Global Recession and Its Impact on the Asian Economy

Dr. Bernardo M. Villegas

November 2008

Black Thursday 1929

Stock Market Crash Passive Federal Reserve System Ignorance of Keynesian Pump Priming Panic in the Banking Sector Unemployment Rate of 25% Complete Dominance of the US Economy in the World World Financial Market Illiquid

Black Monday 2008

Real Estate Bubble Proactive Federal Reserve System US Government Pump Priming No Panic in the Banking Sector No Crash in the Stock Market Unemployment Rate Manageable Countervailing Power of Emerging Markets Liquidity of Sovereign Funds Massive intervention of European governments

Traditional Engines of Growth

Growth Rates of Major Economies
4.0 3.0 2.0 1.0 0.0
2008F 2009F 2002 2003 2004 2005 2006 2007

US

Euro Area

Japan

F forecasts Source: World Economic Outlook, IMF, Oct 2008

Traditional Engines of Growth

World Growth (GDP Growth Rates)
2001 US Euro Area Germany France Italy Spain Netherlands Japan United Kingdom Canada Australia 0.8 1.9 1.2 1.9 1.8 3.6 1.9 0.2 2.5 1.8 2.1 2002 1.6 0.9 1.0 0.5 2.7 0.1 0.3 2.1 2.9 4.2 2003 2.5 0.8 -0.2 1.1 3.1 0.3 1.4 2.8 1.9 3.0 2004 3.6 2.1 1.2 2.5 1.5 3.3 2.2 2.7 2.8 3.1 3.9 2005 2.9 1.6 0.8 1.9 0.6 3.6 2.0 1.9 2.1 2.9 2.8 2006 2.8 2.8 3.0 2.2 1.8 3.9 3.4 2.4 2.8 3.1 2.7 2007 2.0 2.6 2.5 2.2 1.5 3.7 3.5 2.1 3.0 2.7 4.2 2008F 2009F 1.6 1.3 1.8 0.8 -0.1 1.4 2.3 0.7 1.0 0.7 2.5 0.1 0.2 0.2 0.2 -0.2 -0.2 1.0 0.5 -0.1 1.2 2.2

F forecasts Source: World Economic Outlook, IMF, Oct 2008

Global Growth Slowdown

Threats to World Growth

Financial meltdown in the U.S. High rates of inflation Tight credit despite lower interest rate High albeit moderating food and fuel prices Slowdown in the EU and Japan The U.S. twin (fiscal and trade) deficits continue to cause concern

U.S. Economy:

Still no end to financial turmoil

Huge losses in the financial sector Still uncertain results of U.S. government bailouts of failing banks Previously robust private consumption spending has been depressed by the slump in the housing market Real GDP growth to fall from 2.0% in 2007 to 1.6% or lower in 2008

Euro Area Economy

Activity in Western Europe gathered momentum in 2006. GDP growth in the Euro area reached 2.8%, double its pace in 2005 Slowing of growth in 2008 to 1.3% from 2.6% in 2007 Falling housing investments Growth should remain relatively stronger in Germany sustained by good export performance in the face of weaker consumer demand The slowdown will reflect an uptick in unemployment in the Euro area, especially in Spain

Japanese Economy

Political instability caused by successive resignations of two Prime Ministers Despite a stronger than expected GDP outturn in the first quarter of 2008, Japans economic outlook is weak for 2008 and 2009. The yen weakened against the U.S. dollar in June but may strengthen if U.S. economy continues to be troubled by financial crisis. Consumer prices will rise in 2008 Reserves may be used to help ailing banks in the Asian region

Worlds Largest Economies

Country GDP (2007)
US$B

GDP Growth (%) Current Account/

Year over year GDP 2007 (%)

Inflation (%)
Year over year

US 13,808 2.8 Eurozone 12,182 1.4 Japan 4382** -3.0 Germany 3,321 3.1 China 2,280 10.1 Britain 2,804 1.5 France 2,594 0.9 Italy 2,105 -0.1 Canada 1436** 0.3 Brazil 1,314 6.1 Russia 1,290 7.5 India 1,101 7.9 South Korea 970 4.8 Mexico 1,023 2.8 *Harmonized figures **Quarter on quarter annualized ***Urban end 2007 Sources: National Governments, IMF, World Bank

