ECONOMIC AND SOCIAL COMMISSION FOR ASIA AND THE PACIFIC IN THE ASIA-PACIFIC REGION 2008 PROSPECTS DEVELOPMENTS KEY ECONOMIC AND ESCAP is the regional development arm of the United Nations and serves as the main economic and social development centre for the United Nations in Asia and the Pacific. Its mandate is to foster cooperation between its 53 members and 9 associate members. ESCAP provides the strategic link between global and country-level programmes and issues. It supports Governments of countries in the region in consolidating regional positions and advocates regional approaches to meeting the region’s unique socio-economic challenges in a globalizing world. The ESCAP office is located in Bangkok, Thailand. Please visit the ESCAP website at www.unescap.org for further information. The shaded areas of the map indicate ESCAP members and associate members. This publication was prepared by the Poverty and Development Division of ESCAP. For further information on publications in this series, please address your enquiries to: Director Poverty and Development Division Economic and Social Commission for Asia and the Pacific (ESCAP) United Nations Building Rajadamnern Nok Avenue Bangkok 10200, Thailand Fax: (662) 288-1000, 288-3007 E-mail: escap-pdd@un.org escap-publicationsoffice@un.org Website: www.unescap.org Cover design by Tjerah Leonardo i ECONOMIC AND SOCIAL COMMISSION FOR ASIA AND THE PACIFIC United Nations ESCAP New York, 2007 KEY ECONOMIC DEVELOPMENTS AND PROSPECTS IN THE ASIA-PACIFIC REGION 2008 ii United Nations publication Sales No. E.07.II.F.28 Copyright © United Nations 2007 All rights reserved Manufactured in Thailand ISBN: 978-92-1-120523-7 ST/ESCAP/2461 This publication may be reproduced in whole or in part for educational or non-profit purposes without special permission from the copyright holder, provided that the source is acknowledged. The ESCAP Publications Office would appreciate receiving a copy of any publication that uses this publication as a source. No use may be made of this publication for resale or any other commercial purpose whatsoever without prior permission. Applications for such permission, with a statement of the purpose and extent of reproduction, should be addressed to the Secretary of the Publications Board, United Nations, New York. KEY ECONOMIC DEVELOPMENTS AND PROSPECTS IN THE ASIA-PACIFIC REGION 2008 iii Key Economic Developments and Prospects in the Asia-Pacific Region 2008 is the third publication in an annual series that provides an end-of-year report on the region’s economic performance in a rapidly changing global and regional environment. This year’s report highlights the fact that developing economies in the Asian and Pacific region are estimated to have grown over 8 per cent in 2007. The economic powerhouses of China and India continue to drive regional growth, with added impetus coming from the fast-growing Russian Federation. The outlook for 2008 is robust, with developing economies projected to grow by 7.8 per cent. However, the risks to the 2008 projections are increasingly tilted to the downside. The full effect of the unravelling of the United States subprime mortgage problem has yet to be seen. A significant slowdown of the United States economy and further turmoil in financial markets, as a result, cannot be ruled out. Thus far, the region has coped successfully despite financial market instability, muted external demand and appreciating currencies. Good macroeconomic fundamentals in the region will provide the policy space to adapt to a possible worsening of the external environment. Nonetheless, as the report highlights, policymakers in the region should care- fully watch out for financial market volatility in the coming months. Policy measures put in place to address rapidly appreciating regional currencies, overheating in asset markets and burgeoning foreign reserves have been effective in some cases but not so in others. These policies may not be adequate to weather external shocks. The region needs urgently to get back on the unfinished agenda of building strong and deep financial markets that can accommodate such shocks with ease. It is my hope that this year’s report will serve as a wake-up call for policymakers across the region to put financial sector reforms high on their agenda. Ravi Ratnayake Director Poverty and Development Division FOREWORD iv The Key Economic Developments and Prospects in the Asia-Pacific Region 2008 was prepared under the overall guidance of Ravi Ratnayake, Director, Poverty and Development Division. A team led by Shamika Sirimanne, Chief, Socio-economic Analysis Section, comprising Shuvojit Banerjee and Somchai Congtavinsutti prepared this report. The comments and inputs from Eugene Gherman, Alberto Isgut, Muhammad H. Malik and Amornrut Supornsinchai are noted with appreciation. Staff analysis was based on data and information available up to the end of October 2007. All graphics work was done by Somchai Congtavinsutti. The logistics of processing and administrative action were handled by Metinee Hunkosol, Anong Pattanathanes and Woranut Sompitayanurak. Contributions from the Editorial Unit and other divisions in the ESCAP secretariat are noted with appreciation. ACKNOWLEDGEMENTS v CONTENTS Page Foreword iii Acknowledgements iv Abbreviations viii I. Asia-Pacific undaunted by global turbulence 1 Growth spurt of Japan stutters 3 China seeks growth with sustainability 4 Domestic demand cushions slower exports across the region 4 Floods in South Asia devastate lives 6 Consumption buoyant in Central Asia but high energy prices present challenges 6 Inflation contained 7 Oil reaches record highs 9 Inflation a major worry for China 10 Weaker export performance 11 Regional firms are becoming global players 11 Sovereign wealth funds offer risks and rewards 13 II. Key issue on the watch list – the economic impact of capital-market volatility 15 Impact of the United States subprime fallout is still limited 15 Currency appreciation remains the core challenge 18 Measures to help exporters not effective 19 Reserve accumulation is having an adverse impact on the real sector 19 III. 2008 forecast – domestic demand cushions blow to growth 22 Cautious monetary policy 