Asia and Pacific:Building on Asia’s Strengths During Turbulent Times

2016 Asia and Pacific Regional Economic Outlook

May 10, 2016

Ranil SalgadoRanil Salgado IMF’s Asia and Pacific Department

Asia and Pacific REO: ContentsAsia and Pacific REO: Contents

Chapter 1 (Overview): Building on Asia’s Strengths in Turbulent Times

Chapter 3: China’s Ch t 4 Sh i thCh t 2 N i ti th Chapter 3: China s Evolving Trade with Advanced Upstream

Economies and Commodity Exporters

Chapter 4: Sharing the Growth Dividend:

Analysis of Inequality in Asia

Chapter 2: Navigating the Transition: Trade and

Financial Spillovers from China

Launch

2

Overview: Outlook and Risks

3

Key messages and roadmapKey messages and roadmap

•Asia remains the global growth engine.

•Downside risks dominate in the near term.Downside risks dominate in the near term.

•China’s rebalancing and spillovers can have adverse/differential i l i t i th h t b t tl b fi i l i thregional impacts in the short run, but mostly beneficial in the

medium term.

•Asia should continue to build policy buffers and tackle vulnerabilities.

4

Complex Forces Shaping the Global Outlookthe Global Outlook

1. Tooslowfortoolong;2. SlowdownandrebalancinginChina;3. Sharpreductionincommodityprices;4. Volatileandtighterfinancialconditions;5. SlowdownincapitalflowstoEMs;

5

Global Outlook subdued, Slowdown and Uneven growthand Uneven growth

Growth RatesGrowth Rates(percent)

8

AE EM LIDC

6

7 AE EM LIDC

4

5

2

3

0

1

6

Source: IMF, World Economic Outlook.

02010 2011 2012 2013 2014 2015 2016

Asia remains the world’s most dynamic region, continuing to deliver two thirds of global growthcontinuing to deliver two-thirds of global growth…

Gl b l R l GDP G th C t ib ti t Gl b l G th 2008 16

62015 2016 2017

Global: Real GDP Growth(Year-on-year; percent change)

China JapanRest of Asia United States

Contribution to Global Growth, 2008-16(In percentage points)

23456

4.0

5.0

6.0Others World

-1012

sia he

pe ea es m 1 0

2.0

3.0

4.0

As

mer

ica

and

thCa

ribbe

an

mer

ging

and

el

opin

g Eu

rop

Euro

are

Uni

ted

Stat

e

nite

d Ki

ngdo

-2 0

-1.0

0.0

1.0

Latin

A C EmD

eve U

Source: IMF World Economic Outlook database.

2.02008 2009 2010 2011 2012 2013 2014 2015 2016

(Proj.)

Source: IMF World Economic Outlook database

7

Source: IMF World Economic Outlook database. Source: IMF World Economic Outlook database.

Asia: Real GDP(Year-on-year percent change)

Latest ProjectionsDifference from 2015

October WEO

2015 2016 2017 2016 2017

Asia 5.4 5.3 5.3 -0.1 -0.1

A i l di Chi 4 3 4 4 4 6 0 3 0 3Asia excluding China 4.3 4.4 4.6 -0.3 -0.3

Japan 0.5 0.5 -0.1 -0.5 -0.5

China 6.9 6.5 6.2 0.2 0.2

India 7.3 7.5 7.5 0.0 0.0

Korea 2.6 2.7 2.9 -0.5 -0.7

Australia and New Zealand 2.6 2.4 2.9 -0.4 -0.1

East Asia excluding China 2.0 2.2 2.6 -0.7 -0.7

ASEAN 4 7 4 7 5 0 -0 3 -0 3ASEAN 4.7 4.7 5.0 -0.3 -0.3

Indonesia 4.8 4.9 5.3 -0.2 -0.2

Malaysia 5.0 4.4 4.8 -0.1 -0.2

Philippines 5.8 6.0 6.2 -0.3 -0.3

8

Thailand 2.8 3.0 3.2 -0.2 -0.4

APD small states 2.9 2.2 1.9 -0.7 -0.1

What factors are weighing on Asia’s outlook?outlook?

•Weakening global recovery and slowing tradeg g y g

•Tighter global financial conditions

•China rebalancing

•D ti f t•Domestic factors

Upside risks: commodity prices for importers; progress on trade y gagreements; stronger 2016 growth in China

9

Weakening external demand has affected Asian exportsaffected Asian exports

C t ib ti t Ch i Gl b l E t C t ib ti t Ch i Gl b l I t

2009 2015

Contribution to Change in Global Export Volume Growth(Year-on-year percent change)

2009 2015

Contribution to Change in Global Import Volume Growth(Year-on-year percent change)

-1 0

0.0

1.02009 2015

-1 0

0.0

1.02009 2015

-3.0

-2.0

1.0

-3.0

-2.0

1.0

-5.0

-4.0

United Japan Euro Other China Asia ex. Other -5.0

-4.0

United Japan Euro Other China Asia ex. Other States area AEs CHN,

JPN, AUS, NZL

EMs

Sources: IMF, World Economic Outlook database; and IMF staff calculations.

States area AEs CHN, JPN, AUS, NZL

EMs

Sources: IMF, World Economic Outlook database; and IMF staff calculations.

