Asia Economic Monitor - December 2007

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Highlights

Recent Economic Performance Economic growth in emerging East Asia remained strong in

the second half of 2007, in many cases performing better-than-expectedsupported by healthy growth in consumption,investment, and continued solid exports.

In ationary pressures have been increasing across the region overthe past several months, with headline in ation reaching multi-yearhighs in several economies on higher food and energy prices.

Current account surpluses continued to grow, and with capitalin ows remaining strong through the rst 9 months of 2007,balance of payments positions strengthened across much of theregion.

Currency appreciation against the US dollar gained momentumthroughout much of 2007, with exchange rates up nearly 5% onaverage since the beginning of the year.

Monetary policies across the region have become more cautioussince the July global nancial turbulencegiven the increasedvolatility of the regions nancial markets, in ationary pressures,and the uncertain outlook for major industrialized economies.

Despite limited spillover into emerging East Asia from the USsubprime turmoil, there are several signs of nancial vulnerability

related to sharp gains in equity and real estate prices.

Outlook, Risks, and Policy Issues The external environment for emerging East Asian economies

is expected to weaken somewhat in 2008, as economic growthin industrial countries moderates, oil and commodity pricesremain elevated, and global nancial markets continue to exhibitheightened volatility.

With the external environment weakening somewhatand thePRC, the regions largest economy, expected to soften next yearaggregate GDP growth in emerging East Asia is forecast to slow

to 8.0% in 2008 from a likely 8.5% this year. The regions economic outlook is subject to greater downside

risks now than just a few months agoincluding the possibility ofa US hard landing, further tightening of global credit, an abruptadjustment in exchange rates, and a continued rise in oil andcommodity prices.

Continued overleaf

The Asia Economic Monitor (AEM) is asemiannual review of emerging EastAsias growth, financial vulnerability,

and emerging policy issues. It coversthe 10 members of the Association ofSoutheast Asian Nations; Peoples Republicof China; Hong Kong, China; Republic ofKorea; and Taipei,China.

Asia Economic Monitor 2007

December 2007 aric.adb.org

Asian Development BankOf ce of Regional Economic Integration

6 ADB Avenue, Mandaluyong City1550 Metro Manila, Philippines

Telephone+63 2 632 6265+63 2 632 4444

Facsimile+63 2 636 2183

[email protected]

How to reach us

ContentsRecent Economic Performance 3

GDP Growth 3In ation 6Balance of Payments 7 Financial Markets and

Exchange Rates 10Monetary and Fiscal Policy 12

Assessment of FinancialVulnerability 15

Economic Outlook for 2008, Risks,and Policy Issues 21

External Economic Environment 21Regional Economic Outlookfor 2008 27 Risks to the Outlook 30Policy Issues 34

Special SectionCan Emerging East Asia WeatherGlobal Financial Instability? 42

Boxes1. Fed Rate Cuts and Policy

Dilemmas 35

2. Measuring Monetary Independencein Emerging East Asia 37

3. Asset Markets and the RealEconomy 51

4. Is Emerging East Asia Decouplingfrom the US? 55


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ADB Asian Development BankAEM Asia Economic MonitorASEAN Association of Southeast Asian

NationsASEAN-4 Indonesia, Malaysia, Philippines,

ThailandBIS Bank for International

SettlementsCLI composite leading indicatorCPI consumer price indexECB European Central BankEU European UnionFDI foreign direct investmentFed Federal ReserveG3 Group of ThreeGDP gross domestic productH1 rst half H2 second half HKMA Hong Kong Monetary AuthorityIMF International Monetary FundIT information technologyJCI Jakarta Composite IndexKLCI Kuala Lumpur Composite IndexKOSPI Korean Stock Price IndexLao PDR Lao Peoples Democratic Republic

M2 broad moneyMSCI Morgan Stanley CapitalInternational Inc.

m-o-m month on monthNEER nominal effective exchange rateNIE newly industrialized economyNPL nonperforming loanOECD Organisation for Economic Co-

operation and DevelopmentOREI Of ce of Regional Economic

IntegrationPCOMP Philippine Composite IndexPRC Peoples Republic of ChinaQ1 rst quarterQ2 second quarterq-o-q quarter on quarterRMB renminbiROA return on assets

ROE return on equityROPOA real and other properties owned

and acquiredROW rest of worldS&P Standard & PoorsSET Stock Exchange of ThailandSTI Straits Times IndexTWSE Taiwan Stock Exchange IndexUK United KingdomUS United Statesy-o-y year on yearWTO World Trade Organization

Acronyms, Abbreviations, and Notes

The Asia Economic Monitor December 2007was prepared by the Of ce of RegionalEconomic Integration of the AsianDevelopment Bank and does no tnecessarily reflect the views of ADBsBoard of Governors or the countries theyrepresent.

Note: $ denotes US dollars unless otherwise

speci ed.

Given speci c domestic conditions facing the regions economies,monetary authorities will need great care in designing policyresponses to the changing external environment:

in economies that use greater exchange rate control, increasingcurrency exibility could add useful monetary leverage; and

East Asian economies may wish to explore ways to bettermaintain stability among intraregional exchange rates.

Other policy priorities may focus on (i) managing the consequencesof rapidly increasing capital in ows, (ii) improving the investmentclimate to strengthen domestic demand, (iii) continuing to developef cient and deeper nancial markets, and (iv) promoting energyef ciency and conservation.

Can Emerging East Asia Weather Global FinancialInstability?

Despite strong resilience to the weakening external environment,vulnerabilities in the regions nancial systems should not beunderestimated, as resurgent capital in ows and excess liquiditymay complicate a true assessment of risk.

The regions largely bank-dominated nancial systemswith weaksystemic support for effective risk managementleave doors opento potential spillovers if conditions in global nancial marketsworsen or investor sentiment shifts.

Recent trends in the global nancial systemnotably the growingpresence of nonbank nancial institutions and proliferation of newinstruments for risk transferwill also become increasingly relevantin the regional context.

Greater nancial linkages with global markets increases the regions

exposure to risks arising from global nancial instability.Similarly, strong trade ties to major industrialized countries suggestthat the risk to the region might be greater if growth in thoseeconomies slows sharply.

Monetary policy anchored on in ation targeting, a prudent scalapproach, and greater exchange rate exibility could limit anyspillover of continued global nancial instability.

Policymakers will need to concentrate on enhancing riskmanagement systems, strengthening disclosure requirements,and upgrading supervisory frameworks to better assess potentialvulnerabilities.

Economies with less-developed nancial systems may not faceimmediate nancial transmission from the subprime turmoil, butnonetheless could focus on longer-term development issues suchas institution building, nancial sector reforms, and capital marketdevelopment.


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3

Emerging East AsiaA Regional EconomicUpdateRecent Economic Performance

GDP Growth

Economic growth in emerging East Asia remained strong in the second half of 2007, in many cases performing better-than-expectedsupported byhealthy growth in consumption, investment, andcontinued solid exports.

Economic growth in emerging East Asia in the second half of 2007

likely sustained the momentum of the brisk rst half. Combinedgross domestic product (GDP) of the nine largest economiesin emerging East Asia 1 grew 8.9% (year-on-year) in the thirdquarter of 2007or 6.1% excluding the Peoples Republic ofChina (PRC)the highest in recent years (Figure 1) . In thePRC, GDP grew 11.5% in the third quarter, the same as in the

rst half. The four middle-income countries of the Association ofSoutheast Asian Nations (ASEAN-4) grew 6.2%, higher than the5.7% recorded in the rst half. GDP growth in the four newly-industrialized economies (NIEs)Hong Kong, China; Republic ofKorea (Korea); Singapore; and Taipei,Chinaaccelerated to 6.0%

in the third quarter from 5.0% in the rst half.

Excluding the PRC, robust growth was supported by strongconsumption demand and solid exports (Figure 2) . The externalsector contributed strongly to the overall expansion despite theslowdown in the United States (US) economy, driven by relativelyhealthy growth in the euro zone and ongoing recovery in Japan.Private consumption in the region also strengthened markedlyover the past 3 quarters of 2007. Private consumption grew5.2% in the third quarter, up from 4.6% in the previous quarter(Figure 3) .

1 The nine largest emerging East Asian economies are Peoples Republic of China(PRC); Hong Kong, China; Indonesia; Republic of Korea (Korea); Malaysia;Philippines; Singapore; Taipei,China; and Thailand.

7.1

5.7

4.14.2 4.74.03.44.0

4.64.9

2.9

4.7

0

1

2

3

4

5

67

8

2004Q1 2004Q3 2005Q1 2005Q3 2006Q1 2006Q3 2007Q1 2007Q3

ASEAN-4EmergingEast Asiaex. PRC

NIEs

6.2

5.2

Figure 3: Consumption Growth (y-o-y, %)

Source: OREI staff calculations based on CEIC data.

China, Peoples Rep. of

7.3

8.5 8.9

11.5

11.911.5

9.1

6.05.0

6.26.7 6.2

8.1

6.6

3.2

0

2

4

6

8

10

12

2004Q1 2004Q3 2005Q1 2005Q3 2006Q1 2006Q3 2007Q1 2007Q3

Emerging East Asia 2

ASEAN-4

NIEs

Figure 1: GDP 1 GrowthEmerging EastAsia 2

1 Weighted by gross national income (atlas method, current $).2 Includes ASEAN-4, NIEs, and Peoples Republic of China (PRC).Aggregates do not include Brunei Darussalam, Cambodia,Lao PDR, Myanmar, and Viet Nam for which quarterly GDP dataare not available.Source: OREI staff calculations based on national sources.

2.6 2.1 2.3 3.1 2.3

1.4

1.7

1.6

1.31.0

2.9

-0.5

0.91.6

2.1

1.53.3

-0.4

0.3 5.74.9

6.35.4

4.8

7.46.5

-10123456

78

2004Q1 2004Q3 2005Q1 2005Q3 2006Q1 2006Q3 2007Q1 2007Q3

Statistical discrepancyNet exportsInvestmentConsumptionGDP

6.11.8

0.9

3.3

Figure 2: Contributions to GDP GrowthEmerging East Asia ex. PRC (y-o-y, %)



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R E G I O N A L U P D A T E

4

Early indicators suggest strong growth in the region will likelycontinue in the fourth quarter, although at a somewhat moremoderate pace. Industrial production remained generally healthy

across the region, except in the Philippines, where it continuedto contract (Figure 4a, 4b) . But industrial production growthmay have peaked in several economies, including the PRC, Korea,and Singapore, and remained modest in Indonesia and Malaysia.Retail sales also point to a relatively strong second half, withgrowth in the PRC; Hong Kong, China; Korea; and Singaporegenerally higher in the third quarter than in the rst 6 monthsof the year (Figure 5) .

