 -0.5 18.3 8.8 4.9 Key export (% change y-y) 5/ -15.7 31.4 20.2 .. .. 26.1 21.9 .. 26.9 22.4 13.1 -0.5 17.4 10.0 .. Imports of goods (billions US$) 1,003.9 1,393.9 1,741.4 .. .. 400.4 428.1 455.4 258.3 263.7 158.2 122.7 146.0 160.3 144.8 (% change y-y) 4/ -11.3 38.9 24.9 .. .. 32.8 23.1 24.9 20.7 25.4 12.1 -15.0 40.3 5.4 0.3 Current account balance (billions 297.1 305.4 201.1 245.0 315.0 .. .. .. .. .. .. .. .. .. .. US$) (% GDP) 6.0 5.2 2.7 3.0 3.3 .. .. .. .. .. .. .. .. .. .. Foreign direct investment (billions 94.1 105.7 116.0 .. .. 30.3 30.6 .. 17.2 30.3 12.2 10.0 7.7 11.8 8.4 US$) /6 External debt (billions US$) 428.6 548.9 .. .. .. .. .. .. .. .. .. .. .. .. .. (% GDP) 8.6 9.3 .. .. .. .. .. .. .. .. .. .. .. .. .. Short-term debt (billions US$) 259.3 375.7 .. .. .. .. .. .. .. .. .. .. .. .. .. Debt service ratio (% exports of .. .. 2.87 1.6 .. .. .. .. .. .. .. .. .. .. .. g&s) Foreign exchange reserves, gross 2,405.7 2,853.8 3,187.6 3,606.0 4,086.0 3,051.3 3,204.1 .. 1,440.2 1,534.8 3,187.7 3260.2 3,316.3 3,311.6 .. (billions US$) (months of imports of g&s) 18.1 15.6 22.0 .. .. 91.5 89.8 .. 66.9 69.8 20.2 26.6 22.7 20.7 .. Financial Markets Domestic credit (% change y-y) 31.7 19.9 14.3 .. .. 17.9 16.9 .. 17.1 16.1 15.8 15.0 15.2 15.7 15.4 Short-term interest rate (% p.a.) 7/ 2.8 3.3 3.3 .. .. 3.3 3.3 3.3 3.3 3.3 3.3 3.3 3.3 3.3 3.3 Exchange rate (RMB/US$, eop) 6.83 6.62 6.30 .. .. 6.57 6.48 6.38 6.33 6.31 6.30 6.31 6.29 6.29 6.28 Real effective exchange rate 104.7 109.1 116.1 .. .. 107.0 106.7 .. 98.4 97.7 116.1 115.3 116.0 115.2 .. (2000=100) (% change y-y) -5.0 4.2 6.3 .. .. 1.7 -1.5 .. 5.1 4.5 6.3 7.4 5.5 7.6 .. Stock market index (Dec. 19, 3,277 2,808 2,199 .. .. 2,928.1 .. .. 5,552.3 5,261.6 2,199.4 2,292.6 2,428.5 2,262.8 2,199.4 1990=100)/8 Memo: Nominal GDP (billions US$) 4,990.5 6,031.8 7,451.9 .. .. .. .. .. .. .. .. .. .. .. .. Source: National data sources f = forecast 1/ Annual data are not comparable with the quarterly and monthly data. Annual data cover all industrial enterprises while the quarterly and monthly ones only refer to those enterprises with sales value above RMB 5.0 million. 2/ Official urban unemployment only, not including laid-off workers 3/ Includes treasury bonds, policy financial bonds and other financial bonds (end-period outstanding) 4/ Nominal growth rate 5/ Manufactured exports 6/ Gross FDI utilized 7/ Central Bank loans to financial institutions, less than 20 days 8/ Shanghai Stock Exchange A-Share Price Composite WORLD BANK EAST ASIA AND PACIFIC ECONOMIC UPDATE 2012, VOL. 1 COUNTRY PAGES AND KEY INDICATORS 51 F i ji Nadi, which might constrain growth in the tourism sector after the 6.8 percent increase in tourist arrivals experienced in 2011. Inflation picked up sharply in 2011, but is expected to moderate in 2012. Inflation accelerated steadily from 5.9 percent in January 2011 to a peak of 10.4 percent in August, before easing to 7.7 percent by the end of 2011. The upward trend was largely driven by elevated global food and oil prices, an increase in the value-added tax rate, and an upward revision of the electricity tariff. As the impact of one-off factors wears off, inflation Population 860,000 should moderate to a rate under 5.0 percent by the Population growth 1.0 percent end of 2012. The Fijian economy remains vulnerable to adverse international price developments, given around GDP (PPP, int’l US$ billions) 4.0 two-thirds of inflation is imported. GDP per capita (PPP, int’l US$) 4,647 Surface area 18,270 sq. km. The current account deficit is projected to narrow from Capital Suva an estimated 12 percent of GDP in 2011, to under Source: World Development Indicators. 10 percent of GDP in 2012. Higher commodity prices have contributed to the weak external balances in After four years of negative or low growth, Fiji’s recent years. Domestic exports could grow on the back economy is estimated to have grown by around of strong demand for commodities, garments, and food 2 percent in 2011. A fragile domestic investment stuffs from its neighbors. Import growth is expected environment resulting from prolonged economic and to be weak given subdued consumption. Services and political uncertainties, unfavorable weather events, and income receipts are expected to continue growing in continued weakness in the sugar industry contributed line with growth in tourism and remittances. Foreign to the earlier lackluster economic performance. reserves remain adequate, at around five months of The turnaround in 2011 was driven by the continued import cover, and are expected to remain above four strength of the tourism sector, as well as the stronger months of import cover in 2012. The Real Effective performance of the agriculture sector, which recovered Exchange Rate rose by 4 percent in 2011, indicating well from the 2010 cyclones. This included limited a loss in global competitiveness that was mainly improvements in the sugar industry, both in terms of attributable to the increase in inflation. production and mill efficiency. Indicators of investment activity in Fiji have remained Fiji’s economy is projected to experience broad-based weak, and uncertainty in respect of the political situation growth, resulting in a 1.5 percent increase in GDP in is likely to continue to constrain investment. The 2012. Western Fiji experienced floods in both January Reserve Bank of Fiji (RBF) estimates that investment and April 2012, and although as yet it is still too early to was around 14.0 percent of GDP in 2011, below the assess any economic impact from these events, they peak of 18.3 percent in 2005, and substantially beneath could negatively impact the agriculture and tourism than the government’s target of 25 percent of GDP. A industries. The floods affected crops, including cane, higher allocation for capital expenditure in the 2012 which could result in the government missing its budget and potential mining and tourism-related projects targeted 10 percent growth in sugar exports in 2012. might provide some support to investment activity The floods also hit the country’s tourism gateway, in 2012. Credit growth remains sluggish, however, CAPTURING NEW SOURCES OF GROWTH 52 COUNTRY PAGES AND KEY INDICATORS despite ample liquidity in the system, reportedly due Persistent fiscal deficits in recent years have caused to a lack of viable projects. In February 2012, the RBF a steady increase in Fiji’s public debt. Debt is introduced a new policy measure to increase lending currently estimated at 54.2 percent of GDP and the by requiring commercial banks to allocate 4 percent of government faces contingent liabilities equivalent to their deposits to the agriculture sector and 2 percent 17.5 percent of GDP. The authorities announced their to renewable energy. It is too early to judge the impact intention to issue Fiji Infrastructure Bonds of around of this measure. Foreign investment is expected to FJD196 (US$108 million) in the domestic market, remain weak in the medium-term, although this may commencing February 2012, with maturities ranging change if political uncertainties are reduced, helping to from 2–15 years. Around three-quarters of public bolster investor confidence. debt is held domestically, mostly by the Fiji National Provident Fund. In March 2012, the Fund implemented Consumption indicators showed a mixed performance a new set of pension annuitization rates (between in 2011, and no clear trend is expected to emerge in 8.7–12.1 percent), following an assessment that the old 2012. The growth in remittances—estimated to have rates (between 15–25 percent) were unsustainable and been around 5 percent in 2011 in US dollar terms—has created unfunded liabilities. been supportive of consumption activity. However, a decline in new lending for consumption purposes Policy space to respond to future shocks is limited. High (6.4 percent in the year to September 2011), and the government debt is likely to constrain the government’s marginal growth in retail sales (0.2 percent in the year ability to resort to fiscal stimulus. In addition, the space to September 2011) indicates cautiousness in consumer for further monetary easing is constrained, given spending. The increase in public investment and the policy rate is now set at 0.5 percent after three reduction in marginal tax rates in 2012 could support reductions in 2011, and because the weak transmission consumption, but may be partially offset by weak labor mechanism in Fiji limits the impact of monetary market conditions. easing. The fiscal deficit is budgeted to fall to around 2 percent of GDP in 2012 from an estimated 3.5 percent in 2011, despite a substantial capital expenditure boost. The narrowing of the budget deficit is on account of a reduction in expenditure on Fiji Sugar Corporation restructuring costs and a projected increase in revenues (despite reductions in marginal tax rates). Some risks to achieving budget targets include optimistic forecasts of the impact of the change in marginal tax rates, revenue losses from customs duty concessions, slow progress in implementation of revenue administration measures, and the emergence of additional funding requirements associated with weather events. However, in recent years the government has had difficulties in implementing planned capital projects, a trend that may improve the budget balance in 2012, but at the cost of infrastructure development and flow-on growth effects. WORLD BANK EAST ASIA AND PACIFIC ECONOMIC UPDATE 2012, VOL. 1 COUNTRY PAGES AND KEY INDICATORS 53 Fiji Key Indicators 2008 2009 2010 2011e 2012f 2013f Year Year Year Year Year Year Output, Employment and Prices GDP (% change y-y) 1,0 -1,3 -0,2 2,0 1,5 1,7 Tourist arrivals (thousands) 585 542 632 675 .. .. (% change y-y) 8,4 -7,3 16,5 6,8 .. .. Unemployment rate (%) 7,7 9,4 .. .. .. .. Consumer price index (% change y-y) 6,6 6,8 5,0 7,7 4,8 4,2 Public Sector Government revenues (% GDP) 25,5 25,0 25,3 25,2 25,6 24,3 Government expenditures (% GDP) 25,3 29,6 27,4 28,7 28,1 26,4 Government balance (% GDP) 1/ -0,1 -4,5 -2,4 -3,5 -1,9 -1,5 Domestic public sector debt (% GDP) 2/ 42,1 46,2 46,6 41,3 39,6 38,1 Foreign Trade, BOP and External Debt Trade balance (millions US$) -1,177 -676 -773 -856 -816 -1198 Exports of goods (millions US$) 497 393 551 644 702 716 (% change y-y) 25,8 -21,0 40,3 16,9 9,0 2,0 Key export (% change y-y) 3/ 35,5 -38,6 -43,8 33,3 19,4 15,1 Imports of goods (millions US$) 1,980 1,241 1,541 1,759 1,757 2151 (% change y-y) 26,1 -37,3 24,2 14,1 -0,1 22,4 Current account balance millions US$) -649 -219 -358 -421 -361 -707 (% GDP) -18,1 -7,6 -11,3 -11,9 -9,8 -18,6 Foreign direct investment (millions US$) 362 134 189 200 185 193 Total external debt (millions US$) 4/ 450 430 464 612 672 857 (% GDP) 13,9 14,7 14,6 17,3 18,3 22,6 Short-term debt (millions US$) .. .. .. .. .. .. Central government debt service ratio (% exports of 1,9 2,2 1,4 16,6 1,2 1,0 g&s) 5/ Foreign exchange reserves, gross (millions US$) 6/ 317 566 716 761 738 712 (months of imports g&s) 1,8 4,4 4,4 4,6 4,4 3,6 Financial Markets Domestic credit (% change y-y) 7/ 11,2 0,2 3,2 6,0 .. .. Short-term interest rate % p.a.) 0,3 7,1 3,5 2,2 .. .. Exchange rate (FJ$/US$, eop) 1,8 1,9 1,9 1,8 .. .. Real effective exchange rate (2005=100) 102 90,5 87,9 91,3 .. .. (% change y-y) 2,6 -11,3 -2,9 3,9 .. .. Memo: Nominal GDP (millions US$) 3,590 2,879 3,173 3,546 3,671 3,795 Source: National data sources e = estimate f = forecast 1/ Government balance below the line. 2/ Excluding Fiji Sugar Corporation 3/ Sugar. 4/ External debt inclusive of external debt by statutory bodies. Rise in extnal debt reflects drawdown of the US$250 million global bond. 5/ Rise in debt service ratio in 2011 reflects the maturity of the US$150 million global bond, which was refinanced and a new bullet bond repayment is expected in 2016. 6/ Includes foreign assets of non-bank financial institutions. 7/ Domestic credit to the private sector. CAPTURING NEW SOURCES OF GROWTH 54 COUNTRY PAGES AND KEY INDICATORS in don e s i a welcome move away from the quantitative restrictions in the original budget. After much debate, parliament allowed the option of a fuel price increase of one-third to IDR 6,000 per liter subject to the condition that the average, over six months, of the Indonesian crude oil price is 15 percent above the budgeted assumption of US$105.00 per barrel (i.e. US$120.80 a barrel). Concern over the rising fiscal burden of energy subsidies reflects the recent sharp upward movement in international oil prices, but also the sustained increases in domestic fuel consumption, in line with Indonesia’s rising domestic incomes and vehicle usage. Population 229.8 million Population growth 1.0 percent Without a fuel price adjustment and assuming oil prices of US$120 per barrel, the World Bank estimates that the GDP (PPP, int’l US$ billions) 1,037.5 budget deficit could move up to just above 3 percent GDP per capita (PPP, int’l US$) 4,085 of GDP. In 2011, the realized (unaudited) government Surface area 1,904,570 sq. km. deficit came in at IDR 90 trillion, or 1.2 percent of GDP, Capital Jakarta well below the revised budget level of IDR 151 trillion Source: World Development Indicators. (2.1 percent of GDP). This outcome reflected under- spending in core government programs that more than Real sector performance has continued to be strong offset higher spending on energy subsidies. The deficit since our November 2011 update. Indonesia’s growth in the proposed and approved revised 2012 budget was came in at 6.5 percent in the fourth quarter of 2011, 2.2 percent of GDP, up from 1.5 percent in the original and has accelerated on a seasonally-adjusted, quarterly 2012 budget as a result, primarily, of higher energy basis. Annual growth in 2011 was also 6.5 percent, subsidies. However, the World Bank estimates that if the highest annual growth rate since 1996, up from oil prices average US$120 a barrel over the year, the 6.1 percent in 2010. Investment was the major growth deficit for 2012 could rise to 3.1 percent of GDP if there driver in the final quarter, while private consumption, is no subsidized fuel price adjustment, or 2.5 percent although slowing modestly, continued to make a strong of GDP if a fuel price rise is implemented in the third contribution to growth. Reflecting weakening external quarter of 2012. demand, but robust domestic demand and imports, net exports detracted from seasonally-adjusted quarterly Additional spending on fuel subsidies represents growth. The strength of domestic demand continues significant opportunity costs, but not necessarily a short- to support growth in services sectors, such as trade, term fiscal sustainability problem given Indonesia’s transport, and communications. Non-oil and gas strong initial debt position. However, the risk of hitting manufacturing performed particularly strongly, with Indonesia’s deficit limit of 3 percent of GDP might prompt year-on-year growth moving up to 7.4 percent in the a tightening in spending in key development areas. The fourth quarter of 2011. greater uncertainty and complexity of the approach to fuel price adjustment also clouds the inflation and Responding to the weakening external environment macro-policy outlook for investors. Furthermore, while and higher oil price, the government brought forward recognizing the progress made on such a politically to early March the submission of its revised 2012 sensitive topic, the decision not to increase prices budget to parliament. The government’s proposal to now represents a missed, or delayed, opportunity to increase the subsidized fuel price from April 2012 was a redirect spending at a time when risks remain in the WORLD BANK EAST ASIA AND PACIFIC ECONOMIC UPDATE 2012, VOL. 1 COUNTRY PAGES AND KEY INDICATORS 55 global economy. For example, in 2011 Indonesia spent number of restrictive changes to regulations have 3.4 percent of GDP on energy subsidies (2.2 percent been put in place or proposed, affecting, for example, on fuel and 1.2 percent on electricity subsidies), and horticulture imports or exports and investment in the only 1.6 percent and 1.0 percent of GDP on capital mining sector. Although the policies may not have an and social expenditures, respectively. Furthermore, immediate impact on growth and investment, they most of the benefits of fuel subsidies go the wealthier may have significant longer-term implications. segments of the population. Inflation continued its downward trajectory into early The baseline near-term scenario continues to be one 2012, reflecting the fading impact of sharp increases of a solid growth outlook, as Indonesia’s economic in food prices in late 2010. Over 2011, inflation slowed fundamentals remain sound. Fitch Ratings and Moody’s and, at 3.6 percent year-on-year in February 2012, Investors Service recently moved the country’s moved to its lowest rate in almost two years, before sovereign credit rating back to investment grade for picking up to 4 percent in March. Inflation across the the first time since the 1997/1998 crisis. A moderation components of the consumer price index was mixed. of export growth is projected for 2012, reflecting a Core inflation, which reached a two-and-a-half-year downward revision to Indonesia’s major trading partner high of 5.1 percent year-on-year in August 2011, had growth, but there is expected to be continued support eased to 4.3 percent by January 2012. from domestic drivers of growth. However, any fuel price hike later in the year, and the resulting inflation, In anticipation of a worsening external environment, could take some edge off private consumption growth. and with inflation declining, monetary policy eased in Overall, growth is 2012 is forecast to remain robust late 2011 and early 2012. After a 25-basis-point cut at 6.1 percent, and to move back up to 6.4 percent in in October 2011, one of the earliest policy responses 2013. in the region, a subsequent 50-basis-point reduction in November surprised financial markets, and was Spillovers from global financial market volatility and followed by a further 25-basis-point cut in February the weaker external environment have been seen 2012, moving the rate to 5.75 percent. The lower limit most markedly in balance of payments deficits of the of Bank Indonesia’s operational corridor (the overnight second half of 2011. Following strong inflows in the deposit facility rate) was widened further in January first half of 2011, the balance of payments saw overall 2012. As a result of these policy changes, overnight outflows in both the third and fourth quarters of 2011; interbank rates have fallen by around 200 basis points the first quarterly deficits since the fourth quarter of since August 2011. 