10

; ;

Tighter global financial conditions continue to put it l fl d h tpressure on capital flows and exchange rates

E i A i l Chi C it l Fl E i A i l Chi P tf li Fl

60FDI Non - FDI

Emerging Asia excl. China: Capital Flows(In billions of U.S. dollars; positive = capital inflow)

15

Equity Debt

Emerging Asia excl. China: Portfolio Flows(In billions of U.S. dollars; positive = capital inflow)

20

40

60

0

5

10

15

-20

0

1

-10

-5

0

-40

2007

Q1

2008

Q1

2009

Q1

2010

Q1

2011

Q1

2012

Q1

2013

Q1

2014

Q1

2015

Q1

2015

Q3

-15

2013

M1

2013

M7

2014

M1

2014

M7

2015

M1

2015

M7

2016

M1

2016

M3

Sources: IMF, IFS database; CEIC Data Company Ltd.; Haver Analytics; and IMF staff calculations.

Sources: Bloomberg L.P. ; Haver Analytics; and IMF staff calculations.Note: Equities coverage: India, Indonesia, the Philippines, and Thailand; Bonds coverage: India, Indonesia, and Thailand.

11

China: A two-speed economy

Chi E i A ti it I di t

25

China: Economic Activity Indicators(In percent, year-on-year)

15

20

Nominal growth of services sector

10

15

Nominal GDP growth

0

5Nominal growth of industrial sector

010Q1 11Q3 13Q1 14Q3 15Q4

Sources: CEIC Data Company Ltd ; and IMF staff calculations

12

Sources: CEIC Data Company Ltd.; and IMF staff calculations.

Potential Spillovers from ChinaPotential Spillovers from China

Spillover channels:

•Trade: lower commodity and intermediate exports to ChinaTrade: lower commodity and intermediate exports to China

•Financial: higher volatility and capital outflows

•Lower commodity prices: adverse for some exporters; beneficial for importers; differences among commoditiesp ; g

•Opportunities: consumer goods, services and IT exports to China labor intensive sectorsChina, labor-intensive sectors.

13

Asia’s strong growth performance after the GFC came on the back of rising levels of private debtcame on the back of rising levels of private debt

A D bt t GDP i APD t i E i M k t Fi D bt P t ti ll t Ri k

450Public Private

Average Debt-to-GDP in APD countries(GDP weighted averages)

2010 2011 2012 2013 2014 2015 E

Emerging Market Firms: Debt-Potentially-at-Risk(Share of total debt if ICR<1; in percent)

300

350

400

15

20

150

200

250

10

0

50

100

5 4 5 4 5 4 5 3 5 3

5

200

201

200

201

200

201

200

201

200

201

CHN JPN other Asia

LICs PICs

0China Asia excluding

ChinaLatin America Europe,

Middle East, and Africa

14

Source: April 2016 GFSR.Note: Asia excluding China= India, Indonesia, Malaysia, the Philippines, and Thailand.

Source: BIS and IMF staff estimates.Note: Other Asia includes Australia, Hong Kong SAR, India, Indonesia, Korea, Malaysia, New Zealand, the Philippines, Singapore, Taiwan POC, Thailand, and Vietnam.

Inequality in Asia

15

Increased income inequality in Asia is a challenge and could be detrimental for growthand could be detrimental for growth

R i l C i I I lit S l t d A i N t Gi i I d

Sub-Saharan Africa

Regional Comparison: Income Inequality(Net Gini Index; change since 1990; simple average across regions)

602013 (or Latest) 1990

Selected Asia: Net Gini Index(In Gini points)

ASEAN-5

Middle East and North Africa

Latin America and the Caribbean

20

30

40

50

NIEs

LICs Asia

OECD0

10

Kore

aon

golia

Nep

al Fiji

haila

ndM

alay

sia

ippi

nes

Japa

nf C

hina

Zeal

and

ustr

alia

o P.

D.R

.Vi

etna

mdo

nesi

am

bodi

ari

Lank

aga

pore

glad

esh

ng S

ARIn

dia

Gui

nea

Chin

a

India

Emerging and Developing Europe

Industrial Asia Mo Th M

Phili

wan

Pro

vinc

e o

New

Z Au Lao V Ind

Cam Sr Si

ngBa

ngH

ong

Kon

Papu

a N

ew

-5 0 5 10 15 20

China

Sources: SWIID Version 5.0; IMF, WEO database; and IMF staff calculations

Tai

Decreasing Increasing

Sources: SWIID Version 5.0; and IMF staff calculations.

16

calculations.

While financial deepening has contributed to lowering inequality in Asialowering inequality in Asia….

Asia: Financial Deepening Population with Bank Accounts in 2014(I t f t t l 15 l ti )

***0 0120.014

All countries excluding Asia Asia

Sub-Saharan Africa 1/

(In percent of total 15+ population)

0.0060.0080.0100.012

Middle East 1/

Latin America and …

Sub Sa a a ca /

0 0020.0000.0020.004

Euro area

Europe and Central …

*-0.006-0.004-0.002

All countries excluding AsiaEast Asia and Pacific 1/

South Asia

All countries excluding Asia

Asia

Source: IMF staff estimates.Note: Bars represent coefficients of regression explaining the Gini Index; ***

0 20 40 60 80 100

World

17

p g p g ;p<0.01, ** p<0.05, * p<0.1.;The bar for Asia reflects total effect of the policy variable(s) on Asian countries, which is the sum of the average coefficient and the coefficient for the interaction term.