In the PRC, strong investment, solid consumption, and resilientexports supported high GDP growth. The investment boom

regained strength in 2007 after easing somewhat in the secondhalf of 2006, with xed-asset investment edging up to 25.7%(year-on-year) in the third quarter, from 24% in 2006 (Figure 6) .Consumer spending grew steadily, with retail sales growth on anupward trendreaching a record 18.1% in October. The externalsector also remained strong in the PRC, despite measures to coolexport growth, such as a downward adjustment to the export taxrebate system, and even amid concern about product quality andsafety. Exports were up 27.1% in the rst 3 quarters of the year,

just under the 27.2% growth rate for all of 2006.

A strong recovery in domestic demand boosted growth in theASEAN-4 economies (Figure 7) . But Thailand was an exceptionas lingering political uncertainty ahead of the 23 Decemberelections affected private consumption and investment demand.Consumption growth was the weakest in 6 years and xedinvestment fell by 0.7% in the rst half. But private consumptiongenerally increased in the other ASEAN-4 countries, fueled bypublic sector salary hikes, healthy labor markets, and strongeroverseas remittances, which propped up household income andspending. Fixed investment also picked up strongly in the ASEAN-4countries, contributing about 1.7 percentage points to total GDP

growth of 6.2% in the third quarter (Figure 8) . Election-relatedgovernment spending in the Philippines and infrastructureprogram disbursements in the other ASEAN-4 economies providedan additional boost to consumption and investment. Meanwhile,in the ASEAN-4 countries, the contribution of net exports to GDPgrowth fell to 0.6 percentage point in the third quarter, downfrom 3.4 percentage points in the second quarter (Figure 9) .The main factors include the weakening external environment and

Singapore

Korea, Rep. of

Hong Kong, China

China, People's Rep. of

15.8

28.6

18.115.5

3.6

-4.3-2.8

6.5

-3.6 -5.0-10

-5

0

5

10

15

20

25

30

Jan-05

Apr-05

Jul-05

Oct-05

Jan-06

Apr-06

Jul-06

Oct-06

Jan-07

Apr-07

Jul-07

Oct-07

Figure 5: Retail Sales Growth (y-o-y, %)

Source: CEIC.

Figure 4a: Industrial Production Growth 1 (y-o-y, %)

1 3-month moving average.Source: OREI staff calculations based on CEIC data.

Philippines

Thailand

Malaysia

Indonesia

2.0

-9.3-4.8

-14.2

-2.6

12.6 12.5

17.6

9.012.4

-3.5

11.1

4.4

-20

-15

-10

-5

0

5

10

15

20

Jan-04

Jun-04

Nov-04

Apr-05

Sep-05

Feb-06

Jul-06

Dec-06

May-07

Oct-07

Singapore

Korea,Rep. of

Taipei,China

9.6

18.1

3.5

-5

0

5

10

15

20

25

Jan-

04

Jun-

04

Nov-

04

Apr-

05

Sep-

05

Feb-

06

Jul-

06

Dec-

06

May-

07

Oct-

07


11.5

Figure 4b: Industrial Production Growth 1 (y-o-y, %)

1 3-month moving average.Source: OREI staff calculations based on CEIC data.


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5

strengthening currencies, but strengthening domestic demandhas also begun to help narrow trade surpluses. In the Philippines,for example, the appreciation of the peso in real termsmainly

due to strong capital in ows combined with a surge in overseasworker remittanceshas hurt the export competitiveness of themanufacturing sector and seen exports slowing. Remittanceshave bolstered private consumption, however, and the servicessector has become the main driver of strong growth this year inthe Philippines, contributing 3.6 percentage points to the 6.6%third-quarter expansion.

Private consumption also strengthened in the NIEs (see Figure 3).In Hong Kong, China, private consumption picked up as incomeand wealth increased amid strong employment and healthy gains

in the equity markets. In Korea, the on-and-off recovery from2003s household debt-related contraction has steadied, withsupport from a tighter labor market and booming equity markets.And in Singapore and Taipei,China, private consumption wasboosted by tight labor and stronger property markets. Investmentin the NIEs economies also remains buoyant, although it easedin the third quarter from strong growth in the previous quarter:its contribution declined to 0.6 percentage points, from 2.5 inthe second quarter (Figure 10) . Fixed investment, speci cally inplant and facilities, picked up in Taipei,China on capital expansionin the semiconductor sector. Private investment remained

strong in Singapore and Hong Kong, China, supported by rapidconstruction sector growth. Koreas xed investment held up aswell, despite slowing construction demand. Non-constructionbusiness investment, in particular, made a strong showing inrecent quarters on the back of recovery in domestic demand.

In Viet Nam, third-quarter GDP growth of 8.7% was the highest ina decade, aided by continued expansion in industry, construction,and services. GDP in Brunei Darussalam contracted 1.7% inthe rst half of 2007, after strong growth in 2006, largely on adrop in oil production. In Cambodia, a gradual deceleration in

GDP growth continued as external demand softened and privateconsumption eased, although the pace likely remained strongat an estimated 9.2% this year. In the Lao Peoples DemocraticRepublic (Lao PDR), GDP likely grew 6.8% in 2007 as foreigninvestment drove robust expansion of the industrial sector,especially in mining and energy. In Myanmar, independentprojections put GDP growth in a range of about 36% for the2007 scal year.

10.5

9.9

5.64.9

6.45.4

6.7

4.53.9

3.8

-2

0

2

4

6

8

10

12

2004Q1 2004Q3 2005Q1 2005Q3 2006Q1 2006Q3 2007Q1 2007Q3

Fixed investmentPrivate consumption

Domestic demand8.1

6.1

6.4

Figure 7: ASEAN-4 Domestic Demand Growth(y-o-y, %)


2.0 2.3

0.51.2

0.8

-1.7

0.3

-1.4-1.6

2.2

-1.1-0.2

3.1

0.3

-3

-2

-1

0

1

2

3

4

2004Q1 2004Q3 2005Q1 2005Q3 2006Q1 2006Q3 2007Q1

Fixed assetsChanges in inventoryTotal domestic investment

1.7

1.6

-0.1

2007Q3

Figure 8: Investment Contributions to GDPGrowth: ASEAN-4 (y-o-y, %)


10.5

5.62.6

11.6

3.4

8.7

3.5

11.2

7.7

1.2

5.7

43.0

29.8

25.7

0

2

4

6

8

10

12

14

2004Q1 2004Q3 2005Q1 2005Q3 2006Q1 2006Q3 2007Q1 2007Q30510152025303540

4550

ASEAN-4

Emerging East Asia,ex. PRC

NIEs


China, People'sRep. of 1

Others

5.0

8.1

Figure 6: Fixed Assets Growth (y-o-y, %)

1 PRC gures are based on nominal xed-asset investmentgrowth (year-to-date).Source: OREI staff calculations based on CEIC data.

-1.4

3.4

0.60.4

-1.7

2.43.1

0.61.2

1.62.2

1.7 1.51.00.5

1.6

-3

-2-1

0

123

45

6

2004Q1 2004Q3 2005Q1 2005Q3 2006Q1 2006Q3 2007Q1 2007Q3

ASEAN-4 net exportsNIEs net exportsEmerging East Asia ex. PRC net exports

1.8

0.6

Figure 9: Contributions of Net Exports to GDPGrowth (y-o-y, %)



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In ation

In ationary pressures have been increasing across

the region over the past several months, withheadline in ation reaching multi-year highs in severaleconomies on higher food and energy prices.

While headline in ation started to rise in the ASEAN-4 economies,it reached a 16-year high in Singapore, 12-year highs in thePRC and Taipei,China, and a 9-year high in Hong Kong, China.In recent months, it was also at its highest since 2005 in Koreaand in Viet Nam. On average, the regions in ation was up 5.2%in October 2007; from a recent low of 1.9% in October 2006(Figure 11) .The rise in headline in ation is mainly attributed to

rapid and persistent increases in food and energy prices resultingfrom real capacity constraintsnot simply one-off events such aspoor weather. Core in ation is also increasing in some economies(Figure 12) . Persistent high growth in monetary aggregatesmay have also contributed to rising inflationary pressures (Figure 13) .

In the PRC, the consumer price index hit a 12-year high of 6.5%in August and again in Octoberfrom a low of 1% in July 2006putting pressure on the central bank to further tighten monetarypolicy. Surging food prices (up 17.6% over the year to October)

have driven headline in ation in recent months. The underlyingfactor, however, is ample liquidity in the economy as a result ofpersistently large capital in ows and strong money growth inrecent years due to incomplete sterilization. Rapid asset pricein ation has already been a signi cant macroeconomic problemin the PRC. And now, headline in ation also exceeds returns onbank deposits, encouraging more households to put their moneyin the already overheating stock marketswhich the authoritieshave been trying to cool.

In ation in ASEAN countries has increased in recent months as

strong growth continues to close the output gap and energy andfood prices rise. In Indonesia, exemplifying the ASEAN-4 trend,in ation was back up to 6.7% in November, after falling to 5.8%in June 2007. In the past 6 months, in ation also drifted higherin Malaysia (from about 1.5% to close to 2%), the Philippines(from around 2.3% to 2.7%), and in Thailand (from below 2% to3.0%) (Figure 14) . And with the possible removal of remainingfuel subsidies in the retail market, in ation may have risen still

Fixed assetsChanges in inventoryTotal domestic investment

1.6

0.8 1.40.81

-0.2-0.2-0.8

0.80.7

-0.2

0.6

2.3

2.52.4

1.5

0.6

-4

-3

-2

-1

1

2

3

4

2004Q1 2004Q3 2005Q1 2005Q3 2006Q1 2006Q3 2007Q1 2007Q3

Figure 10: Investment Contributions to GDPGrowth: NIEs (y-o-y, %)


China, Peoples Rep. of

NIEs

Emerging East Asia

6.55.3

3.9

6.2

10.7

4.24.8

3.63.4

5.2

2.8

-1

1

3

5

7

9

11

Jan-04

Jun-04

Nov-04

Apr-05

Sep-05

Feb-06

Jul-06

Dec-06

May-07

Oct-07

ASEAN-4

Figure 11: Regional In ationHeadlineRates (y-o-y, %)


Philippines

Korea, Rep. of

Thailand

Malaysia

Singapore

Indonesia

2.4

5.0

7.1

0.7 1.5

2.9

-1.4

3.9

-0.1 1.0

6.3

10.2

-2-1012345678

91011

Jan-04

Jun-04

Nov-04

Apr-05

Sep-05

Feb-06

Jul-06

Dec-06

May-07

Nov-07

Figure 12: Core In ation Rates (y-o-y,%)

Note: Of cial gures, except Malaysia (ex. food, fuel, utilities)and Singapore (ex. food, private transport).Sources: OREI staff calculations based on CEIC data.

