74578 world bank east asia and pacific economic update 2012, volume 2 Remaining Resilient world bank east asia and pacific economic update 2012, volume 2 Remaining Resilient © December 2012 The International Bank for Reconstruction and Development / The World Bank 1818 H Street NW Washington DC 20433 Telephone: 202-473-1000 Internet: www.worldbank.org All rights reserved 1 2 3 4 13 12 11 10 This volume is a product of the staff of the International Bank for Reconstruction and Development / The World Bank. The findings, interpretations, and conclusions expressed in this volume do not necessarily reflect the views of the Executive Directors of The World Bank or the governments they represent. The World Bank does not guarantee the accuracy of the data included in this work. 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All other queries on rights and licenses, including subsidiary rights, should be addressed to the Office of the Publisher, The World Bank, 1818 H Street NW, Washington, DC 20433, USA; fax: 202-522-2422; e-mail: pubrights@worldbank.org. ISSN: 2079-5874 Key title: World Bank East Asia and Pacific Economic Update … (Print) Abbreviated key title: World Bank East Asia Pac. Econ. Update (Print) Cover photo: The World Bank Photo Collection Contents  |  v Contents Preface and Acknowledgments ix Executive Summary x Part I. Recent developments and outlook 1 I.A. Recent developments 2 I.B. Outlook and risks 11 I.C. Policy considerations 15 Part II. Selected emerging issues 19 II.A. Introducing Myanmar 20 II.B. The near-term dynamics and long-term trends in exports of the ASEAN-4 economies 25 Part III. The medium term development agenda 29 III.A. The jobs context in East Asia and the Pacific  30 III.B. Towards managing disaster risk and building resilience in EAP  42 Country Pages and Key Indicators 53 Cambodia54 China58 Fiji61 Indonesia64 Lao People’s Democratic Republic 68 Malaysia72 Mongolia76 Myanmar79 Papua New Guinea 83 Philippines87 Small Pacific Island Countries 91 Solomon Islands 94 Thailand98 Timor-Leste103 Vietnam107 Appendix Tables 111 Remaining Resilient vi  | Contents List of Figures Figure 1. EAP is resilient 2 Figure 2. Projections for 2012 shifted over the past year 3 Figure 3. Domestic demand supported GDP growth 3 Figure 4. Services are contributing more to growth 4 Figure 5. Services still lagging in EAP 5 Figure 6. Industrial production shows signs of picking up 5 Figure 7. Export and import growth fell in tandem 5 Figure 8. Will renewed quantitative easing spark more capital inflows into EAP? 7 Figure 9. Inflation has receded 7 Figure 10. Monetary stances became more accommodative in 2012 9 Figure 11. Recent trends in credit growth 9 Figure 12. Growth of credit to non-government outstripped GDP growth over the last decade 9 Figure 13. Fiscal deficit as a share of GDP 10 Figure 14. Poverty has fallen and is likely to continue to do so 12 Figure 15. Taylor rule says policy rate are at par or slightly too low 16 Figure 16. Export growth of the ASEAN-4 has weakened, particularly for commodities… 25 Figure 17 . …as well as for manufactured goods 25 Figure 18. The imports of manufactured goods by China and the EU from ASEAN countries have contracted… 26 Figure 19. …while the impact of Europe’s slowdown has also been seen in its lower imports from China 26 Figure 20. The share of ASEAN-4 manufacturing exports to the region have risen 27 Figure 21. Growth has created jobs, although less in EAP than in some other regions 30 Figure 22. Participation rates are generally higher than elsewhere 32 Figure 23. Also