Source: World Bank, Global Findex database.1/ Includes only developing countries in each group.Note: South Asia comprises Afghanistan, Bangladesh, Bhutan, India,

…fiscal policy did not lower inequality in Asia, unlike elsewhereelsewhere

Asia: Fiscal Policy Composition of Social Spending

* *****0.4

0.6

All countries excluding Asia Asia

y

30Social Protection

(In percent of GDP)

****** ***

***-0 4-0.2

00.2

20

25Social ProtectionHealthEducation

**-0.6-0.4

ax R

ate

ax R

ate

pend

ing

Bene

fits

pend

ing

10

15

Cor

pora

te T

a

Per

sona

l Ta

duca

tion

Sp

Soci

al B

Cap

ital S

p

0

5

Top

C

Top Ed

Tax Policy Spending PolicyS IMF t ff ti t

Advanced Economies

Emerging Europe

Latin America

Middle East and North

Africa

Asia Sub-Saharan

Africa

Sources: Organization for Economic Cooperation and Development; Eurostat;

18

Source: IMF staff estimates.Note: Bars represent coefficients of regression explaining the Gini Index; *** p<0.01, ** p<0.05, * p<0.1; Empty bars indicate the coefficients are not significant; The bar for Asia reflects total effect of the policy variable(s) on Asian countries, which is the sum of the

g p p ; ;Asian Development Bank; IMF, World Economic Outlook; United Nations; World Health Organization; World Bank; and IMF staff calculations.Note: Data are for 2010 or are the latest available.

…and skill premium contributed to higher inequality in Asiain Asia

Asia: Skill Premium Regional Comparison: Return to Schooling R t

0.035

All countries excluding Asia Asia0.14

Rate

***

0.025

0.030

0 10

0.12

0.015

0.020

0.08

0.10

*

0.005

0.0100.06

0.000All countries excluding Asia Asia

Source: IMF staff estimates.Note: Bars represent coefficients of regression explaining the Gini Index; ***

0.04Advanced countries

South Asia

East Asia and

Pacific

Europe and

Central Asia

North Africa and

Middle East

Sub-Saharan

Africa

Latin America

19

Note: Bars represent coefficients of regression explaining the Gini Index; *** p<0.01, ** p<0.05, * p<0.1.;The bar for Asia reflects total effect of the policy variable(s) on Asian countries, which is the sum of the average coefficient and the coefficient for the interaction term.

Source: Barro and Lee (2010).Note: South Asia comprises Afghanistan, Bangladesh, Bhutan, India, Nepal, Pakistan, and Sri Lanka.

Trade, Financial, and Commodity Market Spillovers from China

20

Spillovers from ChinaSpillovers from China

Wh d ill tt d h t•Why do spillovers matter now and what are the channels?

•Trade spillovers

Fi i l ill•Financial spillovers

•Spillovers to Commodity MarketsSpillovers to Commodity Markets

21

Key Messages on SpilloversKey Messages on Spillovers

• The region and world have become much more sensitive to the Chinese economy.

• While China’s transition to more sustainable growth will be beneficial over the medium-term, it will have some negative h t t ff tshort-term effects.

• But these effects will vary.

By size and type of exports to China (consumption vs. investment).

By extent of financial linkages with China.

By type of commodity exposure.

22

China’s growing size in the world economy

Share of World GDP(In percent; 2015)

China Japan Rest of Asia

Contribution to Global Growth(In percentage points)

5

6

United States Others World

China 15%

Rest of

China 17%

UnitedR t f 2

3

4

United States 24%

Japan 6%Euro area

world 39%United States 16%

Japan 4%

Euro area

Rest of world 51%

0

1

2

Japan 6%Euro area 16%

USD terms, 2015

PPP terms, 2015

4%12%

-2

-1

2008 2009 2010 2011 2012 2013 2014 2015 2016 (Proj.)

Sources: IMF, World Economic Outlook; and IMF staff calculations.

2015 2015 ( j )

Source: IMF World Economic Outlook database.

China’s growing external li bilitiliabilities

6,000 China

Major Emerging Markets: Total External Liabilities(Billion U.S. dollars)

2,000

3,000China BrazilIndia MexicoRussia South Africa

FDI Liabilities(Billion U.S. dollars)

5,000

Brazil

India

Mexico 0

1,000

1980 1985 1990 1995 2000 2005 2010

3,000

4,000Russia

South Africa

500

750 China BrazilIndia MexicoRussia South Africa

Portfolio Equity Liabilities(Billion U.S. dollars)

2,000 0

250

1980 1985 1990 1995 2000 2005 2010

Russia South Africa

Debt Liabilities

0

1,000

0 2 4 6 8 0 2 4 6 8 0 2 4 6 8 0 2 4 500

1,000

1,500

2,000China BrazilIndia MexicoRussia South Africa

Debt Liabilities(Billion U.S. dollars)

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

2010

2012

2014

Sources: Updated and extended version of the Lane and Milesi-Ferretti (2007) dataset.