Philippines

Malaysia

Thailand

18.5

26.0

11.3

32.3

12.2

3.6

6.2

2.76.9

10.3

0

5

10

15

20

25

30

35

Jan-04

Jun-04

Nov-04

Apr-05

Sep-05

Feb-06

Jul-06

Dec-06

May-07

Oct-07

China, People'sRep. of

Korea, Rep. of

Figure 13: Money Growth 1 (y-o-y,%)

1 M2.Source: CEIC.


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further in Malaysia during the course of the year. A strong pesoin the Philippines and weaker demand in Thailand should helpease in ation in both countries. Meanwhile, fast growth also

contributed to in ation in smaller countries: November consumerprices in Viet Nam were up 10.0% over a year earlier, the highestin nearly 3 years.

The NIEs have seen in ation rising quickly in recent monthsmostsigni cantly in Taipei,China (5.3% in October), and in Singapore(3.6% in October), where in ation was below 1% in the rst halfof 2007. While higher oil prices pushed up headline in ation,about half of the increase in Singapore was due to the hike in thegoods and service taxes. Higher food, oil, and other commodityprices, alongside rising wages due to relatively tight labor markets

and the pass-through of increasing business costs, have fueledin ationary pressures in the NIEs.

Balance of Payments

Current account surpluses continued to grow, andwith capital in ows remaining strong through the

rst 9 months of 2007, balance of payments positions strengthened across much of the region.

Third-quarter export growth (in value terms) in emerging EastAsia softened, although it was still robust. However, importgrowth slowed more and the combined trade surplus widenedas a result, compared with the same period in 2006. Exportsslowed largely because of a cyclical downswing in the globalinformation technology industry, while imports eased becauseof related inventory adjustments in the industry over the pastfew quarters. Despite strengthening domestic demand, currentaccount surpluses across the region were sustained going intothe second half of 2007. Capital in ows also remained strong inthe rst 9 months, contributing to a signi cantly stronger balanceof payments. International reserves continued to build as centralbanks intervened in foreign exchange markets to curb the rapidpace of currency appreciation.

In the PRC, exports grew a blistering 26.2% in the third quarterof 2007, though marginally slower than the 27.6% of the rsthalf. Import growth accelerated to 21% in the same period,above the 18% of the rst half. The trade surplus reached more

Indonesia

Philippines

Viet Nam

Malaysia

Thailand 2.7

7.6

4.5

6.7

18.4

14.5

8.810.0

9.110.3

1.93.02.8

5.3

02468

101214

161820

Jan-04

Jun-04

Nov-04

Apr-05

Sep-05

Feb-06

Jul-06

Dec-06

May-07

Nov-07

Figure 14: In ation in Selected ASEANEconomiesHeadline Rates (y-o-y, %)

Sources: OREI staff calculations based on data from CEICand International Financial Statistics , International MonetaryFund.


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than $212 billion in the rst 10 months of the year, already 20%above the entire 2006 total. That is partially due to a rush tomove goods before certain export tax rebates were abolished

or reduced on 1 July. The bigger trade surplus may also derivefrom accelerated export receipts or delayed import paymentsas the private sector is expecting a further appreciation of therenminbi (Table 1a) .

The aggregate ASEAN-4 trade surplus remained high in the rsthalf of 2007, despite a slowdown in exports (Table 1b) . Thecurrent account balance improved dramatically by 79% year-on-year due to a strong trade surplus, maintaining a healthy overallbalance of payments position with an additional small surplus onthe nancial account. A strong current account surplus in Thailand

was fueled by rapid export growth in electronics, vehicles, andiron products. Export growth eased somewhat in Malaysia, butremained robust in recent months in Indonesia. The Philippineshas been running trade de cits, but it has posted current account

Table 1b: Balance of PaymentsASEAN-4 (% of GDP)

2004H1 2004H2 2005H1 2005H2 2006H1 2006H2 2007H1Current Account 2.2 4.5 1.2 2.9 3.9 6.3 5.9 Net Goods Balance 7.4 9.5 5.2 7.9 7.7 9.7 7.3 Net Services -2.6 -2.8 -2.5 -3.2 -2.5 -2.4 -0.7 Net Income -3.9 -3.6 -3.5 -4.1 -3.3 -3.0 -2.6 Net Transfers 1.4 1.4 1.9 2.3 2.0 2.0 2.0Capital Account 0.0 0.0 0.0 0.1 0.1 0.1 0.0Financial Account 0.4 1.7 3.2 -2.5 1.2 -2.5 1.1 Net Direct Investment 0.9 1.3 2.9 1.9 2.1 1.5 0.7 Net Portfolio Investment 1.9 3.0 2.3 0.5 1.9 1.8 4.3 Net Other Investment -2.4 -2.7 -1.9 -4.9 -2.8 -5.8 -4.0Net Errors & Omissions 0.7 -1.3 -1.6 -0.7 0.1 -0.6 -0.6

Overall Balance 3.3 4.8 2.8 -0.3 5.3 3.2 6.4

Sources: International Financial Statistics Online , International Monetary Fund; and CEIC.

Table 1a: Balance of PaymentsPRC (% of GDP)

2004H1 2004H2 2005H1 2005H2 2006H1 2006H2 2007H1Current Account 1.1 7.3 7.0 12.7 8.0 16.7 11.8 Net Goods Balance 0.8 6.3 5.6 10.6 7.0 14.6 9.8 Net Services -0.8 -1.0 -0.4 -0.7 -0.5 -0.6 -0.2 Net Income -0.3 -0.4 0.5 0.8 0.3 0.8 0.9 Net Transfers 1.4 2.4 1.3 2.0 1.2 2.0 1.3Capital Account 0.0 0.0 0.2 0.3 0.2 0.3 0.1Financial Account 9.4 11.8 3.7 4.7 3.2 0.4 6.4 Net Direct Investment 4.3 5.7 2.3 5.4 2.7 4.0 3.7 Net Portfolio Investment 3.9 2.1 -0.1 -0.4 -2.6 -4.5 -0.3 Net Other Investment 1.2 4.0 1.5 -0.3 3.1 0.9 3.1Net Errors & Omissions -1.0 2.9 -0.5 -1.3 -0.7 -0.9 0.9Overall Balance 9.4 22.0 10.4 16.4 10.7 16.6 19.2



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surpluses because of the strong in ow of remittances fromoverseas Filipino workersamounting to about 10% of GDP in the

rst half of 2007. In aggregate, the ASEAN-4 nancial account

showed a small surplus in the rst half of 2007in contrast to alarge de cit in the second half of last yearresulting in an overallbalance of payments surplus of about $30 billion. Foreign directinvestment remained robust, but it was portfolio investment

ows which rose sharply to about $20 billion in the rst halffrom the $15 billion in 2006. Partly due to debt repayments, the

other investment account has been persistently deep in de citin recent years.

The three smaller NIEs had large current account surpluses inthe rst half, but Korea ran a small de cit. The reversal in Korea

was largely due to a huge de cit in its services trade, causedby persistent growth in outbound tourism. Hong Kong, Chinasstrong services trade and income receipts on its assets abroad ledto a healthy current account, in spite of a de cit in goods trade.In the third quarter, export growth remained generally robustin the NIEs, with a modest drop in import growth, pointing to acontinued surplus in the aggregate current account. The NIEs

nancial account performance was quite varied (Table 1c) . Inthe rst half, while capital owed into Korea (mainly in the formof other investments to help hedging activities of i ts shipbuildingindustry), it owed out of Taipei,China (mainly portfolio out ows),

and out of Singapore and Hong Kong, China (in the form of otherinvestment out ows). In Korea, net in ows in other investmentswere almost three times net out ows in portfolio investments.This has been the trend over the past year or so, re ecting thesharp rise in hedging by Korean shipbuilders for surging exportorders. But recently, domestic banks on-shore lending activities

Table 1c: Balance of PaymentsNIEs (% of GDP)

2004H1 2004H2 2005H1 2005H2 2006H1 2006H2 2007H1Current Account 5.8 7.2 5.2 5.9 4.5 6.5 5.8 Net Goods Balance 5.6 6.4 4.9 6.1 4.6 5.9 4.9 Net Services 0.7 0.5 0.3 0.6 0.4 0.9 0.3 Net Income 0.3 1.0 0.7 -0.2 0.3 0.4 1.3 Net Transfers -0.8 -0.7 -0.7 -0.7 -0.8 -0.7 -0.7Capital Account -0.2 -0.2 -0.3 -0.2 -0.2 -0.2 -0.2Financial Account 1.7 -3.1 0.3 -4.4 -1.9 -2.9 -3.5 Net Direct Investment -0.3 0.2 1.8 0.2 1.1 0.4 0.9 Net Portfolio Investment -6.7 -0.2 -5.0 -1.3 -5.5 -5.8 -4.0 Net Other Investment 8.7 -3.2 3.5 -3.3 2.5 2.4 -0.4Net Errors & Omissions 0.5 1.0 0.6 0.6 0.8 -0.1 0.2Overall Balance 7.8 4.9 5.8 1.8 3.2 3.3 2.3



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10

in foreign currency have become stronger, some of which weremade in yen, suggesting that borrowing from foreign banks mighthave been increasing partly to take advantage of widening yield

differentials between domestic and foreign currencies.

Financial Markets and Exchange Rates

Financial markets across the region quickly recoveredfrom the expansive wave of US subprime turmoil in

July and Augustmany reaching record highs fueledby large portfolio in owsraising concern among

policy makers about the risk of an equity market

bubble.