among women, but with important exceptions 32 Figure 24. Open unemployment remained low 32 Figure 25. Primary industries dominate 33 Figure 26. Vulnerable employment prevalent 33 Figure 27 . Labor productivity has risen across the region  33 Figure 28. Real wages mostly rising 34 Figure 29. Poverty has declined across the region 34 Figure 30. Inequality is on the rise in several EAP countries 34 Figure 31. Youth unemployment 35 Figure 32. Informality relatively high 35 Figure 33. Regulation high in some countries 37 Figure 34. The eight country types of the WDR 38 Figure 35. Resource-rich EAP 39 Figure 36. Rural EAP 39 Figure 37 . Urbanizing EAP 40 Figure 38. Formalizing EAP 40 Figure 39. Ageing EAP 40 Figure 40. Global hazard losses classified by World Bank regions, 2000–2011 43 Figure 41. Growth of urban population in Asia 43 Figure 42. Vulnerability of cities to multiple hazards in East Asia and the Pacific 43 Figure 43. Hazard losses in East Asia and the Pacific, 2000–2011 44 Figure 44. East Asia and the Pacific disasters and economic losses in 2011 44 Figure 45. Annual expected economic losses in ASEAN countries 45 Figure 46. 1-in-100 and 1-in-200 year probable maximum loss (PML) 45 Figure 47 . Disaster losses for China, 2002–2011 46 world bank east asia and pacific economic update 2012, vol.2 Contents  |  vii Figure 48. Estimated average annual loss 46 Figure 49. Estimated 75-Year and 250-Year probable maximum loss 46 Figure 50. Average annual fiscal burden 46 Figure 51. 1-in-200-Year probable maximum loss 46 Figure 52. Core areas of DRM 47 List of Tables Table 1. East Asia and the Pacific: GDP Growth Projections 11 Table 2. Most large EAP economies are growing close to capacity 15 Table 3. Rising dependence on China and a higher share of commodity-based exports 28 Cambodia: Key Indicators 57 China: Key Indicators 60 Fiji:Key Indicators 63 Indonesia: Key Indicators 67 Lao PDR: Key Indicators 71 Malaysia: Key Indicators 75 Mongolia: Key Economic Indicators 78 Myanmar:Key Indicators 82 Papua New Guinea: Key Indicators 86 Philippines: Key Indicators 90 Solomon Islands: Key Indicators 97 Thailand: Key Indicators 102 Timor-Leste: Key Indicators 106 Vietnam: Key Indicators 110 Appendix Table 1. Real GDP Growth - % Change Year Ago 112 Appendix Table 2. Real GDP and Components of Aggregate Demand 113 Appendix Table 3a. East Asia - Merchandise Export Growth 114 Appendix Table 3b. East Asia - Merchandise Import Growth 114 Appendix Table 4. East Asia and the Pacific: GDP Growth Projections 115 Appendix Table 5. Regional Aggregates for Poverty Measures in East Asia  116 Appendix Table 6. East Asia: Exchange Rates 117 Appendix Table 7 . East Asia: Foreign Reserves Minus Gold 119 Appendix Table 8a. East Asia: Balance of Payments 121 Appendix Table 8b. East Asia: Financial Account Components 121 Appendix Table 9. East Asia: Nonperforming Loans 122 Appendix Table 10. East Asia: Financial Market Indicators 123 Appendix Table 11. Global hazard losses 2000–2011 124 List of Boxes Box 1. Food price inflation is less of a concern for most EAP countries 8 Remaining Resilient viii  | Contents Abbreviations ADB Asian Development Bank QE1 Quantitative easing by the U.S. Federal ASEAN Association of Southeast Asian Reserve, round 1 Nations QE2 Quantitative easing by the U.S. Federal ASEAN-4 ASEAN members Indonesia, Malaysia, Reserve, round 2 Philippines and Thailand QE3 Quantitative easing by the U.S. Federal ASEAN-5 ASEAN members Indonesia, Malaysia, Reserve, round 3 Philippines, Thailand and Vietnam qoq Quarter-on-quarter BIS Bank for International