0

500

1980 1985 1990 1995 2000 2005 2010

China’s growing importance in commodity marketsin commodity markets

Real Commodity Import Growth

40Iron ore Copper Crude oil

Real Commodity Import Growth(Year-on-year percent change of 12-month rolling sum)

20

30

40

10

20

-10

0

-20

Mar

-11

Jun-

11

Sep-

11

Dec

-11

Mar

-12

Jun-

12

Sep-

12

Dec

-12

Mar

-13

Jun-

13

Sep-

13

Dec

-13

Mar

-14

Jun-

14

Sep-

14

Dec

-14

Mar

-15

Jun-

15

Sep-

15

Dec

-15

M J S D M J S D M J S D M J S D M J S D

Sources: CEIC Data Company Ltd.

Exposures to potential spillovers from China vary by countryChina vary by country

26

Trade Spillovers

27

China’s rebalancing toward consumption will d i t i ll f i t t dreduce imports, especially for investment goods

Chi I t I t it i GDP C t

24

China: Import Intensity in GDP Components, 2011 (In percent)

20GDP IAD

GDP and IAD(real growth, in percentage points)

12

16

20

15

0

4

8

on nt nt ort 5

10

Cons

umpt

io

Gov

ernm

e

Inve

stm

e

Expo

0

5

Q1

Q4

Q3

Q2

Q1

Q4

Q3

Q2

Q1

Q4

Q3

Q2

Q1

Q4

Q3

Q2

Q1

Q4

Q3

Q2

Source: "China and Asia in Global Trade Slowdown", by GH Hong, J Lee, C Liao, and D Seneviratne.

-5 2001Q

2001Q

2002Q

2003Q

2004Q

2004Q

2005Q

2006Q

2007Q

2007Q

2008Q

2009Q

2010Q

2010Q

2011Q

2012Q

2013Q

2013Q

2014Q

2015Q

Sources: Staff estimates.

28

Rebalancing accounts for a big chunk f h i l dof the import slowdown

•Allowing for four drivers of•Allowing for four drivers of imports

External demand

China: Import Growth Decompostion(In percentage points)

2011-2015 - External demand

- China demand

R b l i

over 2006-

2010

If no

rebalancing

Effect of

rebalancing

Imports -6.8

IAD 7 2- Rebalancing

- Onshoring

IAD -7.2

Domestic Demand -5.8

Consumption -0.7 -1.3 0.6

Government -1.2

•To compare 2011-15 and 2006-10,

Investment -3.9 -1.3 -2.6

External Demand -1.5 0.1 -1.6

On-shoring 0.5

R id l 0 1- weak investment

- weak exportsSource: IMF staff estimates.

Residual -0.1

Net effect -3.6

29

Spillovers from rebalancing: a likely winner and losera likely winner and loser

Sources: TiVA database; and IMF staff calculations

30

Sources: TiVA database; and IMF staff calculations.

Exposure to China’s consumption and investmentconsumption and investment

Share of domestic value-added used for China's final demand ( in percent of GDP)

Share of domestic value-added for consumption

1 6

1.8

2Share of domestic value-added for investment

1.2

1.4

1.6

0.6

0.8

1

0

0.2

0.4

31Sources: TiVA database; and IMF staff calculations.

0

World Asia Non-Asia AE EM-COM EM-others

Trade spillovers are likely to be significant, especially for economies more exposed to China’s investment demandeconomies more exposed to China s investment demand

Estimated Ranking: Impact of Rebalancing in China g p g

on Partner Country Exports(Impact in percent, due to 1 percentage point increase [decrease] in China’s consumption [investment] growth)

-0.01

0

of

xpor

ts)

0

0.04

of

xpor

ts)

-0.03

-0.02

(In p

erce

nt

ue a

dded

in e

x

0 08

-0.04

(In p

erce

nt o

e ad

ded

in e

x

-0.05

-0.04

orld

Asia

Asia AE

Com

hers

val u

-0.12

-0.08

orea pan

ralia ne

s

ysia

and

pore

ndia

SAR

esia

and

valu

nce

hina

Wo A

Non

A

EM-C

EM O

th Ko Jap

Aust

rPh

ilipp

i

Mal

a y

Thai

la

Sing

ap In

Hon

g Ko

ng S

Indo

ne

New

Zea

la

Taiw

an P

rovi

nof

Ch

Source: April 2016 APD REO

32

TSource: April 2016 APD REO.Note: EM-COM = commodity-exporting emerging markets; EM-others = other emerging markets

Growth implications of trade spillovers from China’s rebalancing since 2011 have been significantg g

Average Impact on Partner-Country GDP Growthg p y(3.1 percentage point increase in Chinese consumption growth

and 2.5 percentage point decrease in Chinese investment growth over non-rebalancing scenario)

-0.02

0

s)

By Region

0 00

0.10

s)

By (Asian) Country

-0.08

-0.06

-0.04

enta

ge p

oint

s

-0.20

-0.10

0.00

enta

ge p

oint

s

-0.14

-0.12

-0.1

d a a AE M er

(Per

c e

-0.40

-0.30

a a re es a n R m d a a d

(Per

ce

e a

Wor

l

Asi

Non

-Asi A

EM C

OM

EM O

the

Source: IMF staff estimates.