After a sharp sell-off in late-July and early-August amid concernsabout US subprime mortgages and the implications for US growth,most equity markets in emerging East Asia recovered quickly(Figures 15a, 15b) . Booming equity markets in the PRC werebarely affected by the global nancial turmoil, although they havebeen losing steam in recent months. The rest of regional equitymarkets also retreated somewhat in November amid concernabout a further slowdown in the global economy. Currencies inthe region fell brie y at the height of the turbulence as capital ed

and pushed the US dollar higher. But since late August, currenciesin the region have appreciated signi cantly against the dollar onfurther evidence of a slowing US economy and three subsequentUS Federal Reserve policy rate cuts, totaling 100 basis points.(Figures 16a, 16b) .

Excluding the PRC, gains in equity prices over the yearthroughthe end of Novemberranged from 10% in Taipei,China to 49%in Indonesia. In the PRC, equity prices have been rising evenfaster, with the stock price index in Shanghai gaining 130% bymid-October for the year, on top of a 148% rise in 2006. Sincethen (through end-November), however, the Shanghai CompositeIndex has fallen by almost 20% as the authorities continued totighten monetary policy.

Now policymakers in some economies are becoming increasinglyanxious about the risk of an equity market bubble driven bystrong capital in ows and ample liquidity. Across the region,equity markets have been on a quick rise, putting authorities ina bind because raising policy rates may attract further portfolio

Philippines

Thailand

Malaysia

Indonesia 230

133

157

204

153154

132123 118

105

87

171162

80

100

120

140

160

180

200

220

240

2-Jan-06

30-Mar-06

25-Jun-06

20-Sep-06

16-Dec-06

13-Mar-07

8-Jun-07

3-Sep-07

29-Nov-07

Figure 15a: Composite Stock Price Indexes 1ASEAN-4 (last price daily, 2 January 2006 = 100,

local index)

1 Daily stock price indexes of JCI (Indonesia), KLCI (Malaysia),PCOMP (Philippines), and SET (Thailand)Source: OREI staff calculations based on Bloomberg data.

Singapore

Korea, Rep. of


Taipei,China94118

99

137120

485

155

277

399

85

115

145

175

205

235

265

295

2-Jan-06

30-Mar-06

25-Jun-06

20-Sep-06

16-Dec-06

13-Mar-07

8-Jun-07

3-Sep-07

29-Nov-07

60120180240300360420480540600

Hong Kong,China

China, People's Rep.of Others

191

148135

Figure 15b: Composite Stock Price Indexes 1 NIEs and PRC(last price daily, 2 January 2006 = 100, localindex)

1 Daily stock price indexes of Hang Seng (Hong Kong, China),KOSPI (Korea), STI (Singapore), TWSE (Taipei,China), andcombined Shanghai and Shenzhen Composite (PRC), weightedby their respective market capitalization.Source: OREI staff calculations based on Bloomberg data.


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in ows, which are already strong. Meanwhile, an unwindingof carry trades on the yen (and other low-yielding currencies)remains a worry given heightened nancial uncertainty. A partial

unwinding occurred brie y during the recent market turmoil as apart of re-pricing of risks. If investors, who previously borrowedlow-yielding currencies to invest in high-yielding emerging marketassets and currencies, choose to close their positions, it couldsigni cantly exacerbate volatility in nancial markets.

Currency appreciation against the US dollar gainedmomentum throughout much of 2007, with exchangerates up nearly 5% on average since the beginningof the year.

Strong balance of payments positions from current and capitalaccount surpluses continued to put upward pressure on mostcurrencies in the region. In the rst 11 months of 2007, theregions currencies appreciated 4.8% against the US dollar onaverage, and by 4.1% since mid-August. Central banks continuedto intervene in foreign exchange markets to curb the appreciation(particularly since August), as indicated by rising foreign exchangereserves. In the year to date, the Philippine peso and the Thaibaht (both up 15%) outperformed other currencies, largelysupported by growing current account surpluses. The Malaysianringgit, Singapore dollar, and the PRC renminbi have appreciated

by 56% so far in 2007, with other currencies in the region fairlysteady, though volatile in recent months. The Peoples Bank ofChina allowed the renminbi to appreciate 0.5% in the last weekof October, the biggest weekly rise since it moved to a managed

oat in July 2005. This suggests it may have decided to acceleratethe pace of appreciation.

Sovereign bond spreads over US Treasuries widened in Julyand August as the nancial turmoil intensi ed, particularlyin Indonesia and the Philippines. After narrowing somewhatduring September and October, these spreads widened even

further in November, as the specter of a sharper US slowdownincreased and investors risk appetite decreased (Figure 17) .And by end-August, yield curves had shifted up in most emergingAsian economies compared with the second quarteragain,particularly in Indonesia and the Philippines. In the PRC; Korea;and Taipei,China; the upward shift may also have been theoutcome of continued monetary tightening in these economiesin the third quarter. Interest rates in the PRC were on the rise

Singapore

Korea, Rep. of


109

102

115

109

110109

Taipei,China95

100

105

110

115

120

125

130

135

140

02-Jan-06

30-Mar-06

25-Jun-06

20-Sep-06

16-Dec-06

13-Mar-07

08-Jun-07

03-Sep-07

29-Nov-07

99

Figure 16b: Exchange Rate IndexesNIEs 1 and PRC (2 Jan 2006=100)

1 Rep. of Korea; Singapore; and Taipei,China.Source: Bloomberg.

Philippines

Thailand

Malaysia

Indonesia

105103

113

124

110

118

99

123

100105110115120125130135

140145

9502-Jan-

0630-Mar-

0625-Jun-

0620-Sep-

0616-Dec-

0613-Mar-

0708-Jun-

0703-Sep-

0729-Nov-

07

133128

117

142

112111

Figure 16a: Exchange Rate IndexesASEAN-4 (2 Jan 2006=100)

Source: OREI staff calculations based on Bloomberg data.

Philippines

Malaysia


280

237

Indonesia

Viet Nam121

262

198

180

309

286

116

246

134

0

40

80

120

160

200

240280

320

3-Jan-06

31-Mar-06

26-Jun-06

21-Sep-06

17-Dec-06

14-Mar-07

9-Jun-07

4-Sep-07

3-Dec-07

204

Figure 17: JP Morgan EMBI SovereignStripped Spreads (basis points)

Source: Bloomberg.


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12

in 2007, compared with end-2006, as authorities tried to coolan overheating economy. Yield curves in most economies alsosteepened this year, mirroring the trend in world markets. In

Indonesia, Philippines, and Thailand, curves steepened as loosemonetary policy pushed down yields on shorter maturities, whilerising in ation pushed the yields higher on bonds with longermaturities (Figures 18a, 18b, 18c) .

Monetary and Fiscal Policy

Monetary policies across the region have becomemore cautious since the July global financial

turbulencegiven the increased volatility of theregions nancial markets, in ationary pressures,and the uncertain outlook for major industrializedeconomies.

East Asias monetary authorities have been cautious since July2007, with economies buoyant, in ation on the rise, yet with anuncertain outlook for the external environment and for nancialvolatility. Thailand has kept policy rates unchanged since July,when it lowered rates. Malaysia has not changed its policy ratesince April 2006the last time it raised the rate. Korea tightened

policy in July and in August but has kept the rate steady sincethen. But the PRC and Taipei,China continued to tighten duringSeptember. Among the regions bigger economies, only Indonesiaand the Philippines have lowered policy rates (Figure 19).

So far this year, the PRC central bank has raised its benchmarkrate five times (1.17 percentage points) and the reserverequirement ratio 10 times (5.5 percentage points) in its effort tocontain an increasingly overheating economy and surging stockmarkets. The most recent increase of the reserve requirementratio of 1 percentage point will take effect on 25 December. Realinterest rates remain very low, however, and there is growingconcern that this is fueling resurgent investment and asset-pricein ation. The authorities have also restricted loans for stockpurchases and raised the stamp duty on share trading. Thecentral bank widened the renminbi trading band against the USdollar from 0.3% to 0.5% in May. Money supply (M2) in recentmonths, however, has continued to grow above 18%, higherthan the central banks target of 16%. Given that the investmentsurge continues unabated and the stock indexes remain on the

Figure 18b: Indonesia Benchmark Yields(% per annum)

Source: Bloomberg.

8.95

9.33

10.29

8.45

9.62

9.88

10.43

7.5

8.0

8.5

9.0

9.5

10.0

10.5

11.0

2 4 6 8 10 12 14 16 18 20

12-Nov-200729-Aug-200728-May-200729-Dec-2006

15

Year of Maturity

4.15

4.58

3.79

4.43

2.89

3.36

2.68

3.22

2.0

2.5

3.0

3.5

4.0

4.5

5.0

2 3 4 5 6 7 8 9 10

12-Nov-200729-Aug-200729-May-200729-Dec-2006

Year of Maturity

Figure 18a: PRC Benchmark Yields(% per annum)

Source: Bloomberg.

5.5

6.6

7.4

9.6

6.1

8.8

8.3

6.0

6.5

7.0

7.5

8.0

8.5

9.0

9.5

10.0

2 4 6 8 10 12 14 16 18 20 22 24

12-Nov-200729-Aug-200728-May-200729-Dec-2006

157 25Year of Maturity

9.5

Figure 18c: Philippines Benchmark Yields(% per annum)

Source: Bloomberg.


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rise, further monetary tightening is widely expected before theend of the year.

Indonesia paused its easing cycle from July through 6 December,when it lowered its policy rate to 8.0%. In its December statement,Bank Indonesia said it remains con dent that in ation is on a long-term declining trend despite looming in ationary pressures. ThePhilippines also cut policy rates since July, lowering its discountrate three times and bringing it to 5.5% by November. It didso, however, in tandem with liquidity management measuresto contain high money growth in the rst half of the year. TheBank of Thailand maintained its policy interest rate at 3.25% inOctober, after in ation rose to a 9-month high of 2.5% in thesame monthdue to rising fuel costs. Malaysia has kept its policy

unchanged since April 2006.

