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Outlook 2004 ASIAN DEVELOPMENT Update

Asian Development Outlook 2004 Update

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Economic Trends and Prospects in Developing Asiae Pacic

Rollie del Rosario

Outlook2004

ASIAN DEVELOPMENT

UpdateUpdate

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Fiji IslandsEconomic Assessment

The economy is projected to grow at 4.1%in 2004, compared with an originalADO2004 forecast of 3.9%. is upward revision

re ects an unexpectedly strong stimulus fromtourism in the rst two quarters of the year(Figure 2.18). e midyear introduction of new

air services from Australia and New Zealand isexpected to underpin continued expansion intourism in the latter half of 2004 and thereby further stimulate the trade, restaurants and hotels,and transport and communications subsectors. Arelatively strong performance is also anticipatedin the community, social, and personal servicessubsector, with the services sector as a wholeprojected to contribute 2.4 percentage points tothe aggregate growth rate for 2004.

In contrast, gures for the primary sector havebeen revised downward. Sugarcane production

is likely to fall, while noncane agriculturalproduction was damaged by ash ooding inmajor growing areas in April. Fisheries productionis expected to stay subdued, with a new FisheriesManagement Bill intended to monitor and controlcatches. e small forestry subsector is forecastto grow at a historically high rate, though from asmall base. Mining production in 2004 is beingramped up as a result of the expansion programat the Emperor Gold Mine, with maximumproduction to be achieved in 2005. e primary sector is projected to contribute 0.4 percentagepoints to aggregate growth in 2004.

Growth in the secondary sector, i.e., manu-facturing, construction, electricity, and water,has also been revised downward, and is expectedto contribute 1.3 percentage points to theaggregate GDP gure. is revision primarily re ects midyear sugar mill breakdowns that havehampered crushing. Production in the clothingand footwear subsector was virtually stagnant inthe rst 5 months of 2004, but is likely to increase

and register some positive year-on-year growth.As envisaged, construction has expanded signi -cantly, with a range of private and public sectorinvestment projects completed or initiated. Privatebusiness will drive much of the activity in thissubsector during the second half of 2004. e elec-tricity and water subsector is growing modestly.

Labor market conditions have improved

somewhat. In the year to end-June 2004, thenumber of new registered taxpayers rose by 6% from the year-earlier period, with the vastmajority of new jobs generated in the servicessector. Employment surveys have also showna higher volume of job advertisements, andemployers are expected to create more jobs whilewage increases remain moderate and are limitedto a few sectors, including pay increases of 1% forcivil servants in February and 5% for transportworkers in March. However, the demand forskilled labor is unlikely to be met in full by

domestic supply, as emigration continued in the rst 5 months of 2004, albeit at a slower rate thanpreviously.

On the demand side, stronger employmenthas bene ted private consumption as evidencedby a substantial rise in VAT revenue and bank

Figure 2.18 Quarterly Visitor Arrivals,Fiji Islands, 2002–2004

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Source: Reserve Bank of Fiji, Quarterly Review , June 2004.

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94 Asian Development Outlook 2004 Update

Table 2.20 Selected Economic Indicators,Fiji Islands, 2004–2005, %

Item 2004 2005

ADO 2004 Update ADO 2004 UpdateGDP growth 3.9 4.1 3.0 3.2

Ination (CPI) 3.0 3.0 3.0 3.0

Current account/GDP -6.6 -6.0 -9.6 -8.8

Source: Staff estimates.

lending to individuals during the January–May period. Investment spending has also been rela-tively buoyant, mainly due to revived constructionactivity. Overall business condence seems to haveimproved, but it remains to be seen if the long-

term decline in the investment-to-GDP ratio hasbottomed out.

e 2004 budget targeted an overall decit of 3.9% of GDP (before asset sales), to be nancedby domestic borrowing. Preliminary data showa budget surplus equivalent to 0.2% of GDP inthe rst 4 months of 2004, suggesting that theGovernment is on track to achieve or possibly exceed its target. Capital expenditure has beenwell below the budgeted level, but is forecast topick up. Operating expenditure has been broadly in line with budget forecasts, largely because

the public sector wage bill has remained undercontrol. At the same time, revenue collection hasexceeded expectations, partly because of improvedcoordination between the tax and customs author-ities. At end-June, the Government’s domesticdebt stood at 42.6% of GDP, down from 44.7% atend-2003.

Annual ination in the year to June 2004was 2.7%, in line with theADO 2004 forecastof 3.0% for the calendar year. Some upwardpressure on prices has been exerted by foodshortages following the April oods, and theremay be further pressure if oil prices stay high. enominal and real effective exchange rate indexesof the Fiji dollar have both risen marginally in2004, leading to a slight deterioration in thecountry’s international competitiveness. In therst 7 months of the year, the local currency appreciated by about 2% against the US dollar.

Broad money declined during the rst5 months of 2004 because of a drop in net foreignassets. Domestic credit growth was dominated by

increased private sector credit, with commercialbanks lending quite heavily to individuals seekinghousing nance. e trade, construction, businessservices, and public sectors have also borrowedmore, whereas lending to agriculture and utilitieshas fallen. e commercial banks’ weightedaverage lending rate fell to 7.17% by May 2004,while rates on savings fell to 0.36% and rates ontime deposits rose to 1.72% at that time. Conse-quently, the interest rate spread narrowed slightly,while real interest rates on deposits remainedsubstantially negative.

e export performance of the rst 5 monthsof 2004 was disappointing vis-à-vis the year-earlier period. Reexports and exports of sugar,garments, mineral water, and sh all declined.

Imports slid even further as a result of reducedimports of intermediate and investment goods.

e resultant narrowing of the trade decit,though somewhat offset by higher inows on theservices account due to tourism, helped reduce thecurrent account decit. By end-June 2004, foreignreserves covered the equivalent of 3.2 months of imports of goods and nonfactor services.

Policy Developments

e key macroeconomic policy development in

2004 has been a tightening of monetary policy,introduced at end-May. e official interest rate(the rate on 91-day Reserve Bank notes) wasraised from 1.25% to 1.75% to restrain burgeoningconsumer spending which, in the monetary authority’s assessment, was threatening to createunsustainable pressure on the balance of payments.

e Reserve Bank has emphasized the need for animproved export performance if recent economicgrowth is to be sustained, but has not indicated any intention to review the exchange rate policy. (Asanticipated, measures to relax exchange controlswere introduced from January.) In a midyeareconomic symposium, the Government, too,underlined the need for faster private sector-ledexport expansion, and reiterated its commitment tothe development objectives and policies enunciatedin the current strategic development plan, and tothe 2001−2020 plan aimed at enhancing the partici-pation of Fijians in the economy.

With regard to the key issue of investmentpromotion and achievement of an investment-to-

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The Pacific Fiji Islands 95

GDP ratio of 1:4, the Government has amendedforeign investment legislation and formulatedaccompanying regulations intended to streamlinethe approval process for foreign investment. ebusiness community is awaiting the outcome of anassociated review of the list of potential investmentareas restricted or reserved for nationals.

In general, rather than exchange rate adjust-ments, factors such as infrastructure quality, reli-ability and price of utilities, availability of skilledlabor, and efficiency of public administration arethe major determinants of the country’s competi-tiveness.

e early months of 2004 have seen progresson another key issue restructuring the sugarindustry. A new board has been appointed to

reform the Fiji Sugar Corporation. e IndianGovernment is providing technical assistanceand a concessionary loan to expand sugarcanecultivation and to improve the transport andmilling systems. e aim is to make the industry internationally competitive a er the renegotiationof the European Union Sugar Protocol in 2007,which will lead to a signicant reduction in pricesfor sugar from the Fiji Islands. In the matter of fundamental land issues, a bipartisan committeeof politicians is due to report in September 2004,while the Government is reviewing the legislation

governing landowner-tenant relations in the hopeof resolving long-standing tensions in this area.

Outlook for 2004–2005

e services sector is expected to drive theeconomy in its fourth year of brisk economicexpansion since the 2000 coup, with theconstruction sector playing a crucial auxiliary role. In 2005 and broadly in line with theADO2004 projections, growth is forecast to slowto 3.2%, with the services sector contributing2.2 percentage points to this outcome. esecondary sector is projected to contribute a lower0.6 percentage points as construction activity decelerates with the completion of several largeprojects. Garment producers will struggle toadjust to greater international competition whenthe MFA quota in the crucial US market expiresat end-2004, though a more severe adjustmentscenario has been avoided with the recent 7-yearextension of duty-free access to the Australian

market. Sugar production is expected to pickup slowly as transport and milling problems aregradually solved, while mineral water productionis likely to show the benets of the 2004investment program. e growth projection forthe secondary sector may turn out to be conser-vative if garment producers secure new marketsand sugar restructuring is accelerated.

e primary sector is projected to contribute0.4 percentage points to growth in 2005. Littleimprovement is foreseen in the agriculture andsheries subsectors, though the forestry subsectorcould expand signicantly if the country’s maturemahogany forestry resources are commercially exploited. Output from gold mining is expected togrow relatively fast.

Economic expansion in the 3–4% rangewill generate essential growth in formal sectoremployment of about 2% a year, but this is insuf-cient to fully absorb the annual net increase inthe labor force. Many job seekers will be forced toenter the informal sector or become openly unem-ployed. Additionally, former tenants of sugarcaneland are likely to join the labor market, and thegarment industry may resort to redundancies.Clearly, such events would strain the Govern-ment’s capacity to address poverty. Already, about10% of the population live in squatter settle-

ments in the Suva-Nausori corridor, and scalconstraints have limited the scope of poverty reduction programs.

Macroeconomic stability is expected to bemaintained through 2005 as the Governmentcontinues to rein in the budget decit and adheresto a cautious monetary policy stance. However,the official projection of a budget decit of 0.8% of GDP in 2005 appears overoptimistic, since it relieson a fall in nominal operating expenditure thatwill be difficult to achieve. Ination is projected toremain at around 3%, while the nominal effectiveexchange rate is likely to appreciate marginally.

ere is considerable uncertainty surroundingbalance-of-payments projections, given the lack of timely and reliable data, and the difficulties facingthe sugar and garment industries.

Growth in gold, mineral water, and timberexports, combined with tourism expansion,will boost foreign exchange earnings, thoughthe current account decit is likely to widen asimports pick up from their 2004 level.

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Papua New GuineaEconomic Assessment

Preliminary estimates suggest that GDPgrowth for 2004 will reach theADO 2004 forecast of 2.8%, thus continuing the

modest upward trend of 2003. Growth, whilebroad based, remains heavily dependent onexports of primary commodities: gold accounts

for approximately 37% of total exports, copperfor 20%, agriculture for 19%, and crude oil for18%. Supported by high global commodity prices,the total value of exports of most mineral andnonmineral commodities has risen. However,the volume of gold exports declined by 12.2%from 18.8 tons in the last quarter of 2003 to 16.5tons in the rst quarter of 2004, while copperproduction fell by 33% from 69,100 to 46,300 tonsin the same period.

e agriculture, forestry, and shery sectorbeneted from favorable weather conditions,

resulting in higher export volumes for mostcommodities compared with the rst quarter of 2003. e volume of crude oil exports in the rstquarter of 2004 increased to 3.3 million barrels,from 2.9 million barrels in the last quarter of 2003, though this was still 12.8% lower thanin the equivalent period in 2003 due to naturaldecline in the older elds. New capacity in theMoran eld is expected to come on stream towardthe end of 2004.

Further consolidation of the budgetary situation was achieved through the Government’sefforts at expenditure control and improvedrevenue collection. As of May 2004, higher thanexpected revenues resulting from increased collec-tions from personal, corporate, and mineraltaxes, together with lower expenditures, had ledto an overall budget surplus of K258.5 million,equivalent to 2.0% of GDP, compared withK16.2 million a year earlier. e decrease inexpenditures was primarily due to lower interestpayments and slow disbursement of the devel-

opment budget. In the rst 5 months of 2004, theGovernment retired K61.6 million of its domesticand K161.8 million of its external debt.

Prudent monetary policy and better scalmanagement helped further reduce ination inthe rst quarter of 2004. In the quarter to March2004, year-on-year ination fell to 2.9%, thelowest rate since 1997. e kina strengthened

against the US dollar and to a lesser extent againstthe Australian currency. e stronger kina offsetsomewhat the effects of higher international fuelprices and the 2% import levy introduced in the2004 budget. e easing of inationary pressuresled to further cuts in the official Kina Facility Rate from 14.0% in December 2003 to 9.0% inSeptember 2004. Interest rates on 28-day treasury bills declined from 16.1% in December 2003 to6.5% at end-July 2004.