2008. For 2011 as a whole, balance of payment inflows reached US$11.9 billion (down from US$31.8 billion in However, Bank Indonesia now faces the challenge 2010). The outflows in the third quarter were driven of responding to emerging inflationary pressures, primarily by a reversal in portfolio flows in the wake particularly related to any adjustment in the price of of heightened uncertainty surrounding the Euro zone subsidized fuel, but also stemming from potential debt crisis. In the fourth quarter, portfolio outflows overheating if economic growth picks up above were lower, but banking outflows rose. Foreign direct expectations. The central bank has indicated its investment inflows also moderated in the second half intention to manage any resulting short-term of 2011, but still remained relatively strong. With the inflationary pressures, most likely through macro trade surplus narrowing and with a sizeable services prudential tools aimed at liquidity management, while deficit, the current account balance has been trending interest rates would continue to be directed to control downwards, moving into deficit in the fourth quarter of inflation pressure from fundamentals based on the 2011 for the first time since the final quarter of 2008. macroeconomic outlook. In addition, Bank Indonesia In terms of the outlook for trade and investment, a recently announced the imposition of maximum loan- CAPTURING NEW SOURCES OF GROWTH 56 COUNTRY PAGES AND KEY INDICATORS to-value ratios for housing loans as well as prescribed Looking to the medium-term, sustained efforts to minimum down payments on vehicle purchases. remove other distortions in economic activity and to improve the allocation and efficiency of government Developments in the global economy and financial spending can help Indonesia reach its objectives of markets also represent an important downside risk to inclusive and higher growth. Redirecting spending by Indonesia’s short-term outlook. International financial reducing fuel subsidies is only the first step. Progress in markets and portfolio flows to Indonesia remain volatile, improving the allocation and efficiency of government and the global economic outlook is uncertain. The direct spending is crucial to enable Indonesia to achieve its impact of lower growth in the EU on Indonesia is likely potential of sustained 7 percent-plus growth, while to be limited, as its exports are relatively diversified by ensuring that the benefits of this growth are enjoyed destination. However, while Indonesia’s reliance on by all. Improvements in the business climate and commodity exports has supported growth over the past regulatory policy can also help Indonesia reach these few years of rising commodity prices, it also represents higher growth rates. a source of vulnerability. In this respect, developments in China are of particular interest given their influence on commodity demand and prices (as discussed in the main section of the report). WORLD BANK EAST ASIA AND PACIFIC ECONOMIC UPDATE 2012, VOL. 1 COUNTRY PAGES AND KEY INDICATORS 57 Indonesia Key Indicators 2008 2009 2010 2011 2012f 2013f 2011 2012 2011 2012 Year Year Year Year Year Year Q1 Q2 Q3 Q4 Q1 Dec Jan Feb Mar Apr Output, Employment and Prices Real GDP (% change y-y) 6.0 4.6 6.2 6.5 6.1 6.4 6.4 6.5 6.5 6.5 6.3 .. .. .. .. .. Domestic demand (% change y-y) 7.5 5.4 5.3 5.7 6.0 6.4 5.1 5.8 5.2 6.4 6.4 .. .. .. .. .. Industrial production index (2000=100) 127.2 128.9 134.6 142.1 .. .. 137.2 139.5 143.6 148.0 .. 148.9 .. .. .. (% change y-y) 3.0 1.3 4.4 5.6 .. .. 5.4 4.9 5.7 6.0 .. 6.1 .. .. .. Unemployment (%) 2/ 8.4 7.9 7.1 6.6 .. .. .. .. .. .. .. .. .. .. .. .. Real wages (% change y-y) 2/ -3.8 11.2 0.4 .. .. .. .. .. .. .. .. .. .. .. .. .. Consumer price index (% change y-y) 1/ 9.8 4.8 5.1 5.4 6.4 6.8 6.8 5.9 4.7 4.1 3.7 3.8 3.7 3.6 4.0 4.5 Public Sector 2/ Government revenues (% GDP) 19.8 15.5 15.5 16.2 15.9 .. .. .. .. .. .. .. .. .. .. .. Government expenditures (% GDP) 19.9 17.0 16.2 17.4 18.2 .. .. .. .. .. .. .. .. .. .. .. Government balance (% GDP) -0.1 -1.6 -0.7 -1.2 -2.2 .. .. .. .. .. .. .. .. .. .. .. Domestic public sector debt (% GDP) 15.7 14.9 14.0 13.4 .. .. .. .. .. .. .. .. .. .. .. .. Government debt (% GDP) 33.0 28.4 26.1 24.3 23.1 .. .. .. .. .. .. .. .. .. .. .. Foreign Trade, BOP and External Debt Trade balance (billions US$) 3/ 9.9 21.2 21.3 23.2 15.4 18.7 6.6 6.3 7.0 3.3 1.5 .. .. .. .. .. Exports of goods (billions US$) 4/ 139.6 119.6 158.1 200.6 .. .. 45.8 51.8 52.5 50.6 48.2 17.1 15.6 15.7 17.3 .. (% change y-y) 18.3 -14.3 32.1 26.9 .. .. 30.6 38.3 32.1 10.5 5.2 1.5 6.6 8.9 5.5 .. Key export (% change y-y) 5/ 27.5 -35.0 39.0 32.1 .. .. 33.9 32.1 45.9 18.7 11.3 .. .. .. .. .. Imports of goods (billions US$) 4/ 116.7 88.7 127.4 166.6 .. .. 37.1 42.2 42.9 44.2 44.7 16.5 14.6 14.9 16.4 .. (% change y-y) 36.9 -24.0 43.7 30.8 .. .. 32.0 37.8 33.5 20.8 21.2 25.3 15.9 26.5 13.4 .. Current account balance (billions US$) 0.1 10.6 5.1 1.7 -4.1 -1.7 2.1 0.5 0.5 -0.9 -2.9 .. .. .. .. .. (% GDP) 0.0 2.0 0.7 0.2 -0.4 -0.2 1.0 0.2 0.2 -0.4 -1.3 .. .. .. .. .. Inward FDI (billions US$) 9.3 4.9 13.8 18.9 .. .. 5.0 6.3 3.3 4.3 4.6 .. .. .. .. .. External debt (billions US$) 155.1 172.9 202.4 224.8 .. .. 210.1 222.8 224.5 224.8 .. 224.8 230.5 229.3 .. (% GDP) 30.4 32.0 28.6 26.5 .. .. 26.6 26.2 25.1 26.4 .. .. .. .. .. .. Foreign exchange reserves, gross 51.6 66.1 96.2 110.1 .. .. 105.7 119.7 114.5 110.1 110.5 110.1 112.0 112.2 110.5 .. (billions US$) (months of imports of g&s) 6/ 4.3 7.1 7.5 6.7 .. .. 7.8 8.1 7.3 6.7 6.6 6.7 6.7 6.7 6.6 .. Financial Markets Domestic credit (% change y-y) 33.0 16.1 17.5 24.4 .. .. 24.3 23.4 24.2 25.4 24.6 25.1 24.2 .. Short-term interest rate (% p.a.) 7/ 8.7 7.1 6.5 6.6 .. .. 6.7 6.8 6.8 6.2 5.8 6.0 6.0 5.8 5.8 5.8 Exchange rate (Rupiah/US$, ave) 9,69910,390 9,090 8,770 .. .. 8,863 8,569 8,636 9,024 9,079 9,068 9,000 9,085 9,180 9,190 Real effective exchange rate (2000=100) 142.3 142.3 160.4 160.1 .. .. 158.7 160.9 161.3 159.4 159.3 159.8 159.7 159.4 158.7 .. (% change y-y) 8.7 0.0 12.7 -0.2 .. .. -2.4 -1.0 1.6 0.5 -1.0 0.6 1.5 0.4 -0.7 .. Stock market index (Aug. 1982=100) 8/ 2,088 2,014 3,095 3,746 .. .. 3,519 3,848 3,841 3,776 4,016 3,822 3,942 3,985 4,122 4,180.7 Memo: Nominal GDP (billions US$) 510.2 539.6 708.1 846.8 958.4 1,127.2 197.5 212.8 223.6 212.9 217.0 .. .. .. .. .. Source: National data sources f = forecast 1/ Average 2/ Central government data. Government revised Budget for 2012. 3/ Goods and services trade balance. 4/ Goods trade on BOP basis from Bank Indonesia for annual and quarterly series, while monthly figures from BPS. 5/ Crude oil and gas exports 6/ Based on average imports of goods and services over past year 7/ Bank Indonesia Policy rate 8/ Jakarta Composite Index, end of period CAPTURING NEW SOURCES OF GROWTH 58 COUNTRY PAGES AND KEY INDICATORS L a o P dR developments in commodities prices, developments in the Euro zone, and a slowdown in China. Headline inflation has trended lower since November 2011 as a result of lower food and fuel prices. The headline inflation rate fell from 7.9 percent (year- on-year) in November 2011 to 5.3 percent in March 2012. Food inflation has declined from 10.7 percent to 8.2 percent in the same period as lower rice prices offset the relatively high price of meat. Energy prices continue to rise but at a slower pace compared to last year. This slowdown drove energy inflation downward Population 6.2 million in March. Core inflation has also trended down toward Population growth 1.4 percent 3 percent year-on-year in March. GDP (PPP, int’l US$ billions) 15.8 The fiscal deficit for the 2011/2012 fiscal year is GDP per capita (PPP, int’l US$) 2,367 expected to rise to 3.2 percent of GDP, compared Surface area 236,800 sq. km. with 2.7 percent in FY10/11, as the budget will feature Capital Vientiane increased exposure to hydropower and mining revenues. Source: World Development Indicators. Total revenue is projected to grow moderately, driven by higher grants receipts. Domestic revenues will remain Lao PDR enjoys a positive economic outlook in 2012, at the same level as a share of GDP (16.9 percent in given expectations that the economy will expand by FY11/12) driven by resource sector revenues as a result 8.3 percent, slightly above the growth seen in 2011. of high commodity prices (copper and gold) and the Growth is driven by mining, construction, services, completion of project expansion in the mining sector. agriculture, and—to a lesser extent—manufacturing. An expansion of existing projects and as well as Non-resource sector revenue, however, is expected new projects in the mining sector is seen driving its to be lower than GDP growth, bringing the share of contribution to a brighter growth outlook, while the non-resource sector revenue to GDP down from construction sector will also boost economic growth 13.2 percent to 12.6 percent over the same period. through works associated with preparations for the As a result, coupled with expected increased 9th Asia-Europe Meeting (ASEM) 27. Additionally, the expenditures, the non-resource and non-mining deficits service sector will benefit from higher wholesale and are expected deteriorate from 10.7 percent and 10.0 trading, including tourism as well as transport and percent in FY10/11 to 12.6 and 11.6 percent in FY11/12 telecommunication, and agricultural output is expected respectively. 28 to rebound after the adverse impacts of storms in 2011. Finally, the manufacturing sector will benefit from additional demand for cement, construction materials, food, and beverages. The medium-term growth outlook 28 The non-resource fiscal deficit indicates the extent to which remains subject to uncertainty as a result of external domestic revenue outside the mining and hydro power sectors may finance total government expenditures. This indicator also reflects revenue performance in the non-resource sector. The non-mining fiscal deficit indicates to what extent government 27 The 9 th ASEM Summit will held on November 5–6, 2012 in spending is exposed to volatility associated with commodity Lao PDR. Projects for preparation include the construction of a (gold and copper) prices. Revenue from hydropower sector is convention center and villas, and the expansion and upgrading considered more stable as purchase agreements are made in of the Vientiane airport. advance with fixed prices. WORLD BANK EAST ASIA AND PACIFIC ECONOMIC UPDATE 2012, VOL. 1 COUNTRY PAGES AND KEY INDICATORS 59 Total fiscal outlays are projected to rise from The Lao Kip also appreciated against the Thai Baht by 23.9 percent in FY10/11 to 25.2 percent in FY11/12 1 percent during the same period, mostly because of as a result of capital spending on flood recovery29 , the depreciation of the Baht against the dollar. preparation for ASEM, and poverty reduction projects. The government remains committed to curbing any off- After a rapid expansion over the past years, credit budget spending, while past off-budget commitments growth to the private sector slowed in 2011. Credit should be re-paid on-budget, as cited in the FY12/13 growth fell from almost 34 percent year-on-year in budget preparation instructions. Higher recurrent 2010 to 23 percent in 2011. However, lending to state expenditures are expected with targeted increases in owned enterprises increased moderately in 2011 from wages and compensation and allowances following 12.4 percent in 2010 to almost 15 percent year-on-year the government’s policy of promoting the expansion of in 2011, partly due to loans to Lao Airlines to finance social public services to remote areas. the purchase of 2 Airbus aircraft. Non-performing loans are reported to have declined to 2.2 percent in 2011 The overall balance of payment is projected to improve from 3.2 percent 2010. in 2012 due to a reduction in the non-resource sector deficit of external payments. The balance of There were a number of key reforms in 2011. On the payment surplus of the resource sector is expected to public finance front, the General Tax Law was revised moderately decline following higher income repatriation and approved by the National Assembly in 2011, (from mining), which outpaces the expansion of direct introducing a transparent, turnover-based presumptive investments and the trade surplus. Capital imports tax regime for businesses with a turnover below the VAT are likely to increase due to strong investments by registration threshold. It also eliminated the minimum large power projects.30 Outside the resource sectors, business tax. Treasury zero-balance accounts reform the balance of payment is in deficit, but it likely will has moved forward, supported by the transfer of all improve this year as investment inflows will outweigh a major large accounts at the central level and technical slight deterioration of the non-resource current account revenues accounts into the National Treasury’s control. deficit. On the trade side, larger imports of consumption Customs revenue management is also expected to and capital goods, some of which are attributable to benefit from the full deployment of the ASYCUDA the preparations for the 9th ASEM Summit in 2012, will World system currently in place at Lao PDR’s largest lead to deterioration in the trade deficit. This will be border checkpoint at Thanaleng/Friendship Bridge 1. partly financed by higher foreign investments in hotels, Additionally, the National Assembly passed a revised manufacturing, and construction, as well as expected Customs Law in December 2011. higher inflows through the Lao Stock Exchange as a result of the planned capital increase in one of the two The Ministry of Industry and Commerce also updated listed companies. the Diagnostic Trade Integration Study and its Action Matrix that lays out the framework for the next phase of The government continues to follow a policy of a trade-related reforms. The process for acceding to the stabilized exchange rate against major currencies. In World Trade Organization achieved a solid momentum the past six months (Oct 2011 – Mar 2012), the Lao Kip with the conclusion of negotiations with the EU and the appreciated by 0.3 percent against the US dollar due US. Finally, in October 2011 the one-stop service (as to strong demand and to inflows of foreign exchange stipulated in the Enterprise Law and the new Investment associated with investments and export receipts. Promotion Law) was implemented, allowing new businesses to apply for a unified business registration directly at the Ministry of Industry and Commerce. 29 This is the result of the Haima and Nockten storms last year. 30 e.g. Hongsa Lignite project, Nam Ngum 5, Nam Ngum 3 and Nam Ngiep 1, Huay Lam Phanh Yai, Nam Khan 2,etc. CAPTURING NEW SOURCES OF GROWTH 60 COUNTRY PAGES AND KEY INDICATORS Lao PDR Key Indicators 2008 2009 2010 2011e 2012f 2013f Year Year Year Year Year Year Output, Employment and Prices Real GDP (% change y-y) 7.6 7.5 8.5 8.0 8.3 7.5 Consumer price index (% change y-y) 7.6 0.1 6.0 7.5 6.0 6.0 Public Sector 1/ Government balance (% GDP) 2/ -2.7 -7.1 -5.0 -2.7 -3.2 -4.4 Foreign Trade, BOP and External Debt Trade balance (millions US$) -871 -726 -424 -827 -1,038 -1,426 Exports of goods (millions US$) 1,451 1,489 2,149 2,644 3,077 3,211 (% change y-y) 19.4 2.6 44.3 23.0 16.4 4.4 Key export (% change y-y) 12.1 8.7 50.1 24.3 18.0 4.5 Imports of goods (millions US$) 2,291 2,215 2,573 3,472 4,115 4,637 (% change y-y) 22.2 -3.3 16.2 34.9 18.5 12.7 Current account balance (millions US$) -774 -501 -380 -832 -1,209 -1,658 (% GDP) -14.6 -8.8 -5.5 -10.3 -12.8 -15.9 Foreign direct investment (millions US$) 933 848 770 1,157 1,580 1,962 External debt (millions US$) 5,363 6,050 6,574 7,420 8,612 9,958 (% GDP) 97 102 92 86 90 97 Debt service ratio (% exports of g&s) 11.0 11.8 13.4 12.8 10.8 10.3 Foreign exchange reserves, gross (millions US$) 3/ 626 633 730 679 681 807 (months of imports of g&s) 3.1 3.3 3.2 2.2 1.9 2.0 Financial Markets Domestic credit (% change y-y) 4/ 84.6 90.7 46.0 38.2 32.9 26.5 Short-term interest rate (% p.a.) 5/ 10.5 7.0 7.0 7.0 .. .. Exchange rate (Kip/US$, ave) 8,635 8,516 8,259 8,052 7,932 7,900 Real effective exchange rate (2000=100) 111.5 118.1 122.3 127.2 .. .. (% change y-y) 8.5 5.9 3.6 4.0 .. .. Memo: Nominal GDP (millions US$) 5,319 5,722 6,967 8,080 9,427 10,395 Source: National data sources e = estimate f = forecast 1/ Fiscal year basis 2/ After grants 3/ Excluding gold 4/ Excluding government lending funds 5/ Treasury bill rate WORLD BANK EAST ASIA AND PACIFIC ECONOMIC UPDATE 2012, VOL. 1 COUNTRY PAGES AND KEY INDICATORS 61 m a L ay s i a sector. Meanwhile, electrical and electronics production and shipments continued to face headwinds from weak global demand and supply disruptions in Japan and Thailand. Although commodity-related exports have gained share in Malaysia’s trade basket, most exports are still “non-commodities� and remain highly vulnerable to developments in advanced economies. Unemployment held steady at close to 3 percent but real wages made only modest gains. Job creation was healthy, accommodating new workers and a higher participation rate. The two-speed pattern of growth in Population 28.4 million manufacturing was reflected in real wages, with higher Population growth 1.6 percent wage growth seen in resource-intensive manufacturing industries yet not in electrical and electronics. GDP (PPP, int’l US$ billions) 418.4 GDP per capita (PPP, int’l US$) 13,852 Inflation started to decline over the course of 2011 as Surface area 329,740 sq. km. a result of stabilizing food prices and falling transport Capital Kuala Lumpur costs. Consumer price inflation closed the year at Source: World Development Indicators. 3.0 percent, slowing from a peak rate of 3.5 percent in June. While substantial price controls and subsidies The Malaysian economy grew by 5.1 percent in 2011, tend to mask price pressures, a decline in producer price driven by robust domestic demand. Public consumption inflation confirms that price pressures are easing. picked up more than expected toward the end of the year, and contributed 2.2 percentage points to the Higher-than-forecast revenue collection reined in yearly growth figure due to bonus payments to civil the federal government’s deficit, which came in servants. Investment also expanded robustly. Private at 5.0 percent of GDP, better than the 5.4 percent investment grew by 14.1 percent, the fastest rate since projected in the budget. Healthy revenue collection was 2002. Public investments contracted due to lower predicated on higher oil prices but there were notable capital expenditures from the general government, increases in non-oil revenues. Operating expenditures whereas non-financial public enterprises expanded outgrew revenue but were partly offset by lower investments substantially (national oil company development expenditures as post-crisis fiscal stimulus PETRONAS alone accounted for over one-quarter of was unwound. As a result, the deficit and public debt the growth in total gross fixed capital formation). Private levels were better than expected. consumption spending remained strong, sustained by solid consumer credit, civil service bonus payments, The gradual return of monetary policy to pre-crisis and firm commodity prices benefiting smallholders. settings was put on hold in the second half of the year. Inventories were a drag on growth, as the post- financial With earlier rate hikes only partially offsetting previous crisis restocking cycle had been completed. rate cuts, the policy interest rate remained supportive of growth and credit expansion was healthy. The Exports and manufacturing production remain in a authorities turned to prudential measures to ensure two-speed mode. Production and export growth were sustainable credit expansion, especially to lower- sustained in petroleum, palm oil, and rubber based income households. products, although crude oil exports suffered from ongoing production bottlenecks afflicting the mining CAPTURING NEW SOURCES OF GROWTH 62 COUNTRY PAGES AND KEY INDICATORS The current account remained in surplus on strong Downside risks have eased but persist. Given commodity-related receipts. Capital flows were volatile, Malaysia’s export orientation and high correlation of with large inflows earlier in 2011 partly reversed in non-commodity exports, ongoing risks to the global September and October. Reserves were relatively recovery constitute risks for Malaysian growth. Further stable and, overall, the ringgit appreciated slightly in increases in oil prices are generally beneficial, but bring 2011. challenges as well. The Malaysian economy is expected to post steady, There is momentum to the government’s reform though slower, growth in 2012. Investment is likely to agenda, but implementation could be accelerated. expand further on increased investment in oil and gas The government’s transformation programs registered and the implementation of “entry-point projects� under notable progress, but the challenge now is to go beyond the government’s transformation plans, such as mass quick wins and accelerate the implementation of more rapid transit (MRT). Private consumption is projected difficult—but critical—structural reforms that lie at to remain resilient overall, although flat or lower the core of boosting the economy into high-income commodity prices and prudential measures to reduce levels. Implementation can be assisted by increasing credit growth are likely to keep growth at similar levels the coordination of related reform efforts (such as from 2011. Government consumption is expected to safety nets and education), building capacity within moderate, while inventories will be a drag. Net exports the civil service to lead reforms, and working towards will subtract from growth as strong domestic demand, consensus in key areas such as educational reform, combined with moderate export growth, will lead subsidy rationalization, and broadening the tax base. to faster growth in imports, especially of capital and consumer goods. Overall, GDP growth is expected to come in at 4.6 percent in 2012 and, assuming a continuation of the global recovery, 5.1 percent in 2013. WORLD BANK EAST ASIA AND PACIFIC ECONOMIC UPDATE 2012, VOL. 1 COUNTRY PAGES AND KEY INDICATORS 63 Malaysia Key Indicators 2009 2010 2011 2012f 2013f 2011 2012 2011 2012 Year Year Year Year Year Q1 Q2 Q3 Q4 Q1 Dec Jan Feb Mar Apr Output, Employment and Prices Real GDP (% change y-y) -1.6 7.2 5.1 4.6 5.1 5.2 4.3 5.8 5.2 .. .. .. .. .. .. Industrial production index (2005=100) 99.9 107.1 108.6 .. .. 