Economic Outlook and Progress of Regional Cooperation and Integration in Asia and the Pacific

Cyn-Young Park Direction of Regional Cooperation and Integration

Economic Research and Regional Cooperation Department

Asian Development Bank

ADB-Asia Think Tank Development Forum 2018:

“Upgrading Human Capital and Skills Development for Future Asia”

22 August 2018 | Australia National University, Canberra

Key messages

• Developing Asia to continue solid growth at 6.0% in 2018 and 5.9% in 2019

• PRC growth moderates with greater focus on financial stability; India rebounds from temporary reform related setbacks

• Key risks stem from escalating trade tensions, rising US interest rates, and accumulating domestic private debt

• Heightened global financial interconnectedness poses risks to financial stability

2

Developing Asia’s growth to remain solid

6.4 6.3

6.0 5.9 6.1 6.0 5.9

7.0 6.8

6.6 6.4

6.6 6.5 6.4

4

6

8

2013 2014 2015 2016 2017 2018 2019

GDP growth (%)

Developing Asia

Developing Asia excluding NIEs

3

NIEs = newly industrialized economies of Hong Kong, China; Republic of Korea; Singapore; and Taipei,China

Source: Asian Development Outlook database.

forecast

… amid continued robust growth in major advanced economies

GDP growth (%) 2017

Actual

2018

projection

2019

projection

Major industrial economies a 2.3 2.3 2.0

United States 2.3 2.7 2.4

Euro area 2.6 2.2 1.9

Japan 1.7 1.1 1.0

4

a Average growth rates are weighed by gross national income, Atlas method.

Source: ADB, Asian Development Outlook Supplement July 2018.

Synchronized trade resurgence

5

Sources: CEIC Data Company (accessed August 2018).

Growth in nominal exports Growth in nominal imports

-60 -40 -20 0 20 40 60

AzerbaijanTajikistan

KazakhstanGeorgia

MongoliaArmenia

Viet NamAustraliaLao PDR

IndonesiaRep. of Korea

MalaysiaMyanmar

Kyrgyz RepublicTaipei,China

IndiaNew Zealand

SingaporeThailand

Sri LankaPhilippines

JapanPeople's Rep. of China

Brunei DarussalamHong Kong, China

PakistanNepal

CambodiaBangladesh

2017 2016 2015

-40 -20 0 20 40

MongoliaArmenia

CambodiaMyanmar

IndiaPakistanViet Nam

Rep. of KoreaKazakhstan

People's Rep. of ChinaBangladesh

MalaysiaIndonesiaThailand

NepalTaipei,China

SingaporeKyrgyz Republic

AustraliaNew Zealand

JapanPhilippines

Brunei DarussalamGeorgia

Sri LankaHong Kong, China

Lao PDRAzerbaijan

2017 2016 2015

-20

-10

0

10

20

30

Jan-14

Jan-15

Jan-16

Jan-17

Jun-18

ASEAN4 BCLMV NIEs + PRC Japan

6

Trade recovery expected to moderate

Note: Trade values for months with no data were estimated using average growth rate during the preceding three years. Source: CEIC Data Company (accessed August 2018).

Nominal Export Growth (%, y-o-y, 3-month moving average)

-5

0

5

10

PRC IND HKG KOR SIN TAP INO MAL PHI THA VIE

Percentage points

Total consumption Total investments Net exports GDP growth

Domestic demand still the main growth driver…

7

NIEs

Notes: ASEAN = Association of Southeast Asian Nations; NIEs = newly industrialized economies; GDP = gross

domestic product; HKG = Hong Kong, China; IND = India; INO = Indonesia; KOR = Republic of Korea; MAL =

Malaysia; PHI = the Philippines; PRC = People’s Republic of China; SIN = Singapore; TAP = Taipei,China; THA

= Thailand. IND data refers to H1 FY2017. Components do not add up to total due to a statistical discrepancy.

Sources: Haver Analytics and CEIC Data Company (accessed 2 March 2018);

Asian Development Outlook database.

ASEAN-5

Demand-side contributions to growth, selected economies, 2017

...and strong consumption set to continue

8

Consumer confidence index, % change

-16

-8

0

8

16

24

Jan2016

Jun Jan2017

Jun Jan2018

Jun

Year-on-year change, %

East Asia People's Republic of China

Hong Kong, China

Republic of Korea

Taipei,China

-16

-8

0

8

16

-20

-10

0

10

20

30

40

50

60

70

Jan2016

Jun Jan2017

Jun Jan2018

Jun

Percentage points

Year-on-year change, %

Southeast Asia IndonesiaMalaysiaThailandPhilippines (right scale)

Notes: Data for Hong Kong, China; Malaysia and Philippines are on a quarterly basis. For the Philippines, the index refers to

consumer expectations, computed as the percentage of households that answered in the affirmative less the percentage of

households that answered in the negative. A positive (negative) CEI indicates a favorable (unfavorable) view.

Source: Haver Analytics; CEIC Data Company (accessed 13 August 2018).

