Economic Outlook for the Asia Pacific Region and the Global Financial Crisis Reza Baqir IMF Resident Representative 22 nd CACCI Conference Manila Hotel, October 23, 2008

1 Overview  The bad news The world economy is entering a major downturn in the face of the most dangerous financial shock in mature financial markets since the 1930s. Risks may still be tilted to the downside  The good news To date, Emerging Asia has led global growth Nevertheless, Asia is also exposed to global economic conditions, and perhaps more so now than before

2 An extraordinary, banking-sector shock is striking advanced economies Interbank Markets (3-month LIBOR minus T-bill rate; in percent) United States Japan Euro area Q1 Q2 Q3 Q Q1 Q2 Q3 Q Q1 Q2 Oct Bank CDS Spreads (10-years; median; in basis points) 2007 Oct

3 Overnight developments  Markets sold off sharply and on a broad basis today, including equities, emerging market assets and commodities.  Global recession fears continue to grip markets while deleveraging pressures appear to be becoming broader  The selloff in emerging market debt is gaining pace, with the EMBIG selling off 5.5% amid spread widening of 69 bps to 783 bps, the highest level since Selling is across the board in the most liquid names, with the exception of the highest-rated sovereigns.  Emerging market equities also plunged, with major bourses in the EMEA region off 3 to 9%, and Latin stock markets losing 5 to 10%, except Argentina’s Merval, which has lost over 14%.  Emerging market currencies are selling off sharply virtually across the board against the dollar, and even more against the yen.

4 The financial sector shock comes on the heels of, until recently, a major commodity price shock Real Oil, Metals and Food Prices (1970 = 100) Q3 08 Food (LHS) Metals (LHS) Oil (RHS)

5 As a result, advanced economies to come close to or move into recession United States United States Euro area Euro area Japan Japan Real GDP Growth Rates (percent change)

6 Outlook for advanced economies Source: IMF World Economic Outlook, October 2008, available at

7 Emerging economies have so far provided support to global growth

8 …and Asia has led growth in emerging economies Africa Africa Emerging Emerging Asia Asia Latin America Middle East Middle East Emerging Emerging Europe & CIS Real GDP Growth Rates (percent change)

9 A note on country groupings  Emerging Asia: Newly Industrialized Asian Economies: Hong Kong SAR, Korea, Singapore, Taiwan Province of China Developing Asia: Afghanistan, Rep. of, Bangladesh, Bhutan, Brunei Darussalam2, Cambodia, China, Fiji, India, Indonesia, Kiribati, Lao PDR, Malaysia, Maldives, Myanmar, Nepal, Pakistan, Papua New Guinea, Philippines, Samoa, Solomon Islands, Sri Lanka, Thailand, Timor-Leste, Dem. Rep. of, Tonga, Vanuatu, Vietnam.

10 Emerging economies account for a rising share of global growth Contributions to Global Growth (percent change)

11 In general, the resilience in emerging and developing economies has grown, notably since the Asia crisis... Emerging and Developing Economy External Indicators (percent of total GDP) Change in reserves External Debt (left scale) Current account

12...but countries with vulnerabilities are feeling the pressure Emerging Economies: Credit Default Swap Spreads, 2004–08 (In basis points, July 2007 = 100) 2004 Sep

13 Risks to global growth are to the downside Global GDP Growth (percent change, ppp-GDP weighted average)

14 According to one indicator, a global recession is more likely than not

15 Major down side factors include potential further deterioration in financial conditions and domestic demand in the US.

16 Outlook for Asia

17 Outlook for Asia

18 Trade exposure to the US has risen

19 …as has exposure to financial assets

20 Perhaps due to higher exposure, growth in Asia is now more correlated with U.S. growth than in the 1990s.

21 Financial correlations have also increased over time

22 Key results from investigating spillovers from US to Asia:  On average over the last fifteen years, a one percentage point slowdown in the U.S. has led to an estimated ¼ percentage point slowdown in Japan, and a ¼-½ point slowdown in emerging Asia.  The average spillover for emerging Asia masks wide cross-country variation within the region, with particularly large spillovers for the most-trade/financially exposed countries.  These long-sample estimates of spillovers may understate current vulnerabilities.

23 Estimated spillovers show large variations within the region

24 Key results (cont’d)  Why might long-sample estimates understate spillovers at the current juncture? → Reestimating our regressions over shorter samples suggests that spillovers have increased over time, not least for China, consistent with our finding of growing trade and financial integration with the United States. → When U.S. demand shocks are accompanied by realistic declines in global confidence, model simulations predict substantially larger spillovers (0.7 percentage point growth slowdown in Asia for a one percentage point slowdown in the U.S.) → Specific U.S. recessions have in the past generated large negative spillovers to Asia, as witnessed by the 2001 recession.

25 Finally, U.S. slowdowns can have very large impacts on Asia, as evidenced by the 2001 recession.

26 To conclude  The world is facing a major economic shock  To date, Asia has held up better than the rest of the world  But Asia is exposed and the spillover effects could be larger than expected

27 Thank you REZA BAQIR IMF Office Manila (02) ,