Kore

Mal

aysi

Sing

apor

Phili

ppin

eAu

stra

liJa

paon

g Ko

ng S

AVi

etna

mTh

aila

nIn

done

siIn

diN

ew Z

eala

nd

iwan

Pro

vinc

eof

Chi

na

33

Source: IMF staff estimates.Note: AE = advanced economies; EM COM = commodity-exporting emerging markets; EM Other = other emerging markets.

Ho

Source: IMF staff estimates.

Ta

Medium-term reform scenario: diff t th f b l i d thdifferent paths of rebalancing and growth

Baseline: Oct WEO projectionBaseline: Oct WEO projectionCounter-factual: non-reform scenario

Compared to the counter-factual scenario, the baseline scenario

ill hwill have:

1. Growth lower in the near term, ,but higher in the medium term (2019 and 2020)

2. Sharper decline in the growth of investment than consumption

34

Effects on GDP growth turn from losses to gains in the medi m termlosses to gains in the medium term

Changes in Partner Country GDP Growth rate (percentage

points)

Changes in Partner Country GDP Growth rate (percentage

points)

2018 2019 0 42018 2019

0 10.20.30.4

2018 2019

0.2

0.3

0.4

-0.2-0.1

00.1

-0.1

0

0.1

-0.6-0.5-0.4-0.3

-0.4

-0.3

-0.2

35

Source: IMF staff estimates.

0.6World Asia NonAsia

0.4AE EM-COM EM others

As China moves up the value chain, there could b t iti f l b i t i dbe opportunities for labor-intensive producers

Chi E t B kd b F t I t it Ch i M k t Sh i M j L E d

50

60

China Export Breakdown by Factor Intensity(In percent of Chinese exports)

2

Change in Market Share in Major Low End Goods(5 largest and smallest changes since 2010, percentage points)

20

30

40

50

-1012

Apparel Footwear Furniture

0

10

20

93 95 97 99 01 03 05 07 09 11 13 -5-4-3-2

Apparel, Footwear, Furniture, and Plastic Toys

199

199

199

199

200

200

200

200

200

201

201

Raw material intensiveCapital intensive

-65

Chin

a

Japa

n

Ger

man

y

ong

SAR

Thai

land

Mex

ico

Pola

nd

ambo

dia

glad

esh

Viet

nam

Easy to imitate research intensiveDifficult to imitate research intensiveLabor intensive

Sources: COMTRADE; IMF staff estimates

G

Hon

g Ko T

Ca Ban V

Sources: COMTRADE; IMF staff estimates

36

Sources: COMTRADE; IMF staff estimates. Sources: COMTRADE; IMF staff estimates.

…but also implications for advanced upstream countries’ exports to both China and third markets.

Upstream Countries’ Export Growth, 2010-14 1/(In percent)

20

25

Observed Export Growth Competition from China Effect 2/

( p )

12.510

15

6.6

11.2

5

10

2.90

To China To Third MarketsSource: IMF staff estimates.1/ Germany Japan Korea Taiwan Province of China and the United States1/ Germany, Japan, Korea, Taiwan Province of China, and the United States.2/ Additional export growth that would have materialized but for China’s growing competitiveness.

Financial Spillovers

38

Regional markets increasingly i ith Chico-moving with China

Pre-GFC Post-GFC Since June 2015

ChinaPre-GFC Post-GFC Since June 2015

Correlation of Asian Markets withJapan

Pre-GFC Post-GFC Since June 2015

United States

0.30

0.35

0.50

0.60

0.35

0.40

0.45

0.20

0.25

0.30

0.40

0 20

0.25

0.30

0.10

0.15

0 10

0.20

0.10

0.15

0.20

0.00

0.05

Equity Bond FX0.00

0.10

Equity Bond FX0.00

0.05

Equity Bond

Note: Asian countries include Australia, India, Indonesia, Korea, Malaysia, Philippines, Singapore, Taiwan POC, Thailand, and New Zealand.

Financial spillovers from China are increasing and t f i ith t t d li kstronger for economies with greater trade links

R i l St k M k t M t D tR i l St k M k t M t D t

Moderate Trade Links

Regional Stock Market Movements Due to Shocks from China, by Trade Links with China (Percent change)

Asia Equity Movement

Regional Stock Market Movements Due to Shocks from China(Percent change)

1.2

1.4Strong Trade Links

1.2

1.4Daily Standard Deviation

0.6

0.8

1.0

0.6

0.8

1.0

0.2

0.4

0.6

0.2

0.4

0.6

0.0Pre-GFC Post-GFC Since June 2015

0.0Pre-GFC Post-GFC Since June 2015

Source: April 2016 APD REO

40

Source: April 2016 APD REO.Note: Pre-GFC = January 2001-December 2007; Post-GFC = June 2010-June 2015; Since June 2015 = July 2015-January 2016. Trade links based on exports for China’s final demand in value added terms.

… including in FX markets more recently.