Broad money supply increased by 5.4% inthe rst 6 months of 2004 a er an overall drop

of 1.0% in 2003. Liquidity levels in the bankingsystem increased but did not translate into anexpansion of commercial bank credit to theprivate sector. With private sector demand forcredit remaining weak, commercial lending ratescontinued their downward trend to 13.3% in June2004. Lower interest rates are expected to boostprivate consumption and investment levels.

Official government forecasts show a balance-of-payments decit of K44.8 million in 2004 asthe decit on the capital and nancial accountsmore than offsets the gains in trade. e latterdecit is expected to reach K678.3 million in2004, resulting from higher external loan repay-ments by the Government, lower loan drawdowns,and higher balances held in offshore accountsby mineral companies. However, preliminary estimates for the rst 5 months point to aslightly better outturn. Gross foreign reserves areexpected to build up to $491.9 million by year-end, equivalent to approximately 6.5 months of nonmineral import cover.

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The Pacific Papua New Guinea 97

Policy Developments

While higher commodity prices and improve-ments in scal management led to a reversal of the 3-year contraction from 2003, political insta-

bility and frequent government reshuffles are stillhampering the Government’s ability to implementstructural reforms, such as reducing governmentpayroll numbers. Fearing a motion of “no con-dence,” the Government has several times triedto adjourn Parliament since the beginning of the year. e prime minister has also resortedto frequent reshuffles in his coalition, which hasharmed continuity.

e governments of Australia and Papua NewGuinea agreed, at end-June 2004, on an EnhancedCooperation Program. is provides for addi-

tional assistance to the Government of K2 billionas well as senior in-line advisors in the publicsector to strengthen law and order, customs,transport and border security, governance, andeconomic and public sector administration. Addi-tionally, Australian police officers will assist withthe improvement of the law and order situation,which is likely to li business condence in themedium term.

e Government has made progress towardimplementing the recommendations of the PublicExpenditure Review and Rationalization (PERR),nalized in mid-2003. e PERR outlined recom-mendations for four core areas: a road map toscal sustainability, reduction in civil service size,restoration of the integrity of budget institutionsand systems, and expenditure adjustment andprioritization. It also provides recommendationsfor improving health and education spending.

While progress to date has been particularly noticeable in terms of restoring the integrity of the budget process, the focus is still on

improving processes and technical solutions. eGovernment is also aiming for a 10% reductionin public sector staffing by end-2007. Currentplans are to achieve this through a 1% reductionin the workforce in 2004 and 3% in each of theremaining 3 years. Progress has already beenmade in implementing the integrated payroll andhuman resource records management system aswell as in identifying ghost workers and elimi-nating overpayment of allowances.

Financial controllers have been positioned inkey spending departments, leading to improve-ments in reducing arrears and budget overruns.

e rst phase of data cleansing of trust accountshas been completed and efforts to close irregulartrust accounts are currently under way. Despite

these efforts, the Government is aware thatfurther attention is needed to directly improvescal sustainability and strengthen accountability mechanisms and oversight institutions. Anotherformidable challenge is to strengthen the effec-tiveness of provincial expenditures and to improvemonitoring and reporting systems of subnationalaccounts.

Since end-2003, the Medium Term Devel-opment Strategy (MTDS) covering 2003-2007 hasundergone substantial changes and is yet to benalized and endorsed by the National Executive

Council. Based on the Government’s agenda forRecovery and Development, the MTDS empha-sizes good governance, export-driven growth,rural development, human resource development,and poverty reduction as the main priorities.However, the resources required to implement theMTDS have not been clearly mapped out and itslink to the annual budgets is unclear. e PERRprovides a framework for identifying sources of saving, for revenue-raising initiatives that wouldpermit a reprioritization of government spendingwhile maintaining aggregate scal discipline, andfor improving accountability. However, muchremains to be done to integrate and move forwardthe implementation of the various initiatives.

Privatization of the state-owned telecommu-nications company, Telikom PNG, is currently awaiting cabinet approval. Efforts are alsounder way to improve performance standardsand corporate governance of other SOEs with aview to privatization or corporatization in themedium term.

Table 2.21 Selected Economic Indicators,Papua New Guinea, 2004–2005, %

Item 2004 2005

ADO 2004 Update ADO 2004 UpdateGDP growth 2.8 2.8 1.7 1.7

Ination (CPI) 8.7 7.4 9.6 6.0

Current account/GDP 5.0 5.0 3.2 3.2

Source: Staff estimates.

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98 Asian Development Outlook 2004 Update

Outlook for 2004–2005

Economic growth projections are expected toremain at the forecast level of 2.8% for 2004 andat slightly lower levels for the following 2 years.However, the economic growth seen since mid-2003, while relatively broad based, remains fragileand highly dependent on favorable commodity prices and weather conditions.

Most commodity prices are likely to remainhigh in 2005, particularly for crude oil and gold,while the start of operations of the Wewak tunaloining facility and the Napa Napa oil renery in June 2004 is expected to boost manufacturingoutput. As a result, the merchandise trade accountis projected to maintain its surplus in 2005.

e Government is committed to limiting

the budget decit to 1.0% of GDP in 2005 andto lowering it therea er. Provided that thesescal targets are met, the IMF estimates thatcentral government debt could be reduced from63% of GDP at end-2003 to 46% at end-2009.However, 2005 budget savings, initially targetedat K240 million, have been scaled down toK80 million on account of anticipated lowerinterest payments and improved revenues fromcommodity exports. To reach its targets, theGovernment will have to vigorously pursue thesteps initiated for generating savings, particu-larly in continuing to reduce the public sectorwage bill.

Annual ination is forecast to reach 7.4% in2004, somewhat lower than earlier projected, and

to continue to fall to 6.0% in 2005.

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Part 3 Economic Scenarios for Asia

T. Takahara

Outlook2004

ASIAN DEVELOPMENT

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Economic Scenarios for Asia

Outlook2004

ASIAN DEVELOPMENT

UpdateUpdate

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Economic Scenarios for Asia

Introduction

Developing Asia’s trade and economicgrowth have beneted greatly from theemergence of the People’s Republic of

China (PRC) as a major economic power.¹ Overthe past 2 years, for example, exports from devel-oping Asia to the PRC have soared by an averageannual rate of 30%. But if a buoyant PRC hashelped li regional growth rates, what will be theimpact on Asia of a slowdown in that country?

is question is timely because the PRCGovernment is making serious efforts to slowseveral key sectors of its economy, including

automobiles, property, and steel, where excessiveinvestment has caused sharp price rises in rawmaterials and bottlenecks in the supply of powerand transportation. e authorities have usedmonetary, scal, and administrative measuresover the past year to damp xed asset investmentin those sectors, with some success (see the PRCchapter in Part 2). e macroeconomic tighteningreined in gross domestic product (GDP) growthrates from 9.9% in the fourth quarter of 2003 to9.8% in the rst quarter of 2004 and 9.6% in thesecond. It seems likely that the PRC economy will slow to a so landing and achieve a moresustainable growth path of 7–8% from 2005,though the risk of a hard landing remains.

So far, the PRC’s investment slowdownhas not had a perceptible effect on the exportsor economic growth of its trading partners.Moreover, an economic modeling exercise, detailedbelow, to gauge the effect on the region of a signif-icantly sharper cut in PRC industrial investmentsuggests that the impact on regional economies

of this scenario would be moderate. Hong Kong,China is the most vulnerable to such a devel-

opment. e Republic of Korea (Korea); Singapore;and Taipei,China are next. Southeast Asian nationsgenerally would avoid any signicant losses inoutput, and South Asia is the most insulatedfrom developments in the PRC. e results of theexercise also suggest that if the United States (US)and Japan achieve stronger than expected growth,this could more than offset the reductions ingrowth caused by the PRC slowdown for most of developing Asia’s economies.

How a Slowdown in the PRC Affects Other

Economies in Developing Asia

Given that trade links dominate the economicrelationship between the PRC and its developingAsian neighbors, it is through the trade channelthat most impact is likely to be felt when thePRC’s economy slows signicantly, in the processlowering demand for manufactured exports fromthe region. e prices of those exports may alsofall. e boom in the PRC has contributed torecent strength in world commodity markets, soa slowdown in the PRC could also reduce exportsfrom regional economies of rubber, metals, andother primary products.

e extent of these effects depends on thecharacteristics of each PRC trading partner andits trade relationship with the PRC, as well as thenature of the slowdown in the PRC.

In the current situation, the PRC’s tight-ening measures are aimed at slowing xed assetinvestment in selected industries, meaning thatinvestment (capital) goods sectors might be

Regional Impact of an Economic Slowdown inthe People’s Republic of China: ree Alternative Scenarios

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102 Asian Development Outlook 2004 Update

severely aff ected, but the export sector could avoidthe slowdown (Figure 3.1). Consumption is likely to be spared because of rising urban and ruralincomes, and low interest rates. So the impact onthe PRC of these tightening measures could becontained within a few sectors.

With regard to the PRC’s trade relationship

of Southeast Asian Nations (ASEAN) economies,excluding Singapore, to the PRC has doubled from

4.3% in 2001, but to just 8.8% of total exportsfrom the group, excluding Singapore, in 2003(Table 3.2). Similarly, India boosted its share of exports to the PRC, from 1.8% in 2000 but only to6.3% in 2003. e PRC is Japan’s second-biggestmarket (a er the US), buying 12.2% of Japan’sexports.

In addition to extent, the composition of tradebetween the PRC and its regional partners is alsorelevant to assessing the impact of an economicslowdown in the PRC. A large part of developingAsia’s exports to the PRC involves intermediate

goods that are processed and reexported, so

Figure 3.1 PRC Fixed Asset Investment and RetailSales, Q1 2001–Q2 2004

� � � �

� � � � �

Source: CEIC Data Co. Ltd.

with the rest of the region, links have becomemuch more extensive in recent years, but thecountry is still a relatively small trading partnerfor most developing Asian economies comparedwith the US, Japan, and European Union (EU).

e PRC accounted for 16.9% of developingAsia’s trade in 2003, while the US, Japan, andEU together accounted for 39.0% (Table 3.1). enewly industrialized economies (NIEs) of HongKong, China; Korea; Singapore; and Taipei,Chinahave closer trade relationships with the PRC,with 42.7% of Hong Kong, China’s exports and14.9% of Taipei,China’s exports going to the PRCin 2003 though this probably underestimatesshipments from Taipei,China because some thatare destined for the PRC go through Hong Kong,China. Korea, too, is vulnerable because the PRCbecame its biggest export destination in 2003,taking 20.0% of its exports.

Southeast Asia is less dependent on the PRC. e share of total exports from the Association

Table 3.1 Regional Distribution of Merchandise Tradein Developing Asia, 2003, %

Economy or Region PRC US EU Japan

Developing Asia 16.9 14.1 12.9 12.0NIEs (excl. Hong Kong, China) 17.8 22.1 18.0 19.2Hong Kong, China 30.4 8.4 7.6 6.1ASEAN (excl. Singapore) 8.7 14.5 12.2 15.4South Asia 1.8 4.0 6.9 1.1

ASEAN = Association of Southeast Asian Nations,EU = European Union, NIEs = newly industrialized economies,PRC = People’s Republic of China, US = United States.Source: CEIC Data Co. Ltd.

Table 3.2 PRC Share in Exports of Selected AsianEconomies, 2001–2003, %

Economy or Region 2001 2002 2003Japan 7.7 9.6 12.2Developing AsiaNIEs 16.8 19.3 23.5

Hong Kong, China 36.9 39.3 42.7Korea 12.1 14.7 20.0Singapore 4.4 5.5 7.0Taipei,China 3.9 7.6 14.9

ASEAN (excl. Singapore) 4.3 5.2 8.8

Indonesia 3.9 5.1 7.2Malaysia 4.3 5.6 10.5Philippines 2.5 3.9 11.9Thailand 4.4 5.2 7.1

South Asia 2.8 3.3 5.0India 3.4 4.1 6.3

ASEAN = Association of Southeast Asian Nations, NIEs = newlyindustrialized economies.Sources: International Monetary Fund, Direction of TradeStatistics, July 2004; Datastream, downloaded 15 August 2004.