-5.3 0.2 4.9 7.6 11.3 -3.8 -1.2 -2.5 0.9 0.1 5.9 -1.4 0.6 -0.6

4.9 3.6* 2.4 2.9* 4.7 5.2 3.3* 3.9* 3.5 6.3 15.0 11.5 5.1 5.5

Jobless (%) 6.1 7.5 4.2 7.6 4.0*** 5.7 7.6 6.8 6.1 7.6 5.3 n.a. 3.1 4.25

Asian Financial Crisis

GDP Growth Rates

Southeast Asia Indonesia Malaysia Philippines Singapore Thailand Viet Nam 1996 7.8 10.0 5.8 7.7 5.9 9.3
1996 East Asia China, People's Rep. of Hong Kong, China Korea, Rep. of Taipei,China Others India
Source: ADB Key Indicators 2002

1997 4.7 7.3 5.2 8.5 -1.4 8.2

1997 8.8 5.0 5.0 6.7 4.8

1998 -13.1 -7.4 -0.6 -0.1 -10.5 5.8

1998 7.8 -5.3 -6.7 4.6 6.5

1999 0.8 6.1 3.4 6.9 4.4 4.8

1999 7.1 3.0 10.9 5.4 6.1

2000 4.9 8.3 4.4 10.3 4.6 6.8

2000 8.0 10.5 9.3 5.9 4.0

2001 3.3 0.4 3.2 -2.0 1.8 ...

2001 7.3 0.1 3.0 -1.9 5.4

9.6 4.5 6.7 6.1 8.1

Asia: The Most Dynamic Region

GDP Growth Rates

SOUTHEAST ASIA 2004 2005 2006 Indonesia 5.0 5.7 5.5 Malaysia 6.8 5.3 5.8 Philippines 6.4 5.0 5.4 Singapore 9.0 7.3 8.2 Thailand 6.3 4.5 5.1 Vietnam 7.8 8.4 8.2 Source: World Economic Outlook, Oct 2008 (IMF) 2007 6.3 6.3 7.2 7.7 4.8 8.5 2008F 6.1 5.8 4.4 3.6 4.7 6.3 2009F 5.5 4.8 3.8 3.5 4.5 5.5

NORTHEAST ASIA 2004 2005 2006 China 10.1 10.4 11.6 Hong Kong 8.5 7.1 7.0 Korea, Republic of 4.7 4.2 5.1 Taiwan 6.2 4.2 4.9 OTHERS India 7.9 9.1 9.8 Source: World Economic Outlook, Oct 2008 (IMF)

2007 11.9 6.4 5.0 5.7 9.3

2008F 9.7 4.1 4.1 3.8 7.9

2009F 9.3 3.5 3.5 2.5 6.9

BRICA

Emerging Engines of Growth

GDP Value (in current prices,US$B) 2007 1,314.2 1,291.0 1,171.0 3,280.1 1073.9* Foreign Exchange Reserves (US$B) 2007 180.1 445.2 249.6 1531.3 368.8*

BRICA

Population (in Millions)

Real GDP Growth

Inflation

2007 Brazil 191.6 Russia 141.6 India 1,123.3 China 1,320.0 ASEAN 567.4* *2006 available data

2008F 5.2 7.0 7.9 9.7 5.4

2009F 3.5 5.5 6.9 9.3 5.4

2008F 5.7 14.0 7.9 6.4 9.4

2009F 5.1 12.0 6.7 4.3 6.9

Sources: IMF World Economic Outlook (Oct 2008); World Bank Key Development Data & Statistics ADB Asian Development Outlook 2008 Update (September 2008); www.aseansec.org

Emerging Engines of Growth

The Next Eleven

Country Population 2007 (in millions) GDP 2007 (current US$ B)

Bangladesh Egypt Indonesia Iran Mexico Nigeria Pakistan Philippines South Korea Turkey Vietnam

158.6 75.5 225.6 71.0 105.3 148.0 162.4 87.9 48.5 73.9 85.1

67.7 128.1 432.8 270.9 893.4 165.7 143.6 144.1 969.8 657.1 71.2

Source: World Bank Key Development Data and Statistics

http://ddp-ext.worldbank.org/ext/ddpreports (Accessed October 13, 2008)

Emerging Engines of Growth GDP % Change

US, EU, JAPAN AND BRICA 2006 US Euro Area Japan BRICA Brazil Russia India China ASEAN 2.8 2.8 2.4 3.8 7.4 9.8 11.6 6.0 2007 2.0 2.6 2.1 5.4 8.1 9.3 11.9 6.5 2008F 2009F 1.6 1.3 0.7 5.2 7.0 7.9 9.7 5.4 0.1 0.2 0.5 3.5 5.5 6.9 9.3 5.4