107.7 106.1 109.6 111.0 .. 112.0 108.9 109.1 114.5 .. (% change y-y) -7.6 7.3 1.4 .. 2.4 -1.6 2.0 2.7 2.9 0.3 8.2 0.6 .. Unemployment (%) 3.6 3.2 3.1 .. .. 3.1 3.1 3.1 3.1 3.1 3.0 3.2 .. .. Consumer price index (% change y-y) 0.6 1.7 3.2 2.8 3.0 2.8 3.3 3.4 3.2 3.0 2.7 2.2 2.1 .. Public Sector Government revenues (% GDP) 2/ 23.3 20.8 21.7 .. .. .. .. .. .. .. .. .. .. Government expenditures (% GDP) 2/ 30.3 26.5 26.7 .. .. .. .. .. .. .. .. .. .. Government balance (% GDP) 2/ -7.0 -5.6 -5.0 -4.7 -4.0 .. .. .. .. .. .. .. .. .. .. Domestic public sector debt (% GDP) 2/ 53.3 53.1 53.5 53.2 52.5 54.6 53.9 52.8 53.5 .. .. .. .. .. .. Foreign Trade, BOP and External Debt Trade balance (billions US$) 3/ 41.6 42.5 46.1 .. .. 12.1 11.8 11.8 10.5 .. .. .. .. .. .. Exports of goods (billions US$) 157.6 199.2 227.7 .. .. 54.7 56.9 58.5 57.6 .. 19.2 17.7 18.8 20.3 .. (% change y-y) -21.1 26.4 14.3 .. .. 5.3 9.9 11.7 9.7 .. 6.1 0.4 14.5 -0.1 .. Key export (% change y-y) 4/ 3.5 5.3 13.7 .. .. 25.2 11.7 13.5 4.5 .. 2.3 -12.5 -21.3 -10.2 .. Imports of goods (billions US$) 117.3 157.3 178.8 .. .. 42.2 44.9 45.9 45.8 .. 16.6 14.9 15.3 16.9 .. (% change y-y) -20.8 34.1 13.7 .. .. 13.5 6.9 6.0 8.7 .. 10.4 3.3 18.0 1.6 .. Current account balance (billions US$) 31.9 27.4 32.0 .. .. 8.5 7.8 8.8 7.0 .. .. .. .. .. .. (% GDP) 16.5 11.5 11.5 11.1 10.6 12.7 11.1 12.3 9.9 .. .. .. .. .. .. Foreign direct investment (billions US$) 5/ 1.4 9.1 10.8 .. .. 3.6 3.4 1.7 2.1 .. .. .. .. .. .. External debt (billions US$) 66.2 70.7 84.1 .. .. 76.6 80.1 87.2 81.7 .. .. .. .. .. .. (% GDP) 34.2 29.6 30.2 .. .. 30.5 30.4 31.9 29.3 .. .. .. .. .. .. Short-term debt (billions US$) 22.0 24.7 34.0 .. .. 29.9 30.6 34.9 33.0 .. .. .. .. .. .. Debt service ratio (% exports of g&s) 6.5 7.6 10.3 .. .. 10.0 8.4 12.6 10.3 .. .. .. .. .. .. Foreign exchange reserves, gross (billions US$) 96.7 106.5 133.6 .. .. 113.8 134.3 131.0 133.6 .. 133.6 134.1 134.7 135.7 135.9 (months of imports of g&s) 6.2 5.5 6.1 .. .. 5.4 6.1 5.8 6.0 .. .. .. .. .. .. Financial Markets Domestic credit (% change y-y) 6/ 9.2 11.3 13.2 .. .. 12.7 13.6 13.3 13.1 .. 13.6 12.1 11.9 12.2 .. Short-term interest rate (% p.a.) 7/ 2.0 2.5 2.9 .. .. 2.8 2.9 3.0 3.0 3.0 3.0 3.0 3.0 3.0 3.0 Exchange rate (Ringgit/US$, eop) 3.42 3.08 3.16 .. .. 3.03 3.02 3.19 3.18 3.07 3.18 3.05 3.00 3.07 3.03 Real effective exchange rate (2000=100) 8/ 95.1 100.0 99.9 .. .. 101.8 100.3 99.6 97.8 100.6 98.2 99.7 101.1 101.1 100.2 (% change y-y) -3.1 5.2 -0.1 .. .. 5.5 -1.0 -2.6 -2.2 -1.1 -2.1 -2.5 -0.7 -0.2 -0.5 Stock market index (1 Jan 1977=100) 9/ 1,090 1,379 1,509 .. .. 1,545 1,579 1,387 1,531 1,596 1,531 1,521 1,570 1,596 1,571 Memo: Nominal GDP (billions US$) 193.4 238.4 278.9 .. .. 67.0 69.6 71.8 70.5 .. .. .. .. .. .. Source: National data sources, World Bank staff estimates. f = forecast 1/ Manufacturing wages only 2/ Federal government only 3/ Balance of Goods and Services 4/ Thermionic Valves & Tubes, Photocells etc 5/ Inward FDI 6/ Total loans in the banking system 7/ Overnight Policy Rate (OPR) 8/ Source: BIS 9/ FTSE Bursa Malaysia Composite CAPTURING NEW SOURCES OF GROWTH 64 COUNTRY PAGES AND KEY INDICATORS m on go L i a transfers, and large increases in capital expenditures. As a result of high revenues, the overall 2011 deficit was contained at 3.6 percent. However, the structural deficit (based on long run commodity prices as defined under Mongolia’s Fiscal Stability Law) was much higher at 5.8 percent. The 2012 budget projects an overall deficit of 1 percent, with a structural deficit of 3 percent, with the difference saved in the Fiscal Stability Fund. The Development Bank of Mongolia, which was set up last year to finance infrastructure projects and which is backed by a full sovereign guarantee, successfully Population 2.7 million introduced its first foreign currency bond offering in Population growth 1.6 percent March. The five-year US$580-million bond offering drew orders of US$6.25 billion, with a yield of 5.75 percent GDP (PPP, int’l US$ billions) 11.1 much lower than the initial guidance of 6–6.25 percent. GDP per capita (PPP, int’l US$) 3,825 Along with US$20 million raised through a private Surface area 1,566,500 sq. km. placement at the end of 2011, the latest offering Capital Ulaanbaatar completes the Bank’s US$600-million program of Source: World Development Indicators. issuance to fund several key projects including roads and railway links necessary for facilitating minerals Economic growth accelerated to 17.3 percent in 2011 production and exports. from 6.4 percent in 2010 and the unemployment rate fell to 9 percent from 13 percent, spurred by On the monetary front, the Bank of Mongolia took the development of the Oyu Tolgoi mine, one of the significant action to curb inflation and lending growth world’s largest copper and gold mines, and rising coal in 2011, raising the benchmark rate three times (by a exports to China. There are growing concerns that total of 125 basis points to 12.25 percent) in October. the economy is overheating, with inflation steadily In March, it raised the policy rate by a further 50 basis accelerating since the middle of last of last year and points. But with inflation continuing to rise, policy is reaching 17.3 percent in March in Ulaanbaatar. Sharply still very loose and with bank lending expanding at a rising government spending is the root cause of this staggering pace (62 percent year-on-year in February), overheating; spending rose by 56 percent in 2011 and more tightening is needed. Liquidity risks are also rising is budgeted to rise by a further 32 percent this year, and non-performing loan levels are large. Given the fueled by growing mineral receipts. This pro-cyclical easy convertibility between dollar and local currency fiscal policy could result in another “boom-and-bust� accounts, the banking system remains vulnerable to cycle in Mongolia. In addition, the country is heavily capital flight if macro-prudential action is not taken to exposed to deterioration in the external environment as strengthen it. Such action could include, in addition to government revenues remain vulnerable to volatility in the recently-introduced additional capital buffers for commodity prices. systematically important banks, the use of additional provisioning requirements for highly volatile sectors High levels of government spending in 2011 and 2012— such as construction, mortgage, and consumer loans. spending is projected to rise to MNT 6,309 billion in the 2012 budget, close to total GDP in 2009 in absolute The Togrog depreciated by 11 percent toward the terms—mainly reflect pre-election year pressures, end of 2011, reflecting high domestic inflation and efforts to fulfill political promises for large cash declining commodity prices. Going forward, exchange WORLD BANK EAST ASIA AND PACIFIC ECONOMIC UPDATE 2012, VOL. 1 COUNTRY PAGES AND KEY INDICATORS 65 The economy is expanding at a furious pace and overheating concerns are mounting % point contributions to GDP growth, yoy 25 20 15 10 5 0 -5 -10 Q3-08 Q4-08 Q1-09 Q2-09 Q3-09 Q4-09 Q1-10 Q2-10 Q3-10 Q4-10 Q1-11 Q2-11 Q3-11 Q4-11 Electricity, communication, other services Transportation Wholesale & retail trade Construction Manufacturing Mining Agriculture Gross Domestic Product Sources: NSO and World Bank staff estimates. rate flexibility remains crucial. It will reduce the risk of law that reforms the entire budget process from public one-way speculative bets on the currency and allow investment planning to budget execution and auditing, the economy to better absorb external shocks such as secures the implementation of the Fiscal Stability Law, commodity price shocks without transmitting these and fully accounts for contingent liabilities, including directly to budgetary and export revenues, as in the those from the Development Bank of Mongolia. It also previous “bust� in 2008. More significantly, it will strengths the public investment framework by requiring help the economy adjust through movements in the feasibility studies and alignment with national priorities nominal exchange rate rather than through sharp cuts for projects to be included in the Public Investment in domestic wages, employment, and prices that hurt Program and the budget. This will help permanently the real incomes and profits of workers and businesses. lock in prudent fiscal policies and mechanisms in the Finally, exchange rate flexibility is desirable in that it will future alongside the Fiscal Stability Law. Meanwhile reduce incentives for the private sector or banks for the Social Welfare Law was passed in early January taking on unhedged risk. 2012. This mandates the provision of a targeted poverty benefit to replace the existing system of universal cash The trade deficit reached record levels (US$1.9 billion in transfers. This represents a major step towards setting February, 12-month rolling sums) as imports of mining- up a fiscally-sustainable social protection system while related equipment and fuel imports surged. But exports supporting Mongolia’s poor. It is expected to reach also grew strongly, reaching US$4.9 billion in February about 130,000 of the poorest households, or one-fifth (12 month rolling sums) from US$3.0 billion a year ago, of all households, in Mongolia. supported almost entirely by coal shipments to China. The current account deficit widened to 35 percent of Although exports and revenues will be permanently GDP in 2011 from 14 percent the year before, but was boosted once the Oyu Tolgoi mine begins production fully funded by record foreign direct investment inflows at the end of 2012, net revenues from the mine are of US$5.3 billion, representing almost 62 percent of expected to enter the budget only after repayment GDP. of advance payments and mine-related investment share borrowing from mining companies. Fiscal space There have been major legislative developments in will remain constrained in the near term by loan 2011 and early 2012 aimed at strengthening policy repayments to the International Monetary Fund (IMF) institutions and frameworks. The Integrated Budget and Development Bank of Mongolia bonds. Despite Law, passed in December 2011, is a comprehensive an improvement in the global economic environment CAPTURING NEW SOURCES OF GROWTH 66 COUNTRY PAGES AND KEY INDICATORS since the end of last year, it remains vulnerable to adverse external shock, Mongolia needs to adhere developments in the Euro zone and the US, while the strictly to prudent fiscal policies as set out in the Fiscal upcoming elections in Mongolia increase domestic Stability Law and the Integrated Budget Law. It should uncertainty. Accordingly, until a substantial amount also seek to tighten both fiscal and monetary policy to of savings has accumulated in the stabilization fund, reduce inflation, take macro-prudential action to reduce Mongolia remains exposed to volatility in commodity systemic risks in the banking sector, and maintain a prices. To ensure macroeconomic stability and to flexible exchange rate that will act as the first buffer if prevent a hard landing for the economy in case of an any external shock materializes. Mongolia Key Indicators 2008 2009 2010 2011 2012f 2013f Year Year Year Year Year Year Output, Employment and Prices Real GDP (% change y-y) 8.9 -1.3 6.4 17.3 17.2 11.8 Industrial production index 113.0 109.6 120.5 132.2 145.4 162.8 (% change y-y) 2.7 -3.3 9.9 9.7 10.0 12.0 Consumer price index, Ulaanbaatar (% change y-y, 23.2 1.9 14.3 11.1 18.0 12.0 eop) Public Sector Government expenditures (% GDP) 1/ 37.6 35.2 36.6 44.2 39.1 34.1 Government revenues (% GDP) 1/ 33.1 30.2 36.6 40.6 38.1 33.1 Government balance (% GDP) 1/ -4.5 -5.0 0.0 -3.6 -1.0 -1.0 Non-mineral government balance (% GDP) -14.1 -12.4 -10.5 -16.0 -11.9 -- Total public sector debt (% GDP) 2/ 31.0 49.4 42.2 38.6 37.1 27.3 Foreign Trade, BOP and External Debt Trade balance (millions US$) -627 -229 -379 -1747 -700 265 Exports of goods (millions US$) 2,535 1,903 2,899 3,825 4,680 5,288 (% change y-y) 30.0 -24.9 52.4 31.9 22.4 13.0 Imports of goods (millions US$) 3,147 2,131 3,278 4,874 5,290 4761 (% change y-y) 57.1 -32.3 53.8 53.4 8.5 -10.0 Current account balance (millions US$) -722 -592 -887 -2,587 -2,664 -269 (% GDP) -12.9 -12.9 -14.3 -15.1 -13.6 -1.8 Foreign direct investment (millions US$) 838 1,038 1,630 5,310 1,500 1,200 External debt (% GDP) 3/ 31.0 43.3 30.3 22.8 19.8 14.7 Foreign exchange reserves, gross (millions US$) 4/ 637 1,145 2,091 2,407 .. .. (month of imports of g&s) 3.7 4.2 5.1 5.6 .. .. Financial Markets Domestic credit (% change y-y) 59.1 -9.3 26.7 75.8 45.0 .. Short-term interest rate (% p.a.) 4/ 9.8 10.0 11.0 12.8 .. .. Exchange rate (Tugrik/US$, eop) 1,267 1,443 1,257 1,265 .. .. Real effective exchange rate (% change y-y) 13.7 -15.5 26.9 -4.6 .. .. Stock market index, Top 20 (Dec. 2000=100) 1182 1229 2931 4254 .. .. Memo: Nominal GDP (millions US$) 5,174 4,567 6,694 8,562 .. .. Sources: Bank of Mongolia, National Statistical Office, Ministry of Finance, IMF and World Bank staff estimates. f = forecast 1/ Estimates for 2012 are from the approved 2012 budget. 2/ Based on 2011 IMF-World Bank Debt Sustainability Analysis (DSA) 3/ On public and publicly guaranteed debt (2011 DSA) 4/ Base policy rate, March 2012 WORLD BANK EAST ASIA AND PACIFIC ECONOMIC UPDATE 2012, VOL. 1 COUNTRY PAGES AND KEY INDICATORS 67 Pa P u a n e w guin e a investment has reached its peak of activity, and is shifting from largely civil works to higher-skilled engineering works (e.g., skilled welding). The project managers report construction of some key components to be ahead of schedule, while others are near schedule, but disruptions are affecting some areas of the work. The first gas delivery is still expected in late 2014. Meanwhile investments in new capacity for various upstream inputs—ranging from technical training of workers, to new airfields and trucking operations, through to hotels and catering—are reaching final stages or entering operation, expanding the economy’s Population 6.8 million capacity and stabilizing or even lowering prices of such Population growth 2.3 percent inputs. GDP (PPP, int’l US$ billions) 17.0 Meanwhile, minerals and oil and gas production GDP per capita (PPP, int’l US$) 2,323 continued to subtract from growth. Oil production Surface area 462,840 sq. km. continued to wane, some major mines were shut Capital Port Moresby for temporary reasons, and openings of new mines Source: World Development Indicators. continued to be delayed. The most significant delay, of the opening of the Ramu nickel-cobalt mine, appears to The economy of Papua New Guinea (PNG) continued have been resolved as court cases around landowner to expand strongly through the second half of 2011 and and environmental impact issues are cleared. The into early 2012, with the pace of growth likely to be preparation of various other potential, large minerals near its peak for this upswing. Over 2011, the economy and non-mineral investments continued, although none is likely to have expanded by 9-to-10 percent, driven reached investment decision. by the direct and spin-off investments associated with future resource production, high commodity prices, The 2012 budget raises spending to PGK 10.5 billion, and supportive agricultural conditions, as well as 20 percent more than 2011 projected levels. Authorities government spending. The strength of these drivers is expect this to be largely funded by higher revenues and likely to have peaked around the turn of 2012, especially withdrawals from funds set aside in trust accounts in as the stronger Kina and weakening global commodity the 2011 supplementary budget and in earlier years. prices start to drag rural incomes and government Overall, this implies a small deficit of around 1.5 percent revenues. of GDP after accounting for funds withdrawn from trust accounts. The government presents its budget as Growth in prices across the economy, while still strong, balanced by not counting these as an expense in the has moderated. As a key first step in strengthening current year. economic management in the face of an anticipated resource revenue boom, the legal framework for a Centerpieces of the 2012 budget were the expanded Sovereign Wealth Fund to manage PNG’s minerals tuition-fee free education subsidy and an increase revenues was adopted. in the threshold for paying income tax. Parents are no longer charged tuition fees for children in Years 1 Ongoing construction of the PNG-LNG (liquefied through 10, and those in Years 11, 12, and in vocational natural gas) project continued to be the major factor education receive a 75 percent tuition fee subsidy, driving PNG’s economic expansion. The US$15.7 billion though parents still incur various other non-tuition CAPTURING NEW SOURCES OF GROWTH 68 COUNTRY PAGES AND KEY INDICATORS related fees. Anecdotal reports suggest that this policy 2012, with the aim of activating the Fund in 2013. was largely successfully implemented at the start of the The law features strong provisions on transparency, 2012 school year, despite the significant administrative reporting, and governance and is consistent with the and logistical challenges of ensuring all schools across internationally-agreed Santiago Principles of sovereign the country could access the funds. The earlier waiver wealth fund management. The government created of tuition fees for the first years of primary schooling the fund to receive all tax revenues and government led to a significant increase in the enrollment of girls. dividends from natural resource revenues, and to invest Additional funds were allocated for regional roads these offshore. The proceeds flow back to general and some other capital works projects. The threshold revenue at a rate equal to the 15-year average of for paying income tax was raised from PGK 7000 to minerals revenues and dividends relative to aggregate PGK 10,000, placing it above the minimum wage. The revenues. These funds are then allocated through the tariff reduction program was extended to intermediate annual budget process into a development fund for goods such as meat, flour, shoes, and steel, and could specific projects and activities; these likely will include contribute toward a reduction in inflationary pressures. infrastructure development and the recapitalization of state-owned enterprises. These funds would be largely Official public debt levels, near 25 percent of GDP, are held offshore. There is some concern that creating new assessed to be sustainable, and the underlying dynamics planning and implementation authorities somewhat are favorable. These debts only include those currently outside the central government may undermine the on the government’s balance sheet, not the debt used capacity and effectiveness of existing agencies. to fund the government’s equity share in the PNG-LNG project, due in 2014, or its superannuation liabilities, Inflation, while high, appears to have peaked. The nor various contingent liabilities such as the completion official urban consumer price inflation rate moderated guarantee over the LNG project. Together these raise from its recent peak near 10 percent in the year to the current debt levels by 15-to-20 percent of GDP. In a second quarter of 2011 to 6.9 percent in the year to the shift from previous