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Economic Scenarios for Asia 103

much of the PRC’s import growth is related todemand levels outside the region. A strong trendhas been apparent in recent years toward verticalspecialization, where steps in the manufacturingproduction process are divided between severalAsian countries and where the components areshipped to another country for nal processingand assembly and then reexport. Improvementsin transportation and communications, as wellas falling trade and investment barriers, havebolstered this trend. e PRC has developed many of the centers for nal processing and assembly because it has the biggest low-cost labor forceand has attracted substantial in ows of foreigndirect investment to build the facilities. As aresult, the PRC’s demand for intermediate goods

from developing Asia has grown sharply while itsexports of nal goods to industrial countries havealso increased signi cantly. During 2001–2003,the PRC’s trade surplus with the US and EUburgeoned from $33 billion to $77 billion, but overthe same period the PRC ran a de cit of aboutthe same size with Korea; Taipei,China; and theASEAN economies (Figure 3.2).

Consistent with the rising vertical special-ization of production within Asia, there has beenan increase in the proportion of intra-industry trade, especially for electronics, within intrare-

gional trade. e International Monetary Fund hasestimated that intra-industry trade accounted for75% of total trade growth in East and Southeast

Asia on average in 1996–2000, much higher thanin other developing regions. ere is evidencefrom other studies (e.g., Frankel and Rose 1998)that countries with closer trade linkages havehighly correlated business cycles, and that intra-industry trade is the major channel throughwhich the business cycles of East Asian economiesbecome synchronized (Shin and Wang 2003).

It is clear that increasing vertical special-ization and intra-industry trade have createda new channel to transmit economic shocksthrough Asia. A slowdown in one country’sdemand will not only lead to reduced exports, butalso to lower demand for imported intermediateinputs and capital goods by its trading partners.

erefore, besides the direct and indirect demand

eff ects associated with the income decline, thereare production-related demand eff ects that canquickly travel along the production chain.

However, the current slowdown in the PRC isless likely to exert strong demand reduction eff ectsthrough the region because developing Asia’sproduction chain depends on nal demand fromindustrial countries, and the linkage between thePRC’s export processing sector and its internaleconomy is relatively weak.

Assessing the Impact of a Sharper PRC

Slowdown

To quantify the potential impact of a sharperslowdown in the PRC, a global trade simulationmodel Linkage is used, to assess the eff ects ontrade ows, terms of trade, income and outputof diff erent regions under various scenarios. eLinkage model is a multiregion, multisector,dynamic computable general equilibrium modelthat captures the geographic and sector structureof global trade ows (see van der Mensbrugghe2003). A baseline is established, in whicheconomic growth and other macroeconomicindicators are broadly assumed to be consistentwith the benchmark projections of the ADO 2004Update. Under the baseline scenario, the PRC isset to achieve a so landing, with its GDP growthrate slowing from 8.8% in 2004 to 8.0% in 2005.

is is expected to have only a slight impact onthe PRC’s trading partners.

ree alternative scenarios for 2005 are thenconsidered:

Figure 3.2 PRC Trade Balance, 1997–2003

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Source: CEIC Data Co. Ltd.

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104 Asian Development Outlook 2004 Update

• a cut in real investment growth in the PRCfrom 10.2% to 5.0% in 2005;²

• an identical investment cut in the PRC and anacceleration of growth in the US and Japan by 1 percentage point from the baseline; and

• an identical investment cut in the PRC andgrowth slowdowns in the US (to 2.0%) andJapan (to 1.0%) simultaneous slowdowns inall three countries.

Effects on Output and Tradee rst alternative scenario (investment growth

cut in the PRC) looks at the potential results of a further slowdown in the PRC economy. As aresult of the simulated reduction in investment,private consumption growth in the PRC would

decline by 0.5 percentage points to 6.6%, exportgrowth from 7.6% to 7.2%, import growth from8.9% to 7.0%, and the PRC’s GDP growth ratefrom 8.0% to 6.0%.

e simulation results suggest that such aslowdown would have a moderate impact onthe region in 2005. Hong Kong, China would

be most affected, with a loss of 0.95 percentagepoints of GDP (Table 3.3). e other three NIEswould also experience relatively large losses inoutput, with their GDP growth rates falling by 0.39–0.43 percentage points from the baselineposition. e adverse growth effects on ASEANcountries (excluding Singapore) would be generally smaller, from 0.15 to 0.32 percentage points. SouthAsia is the most insulated from a PRC slowdownits subregional GDP growth would be clipped by 0.09 percentage points in 2005.

Industrial economies would also be affectedunder this scenario, although the negativeeffect would be small. Japan appears to be moreexposed than the US or EU because of its strongerexport dependence on the PRC. rough trade

linkage and multiplier effects, such a slowdownin the PRC could lower world GDP growth by 0.24 percentage points in 2005.

Changes in net exports, or the trade balance,driven by the PRC slowdown are key factorsthat determine the above growth effects. esimulation results show that the investment cut

Table 3.3 Effects of the Investment-Induced PRC Slowdown on GDP and Trade, 2005(rst alternative scenario; % change relative to the baseline)

Economy or Region GDP Grow th(percentage

points)

Exports(%)

Imports(%)

Trade Balance(percentage

points of GDP)

($ billion)

PRC -2.00 -0.39 -1.71 0.58 10.24United States -0.11 -0.18 -0.14 -0.01 -1.49Japan -0.24 -0.40 -0.20 -0.04 -2.16European Union -0.12 -0.14 -0.11 -0.02 -2.55Rest of OECD -0.13 -0.15 -0.11 -0.02 -0.56NIEs -0.50 -0.57 -0.40 -0.11 -1.49

Korea -0.39 -0.55 -0.31 -0.10 -0.70Hong Kong, China -0.95 -1.01 -0.70 -0.18 -0.32Taipei,China -0.43 -0.49 -0.32 -0.10 -0.35Singapore -0.43 -0.38 -0.37 -0.11 -0.12

ASEAN (excluding Singapore) -0.24 -0.33 -0.25 -0.08 -0.65Indonesia -0.23 -0.32 -0.22 -0.07 -0.17Malaysia -0.32 -0.38 -0.30 -0.22 -0.26Philippines -0.28 -0.29 -0.26 -0.03 -0.02Thailand -0.25 -0.31 -0.23 -0.08 -0.14Others -0.15 -0.23 -0.21 -0.03 -0.04

South Asia -0.09 -0.16 -0.13 -0.02 -0.16Latin America -0.22 -0.23 -0.19 -0.02 -0.31Rest of the World -0.19 -0.22 -0.17 -0.03 -0.88The World -0.24 -0.24 -0.24 0.0 0.0

NIEs = newly industrialized economies, OECD = Organisation for Economic Co-operation and Development, PRC = People’s Republic of China.Source: Linkage model simulations.

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Economic Scenarios for Asia 105

and subsequent growth slowdown would reducethe PRC’s imports by 1.71% from the baseline,and increase its net exports by $10.24 billion, or0.58 percentage points of GDP. is would beaccompanied by a global trade adjustment. Asshown in Table 3.3, world trade would decline by 0.24% from the baseline. Economies with closertrade links to the PRC would suffer sharperdeclines in exports. Hong Kong, China’s totalexports would fall by 1.01% from the baseline in2005. Its imports would decline by 0.70% giventhat a larger proportion of its trade is entrepôttrade where imports are reexported. Korea andTaipei,China would be the second- and third-biggest losers in terms of exports, with declines of 0.55% and 0.49%, respectively. e PRC slowdown

would damp export growth in Japan, Malaysia,and Singapore by around 0.40%. Exports fromthe other economies generally would fall by 0.20–0.30% relative to the baseline.

e increased trade surplus of the PRC wouldcause a reduction in the trade balances of many industrial economies. In the US, Japan, and EUthe reductions in the trade balances would be$1.49 billion, $2.16 billion, and $2.55 billion,respectively. Trade balance reductions in devel-oping Asia’s economies would be proportionately larger because their economies are smaller. For

example, Hong Kong, China’s trade balance woulddecline by 0.18 percentage points of GDP. Also,given these economies’ o en heavy dependence on

external trade, the reduction in external demandcontributes signicantly to a decline in GDP indeveloping Asia.

e extent of the impact on economic growthalso depends on the magnitude of the Keynesiandemand multiplier in individual economies.

e Keynesian multiplier is the rate at whichchanges in exogenous demand are magnied intochanges in the overall level of income. Countrieswith higher propensities to consume tend tohave larger multipliers. is explains why thePhilippines would suffer a similar loss of GDPas Indonesia and ailand, even though thereduction in its trade balance as a ratio to GDPwould be smaller.

e output reduction in 2005 would vary

across sectors (Table 3.4). In the PRC, services,including construction, and capital goods sectorssuch as motor vehicles and ferrous metals wouldbe the major losers. Output in these industriesin the PRC would shrink by 2.21–3.32% relativeto the baseline. Clothing, electronics, and foodwould be the least affected, but they too wouldsuffer output contractions of 0.49–0.87% becauseof the general economic slowdown. In Japan,textile output would contract by 0.55% due toreduced exports to the PRC. e NIEs wouldlikely experience some production losses in their

chemicals, energy and mining, metals, services,and textile sectors. Declines in industrial outputin Southeast Asia would be relatively evenly

Table 3.4 Effects of Investment-Induced PRC Slowdown on Sector Output, 2005(rst alternative scenario; % change relative to baseline)

Sector PRC US Japan EU NIEs ASEAN(excludingSingapore)

SouthAsia

Rest of the World

Agriculture -1.05 -0.08 -0.09 -0.06 -0.23 -0.22 -0.08 -0.17Energy and mining -1.79 -0.10 -0.25 -0.12 -0.61 -0.27 -0.13 -0.22Foods -0.87 -0.05 -0.09 -0.07 -0.25 -0.21 -0.08 -0.17Textiles -1.03 -0.05 -0.55 -0.09 -0.66 -0.21 -0.13 -0.17Clothing -0.49 -0.05 -0.21 -0.09 -0.47 -0.19 -0.10 -0.17Chemical -1.55 -0.09 -0.29 -0.11 -0.62 -0.36 -0.10 -0.20Ferrous metals -2.21 -0.07 -0.32 -0.10 -0.54 -0.23 -0.07 -0.21Other metals -1.94 -0.07 -0.36 -0.08 -0.61 -0.35 -0.08 -0.25Motor vehicles -3.32 -0.04 -0.15 -0.09 -0.21 -0.19 -0.01 -0.11Electronics -0.49 -0.15 -0.30 -0.10 -0.44 -0.42 -0.08 -0.14Other manufacturing -2.05 -0.06 -0.24 -0.09 -0.47 -0.23 -0.07 -0.15Services -2.48 -0.12 -0.24 -0.13 -0.54 -0.20 -0.09 -0.17

EU = European Union, NIEs = newly industrialized economies, PRC = People’s Republic of China, US = United States.Source: Linkage model simulations.

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106 Asian Development Outlook 2004 Update

distributed across sectors, ranging from 0.19% inclothing to 0.42% in electronics.

Price Effectse increasing importance of the PRC in global

commodity markets has raised concerns that aslowdown in its economy might hit commodity prices and so erode the terms of trade for itstrading partners. To capture the price effectsof a PRC slowdown, a separate simulation isrun, based on different adjustment mechanismsfor factor markets and external accounts.³ issimulation also assumes the further cut in PRCinvestment, resulting in the GDP growth rateslowing from 8.0% to 6.0%. e simulationresults reported in Table 3.5 suggest that in the

face of falling global demand due to such a PRCslowdown, the other economies would depreciatetheir real effective exchange rates against the yuanby around 0.70–1.20% to maintain their tradebalances at the baseline level. As a result of theglobal price adjustment, the PRC would receive

a modest terms-of-trade gain of 0.88% and theterms of trade of its trading partners would dete-riorate slightly.⁴

What Happens if Japan and the US Speed Upor Slow Down?

As developing Asia’s economies generally havelarge exposures to swings in the business cyclesof industrial countries, the second and thirdalternative scenarios are used to examine theconsequences of the interaction between a PRCslowdown and changes in growth conditions inJapan and the US. e second alternative scenarioassumes an identical investment cut in the PRC,with growth acceleration in the US and Japan

of 1.0 percentage point from the baseline dueto increases in investment spending. e thirdalternative scenario simultaneous slowdownsin all three countries assumes an investment-induced PRC GDP growth slowdown, with growthslowdowns in the US (to 2.0%) and Japan (to1.0%) from the baseline. e major simulationresults are reported in Table 3.6.