Among the NIEs, there has been some convergence in monetarypolicy direction. Citing robust growth and increasing in ation, theBank of Korea raised its policy rate in July and August (by a totalof 50 basis points). But it paused from September to November,pointing to stable growth and prices amid ample and increasingliquidity, even as oil prices rose and nancial markets weatheredhigher volatility. Taipei,China has continued to hike its policy rate,which reached a 6-year high of 3.25% in September, bringing itsmonetary stance to a more neutral level. Taipei,Chinas interest

rates are lower than in other emerging markets, encouragingcapital out ows putting downward pressure on its currency. Dueto rising in ation, the Singapore Monetary Authority slightlyincreased the slope of its nominal effective exchange rate policyband in October in order to cap in ationary pressures and ensureprice stability over the medium term.

Governments in the region have maintained scal prudence, but budgetary trends diverged slightlyas varied economic and social situations warranteddifferent scal strategies.

On scal policy, most governments in the region have beenprudent, although trends have varied (Table 2) . The PRCs

scal position remains healthy with a modest de cit due tostrong revenue growth, but authorities see a need for furtherimprovement in the standards of scal management and practices.The government continues to adjust the emphasis and structureof expenditures, addressing weak links in economic and social

Philippines

Malaysia

Thailand 2China, People's Rep. of

8.00

12.75

5.003.503.503.00

5.50

7.507.50

2.752.25 3.25 3.25

7.29

0

2

4

6

8

10

12

14

01-Jul-04

27-Dec-04

24-Jun-05

20-Dec-05

17-Jun-06

13-Dec-06

10-Jun-07

06-Dec-07

Indonesia

Korea, Rep. of

Taipei,China

Figure 19: Policy Rates 1 (% per annum)

Notes:1 Bank Indonesia rate, (Indonesia); overnight call rate (Korea);overnight policy rate (Malaysia); reverse repurchase rate(Philippines); of cial discount rate (Taipei,China); 1-yearlending rate (PRC).2 Bank of Thailand switched its benchmark from the 14-day to1-day reverse repurchase rate on 17 January 2007.Source: Bloomberg.


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Table 2: Fiscal Balance of Central Government (% of GDP)

2003 2004 2005 2006 2007 1 2008 1

Cambodia -6.0 -4.7 -3.4 -1.5 -4.1 -3.2

China, Peoples Rep. of -2.2 -1.3 -1.2 -0.5 -0.9 -1.2Hong Kong, China -3.3 1.7 1.0 1.6 1.9 2.3

Indonesia -1.7 -1.0 -0.5 -1.0 -1.5 -1.7

Korea, Rep. of 0.1 -0.5 -1.0 -1.3 -1.5 -1.2

Malaysia -5.3 -4.3 -3.8 -3.3 -3.2 -3.1

Philippines -4.6 -3.8 -2.7 -1.1 -0.1 0.1

Singapore 2 4.1 5.5 8.3 6.6 4.4

Taipei,China 2 -3.0 -2.1 -1.7 -0.7 -1.9

Thailand 2 0.6 0.3 0.2 0.1 -1.7

Viet Nam -1.2 0.9 -1.2 -5.0

= not available1 Budget.2 Fiscal year.Sources: National sources; Asian Development Outlook 2007 , Asian Development Bank;Economist Intelligence Unit; and World Bank.

development and improving rural public services, which will helppromote balanced growth between rural and urban areas.

The NIEs have relatively strong scal positions. Singapore andHong Kong, China were in surplus in 2006, which likely continuedinto 2007. Although Korea has run a primary scal surplus, itsadjusted scal balancewhich excludes social security funds andis closely monitored by the governmentwas in de cit. While its

scal position remains generally sound, the growing costs of social

security and welfare programs continue to constrain budgetaryroom. Taipei,China has reduced its budget de cit over the pastfew years, though it has budgeted a bigger de cit in 2007 thanin 2006. Overall, the NIEs are moving toward scal consolidation,with ongoing efforts to improve revenue collection, broadentax bases, rationalize incentives, and manage expenditures toef ciently address key public concerns. Revenues are expectedto rise with economic growth, while expenditures and reformsare focused on moving toward a more equitable system. A majorconcern is the adequacy of social safety nets, in particular foran ageing workforce. The NIEs also need to resolve structural

issues to maintain their competitive edge in the regional andglobal markets.

In Indonesia, the scal de cit has been kept at generally modestlevels following the successful consolidation of recent years.The challenge remains in keeping the de cit around 1.0% ofGDP and reducing government debt to 30% of GDP by 2009,while promoting a better investment climate and infrastructuredevelopment. Malaysias scal position has improved recently,


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15

possibly due to stronger-than-expected oil-related revenues.But further spending is expected in relation to new investmentprojects and development programs planned under the Ninth

Malaysian Plan. In Thailand, lingering political uncertainty andtightened governance rules have delayed disbursement of theplanned scal expenditures, which limited its efforts to accelerateinfrastructure spending in key utilities and services. The Philippinegovernment, meanwhile, targeted a de cit of P63 billion in 2007from P64.8 billion (1.1% of GDP) in 2006 and is expected tosurpass its goal due to strong revenues and large privatizationreceipts. To ensure a balanced budget by 2008, stronger taxadministration and continued restraint in expenditures areneeded. Public sector debt in the ASEAN-4 economies has declinedsince 2003.

Assessment of Financial Vulnerability

Despite limited spillover into emerging East Asiafrom the US subprime turmoil, there are several

signs of nancial vulnerability related to sharp gainsin equity and real estate prices.

Recent turbulence in international nancial markets has so farhad only limited effect on the regions nancial markets. Followingsharp declines in the third quarter, regional equity markets havegenerally advancedalbeit amid higher volatilityand therehas been suf cient liquidity in the regions short-term moneymarkets. The resilience has been the result of the strengtheningof macroeconomic and nancial fundamentals in the regiontogether with limited direct exposure to subprime and related

nancial products. The potential for spillover remains, however,as segments of the major international nancial markets have

not yet returned to normalcy, additional losses from subprimerelated products continue to appear, and a wider re-pricing ofcredit risk cannot be ruled out. In addition, elevated equity andreal estate prices in a number of regional economies are at riskof correction in the event of further international turbulence.Reported large capital positions in regional banking systems,generally lower nonperforming loan (NPL) ratios, and improvedcushions against market risk are grounds for guarded optimism,but not complacency.


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Prudential Indicators

Prudential indicators for regional banking systems

generally remain strong, with a sizable build up ofcapital cushions.

Favorable economic and nancial conditions in recent years haveplayed a key role in helping regional banking systems build uplarge capital cushions and return to pro tability. Supported inmany cases by of cial asset management companies, many bankshave also substantially reduced their NPL ratios and strengthenedasset quality. Reductions in public and external debt burdens torelatively low levels (Table 3) and upgrades in sovereign riskratings have also played a key contributing role (Figures 20a,

20b, 20c, 20d) . Exposure to global market risk, however, ishigher than in the past and any further worsening in international

nancial market conditions could prove challenging. Bankingsystems in the region entered the current period of nancialturbulence with considerable strength. Most notably, NPL ratioshave generally remained low or have fallen further (Table 4a) .In addition, regulatory capital cushions have generally beensustained at high levels (Table 4b) . Pro tability in regionalbanking systems continued to be strong through the middle ofthe year as re ected in high rates of return on assets and equity (Tables 4c, 4d) . The high levels of pro tability have re ected

not only improvements in core lending activities, but also therecent favorable nancial conditions that have boosted returnson banks securities holdings.

Activity Indicators

Recent improvements in banking sector strengthand soundness, sustained by strong macroeconomicfundamentals, re ect the improved risk pro les ofregional banking systems, but they are now moreclosely linked to nancial market conditions and

thus more sensitive to movements in asset pricesand returns.

Subdued lending to the business sector has made debt and equityinvestments an increasing share of bank assets, while banks alsohave moved aggressively into new areas such as household andreal estate lending. Although banks new business operations havehelped pro tability, they have also left the risk pro les of banking

Malaysia

Thailand

Philippines

Indonesia

Viet Nam

B-BB+

BB-

CCCCCC+

BB

BBB-BB+

AA-

BBB+BBB

2-Jan-03

30-Dec-03

27-Dec-04

21-Dec-05

15-Dec-06

27-Nov-07

Figure 20a: S&P Sovereign Ratings(Long-term foreign currency)

Source: Bloomberg.

Singapore

Korea, Rep. of

Hong Kong, China

China, People's Rep. of BBB+

A-

A

A+

BBB-

BBB

AA-

AA+

AA

AAA

2-Jan-03

30-Dec-03

27-Dec-04

21-Dec-05

15-Dec-06

27-Nov-07

Taipei,China

Figure 20b: S&P Sovereign Ratings(Long-term foreign currency)

Source: Bloomberg.

B2B1

Ba3Ba2

Caa1B3

Ba1

Baa2Baa3

A2A3

Baa1

Malaysia

Thailand

Philippines

Indonesia

Viet Nam

2-Jan-03

30-Dec-03

27-Dec-04

21-Dec-05

15-Dec-06

27-Nov-07

Figure 20c: Moodys Sovereign Ratings(Long-term foreign currency)

Source: Bloomberg.

Baa1A3

A2

A1

Baa3-Baa2

Aa3

Aa1-Aa2

Aaa Singapore

Korea, Rep. of

Hong Kong, China


2-Jan-03

30-Dec-03

27-Dec-04

21-Dec-05

15-Dec-06

27-Nov-07

Taipei,China

Figure 20d: Moodys Sovereign Ratings(Long-term foreign currency)

Source: Bloomberg.


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Table 3: Public and External Debt (% of GDP)

2003 2004 2005 2006 2007

Public Sector Debt

China, Peoples Rep. of 19.2 18.5 17.9 17.3 p

Indonesia 1 58.3 55.2 45.6 38.6 35.7 p

Korea, Rep. of 1 22.0 25.2 29.5 32.2 33.3 p

Malaysia 68.8 66.7 62.5 56.5 p 55.6 p

Philippines 2 100.8 95.4 86.3 e 77.4 p 72.7 p

Thailand 50.7 49.5 47.4 42.3 p 39.2 p

Viet Nam 40.8 42.7 43.7 45.5 p

External Debt

China, Peoples Rep. of 12.7 12.8 12.6 12.7 p

Indonesia 57.7 53.5 46.6 36.6 31.2 p

Korea, Rep. of 25.9 25.3 23.7 29.7 35.8 p

Malaysia 47.3 44.6 39.6 e 35.2 p 33.5 p

Philippines 78.8 70.5 62.6 e 51.5 p 46.7 p

Thailand 36.2 31.7 29.5 27.5 p 25.8 p

Viet Nam 33.8 33.9 32.5 p 32.6 p

p = projection, e = estimate, = not available.1 Central government debt.2 Non nancial public sector debt.Source: Article IV Consultations, International Monetary Fund.