9

2017 2018 2019 2017 2018 2019

Actual Forecast Actual Forecast

East Asia 6.3 6.0 5.8 South Asia 6.5 7.0 7.2

China, People’s Rep. of 6.9 6.6 6.4 India 6.7 7.3 7.6

Hong Kong, China 3.8 4.0 3.0

Korea, Rep. of 3.1 3.0 2.9 Central Asia 4.3 4.2 4.3

Taipei,China 2.9 3.0 2.8 Kazakhstan 4.0 3.7 3.9

Southeast Asia 5.2 5.2 5.2 The Pacific 2.2 2.2 3.0

Indonesia 5.1 5.2 5.3

Malaysia 5.9 5.3 5.0

Philippines 6.7 6.8 6.9

Singapore 3.6 3.1 2.9 Developing Asia 6.1 6.0 5.9

Thailand 3.9 4.2 4.1

Viet Nam 6.8 7.1 6.8 Excluding NIEs 6.6 6.5 6.4

2018 and 2019 should consolidate gains

10

Sources: Bloomberg; Haver Analytics; and CEIC Data Company (accessed 19 February 2018).

PRC growth will sustain moderation in

favor of reforms

forecast

-2

0

2

4

6

8

10

2013 2014 2015 2016 2017 2018 2019

percentage points

Net exports

Investment

Consumption

Gross domestic product• Growth will dampen over

2018–2019 as planned

• Government priorities to

improve quality of growth:

1 Heading off financial risks

2 Controlling environmental

pollution

3 Targeted intervention to

eliminate poverty

Demand-side contributions to growth

Downside risks to the outlook

Escalation of trade tensions

Interest-rate induced capital flow shifts

Impact of private debt and leverage on growth

11

Improved fiscal and financial positions bolster

developing Asia’s resilience to shocks

Potential domestic financial risks Elevated private debt and leverage driven by an extended

period of easy monetary policy and global liquidity

Deteriorating bank assets―with potential spillover to real economy

12 Source: Bank for International Settlements.

NPL Ratios of Selected Asian Economies (%)

Credit to Private Sector–Selected EMEAP

Economies (% of GDP)

0123456789

2011 2012 2013 2014 2015 2016

India Indonesia Mongolia PRC

Source: ADB calculations using data from Bank of Mongolia; and World Bank. World Development Indicators.

0

50

100

150

200

250

300

350

1996Q

22

00

6Q

22

01

6Q

41

99

6Q

22006Q

22

01

6Q

41

99

6Q

22

00

6Q

22

01

6Q

41

99

6Q

22

00

6Q

22

01

6Q

41

99

6Q

22

00

6Q

22

01

6Q

41

99

6Q

22

00

6Q

22

01

6Q

41

99

6Q

22

00

6Q

22

01

6Q

41

99

6Q

22

00

6Q

22

01

6Q

4

PRC HKG INO JPN KOR MAL SIN THA

Households Non-financial corporations

FDI = foreign direct investment (flows data); Equity = equity asset holdings (stock data); Debt = debt asset holdings

(stock data).

Note: Asia and the Pacific includes ADB’s 45 regional developing members plus Australia, Japan, and New Zealand,

where data is available. Source: ADB, Asian Economic Integration Report database.

Asia’s regional integration deepens

13

Intraregional Shares—Asia and the Pacific (% of total)

2017

2001 53%

Trade FDI

47%

58% 53% (2016)

12%

Equity

19%

8%

16%

Debt

14

Global financial market interconnectedness intensifies

Pre- AFC (1 Mar 1995–1 Jul 1997)

Post-GFC (1 Apr 2010–30 Dec 2016)

Banking network can transmit shocks across borders

15

Impact of direct and indirect banking exposures to the crisis-affected countries on capital outflows during the GFC

*** = significant at 1%, ** = significant at 5%. Robust standard errors in parenthesis. Coefficients for the control variables are not shown for brevity. Source: Park and Shin (2017).

Variables

Without Control

Variables

With Control

Variables

(1)

Outflows

(2)

Outflows

(3)

Outflows

(4)

Outflows

Direct exposure of

banking sector

0.257***

(0.075)

0.282***

(0.078)

0.228**

(0.085)

0.253***

(0.086)

Indirect exposure of

banking sector

0.722**

(0.285)

0.359

(0.269)

Investors too complacent toward risk?

16

-2

-1

0

1

2

3

4

5

6

Jan-95 Dec-97 Nov-00 Oct-03 Sep-06 Aug-09 Jul-12 Jun-15

ADB Financial Stress Index—Asia

Episodes FSI

GFC

1st Greek

bailout

Euro

crisis

Taper

Tantrum

PRC currency

devaluation; stock

market crash

Brexit

Fed rate hike

Korean

peninsula

tensions

Mar-18

AFC

Fed rate

hike

twice

Trade

conflicts

AFC = Asian financial crisis, GFC = global financial crisis, PRC = People's Republic of China, US = United States. Note: Based on (i) banking sector price index, (ii) sovereign yield spreads, (iii) stock market volatility, (iv) stock price index and (v) exchange market pressure index and using the principal components analysis Source: ADB calculations using data from Bloomberg, CEIC, and Haver Analytics (accessed 19 June 2018).

Policy considerations

17

Further develop LCY bond markets for long-term finance and greater financial resilience

Urgently strengthen macroprudential regulation and supervision

Enhance regional financial cooperation to address growing financial interconnectedness

Time to review and strengthen existing financial safety nets