In the case where growth accelerates in Japanand the US while growth slows in the PRC, thesimulation indicates that the adverse effects of the PRC slowdown on the GDP of most countries

would be more than offset by the stronger growthin Japan and the US. Global economic growthwould be raised by 0.43 percentage points. Only Hong Kong, China; Korea; and Taipei,Chinawould still suffer declines in their GDP growthrates. e Philippines, Latin America, and otherOECD countries would gain most in terms of GDP growth.

e differences between Table 3.6 andTable 3.3 show that most economies would benetfrom an additional 0.30–0.50 percentage pointgain in GDP growth from such pickups in Japanand the US. Singapore and the Philippines wouldbenet most their GDP growth rates wouldincrease by about 0.55 percentage points comparedwith the earlier scenario of just a PRC slowdown.But GDP gains in South Asia and the PRC fromthe accelerated growth in the US and Japan areless than 0.20 percentage points.

In the scenario of simultaneous slowdowns inthe PRC, US, and Japan, global economic growthwould be reduced by 1.0 percentage point from

Table 3.5 Price Effects of Investment-Induced PRCSlowdown, 2005(rst alternative scenario; % change relative tobaseline)

Economy or Region Terms of

Trade

REER

Relative toPRC

PRC 0.88 0.00United States -0.07 0.65Japan -0.14 0.77European Union -0.04 0.68Rest of OECD -0.05 0.69NIEs -0.19 0.89

Korea -0.12 0.85Hong Kong, China -0.59 1.16Taipei,China -0.07 0.78Singapore -0.10 1.02

ASEAN (excluding Singapore) -0.04 0.76Indonesia -0.06 0.80Malaysia -0.04 0.81Philippines -0.02 0.74Thailand -0.04 0.75Others -0.08 0.68

South Asia -0.06 0.69Latin America -0.04 0.72Rest of the World -0.05 0.71

PRC = People’s Republic of China, NIEs = newly industrializedeconomies, OECD = Organisation for Economic Co-operationand Development, REER = real effective exchange rate.Source : Linkage model simulations.

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Economic Scenarios for Asia 107

the baseline in 2005. e PRC’s growth rate wouldfall by an additional 0.20 percentage points, to5.80%, as a result of slower growth in the US andJapan. Hong Kong, China would still be the largestloser in terms of economic growth, with a loss of 1.39 percentage points of GDP. e other NIEs,as well as the Philippines and Malaysia, are moreexposed than other Asian economies. eir GDPgrowth would slow by around 0.7–1.0 percentagepoint. e rest of the OECD and Latin Americawould also experience relatively large outputlosses due to their strong dependence on the USeconomy. Again, the adverse effect on South Asiais smallest given its relatively weak linkages to therest of the world.

Conclusion and Policy Implications

e model-based analysis suggests that a furthercut in PRC xed investment and reduction inits GDP growth rate from 8.0% to 6.0% wouldhave a moderate impact on Asian economies,

reducing GDP by less than 0.45 percentage pointsin most Asian economies. Hong Kong, China isthe most vulnerable, while South Asia is the mostisolated from changes in the PRC. Furthermore,the simulations suggest that the adverse effects of such a PRC slowdown would be more than offsetfor most developing Asian economies if GDPgrowth rates in Japan and the US were to rise by 1.0 percentage point.

Two alternative estimates of the PRC’soutput multiplier effects using a macroeconomicmodel from Oxford Economic Forecasting(Huang and Hanna 2004) and a structuralvector autoregression (Abeysinghe and Lu 2003)generally lead to conclusions that are consistentwith the Linkage simulation analysis.

However, there are several important limita-tions in the Linkage simulation exercise. First,it captures the trade channel of internationalbusiness cycle linkage only. It does not includesome other transmission channels, such as privatecapital ows and contagion in regional nancial

Table 3.6 Effects of Investment-Induced PRC Slowdown plus Changes in US and Japanese Growth(% change relative to baseline)

PRC Slowdown but US and Japan

Accelerationa

Simultaneous PRC, US, and Japan

Slowdownb

Economy or Region GDP Growth(percentage points)

Trade Balance($ billion)

GDP Growth(percentage points)

Trade Balance($ billion)

PRC -1.81 11.99 -2.20 8.40United States 1.00 -10.04 -1.67 12.27Japan 1.00 -6.11 -0.87 -2.00European Union 0.09 1.98 -0.36 -7.45Rest of OECD 0.35 1.48 -0.75 -3.21NIEs -0.15 -0.33 -0.89 -2.76

Korea -0.12 -0.17 -0.69 -1.28Hong Kong, China -0.54 -0.17 -1.39 -0.49Taipei,China -0.04 -0.01 -0.86 -0.71Singapore 0.11 0.02 -1.01 -0.28

ASEAN (excluding Singapore) 0.12 0.25 -0.59 -1.54Indonesia 0.07 0.06 -0.49 -0.38

Malaysia 0.07 0.06 -0.74 -0.61Philippines 0.27 0.02 -0.87 -0.08Thailand 0.12 0.08 -0.62 -0.37Others 0.10 0.03 -0.40 -0.12

South Asia 0.05 0.09 -0.27 -0.45Latin America 0.19 0.26 -0.70 -0.99Rest of the World 0.08 0.43 -0.47 -2.27The World 0.43 0.00 -1.00 0.00

NIEs = newly industrialized economies, OECD = Organisation for Economic Co-operation and Development, PRC = People’s Republic of China. a Second alternative scenario. b Third alternative scenario.Source: Linkage model simulations.

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108 Asian Development Outlook 2004 Update

markets. Second, it lacks nancial variables andnominal prices changes. is limits its ability to incorporate macroeconomic adjustments andpolicies that are important to determine the trans-mission of macroeconomic uctuations. ird, themodel has only 12 sectors so it may underestimatethe impact of a collapse of the PRC’s investmentgrowth in some special commodity markets.

erefore, the results should be viewed as indica-tions rather than predictions.

Two major policy implications emerge fromthe simulation exercise. e export orientation of most developing Asian economies makes themvulnerable to the business cycles in the industrialcountries and to global current account imbal-ances. Although the rise of the PRC economy

and increasing intraregional trade have helpedbuffer the demand shocks from the industrialcountries, developing Asian economies remain

dependent on the levels of nal demand in theUS, Japan, and EU. Reducing the vulnerability toexternal events so as to achieve sustained pros-perity requires governments to put more emphasison domestic demand-led growth, and indeed,signs have emerged in recent years of strength-ening domestic consumption. A further structuralshi toward domestic demand requires improve-ments in income distribution and in domesticnancial markets to mobilize savings for domesticinvestment.

In the longer term, continued growth in thePRC economy and in the regional productionchain will make developing Asia’s economies moreexposed to economic events in the PRC and leadto greater synchronization of business cycles in

regional economies. is calls for Asian countries,including Japan, to strengthen coordination of macroeconomic policies.

ReferencesAbeysinghe, Tilak, and Ding Lu. 2003. “China as an

Economic Powerhouse: Implications on itsNeighbors.” China Economic Review, 14, 164-185.

Frankel, Jeffrey, and Andrew Rose. 1998. “ eEndogeneity of the Optimum Currency Area

Criteria.” e Economic Journal, 108, 1009-1025.Huang, Yiping and Don Hanna. 2004. “What if ereIs a Hard Landing in China.”Citigroup Economicand Market Analysis: Greater China Insights ,12 May.

International Monetary Fund. 2002. World EconomicOutlook, September, Washington, DC.

Robinson, Sherman. 1991. “Macroeconomics,Financial Variables, and Computable GeneralEquilibrium Models.”World Development, 19(11), 1509-1525.

Shin, Kwanho, and Yunjong Wang. 2003. “TradeIntegration and Business Cycle Synchronizationin East Asia.”Asia Economic Papers, 2(3), 1-20.

Taylor, Lance. 1990. “Structuralist CGE Models.” InL. Taylor, ed.,Socially Relevant Policy Analysis.Cambridge, MA: MIT Press.

van der Mensbrugghe, Dominique. 2003. LINKAGETechnical Reference Document: Version 5.3.Washington, DC: World Bank, March (http://www.worldbank.org/prospects/pubs/TechRef.pdf).

Endnotes1 “Developing Asia” in this section excludes Central Asia and

the Pacic.2 is policy simulation assumes that total investment is

exogenous and the unemployment rate is endogenous foradjusting income and savings. e real exchange rate is xedand foreign savings are endogenous. is specication corre-sponds to the Keynesian macro model adjustment mecha-

nism in the computable general equilibrium literature (e.g.,Taylor 1990, Robinson 1991) and makes the model behavelike a Keynesian trade multiplier model.

3 In factor markets, the supply of factors is assumed to be xedand factor prices are assumed to be endogenous to clear themarket. e trade balances are xed at the baseline level andchanges in relative domestic prices (i.e., the real exchangerate) bring about equilibrium in the foreign exchange market.Total investment in each region is endogenous and deter-mined by aggregate savings (domestic and foreign).

4 e results should be viewed as an extreme case becausethe model assumes that the adjustment would be made fully through exchange rate changes. e actual result would likely be a mix of exchange rate and trade balance adjustments.

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Economic Scenarios for Asia 109

Higher Global Oil Prices: Implications for Developing Asia in 2005

Introduction

The Asian Development Outlook 2004 releasedin May this year projected global oil prices

to stay within the $28–30 a barrel (/bbl)range in 2004, or higher than the historic average,and easing to $24–26/bbl in 2005. However, oilprices in 2004 have already breached these levelsand prices are likely to stay relatively high forsome time. Brent crude oil prices have risen toa record high, approaching the $45/bbl mark inAugust 2004, while West Texas Intermediate crudeoil prices have surged close to the $50/bbl mark.Oil prices at these levels could threaten the presentglobal economic recovery. Developing Asia’seconomies (also “the region” or “Asia”) are partic-

ularly vulnerable to an oil shock as most of themare highly dependent on oil imports, and are moreenergy intensive and less energy efficient than mostindustrial countries. In addition, Asia is growingmuch faster than other regions, and although itnow produces 11% of world crude oil supply itconsumes about 21% of it. As a result, Asia nowimports more than 44% of the oil it consumes,up from 7% during the 1970s and 1980s and 32%in the 1990s. Overall, the region’s oil dependency ratios leave much to be desired. Oil consumptionin Asia is equivalent to 4.5% of its GDP. is ismuch higher than in industrial countries, whichaveraged 1.6% of GDP in 2003.

Why are Global Oil Prices High?

e recent run-up in oil prices is the result of the interplay among demand, supply, and specu-lative factors, which can be analyzed under fourmain headings. First, over the past 2 years,global demand grew more than expected, due to

a strengthening economic recovery in the US,as well as fast-growing demand in developingAsia, especially the PRC. e global recovery ledto a rise in oil demand in 2003 of 1.48 million

barrels a day (mb/d), from 76.6 mb/d in 2002, andmore than double the average increase in annualdemand between 2000 and 2002. In 2003, the PRCand the US were responsible for demand increasesof 0.60 mb/d and 0.31 mb/d, respectively. atyear, the PRC’s net oil imports surged to anaverage of 2.6 mb/d, compared with 12.6 mb/din the US. In 2004, the PRC Government expectscrude oil imports to climb by about another 40%.

Another factor that contributed to strongerdemand is the low level of stocks in industrialcountries and their rebuilding in a period of

greater supply uncertainty. Also, some devel-oping countries, notably the PRC and India,have indicated that they intend to start buildingtheir own strategic reserves over the next 3 years.Some countries in Southeast Asia will likely do the same indeed, it seems that the processhas already started. All of these factors havecontributed to upward demand pressure.