Table 4a: Nonperforming Loans (% of commercial bank loans)2001 2002 2003 2004 2005 2006 2007 1

China, Peoples Rep. of 21.6 17.8 13.2 8.6 7.1 6.2Hong Kong, China 2 6.5 5.0 3.9 2.3 1.4 1.1 1.0Indonesia 12.1 8.1 8.2 5.7 8.3 7.0 5.8Korea, Rep. of 2.9 1.9 2.2 1.7 1.1 0.8 0.7Malaysia 2 10.5 9.3 8.3 6.8 5.6 4.8 3.5Philippines 2 17.3 15.0 14.1 12.7 8.2 6.0 5.3Singapore 5.4 4.0 3.0 2.4 3 Taipei,China 7.5 6.1 4.3 2.8 2.2 2.1 2.3Thailand 10.5 15.7 12.8 10.9 8.3 4.2 4.4

Memo items: compromised assets ratio (Indonesia) and nonperforming assets ratio (Philippines)Indonesia 31.9 24.0 19.4 14.2 15.6 16.0 3 Philippines 27.7 26.5 26.1 24.7 19.7 18.6 4

= not available1 Data for Hong Kong, China as of Mar 2007; Korea and Taipei,China as of Jun 2007; Philippines as of Aug 2007; Indonesia, Malaysia, PRC, and Thailand as ofSep 2007.2 Reported nonperforming loans are gross classi ed loan ratio of retail banks.3 As of Sep 2006.4 As of Jun 2006.Notes:1. The table excludes nonperforming loans transferred from bank balance sheets to asset management companies.2. The measurement of NPLs follows of cial de nitions and differs across economies depending on loan classi cation (for example, whether a 3month or 6monthrule is used), the treatment of accrued interest, and whether speci c provisioning is deducted from the NPL measure.3. For Malaysia and the Philippines, reported NPLs are net of speci c provisioning.4. Compromised assets ratio includes reported NPLs, restructured loans, and foreclosed assets for the 16 largest banks in Indonesia; distressed asset ratio refers tothe ratio of NPL + real and other properties owned and acquired (ROPOA) + restructured loans, current to total loan portfolio, gross + ROPOA.Sources: National sources; CEIC; and Global Financial Stability Report , International Monetary Fund.


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Table 4d: Rate of Return on Commercial Bank Equity(% per annum, end of period)

2003 2004 2005 2006 2007H1

China, Peoples Rep. of 13.7 12.4 14.1

Hong Kong, China 16.9 18.7 18.4 18.9 Indonesia 1 25.3 37.1 32.3 33.2 35.5 2

Korea, Rep. of 3.4 15.2 18.4 14.6 Malaysia 15.3 16.0 16.5 16.1 Philippines 9.3 7.6 9.5 11.5 9.9Singapore 10.3 11.8 11.1 12.4 3 Taipei,China 6.5 8.8 4.4 -7.3 5.1Thailand 15.7 15.7 14.2 8.5 5.7

= not available.1 2005 gure on a domestic consolidation basis; not strictly comparable with previous years.2 As of Mar 2007.3 As of Sep 2006.Sources: CEIC, national sources, and IMF Global Financial Stability Report, International MonetaryFund (PRC and Indonesia).

Table 4c: Rate of Return on Commercial Bank Assets(% per annum)

2003 2004 2005 2006 2007H1

China, Peoples Rep. of 0.8 0.8 0.9 Hong Kong, China 1.4 1.5 1.6 1.5 1.7 2

Indonesia 2.6 3.5 2.6 2.6 2.9Korea, Rep. of 0.2 0.9 1.3 1.1 Malaysia 1.3 1.4 1.3 1.3 Philippines 1.2 1.0 1.1 1.3 1.1Singapore 1.1 1.3 1.2 1.3 1

Taipei,China 0.5 0.6 0.3 -0.4 0.3

Thailand 0.7 1.3 1.4 0.8 0.3 = not available.1 As of Sep 2006.2 As of Mar 2007.Sources: CEIC, national sources, and Global Financial Stability Report, International MonetaryFund (PRC and Indonesia).

Table 4b: Risk-Weighted Capital Adequacy Ratios(% of risk-weighted assets)

2003 2004 2005 2006 2007 1

Hong Kong, China 15.3 15.4 14.8 14.9 13.6 3

Indonesia 19.4 19.4 19.5 20.5 21.3Korea, Rep. of 11.2 12.1 13.0 12.8 12.9Malaysia 14.0 14.3 13.6 13.1 12.6Philippines 17.4 18.7 17.7 18.5 Singapore 16.0 16.2 15.8 15.4 2 Taipei,China 10.1 10.7 10.3 10.1 9.5Thailand 14.0 13.0 14.2 14.5 15.4

= not available.Note: Based on of cially reported risk-adjusted capital adequacy ratios under Basel I and appliedto commercial banks (except Republic of Korea, where data includes nationwide commercialbanks, regional banks, and specialized banks). Data for the Philippines is on a consolidated,not solo, basis.1 Data for Hong Kong, China as of Mar 2007; Korea and Taipei,China as of Jun 2007; Indonesia,Malaysia, and Thailand as of Sep 2007.2 Data for Singapore as of Sep 2006.3 Based on Basel II calculations. The previous years calculations were based on Basel I.Source: National sources.


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Table 6a: Household Indebtedness (% of GDP)

2002 2003 2004 2005 2006 2007Q3 1

Indonesia 5.4 6.7 8.2 9.1 8.5 8.3Hong Kong, China 62.0 60.9 58.2 55.5 52.1 54.0Korea, Rep. of 32.5 34.9 35.3 37.6 40.8 41.0Malaysia 2 47.2 49.2 50.0 52.5 53.1 53.7Philippines 5.3 4.8 5.2 4.7 4.2 4.2Singapore 3 51.0 49.4 46.4 47.4Taipei,China 43.2 47.2 53.0 58.3 56.7 56.8Thailand 24.5 24.7 23.7 23.5

Table 6b: Household Non-mortgage Indebtedness (% of GDP)

2002 2003 2004 2005 2006 2007Q3 1

Indonesia 4.2 5.2 6.4 7.1 6.3 6.1

Hong Kong, China 10.3 10.3 10.9 11.0 11.7 13.2Korea, Rep. of 13.2 13.8 13.6 14.2 15.2 15.5Malaysia 2 21.0 21.3 21.9 23.7 24.8 24.9Philippines 4.5 4.1 4.5 4.1 3.6 3.6Singapore 3 18.0 16.7 15.4 15.2Taipei,China 16.3 18.4 21.5 23.5 19.5 18.3Thailand 8.4 7.6 6.5 6.1

Table 6c: Household Mortgage Indebtedness (% of GDP)

2002 2003 2004 2005 2006 2007Q3 1

PRC 6.9 8.7 10.6 10.0 10.7 11.6Indonesia 1.2 1.5 1.8 2.0 2.2 2.2Hong Kong, China 50.3 49.9 47.3 44.4 40.3 40.8Korea, Rep. of 19.3 21.1 21.8 23.4 25.6 25.5Malaysia 2 26.2 27.8 28.0 28.7 28.4 28.8Philippines 0.8 0.7 0.7 0.6 0.6 0.6Singapore 3 29.3 32.9 33.0 32.7 31.0 32.2Taipei,China 26.9 28.9 31.5 34.8 37.2 38.5Thailand 13.9 14.6 16.1 17.1 17.2 17.4

= not available.1 As of 30 Jun 2007 for Indonesia and Korea; 31 Mar 2007 for the Philippines.2 Sum of loans for personal use, credit cards, purchase of consumer durable goods, and purchaseof passenger cars for commercial banks, merchant banks, and nance companies. 2006 and 2007data from commercial banks and merchant banks only.3 Refers to consumer loans from commercial banks and nance companies.Sources: CEIC; Monthly Statistical Bulletin , Bank Negara Malaysia; Monthly Statistical Bulletin ,Monetary Authority of Singapore; Peoples Bank of China and Hong Kong Monetary Authority.

regional economies (Figure 21) . As a result, the nancialsystems exposure to real estate has increased, as have thepossible adverse effects of any correction in real estate prices.

National authorities in several countriesincluding the PRC,Korea, and Viet Namhave recently taken steps to help coolthese markets.

0 10 20 30 40 50

Hong Kong, China

Indonesia

Korea, Rep. of

Malaysia

Philippines

Singapore

Taipei,China

Thailand

Dec-04Dec-05Dec-06Sep-07 1

China, People's Rep. of 15

20

15

8

36

46

38

19

18

11

47

1236

16

9

17

40

20

Figure 21: Real Estate Loans (% of total loans)

Sources: Peoples Bank of China, Bank Indonesia, FinancialSupervisory Service (Korea), Bank Negara Malaysia, BangkoSentral ng Pilipinas (Philippines), Bank of Thailand, Hong KongMonetary Authority, and CEIC.1 Korea as of Jun 2007.


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Market Indicators

While the share prices of listed nancial corporations

in the region have largely avoided the sharpdownward corrections of their US and Europeancounterparts, they have generally underperformedthe stock market indexes on which they are listed.

Regional banking systems have avoided the sharp downwardadjustments in share prices evident in many of the mature

nancial markets during the recent turbulence. For the mostpart, this has re ected relatively low direct exposure to thecredit and liquidity problems in the US subprime market, alongwith less concern on the part of investors about the possibility

of unreported off-balance sheet losses. To date, severaleconomies in the regionincluding PRC; Hong Kong, China;Korea; Singapore; and Taipei,Chinahave reported exposureto the US subprime market, but these have generally been verysmall, and provisioning charges have had only a limited impacton pro tability. A continued benign outcome is not necessarilyguaranteed, however, in the event that international nancialturbulence resumes and there is a more general re-pricing ofcredit risk.

Economic Outlook for 2008, Risks, and Policy Issues

External Economic Environment

The moderation in economic growth among theworlds major industrial economies that started thisyear is likely to continue in 2008.