arrangements, the government final quarter of 2011. Volatile prices (largely betalnut) is funding its PGK 900-million equity contribution for and the stabilization in fuel prices explained much of this the increased construction cost of the LNG project slowing, with underlying inflation remaining stronger, at by issuing more government bonds in the domestic around 7.8 percent, in the year to the fourth quarter of market. Even counting these liabilities, and assuming 2011. PNG’s official CPI suffers significant composition the LNG and part of the pipeline of additional projects and measurement errors that bias it downwards. This is do go ahead, the government’s finances appear to be expected to be addressed for the first time in 33 years sufficiently robust to support modest budget deficits by when a new consumer price index—based on urban mid-decade before the LNG project starts to generate consumers’ spending patterns recorded by the 2009/10 significant fiscal revenues towards 2020. Household Income and Expenditure Survey—is fielded midway through 2012. Meanwhile, various anecdotal The government took an important step towards reports suggest that other prices are slowing or improving the effectiveness with which natural resource declining. Employers are less often highlighting growth revenues are translated into public goods and services in employment costs, or resorting to bidding wars to by passing the organic law (requiring a constitutional retain skilled labor. Prices for all types of higher-end amendment) that established a PNG Sovereign Wealth and commercial real estate in the main urban centers Fund. The law features strong provisions on transparency, appear to be stabilizing or even falling as new supply reporting and governance, and is consistent with the responds to the earlier surge in demand and vacancy internationally-agreed Santiago Principles of sovereign rates start to rise. Additional new supply of residential wealth fund management. Subordinate legislation and and commercial land, and training of workers, will help management processes will be developed through further unwind earlier extreme price rises. WORLD BANK EAST ASIA AND PACIFIC ECONOMIC UPDATE 2012, VOL. 1 COUNTRY PAGES AND KEY INDICATORS 69 Since mid-2011, the central bank has largely relied on Political frictions intensified between the current and the appreciating exchange rate to manage inflation. former Prime Minister, ahead of national elections The Kina appreciated to near 2 Kina per US dollar in scheduled for mid-year. These frictions spread from March 2012, a strengthening of 9 percent in six months the parliamentary and executive to the other branches and 25 percent in a year. In nominal terms, this is of government, most notably the peak judicial bodies. its strongest rate against the US currency since The Chief Justice of the Supreme Court was arrested, commodity prices collapsed in the wake of the Asian and an Ombudsman was referred to the Leadership financial crisis in the late 1990s. In real effective terms, Commission. Local business and non-governmental the exchange rate rose to 10 percent above its peak organizations generally viewed these developments before the Kina was de-pegged in 1994. The Bank of as a distraction rather than substantively impacting Papua New Guinea (BPNG) restrained this appreciation the business environment. Nonetheless, these by also accumulating foreign exchange reserves, developments have had ramifications. Standard & which reached US$4.3 billion in December 2011 and Poor’s shifted the outlook for its rating of PNG long- remained around this level through the first quarter term sovereign debt from stable to negative, with the of 2012. This compares with just over US$3 billion risk of its rating being lowered if the political friction in reserves a year earlier. Meanwhile BPNG has held remains unresolved. The agency affirmed its ‘B+’ local its main policy interest rate, the Kina Facility Rate, at and foreign currency long-term rating and ‘B’ short- 7.75 percent after raising it 75 basis points earlier in this term rating. year. The central bank also increased banks’ minimum reserve requirements from 4 to 6 percent in mid 2011, PNG’s non-mineral economy is likely to moderate and then to 7 percent in late March 2012. While banks through to 2015, as construction of the LNG plant report that the higher reserve requirement raises their winds down, and the moderation in cash crop and costs, it appears to have had little impact on interest other commodity prices combines with the stronger rates for loans, deposits, or short-term paper. At times, PGK to cut real incomes. Supply bottlenecks are likely BPNG has worked to absorb the growth in liquidity to remain a significant issue for the coming 18 months, generated by the rise in foreign exchange reserves but less so than in the recent past. This stems from by issuing more paper, but it has also repeatedly and the introduction of new capacity and, more importantly, unsuccessfully asked fiscal authorities to support this the fact that many Papua New Guineans are currently by shifting the government’s sizeable cash holdings finding new, often temporary, jobs. These jobs are from commercial banks to the central bank. developing workers’ skills that can be taken to other jobs and are bringing these workers into the cash In other financial developments, BPNG issued the economy. In 2014 and 2015, the start of gas production country’s first mobile banking license as major retail will boost GDP by as much as 25 percent, but this will banks also trialed new banking platforms designed to only be associated with about 800 ongoing jobs. enable access to financial services, particularly savings accounts, for PNG’s largely rural and often remote The LNG project is expected to become a significant population. These services combine mobile agents source of government revenues late in the decade, using low-cost tablet computers connected with mobile after the capital investment is depreciated, and will phone networks to open and operate bank accounts. be enough to offset declining mine revenues and These innovations have the potential to dramatically the closure of oil wells. A number of minerals, gas, deepen many Papua New Guineans’ engagement with and large infrastructure projects are currently being the cash economy, allowing small, rural farmers to shift prepared. The knock-on effects of these projects, if from relying on opportunistic production of cash crops approved, have the potential to become new drivers for cash needs to more strategic production. for PNG’s emerging non-resource economy, and to help expand PNG’s fiscal space. All are contingent on CAPTURING NEW SOURCES OF GROWTH 70 COUNTRY PAGES AND KEY INDICATORS international commodity prices and on PNG being able and implementation. The government’s move towards to maintain the past decade’s gains in the stability of multi-year budgets for capital projects is a step in this government and the quality of economic management. direction. It will also require reducing budget leakages. In the intervening years, as government revenues Stronger governance institutions can help achieve this. stagnate while community expectations and costs International experience finds these to be most effective continue to rise, it will be essential that the government when these are built gradually, based on existing becomes much more effective at ensuring spending formal and informal institutions, through a consensual from the budget is translated into delivered education process and are widely owned and respected by the and health services, and appropriately-maintained community. infrastructure. This will require both better planning Papua New Guinea Key Indicators 2008 2009 2010 2011e 2012f 2013f Year Year Year Year Year Year Output, Employment and Prices Real GDP (% change y-y) 6.7 5.5 7.5 9.0 7.5 4.0 Consumer price index (% change y-y) 10.7 6.9 6.0 8.5 8.0 7.0 Public Sector Government revenues (% GDP) 32.6 27.5 32.5 29.8 27.5 27.0 Government expenditures (% GDP) 30.1 37.0 29.5 29.4 30.0 28.0 Government balance (% GDP) 3.8 -9.5 3.0 0.4 -2.5 -1.0 Domestic public sector debt (% GDP) 31.7 32.1 26.5 25.0 23.0 21.0 Foreign Trade, BOP and External Debt Trade balance (millions US$) 2,675 1,253 1,582 861 1,325 2,107 Exports of goods (millions US$) 5,685 4,511 5,843 7,047 7,788 8,000 (% change y-y) 20.8 -20.7 29.5 20.6 10.5 2.7 Key export (% change y-y) 1/ 16.0 -17.5 30.4 13.5 5.0 5.0 Imports of goods (millions US$) 3,148 3,258 4,261 6,186 6,463 5893.0 (% change y-y) 19.7 3.5 30.8 45.2 4.5 -8.8 Current account balance (millions US$) 674 -1,325 -2,532 -4,605 -4,374 -3247.0 (% GDP) 10.0 -16.4 -25.3 -33.0 -26.2 -18.0 Foreign direct investment (millions US$) -31.0 764.0 1803.0 1935.0 1800.0 1400.0 External debt (millions US$) 2,047 2,144 2,391 3,185 3,978 4250.0 (% GDP) 25.6 26.6 23.9 22.8 23.8 23.6 Short-term debt (millions of US$) 2/ 44 72 93 ,, ,, ,, Debt service ratio (% exports of g&s) 5.1 13.4 14.7 15.7 16.5 15.3 Foreign exchange reserves, gross (millions US$) 1,988 2,571 3,092 3,450 4,000 4,000 (months of imports of g&s) 4.4 5.6 3.8 4.5 7.4 8.1 Financial Markets Domestic credit (% change y-y) 15.7 37.3 5.0 10.0 12.0 15.0 Short-term interest rate (% p.a.) 5.91 7.18 7.00 7.75 7.75 7.8 Exchange rate (Kina/US$, eop) 2.68 2.70 2.64 2.16 2.05 2.1 Real effective exchange rate (2000=100) 109.4 118.0 111.7 125.0 122.0 122.0 (% change y-y) 13.4 7.8 -5.3 11.9 -2.4 0.0 Memo: Nominal GDP (millions US$) 7,997 8,060 10,004 13,967 16,716 17,989 Source: National data sources, IMF, and World Bank staff estimates. e = estimate f = forecast 1/ Gold 2/ Banking system short-term external debt only WORLD BANK EAST ASIA AND PACIFIC ECONOMIC UPDATE 2012, VOL. 1 COUNTRY PAGES AND KEY INDICATORS 71 P hiL iP P in e s October 2010 and 2011. In January, unemployment and underemployment rates fell to 7.2 percent and 18.8 percent, respectively, from 7.4 percent and 19.4 percent last year. Around 50 percent of new jobs, however, were created in the informal sector, mostly retail trade and for unskilled workers, while real wages are shrinking. These trends, together with stubbornly- high levels of poverty and hunger, reflect structural weaknesses in the labor market. In December, the self-rated hunger incidence worsened to 22.5 percent, one percent higher than the previous quarter, and an indication that around 4.5 million households Population 93.2 million experienced involuntary hunger. High levels of hunger Population growth 1.7 percent incidence were especially pronounced in Visayas and Mindanao—two island groups that were hardest hit by GDP (PPP, int’l US$ billions) 370.2 Typhoon Sendong in December. GDP per capita (PPP, int’l US$) 3,720 Surface area 300,000 sq. km. Robust growth in services exports and remittances Capital Manila helped to mitigate falling merchandise exports during Source: World Development Indicators. 2011 and contributed to a balance of payments surplus of US$9.7 billion through December 2011. Nominal The Philippine economy grew slower than expected dollar remittances grew by 7 percent to US$20.1 billion at 3.7 percent in 2011, held back by weak public in 2011 (9 percent of GDP), supporting household spending and external demand. Fourth quarter growth spending. In real peso terms, remittances have been of 3.7 percent was slightly better than the previous growing since September 2011, after contracting for quarter, with expansion continuing to be driven by 12 successive months thanks to the depreciating peso. remittance-fueled household consumption, which Services exports grew by 20 percent in the fourth grew by 6.7 percent. The government’s Disbursement quarter of 2011 from a year earlier, led by business Acceleration Plan, designed to speed up spending, process outsourcing, even as merchandise exports fell was partially successful, contributing 1.3 percentage by 18 percent with a particularly sharp dip in electronics points to growth, though this was not enough to reach exports. Overall, the Philippine electronics sector the targeted growth level of around 5 percent. On the was hit much harder than in neighboring countries— production side, the services sector, which includes the contracting by 22 percent in 2011—suggesting some fast-growing business process outsourcing industry, structural challenges. In January, overall exports was a key driver of growth, contributing 3.2 percentage rebounded, growing by 3 percent on the back of a points in the fourth quarter. Industry, and in particular recovery of demand in the country’s top exports manufacturing exports, was buffeted by weaker markets. Meanwhile, international reserves amounted demand, while agriculture suffered from typhoon- to US$77 billion, equivalent to 11.3 months of imports, related damage. through February. Riding on the country’s positive outlook, the Philippine government successfully raised Despite some improvements in recent months, the US$1.5 billion in global bonds in early January at a rate labor market continues to face structural issues, and of 5 percent (around 200 basis points above comparable poverty, hunger, and the informal economy remain US treasuries). The issuance came after Standard & prevalent. The labor market improved markedly during Poor’s raised its outlook for the Philippines from stable 2011, with 2.1 million new jobs created between to positive in December 2011. CAPTURING NEW SOURCES OF GROWTH 72 COUNTRY PAGES AND KEY INDICATORS Consumer price inflation remained manageable in Should the global slowdown persist, growth of 2011, averaging 4.8 percent, although this was at around 4.2 percent and 5.0 percent in 2012 and 2013, the high-end of the central bank’s 3-5 percent target respectively, will hinge on robust domestic demand, range. Domestic food price inflation, which comprises investment, and government spending. Appropriate almost 40 percent of the CPI basket, continued to ease fiscal and monetary policy responses are expected to in February to a low of 1.4 percent, as the domestic boost growth to targeted levels, assuming sustained supply of vegetables and global rice stocks increased. growth in consumption and some improvements in Inflation this year is expected to be lower at 3.5 percent, investments and exports. To sustain such a stimulus, given cheaper and more stable prices of food, as well higher tax revenues (through the executive’s effort as fuel, electricity, light, and water. With inflation on a to strengthen tax administration and push for the downward trend, monetary policy easing, which began immediate passage of the tobacco and alcohol excise in January, is expected to continue if downside risks to and fiscal incentives bills) would be necessary. The growth persist. country likewise needs to address the key impediments to accelerating inclusive growth through the three Although actual national government spending reform areas as follows: i) strengthening public financial was lower than originally budgeted in 2011, below- management; ii) raising tax revenues efficiently and target revenue collection resulted in a fiscal deficit equitably; and iii) enhancing competitiveness to equal to 2 percent of GDP. This still represented an attract more investment. Successful public financial improvement from the 3.5 percent deficit recorded management reforms would not only allow the public in 2010. The implementation of transparency and to see more tangible improvements in governance accountability measures early last year resulted in but would also help make a better case for tax policy slower-than-expected government spending through reforms. Successful implementation of public sector the third quarter. In December, disbursements grew reforms would allow the country to increase public by 43 percent, with significant increases in current investment and pro-poor spending and take advantage expenditures and areas targeted by the Disbursement of new opportunities arising from the global economic Acceleration Plan. Full year capital outlays were 12 rebalancing, given rising production costs in the rest of percent lower than the previous year, despite efforts to the region, including China. increase spending in the fourth quarter. The tax effort improved to 12.3 percent of GDP, a 0.2 percentage point increase from 2010, largely on account of improved tax administration. However, the actual contribution of the tax administration effort is estimated to be higher, at around 0.5 of a percentage point of GDP, as the present tax system is designed to lose around 0.3 of one percentage point of GDP annually due to the non- indexation of excise taxes, and losses from various tax incentives. To support spending this year, policy reforms will be needed to plug holes in the tax system. WORLD BANK EAST ASIA AND PACIFIC ECONOMIC UPDATE 2012, VOL. 1 COUNTRY PAGES AND KEY INDICATORS 73 Philippines Key Indicators 2009 2010 2011 2012f 2013f 2011 2012 2011 2012 Year Year Year Year Year Q1 Q2 Q3 Q4 Q1 Dec Jan Feb Mar Apr Output, Employment and Prices Real GDP (% change y-y) 1/ 1.1 7.6 3.7 4.2 5.0 4.6 3.1 3.6 3.7 .. .. .. .. .. .. Industrial production index (2000 74.7 92.0 93.3 .. .. 90.5 92.5 97.2 93.0 95.4 96.0 89.1 93.3 102.0 .. = 100) (% change y-y) -11.9 23.2 3.2 .. .. 12.0 1.9 3.2 -8.0 .. .. .. .. .. .. Unemployment (%) 2/ 7.5 7.3 7.0 .. .. 7.4 7.2 7.1 6.4 7.2 .. .. .. .. .. Nominal wages (% change y-y) 3/ 2.2 3.8 4.6 .. .. 5.8 1.9 5.4 5.4 .. 5.4 5.4 .. .. .. Real wages (% change y-y) 3/ 0.7 -0.1 0.6 .. .. 1.5 -2.1 1.5 1.6 .. 2.3 1.8 .. .. .. Consumer price index (% change 4.1 3.9 4.7 3.5 4.0 4.5 5.0 4.7 4.7 3.1 4.1 4.0 2.7 2.6 3.0 y-y) Public Sector Government balance (% GDP) 4/ -3.9 -3.6 -2.1 -3.0 -2.8 -0.3 0.1 -0.4 -1.5 .. .. .. .. .. .. Domestic public sector debt (% 33.5 41.4 .. .. .. 41.3 .. .. .. .. .. .. .. .. .. GDP) 5/ Foreign Trade, BOP and External Debt Trade balance (billions US$) 6/ -8.8 -11.0 -15.5 .. .. -3.9 -3.3 -3.5 -4.7 .. -1.4 .. .. .. .. Exports of goods (billions US$) 6/ 37.6 50.7 47.2 .. .. 12.0 12.3 12.2 10.6 .. 3.4 .. .. .. .. (% change y-y) -22.1 34.9 -6.9 .. .. 8.1 1.0 -15.3 -17.8 .. -18.9 .. .. .. .. Key export (% change y-y) 7/ -21.2 38.9 -21.3 .. .. -1.6 -20.1 -32.0 -31.4 .. -27.7 .. .. .. .. Imports of goods (billions US$) 6/ 46.5 61.7 62.7 .. .. 15.9 15.6 15.8 15.3 .. 4.8 .. .. .. .. (% change y-y) -24.0 32.9 1.6 .. .. 13.6 2.4 -1.0 -6.0 .. -9.2 .. .. .. .. Current account balance (billions 9.4 8.9 7.1 4.2 6.9 1.0 2.1 2.0 1.8 .. 0.8 .. .. .. .. US$) 8/ (% GDP) 5.6 4.5 3.1 1.7 2.5 1.9 3.7 3.7 2.9 .. .. .. .. .. .. Foreign direct investment (billions 1.6 0.7 1.3 1.5 2.5 0.4 0.4 -0.1 0.5 .. 0.0 US$) External debt (billions US$) 9/ 54.9 60.0 61.7 .. .. 60.9 61.4 62.4 61.7 .. 61.7 .. .. .. .. (% GDP) 32.6 30.1 27.5 .. .. 27.4 27.3 27.4 27.5 .. 27.5 .. .. .. .. Short-term debt (billions US$) 9/ 4.0 6.3 7.0 .. .. 6.8 7.2 7.1 7.0 .. 7.0 .. .. .. .. Debt service ratio (% exports of 10.4 8.7 8.9 .. .. 8.3 7.9 8.5 8.9 .. 8.9 .. .. .. .. g&s) Foreign exchange reserves, gross 44.2 62.4 75.3 78.0 81.9 66.0 69.0 75.2 75.3 76.1 75.3 77.4 77.0 76.1 76.5 (billions US$) 9/ (months of imports of g&s) 10/ 8.7 9.5 11.1 11.1 11.2 9.8 10.2 11.1 11.1 .. 11.1 11.4 11.3 .. .. Financial Markets Domestic credit (% change y-y) 11/ 7.4 8.7 14.7 .. .. 7.2 8.1 9.6 14.7 .. 14.7 .. .. .. .. Short-term interest rate (% p.a.) 12/ 4.8 4.2 4.6 .. .. 4.2 4.6 4.7 4.7 .. 4.7 4.5 4.4 .. .. Exchange rate (Peso/US$, ave) 47.7 45.1 43.3 .. .. 43.8 43.2 42.8 43.5 43.0 43.6 43.6 42.7 42.9 42.7 Real effective exchange rate 121.2 126.8 127.2 .. .. 127.3 126.7 127.0 127.9 .. 127.9 127.7 .. .. .. (2005=100) (% change y-y) 13/ -2.6 4.6 0.4 .. .. .. .. .. .. .. .. .. .. .. .. Stock market index (Jan. 2, 2,468 3,524 4,189 .. .. 3,921 4,255 4,334 4,240 4,819 4,321 4,601 4,824 5,030 5,129 1985=100) 14/ Memo: Nominal GDP (billions US$) 168.5 199.6 225.9 245.4 274.4 51.2 56.2 54.7 54.7 .. .. .. .. .. .. Source: National data sources. f = forecast 1/ The GDP series has a break in 2000. 2/ New methodology. Figures are based on the 2000 census. 