Second, a long period of stable and low priceshas led oil producers to maintain current supply conditions, with low inventory levels and stag-nating production and rening capacity. Whileadditional supply from new oil elds is expectedto come on stream by end-2004, this extracapacity was meant to replace reduced supply from planned shutdowns of aging oil elds. Addi-tional supply amounting to 0.65 mb/d from twonew oil elds in Saudi Arabia, for instance, wasplanned before the recent surge in prices andwas intended to offset declines in eld output.World oil supply in the rst half of 2004 reached82.2 mb/d, 3.5 mb/d higher than during the same

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110 Asian Development Outlook 2004 Update

period in 2003. In July, production was 83.5 mb/d,up 0.6 mb/d from the previous month’s level.Most of this increase came from the 11 members

of the Organization of the Petroleum ExportingCountries (OPEC), including Iraq. OPECproduction reached 29.6 mb/d, which is just about0.7 mb/d below estimated total OPEC crude oilproduction capacity (Table 3.7). e increase inJuly followed OPEC’s decision to raise productionby 0.5 mb/d. OPEC committed to furtherincreases of 0.5 mb/d and 1.0 mb/d in August andNovember 2004, respectively. But beyond this,most OPEC oil producers (except probably forSaudi Arabia, Kuwait, and United Arab Emirates),have limited ability for further production growthas they are close to full capacity. By the fourthquarter of 2004, OPEC spare capacity is expectedto rise by 370,000 barrels a day as new capacity isbrought on stream and the scheduled shutdownof some oil elds is delayed in an eff ort to meetdemand and pull prices lower. Non-OPEC supply,at about 50 mb/d, accounts for 60% of total worldsupply. While there is some potential for highernon-OPEC production, it is limited over the shortterm. Possible increases in non-OPEC production

are projected mostly from the countries of theformer Soviet Union, with likely small outputgains from Latin America and Africa. Hence,present world oil surplus production capacity is at a low point, providing little cushion in theevent of unexpected oil market disruptions. Newexploration and re ning investments have only recently been initiated in response to higher oil“ oor” prices, i.e., the base prices considered by oil producers to be the minimum.

ird, the present risk premium on oil ishigh and persisting, as supply by some mainproducers is regarded as potentially unstable.Iraq has some spare production capacity, but itscurrent exports are small and volatile due to theuncertain political situation. Similarly, uncertainty

surrounding the future of Yukos Oil Corpo-ration in the Russian Federation, recent politicalturmoil in Venezuela, as well as the potentialfor a worsening of the political situation in theMiddle East have contributed to the high riskpremium. e threat of supply problems in theRussian Federation and Venezuela had receded by end-August, while exports from Iraq continued,though they remained very erratic.

Fourth, geopolitical uncertainties and tightmarket conditions have encouraged speculativefunds to enter the market and further push up

prices in the short term. Hedge funds have drivenup forward and futures prices, such that spot andforward prices now move very closely together(Figure 3.3).

Table 3.7 OPEC Production and Quota vs ProductionCapacity (million barrels a day)

July 2004

Production

August

2004Quota

Sustainable

ProductionCapacity a

Algeria 1.25 0.83 1.25Indonesia 0.96 1.35 1.00Iran 3.95 3.82 4.00Kuwait 2.38 2.09 2.35Libya 1.56 1.39 1.58Nigeria 2.40 2.14 2.50Qatar 0.80 0.67 0.80Saudi Arabia 9.32 8.45 9.50United Arab Emirates 2.42 2.27 2.55Venezuela 2.56 2.99 2.25OPEC (excluding Iraq) 27.60 26.00 27.78Iraq 1.96 b 2.50OPEC 29.56 26.00 30.28

a Capacity levels can be reached in 30 days and sustained for90 days.b Due to political instability, Iraq is not included in the OPECquota allocations.Sources: OPEC Market Indicators, July 2004, available: http://www.opec.org/NewsInfo/mi/pdf/MI072004.pdf; InternationalEnergy Agency Monthly Oil Market Report, August 2004,available: http://omrpublic.iea.org/omrarchive/11Aug04full.pdf.

Figure 3.3 Spot and 3-Month Forward Oil Prices,Brent Crude, October 2002–August 2004

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Source: Datastream, 15 September 2004.

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Economic Scenarios for Asia 111

Rising Oil Prices in the Current Global andRegional Economic Context

e impact of an oil shock generally dependson the size and duration of the shock, as wellas on an economy’s dependence on oil (and onenergy more generally). In analyzing the size of the shock, it is necessary to consider oil prices inreal terms and the extent of the price increases.With Brent averaging about $40/bbl in the thirdquarter, the oil price now is high. While it has notgone past the average real levels reached duringthe previous oil shocks (of 1973, 1979, and 1990),it is dangerously close to the level reached duringthe third oil shock of 1990 (Figure 3.4). On theother hand, the price of oil now is still well below

the peak seen in the fourth quarter of 1979, whenin real terms it breached the $100/bbl mark. Oilprices are therefore now about 40% of 1979’s all-time high in real terms. In nominal terms, oilprices have risen by more than 108% since thefourth quarter of 2001, slightly more than the rateof increase seen during the 1990 oil shock, whichwas brief and had a substantially slower rate of increase than the rst and second oil shocks.

Against this backdrop, the risk of higher oilprices arises mainly from a possible aggravation of existing imbalances in the global economy. Since

the 2001 economic slowdown, most industrialcountries, but notably the US, have pursued highly expansionary macroeconomic policies. As a result,world interest rates are close to historical lows and

many countries have high public sector de cits.Low interest rates have fueled housing andasset price rises, at the same time as supportingconsumption and leading to a sharp deterio-ration in the current account in the US. As worldGDP accelerated over the past year, in ationary pressure started to mount, albeit remaining very mild. However, higher oil prices, if sustainedover a long period of time, will feed in ationary pressures, possibly forcing interest rates to risefaster than expected. is could trigger a suddenreversal in consumption and savings behavior,leading to a substantial slowdown in worldeconomic growth and aff ecting, in particular,non-oil exports from Asian economies. ushigher oil prices, if sustained for long enough,

would slow economic activity in Asia.Expansionary macroeconomic policies, in

particular monetary policies, have provided muchsupport to consumption growth in most Asianeconomies over the past few years. Consequently,consumer credit expansion has been strong,leading to higher household indebtedness. Lowerreal incomes due to higher oil prices and higherinterest rates would signi cantly raise the debt-servicing burden of households, possibly leadingto a substantial rise in default rates in somecountries. At the same time, business investment

in some Asian economies, which is only startingto rm up a er the Asian nancial crisis of 1997–98, could also suff er a new setback. Fallingpro tability could lead rms to curtail businessinvestment and employment plans, aff ectinggrowth potential. Finally, higher world interestrates could also aff ect the emerging nancialmarkets of Asia, reducing their attractiveness toinvestors.

Developing Asia is vulnerable to high oilprices, but its current economic fundamentalssigni cantly mitigate the risks associated withhigh oil prices, for four main reasons. First,the region now has a high level of interna-tional reserves, which could provide a cushionagainst an anticipated short-term deteriorationin balance-of-payments positions (Figure 3.5).In 1979, Asia’s foreign exchange reserves rangedfrom less than 1% of GDP in the PRC to over61% in Singapore. Recent data suggest, however,that many regional economies now hold foreignexchange reserves equivalent to well over 25%

Figure 3.4 Nominal and Real Prices, Brent Crude,Q1 1970–Q3 2004

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Source: IMF, IFS Online, August 2004, available: http://ifs.apdi.net/imf/ifsbrowser.aspx?branch=ROOT.

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112 Asian Development Outlook 2004 Update

of their GDP indeed, for Singapore the gure

is more than 100% of GDP, and close to 75% forHong Kong, China and for Taipei,China. Formany economies, these reserves could help reducethe impact of an external shock resulting fromsustained high oil prices.

Second, in spite of strong growth in 2003and the rst half of 2004, in ation has stayedquiescent in many Asian economies (Figure 3.6).

is provides ample room for necessary policy support, if growth were to falter in a signi cantway. During the second oil shock of 1979, severalAsian economies experienced high in ation rates,with some economies, notably Indonesia, Korea,and Philippines, in double digits. In the currentperiod, in ation has moderated in many Asianeconomies.

ird, though still high, Asia’s dependenceon oil has fallen over time. e region’s oilconsumption as a share of GDP has dropped by about half in the last 20 years. When the secondoil shock hit Asia, it was more dependent onoil than it is today in terms of consumption. In

1979, the region spent $0.073 on oil per dollar of output; by 2003, it was spending only $0.045. eeconomies of Hong Kong, China; Korea; Philip-pines; Singapore; and Taipei,China all success-fully made signi cant improvements in thisregard in the last two decades, reducing their oildependency ratios by at least half. PRC, Malaysia,and ailand also achieved some improvement,though more gradually than the rst group.Despite such progress though, energy effi ciency can still be further improved.

Fourth, the increasing importance of intra-regional trade has to some extent reduced theregion’s susceptibility to slowdowns in the global,particularly the US, economy. While the currentshare of Asian exports to the US has remained at

the same rate as in 1980, intraregional Asian tradehas risen substantially (Figure 3.7). Intraregionaltrade in Asia in 2003 was almost 75% higher thanin 1980. In addition, while intraregional tradeaccounted for just a quarter of total Asian exportsin 1980, it was close to 45% in 2003.

us, despite much concern, the current oil

Figure 3.5 Foreign Exchange Reserves,1979 and 2004

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Sources: IMF, IFS Online, August 2004, available: http://ifs.apdi.net/imf/ifsbrowser.aspx?branch=ROOT; World Economic Outlook , April 2004.

Figure 3.6 In ation Rates, 1979 and 2004

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Sources: IMF, IFS Online, August 2004, available: http://ifs.apdi.net/imf/ifsbrowser.aspx?branch=ROOT; Institute of International Finance database, available: http://www.iif.com.

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Economic Scenarios for Asia 113

price rally is unlikely to impact on developing Asiaas severely as earlier shocks, and the region is ina better position to weather the recent run-up incrude oil prices than it was during those shocks.However, in spite of its strengths, the region wouldstill be hurt by a sustained high oil price.

Oil Price Scenarios and their Impact onAsian Economies

To assess the potential impact of higher oil pricescenarios, a set of simulations was made with

the Oxford Economic Forecasting World Macro-economic Model. Two oil price scenarios arepresented to shed light on the impact and policy implications of oil price rises on developingAsia’s economies. No policy responses such astightening macroeconomic policies or changes inexchange rate policies have been assumed. Only oil price shocks were introduced in the model.

As mentioned earlier, an oil price rise may aff ect Asia’s macroeconomic performance throughvarious channels. First, higher oil prices transferincome from oil-importing to oil-exportingcountries through a shi in the terms of trade. Inthis process, net oil-importing countries suff er aloss of real national income. Second, a rise in oilprices reduces industry output through highercosts of production. is supply-side impact exertsin ationary pressure on the economy. ird, theimpact of an oil price rise can be ampli ed by asecondary price eff ect. Although higher oil pricesdirectly raise consumer prices via higher prices of imported goods and petroleum products, higher

input costs on the supply side also translate intoin ation. e higher price levels, together withlower real incomes, further depress domesticdemand, leading to rising unemployment.Moreover, consumers who sustain a loss in realincome may consider seeking wage increases,which further feeds into higher production costs,which are then passed on to consumers. In the rst two oil shocks, this upward spira l of in ationand wages proved devastating in the absence of appropriate policy responses.

Two alternative price scenarios for Brentcrude are examined: Scenario 1 an increase inprices of $10/bbl; and Scenario 2 an increase inprices of $20/bbl. In both scenarios, temporary and sustained increases are considered. In the

temporary increase analysis, high oil prices areassumed beginning in the second quarter of 2004,and remain only until the rst quarter of 2005;for the sustained increase analysis, oil prices areassumed to remain high for the whole of 2005.

As the impact on Asian economies issomewhat muted in 2004, the focus of Tables 3.8and 3.9 is on the impact of the rise in oil prices in2005. Obviously, the impact on growth is propor-tionately larger in Scenario 2. In the temporary increase analysis, trade balances are barely aff ected as oil exporters expand imports of non-oil

products from Asia and the impact of higherprices dissipates in 2005. In ation picks up signi -cantly in Scenario 2. is has a stronger impacton domestic demand and economic growth.Essentially, the secondary impact eff ects are muchmore pronounced than in Scenario 1. Sustainedhigh oil prices signi cantly aff ect growth inindustrial countries, damping export growth fromAsian countries. is would amplify the directin ationary and balance-of-payment eff ects of thehigh oil prices on Asian economies. e situationin the third quarter of 2004 makes the scenarioof a sustained price rise of about $10/bbl quitepossible. A crucial point is that a $10/bbl price risesustained over 7 quarters is much more damagingto Asian trade balances than a $20/bbl oil priceincrease lasting 4 quarters. us, the durationof the shock is more an issue for Asian tradebalances than the extent of the price increase.

e worst-hit Asian economies are Philippines,Singapore, and ailand. e impact diff erssubstantially across the countries in the table,

Figure 3.7 Asian Exports, 1980–2003

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Source: IMF, Direction of Trade Statistics , July 2004.

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114 Asian Development Outlook 2004 Update

and can be direct or indirect. e direct effectof higher oil prices on the domestic economy depends on oil import dependency, efficiency inuse, and the structure of GDP in each economy.For instance, although oil consumption to GDPas a ratio in both the PRC and India is about 2.5times higher than the Organisation for EconomicCo-operation and Development average, India’soil imports account for about 25% of its total

import bill but less than 5% in the PRC. us, thedirect effect on India is larger than in the PRC.e indirect effect of an oil price shock is seen

in the impact on exports to the rest of the worldand, again, depends on the composition of exportsand export demand elasticities. In this instance,the PRC would be more affected than India.All of these factors explain the different ordersof magnitude of the impact of oil price rises inTables 3.8 and 3.9.