E t St d E h R t M t D E h R t M t D t Sh k

Asia FX Movement

Event Study: Exchange Rate Movements Due to Shocks from China(Percent change)

Moderate Trade Links Strong Trade Links

Exchange Rate Movements Due to Shocks from China, by Trade Links with China (Percent change)

0.4

0.5Daily Standard Deviation

0 5

0.6

0.7

0.2

0.3

0.3

0.4

0.5

0.0

0.10.1

0.2

0.02005M7-2015M6 2015M7-2016M1

Sources: Bloomberg L.P.; and IMF staff calculations.Note: FX = foreign exchange

0.02005M7-2015M6 2015M7-2016M1

Sources: Bloomberg L.P.; and IMF staff calculations.

41

Note: FX = foreign exchange. g ;

Market sensitivity to systemic economieseconomies

Estimated Beta Coefficients for Systemic Economies

Beta Coefficient for China(12-month rolling window)

0 25

0.30Pre-GFC

Post GFC 0 15

0.20

0 15

0.20

0.25 Post-GFC

0 05

0.10

0.15

0.10

0.15

0.00

0.05

0.00

0.05

China United Japan Euro area-0.10

-0.05

c-01

c-02

c-03

c-04

c-05

c-06

c-07

c-08

c-09

c-10

c-11

c-12

c-13

c-14China United

StatesJapan Euro area

Source: IMF staff estimates.

Dec

Dec

Dec

Dec

Dec

Dec

Dec

Dec

Dec

Dec Dec

Dec

Dec

Dec

Explaining market sensitivity to ChinaChina

Significance of Bilateral Linkages in Explaining Differences in Market Sensitivities to China

Decomposition of Explained Variance inMarket Sensitivities to China

2.0Trade exposureT d titi

90%100%

Financial linkages Trade competitionTrade exposure

1.0

1.5 Trade competitionFinancial linkages

60%70%80%

Trade exposure

0.530%40%50%

-0.5

0.0

0%10%20%

Note: The shaded bars denote variables that are statistically significant.

0%Pre-GFC Post-GFC

S i l iScenario analysis

VIX index China VIX index

Global and Chinese VIX(points)

Asian Market Sensitivity to China (Beta coefficient)

50

60VIX index China VIX index

China introduces new exchange rate mechanism ahead of potential Fed hike

0 30

Impact without a VIX shockAdditional impact from a VIX shock

30

40Fed tightening coupled with commodity price slump and China concerns 0.20

0.25

0.30

20

30 China concerns

0.10

0.15

0.20

0

10

Jan 15 Apr 15 Jul 15 Oct 15 Jan 16

0.00

0.05

Baseline estimate Adjusted estimate with Jan-15 Apr-15 Jul-15 Oct-15 Jan-16

Source: Bloomberg L.P.Note: The shaded bars represent global risk aversion episodes as defined by De Bock and de Carvalho Filho (2015) based on the daily high of the VIX.

VIX shock

Source: IMF staff estimates.Note: Post-GFC sample is shown. GFC= global financial crisis.

Commodity Market Spillovers

45

China’s consumption of diticommodities

China: Commodity ConsumptionChina: Commodity Consumption(In millions of metric tons unless otherwise noted)

Iron Ore 800

Crude Oil1

Actual

1 000

2,000

3,000 ActualLinear trendModel-based projections

200

400

600

800 ActualLinear trendModel-based projections

0

1,000

0

200

3000

Coal1

ActualTrend

60

Pork ActualLinear trend

0

1000

2000 Macrotrend

40

45

50

55Linear trendModel-based projections

40

Sources: BP Global; United Nations, Food and Agriculture Organization; International Energy Agency, and IMF staff calculations.1 Units for crude oil and coal are million tons oil equivalent (mtoe).

China’s impact on commodity k i l l ilmarkets mainly on metals, not oil

China: Deviations of Actual Consumption from Counterfactual (In percent)

01020

Model-based Linear trend Growth component of deviation 1

-40-30-20-10

-60-5040

n or

e

per*

ckel

*

g oi

l

Coa

l

mea

t

um*

e oi

l

Pork

heat

Ric

e

aize

Iron

Cop Nic Ve

C

Shee

p m

Alum

in

Cru

d P

Wh R M

Source: IMF staff calculations.Note: For 2014 consumption levels (* for 2015). See text for details of the calculations. 1 Percent difference in actual GDP (latest observation) and GDP forecast in April 2011, times the estimated income elasticity.

Robust import growth, even when consumption “shortfalls”when consumption shortfalls

China: Contribution to Changes in Net Commodity Imports 2011-15

Consumption contribution Production contribution Net imports (2011-15 change)

China: Contribution to Changes in Net Commodity Imports, 2011-15(Percent change)

171.5

46.1 42.0 38.9 20.1 2 5 277 150 653 2000400060008000

50100150200

p p ( g )

Right scale

2.5

-101.3

277 150

-6000-4000-200002000

-150-100-50

050

6000150

Coa

l

Nic

kel

Iron

ore

Cop

per

Cru

de o

il

etab

le o

il

Whe

at

eep

mea

t

Pork

Mai

ze

Veg

She

Sources: BP Global, Statistical Review of World Energy; Food and Agriculture Organization (FAO), OECD-FAO Agricultural Outlook 2015-2024; World Steel Association, Steel Statistical Yearbook 2015; World Bureau of Metal Statistics; and IMF staff calculationsStatistics; and IMF staff calculations.Note: Only commodities in which China was a net importer in 2011 are included. Net imports are defined as production minus consumption. Figures for 2014 (2015 for nickel and copper). Positive contribution of production indicates a decline in production.