3/ Non-agriculture minimum wage, National Capital Region 4/ IMF Government Financial Statistics (GFS) basis 5/ Total public sector domestic debt 6/ Central bank data, Balance-of-payments basis 7/ Electronics and other electronics 8/ Estimates 9/ Central bank data, % of annual GDP for quarterly figures 10/ Based on end-of-period gross international reserves 11/ Based on Depository Corporations Survey 12/ Interbank call rate 13/ World Bank staff estimates 14/ PSEi Composite, period average for annual figures CAPTURING NEW SOURCES OF GROWTH 74 COUNTRY PAGES AND KEY INDICATORS s m a L L Pa C i F iC is L a n d s Growth of 4.5 percent is expected in 2012, driven by continued activity in the construction sector, strong The small Pacific Island economies—comprising agricultural prices, and a pick-up in tourism receipts, Vanuatu, Samoa, Tonga, Kiribati, and Tuvalu—face in part from planned major international meetings. unique challenges in their size, remoteness, and Inflation is expected to accelerate to 3 percent, while vulnerability to external shocks. These challenges have the current account deficit is expected to gradually been highlighted during the global economic crisis and widen with higher consumer spending and increased its aftermath, with uneven recovery of tourism and import prices. Following recent accession to the World remittances across the islands. The resulting increase Trade Organization, and given current low revenues as in reliance on donor financing across most of the islands a proportion of GDP, an ongoing challenge for Vanuatu highlights challenges to achieving fiscal sustainability in is to sustainably expand the revenue base while the context of a narrow production base, heavy import rebalancing away from customs duties in order to reliance, and limited prospects for private-sector finance much-needed improvements in public services development. and infrastructure. Vanuatu’s economy grew by 4.3 percent during 2011, Samoa’s recovery from the combined impacts of compared with 2.2 percent in 2010. Weak copra and the global economic crisis and the 2009 tsunami other commodity prices, falling tourism arrivals following continued at a slower pace, with growth of 1.4 percent a recent peak in the second half of 2009, and the delay in FY2011/12. The economy weakened considerably of major infrastructure projects had constrained growth in FY2008/09-FY2009/10 reflecting the impact of over recent years. These constraints are now loosening, several factors, including fewer tourism arrivals, with accelerated growth reflecting strong agricultural declining agricultural production and exports, and a performance (as export commodity prices rise), and halt in production at the Yazaki automotive component continued growth in the construction sector, supported plant. The economy grew by 2.1 percent in FY2010/11, by donor-financed investments. Inflation during 2011 driven by accelerated remittance inflows in response reached just 0.8 percent. Credit growth slowed as the to the tsunami, the reopening of the Yazaki plant, and Reserve Bank moved to normalize monetary policy a substantial fiscal stimulus for economic recovery following its expansionary stance during recovery from and reconstruction, largely financed from concessional the global economic crisis. Price increases were also loans. restrained by the slight appreciation of the Vatu. The pace of recovery slowed in FY2011/12 due to a While consistently in deficit, the current account softening of remittances from post-tsunami peaks, a position has been narrowing since 2008, to 5.7 percent winding down of fiscal stimulus, and a slow recovery of GDP in 2011, due to the combined effects of in tourism. Public expenditure declined to 41.6 percent increased tourism arrivals and a recovery in agricultural of GDP, down from 46.8 percent in FY2009/10 exports. The government was initially targeting a small and 44.2 percent in FY2010/11, as post-tsunami fiscal surplus in 2011, but additional expenditure was reconstruction projects reached completion. Inflation approved through a supplementary budget in the reached a high of 11.4 percent in December 2011, before second half of the year, aimed at boosting growth and moderating in the first quarter of 2012, as weather partly offsetting delays in donor expenditure. The overall conditions impacted the supply of agricultural products. fiscal position remains sound, with debt of around The fiscal deficit narrowed to 5.5 percent of GDP, down 14 percent of GDP providing a buffer for responding to from 10 percent in FY2009/10, reflecting both fiscal further external shocks within the target debt ceiling of consolidation and strong revenue performance. Private 40 percent of GDP. sector credit has recovered from a period of contraction WORLD BANK EAST ASIA AND PACIFIC ECONOMIC UPDATE 2012, VOL. 1 COUNTRY PAGES AND KEY INDICATORS 75 during the crisis, but still grew by only 6.5 percent in Banks’ lending standards have remained tight while the FY2010/11, reflecting weak economic activity. provisioning for non-performing loans have contributed to increased costs of borrowing, limiting the projected The economy is expected to grow by about 2 percent in growth of private sector credit to just 0.9 percent in FY2012/13. The outlook remains sensitive to economic FY2011/12. developments in the US, New Zealand, and Australia, which are the main sources of tourism demand and Tonga is at high risk of debt distress, with current foreign remittance income. Production at the Yazaki plant debt equal to 42 percent of GDP, and the government seems to have been permanently scaled back, relative will continue to rely on donor grants to avoid large to levels prior to the global economic crisis. Continued contractions in public expenditure that would undermine efforts at fiscal consolidation to bring down deficits and prospects for further recovery. Growth is already keep debt levels within the policy target of 40 percent projected to slow to 1.2 percent in FY2012/13 due to of GDP will need to be carefully managed to avoid risks the withdrawal of fiscal stimulus associated with loan- to growth and service delivery. financed construction projects, and the medium-term outlook remains sensitive to recovery in remittances Tonga’s recovery from the impacts of the food and fuel and changes in global economic conditions. Inflation crisis and the global economic crisis continues, with is expected to accelerate to 6 percent as global food growth of 1.6 percent projected in FY2011/12. Growth and fuel prices remain elevated. Prioritizing public stalled at zero percent in FY2008/09 as poor economic expenditures so as to maintain essential service conditions in New Zealand and the US impacted on delivery and infrastructure, and efforts to improve remittance income, fewer tourist arrivals stunted revenue collection are vital in the context of ongoing demand, and adverse weather conditions constrained revenue declines and upcoming expiry of grace periods agricultural exports. The economy gradually recovered, on large loans. with fiscal stimulus – financed largely by grants and concessional loans – supporting growth of 1.9 percent in During the food and fuel crisis and global economic FY2009/10 and 1.4 percent in FY2010/11. Remittances crisis, Kiribati’s economy was adversely impacted by and tourism receipts, however, remained weak and high import prices and falls in seafarer remittances, commercial banks tightened lending conditions resulting in an economic contraction in 2008 and 2009. following a spike in non-performing loans after an earlier The subsequent recovery has been driven by donor lending surge. Credit to the private sector contracted infrastructure expenditure and the moderation of food by 15.6 percent in 2009/10 and 9.9 percent in 2010/11. and fuel prices, with growth reaching 1.8 percent in 2011. After inflation reached a high of 18.8 percent Recovery has continued in FY2011/12, with donor- during the global food and fuel crisis, prices decreased financed government spending and an uptick in tourism by 1.4 percent in 2010 and increased by 2.8 percent in receipts compensating for continued weak domestic 2011. The current account deficit widened to 23 percent revenue performance, but this rebound remains fragile. of GDP, including official transfers, reflecting import Inflation has eased to 3.0 percent, down from 7.9 percent growth accompanying recovery. in FY2010/11, as import prices have moderated and the exchange rate appreciated. Donor inflows have allowed Kiribati faces severe problems of fiscal sustainability. the continued build-up of foreign reserves, which now The government relies heavily on draw-downs from stand at an equivalent of 5.9 months of import cover. a sovereign wealth fund, the Revenue Equalization Private consumption has remained sluggish due to Reserve Fund (RERF), established with revenues the decline in remittance inflows, and exports remain from now-depleted phosphate deposits. Asset values unusually low—below 3 percent of GDP—due to declined during the global economic crisis, while supply-side constraints and poor weather conditions. withdrawals increased in the face of lower domestic CAPTURING NEW SOURCES OF GROWTH 76 COUNTRY PAGES AND KEY INDICATORS revenue. Income tax and customs revenues have Tuvalu’s economy grew by 1 percent in 2011, driven continued to fall throughout the economic recovery, with largely by a recovery in remittances. The economy total domestic revenues declining by 22 percent since contracted by 1.7 percent in 2009 and 0.5 percent in 2007. Declines have been driven by tax non-compliance 2010 due to reduced demand for seafarers—Tuvalu’s by poorly-performing state-owned enterprises, and largest source of foreign exchange earnings. Tuvalu problems with customs administration. This has placed experienced deflation for the year up to the second further pressure on the RERF, with a budgeted 2012 quarter of 2011 due the appreciation of the Australian fiscal deficit of more than 25 percent of GDP. At current dollar (which it uses as its domestic currency), with draw-down rates, the RERF will be depleted to one- average inflation of 0.5 percent over 2011. Efforts third of its current value before 2030. to constrain the fiscal deficit were effective, with improved revenue performance supporting a reduction The economy is expected to grow by 2.5 percent in in the 2011 deficit to 22.7 percent of GDP, down from 2012 on the back of large, donor-funded infrastructure 38.0 percent of GDP in 2010. Further fiscal challenges projects. While consumer prices are currently projected are expected in 2012, with revenues expected to to increase by 2.5 percent, additional inflationary decline slightly and additional donor support required to pressures may arise from strong construction-sector meet budget financing requirements. Priorities for the growth, higher import prices, and a recovery in private government include maintaining momentum in efforts sector credit through a scheme allowing Kiribati to improve the quality of expenditure and implementing Provident Fund account-holders to access loans using planned revenue reforms. pension savings as collateral. The government faces major challenges in implementing much-needed reforms to state-owned enterprises and improvements to revenue policy and administration. WORLD BANK EAST ASIA AND PACIFIC ECONOMIC UPDATE 2012, VOL. 1 COUNTRY PAGES AND KEY INDICATORS 77 s o L o m on is L a n d s tons, 10 percent more than 2010. Improved fishing performance in the second half of 2011 raised the full year fish catch to 28,200 tons, almost one-third more than 2010. With the strength in production from these export sectors, combined with high prices, the Solomon Islands recorded trade surpluses in the second half of 2011. Over the full year, the country recorded a trade deficit of just over US$3 million, compared with US$141-million deficit in 2010. This represents the strongest performance in this area since the 1990s. At Population 538,000 the same time, export values reached US$436 million, Population growth 2.6 percent 75 percent above 2010 totals. The improvement in the economy’s trade balance was partly attributable GDP (PPP, int’l US$ billions) 1.5 to the finalization of import-intensive investments in GDP per capita (PPP, int’l US$) 2,579 the Gold Ridge mine and telecommunications. Import Surface area 28,900 sq. km. values rose at almost the pace of exports in 2011 due Capital Honiara to increases in the value of imported fuel, vehicles, and Source: World Development Indicators. basic machinery. The Solomon Islands continued its recent strong This stronger trade position, ongoing transfers from economic growth through 2011 and early 2012, though development partners, and fishing licence payments, growth may have peaked. The government has used lifted foreign exchange reserves to SBD 3.24 billion the recent period of strong output growth to rebuild (approx US$439 million) as at March 2012. This is and maintain foreign exchange and fiscal buffers, while equivalent to 10 months of imports, a level of cover the adverse effects from the rise in global fuel prices maintained since late 2010. Foreign investors’ interest in 2011 faded. in the Solomon Islands, as indicated by foreign direct investment applications, spiked in late 2011 and was Elevated levels of logging and a gradual move to full focused on forestry, wholesale and retail trade, and production capacity at the Gold Ridge mine continued mining. The growth in reserves continues to be the to make the largest contributions to growth. Of main factor increasing the money supply and adding to the 9 percent estimated expansion in the Solomon the structural surplus liquidity in the banking system. Islands’ economy in 2011, around 3 percentage points Banks appear to have started lending these funds are estimated to have come from logging, another again, with credit to the private sector at the end of 2 percentage points from the start of production at 2011 being 6 percent higher than a year earlier. the Gold Ridge mine, and the remainder from strong government spending and donor support. Log exports On average, Honiara consumer price inflation slowed totaled almost 2 million m3 in 2011, compared with just through the second half of 2011, while the year-on-year over 1.4 million m3 in 2010, itself a record year; a trend rate peaked at 10.8 percent in October 2011. By April that does not augur well for the sustainability of forest 2012, it had slowed to 7.9 percent. Volatile betelnut and resources. Gold production totaled around 39,500 oz, energy prices were the main drivers of the increase compared with a mine capacity of two- to three-times and subsequent slowing in the CPI, although there is this amount. Output of other agricultural commodities some evidence that movements in fuel prices have also strengthened. Palm oil production reached 31,592 passed into other prices. A particularly wet rainy season CAPTURING NEW SOURCES OF GROWTH 78 COUNTRY PAGES AND KEY INDICATORS impacted fruit and vegetable prices through the first development budget to parliamentarians’ constituency quarter of 2012, as did a large adjustment in electricity funds has been increased. These funds can be spent tariffs reflecting higher generator fuel costs. largely at the Member of Parliament’s discretion in their constituency, and the disbursement rate on these While accumulating reserves, authorities have allowed funds is generally high. the Solomon Islands dollar to appreciate a further 4.3 percent against its US counterpart between The outlook for 2012 is for a moderation in the rate of September 2011 and March 2012. This builds on the GDP growth. While the continued commissioning of the 4.1 percent revaluation implemented in June 2011. Gold Ridge mine will again contribute to output growth Beyond this, the SBD has generally moved with the US in 2012, recent logging rates are not sustainable and are dollar’s fluctuations against other currencies through this likely to ease with the weakening in global timber prices. period. The real effective exchange rate appreciated by This factor alone is likely to slow GDP growth in 2012 by 14 percent overall in the year to January 2012, although 2 to 3 percentage points compared with the 2011 rate. it is still 7.4 percent weaker than the high recorded in After 2013, the EU will require that the sustainability of March 2009. The exchange rate is assessed to be a wood products imported into the region be certified, key determinant of inflation in the Solomon Islands, which has the potential to affect some of Solomon making exchange rate management an important tool Islands’ log exports. While significant quantities are of monetary policy. destined for construction and for products that are used within East Asia, some logs are processed into The Solomon Islands government’s budget position products destined for the EU, meaning that the relative benefited from the strength in export values and donor value of certified, sustainably harvested timber is likely support. The government presented a fiscal surplus to rise. Demand in the non-resource economy has of SBD 171.6 million (approximately US$23 million, or benefited from both donor flows and the rising receipts around 5 percent of GDP) against a projected shortfall of of cash crop producers. However, both are likely to SBD 126.6 million in 2011, on spending of SBD 2.1 billion. be near their peaks. This weaker outlook emphasizes Recurrent expenditures, particularly payroll, were in the importance of the government’s current efforts line with budget projections, while government-funded to rebuild foreign exchange and government account development expenditures fell considerably short of balances during the current upswing. budgetary plans, in part attributable to the late adoption of the 2011 budget. The 2012 SBD 3-billion budget includes a near 50 percent increase in public spending. It maintains government funding in core service delivery for health (at above 10 percent of recurrent spending), education (over 22 percent of recurrent spending), and a large increase in the allocation for police. However most of the increase is associated with the government’s contribution to the development budget, an area that has suffered from poor realization rates in the past. Towards improving this performance, in 2012 the government plans to develop a four-year rolling expenditure framework to link planning with annual budgets. The framework aims to allocate budgetary resources to programs, activities, and projects. The allocation in the WORLD BANK EAST ASIA AND PACIFIC ECONOMIC UPDATE 2012, VOL. 1 COUNTRY PAGES AND KEY INDICATORS 79 Solomon Islands Key Indicators 2008 2009 2010 2011e 2012f 2013f Year Year Year Year Year Year Output, Employment and Prices GDP (% change y-y) 7.1 -4.7 7.0 9.0 6.0 4.0 Consumer price index (% change y-y) 18.3 1.8 0.7 9.0 5.0 4.0 Public Sector Government revenues (% GDP) 45.2 49.8 59.3 61.5 58.0 55.0 Government expenditures (% GDP) 45.5 48.2 53.4 55.0 54.0 54.0 Government balance (% GDP) -0.3 2.2 5.9 6.5 4.0 1.0 Total public sector debt (% GDP) 35.0 33.2 28.1 21.3 18.5 17.5 Foreign Trade, BOP and External Debt Trade balance (millions US$) -132 -109 -215 -104 -82 -78 Exports of goods (millions US$) 193 235 333 524 596 600 (% change y-y) 21.1 21.5 41.8 57.4 13.7 0.6 Key export (% change y-y) 1/ 10.1 -20.1 41.5 50.4 -10.0 -10.0 Imports of goods (millions US$) 409 344 548 628 678 678 (% change y-y) 74.1 -15.7 59.2 14.7 7.9 0.0 Current account balance millions US$) -106 -128 -200 -90 -136 -118 (% GDP) -16.4 -21.4 -29.6 -11.1 -15.0 -12.0 Foreign direct investment, net (millions US$) 91 117 236 156 105 150 Total external debt (millions US$) 207 194 218 202 206 221 (% GDP) 32.1 32.4 32.2 25.0 22.7 22.6 Debt service ratio (% exports of g&s) 4.2 3.6 3.0 2.0 1.5 1.2 Foreign exchange reserves, gross (millions US$) 2/ 90 146 266 365 390 395 (months of imports g&s) 3.1 3.1 3.2 6.5 6.4 7.0 Financial Markets Domestic credit (% change y-y) 3/ 26.5 -4.2 -12.4 2.0 6.0 8.0 Exchange rate (SBD$/US$, eop) 7.54 7.90 7.80 7.35 7.35 7.4 Real effective exchange rate (2005=100) 120.6 112.1 109.8 109.8 109.8 109.8 (% change y-y) 6.9 -7.0 -2.0 0.0 0.0 0.0 Memo: Nominal GDP (millions US$) 646 598 676 810 907 979 Source: National data sources and IMF. e = estimate f = forecast n.i. = no issues 1/ Logs 2/ Includes foreign assets of non-bank financial institutions 3/ Domestic credit to the private sector CAPTURING NEW SOURCES OF GROWTH 80 COUNTRY PAGES AND KEY INDICATORS T h a iL a n d seven flooded industrial estates was expected by the beginning of the second quarter of 2012. However, as of March 2012, only around 60 percent of the factories in the industrial estates are operational. This slow recovery is reflected in the manufacturing production index, which continued to contract in January and February 2012 by 15.0 percent and 3.4 percent respectively, while capacity utilization is only slowly growing. This slower-than-expected recovery reflected the greater-than-expected time taken for rehabilitation of the factories. As many firms in the industrial estates are manufacturers of relatively high-tech products, time Population 69.1 million taken to import the new machinery, install them, train Population growth 0.6 percent employees on the use of the new machineries, and also clean the factories to meet the required standards have GDP (PPP, int’l US$ billions) 591.3 been longer than originally expected. There is evidence GDP per capita (PPP, int’l US$) 7,918 of some firms moving out of the industrial estates, but Surface area 513,120 sq. km. the numbers are low (less than 5 percent of the total Capital Bangkok number of factories as of March). It is now expected Source: World Development Indicators. that full recovery will most likely take place by the end of the second quarter of this year. The Thai economy will rebound this year from a number of major shocks in 2011: the Japan earthquake in March Exports, Thailand’s major engine of growth, have also 2011, heavy floods in the last quarter of the year, and continued to be affected by the impact of the floods into the EU economic slowdown through the year. The flood at least the first quarter of the year. With the slower- had swept the seven industrial estates in Ayudhaya and than-expected recovery of the manufacturing firms in Pathumthan, which together account for around a third the seven industrial estates, of which a large share of of industrial production in Thailand, from September their production is for export, Thai exports continued to December 2011. As a result, manufacturing firms to contract in January by 6.1 percent year-on-year after halted production and companies that are a part of their contracting by 5.2 percent in the final quarter of 2011. supply chain also had to suspend work. This resulted in Exports have started to grow again, although slowly, at a sharp fall in manufacturing production by 34 percent 1.2 percent year-on-year in February. Exports for the year-on-year in the last quarter of 2011, especially in entire year will most likely grow by less than 10 percent, the automobile, hard disk drive, integrated circuits, and a rate significantly below the normal average of double- electrical appliance industries. Agricultural production digit growth in the non-flood affected years. This is due in the last quarter also contracted as rice crops in the to a combination of the impacts of the floods and also Central region were damaged. Tourism receipts also the slowdown in the economies of Thailand’s major suffered as arrivals began to decline in October and markets, such as the Euro zone and China. contracted in November and December. As a result, real GDP growth contracted by 9 percent year-on-year The floods also severely affected domestic demand, in the fourth quarter of 2011 and full-year GDP grew by which began to slowly recover at the beginning of only 0.1 percent. this year. Seasonally-adjusted monthly data of private consumption and investment showed monthly Recovery from the flooding has progressed though contractions from September through to November been slower than expected. Full recovery of the 2011. Automobile sales plummeted in October and WORLD BANK EAST ASIA AND PACIFIC ECONOMIC UPDATE 2012, VOL. 1 COUNTRY PAGES AND KEY INDICATORS 81 November. In addition to the disruption of production, Monetary policy has been accommodative, with the the floods affected transportation networks, resulting in policy rates reduced to promote recovery from the the shortage of some products from firms outside the floods. Inflation has remained in check and will most flood zone. Investments also dried up, as production likely average below 4 percent this year. Headline inflation was disrupted and construction and transportation of (core inflation) rose from 3.0 percent (1.4 percent) at equipment and machinery were difficult. There are signs the end of 2010 to its peak of 4.19 percent (2.9 percent) of recovery in both private consumption and investment in November 2011 before starting to ease in December since January. Private consumption resumed a modest and now stands at 3.45 percent (2.77 percent) in March year-on-year growth of 0.2 percent in January 2012, 2012. To curb inflation and inflation expectations, and a strong 6.6 percent in February as the floods the Bank of Thailand raised its policy rate (the subsided and home rehabilitation began. Similarly, 1 day repurchase rate) six times in 2011 from 2.25 to private investment also started to expand in January by 3.50 percent by August 2011. However, the effect of 0.6 percent year-on-year and by 8.8 percent in February the heavy floods in key economic areas prompted the with rehabilitation of the affected factories. Bank of Thailand to ease its hawkish stance in cutting the policy rate by 25 basis points in November 2011 Public investments in flood prevention and water and another 25 basis points in January to 3.00 percent. management plans have been prepared, but However, the government’s raising of the minimum implementation has just begun. Public investments last wage and rice prices will add to price pressures. year were affected by a change in government, delayed passage of the FY2012 budget (from September 2011 to As of the beginning of April 2011, Thailand’s international February 2012), as well as the floods. Public investment reserves totaled US$178.5 billion (equivalent to in real terms contracted by 8.7 percent year-on-year almost nine months of imports), falling from a peak last year. In response to the floods, the government of US$187.5 billion in April 2011. The balance of has allocated around THB 137 billion (US$4.6 billion) payments should be slightly lower than that of last for flood prevention and water management projects year’s US$1.2 billion as the current account surplus will this year. The Cabinet also approved an additional THB be smaller as imports of capital goods sharply rise for 350 billion (US$11.7 billion) in an Emergency Decree for flood-related construction and rehabilitation, particularly a three-year flood prevention and water management of the manufacturing sector. project. Most of this latter amount, however, will be used for projects that will begin next year. Public investment this year should see an expansion of more than 10 percent in real terms through the increase in public investment funds from last year. With flood recovery now slowly underway, the key downside risk to the economy this year remains the slow growth of the Euro zone and China. Although less than 10 percent of direct Thai exports travel to Europe, exports of parts to other countries—such as China—would be affected, as the EU is the destination for the final products (Thai exports to China account for around 15 percent of total exports). A direct slowdown in demand in China would also negatively affect Thai exports. CAPTURING NEW SOURCES OF GROWTH 82 COUNTRY PAGES AND KEY INDICATORS Thailand Key Indicators 2009 2010 2011 2012f 2013f 2011 2012 2011 2012 Year Year Year Year Year Q1 Q2 Q3 Q4 Q1 Dec Jan Feb Mar Apr Output, Employment and Prices Real GDP (% change y-y) -2.3 7.8 0.1 4.5 5.0 3.2 2.7 3.6 -9.0 .. .. .. .. .. .. Domestic demand (% change y-y) -6.9 10.3 2.5 .. .. 0.7 3.1 2.8 3.2 .. .. .. .. .. .. Industrial production index 166.1 190.0 172.4 .. .. 187.7 181.7 195.3 124.9 174.3 140.7 158.6 172.2 192.0 .. (2000=100) (% change y-y) -7.2 14.4 -9.3 .. .. -2.1 -2.5 1.8 -34.2 -7.1 -25.3 -15.2 -3.2 -3.2 .. Unemployment (%) 1.5 1.0 0.7 .. .. 0.8 0.6 0.7 0.6 .. 0.4 .. .. .. .. Real wages (% change y-y) 1/ -1.6 3.3 7.2 .. .. 4.4 1.6 7.3 8.0 .. .. .. .. .. .. Consumer price index (% change -0.8 3.3 3.8 3.5 .. 3.0 4.1 4.1 4.0 3.4 3.8 3.4 3.4 3.4 2.5 y-y) Public Sector Government revenues (% GDP) 15.9 17.2 17.7 16.8 15.8 14.0 23.1 18.6 16.5 .. .. .. .. .. .. Government expenditures (% GDP) 21.1 19.5 21.4 22.8 23.3 21.3 21.2 17.5 19.9 .. .. .. .. .. .. Government balance (% GDP) 2/ -5.1 -2.3 -3.7 -6.0 -7.5 -10.3 5.2 4.3 -10.2 .. .. .. .. .. .. Domestic public sector debt (% 39.4 38.8 37.7 41.7 42.1 37.9 37.4 38.3 37.4 .. 37.8 .. .. .. .. GDP) 3/ Foreign Trade, BOP and External Debt Trade balance (billions US$) 19.4 28.0 23.9 .. .. 8.0 7.3 7.7 1.0 .. -0.2 0.5 .. .. .. Exports of goods (billions US$) 150.7 193.7 225.8 .. .. 56.0 57.3 63.3 49.2 .. 16.9 15.5 .. .. .. (% change y-y) -14.0 28.5 16.6 .. .. 27.3 19.2 27.3 -5.2 .. -2.1 -6.1 .. .. .. Key export (% change y-y) 4/ -13.5 20.9 -2.5 .. .. 1.8 6.7 10.6 -29.0 .. -30.6 -26.5 .. Imports of goods (billions US$) 118.2 161.9 201.9 .. .. 48.0 50.0 55.6 48.2 .. 17.1 15.0 .. .. .. (% change y-y) -25.2 36.7 24.7 .. .. 26.4 28.0 33.4 12.2 .. 19.6 -2.5 .. .. .. Current account balance (billions 21.9 13.2 11.9 .. .. 5.9 .9 3.1 1.8 .. 1.9 0.8 .. .. .. US$) (% GDP) 8.3 4.1 3.4 .. .. 6.6 1.1 3.5 2.3 .. .. .. .. .. .. Foreign direct investment (billions 4.9 9.7 8.4 .. .. 0.9 2.5 2.4 2.6 .. 0.8 .. .. .. .. US$) 5/ External debt (billions US$) 6/ 75.3 100.6 .. .. .. 108.2 112.0 115.6 .. .. .. .. .. .. .. (% GDP) 28.6 31.6 .. .. .. 30.1 32.0 32.4 .. .. .. .. .. .. .. Short-term debt (billions US$) 6/ 33.1 50.7 .. .. .. 55.7 58.9 58.7 .. .. .. .. .. .. .. Debt service ratio (% exports of 7.6 4.7 .. .. .. 3.9 3.0 2.4 .. .. .. .. .. .. .. g&s) Foreign exchange reserves, gross 138.4 172.1 182.2 .. .. 181.6 184.9 180.1 175.1 179.2 175.1 178.6 180.4 179.2 179.0 (billions US$) (months of imports of g&s) 10.7 10.0 8.7 .. .. 9.0 8.8 7.9 8.7 .. .. .. .. .. .. Financial Markets Domestic credit (% change y-y) 7/ 3.1 12.6 16.2 .. .. 14.9 16.1 17.5 16.2 .. 16.2 16.0 .. .. .. Short-term interest rate (% p.a.) 8/ 1.4 1.5 3.0 .. .. 2.3 2.8 3.4 3.3 3.0 3.3 3.0 3.0 3.0 3.0 Exchange rate (Baht/US$, ave) 34.3 31.7 30.5 .. .. 30.5 30.3 30.1 31.0 31.0 31.2 31.6 30.7 30.7 30.9 Real effective exchange rate 108.8 113.4 111.5 .. .. 113.0 111.7 111.4 110.0 .. 110.8 110.3 109.5 .. .. (2000=100) 9/ (% change y-y) -3.6 4.2 -1.6 .. .. 2.6 -1.5 -1.9 -5.3 .. 7.8 10.0 10.3 .. .. Stock market index (Dec. 735 1,033 .. .. .. 1,047 1,041 916 1,025 1,196 1,025 1,084 1,161 1,196 1,025 1996=100) 10/ Memo: Nominal GDP (billions US$) 263.4 318.7 356.8 .. .. 89.9 87.5 89.3 79.1 .. .. .. .. .. .. Source: National data sources, World Bank staff estimates. f = forecast 1/ Average wage of employed person, using the National Statistical Office Labor Force Survey, deflated by CPI inflation 2/ Cash balance of central government 3/ Includes domestic central government (CG) debt, domestic debt of non-financial state enterprises, and the Financial institutions Development Fund (FIDF) debt. Series was revised by adding the Village Fund (VF) and the Energy Fund Public Organization (EFPO). 4/ Machinery and mechanical appliances 5/ Non-bank FDI 6/ Bank of Thailand figures 7/ Private credits from domestically registered commercial banks, branches of foreign banks, international banking facilities, finance companies, specialized banks, thrift and credit cooperatives, and money market mutual funds 8/ One-day repurchase rate, average 9/ World Bank staff estimates 10/ Bangkok SET WORLD BANK EAST ASIA AND PACIFIC ECONOMIC UPDATE 2012, VOL. 1 COUNTRY PAGES AND KEY INDICATORS 83 T im o R - L e s T e a downstream petroleum industry, to be financed by moderate foreign borrowing, and greater withdrawals from the nation’s petroleum fund. This sovereign wealth fund, managed by the Santiago Principles, was valued at US$9.3bn in 2011, or nearly nine times non-oil GDP. The total petroleum wealth of the country includes the petroleum fund and an estimated present value of US$13.5 billion in revenues from fields currently under production. GDP growth is estimated to be 10.6 percent in 2011 compared with 9.5 percent in 2010, thanks to an Population 1.1 million expected rebound in agricultural production and a Population growth 2.2 percent 44 percent increase in public spending. In 2012, GDP growth is estimated to be 10 percent reflecting more GDP (PPP, int’l US$ billions) 1.0 moderate agricultural growth and a more than 50 percent GDP per capita (PPP, int’l US$) 876 boost in public spending to US$1.67 billion. The UN Surface area 14,870 sq. km. mission (UNMIT), is scheduled to begin its withdrawal Capital Dili at the end of 2012. Recent estimates suggest that Source: World Development Indicators. UNMIT’s direct contribution to total 2011 GDP (oil and non-oil) was around 1 percent, which is equivalent to Timor Leste’s non-oil GDP has grown at nearly 4.4 percent of non-oil GDP. Four-fifths this contribution 12 percent annually over the past five years. Growth comprises local payments to international staff. has been driven largely by agriculture, services related to trade and transport, and public spending. The latter While the absolute value of Timor Leste’s oil wealth is financed by petroleum revenues, buoyed by global oil is low relative to other petroleum endowed nations, it prices. Inflationary pressures are increasing as global is one of the most dependent on petroleum revenues. commodity prices remain high, the US dollar (Timor Petroleum receipts (including investment returns) are Leste’s currency) depreciates against major trading estimated to peak in 2011 at US$2.8 billion before partners, public spending adds to aggregate demand, and falling to US$2.1 billion in 2012. Estimates naturally while supply bottlenecks emerge. Rising inflation may remain highly sensitive to global oil prices. Thanks to slow progress on poverty reduction and compromise these receipts, the estimated overall fiscal surplus in competitiveness and economic diversification in 2012 is 37 percent of GDP. But the non-oil deficit is the longer term. The real effective exchange rate estimated at 130 percent of GDP. Forward spending appreciated faster than the nominal in the last quarter plans have triggered a debate about adherence to a of 2011, as inflation picked up pace. The presidential fiscal anchor that proposes a non-oil fiscal deficit in elections in March/April and Parliamentary elections in line with the sustainable income from the petroleum June may affect 2012 economic performance. fund, which is calculated as 3 percent of the petroleum wealth. In 2011, domestic revenues represented just The government’s 2011-2030 Strategic Development 10.2 percent of GDP and covered 9.9 percent of public Plan emphasizes the importance of high-quality public spending. Domestic revenues are expected to grow spending and the accumulation of physical and human by 25.8 percent in the 2012 budget, and to outpace capital to stimulate the economy and enhance absorptive GDP growth in the medium-term, especially if planned capacity. The plan envisages public investment in tax policy and administration reforms take effect. But non-oil sectors, such as agriculture and tourism, and spending will grow even faster, thereby increasing the CAPTURING NEW SOURCES OF GROWTH 84 COUNTRY PAGES AND KEY INDICATORS reliance on financing from the petroleum fund. The 2012 sustainability analysis tests this scenario and puts budget shows the government withdrawing roughly Timor Leste at a low risk of debt distress on present double the estimated sustainable income (ESI) for the assumptions. Parliament also recently passed a law next four years, and the Strategic Development Plan on public private partnerships as a further means of suggests this will continue well beyond that. These generating public financing. excess withdrawals will, on present assumptions, slow the growth in the value of the petroleum fund and Institutional reforms continue, including the ESI, but should also spur non-oil growth and generate government publication of a “Citizens Budget� in partially-compensating domestic revenues. 2012. A “Transparency Portal� was launched late 2011, enabling the public to access data on revenue and public Timor Leste’s external balance reflects the country’s spending. The national accounts for 2004–10 will soon heavy reliance on imports. Like the fiscal balance, the be published for the first time since 2006. It is hoped current account balance is supported by petroleum that ongoing adjustments to the new institutional income. In 2011, Timor Leste imported US$689 million structure created to manage the government’s of goods, while exports were valued at US$22 million; multiannual infrastructure fund (just under half the 2012 coffee represented 90 percent of this figure. Petroleum budget) will lead to stronger design, implementation, receipts are recorded as income rather than exports on and ultimately higher rates of economic return on public the balance of payments. Thanks to this income, the investment. The much-awaited Land Law was passed 2011 estimated current account balance is a surplus of by Parliament in February, but vetoed by the President US$2.4 billion, or a healthy 225 percent of GDP. Year- in March. If passed, this should provide greater certainty end official reserves stood at US$450 million, equal to around land ownership, improving the incentives for eight months of 2011 imports. Adding the petroleum investment. It should also allow for the opportunity to fund increases this to roughly 170 months of cover. use land as collateral to access finance, an issue that remains a constraint to growth in Timor Leste. The government is increasingly aware of the perils of high inflation. Despite easing to 12.7 percent in February, The formal banking sector comprises branches of an inflation (measured as CPI in Dili) has been on the rise, Australian, Indonesian, and Portuguese banks, and a peaking at 17.7 percent in January. Recent analysis by locally-incorporated microfinance institution. Credit the Ministry of Finance emphasizes the effect of global to the private sector is estimated to have expanded food prices (food constitutes 60 percent of the CPI rapidly, growing by 18.5 percent in 2011, after basket) and the depreciation of the US dollar relative stagnating in 2010. But this still constitutes a relatively to Timor Leste’s major trading partners. However, low 12.5 percent share of GDP. January deposit rates the analysis also recognizes the role that rising public were 0.6 percent and lending rates 12.1 percent, with spending, and especially recurrent spending, can play the spread reflecting high administrative costs and in driving inflation. It proposes a more careful review risk. Non-performing loans declined steadily from of the pipeline of investment projects and recurrent 42 percent of total loans in 2010 to 36 percent at the spending, noting the importance of investments that end 2011. Loan loss provisioning was US$63.5 million, stimulate aggregate supply and productivity. or 133 percent of the value of non-performing loans, effectively mitigating this risk to the banking system. The government will borrow for the first time this year. The 2012 budget allows foreign concessional borrowing of up to US$160 million, of which US$43 million is allocated for 2012. This is part of a wider plan to borrow up to US$483 million over 2012-16 to finance capital spending. The 2011 joint World Bank/IMF debt WORLD BANK EAST ASIA AND PACIFIC ECONOMIC UPDATE 2012, VOL. 1 COUNTRY PAGES AND KEY INDICATORS 85 V ie T n a m domestic policies in 2011 have dampened investment (particularly in infrastructure and real estate) and private consumption. Thanks to a combination of these measures and falling food prices, inflation declined to 10.5 percent year-on-year in April 2012 from a peak of 23 percent in August 2011. The current account deficit is estimated to have declined to 0.5 percent of GDP in 2011, from 4.1 percent in 2010, mainly due to a broad-based rebound in exports. Export earnings soared by 34.2 percent in 2011 and continue to grow. Exports in the first quarter of 2012 were Population 86.9 million 23.6 percent higher compared to the same period last Population growth 1.0 percent year. Key labor intensive manufacturing exports such as garments, footwear, and furniture continued to grow GDP (PPP, int’l US$ billions) 278.6 at 14-18 percent in the first three months of this year. GDP per capita (PPP, int’l US$) 3,009 Surface area 329,310 sq.km. Pressures on the exchange rate have continued to Capital Hanoi decline in the first quarter of 2012, as confidence in the Source: World Development Indicators. dong has gradually picked up. The unofficial exchange rate has remained close to the lower edge of the plus/ After a prolonged period of heightened turbulence, minus 1 percent band around the official rate since the Vietnam’s economy is gradually entering a more 8.5 percent devaluation of the Vietnamese Dong against stable macroeconomic environment. Between 2007 US dollar in February 2011. The increased supply of US and 2010, partial adjustments to a series of shocks, dollars in the market has enabled the State Bank of including a surge in capital flows, resulted in rising Vietnam (SBV) to replenish foreign exchange reserves macroeconomic vulnerabilities evidenced by higher in the first months of 2012, which are reportedly at inflation, falling reserves, an increase in public and nearly 7.5 weeks of imports. external deficits, and structural weaknesses in the banking and enterprise sectors. These vulnerabilities Government measures have led to a sharp decline in and the absence of a persuasive strategy to address credit growth, from 32.4 percent at the end of 2010 to them led to deterioration in sentiment towards Vietnam. 