Policy Responses

Policy responses to higher oil prices obviously will not be identical across countries. e typeand depth of the responses will have to depend onthe initial conditions prevailing in the economy.Responses also have to be tailored to the durationand extent of the oil price increase, and thescenarios above are revealing in this respect.

Ination will obviously be the rst economic

indicator affected by higher oil prices. If the highoil prices transmit rapidly to domestic pricesand wages, stabilizing policy responses will beneeded, possibly through some tightening of monetary policy. Also, as mentioned earlier, many Asian economies are running current accountsurpluses and have accumulated substantialforeign exchange reserves. is would permit

some of them to adopt a more exible exchangerate policy, allowing the currency to appreciatemoderately, and help cushion the impact of higheroil prices.

Other selective measures to bring downoil consumption in the short run will also berequired. e dilemma facing governments willtherefore be to attempt to avoid an excessivenegative impact on growth. Again, this willdepend on particular circumstances and thestrength and structure of each economy. Anotherindicator to monitor would be the governmentbudgetary situation. Slower growth will reducerevenues. In addition, in countries where fuelsubsidies are high, the budgetary impact of higheroil prices could be sizable, requiring some policy adjustments in the short term.

e above possible policy responses woulddenitely help in the short run, but a higher oilprice environment calls for an in-depth reviewof some policies. An implication of the current

Table 3.8 The Impact of a Temporary Oil Price Increase: Scenario 1 vs Scenario 2, 2005

Scenario 1 ($10/bbl increase) Scenar io 2 ($20/bbl increase)GDP (percentage

points)Trade Balance

(% of GDP)Consumer Prices GDP (percentage

points)Trade Balance

(% of GDP)Consumer

PricesAsia excluding Japan -0.6 0.1 0.5 -1.2 0.1 1.1

Asia including Japan -0.5 0.0 0.5 -0.9 0.0 1.0PRC -0.6 0.2 0.3 -1.2 0.3 0.6Hong Kong, China -0.5 -0.5 0.2 -0.9 -0.9 0.3India -0.6 -0.1 0.9 -1.1 -0.1 1.8Indonesia 0.0 0.1 0.6 0.0 0.1 1.2Japan -0.4 -0.1 0.3 -0.7 -0.1 0.5Korea -0.5 0.0 0.4 -0.8 -0.2 0.8Malaysia -0.7 0.8 0.7 -1.8 1.7 1.4Philippines -1.5 -0.4 0.7 -3.0 0.1 1.4Singapore -1.2 -0.2 0.6 -2.4 -0.3 1.2Taipei,China -0.3 0.0 0.2 -0.5 0.0 0.3Thailand -1.7 -0.1 0.8 -3.3 -0.2 1.5

PRC = People’s Republic of China.Source: Staff estimates based on Oxford Economic Forecasting World Macroeconomic Model.

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Economic Scenarios for Asia 115

experience is that the oor price of oil is likely to rise from $22–28/bbl to $31–36/bbl. Medium-to long-term structural adjustments need to bemade in the face of this. For example, developingAsia’s economies have much scope for improvingenergy efficiency use, and governments need tofocus on this. Among other things, they shouldconsider phasing out fuel subsidies and adopting

measures to encourage the efficient use of oil anddiscourage wasteful consumption as well as otherschemes including tax incentives to developand use alternative renewable energy resources.

In many of these policy areas, it would seemthat developing Asia is in a position to make rapidprogress over the next few years.

Bibliography British Petroleum. 2004.Statistical Review of

World Energy. Available: http://www.bp.com/statisticalreview2004.

Institute of International Finance. 2004. Chinadatabase. Available: http://www.iif.com/verify/data/country_docs/924db_0704.xls.

International Energy Agency. 2004.Oil Market

Report , 11 August. Available: http://www.oilmarketreport.org.International Monetary Fund. 2004. International

Financial Statistics Online, August.Available: http://ifs.apdi.net/imf/ifsbrowser.aspx?branch=ROOT.

. 2004. World Economic Outlook database,April. Available: http://www.imf.org/external/pubs/ /weo/2004/01/data/index.htm.

. 2004. Direction of Trade Statistics CD-ROM,July.

Organization of the Petroleum Exporting Countries.2004. OPEC Market Indicators, July 2004.Available:http://www.opec.org/NewsInfo/mi/pdf/MI072004.pdf .

Park, C.-Y. 2004.Higher Oil Prices: Asian Perspectiveand Implications for 2004–2005. ERD Policy Brief No. 28. Manila: Asian Development Bank.

Table 3.9 The Impact of a Sustained Oil Price Increase: Scenario 1 vs Scenario 2, 2005

Scenario 1 ($10/bbl increase) Scenar io 2 ($20/bbl increase)GDP (percentage

points)Trade Balance

(% of GDP)Consumer Prices GDP (percentage

points)Trade Balance

(% of GDP)Consumer

PricesAsia excluding Japan -0.8 -0.4 1.1 -1.5 -0.8 2.0

Asia including Japan -0.6 -0.3 1.0 -1.2 -0.7 1.9PRC -0.8 -0.1 0.5 -1.5 -0.3 0.9Hong Kong, China -0.6 -0.8 0.3 -1.1 -1.6 0.5India -0.8 -0.7 1.7 -1.5 -1.4 3.3Indonesia 0.1 0.9 1.3 0.1 1.9 2.1Japan -0.5 -0.3 0.7 -1.0 -0.6 1.3Korea -0.6 -0.8 0.8 -1.2 -1.7 1.4Malaysia -0.9 0.3 1.4 -2.4 1.1 2.7Philippines -1.9 -0.9 1.4 -3.6 -1.9 2.8Singapore -1.7 -1.3 1.3 -3.4 -2.5 2.5Taipei,China -0.4 -0.6 0.3 -0.7 -1.2 0.6Thailand -2.2 -1.2 1.5 -4.1 -2.5 2.9

PRC = People’s Republic of China.Source: Staff estimates based on Oxford Economic Forecasting World Macroeconomic Model.

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Statistical Appendix

Felix Pineda

Outlook2004

ASIAN DEVELOPMENT

UpdateUpdate

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118 Asian Development Outlook 2004 Update

there are missing country data for a given year,the sum of the prior year used for computing thegrowth rate excludes the corresponding country data.

e GNI data, in current US$, for DMCsfrom 2001 to 2002 were obtained from the WorldBank Group WDI Data Query (http://devdata.worldbank.org/data-query/). e same weightsused in ADO 2004 are applied in the computationof regional and subregional averages. Data for2002, as the most recent data available, are usedas weights for 2003, 2004, and 2005. e GNIdata, in current US$, for three of the DMCs areunavailable, namely Cook Islands; Taipei,China;and Tuvalu. For these economies, weights wereestimated using GDP at current prices.

e following paragraphs look at the tables ingreater detail.

Table A1: Growth Rate of GDP (% per year).is shows annual growth rates of GDP valued

at constant market prices, factor costs, or basicprices. GDP at market prices is the aggregationof the value added of all resident producers atproducers’ prices including taxes less subsidieson imports plus all nondeductible value-addedor similar taxes. Factor cost measures differ frommarket price measures in that they exclude taxeson production and include subsidies. Basic price

valuation is the factor cost plus some taxes onproduction, such as property and payroll taxes,and less some subsidies, such as labor-relatedsubsidies but not product-related subsidies. MostDMCs use constant market price valuation. SouthAsian countries predominantly use constant factorcosts, including Bhutan, India, Nepal, Pakistan,and Sri Lanka, while Maldives’ GDP valuationis at basic prices. Among the Pacic countries,Fiji Islands, Solomon Islands, and Tuvalu employ constant factor cost valuation. For Hong Kong,China, the computations of real GDP and sectorgrowth rates are based on volume indexes, whileGDP sector growth rates for Solomon Islands arebased on GDP production indexes.

Table A2: Ination (% per year). Except forIndia, which reports the wholesale price index;Kiribati and Solomon Islands, which use theretail price index; and the Federated States of Micronesia (FSM), which uses the implicit GDPdeator, annual ination rates presented are basedon consumer price indexes. For most DMCs, the

reported ination rates represent period averagesexcept for Bhutan, Cook Islands, Timor-Leste,and Viet Nam, which use end-of-period data.

e data for Singapore are on a calendar yearbasis, yet the base year used for the computationof ination rates is November 1997–October1998. For Sri Lanka, ination is calculated usingthe new Sri Lanka consumer price index, whichmeasures all-island price movements and usesan updated basket of goods with 1995–1997 asthe base period. e consumer price indexes of the following countries are for a given city orgroup of consumers only: Cambodia is for PhnomPenh, Kiribati is for Tarawa, Palau is for KororState, Republic of Marshall Islands is for Majuro,Solomon Islands is for Honiara, and Nepal is for

urban consumers.Tables A3 and A4: Growth Rates of

Merchandise Exports and Imports (% per year).e annual growth rates of exports and imports,

in terms of merchandise goods only, are shown inthese tables. Data are in million US$, primarily obtained from the balance of payments accountof each DMC. Exports in general are reportedon a free-on-board (f.o.b.) basis, when they arevalued at the customs frontier of the exportingcountry plus export duties and the costs of loading the goods onto the carrier unless the

latter is borne by the carrier. It excludes the costof freight and insurance beyond the customsfrontier. For Cambodia, exports refer to domesticexports. Import data are reported either on anf.o.b. or c.i.f. (cost, insurance, freight) basis. Ona c.i.f. basis, the value of imports includes thecost of international freight and insurance up tothe customs frontier of the importing country. Itexcludes the cost of unloading the goods from thecarrier unless it is borne by the carrier.

For East Asia, imports are valued on an f.o.b.basis except for Mongolia, which records them ona c.i.f. basis. Imports are valued on an f.o.b. basisfor Indonesia, Malaysia, and Viet Nam while forthe rest of the Southeast Asian countries, importsare valued on a c.i.f. basis. Bhutan and Indiarecord imports on a c.i.f. basis while Bangladesh,Maldives, Nepal, Pakistan, and Sri Lanka valuethem on an f.o.b. basis. For most of the CentralAsian republics, all imports are costed on an f.o.b.basis. For the Pacic, Micronesia, Kiribati, Palau,Tonga, and Vanuatu report imports on an f.o.b.

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Statistical Appendix 119

basis while imports of Cook Islands, Fiji Islands,Papua New Guinea, Samoa, Solomon Islands, andTimor-Leste are recorded on a c.i.f. basis.

Table A5: Balance of Payments on CurrentAccount (% of GDP). e current accountbalance is the sum of the balance of trade formerchandise, net trade in services and factorincome, and net transfers. In the case of Bhutan,GDP for the previous calendar year is used as thedenominator. In this table, the reported currentaccount levels are divided by GDP valued atcurrent US$ prices.

Table A6: Fiscal Balance of the CentralGovernment (% of GDP). Fiscal balance is thedifference between central government revenuesand expenditures presented in nominal local

currency. e difference is also computed as ashare of GDP. Data variations may arise due tostatistical discrepancies, e.g., balancing items forboth central and local governments, and differ-ences in the concept used in the individualcomputations of revenues and expendituresas compared with the calculation of the scalbalance. For ailand, the scal balance is a cashbalance composed of the budgetary balance andnonbudgetary balance. Some off-budget accountsare included in the computation of the scalbalance for Turkmenistan.

Central government revenues comprise allnonrepayable receipts, both current and capital,plus grants. ese amounts are computed as ashare of GDP at current prices. For the Republicof Korea (Korea), revenues incorporate therepayment on government-guaranteed debts. erevenue data series for Taipei,China was revisedin view of the inclusion of the items “Retentionof Previous Fiscal Years” and “Special Budget”in the revenue items. For Singapore, revenuesrefer to receipts credited to Consolidated Revenue

Account, Development Fund Account, andSinking Fund Account, including investmentincome, capital receipts, and investment adjust-ments. In some countries, other revenue itemsare included or excluded in the reported revenuegures: social security contributions are excludedfor Korea; grants are excluded for Cambodia, LaoPDR, Malaysia, Singapore, ailand, and VietNam; capital receipts are excluded but revenuesfrom disinvestment are included for India; currentrevenues only are included for Bangladesh andPakistan; grants and privatization proceeds areexcluded for Sri Lanka; the Oil Fund is includedfor Azerbaijan; sales from assets are excluded forthe Fiji Islands; Revenue Equalization ReserveFund income is excluded for Kiribati; and

Consolidated Investment Fund drawdowns areincluded for Tuvalu. For Kazakhstan, privatizationproceeds are treated as nancing items ratherthan revenues in 2002.