24 Coping with a United States slowdown 25 vi FIGURES Page 1. Rates of economic growth of developing and developed economies in the ESCAP region, 2006-2007 1 2. Contribution of domestic demand to GDP for selected developing Asian economies, 2006-2007 5 3. Rates of inflation of developing and developed economies in the ESCAP region, 2006-2007 8 4. Selected nominal commodity prices, 2006-2007 8 5. Nominal and real oil prices, 1970-2007 9 6. Movement of exchange rates for selected developing ESCAP economies, 2007 17 7. Major holders of foreign reserves in the Asian and Pacific region, 2006-2007 20 8. Money supply index for selected developing ESCAP economies, 2006-2007 20 9. Real GDP growth forecast for selected developing economies in the ESCAP region, 2007-2008 22 10. Consumer price inflation for selected developing economies in the ESCAP region, 2007-2008 24 11. Current account balance for selected developing economies in the ESCAP region, 2007-2008 25 vii Page 1. Rates of economic growth and inflation of selected developing economies of the ESCAP region and North and Central Asian economies, 2005-2007 2 2. Current account balance as a percentage of GDP of selected developing economies of the ESCAP region and North and Central Asian economies, 2004-2007 12 3. Price/earnings ratios in Asia and the Pacific and international equity markets, 2007 17 TABLES viii ADB Asian Development Bank CIS Commonwealth of Independent States CD-ROM compact disk read-only memory CPI consumer price index EIU Economist Intelligence Unit FAO Food and Agriculture Organization FDI foreign direct investment GDP gross domestic product IMF International Monetary Fund OECD Organisation for Economic Co-operation and Development OPEC Organization of Petroleum Exporting Countries UNICEF United Nations Children’s Fund ABBREVIATIONS [...]... high international oil and food prices Monetary policy has varied according to inflationary concerns The Republic of Korea and Taiwan Province of China have been raising interest rates while Malaysia has kept them steady In contrast, Indonesia, the Philippines and Thailand have been easing rates Rising food prices have put upward pressure on inflation in developing countries in the region, and internationally... domestic demand which countered a weakening in exports in many countries The region s economic powerhouses, India and China, led the expansion, while energy-exporting countries of Central Asia, and in particular the Russian Federation, made significant contributions Together, China, India and the Russian Federation accounted for more than two thirds of the growth of developing economies in Asia and the Pacific... wheat and rapeseed production and dry weather in Europe lowered grain yields “ One of the major factors driving food price increases has been the biofuel industry’s appetite for grain ” Rising food prices, most sharply for pork, spurred the record inflation in China in 2007 The increase in the CPI in August of 6.5 per cent year on year was led by food price inflation of 18.2 per cent Pork prices in China,... active in greenfield investments, such as establishing manufacturing operations and training centres 12 Markets in Asia and the Pacific as well as further afield will increasingly see the impact of private portfolio investment by China In 2007, the country eased restrictions on portfolio investment by private individuals and companies To date most outward financial investment by China has been by the. .. to rein in spending in overheating sectors face obstacles as a result of buoyant liquidity India is forecast to maintain its dynamic growth in 2008, with the country remaining largely insulated from weakness in the global economy Investment in the booming manufacturing and services sectors will remain the main driver of GDP growth Private consumption is expected to remain healthy as the rural economy... shocks Finally, the oil intensity of consumption and production, particularly in major economies, is significantly lower than in the 1980s, reducing the economic impacts of a higher oil price Nonetheless, for those countries that are facing overheating pressures, such as China and India, the rising oil prices have produced an added challenge in containing inflation For low-income oil importers, in addition... against the dollar have been the Philippines and Thailand The economies which have seen the least appreciation are Singapore and Malaysia Of particular relevance when considering the export competition impact of currency appreciation is the relative appreciation against the Chinese yuan renminbi China is an export competitor in third country markets for all of the region s economies Thailand and the. .. addition to inflationary concerns, addressing deteriorating external balances would be a challenge Inflation a major worry for China “” India has fought a pitched battle with inflation in 2007 There have been growing fears of overheating in the two major emerging economies of the region, China and India China is witnessing its highest level of inflation in 10 years While supply-side factors through the global... approaching the scale of its inward FDI The enabling environment was created in 2005 when the limit on outward FDI was increased from $100 million to the net worth of companies The bulk of the flows has been from the manufacturing sector, particularly in the IT, pharmaceutical and automotive sectors Preferred destinations are the United States, and countries in Europe and Africa Other than mergers and. .. effects in the region ” Subprime-related losses have already led to a number of ripple effects in the region First, international investors have been covering their losses on subprime-related products by disposing of other liquid assets worldwide In August 2007 this led to large declines in the Asia-Pacific equity markets as investors cashed in their holdings Financial-market contagion thus spread from the . ECONOMIC AND SOCIAL COMMISSION FOR ASIA AND THE PACIFIC IN THE ASIA-PACIFIC REGION 2008 PROSPECTS DEVELOPMENTS KEY ECONOMIC AND ESCAP is the regional. discussed in the Key Economic Developments and Prospects in the Asia-Pacific Region 2006. First, the appreciation of regional currencies against the United