Led by a slowdown in the US economy, economic growth in theOrganisation for Economic Co-operation and Development (OECD)is projected to moderate further to 2.3% in 2008, followingestimated growth of 2.7% in 2007. But growth deceleration inthe non-US OECD economies is expected to remain reasonablymodest in 200708, with domestic demand in the euro zone andJapan making a gradual recovery. And while nancial turbulencein recent months has yet to have any major impact on the real


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economy, stock markets around the world continue to showsigni cant volatility. Tighter credit conditions persist in somesegments of money and lending markets, and more signi cant

economic repercussions cannot be ruled out.

US economic growthdown from 2.9% last year to alikely 2.2% this yearis expected to slow further in2008, driven by the housing market correction andrelated nancial market volatility.

Third-quarter US GDP growth came in strong at 4.9%, unexpectedlyaccelerating over the second quarters 3.8% (quarter-on-quarter,seasonally adjusted annualized rate) (Figure 22) . Althoughconsumers will likely feel the downdraft from the subprime turmoil

in the months ahead, recent consumption and employment datashow much resilience. Relatively robust consumer spending issupported by a healthy job market. In August through October,non-farm payrolls were up an average of nearly 120,000.Average hourly earnings are also edging up and an increasein real disposable personal income has supported consumerspending. But the persistent housing slump poses a signi cantthreat to growth. Home sales are still falling and, with the glutof home supply, house prices are expected to drop further(Figure 23) . The effect on construction from the housing marketcorrection is also likely to continue to constrain growth into 2008.

Meanwhile, the housing market downturn has spilled over into themanufacturing and service industries. Retail sales have slowedin recent months, hit by a sharp decline in consumer con dence.Recent surveys of business activity from the Institute for SupplyManagement also show a loss of momentum amid sluggish neworders and rising inventories (Figure 24) . In response to thedownside risks to economic growth, the US Federal Reserve(Fed) cut its of cial rate again on 11 December by 25 basispoints (bp), adding to the 31 October 25bp cut and the 50bp cuton 18 September. While slowing economic activity has helpedkeep price pressures at bay, resurgent global oil and commodity

prices are reigniting in ation concerns. Headline in ation driftedhigher to 3.5% (y-o-y) in October, from the rst-half averageof 2.5%, although core in ation remains stable within the Fedscomfort zone. The recent decline in the US dollar is also raisingconcerns, although it is helping improve export performance. TheUS current account de cit is persistently large, but a weaker USdollar will allow for another moderate improvement in the tradebalance in 2008.

Figure 22: Contributions to GrowthUS(seasonally adjusted, annualized, q-o-q,% change)

Source: US Bureau of Economic Analysis.

2.1

0.6

2.7 33.5 3.6

2.5

3.1

2.8

4.5

1.2

7.5

3.5

1.2

4.8

1.1

2.4

4.93.8

-4

-2

0

2

4

6

8

10

2003Q1

2003Q3

2004Q1

2004Q3

2005Q1

2005Q3

2006Q1

2006Q3

2007Q1

2007Q3

Personal consumptionGovernment consumption

Private domestic investmentNet exportsGDP

Real GDP growth

4.97

6.92 7.12

255.5

184.3

215

4

5

6

7

8

Jan-01

Oct-01

Jul-02

Apr-03

Jan-04

Oct-04

Jul-05

Apr-06

Jan-07

Oct-07

150

200

250

300

Sales(million units)

Prices(Mean, $ '000)

Prices

Sales

Figure 23: Existing Home Sales 1 and PricesUS

1 Seasonally adjusted; annualized.Source: CEIC.

5249 51

65

56

61

65

4346495255

5861646770

Jan-04

Jun-04

Nov-04

Apr-05

Sep-05

Feb-06

Jul-06

Dec-06

May-07

Oct-07

Non-manufacturing

Manufacturing

Figure 24: US Business Activity SurveyIndexes 1

1 Data survey from the Institute for Supply Management.The indexes are a summary measure showing the prevailingdirection and scope of change. An index above 50% indicatesthat the manufacturing or non-manufacturing economy isgenerally expanding; below 50% indicates that it is generallydeclining.Source: Bloomberg.


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Growth momentum in the euro zone is likely to slowfrom an estimated 2.6% this year to 2.1% in 2008amid heightened nancial volatility and a substantial

appreciation of the euro.

In 2007, the euro zone economy held rm on the back of robustinvestment and German industrial strength (Figure 25) . However,that pace is unlikely to continue as a slowing US economy anda stronger euro start to crimp export growth and tighter creditdamps investment. Euro zone nancial markets were visiblyshaken by the US subprime turmoil. Indeed, several Europeanbanks with direct exposure to US subprime mortgages and relatedmortgage derivatives were caught in the meltdown. Notably, IKBDeutsche Industriebank reported large losses and BNP Paribasmade headlines by suspending withdrawals from $2.2 billionworth of funds invested in asset-backed securities. Worriesabout the nancial turbulence in turn undermined consumer andinvestor sentiment (Figure 26) . A strong eurowhich surged torecord highs against the US dollarand the recent rise in money-market interest rates above the European Central Bank (ECB)reference rate suggest that monetary conditions are de facto tightening, which might allow the ECB to relax its tightening biasfor the time being. Nonetheless, in ationary pressures are rising,with euro zone in ation picking up to 3.0% in November due torising energy and food prices. Tightened production capacity and

labor market conditions are also translating into higher prices andwages. On a brighter note, external performance so far exhibitsrelative buoyancy despite the strong euro. Remarkable resiliencein emerging market economies coupled with their currencystrength against the US dollars slide has helped sustain exportgrowth, especially in Germany. The euro zone current account isexpected to be in balance in 2008.

In Japan, GDP likely grew 1.9% this year but themomentum has weakened visibly, with GDP growth

projected to slow to 1.7% in 2008.

Third-quarter growth rebounded to an annualized 1.5% froma 1.8% decline in the second quarter on strong exports and apickup in investment (Figure 27) . But a slowing US economy andrecent strengthening in the yen cast a shadow over export-drivengrowth next year. A recovery in private consumption also still lags,re ecting sluggish growth in household income despite a gradualtightening in the labor market. However, the investment outlook

95.4

112.1

104.8100.8

85

90

95

100

105

110

115

Jan-04

Oct-04

Jul-05

Apr-06

Jan-06

Nov-07

Figure 26: Economic Sentiment Indicator 1euro zone

1 The economic sentiment indicator is a composite indexof business and consumer con dence indicators based onsurveys of overall economic assessment and expectations in

the euro zone.Source: Bloomberg.

4.35.9

4.3

8.4

0.80

2

4

6

8

10

Jan-04

Jun-04

Nov-04

Apr-05

Sep-05

Feb-06

Jul-06

Dec-06

May-07

Oct-07

Figure 25: German Industrial Production(y-o-y, seasonally adjusted)

Source: Bloomberg.

2.6

4.6

1.4

3.1

1.8

-1.8

1.5

3.2

1.2

-0.4-1.7

2.1

3.0 4.4

6.6

-0.8 -0.3

3.3

5.3

-4

-2

0

2

46

8

2003Q1

2003Q3

2004Q1

2004Q3

2005Q1

2005Q3

2006Q1

2006Q3

2007Q1

2007Q3

Private consumptionGovernment consumptionInvestmentNet exportsStatistical discrepancyGDP Growth

Real GDP growth

Figure 27: Contributions to GrowthJapan (seasonally adjusted, annualized, q-o-q,% change)

Source: Cabinet Of ce, Government of Japan.


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remains generally positive given healthy corporate pro ts, tightcapacity levels, and still benign funding conditions. But concern isrife that the recent nancial turmoil may depress consumer and

investor sentiment further, particularly if the US economy slowsmore signi cantly. Headline in ation has again been below zerofor most of the year, while core in ationwhich excludes foodand energy priceshas been further dipping into the negative(Figure 28) . The Bank of Japan has kept rates steady sinceFebruary, re ecting a more cautious stance in light of softereconomic activity and the recent nancial market volatility.

Continued strong growth in most emerging marketeconomies is likely to partially compensate for theeasing demand in developed countries; yet growthin world trade volume is projected to slow to 7.6%,after growing about 9% this year.

World trade volume growth eased in 2007 as demand from majorindustrial countries slackened. But brisk demand elsewhere,particularly in the developing world, is helping sustain relativelyhealthy momentum. After some weakness around midyear,industrial production in key industrial countries is slowlyrecovering, but not to previous levels. And while unable tocompensate fully for the moderation in demand from OECDeconomies, healthy momentum in manufacturing output among

developing countries is expected to provide support for continuedrobust world trade in 2008, albeit at a moderated pace. Inemerging East Asia, for example, industrial production grewmore than 13% in the second quarter of 2007. 2 The PRC leadsthe group, with industrial production up 18.1%. But solid gainshave been achieved across the region.

Another factor in expectations for more moderate but still healthyworld trade growth is the recovery in the global informationtechnology (IT) industry. Early signs indicate that global demandfor IT productsa major source of export earnings for many

emerging East Asian economiesis likely to rebound in 2008.There was a cyclical IT downturn through most of 2007, withweakening equipment investment in the US early in the year,falling chip prices, and sluggish inventory adjustments. However,it now appears that a recovery may be underway, which may helpthe regions industrial production and trade further into 2008.The deceleration in new orders is slowing and the semiconductor

2 Excluding Brunei Darussalam, Cambodia, Lao PDR, and Viet Nam.

0.3

-1.0

0.3

0.8 0.9

-0.3

-0.2

-1.5

-1.0

-0.5

0.0

0.5

1.0

Jan-04

Apr-04

Jul-04

Oct-04

Jan-05

Apr-05

Jul-05

Oct-05

Jan-06

Apr-06

Jul-06

Oct-06

Jan-07

Apr-07

Jul-07

Oct-07

Headline inflation

Core inflation

Figure 28: In ationJapan (y-o-y)



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investors ed risky assets. There is now concern that tighterglobal credit may affect overall economic activity by reducingloans to businesses and households. There is also evidence that

lending standards are already becoming more strict in somemature credit markets.

Despite signi cant injections of liquidity into thenancial system by the worlds major central banks,nancial volatility in global markets remains high,

with heightened investor sensitivity to risk likely to persist into 2008.