Central government expenditures compriseall nonrepayable payments to both current andcapital expenses, plus net lending. ese amountsare computed as a share of GDP at current prices.

e expenditure data series for Taipei,Chinawas revised in view of the inclusion of the items“Retention of Previous Fiscal Years” and “SpecialBudget” in the expenditure items. For Singapore,

expenditures refer to outlays made from theConsolidated Revenue Account, DevelopmentFund Account, and Sinking Fund Accountplus lending minus repayments. For ailand,expenditures refer to budgetary expendituresexcluding externally nanced expenditures andcorresponding borrowing. For Bangladesh, expen-ditures include a residual. One-time expendi-tures are excluded but a statistical discrepancy isincluded for Pakistan. For Tuvalu, Tuvalu TrustFund transfers are excluded.

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120 Asian Development Outlook 2004 Update

Table A1 Growth Rate of GDP (% per year)

Item 2001 2002 2003 2004 2005ADO 2004 Update ADO 2004 Update

East Asia 4.6 6.7 6.5 6.9 7.3 6.8 6.4China, People’s Rep. of 7.3 8.0 9.1 8.3 8.8 8.2 8.0Hong Kong, China 0.5 1.9 3.2 6.0 7.5 5.0 6.0Korea, Rep. of 3.8 7.0 3.1 4.8 4.4 5.2 3.6Mongolia 1.1 4.0 5.5 5.8 6.0 6.0 6.0Taipei,China -2.2 3.6 3.3 5.4 6.0 4.7 4.8

Southeast Asia 1.9 4.4 4.8 5.7 6.2 5.4 5.7Cambodia 5.7 5.5 5.2 5.4 4.5 5.4 2.3Indonesia 3.8 4.3 4.5 4.5 4.8 4.5 5.2Lao People’s Dem. Rep. 5.8 5.9 5.8 6.0 6.5 6.2 7.0Malaysia 0.3 4.4 5.3 5.8 6.8 5.6 6.0Myanmar 11.3 10.0 10.6 - - - -Philippines 1.8 4.3 4.7 5.0 5.5 5.0 5.5

Singapore -1.9 2.2 1.1 5.6 8.1 4.8 4.2Thailand 2.1 5.4 6.8 7.2 6.4 6.2 6.6Viet Nam 5.8 6.4 7.1 7.5 7.5 7.6 7.6

South Asia 5.1 3.9 7.6 7.0 6.4 7.2 5.9Afghanistan - 29.0 23.0 - - - -Bangladesh 5.3 4.4 5.3 5.7 5.5 6.0 4.8Bhutan 7.1 6.7 6.5 7.0 7.0 8.0 8.0India 5.8 4.0 8.2 7.4 6.5 7.6 6.0Maldives 3.5 6.5 8.5 5.5 5.4 5.0 5.0Nepal 4.6 -0.4 2.7 4.0 3.6 5.0 3.7Pakistan 1.8 3.1 5.1 5.5 6.4 5.8 6.5Sri Lanka -1.5 4.0 5.9 5.0 5.0 5.5 5.5

Central Asia 10.8 8.1 8.4 8.1 7.9 8.4 8.0Azerbaijan 9.9 10.6 11.2 9.0 10.0 12.5 12.5Kazakhstan 13.5 9.8 9.2 9.5 9.5 9.5 9.0Kyrgyz Republic 5.3 0.0 6.7 4.1 4.5 4.5 4.6Tajikistan 10.2 9.1 10.2 8.0 8.5 5.0 7.5Turkmenistan 20.5 8.6 10.0 10.0 10.0 10.0 10.0Uzbekistan 4.2 4.0 4.4 4.5 3.0 4.0 3.0

The Pacific 1.0 1.2 4.3 2.9 2.9 2.4 2.4Cook Islands 4.9 3.9 3.1 2.7 2.7 2.9 2.9Fiji Islands 3.0 4.1 10.1 3.9 4.1 3.0 3.2Kiribati 1.8 0.9 3.3 1.8 1.8 1.5 1.5Marshall Islands, Rep. of -1.5 4.0 3.0 2.0 2.0 3.0 3.0Micronesia, Fed. States of 0.5 0.9 0.1 -1.5 -1.5 2.2 2.2Nauru - - - - - - -Palau 3.8 -4.7 -0.1 - - - -

Papua New Guinea -2.3 -0.8 2.0 2.8 2.8 1.7 1.7Samoa 7.1 1.5 3.5 4.0 4.0 3.5 3.5Solomon Islands 0.0 6.6 11.8 4.5 4.2 4.5 4.4Timor-Leste, Dem. Rep. of 15.0 2.0 -2.0 1.0 1.0 3.0 2.0Tonga 1.8 2.1 2.9 2.6 1.6 2.8 2.8Tuvalu 5.9 1.3 7.0 3.0 3.0 - -Vanuatu -2.1 -2.8 1.6 2.1 2.1 2.6 2.6

Average 4.3 5.8 6.5 6.8 7.0 6.7 6.2

- = data not available.

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Statistical Appendix 121

Table A2 Inflation (% per year)

Item 2001 2002 2003 2004 2005ADO 2004 Update ADO 2004 Update

East Asia 1.2 -0.1 1.2 2.6 3.0 2.4 3.8China, People’s Rep. of 0.7 -0.8 1.2 3.0 3.4 2.7 4.9Hong Kong, China -1.6 -3.0 -2.5 1.1 0.7 1.1 1.1Korea, Rep. of 4.1 2.7 3.6 3.1 3.8 2.8 3.0Mongolia 8.0 1.6 4.7 4.5 4.5 4.0 4.7Taipei,China 0.0 -0.2 -0.3 0.8 1.5 1.2 2.0

Southeast Asia 4.6 4.2 3.1 3.6 4.2 3.8 4.2Cambodia 0.3 3.3 1.1 2.9 2.3 3.3 3.0Indonesia 11.5 11.9 6.6 6.5 6.5 6.5 7.0Lao People’s Dem. Rep. 7.8 10.7 15.5 12.0 12.4 10.0 10.0Malaysia 1.4 1.8 1.1 1.5 1.5 1.7 2.2Myanmar 21.2 57.0 - - - - -Philippines 6.1 3.1 3.1 4.5 5.2 4.5 5.5

Singapore 1.0 -0.4 0.5 1.2 1.8 1.7 1.6Thailand 1.6 0.7 1.8 2.4 2.8 2.6 2.6Viet Nam -0.4 3.8 4.0 4.5 9.0 4.5 6.0

South Asia 3.7 3.5 5.1 4.9 5.5 4.6 6.5Afghanistan - 52.3 10.5 - - - -Bangladesh 1.9 2.8 4.4 4.7 5.8 4.2 6.0Bhutan 3.6 2.7 1.8 - 1.2 - -India 3.6 3.4 5.5 5.0 5.7 4.7 6.8Maldives 0.7 0.9 -2.9 0.3 0.3 2.3 2.3Nepal 2.4 2.9 4.8 4.5 4.0 5.0 5.5Pakistan 4.4 3.5 3.1 4.0 4.6 4.0 5.5Sri Lanka 12.1 10.2 2.6 - 4.0 - 4.0

Central Asia 14.3 9.7 5.4 8.6 6.9 8.3 6.4

Azerbaijan 1.5 2.8 2.2 4.0 5.0 3.0 3.0Kazakhstan 8.4 5.9 6.6 5.4 6.5 5.0 6.0Kyrgyz Republic 6.9 2.0 3.0 3.8 4.9 3.8 4.6Tajikistan 38.6 12.2 16.4 8.5 7.3 5.0 5.6Turkmenistan 11.6 8.8 5.5 5.0 5.0 5.0 5.0Uzbekistan 27.4 21.6 3.8 20.0 10.0 20.0 10.0

The Pacific 6.2 7.0 8.5 5.6 5.1 6.0 4.4Cook Islands 9.5 3.9 2.4 1.9 1.9 2.4 2.4Fiji Islands 4.3 0.8 4.1 3.0 3.0 3.0 3.0Kiribati 6.0 3.2 1.8 - - - -Marshall Islands, Rep. of -1.8 0.4 1.2 2.5 1.5 2.5 1.5Micronesia, Fed. States of 1.3 -0.2 -0.2 0.5 0.5 1.2 1.2Nauru - - - - - - -Palau -0.6 0.1 1.3 - - - -

Papua New Guinea 9.3 11.8 14.7 8.7 7.4 9.6 6.0Samoa 3.8 8.1 0.1 3.0 3.0 3.0 3.0Solomon Islands 7.7 9.4 10.0 6.0 5.6 6.5 2.5Timor-Leste, Dem. Rep. of 0.0 9.5 4.2 3.0 3.0 3.0 3.0Tonga 8.4 10.3 11.7 4.5 11.0 4.5 11.0Tuvalu 1.5 5.0 2.9 2.5 2.5 - -Vanuatu 3.7 2.0 3.0 2.6 2.6 2.5 2.5

Average 2.4 1.4 2.3 3.3 3.7 3.1 4.4

- = data not available.

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122 Asian Development Outlook 2004 Update

Table A3 Growth Rate of Merchandise Exports (% per year)

Item 2001 2002 2003 2004 2005ADO 2004 Update ADO 2004 Update

East Asia -5.8 12.1 22.6 13.4 20.0 13.2 12.6China, People’s Rep. of 6.8 22.4 34.6 15.0 22.0 15.0 16.0Hong Kong, China -5.8 4.9 12.5 6.8 7.0 7.3 7.0Korea, Rep. of -14.0 7.9 20.9 21.0 33.0 19.0 13.0Mongolia -2.3 0.2 11.1 15.0 15.0 14.0 14.0Taipei,China -17.3 6.4 10.5 8.0 16.2 7.4 9.2

Southeast Asia -10.5 4.7 12.7 10.2 13.9 8.3 7.8Cambodia 12.1 11.4 16.9 17.0 20.3 12.0 -7.6Indonesia -12.3 3.1 6.9 3.5 3.5 3.5 3.5Lao People’s Dem. Rep. -3.3 -5.9 19.5 20.4 22.5 4.5 4.5Malaysia -10.6 6.1 12.4 8.6 14.6 7.5 9.4Myanmar 56.4 -5.2 - - - - -Philippines -16.2 10.0 1.4 8.0 10.0 8 .0 10.0

Singapore -10.5 2.7 15.0 12.2 15.0 7.5 7.5Thailand -7.1 4.8 18.6 14.0 20.0 13.7 8.0Viet Nam 6.5 7.4 16.5 12.0 16.3 12.0 12.0

South Asia 1.2 10.7 18.0 14.9 19.1 15.6 15.8Afghanistan - - - - - - -Bangladesh 12.6 -7.6 9.5 13.5 15.9 11.0 7.0Bhutan -12.9 4.1 8.9 - - - -India 0.0 16.9 19.9 16.1 20.9 17.6 17.9Maldives 1.4 20.1 14.9 7.3 7.3 - -Nepal 11.7 -20.3 -13.8 10.0 13.1 12.0 10.0Pakistan 9.1 2.7 19.6 12.0 13.5 10.0 12.0Sri Lanka -12.8 -2.4 9.2 10.0 10.0 9.0 9.0

Central Asia -2.4 8.6 27.8 6.1 17.9 9.4 12.3Azerbaijan 11.9 10.9 13.9 -0.8 12.0 29.3 20.0Kazakhstan -3.9 12.3 32.0 6.0 25.0 6 .0 11.4Kyrgyz Republic -6.0 3 .7 18.5 2.3 7.5 6.3 5.8Tajikistan -17.3 7.3 14.2 10.8 8.8 6.4 8.5Turkmenistan 4.6 9.0 30.3 12.9 12.9 - -Uzbekistan -9.9 -5.1 26.9 3.6 3.6 - -

The Pacific -15.4 -5.5 22.7 -0.2 2.7 -0.7 -0.9Cook Islands -25.7 -25.3 67.3 - - - -Fiji Islands -8.8 0.7 -17.6 12.7 10.6 14.5 12.0Kiribati 25.0 15.6 11.5 8.6 8.6 3.2 3.2Marshall Islands, Rep. of - - - - - - -Micronesia, Fed. States of 2.1 17.9 2.4 4.2 4.2 5.7 5.7Nauru - - - - - - -Palau 62.6 8.6 -41.4 - 3.4 - -

Papua New Guinea -14.2 -8.9 35.6 -4.0 0.8 -5.5 -3.9Samoa 13.1 -3.9 4.0 10.0 10.0 - -Solomon Islands -27.9 24.1 27.4 22.6 11.9 17.9 6.1Timor-Leste, Dem. Rep. of -20.0 50.0 16.7 14.3 14.3 25.0 25.0Tonga 7.0 61.0 2.1 - - - -Tuvalu - - - - - - -Vanuatu -26.7 1.2 48.3 5.0 5.0 - -

Average -6.9 9.5 19.4 12.4 18.1 11.4 10.9

- = data not available.