14.3 percent by the end of last year. However, asset The situation, however, started to reverse after the quality has deteriorated in part due to rapid credit government introduced measures in February 2011 to growth before 2011 and the slowdown in the real sector. stabilize the economy and to ensure social stability (the Official non-performing loans have increased from so-called Resolution 11). 2.2 percent of assets at the end of 2010 to 3.6 percent in March 2012, but are likely to be higher if measured by While Vietnam’s economy has started to stabilize, international accepted standards. Monetary tightening the significant tightening of macroeconomic policies, has also added liquidity stress in some smaller banks. In along with uncertain global economic environment, are response to this, the authorities have provided liquidity beginning to take a toll on its economic growth. Real and other support to ailing banks. GDP growth decelerated from 6.8 percent in 2010 to 5.9 percent in 2011 and further to 4.0 percent in the Maintaining macroeconomic stability remains the first quarter of 2012 as domestic demand slowed, government’s priority. Economic growth is expected affecting construction, services, and utilities. Tighter to be around 5.7 percent, and year-end inflation is CAPTURING NEW SOURCES OF GROWTH 86 COUNTRY PAGES AND KEY INDICATORS forecast to decline to below 10 percent in 2012. In a The unresolved problems in the banking sector are move to shore up the economy, SBV reduced policy likely to remain a source of concern for Vietnam in the interest rates by 200 basis points in March and coming years. The SBV has stepped up its supervision April (from 15 to 13 percent) and announced further efforts and raised minimum capital requirements in reductions of at least 100 basis points every quarter response to concerns about the health of the banking during 2012. Cooling demand and slow credit growth sector. At the end of 2011, three weak banks with should dampen the inflationary impact of the rate cuts, liquidity problems and high non-performing loans which at the same time should help ease financing cost were merged and the combined bank is now being of the private sector. closely supervised by SBV. On March 1, the Prime Minister issued Decision 254 on “Restructuring credit The government is making efforts at fiscal consolidation, institution system in the 2011–15 period.� The Decision following expansionary policies in 2009 and 2010 in provides a framework to deal with weak banks and response to global financial crisis. The fiscal deficit is sets out a number of targets to be achieved by 2015. estimated to have declined to 2.7 percent of GDP in It sets out a number of restructuring options including 2011 against a budgeted deficit of 6.5 percent, and in letting the SBV directly acquire the equity of weak contrast to almost 6.0 percent in 2010. For 2012, the banks, increasing the ownership limit for foreign banks budget deficit is expected to widen to 6.0 percent of in domestic credit institutions, encouraging healthy GDP, but the government may be able to keep it below banks to buy good quality assets and loans from weak this since past revenue performance is consistently banks, and allowing banks to sell their bad debts to understated. Maintaining fiscal discipline is a priority the Debt and Asset Trading Company. However, the to help relieve the burden on monetary policy as the actual implementation of the plan, the restructuring economy begins to stabilize, and to help maintain debt options to consider, and the related implications are still sustainability over the medium-term. under discussion. Preparations for a Financial Sector Assessment Program are also underway. Vietnam’s public debt is likely to remain sustainable if the economic recovery continues and the authorities Vietnam’s near-term policy challenge is to maintain remain on the current path of fiscal consolidation. The macroeconomic stability and restore confidence among World Bank’s Low-Income Country Debt Sustainability investors, while also addressing longer-term structural Analysis shows that Vietnam remains at a low risk of reforms. The government is stepping up efforts to debt distress. restructure SOEs, public investment management, and the financial sector. A number of key regulations, The largest source of uncertainty to debt sustainability including the ones involving medium-term investment comes from implicit obligations to state-owned planning, management and supervision of state capital enterprises, which are not captured under government investment in SOEs, and performance monitoring and government-guaranteed debt statistics. A reliable of SOEs are likely to be enacted during 2012. Even estimate of such liabilities is not available, which limits if only a subset of the announced structural reforms the government’s ability to manage associated risks. is implemented steadfastly, Vietnam should return The authorities are stepping up efforts to collect reliable to a more sustainable macroeconomic environment and up-to-date information on contingent liabilities while laying the foundations for greater efficiency and (mostly in the state-owned enterprise or SOE sector) productivity to drive medium- and longer-term growth. and to monitor and manage potential fiscal risks. Greater transparency and disclosure of information is critical to build confidence among market participants. WORLD BANK EAST ASIA AND PACIFIC ECONOMIC UPDATE 2012, VOL. 1 COUNTRY PAGES AND KEY INDICATORS 87 Vietnam Key Indicators 2008 2009 2010 2011e 2012f 2013f Year Year Year Year Year Year Output, Employment and Prices Real GDP (% change y-y) 6.2 5.3 6.8 5.9 5.7 6.3 Industrial production index 1/ (% change y-y) 7.4 7.1 9.3 6.8 7.0 7.5 Unemployment (%) 2/ 4.7 4.6 4.4 4.0 4.0 4.0 Consumer price index (% change y-y) 19.9 6.5 11.8 18.1 9.5 6.0 Public Sector Government revenues (% GDP) 28.9 27.3 27.8 27.6 27.8 27.6 Government expenditures (% GDP) 29.4 34.5 33.1 30.3 31.4 30.4 Government balance, official (% GDP) 3/ 1.2 -3.9 -2.0 -0.6 -1.6 -1.0 Government balance, general (% GDP) 4/ -0.5 -7.2 -5.2 -2.7 -3.6 -2.8 Public sector debt (% GDP) 5/ 42.9 51.2 54.2 48.8 49.0 47.7 Foreign Trade, BOP and External Debt Trade balance (billions US$) -12.8 -8.3 -5.1 -0.5 -2.2 -2.5 Exports of goods (billions US$) 62.7 57.1 72.2 96.9 110.5 126.0 (% change y-y) 29.1 -8.9 26.4 34.2 14.0 14.0 Key export (% change y-y) 6/ 23.1 -40.2 -23.0 45.9 5.0 5.0 Imports of goods (billions US$) 80.7 69.9 84.8 106.7 123.9 141.3 (% change y-y) 28.6 -13.3 21.2 25.9 16.0 14.1 Current account balance (billions US$) -10.8 -6.1 -4.3 -0.6 -2.1 -2.0 (% GDP) -11.9 -6.6 -4.1 -0.5 -1.6 -1.4 Foreign direct investment (billions US$) 9.3 6.9 7.1 7.3 7.3 7.3 External debt (billions US$) 29.2 38.7 45.4 50.3 55.6 59.8 (% GDP) 32.4 41.6 43.8 41.0 41.1 40.5 Debt service ratio (% exports of g&s) 2.9 4.9 3.3 3.4 3.8 3.9 Foreign exchange reserves, gross (billions US$) 23.0 14.1 12.4 .. .. .. (months of imports of g&s) 3.4 2.4 1.8 .. .. .. Financial Markets Domestic credit (% change y-y) 25.4 39.6 32.4 14.3 16.0 16.0 Short-term interest rate (% p.a.) 7/ 8.1 10.7 14.0 14.0 13.0 .. Exchange rate (Dong/US$, eop) 8/ 17,483 18,479 19,498 20,828 20,828 .. Real effective exchange rate (2000=100) 125.7 115.7 116.9 121.9 .. .. (% change y-y) 18.7 -8.0 1.0 4.3 .. .. Stock market index (Jul. 2000=100) 9/ 316 495 485 352 .. .. Memo: Nominal GDP (billions US$) 90 93 104 123 135 148 Sources: Vietnam Government Statistics Office, State Bank of Vietnam, IMF, and World Bank staff estimates. e = estimate f = forecast 1/ The industrial production index (IPI) is a new series replacing previous “industrial production value in constant 1994 price�. 2/ Urban areas 3/ Excludes off-budgetary items 4/ Includes off-budgetary items 5/ Public and publicly-guaranteed debt 6/ Crude oil 7/ Three-month deposit, end-of-period. Data for 2012 is as of March 30 8/ Inter-bank exchange rate. Data for 2012 is as of March 30 9/ Ho Chi Minh Stock Index CAPTURING NEW SOURCES OF GROWTH 88 aPPEndix taBlES Appendix Table 1 Real GDP Growth percent change from a year earlier Hong Kong Taiwan, China Indonesia Malaysia Philippines Thailand Vietnam SAR, China Korea, Rep. Singapore East Asia China Q1-2002 8.9 3.5 2.7 3.2 4.5 .. -1.0 6.6 -0.8 1.6 .. Q2-2002 8.0 4.2 4.7 4.0 5.0 .. 0.5 7.0 4.5 6.5 .. Q3-2002 8.1 5.6 7.1 2.7 5.8 .. 2.8 6.8 6.8 6.8 .. Q4-2002 8.1 4.7 6.9 4.6 6.0 .. 4.8 8.1 6.4 6.0 .. Q1-2003 10.8 4.9 6.3 4.8 6.9 .. 4.1 3.5 4.2 4.7 .. Q2-2003 7.9 5.0 5.9 4.8 6.6 .. -0.9 1.8 -0.6 -1.3 .. Q3-2003 9.6 4.6 4.6 5.3 6.7 .. 3.8 2.0 5.4 4.6 .. Q4-2003 9.9 4.6 6.5 5.0 8.3 .. 4.7 3.9 9.1 6.4 .. Q1-2004 10.4 4.1 8.2 7.3 6.7 .. 7.7 5.2 9.9 6.1 .. Q2-2004 9.6 4.4 7.9 7.7 6.6 .. 12.0 5.9 12.8 9.7 .. Q3-2004 9.1 4.5 6.4 5.8 6.3 .. 6.6 4.8 7.7 6.7 .. Q4-2004 9.5 7.2 4.9 6.1 5.9 .. 7.9 2.7 6.6 2.9 .. Q1-2005 10.5 6.0 5.6 4.4 3.6 7.4 6.2 2.7 4.7 2.7 7.0 Q2-2005 10.1 5.9 4.3 5.1 4.7 7.8 7.1 3.4 6.4 4.0 7.2 Q3-2005 9.8 5.8 5.6 4.4 5.5 8.3 8.1 4.5 8.6 4.8 7.5 Q4-2005 9.9 5.1 5.9 5.1 4.7 8.4 6.9 5.1 9.5 7.0 7.8 Q1-2006 12.4 5.1 6.0 5.4 6.1 7.3 9.0 6.1 10.6 5.8 9.3 Q2-2006 11.5 4.9 6.1 5.3 5.1 7.4 6.1 5.1 8.7 5.8 8.5 Q3-2006 10.6 5.9 5.8 4.9 4.8 7.9 6.4 5.0 8.1 6.5 8.1 Q4-2006 10.4 6.1 5.4 5.4 4.4 8.2 6.7 4.6 7.9 3.8 7.7 Q1-2007 14.0 6.1 5.7 6.3 4.6 7.7 5.6 4.5 8.1 4.5 9.6 Q2-2007 13.8 6.7 5.9 7.6 4.6 7.8 6.1 5.3 9.7 5.7 9.9 Q3-2007 13.4 6.7 6.8 6.3 5.5 8.2 6.8 4.9 11.0 7.1 9.9 Q4-2007 12.1 5.8 7.5 6.3 5.4 8.5 6.9 5.7 6.7 6.5 9.1 Q1-2008 11.3 6.2 7.5 4.0 6.3 7.5 7.2 5.5 8.1 7.5 9.0 Q2-2008 10.1 6.3 6.7 4.3 5.2 6.5 4.2 4.4 3.2 5.7 7.6 Q3-2008 9.0 6.3 5.1 5.3 3.1 6.3 1.2 3.3 -0.3 -1.2 5.9 Q4-2008 6.8 5.3 0.2 3.1 -4.1 6.2 -2.6 -3.3 -3.7 -7.5 2.4 Q1-2009 6.5 4.5 -6.2 1.0 -7.0 3.1 -7.9 -4.2 -8.8 -8.1 1.4 Q2-2009 8.1 4.1 -3.9 1.6 -5.2 3.9 -3.4 -2.1 -2.0 -6.6 3.3 Q3-2009 9.6 4.3 -1.2 0.5 -2.8 4.6 -2.0 1.0 1.9 -1.4 5.3 Q4-2009 10.7 5.6 4.6 1.4 5.9 5.5 2.5 6.3 5.3 8.8 8.4 Q1-2010 11.9 5.9 10.1 8.4 12.0 5.9 8.0 8.7 16.5 12.9 11.0 Q2-2010 10.3 6.3 9.0 8.9 9.2 6.2 6.8 7.6 19.8 13.0 9.9 Q3-2010 9.6 5.8 5.3 7.3 6.6 6.6 6.9 4.5 10.6 11.2 8.4 Q4-2010 9.8 6.8 4.8 6.1 3.8 6.8 6.6 4.9 12.5 6.5 8.1 Q1-2011 9.7 6.4 5.2 4.6 3.2 5.4 7.6 4.2 9.1 6.6 7.9 Q2-2011 9.5 6.5 4.3 3.1 2.7 5.6 5.3 3.5 1.2 4.5 7.1 Q3-2011 9.1 6.5 5.8 3.6 3.7 5.8 4.3 3.6 6.0 3.4 7.0 Q4-2011 8.9 6.5 5.2 3.7 -9.0 5.9 3.0 3.3 3.6 1.9 6.1 Q1-2012 8.1 6.3 .. .. .. 4.0 0.4 2.8 1.6 0.4 .. Source: Haver Analytics and national sources. Data for China uses annual production side GDP. WORLD BANK EAST ASIA AND PACIFIC ECONOMIC UPDATE 2012, VOL. 1 APPENDIx TABLES 89 Appendix Table 2 Real GDP and Components of Aggregate Demand percent change from a year earlier Hong Kong Taiwan, Indonesia Malaysia Philippines Thailand Korea, Rep. Singapore S.E. Asia NIEs SAR, China China GDP 2005 5.7 5.3 4.8 4.6 7.1 4.0 7.4 4.7 5.2 4.9 2006 5.5 5.8 5.2 5.1 7.0 5.2 8.8 5.4 5.4 5.9 2007 6.3 6.5 6.6 5.0 6.4 5.1 8.9 6.0 6.1 5.9 2008 6.0 4.8 4.2 2.5 2.3 2.3 1.7 0.7 4.5 1.8 2009 4.6 -1.6 1.1 -2.3 -2.6 0.3 -1.0 -1.8 1.0 -0.8 2010 6.2 7.2 7.6 7.8 7.0 6.3 14.8 10.7 7.1 8.5 2011 6.5 5.1 3.7 0.1 5.0 3.6 4.9 4.0 4.1 4.1 Private Consumption 2005 4.0 9.1 4.4 4.6 3.0 4.6 3.6 2.9 5.2 3.8 2006 3.2 6.8 4.2 3.2 5.9 4.7 5.0 1.5 4.1 4.0 2007 5.0 10.5 4.6 1.8 8.5 5.1 6.8 2.1 5.2 4.9 2008 5.3 8.7 3.7 2.9 2.4 1.3 3.3 -0.9 5.1 1.0 2009 4.9 0.7 2.3 -1.1 0.7 0.0 0.1 0.8 2.1 0.3 2010 4.7 6.5 3.4 4.8 6.7 4.4 6.5 3.7 4.9 4.7 2011 4.7 6.9 6.1 1.3 8.6 2.3 4.1 3.0 4.6 3.6 Fixed Investment 2005 10.9 5.0 2.4 10.5 4.1 1.9 -1.7 2.7 8.1 2.1 2006 2.6 7.5 5.4 3.9 7.1 3.4 16.0 0.1 4.4 4.2 2007 9.3 9.4 5.2 1.5 3.4 4.2 17.4 0.6 6.5 4.3 2008 11.9 1.1 3.2 1.2 1.0 -1.9 13.0 -12.4 5.4 -3.0 2009 3.3 -5.6 -1.7 -9.2 -3.9 -1.0 -2.9 -11.2 -2.5 -4.4 2010 8.5 9.8 19.1 9.4 7.7 5.8 7.0 24.0 10.8 11.3 2011 8.8 6.0 2.7 3.3 7.2 -1.1 3.3 -3.8 5.8 -0.2 Exports of Goods & Services 2005 16.6 8.3 5.0 4.2 10.6 7.8 20.8 7.8 9.6 9.3 2006 9.4 6.6 12.6 9.1 9.4 11.4 8.2 11.4 9.3 10.8 2007 8.5 4.1 6.7 7.8 8.3 12.6 15.4 9.6 7.1 11.3 2008 9.5 1.7 -2.7 5.1 2.5 6.6 -26.7 0.9 4.7 1.3 2009 -9.7 -10.5 -7.8 -12.5 -10.3 -1.2 24.2 -8.7 -10.2 -2.3 2010 15.3 9.9 21.0 14.7 16.7 14.7 39.7 25.6 15.0 20.5 2011 13.6 3.7 -3.8 11.1 4.1 9.5 3.4 4.5 8.0 6.7 Source: Haver Analytics. national data sources. and World Bank staff estimates. Regional averages are 2000 US$ GDP weighted. CAPTURING NEW SOURCES OF GROWTH 90 APPENDIx TABLES Appendix Table 3 East Asia - Merchandise Export Growth in US dollars. percent change from a year earlier 2009 2010 2011 Q2 2011 Q3 2011 Q4 2011 Q1 2012 Dec-11 Jan-12 Feb-12 Mar-12 Apr-12 East Asia (10) -16.3 28.7 14.8 19.6 18.6 9.9 4.6 8.8 -3.6 17.5 2.8 .. China -15.9 31.3 20.4 22.1 20.7 14.3 7.6 13.4 -0.6 18.4 8.9 4.9 S.E. Asia -16.8 29.5 18.9 22.5 21.9 11.6 6.8 2.5 -0.2 13.7 2.0 .. Indonesia -15.0 35.5 28.7 43.8 39.6 8.7 6.9 1.5 6.6 8.9 5.5 .. Malaysia -21.2 26.3 14.3 16.8 16.4 8.6 4.0 5.0 -1.2 15.4 -0.5 .. Philippines -21.7 34.0 -6.7 1.0 -14.9 -17.5 5.2 -18.9 3.1 14.6 -1.2 .. Thailand -14.3 28.1 17.2 18.5 29.0 -4.8 -3.9 -2.1 -6.0 0.9 -6.5 .. Vietnam -10.1 26.9 32.9 28.8 39.7 29.3 28.3 21.2 0.1 71.2 27.3 15.6 NIEs -16.2 28.3 14.7 15.2 13.3 7.1 1.4 6.4 -8.5 18.7 -3.1 .. Hong Kong SAR, China -12.2 22.5 9.9 7.9 4.0 6.7 -1.1 7.4 -8.4 14.5 -6.4 .. Korea, Rep. -13.9 28.3 19.0 18.6 21.4 9.0 3.0 8.2 -7.3 20.5 -1.4 -4.6 Singapore -20.2 30.5 16.4 19.8 15.7 7.1 6.0 8.4 -3.9 27.1 -1.5 .. Taiwan, China -20.5 35.0 11.6 13.7 11.0 3.7 -4.5 -1.0 -16.9 9.4 -3.9 -7.0 Source: Haver Analytics. Appendix Table 4 East Asia and the Pacific: GDP Growth Projections percent change form a year earlier Forecast Forecast 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 East Asia 6.7 7.9 8.0 9.1 10.1 6.3 4.9 9.3 7.0 6.3 7.0 Developing East Asia 8.8 9.0 9.8 10.9 12.3 8.5 7.5 9.7 8.2 7.6 8.0 China 10.0 10.1 11.3 12.7 14.2 9.6 9.2 10.4 9.2 8.2 8.6 Indonesia 4.8 5.0 5.7 5.5 6.3 6.0 4.6 6.2 6.5 6.1 6.4 Malaysia 5.8 6.8 5.3 5.8 6.5 4.8 -1.6 7.2 5.1 4.6 5.1 Philippines 5.0 6.7 4.8 5.2 6.6 4.2 1.1 7.6 3.7 4.2 5.0 Thailand 7.1 6.3 4.6 5.1 5.0 2.5 -2.3 7.8 0.1 4.5 5.0 Vietnam 7.3 7.8 8.4 8.2 8.5 6.3 5.3 6.8 5.9 5.7 6.3 Cambodia 8.5 10.3 13.3 10.8 10.2 6.7 0.1 6.0 6.9 6.6 6.7 Fiji 1.0 5.3 0.7 1.8 -0.9 1.0 -1.3 -0.2 2.0 1.5 1.7 Lao PDR 6.1 6.4 7.1 8.5 7.5 7.6 7.5 8.5 8.0 8.3 7.5 Mongolia 7.0 10.6 7.3 8.6 10.2 8.9 -1.3 6.4 17.3 17.2 11.8 Papua New Guinea 2.2 2.7 3.6 2.6 7.2 6.7 5.5 7.5 9.0 7.0 5.0 Solomon Islands 6.5 4.9 5.4 6.9 10.7 7.1 -4.7 7.0 9.0 6.0 4.0 Timor-Leste 0.1 4.2 6.2 -5.8 11.7 14.6 12.8 9.5 10.6 10.0 10.0 East Asia NIEs 3.2 6.0 4.9 5.8 5.9 1.8 -0.8 8.4 4.1 3.2 4.2 Source: World Bank data and staff estimates. WORLD BANK EAST ASIA AND PACIFIC ECONOMIC UPDATE 2012, VOL. 1 APPENDIx TABLES 91 Appendix Table 5 Regional Aggregates for Poverty Measures in East Asia $1.25 –a-day $2-a-day Mean Consumption Headcount Index (%) Number of Poor Headcount Index (%) Number of Poor Population (million) (2005 PPP$/month) (million) (million) EAP 1990 47.79 54.96 881.76 80.97 1.299.12 1.604.41 1993 54.69 50.72 848.46 75.76 1.267.24 1.672.77 1996 67.19 35.90 623.43 63.97 1.110.79 1.736.37 1999 70.74 35.58 639.04 61.74 1.108.86 1.795.97 2002 85.64 27.61 509.97 51.93 959.23 1.847.03 2005 107.07 17.11 323.78 39.57 748.88 1.892.72 2008 127.40 14.34 277.49 32.94 637.17 1.934.41 EAP excluding China 1990 67.32 40.38 189.48 70.73 331.89 469.23 1993 74.04 42.57 210.42 67.94 335.87 494.33 1996 86.16 34.65 179.75 61.03 316.65 518.82 1999 82.71 35.46 192.61 62.54 339.74 543.23 2002 89.65 25.67 145.44 53.96 305.78 566.63 2005 104.96 19.28 113.53 46.21 272.20 589.00 2008 114.30 17.53 106.89 40.74 248.44 609.76 South East Asia (Indonesia, Malaysia, Philippines, Thailand) 1990 75.07 32.72 105.12 66.26 212.85 321.26 1993 81.96 37.97 128.37 63.92 216.09 338.07 1996 95.84 30.05 106.57 56.32 199.69 354.59 1999 90.47 32.29 119.99 59.08 219.51 371.56 2002 97.70 21.50 83.60 49.81 193.68 388.82 2005 113.56 16.90 68.54 43.60 176.85 405.65 2008 122.78 16.85 70.94 39.05 164.34 420.89 Lower-Income East Asia (Cambodia, Laos, PNG, Vietnam) 1990 37.82 69.13 58.00 87.83 73.69 83.90 1993 44.29 59.84 53.39 83.14 74.18 89.22 1996 50.14 51.74 48.82 78.67 74.24 94.36 1999 53.90 47.16 46.83 75.46 74.92 99.28 2002 59.73 41.07 42.53 69.41 71.87 103.54 2005 72.93 28.04 30.17 55.90 60.15 107.60 2008 82.59 20.01 22.31 47.01 52.43 111.52 Source: World Bank PovcalNet 2012, World Development Indicators, and staff calculations CAPTURING NEW SOURCES OF GROWTH 92 APPENDIx TABLES Appendix Table 6 East Asia: Exchange Rates local currency per US dollar, end-of-period Hong Kong Taiwan, China Indonesia Malaysia Philippines Thailand Vietnam SAR, China Korea, Rep. Singapore Japan China Jan-2008 7.19 9,291 3.24 40.65 32.98 15,971 7.80 943.9 1.42 32.20 106.36 Feb-2008 7.11 9,051 3.19 40.36 31.85 15,931 7.78 937.3 1.39 30.95 104.73 Mar-2008 7.02 9,217 3.19 41.87 31.46 16,105 7.79 991.7 1.38 30.41 100.10 Apr-2008 7.00 9,234 3.16 42.19 31.70 16,116 7.80 999.7 1.36 30.45 104.08 May-2008 6.95 9,318 3.24 43.88 32.40 16,246 7.80 1,031.4 1.37 30.41 105.66 Jun-2008 6.86 9,225 3.27 44.76 33.48 16,842 7.80 1,043.4 1.36 30.35 106.40 Jul-2008 6.84 9,118 3.26 44.14 33.48 16,755 7.80 1,008.5 1.37 30.59 107.99 Aug-2008 6.83 9,157 3.39 45.69 34.12 16,525 7.80 1,081.8 1.42 31.52 109.10 Sep-2008 6.82 9,378 3.46 46.92 34.00 16,575 7.77 1,187.7 1.43 32.13 104.30 Oct-2008 6.83 10,995 3.56 48.75 34.93 16,813 7.75 1,291.4 1.48 33.00 98.30 Nov-2008 6.83 12,151 3.62 48.88 35.38 16,974 7.75 1,482.7 1.51 33.30 95.25 Dec-2008 6.83 10,950 3.46 47.49 34.90 17,433 7.75 1,257.5 1.44 32.86 90.75 Jan-2009 6.84 11,355 3.61 47.08 34.88 17,475 7.75 1,368.5 1.51 33.80 89.60 Feb-2009 6.84 11,980 3.69 48.24 36.00 17,475 7.75 1,516.4 1.54 34.95 97.55 Mar-2009 6.84 11,575 3.65 48.42 35.48 17,756 7.75 1,377.1 1.52 33.92 98.10 Apr-2009 6.83 10,713 3.56 48.70 35.27 17,784 7.75 1,348.0 1.48 33.23 97.60 May-2009 6.83 10,340 3.51 47.55 34.33 17,784 7.75 1,272.9 1.45 32.65 96.50 Jun-2009 6.83 10,225 3.52 48.31 33.98 17,801 7.75 1,284.7 1.45 32.82 95.95 Jul-2009 6.83 9,920 3.52 48.12 33.99 17,815 7.75 1,240.5 1.44 32.82 95.33 Aug-2009 6.83 10,060 3.53 48.91 33.97 17,823 7.75 1,244.9 1.44 32.92 92.70 Sep-2009 6.83 9,681 3.47 47.59 33.51 17,841 7.75 1,188.7 1.41 32.20 89.77 Oct-2009 6.83 9,545 3.41 47.73 33.39 17,862 7.75 1,200.6 1.40 32.54 91.38 Nov-2009 6.83 9,480 3.39 46.75 33.16 18,485 7.75 1,167.4 1.38 32.19 86.75 Dec-2009 6.83 9,400 3.42 46.36 33.32 18,472 