Overview: Policies for the Region

49

Building on strengths: Navigating the turbulent global environmentturbulent global environment

Asia has broadly:

•Strong current account positions and reserve buffersStrong current account positions and reserve buffers

•Low inflation and some room to cut rates, if needed

•Stronger macro-prudential frameworks than in the past

Structural reforms can further strengthen the region’s resilience to l b l i kglobal risks

50

Three Pronged Policy StrategyThree-Pronged Policy Strategy

Policy makers in Asia should continue to build policy buffers and tackle vulnerabilities.

In the near-term, monetary policy should remain focused on supporting demand and addressing risks, including from large exchange rate depreciations and deflationary shocks.

Need also to manage risks associated with high leverage and financial g g gvolatility, including through exchange rate flexibility, targeted macroprudential policies, and in some cases, capital flow measures.

Fiscal policy can also support demand in the near term if there is a need and Fiscal policy can also support demand in the near term if there is a need and policy space is available.

Structural reforms should support economic transitions and bolster potential growth aided by fiscal policy where relevantgrowth, aided by fiscal policy where relevant.

Broadening access to education and health and promoting financial and gender inclusion are also critical to address rising income inequality in most countries in the regioncountries in the region.

51

Key Policy Challenges

Policy recommendationsKey Challenge

Improve the allocation of credit; enhance resilience ofChina

Improve the allocation of credit; enhance resilience of

corporates and banksCredit growth

Japan A comprehensive and coordinated policy packageReflation and

fiscal sustainabilityfiscal sustainability

IndiaSpeed up structural reform implementation to boost

investment; enhance resilience of corporates/banks

Corporate and banking sector strains

AUS and NZL

Accommodative monetary and fiscal policies, structural

reforms

Adjust to lower commodity prices

ASEAN- Continue to build policy buffers and to implement structural Tighter external 4 reforms, and use macro prudential policies, as neededenvironment

Asian FDEs

Strengthen macro policy frameworks furtherMacro vulnerabilities

52

SmallStates

Build resilience and enhance growth potentialNatural disasters/climate

change and de-risking

Concluding Remarks

•While Asia remains the global growth engine, the external g g g ,environment is becoming more difficult.

•Policy makers need to tackle rapid credit growth corporate andPolicy makers need to tackle rapid credit growth, corporate and banking vulnerabilities and press ahead with structural reforms

•Asia should continue to build strong buffers that can be used if•Asia should continue to build strong buffers that can be used, if downside risks materialize.

53

Country-specific Slides

54

China: Credit growth is still too fast and leverage ratios are rising in particular for SOEsratios are rising, in particular for SOEs

Chi C dit G th Chi L R ti

16040Household and corporate credit t GDP ti ( dj t d

China: Credit Growth(In percent; year-on-year growth)

200Average leverage for local SOEs

China: Leverage Ratios(Debt-to-equity; in percent)

14030 Household and corporate credit(adjusted for LG

to GDP ratio (unadjusted, quarterly, RHS)

160

180 Average leverage of private firmsAverage leverage SOEs

100

120

10

20 debt swap)

Nominal GDP

120

140

800

09Q

1

09Q

4

10Q

3

11Q

2

12Q

1

12Q

4

13Q

3

14Q

2

15Q

1

15Q

4 80

100

3 4 5 6 7 8 9 0 1 2 3 4

200

200

201

201

201

201

201

201

201

201

Sources: CEIC Data Company Ltd.; and IMF staff calculations.Note: Household and corporate credit in total social financing stock excluding equity and estimated LGFV borrowing

200

2004

200

200

200

200

200

201

201

201

201

2014

Sources: WIND database and staff estimates

55

excluding equity and estimated LGFV borrowing. Sources: WIND database and staff estimates.

China: Concerns about the growth model and near-term outlook are putting pressure on the exchange rate and capital flows

China: External Sector China: Exchange Rate and Foreign Exchange

170200

China: External Sector

Capital Flows (In billions of U S dollars)

4.0105

China: Exchange Rate and Foreign Exchange Reserves

150

0

(In billions of U.S. dollars)

100

Foreign Exchange Reserves (In trillions of US$, RHS)

130

-200

3.5

95

USD/RMBDec.2014=100)

New Fixing(Aug 11, 2015)

90

110

400

REER (2005=100, RHS)

3 090

CFETS Index (Dec.2014=100)

Basket Announced

(Dec 15, 2015)

Sources: Bloomberg L P ; CEIC Data Co Ltd ; and IMF staff calculations

90-4002005 2007 2009 2011 2013 20152015Q4

3.090Jan-14 Jul-14 Jan-15 Jul-15 Jan-16Mar-16

56

Sources: Bloomberg, L.P.; CEIC Data Co. Ltd.; and IMF staff calculations.