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Statistical Appendix 123

Table A4 Growth Rate of Merchandise Imports (% per year)

Item 2001 2002 2003 2004 2005ADO 2004 Update ADO 2004 Update

East Asia -6.6 10.4 23.9 15.7 22.7 13.8 15.0China, People’s Rep. of 8.1 21.3 39.8 19.0 30.0 16.5 20.0Hong Kong, China -5.5 3.1 12.5 9.0 8.7 6.4 6.4Korea, Rep. of -13.4 7.7 18.1 22.0 27.0 20.5 16.0Mongolia 2.5 8.6 7.1 12.0 12.0 12.0 12.0Taipei,China -23.7 3.4 12.2 8.7 19.6 7.6 10.5

Southeast Asia -9.5 4.2 10.7 12.2 16.8 9.7 8.9Cambodia 8.0 10.5 12.2 16.0 18.5 14.5 2.9Indonesia -14.1 2.8 10.9 4.0 4.0 4.0 4.0Lao People’s Dem. Rep. -4.7 -12.4 7.9 11.7 16.2 1.8 1.8Malaysia -10.3 8.1 5.4 13.5 17.5 10.0 10.6Myanmar 14.9 -18.3 - - - - -Philippines -4.5 6.2 6.3 10.0 7.0 10.0 7.0

Singapore -13.7 -0.5 9.4 10.8 17.5 8.8 10.0Thailand -3.0 4.6 17.1 17.8 27.0 13.1 8.0Viet Nam 6.0 19.5 27.0 14.0 15.0 11.0 11.0

South Asia 0.2 7.3 19.7 17.8 18.8 17.8 18.5Afghanistan - - - - - - -Bangladesh 11.4 -8.7 13.1 17.5 12.6 15.0 14.0Bhutan 6.1 -5.0 1.2 - - - -India -2.8 13.5 21.8 18.7 19.9 19.5 19.3Maldives 1.3 -0.5 20.2 6.9 6.9 - -Nepal 6.7 -15.3 7.1 10.0 15.4 12.0 12.0Pakistan 6.2 -7.5 20.1 16.4 21.2 12.0 20.0Sri Lanka -18.4 2.2 9.2 12.0 12.0 12.5 12.5

Central Asia 8.7 0.4 21.4 12.3 23.4 3.9 6.3Azerbaijan -4.8 24.5 49.3 26.5 26.5 -6.1 -6.1Kazakhstan 11.1 1.6 18.4 12.4 35.0 6.8 9.4Kyrgyz Republic -13.1 25.4 21.9 5.4 10.5 6.1 8.9Tajikistan -7.3 6.5 22.0 11.0 9.1 6.6 8.9Turkmenistan 31.6 -9.8 15.6 10.2 10.2 - -Uzbekistan 4.0 -13.9 13.4 0.8 0.8 - -

The Pacific -9.5 7.4 4.6 3.7 1.7 6.7 6.0Cook Islands -8.1 0.5 49.2 - - - -Fiji Islands -6.9 14.2 -6.0 7.6 6.2 18.6 15.0Kiribati 12.1 18.3 23.1 -11.0 -11.0 2.6 2.6Marshall Islands, Rep. of - - - - - - -Micronesia, Fed. States of 8.6 -9.0 8.3 -8.8 -8.8 9.8 9.8Nauru - - - - - - -Palau -21.5 0.9 -7.0 - 16.1 - -

Papua New Guinea -7.0 15.5 11.4 2.1 -2.2 -1.4 0.3Samoa 24.1 10.4 -2.6 15.0 15.0 - -Solomon Islands -8.0 -31.0 36.8 20.7 19.8 20.8 17.3Timor-Leste, Dem. Rep. of -4.4 -15.3 -21.3 -7.7 -8.0 -11.0 -2.5Tonga -3.9 7.8 25.1 - - - -Tuvalu - - - - - - -Vanuatu 0.9 -0.6 31.0 5.0 5.0 - -

Average -6.8 8.1 19.7 14.8 20.8 12.6 13.2

- = data not available.

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124 Asian Development Outlook 2004 Update

Table A5 Current Account Balance (% of GDP)

Item 2001 2002 2003 2004 2005ADO 2004 Update ADO 2004 Update

East Asia 2.6 3.7 4.5 2.8 2.3 2.6 1.4China, People’s Rep. of 1.5 2.8 3.2 1.3 -0.1 1.0 -1.4Hong Kong, China 6.1 7.8 10.2 6.8 6.8 8.5 8.5Korea, Rep. of 1.7 1.0 2.0 2.7 3.9 2.6 3.1Mongolia -16.6 -15.9 -14.9 -14.0 -14.0 -13.5 -13.5Taipei,China 6.4 9.1 10.2 6.9 6.8 6.0 6 .0

Southeast Asia 6.9 7.5 9.0 8.2 7.2 7.6 6.6Cambodia -9.2 -8.9 -10.2 -4.3 -10.0 -5.6 -11.2Indonesia 4.8 4.5 3.6 3.4 3.4 3.1 3.1Lao People’s Dem. Rep. -4.6 -2.3 -0.3 -2.2 -2.0 -1.9 -1.6Malaysia 8.3 8.4 12.9 7.9 7.8 6.5 7.0Myanmar 0.0 - - - - - -Philippines 1.9 5.7 4.2 3.0 3.0 2.8 2.8

Singapore 18.7 21.4 30.9 34.5 27.0 32.7 25.0Thailand 5.4 5.5 5.6 3.9 4.0 3.9 4.0Viet Nam 1.5 -2.8 -5.8 -5.7 -4.1 -5.7 -4.1

South Asia 0.0 1.0 1.6 0.4 1.3 0.2 0.6Afghanistan - -4.7 -3.4 - - - -Bangladesh -2.3 0.4 0.3 0.0 0.3 -1.5 -1.5Bhutan -1.7 -1.2 10.6 - - - -India 0.2 0.8 1.4 0.3 1.4 0.3 1.1Maldives -9.4 -5.6 -4.3 -9.1 -9.1 - -Nepal 4.9 4.3 2.6 1.0 3.5 0.5 4.0Pakistan 0.5 3.8 4.9 3.0 1.9 2.1 -1.3Sri Lanka -1.4 -1.4 -0.6 -3.0 -3.0 -3.5 -3.5

Central Asia -3.2 -2.5 -2.3 -3.6 -3.9 -4.3 -2.1Azerbaijan -0.9 -12.3 -28.3 -32.5 -35.0 -18.1 -23.0Kazakhstan -5.4 -3.5 -0.2 -1.1 -1.0 -0.6 -0.6Kyrgyz Republic -1.3 -2.2 -1.6 -4.2 -3.9 -5.3 -5.4Tajikistan -6.7 -2.7 -1.3 -2.2 -2.0 -4.7 -2.2Turkmenistan -0.7 0.5 - - - - -Uzbekistan -1.7 2.5 6.5 6.0 6.0 6.0 6.0

The Pacific 2.8 -3.0 -0.6 0.9 0.8 -1.3 -1.7Cook Islands 12.0 11.3 - - - - -Fiji Islands -3.3 -3.7 -10.1 -6.6 -6.0 -9.6 -8.8Kiribati 3.2 7.6 -16.3 -12.5 -12.5 -13.7 -13.7Marshall Islands, Rep. of 29.7 19.9 21.1 - 13.2 - -Micronesia, Fed. States of -8.6 4.6 7.3 5.1 5.1 1.9 1.9Nauru - - - - - - -Palau -6.1 -13.9 -4.3 - -17.8 - -

Papua New Guinea 9.4 -4.5 4.1 5.0 5.0 3.2 3.2Samoa -11.9 -7.6 -0.6 -1.1 -1.1 - -Solomon Islands -12.8 -6.8 1.4 2.0 -0.6 2.0 -10.1Timor-Leste, Dem. Rep. of 4.1 2.7 8.5 6.4 5.8 1.5 -0.3Tonga -8.8 4.8 -3.7 - - - -Tuvalu - - - - - - -Vanuatu 0.8 -7.8 -14.1 0.0 0.0 -0.6 -0.6

Average 2.8 3.7 4.6 3.2 2.8 2.9 2.1

- = data not available.

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Statistical Appendix 125

Table A6 Fiscal Balance of Central Government (% of GDP)

Item 2001 2002 2003 2004 2005ADO 2004 Update ADO 2004 Update

East AsiaChina, People’s Rep. of -2.6 -3.0 -2.5 -2.5 -0.7 -2.3 1.1Hong Kong, China -5.0 -4.9 -3.3 -3.1 -3.0 -2.5 -2.5Korea, Rep. of -1.7 0.4 -1.7 -0.5 -0.9 0.0 -1.2Mongolia -4.5 -5.9 -4.5 -5.1 -5.1 -5.0 -5.0Taipei,China -6.7 -4.3 -4.0 -3.0 -2.9 -2.9 -2.6

Southeast AsiaCambodia -5.6 -6.6 -7.0 -5.8 -6.1 -5.6 -6.0Indonesia -2.3 -1.7 -2.1 -1.3 -1.3 -0.8 -0.8Lao People’s Dem. Rep. -7.6 -8.3 -7.8 -5.4 -9.2 -5.3 -5.3Malaysia -5.5 -5.6 -5.3 -3.6 -4.5 -1.8 -3.8Myanmar 5.9 4.1 - - - - -Philippines -4.0 -5.3 -4.6 -4.2 -4.2 -4.2 -3.6

Singapore -0.9 -1.6 6.4 3.5 3.6 3.6 3.8Thailand -2.4 -1.4 0.4 -0.1 -0.1 -0.3 -0.3Viet Nam -3.0 -3.8 -4.8 -4.6 -4.6 -4.2 -4.2

South AsiaAfghanistan - -5.4 - - - - -Bangladesh -5.0 -4.6 -4.2 -4.8 -4.2 -4.5 -4.3Bhutan -11.7 -5.0 -10.0 -4.2 -6.0 - -India -9.9 -9.5 -9.4 -10.0 -10.0 -9.5 -9.5Maldives -4.7 -4.9 -4.1 -4.5 -4.5 - -Nepal -4.5 -3.9 -1.5 -2.7 -1.5 -4.5 -2.5Pakistan -4.3 -4.3 -3.7 -4.0 -3.3 -3.9 -3.5Sri Lanka -10.8 -8.9 -8.0 -7.3 -7.3 -6.5 -6.5

Central AsiaAzerbaijan 1.8 1.3 0.2 1.1 1.1 1.5 1.5Kazakhstan -0.4 -0.3 -0.9 -1.9 -0.5 -1.0 -1.0Kyrgyz Republic -5.0 -5.4 -5.0 -4.4 -4.3 -3.5 -4.0Tajikistan -0.1 -0.1 0.9 -0.5 -0.4 0.0 -0.5Turkmenistan 0.6 0.2 -1.0 - - - -Uzbekistan -1.0 -0.8 -0.4 -2.0 -2.0 - -

The PacificCook Islands 1.5 0.2 -3.2 - - - -Fiji Islands -6.6 -5.6 -6.1 -3.5 -3.5 -0.8 -0.8Kiribati -42.1 21.4 -30.1 - - - -Marshall Islands, Rep. of 2.2 9.4 19.4 6.2 6.5 - -Micronesia, Fed. States of -6.2 2.5 1.9 1.9 1.9 -1.1 -1.1Nauru - - - - - - -Palau -20.9 -28.1 -2.3 - -12.4 - -

Papua New Guinea -3.6 -4.1 -1.0 -1.5 -1.5 -1.1 -1.0Samoa -2.2 -2.1 -0.6 -1.5 -1.5 - -Solomon Islands -12.3 -10.5 0.2 0.0 0.0 - -0.5Timor-Leste, Dem. Rep. of -6.9 -5.8 -7.3 -9.0 -9.0 -10.1 -2.4Tonga -0.2 1.2 -3.8 -1.8 -0.7 - -2.8Tuvalu -51.0 71.5 -16.3 -1.3 -1.3 - -Vanuatu -3.0 -2.1 -1.8 0.4 0.4 0.4 0.4

- = data not available.

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