Stock markets rallied after the Feds rate cuts in September andOctober. The world Morgan Stanley Capital International (MSCI)

Barra Index is now higher than before the market correction inAugust and September (Figure 32) . 3 But global equity marketsremain sensitive to new data releases on the US economy,re ecting heightened risk perception. The re-pricing of credit riskshas also been orderly in most credit markets. But some segmentsof the money markets are still strained by a lack of liquidity andincreased counterparty risk. Despite generally tighter credit andheightened nancial volatility, however, external funding foremerging East Asian economies remains adequate.

In sum, the external environment for emerging East Asian economies is expected to weaken somewhatin 2008, as economic growth in industrial countriesmoderates, oil and commodity prices remainelevated, and global nancial markets continue toexhibit heightened volatility.

Although recent nancial instability has had only limited impact onthe global economy, further signi cant spillover cannot be ruledout. World GDP growth is expected to slow, although with theglobal IT market slowly recovering from its recent slump, externaldemand for regional products may remain generally supportivenext year. And in ationary pressures are resurfacing as global oiland commodity prices surge, complicating monetary decisionsinto 2008. After a brief retreat in August and September, capital

ows to emerging market economies have resumed, again addingto pressure on asset prices and currencies in these markets. Amidincreased volatility in price and volume, nancial conditions willwarrant close monitoring.

3 The MSCI Barra indexes are widely used as performance benchmarks by assetmanagers. The MSCI All Country World Index covers 23 developed and 26 emergingequity markets. Sources: Wall Street Journal and MSCI Barra.

Japan

US

euro zone

142131

32

72

195

150

124

105 100

676458

370

25

50

75

100

125150

175

200

02-Jan-06

30-Mar-06

25-Jun-06

20-Sep-06

16-Dec-06

13-Mar-07

08-Jun-07

03-Sep-07

29-Nov-07

basis points

Figure 31: Corporate Bond Spreads 1

Note: The shaded area indicates the period 15 Jul to 20Sep 2007.1 Refers to the difference between yields of 5-year bondsissued by BBB-rated nance companies and yields of sovereignbenchmark bonds of the same tenor.Source: Bloomberg.

130

120115

174

197190

214

162

80

100

120

140

160

180

200

220

02-Jan-06

20-Mar-06

05-Jun-06

21-Aug-06

06-Nov-06

22-Jan-07

09-Apr-07

25-Jun-07

10-Sep-07

26-Nov-07

EmergingLatin America

Emerging Europe

Emerging Asia

World

Figure 32: MSCI Indexes (2 Jan 2006=100)

Note: Shaded area indicates the period 15 Jul to 20 Sep 2007.Source: Morgan Stanley Capital International (MSCI) Barra.


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Regional Economic Outlook for 2008

With the external environment weakening

somewhatand the PRC, the regions la rges teconomy, expected to soften next yearaggregateGDP growth in emerging East Asia is forecast to slowto 8.0% in 2008 from a likely 8.5% this year.

While much of the region will be affected by the expectedslowdown in economic expansion in industrial countries, thereremain several mitigating factors that will allow emergingEast Asian economies to sustain lower but still robust growth(Table 8) . Despite attempts to cool its economy, the PRC islikely to continue its double-digit expansion. At the same time,

growth in the rest of the region has become more broad-based,with strong gains in some larger economiesincluding Indonesiaand the Philippinesand small economies continuing to catchup. GDP growth in the NIEs is expected to ease only modestly in2008, while GDP growth in ASEAN-4 is likely to be, if anything,higher. Also, despite softer external demand and the cyclicaldownswing in the global IT industry, exports performed stronglyand most economies in the region posted solid current accountsurpluses in 2007 (Figure 33) . As robust growth persists in theregion and the global IT industry is expected to recover over thecourse of 2008, export growth is expected to recover. But rapid

economic growth and strengthening domestic demand are likelyto compress current account surpluses across the region.

The PRC economy is expected to continue double-digit growth in 2008, but the pace may softenoffits current peakif measures to cool the economybegin to take hold.

Growth in the rst 3 quarters hit a record 11.5%, and is projectedto sustain double-digit levels for the remainder of this year andnext, although the pace is expected to moderate to 10.5% in

2008. A series of tightening measures has been introduced tocurb rapid investment growth and asset-price in ation sincemid-2006, but the full effect has yet to be seen. Strong exportscontinue to bolster investment, especially in manufacturing andmining. Increasingly, private consumption growth is contributingto economic strength. Rising incomes and improvements to thesocial security system underpin rapid consumption growth. Aplanned increase in scal spending should also support more

2.6

16.711.8

2.7

31.0

8.0

7.4

27.9

14.0

1.4

18.5

4.2

13.9

14.7

12.0

-0.3

-5 0 5 10 15 20 25 30 35

2007H12006H22006H1China, People's Rep. of

Hong Kong, China

Indonesia

Korea, Rep. of

Malaysia

Philippines

Singapore

Thailand

Taipei,China

5.5

7.87.5

4.55.4

Figure 33: Current Account Balance(% of GDP)

Source: International Financial Statistics , InternationalMonetary Fund.


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broad-based expansion in 2008, with more public investmentslated for education, health care, and rural development.

GDP growth in the NIEs is forecast to average 5.1%

next year, just slightly below an estimated 5.3% in2007.

In Korea, growth is gathering pace as strong export earningsand corporate sector balance sheets support reasonably healthyinvestment growth. In addition, a steady tightening in the labormarket is driving a gradual recovery in consumption. In Singapore,despite buoyant industrial activitydriven by the manufacturing

Table 8: Annual GDP Growth Rates (%)

Average ADB Forecasts

19962006 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

Emerging East Asia 1,2 6.5 6.7 7.7 4.6 7.0 6.9 8.0 7.8 8.4 8.5 8.0

ASEAN 1,2 4.2 4.3 6.7 1.9 4.9 5.4 6.4 5.6 6.0 6.3 6.1

Brunei Darussalam 2.0 3.1 2.9 2.7 3.9 2.9 0.5 0.4 5.1 1.9 2.3

Cambodia 8.6 12.6 8.4 7.7 6.9 8.5 10.0 13.5 10.8 9.2 8.0

Indonesia 3 3.1 0.8 4.9 3.6 4.5 4.8 5.0 5.7 5.5 6.2 6.4

Lao PDR 6.3 7.3 5.8 5.8 5.9 5.8 6.9 7.2 7.3 6.8 7.9

Malaysia 4 4.9 6.1 8.9 0.5 5.4 5.8 6.8 5.0 5.9 5.9 5.9

Myanmar 5 10.7 10.9 13.7 11.3 12.0 13.8 13.6 13.2 . . . . . . . . .

Philippines 6 4.3 3.4 6.0 1.8 4.4 4.9 6.4 4.9 5.4 7.0 6.4

Thailand 3.1 4.4 4.8 2.2 5.3 7.1 6.3 4.5 5.0 4.3 4.8

Viet Nam 7.3 4.8 6.8 6.9 7.1 7.3 7.8 8.4 8.2 8.3 8.5

Newly Industrialized Economies 1 4.5 6.9 7.7 1.0 5.3 3.2 6.0 4.8 5.5 5.3 5.1

Hong Kong, China 3.8 2.6 8.0 0.5 1.8 3.0 8.5 7.1 6.8 6.1 5.4

Korea, Rep. of 4.6 9.5 8.5 3.8 7.0 3.1 4.7 4.2 5.0 4.8 5.0

Singapore 5.5 7.2 10.1 -2.4 4.2 3.1 8.8 6.6 7.9 8.1 6.3

Taipei,China 4.6 5.7 5.8 -2.2 4.6 3.5 6.2 4.2 4.9 5.0 4.8

China, Peoples Rep. of 9.3 7.6 8.4 8.3 9.1 10.0 10.1 10.4 11.1 11.4 10.5

Japan 1.2 -0.1 2.9 0.2 0.3 1.4 2.7 1.9 2.2 1.9 1.7

US 3.2 4.5 3.7 0.8 1.6 2.5 3.6 3.1 2.9 2.2 1.9

Euro zone 2.1 3.0 3.8 1.9 0.9 0.8 2.0 1.5 2.8 2.6 2.1

. . . = not available1 Aggregates are weighted according to gross national income levels (atlas method, current US$) from World Development Indicators (World Bank).2 Excludes Brunei Darussalam and Myanmar for all years as weights are unavailable.3 GDP growth rates from 19992000 are based on 1993 prices, while growth rates from 2001 onward are based on 2000 prices.4 Growth rates from 19992000 are based on 1987 prices, while growth rates from 2001 onward are based on 2000 prices.5 For scal year AprilMarch.6 Figures for 20042006 are not linked to the GDP gures 2003 backwards due to National Statistics Of ce revisions of sectoral estimates.Sources: ADB; government estimates (Brunei Darussalam); Eurostat website (euro zone) Economic and Social Research Institute (Japan); Bureau of EconomicAnalysis (US).


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and construction sectorsmoderation is expected due to a slowingin nancial services. The outlook for Hong Kong, China, which isheavily in uenced by the PRC, remains solid. However, the rapidly

closing output gap and more subdued nancial market conditionsimply some easing of growth in 2008.

The four largest ASEAN economiescurrently in theupswing phase of their business cyclesare forecastto maintain strong growth in 2008, with Indonesiaand Thailand accelerating, Malaysia maintaining thisyears pace, and the Philippines slowing somewhatfrom a strong 2007.

Strong domestic demand and resilient exports are likely to

keep the four middle-income ASEAN countries in good stead. InIndonesia, GDP growth continues to accelerate, after exceeding6% in 2007 for the rst time since the 1997/98 Asian nancialcrisis. Buoyant consumption and strong investment on the back ofeasier monetary policy underpin the robust outlook. In Malaysia,improving electronics exports will support relatively strong growthwhile the impact of scal stimulus on domestic demand graduallyfades. In the Philippines, GDP growth will remain high at about6.4% in 2008although off the post-crisis peak reached thisyearon strong gains in net exports, private consumption, andgovernment spending. Thailands economy continues to struggle

amid ongoing political and policy uncertainties. But there issubstantial scope for expansionary policieswhich can boostGDP growth in 2008once the December national elections havereduced political uncertainty.

The smaller ASEAN econom

Documents

Asia Economic Monitor - December 2007