7.76 1,167.6 1.40 32.03 92.06 Jan-2010 6.83 9,365 3.41 46.74 33.10 18,472 7.76 1,156.5 1.40 31.99 89.85 Feb-2010 6.83 9,335 3.41 46.26 33.03 18,925 7.76 1,158.4 1.41 32.09 89.25 Mar-2010 6.83 9,115 3.27 45.22 32.32 19,080 7.77 1,130.8 1.40 31.82 93.25 Apr-2010 6.83 9,012 3.19 44.64 32.25 18,960 7.77 1,115.5 1.37 31.42 94.06 May-2010 6.83 9,180 3.25 46.21 32.49 18,980 7.79 1,200.2 1.40 32.23 91.30 Jun-2010 6.79 9,083 3.26 46.31 32.40 19,065 7.79 1,210.3 1.40 32.28 88.60 Jul-2010 6.78 8,952 3.19 45.81 32.22 19,095 7.77 1,187.2 1.36 32.05 86.50 Aug-2010 6.81 9,041 3.14 45.18 31.25 19,485 7.78 1,189.1 1.36 32.10 84.25 Sep-2010 6.70 8,924 3.09 43.90 30.37 19,485 7.76 1,142.0 1.32 31.33 83.40 Oct-2010 6.69 8,928 3.11 43.18 29.97 19,495 7.75 1,126.6 1.30 30.78 80.58 Nov-2010 6.68 9,013 3.16 44.26 30.22 19,498 7.77 1,157.3 1.32 30.85 84.15 Dec-2010 6.62 8,991 3.08 43.89 30.15 19,498 7.78 1,138.9 1.29 30.37 81.45 Jan-2011 6.59 9,057 3.06 44.09 31.14 19,498 7.80 1,114.3 1.29 29.30 82.05 Feb-2011 6.58 8,823 3.05 43.84 30.62 20,875 7.79 1,127.9 1.27 29.75 81.70 Mar-2011 6.56 8,709 3.03 43.43 30.30 20,908 7.78 1,107.2 1.26 29.42 83.13 Apr-2011 6.50 8,574 2.97 43.02 29.94 20,625 7.77 1,072.3 1.23 28.76 82.06 May-2011 6.48 8,537 3.01 43.29 30.31 20,535 7.78 1,080.6 1.23 28.77 80.85 Jun-2011 6.47 8,597 3.02 43.49 30.75 20,565 7.78 1,078.1 1.23 28.80 80.72 Jul-2011 6.44 8,508 2.96 42.23 29.75 20,555 7.79 1,052.6 1.20 28.89 77.55 Aug-2011 6.39 8,578 2.98 42.51 30.03 20,822 7.80 1,071.7 1.20 29.02 76.59 Sep-2011 6.35 8,823 3.19 43.64 31.17 20,822 7.79 1,179.5 1.30 30.51 76.63 Oct-2011 6.32 8,835 3.07 43.03 30.67 20,999 7.77 1,104.5 1.25 29.93 79.20 Nov-2011 6.35 9,170 3.17 43.81 31.22 20,999 7.79 1,150.3 1.30 30.35 78.05 Dec-2011 6.30 9,068 3.18 43.93 31.69 21,024 7.77 1,153.3 1.30 32.29 77.72 Jan-2012 6.31 9,000 3.05 42.95 31.04 20,981 7.76 1,125.0 1.25 29.62 76.36 Feb-2012 6.29 9,085 3.00 42.86 30.25 20,830 7.76 1,126.5 1.25 29.42 80.65 Mar-2012 6.29 9,180 3.07 43.00 30.84 20,810 7.76 1,137.8 1.26 29.53 82.82 Apr-2012 6.28 9,190 3.03 42.44 30.73 20,860 7.76 1,134.2 1.24 29.23 79.80 May-2012* 6.31 9,180 3.07 42.37 31.13 20,845 7.76 1,142.9 1.25 29.40 79.93 Sources: Haver Analytics, Datastream. Note: * May 10, 2012. WORLD BANK EAST ASIA AND PACIFIC ECONOMIC UPDATE 2012, VOL. 1 APPENDIx TABLES 93 Appendix Table 7 East Asia: Foreign Reserves Minus Gold in billions of US dollars Hong Kong Taiwan, China Indonesia Malaysia Philippines Thailand Korea, Rep. Singapore Total SAR, China China Dec-1997 142.8 17.4 20.8 7.3 26.3 92.8 20.4 71.3 83.5 482.5 Dec-1998 149.2 23.5 25.6 9.3 28.8 89.7 52.0 75.1 90.3 543.4 Dec-1999 157.7 27.3 30.6 13.3 34.1 96.2 74.0 77.0 106.2 616.4 Dec-2000 168.3 29.4 28.4 13.1 32.0 107.5 96.1 80.2 106.7 661.8 Dec-2001 215.6 28.0 29.6 13.5 32.4 111.2 102.8 75.7 122.2 730.9 Dec-2002 291.1 32.0 33.4 13.3 38.1 111.9 121.3 82.2 161.7 885.1 Dec-2003 408.2 36.3 44.6 13.7 41.1 118.4 155.3 96.2 206.6 1,120.3 Dec-2004 614.5 36.3 66.4 13.1 48.7 123.5 199.0 112.6 241.7 1,455.9 Dec-2005 821.5 34.7 70.2 15.9 50.7 124.2 210.3 116.2 253.3 1,697.1 Dec-2006 1,068.5 42.6 82.2 20.0 65.3 133.2 238.9 136.3 266.1 2,053.0 Dec-2007 1,530.3 56.9 101.1 30.2 85.2 152.6 262.1 163.0 270.3 2,651.7 Dec-2008 1,949.3 51.6 91.2 33.2 108.7 182.5 201.1 174.2 291.7 3,083.4 Dec-2009 2,416.0 66.1 96.4 38.8 135.5 255.8 269.9 187.8 348.2 3,814.5 Jan-2010 2,432.0 69.6 95.7 40.2 139.5 257.0 273.6 189.6 350.7 3,847.8 Feb-2010 2,441.2 69.7 95.6 40.2 138.8 258.2 270.6 187.6 352.7 3,854.6 Mar-2010 2,463.5 71.8 94.0 39.6 141.1 258.8 272.3 196.9 355.0 3,893.0 Apr-2010 2,506.9 78.6 94.7 40.6 144.4 259.2 278.8 203.2 357.6 3,963.9 May-2010 2,456.2 74.6 96.2 41.0 140.2 256.1 270.1 198.1 360.1 3,892.7 Jun-2010 2,471.2 76.3 93.3 41.8 143.4 256.7 274.1 199.7 362.4 3,919.1 Jul-2010 2,556.4 78.8 93.6 42.4 147.7 260.6 285.9 206.7 370.1 4,042.2 Aug-2010 2,565.3 81.3 93.8 42.8 151.2 261.3 285.3 206.2 372.1 4,059.2 Sep-2010 2,666.9 86.6 107.5 46.4 159.0 266.0 289.7 214.5 380.5 4,216.9 Oct-2010 2,779.8 91.8 114.1 50.3 166.7 267.0 293.3 221.2 383.8 4,368.0 Nov-2010 2,786.1 92.8 104.3 53.7 163.5 266.0 290.2 217.4 379.3 4,353.0 Dec-2010 2,866.1 96.2 104.9 55.4 167.5 268.6 291.5 225.5 382.0 4,457.7 Jan-2011 2,952.4 95.3 106.5 57.0 169.7 273.1 295.9 226.9 387.1 4,563.8 Feb-2011 3,012.2 99.6 108.1 56.9 174.9 272.6 297.6 230.7 390.7 4,643.3 Mar-2011 3,067.2 105.7 112.2 58.9 176.5 272.5 298.5 234.0 392.6 4,718.2 Apr-2011 3,168.5 113.8 128.3 60.9 184.4 276.8 307.1 242.3 399.5 4,881.7 May-2011 3,188.3 118.1 131.1 61.3 180.1 275.8 305.0 239.7 398.7 4,898.0 Jun-2011 3,219.8 119.7 132.6 61.4 178.8 277.1 304.4 242.1 400.3 4,936.1 Jul-2011 3,267.4 122.7 133.7 64.2 181.0 278.7 309.7 248.9 400.8 5,007.0 Aug-2011 3,284.4 124.6 134.5 68.4 180.3 279.4 310.9 249.0 400.3 5,031.8 Sep-2011 3,223.0 114.5 129.1 67.7 172.1 277.5 302.1 233.4 389.2 4,908.6 Oct-2011 3,295.5 114.0 132.9 67.9 173.5 281.6 309.7 245.2 393.3 5,013.6 Nov-2011 3,242.2 111.3 132.9 68.1 169.6 282.4 306.5 240.8 388.0 4,941.8 Dec-2011 3,202.8 110.1 131.8 67.3 167.4 285.3 304.2 237.5 385.5 4,892.0 Jan-2012 3,275.8 112.0 132.2 68.5 170.0 292.7 309.2 245.3 390.3 4,995.9 Feb-2012 3,331.3 112.2 132.9 68.1 172.0 294.6 313.6 246.8 394.4 5,066.0 Mar-2012 3,326.6 110.5 133.7 65.7 171.0 294.7 313.8 243.4 393.9 5,053.2 Apr-2012 .. 116.4 .. 65.6 170.7 .. 314.7 245.9 395.1 .. Sources: Haver Analytics, Thomson Datastream, and IMF International Financial Statistics. CAPTURING NEW SOURCES OF GROWTH 94 APPENDIx TABLES Appendix Table 8a East Asia: Balance of Payments in percent of GDP Overall Balance Current Account Capital Account 1/ 2007 2008 2009 2010 2011 2007 2008 2009 2010 2011 2007 2008 2009 2010 2011 East Asia (11) 8.8 6.8 8.2 7.0 4.4 8.4 7.1 5.7 4.5 3.5 0.5 -0.3 2.4 2.5 1.0 China 13.1 10.6 8.0 7.9 5.3 10.1 9.1 5.2 4.0 2.8 3.0 1.5 2.8 3.9 2.5 S.E. Asia 5.6 1.4 3.1 4.7 3.0 5.1 2.7 5.3 3.2 2.9 0.5 -1.3 -2.3 1.5 0.4 Indonesia 2.9 -0.4 2.3 4.3 1.4 2.4 0.0 2.0 0.7 0.2 0.5 -0.4 0.3 3.5 1.2 Malaysia 7.0 -2.5 2.0 -0.3 11.1 15.9 17.7 16.4 11.5 11.5 -8.8 -20.1 -14.4 -11.8 -0.4 Philippines 5.7 0.1 3.8 7.2 4.5 4.7 2.1 5.5 4.4 3.1 1.0 -2.0 -1.7 2.7 1.4 Thailand 6.4 8.9 9.1 9.8 0.4 5.9 0.8 8.3 4.1 3.4 0.5 8.2 0.8 5.7 -3.1 Vietnam 14.4 0.5 -9.1 -1.7 1.0 -9.8 -11.9 -6.6 -4.1 -0.5 24.9 13.7 7.7 6.0 4.4 NIEs 2.5 1.0 12.7 6.2 2.5 7.0 4.9 7.7 7.2 6.6 -4.5 -4.0 5.0 -1.0 -4.1 Hong Kong 7.1 15.7 33.9 4.1 5.9 12.3 13.7 8.6 5.5 5.1 -5.2 2.0 25.3 -1.4 0.8 SAR, China Korea, Rep. 1.4 -6.0 8.1 2.7 1.2 2.1 0.3 3.9 2.9 2.4 -0.6 -6.3 4.3 -0.2 -1.1 Singapore 10.9 6.9 6.1 18.5 6.6 25.8 13.9 16.2 24.4 21.9 -14.8 -7.0 -10.1 -5.9 -15.3 Taiwan, China -1.0 6.6 14.3 9.3 1.3 8.9 6.9 11.3 9.2 8.8 -10.0 -0.3 3.0 0.1 -7.5 Median 6.4 6.6 8.0 7.2 4.5 8.9 6.9 8.3 4.4 3.4 -0.6 -0.4 0.8 0.1 -0.4 Sources: IMF, Haver Analytics, national sources. Note: 1/ Capital Account + Financial Account + Errors and Omissions Appendix Table 8b East Asia: Financial Account Components in percent of GDP Net FDI Net Portfolio Investment Net Other Capital 2/ 2007 2008 2009 2010 2011 2007 2008 2009 2010 2011 2007 2008 2009 2010 2011 East Asia (11) 2.2 1.6 0.7 1.9 1.7 -1.3 -0.4 0.0 0.0 -0.1 -0.7 -1.9 2.3 1.4 -0.4 China 4.1 2.7 1.4 3.1 2.3 0.5 0.9 0.8 0.4 0.3 -2.0 -2.7 1.4 1.2 0.3 S.E. Asia 1.2 0.8 0.4 1.2 0.8 1.4 -2.4 0.3 2.8 1.3 -1.6 0.4 -2.0 -0.3 -0.8 Indonesia 0.5 0.7 0.5 1.6 1.2 1.3 0.3 1.9 1.9 0.5 -1.1 -1.4 -1.5 0.3 -0.1 Malaysia -1.5 -3.5 -3.4 -1.8 -1.5 2.9 -11.4 -0.2 6.3 3.6 -7.5 -1.1 -8.5 -7.0 -0.3 Philippines -0.4 0.7 1.0 0.3 0.6 3.1 -2.1 -0.4 2.1 2.5 -0.3 0.4 -1.6 1.2 -0.8 Thailand 3.1 1.6 0.3 1.3 -0.3 -2.5 -0.8 -2.1 2.9 1.0 -1.2 3.7 0.8 3.3 -2.6 Vietnam 9.2 10.3 7.4 6.9 5.9 8.8 -0.6 -0.1 2.3 1.1 7.0 4.0 0.4 -3.2 -2.6 NIEs -1.0 -0.4 -1.4 -1.5 0.5 -6.4 -2.3 -2.7 -3.4 -2.8 2.3 -1.4 8.5 3.4 -2.5 Hong Kong -3.3 4.2 -5.5 -10.9 0.6 -1.3 -17.6 -20.5 -26.8 -1.5 -5.0 14.4 48.1 30.7 -3.7 SAR, China Korea, Rep. -1.7 -1.8 -1.8 -2.2 -1.4 -2.5 -0.3 5.9 4.2 0.9 3.6 -4.0 -0.1 -2.0 -1.1 Singapore 5.6 2.6 3.6 12.0 14.9 -26.7 6.1 -21.6 -11.8 -11.0 6.3 -16.8 5.8 -5.9 -19.3 Taiwan, China -0.8 -1.2 -0.8 -2.1 -3.2 -10.2 -3.1 -2.7 -4.8 -7.6 1.1 3.9 7.1 6.8 4.0 Median -0.4 0.7 0.3 0.3 0.6 -1.3 -0.8 -0.4 1.9 0.5 -1.1 -1.1 0.8 1.2 -0.8 Sources: IMF, Haver Analytics, national sources. Note: 2/ Net Other Investment + Net Financial Derivatives WORLD BANK EAST ASIA AND PACIFIC ECONOMIC UPDATE 2012, VOL. 1 APPENDIx TABLES 95 Appendix Table 9 East Asia: Nonperforming Loans in percent of total loans 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Dec Dec Dec Dec Dec Dec Dec Dec Dec Dec Dec Dec Dec Dec Mar Jun Sep Dec China 1/ .. .. .. .. .. 23.6 17.9 13.2 8.6 7.1 6.2 2.4 1.6 1.1 1.1 1.0 .. .. Indonesia 2/ 7.2 48.6 32.9 18.8 12.1 7.5 6.8 4.5 7.6 6.1 4.1 3.2 3.3 2.6 2.9 2.8 2.8 2.3 Malaysia 3/ .. 10.6 11.0 9.7 11.5 10.2 9.0 7.5 5.8 4.8 3.2 2.2 1.8 2.3 2.2 2.0 1.8 1.9 Philippines 4/ .. 11.0 12.7 14.9 16.9 14.6 13.8 12.5 8.6 6.1 4.9 4.1 3.7 3.6 3.7 3.1 3.1 .. Thailand 5/ .. 45.0 38.9 17.7 10.4 15.7 12.7 10.7 8.2 7.5 7.3 5.3 4.9 3.6 3.2 3.0 2.8 2.7 Korea, Rep. 6/ 6.0 7.3 13.6 8.8 3.3 2.4 2.2 2.0 1.3 0.9 0.7 1.1 1.2 1.9 2.0 1.7 1.7 1.4 Source: National data sources. Notes: 1/ Covers only the major commercial banks for 2002-04, and all commercial banks for 2005-10. 2/ Excludes IBRA’s AMC. Data for 1997 to 2002 excludes state banks; the data source is the Monetary Division of Bank Indonesia. Data from 2003 covers all commercial banks including state banks; the data source is the Banking Supervision Division of Bank Indonesia 3/ Excludes Danaharta. This series, used by Bank Negara Malaysia, is net of provisions and excludes interest in suspense. Beginning financial year 2010, banking institutions are required to report impaired loans in accordance with the Guideline on the Classification and Impairment Provisions for Loans/Financing. The reporting of non-performing laons has since been discontinued. 4/ Includes interbank loans. 5/ Excludes transfers to AMCs. The jump in headline NPLs in December 2002 was a one-off increase, reflecting a change in definition and did not affect provisioning. 6/ Excludes KAMCO/KDIC. CAPTURING NEW SOURCES OF GROWTH 96 APPENDIx TABLES Appendix Table 10 East Asia: Financial Market Indicators Stock Market Index, end-of-period, Dec. 31, 2007 = 100 Jun-07 Dec-07 Jun-08 Dec-08 Jun-09 Dec-09 Jun-10 Dec-10 Jun-11 Des-11 Mar-12 May-12* China 72.6 100.0 52.0 34.6 56.3 62.3 45.5 53.3 52.4 41.7 42.9 45.7 Indonesia 77.9 100.0 85.6 49.4 73.8 92.3 106.1 134.9 141.6 139.2 150.1 150.5 Malaysia 93.7 100.0 82.1 60.7 74.4 88.1 90.9 105.1 109.3 105.9 110.5 109.9 Philippines 101.1 100.0 67.9 51.7 67.3 84.3 93.1 116.0 118.5 120.7 141.0 143.4 Thailand 90.5 100.0 89.6 52.4 69.6 85.6 92.9 120.4 121.4 119.5 139.5 138.8 Vietnam 110.5 100.0 43.1 34.0 48.4 53.4 54.7 52.3 46.7 37.9 47.4 52.4 Hong Kong SAR, China 78.3 100.0 79.5 51.7 66.1 78.6 72.4 82.8 80.5 66.3 73.9 72.7 Korea, Rep. 91.9 100.0 88.3 59.3 73.3 88.7 89.5 108.1 110.7 96.2 106.2 102.5 Singapore 100.3 100.0 85.1 50.8 67.3 83.6 81.8 92.0 90.0 76.4 86.9 83.8 Taiwan, China 104.4 100.0 88.4 54.0 75.6 96.3 86.2 105.5 101.7 83.1 93.1 88.0 Source: Thomson Datastream. Yields, 10-year local-currency government bonds, end-of-period, in percent Jun-07 Dec-07 Jun-08 Dec-08 Jun-09 Des-09 Jun-10 Dec-10 Jun-11 Des-11 Mar-12 May-12* China 4.4 4.5 4.5 2.8 3.2 3.6 3.3 3.9 3.9 3.4 3.5 3.6 Indonesia 9.0 10.0 13.4 11.9 11.1 10.1 8.4 7.6 7.5 6.0 5.9 6.2 Malaysia 5.0 4.1 4.9 3.2 4.4 4.3 4.0 4.0 3.9 3.7 3.7 3.6 Philippines 7.4 6.6 9.4 7.4 8.1 8.1 7.9 6.1 6.6 5.4 5.8 5.7 Thailand 4.5 5.0 5.9 2.7 3.7 4.2 3.1 3.7 3.9 3.3 3.8 3.8 Vietnam 7.8 9.1 16.0 10.2 9.7 11.5 11.5 11.8 12.5 125.0 11.5 10.4 Hong Kong SAR, China 4.8 3.4 3.5 1.9 2.6 2.6 2.3 2.9 2.3 1.5 1.2 1.1 Korea, Rep. 5.5 5.7 6.0 4.2 5.2 5.4 5.0 4.5 4.3 3.8 4.0 3.8 Singapore 2.9 2.7 3.6 2.1 2.6 2.7 2.4 2.7 2.3 1.6 1.7 1.5 Taiwan, China 2.5 2.6 2.7 1.4 1.6 1.5 1.4 1.6 1.6 1.3 1.3 1.2 Source: Bloomberg. Foreign-Currency Government Bond Spreads (EMBIG), end-of-period, in basis points over US Treasuries Jun-07 Dec-07 Jun-08 Dec-08 Jun-09 Des-09 Jun-10 Dec-10 Jun-11 Des-11 Mar-12 May-12* China 54 120 137 228 122 104 86 126 155 278 249 252 Indonesia 165 275 381 762 433 230 274 183 178 274 210 251 Malaysia 75 119 153 119 167 136 171 117 131 178 168 170 Philippines 155 172 303 546 324 206 266 163 160 242 181 201 Vietnam 122 203 368 747 379 314 338 323 329 510 340 391 Source: JP Morgan, Bloomberg. Credit Default Swap (CDS) Spreads on Foreign-Currency Government Bonds, 5-year, end-of-period, in basis points Jun-07 Dec-07 Jun-08 Dec-08 Jun-09 Des-09 Jun-10 Dec-10 Jun-11 Des-11 Mar-12 May-12* China 13 29 75 188 75 73 91 68 85 144 110 121 Indonesia 110 154 286 638 317 188 186 133 141 202 163 187 Malaysia 16 44 116 225 105 90 102 74 93 144 102 123 Philippines 111 153 266 384 217 168 174 130 138 185 139 154 Thailand 39 55 135 256 110 96 134 99 136 179 130 146 Hong Kong SAR, China 5 18 42 104 68 48 57 46 54 91 66 70 Korea, Rep. 17 47 107 319 182 85 131 98 103 156 118 129 Singapore .. .. .. 45 45 35 45 45 90 83 83 83 Source: Thomson Datastream. Note: *May 10, 2012 WORLD BANK EAST ASIA AND PACIFIC ECONOMIC UPDATE 2012, VOL. 1 97 aPPEndix chartS Appendix Chart 1 East Asia: Stock Market Price Indices China: Stock Market Indonesia: Stock Market Malaysia: Stock Market (Shanghai A Share) Price Index (Jakarta Composite) Price Index (KLCI Composite) Price Index 7,000 4,500 1,800 4,000 1,600 6,000 3,500 1,400 5,000 3,000 1,200 4,000 2,500 1,000 3,000 2,000 800 1,500 600 2,000 1,000 400 1,000 500 200 0 0 0 Jan-07 Oct-07 Jul-08 Apr-09 Jan-10 Oct-10 Jul-11 Apr-12 Jan-07 Oct-07 Jul-08 Apr-09 Jan-10 Oct-10 Jul-11 Apr-12 Jan-07 Oct-07 Jul-08 Apr-09 Jan-10 Oct-10 Jul-11 Apr-12 Philippines: Stock Market Thailand: Stock Market Vietnam: Stock Market (PSEi) Price Index (Bangkok SET) Price Index (Ho Chi Minh) Price Index 6,000 1,400 1,400 5,000 1,200 1,200 1,000 1,000 4,000 800 800 3,000 600 600 2,000 400 400 1,000 200 200 0 0 0 Jan-07 Oct-07 Jul-08 Apr-09 Jan-10 Oct-10 Jul-11 Apr-12 Jan-07 Oct-07 Jul-08 Apr-09 Jan-10 Oct-10 Jul-11 Apr-12 Jan-07 Oct-07 Jul-08 Apr-09 Jan-10 Oct-10 Jul-11 Apr-12 Hong Kong SAR, China: Stock Korea, Rep.: Stock Market Singapore: Stock Market Market (Hang Seng) Price Index (KOSPI) Price Index (STIL) Price Index 35,000 2,500 4,500 4,000 30,000 2,000 3,500 25,000 3,000 1,500 20,000 2,500 15,000 2,000 1,000 1,500 10,000 500 1,000 5,000 500 0 0 0 Jan-07 Oct-07 Jul-08 Apr-09 Jan-10 Oct-10 Jul-11 Apr-12 Jan-07 Oct-07 Jul-08 Apr-09 Jan-10 Oct-10 Jul-11 Apr-12 Jan-07 Oct-07 Jul-08 Apr-09 Jan-10 Oct-10 Jul-11 Apr-12 Taiwan, China: Stock Market Price Index 12,000 10,000 8,000 6,000 4,000 2,000 0 Jan-07 Oct-07 Jul-08 Apr-09 Jan-10 Oct-10 Jul-11 Apr-12 Source: Thomson Datastream. CAPTURING NEW SOURCES OF GROWTH 98 APPENDIx CHARTS Appendix Chart 2 East Asia: Local-Currency 10-Year Government Bond Yields China: 10-Year LCY Indonesia: 10-Year LCY Malaysia: 10-Year LCY Government Bond Yield Government Bond Yield Government Bond Yield 5 25 6 5 4 20 4 3 15 3 2 10 2 1 5 1 0 0 0 Jan-07 Oct-07 Jul-08 Apr-09 Jan-10 Oct-10 Jul-11 Apr-12 Jan-07 Oct-07 Jul-08 Apr-09 Jan-10 Oct-10 Jul-11 Apr-12 Jan-07 Oct-07 Jul-08 Apr-09 Jan-10 Oct-10 Jul-11 Apr-12 Philippines: 10-Year LCY Thailand: 10-Year LCY Vietnam: 10-Year LCY Government Bond Yield Government Bond Yield Government Bond Yield 12 7 20 18 10 6 16 5 14 8 4 12 6 10 3 8 4 2 6 2 4 1 2 0 0 0 Jan-07 Oct-07 Jul-08 Apr-09 Jan-10 Oct-10 Jul-11 Apr-12 Jan-07 Oct-07 Jul-08 Apr-09 Jan-10 Oct-10 Jul-11 Apr-12 Jan-07 Oct-07 Jul-08 Apr-09 Jan-10 Oct-10 Jul-11 Apr-12 Hong Kong SAR, China: 10-Year Korea, Rep.: 10-Year LCY Singapore: 10-Year LCY LCY Government Bond Yield Government Bond Yield Government Bond Yield 6 7 4,5 4 5 6 3,5 5 4 3 4 2,5 3 3 2 2 1,5 2 1 1 1 0,5 0 0 0 Jan-07 Oct-07 Jul-08 Apr-09 Jan-10 Oct-10 Jul-11 Apr-12 Jan-07 Oct-07 Jul-08 Apr-09 Jan-10 Oct-10 Jul-11 Apr-12 Jan-07 Oct-07 Jul-08 Apr-09 Jan-10 Oct-10 Jul-11 Apr-12 Taiwan, China: 10-Year LCY Government Bond Yield 3 2,5 2 1,5 1 0,5 0 Jan-07 Oct-07 Jul-08 Apr-09 Jan-10 Oct-10 Jul-11 Apr-12 Source: Bloomberg. WORLD BANK EAST ASIA AND PACIFIC ECONOMIC UPDATE 2012, VOL. 1 APPENDIx CHARTS 99 Appendix Chart 3 East Asia: Foreign-Currency Government Bond Spreads China: EMBI-Global Bond Indonesia: EMBI-Global Bond Malaysia: EMBI-Global Bond Spreads, basis points Spreads, basis points Spreads, basis points 350 1,400 600 300 1,200 500 250 1,000 400 200 800 300 150 600 200 100 400 50 200 100 0 0 0 Jan-07 Oct-07 Jul-08 Apr-09 Jan-10 Oct-10 Jul-11 Apr-12 Jan-07 Oct-07 Jul-08 Apr-09 Jan-10 Oct-10 Jul-11 Apr-12 Jan-07 Oct-07 Jul-08 Apr-09 Jan-10 Oct-10 Jul-11 Apr-12 Philippines: EMBI-Global Bond Vietnam: EMBI-Global Bond Spreads, basis points Spreads, basis points 900 1,200 800 1,000 700 600 800 500 600 400 300 400 200 200 100 0 0 Jan-07 Oct-07 Jul-08 Apr-09 Jan-10 Oct-10 Jul-11 Apr-12 Jan-07 Oct-07 Jul-08 Apr-09 Jan-10 Oct-10 Jul-11 Apr-12 Source: JPMorgan Emerging Markets Bond Index Global (EMBIG), via Bloomberg. CAPTURING NEW SOURCES OF GROWTH 100 APPENDIx CHARTS Appendix Chart 4 East Asia: Sovereign Credit Default Swap (CDS) Spreads China: CDS Spreads, 5-Year Indonesia: CDS Spreads, 5-Year Malaysia: CDS Spreads, 5-Year Government, basis points Government, basis points Government, basis points 300 1,400 600 250 1,200 500 1,000 200 400 800 150 300 600 100 200 400 50 200 100 0 0 0 Jan-07 Oct-07 Jul-08 Apr-09 Jan-10 Oct-10 Jul-11 Apr-12 Jan-07 Oct-07 Jul-08 Apr-09 Jan-10 Oct-10 Jul-11 Apr-12 Jan-07 Oct-07 Jul-08 Apr-09 Jan-10 Oct-10 Jul-11 Apr-12 Philippines: CDS Spreads, 5-Year Thailand: CDS Spreads, 5-Year Hong Kong SAR, China: CDS Spreads, Government, basis points Government, basis points 5-Year Government, basis points 900 600 140 800 500 120 700 100 600 400 500 80 300 400 60 300 200 40 200 100 20 100 0 0 0 Jan-07 Oct-07 Jul-08 Apr-09 Jan-10 Oct-10 Jul-11 Apr-12 Jan-07 Oct-07 Jul-08 Apr-09 Jan-10 Oct-10 Jul-11 Apr-12 Jan-07 Oct-07 Jul-08 Apr-09 Jan-10 Oct-10 Jul-11 Apr-12 Korea, Rep.: CDS Spreads, 5-Year Government, basis points 800 700 600 500 400 300 200 100 0 Jan-07 Oct-07 Jul-08 Apr-09 Jan-10 Oct-10 Jul-11 Apr-12 Source: Thomson Reuters, via Datastream. WORLD BANK EAST ASIA AND PACIFIC ECONOMIC UPDATE 2012, VOL. 1 APPENDIx CHARTS 101 Appendix Chart 5 East Asia: Foreign Exchange Reserves and Exchange Rates in billions of US dollars and in local currency unit per US dollar China Indonesia Malaysia 150 6.9 10 13,000 20 3.8 6.8 12,000 15 3.6 100 6.7 5 11,000 10 6.6 3.4 50 0 10,000 5 6.5 3.2 6.4 9,000 0 0 -5 6.3 3 8,000 -5 -50 6.2 -10 7,000 -10 2.8 6.1 -100 6.0 -15 6,000 -15 2.6 Jan-09 Aug-10 Mar-12 Jan-09 Aug-10 Mar-12 Jan-09 Aug-10 Mar-12 Philippines Thailand Cambodia 5 50 10 38 0.2 4,300 4 8 0.15 4,250 48 36 6 0.1 4,200 3 4 46 34 0.05 4,150 2 2 0 4,100 1 44 0 32 -0.05 4,050 0 -2 42 30 -0.1 4,000 -4 -1 -0.15 3,950 -6 40 28 -2 -8 -0.2 3,900 -3 38 -10 26 -0.25 3,850 Jan-09 Aug-10 Mar-12 Jan-09 Aug-10 Mar-12 Jan-09 Aug-10 Mar-12 Lao, PDR Mongolia Vietnam 0.2 8,700 0.4 1,700 2.5 22,000 8,600 1,600 2 0.15 0.3 21,000 8,500 1,500 1.5 8,400 0.2 1 0.1 1,400 20,000 8,300 0.1 0.5 1,300 0.05 8,200 0 19,000 0 1,200 8,100 -0.5 0 1,100 18,000 8,000 -0.1 -1 7,900 1,000 -1.5 -0.05 -0.2 17,000 7,800 900 -2 -0.1 7,700 -0.3 800 -2.5 16,000 Jan-09 Aug-10 Mar-12 Jan-09 Aug-10 Mar-12 Jan-09 Aug-10 Mar-12 Change in reserves Exchange rates (rhs) Source: Haver Analytics and IMF. CAPTURING NEW SOURCES OF GROWTH 102 APPENDIx CHARTS Appendix Chart 6 East Asia: Real and Nominal Exchange Rates* indices, 2010 = 100, and in local currency unit per US dollar China Indonesia Malaysia 110 7 110 12,800 105 3.8 6.8 100 11,800 3.6 105 100 6.6 90 10,800 3.4 100 6.4 80 9,800 3.2 95 95 6.2 70 8,800 3 90 6 60 7,800 90 2.8 Jan-09 Jan-10 Jan-11 Jan-12 Jan-09 Jan-10 Jan-11 Jan-12 Jan-09 Jan-10 Jan-11 Jan-12 Philippines Thailand Vietnam 105 50 105 38 150 24 36 22 48 130 20 100 100 34 46 110 18 32 44 90 16 95 95 30 14 42 70 28 12 90 40 90 26 50 10 Jan-09 Jan-10 Jan-11 Jan-12 Jan-09 Jan-10 Jan-11 Jan-12 Jan-09 Jan-10 Jan-11 Jan-12 REER NEER LCU/USD (rhs) Sources: BIS, IMF and Haver Analytics. Note: *REER = real effective exchange rate; NEER = nominal effective exchange rate; LCU = local currency units. WORLD BANK EAST ASIA AND PACIFIC ECONOMIC UPDATE 2012, VOL. 1 WORLD BANK EAST ASIA AND PACIFIC ECONOMIC UPDATE 2012, VOLUME 1 Capturing New Sources of Growth