Japan: With weak growth, stronger wage-price dynamics remain essentialdynamics remain essential

C t ib ti t G th C ti d L b M k t I di t

66Private consumption

Contributions to Growth (In percent; y/y)

Private Consumption (SA, QoQ) Real Wages (SA, QoQ)O t t G

Consumption and Labor Market Indicators(In percent)

3

4

5

3

4

5 Private gross fixed investmentPrivate inventoryGovernment spendingNet exportsGDP h

2

3

Output GapCore-core CPI Adjusted for VAT Effect (YoY) 1/

1

2

3

1

2

3 GDP growth

-1

0

1

-1

0

-1

0

-3

-2

-1

-2-22010A1 2012A1 2014A1 2016A1 2018A1

Source: Haver Analytics and IMF staff estimates

-42012Q2 2013Q2 2014Q2 2015Q4

Source: Haver Analytics.1/ Bank of Japan's measure excludes fresh food and energy

5757

Source: Haver Analytics and IMF staff estimates. 1/ Bank of Japan s measure, excludes fresh food and energy.

India: Strong macroeconomic performance continues but downside risks prevail p

C t A t GDP G th d I fl ti B k A t i Di t

Current account balance (in percent of GDP)Real GDP Growth

Current Account; GDP Growth; and Inflation(In percent)

14

16Gross NPA ratio

Bank Assets in Distress(In percent of outstanding advances)

8

10

12Inflation

8

10

12 Restructured loan ratio

2

4

6

8

0

2

4

6

-4

-2

0

2 0

2009

/10

2010

/11

2011

/12

2012

/13

2013

/14

2014

/15

2009

/10

2010

/11

2011

/12

2012

/13

2013

/14

2014

/15

2009

/10

2010

/11

2011

/12

2012

/13

2013

/14

2014

/15

2009

/10

2010

/11

2011

/12

2012

/13

2013

/14

2014

/15

-6

4

2012 2013 2014 2015

ff

Public Sector banks

Old Private Sector Banks

New Private Sector Banks

Foreign banks

f ff

58

Source: IMF staff calculations. Sources: Reserve Bank of India; and IMF staff estimates

ASEAN-4: Addressing vulnerabilities in a more challenging environmentchallenging environment

Change in Exchange Rates, Stock Prices, and International Reserves(2015 and ear to date in percent)

1.44.0 6.61.6 2.0 5.1

1.45.9

9.10.3 1.5

7.35

1015

(2015 and year-to-date, in percent)2015 2016, year-to-date

Exchange rates against the US$ Equity Prices International Reserves

-9.8-18.4

-5.1 -8.7 -12.1-3.9 -3.9

-14.0-5.3

-17.8

-0.4

1.4

-1.3

0.3

-25-20-15-10-505

a a s d a a s d a a s d

Indo

nesi

a

Mal

aysi

a

Phili

ppin

e

Thai

land

Indo

nesi

a

Mal

aysi

a

Phili

ppin

e

Thai

land

Indo

nesi

a

Mal

aysi

a

Phili

ppin

e

Thai

land

0.2y

rate

s 20

14)

Change in Inflation and Policy Rates(in percentage points)

Philippines

Malaysia5.4

5.8 ASEAN-4: WEO Growth Projections

-0.8

-0.3ha

nge

in p

olic

yM

ar 2

016

-D

ec 2 Philippines

ThailandIndonesia

4.6

5.0

-1.3-6.0 -5.0 -4.0 -3.0 -2.0 -1.0 0.0 1.0

Ch (M

Change in Inflation (e-o-p, 2015 vs 2014)59

4.22014 2015 2016 2017 2018 2019 2020

October 2014 April 2015

October 2015 April 2016

FDEs: Increasing vulnerabilities

Fi l d C t A t B lS l t d I di t

4

6

Fiscal and Current Account Balance(Year of 2015)

10

12

Selected Indicators (In percent)

Cambodia Nepal

-2

0

2

4

% o

f G

DP)

Bangladesh4

6

8

10

Lao P.D.R.Myanmar

Sri Lanka Vietnam-8

-6

-4

cal B

alan

ce (% Bangladesh

2

0

2

4

Mongolia

-14

-12

-10

40 20 0 20

Fisc

-6

-4

-2

2015 2016 2015 2016 2015 2014 2015 -40 -20 0 20Current Account Balance (% of GDP)

Sources: IMF World Economic Outlook database; and IMF staff calculations.Note: The size of the bubbles represents public debt in percent of GDP

2015 2016 2015 2016 2015 2014 2015

GDP growth Inflation ReservesExport growth

Sources: IMF World Economic Outlook database and IMF staff

(y/y)

60

Note: The size of the bubbles represents public debt in percent of GDP.calculations.

Small States: “De-risking” could affect financial inclusion and intermediation, given high reliance on remittancesand intermediation, given high reliance on remittances

R itt 2015B k A t Cl f M T f

30

Remittances, 2015(In percent of GDP)

60

Bank Account Closures for Money Transfer Operator Clients(In percent)

15

20

25

APD small states 40

50

5

10

15

World

Small states

30

0

Tong

a

Sam

oa

ll Is

land

s

Tuva

lu

Kirib

ati

icro

nesi

a

Fiji

Vanu

atu

mor

-Les

te

n Is

land

s

Pala

u

PNG

10

20The share of banks that closed money transfer operator accounts

Mar

sha Mi

Tim

Solo

mon

Source: IMF staff calculations

02010 2011 2012 2013 2014

Source: World Bank Group CBR Survey Source: IMF staff calculations.Source: World Bank Group, CBR Survey.