F-forecasts Sources: World Economic Outlook, Oct 2008 (IMF) aseansec.org

THE NEXT ELEVEN 2006 Bangladesh Egypt Indonesia Iran Mexico Nigeria Pakistan Philippines South Korea Turkey Vietnam 6.5 6.8 5.5 5.8 4.9 6.2 6.9 5.4 5.1 6.9 8.2 2007 6.3 7.1 6.3 6.4 3.2 5.9 6.4 7.2 5.0 4.6 8.5 2008F 7.0 7.2 6.1 5.5 2.1 6.2 5.8 4.4 4.1 3.5 6.3 2009F 5.6 6.0 5.5 5.0 1.8 8.1 3.5 3.8 3.5 3.0 5.5

BRICA

Threats in China

Overheating economy: possible credit and stock market bubble Inflation rate reached 6.5% in October 2007, the highest monthly inflation in 11 years Efforts to cool down economy may result in hard landing Underdeveloped banking sector Undervalued currency Uncontrolled local officials Shortage of local entrepreneurs and managers High rates of poverty Stricter regulations in IT

BRICA

Opportunities in China
GDP growth of 8% or over for the last two decades

Domestic market of some 250-300 million high-income consumers

High rate of investment at 50% of GDP Foreign direct investments (FDIs) of US$60 billion or more yearly Surging raw material demand Greater integration of China and other Asian countries (e.g. ASEAN + China) Demand for middle managers

BRICA
ASEAN GDP Growth Rates and Per Capita Income
GDP per Capita, at Current Prices (in US$) 2009F 6.2 5.3 4.7 4.6 5.0 6.0 2006 1,640.0 5,890.5 1,355.7 29,499.6 3,293.9 724.4 2007 1,919.6 6,880.2 1,652.8 35,206.1 3,740.1 836.7

GDP Growth Rates Country Indonesia Malaysia Philippines Singapore Thailand Vietnam 2007 6.3 6.3 7.2 7.7 4.8 8.5 2008F 6.2 5.6 4.5 4.2 5.0 6.5

Source: ADB, Asian Development Outlook 2008 Update (September 2008); aseansec.org

BRICA

Domestic Markets
Mid-Year Population 2006 (in millions)

Age Distribution
(as % of total population)

0-14

15-60

60+

Age Dependency Ratio

Southeast Asia Indonesia Malaysia Philippines Singapore Thailand Vietnam

566.3 222.1 26.6 87.0 4.5 65.2 84.2 28 32 35 19 23 29 64 61 59 68 66 64 8 7 6 13 11 7 56 64 69 47 52 56

Source: ADB Key Indicators 2007

BRICA

Savings and Capital Formation

Gross Domestic savings (% of GDP) 2006 28.7 43.0 18.3 50.5 29.5 30.2 Gross Capital Formation (% of GDP) 2006 24.6 20.7 14.3 18.8 31.5 35.6

Country Indonesia Malaysia Philippines Singapore Thailand Vietnam

Source: ADB Key Indicators 2007

Asian Economic Trends 2008-2010

Domestic markets as engines of growth: double track strategy China as engine of growth of the Asia Pacific region The predominance of China in manufacturing Growth in intra-regional trade: increased complementarity Continuing battle against mass poverty in the big economies Outsourcing of manufacturing and services to Asia Outsourcing is intra-company as well as inter-country Focus on agricultural productivity in Southeast Asia The emergence of SMEs and microenterprises The entrepreneurial challenge to centrally planned economies The challenge of innovations and productivity

Consumer Trends in Asia

Non-income consumption factors Expanding middle class Diversity of consumer tastes and lifestyles Mallification of Asian cities Demographic gift stage in South and Southeast Asia Rapid aging in Northeast Asia and Singapore Widespread use of English The telecom revolution Spread of university education

Selected Sunrise Industries in Asia

Agribusiness

Mining
Triple Ts: Transport, Telecom, and Tourism Infrastructures Automobiles Consumer durables IT-enabled and IT services Logistics and retailing Health care and medical tourism Education Construction and real estate Four Fs: Food, Fashion, Furniture, Fun

Global Recession and Its Impact on the Asian Economy

Thank you.