Settlements saar Seasonally-adjusted annual rate BNM Bank Negara Malaysia SBD Solomon Islands dollar BOJ Bank of Japan sq. km. Square kilometers BOP Balance of payments US United States CEIC CEIC Data Company Ltd. US$ United States dollar CPI Consumer price index VAT Value-added tax DECPG Development Economics Prospects WDI World Development Indicators Group, of the World Bank WDR World Development Report DSA Debt Sustainability Analysis WTO World Trade Organization ECB European Central Bank SBV State Bank of Vietnam EAP East Asia and Pacific Region, World RHS Right-hand-side axis of the graph Bank classification SOEs State-owned enterprises e.g. For example THB Thai baht ETFs Exchange traded funds yoy Year-on-year EU European Union FAI Fixed asset investment FASBI Bank of Indonesia deposit facility Countries EPFR GLOBAL Emerging Portfolio Funds Research CHN China FDI Foreign direct investment FJI Fiji F$ Fiji dollar HKG Hong Kong, SAR China FY Fiscal year IDN Indonesia GDP Gross development product KHM Cambodia IMF International Monetary Fund KOR Republic of Korea IDR Indonesian rupiah LAO Lao People’s Democratic Republic LIBOR London inter-bank offer rate (PDR) MSCI Morgan Stanley Capital International MNG Mongolia NBER National Bureau of Economic Research MMR Myanmar NEET Not in education, employment or MYS Malaysia training PHL The Philippines NIEs Newly-industrialized economies PNG Papua New Guinea NPLs Non-performing loans SLB Solomon Islands OECD Organization for Economic SGP Singapore Cooperation and Development THA Thailand OPR Overnight policy rate TMP Timor-Leste PMI Purchasing managers index TWN Taiwan, China PGK Papua New Guinea kina VNM Vietnam PPP Purchasing power parity world bank east asia and pacific economic update 2012, vol.2 Preface and Acknowledgments  |  ix Preface and Acknowledgments The East Asia and Pacific Economic Update was prepared by a team led by Keiko Kubota and including Antonio Ollero, Manohar Sharma, Jennifer Golan, Douglas Addison, Fitria Fitrani, Truman Packard, and Abhas Kumar Jha. The team worked under the guidance of Shubham Chaudhuri (Sector Manager, Poverty and Economic Management, East Asia and Pacific Region), Sudhir Shetty (Director, Poverty Reduction and Economic Management, East Asia and Pacific Region) and Bert Hofman (Chief Economist, East Asia and Pacific Region). Andrew Beath of the Chief Economist Office East Asia and Pacific coordinated the Office’s contributions. World Bank country economists throughout the East Asia and Pacific Region provided country write-ups and tables and assisted with the analysis. They include: Xiaofan Liu, Min Zhao, Xiaoli Wan, Ashley Taylor, Alex Sienaert, Magda Adriani, Frederico Gil Sander, Intan Nadia Jalil, Kai Kaiser, Karl Kenrick Tiu Chua, Marianne Juco, Tehmina Khan, Kirida Bhaopichitr, Amornsak Mala, Nattaporn Triratanasirikul, Habib Rab, Viet Tuan Dinh, Enrique Aldaz-Carroll, Huot Chea, Genevieve Boyreau, Somneuk Davading, Keomanivone Phimmahasay, Tae Hyun Lee, Altantsetseg Shiilegmaa, Khwima Nthara, Virginia Horscroft, Tobias Hauqe, Lucy Pan, Timothy John Bulman, and Hans Anand Beck. The country economists worked under the supervsion lead economists Chorching Goh, James Brumby, Mathew Verghis, Rogier J. E. Van Den Brink, Deepak Mishra, and Vivek Suri. Other World Bank officers and staff provided inputs to the report, including Andrew Burns, Ekaterine Vashakmadze, and Theo N. Janse Van Rensberg of the Development Prospects Group (DECPG), and Carl Patrick Hanlon, Chisako Fukuda and David Llorico Llorito of East Asia and Pacific External Affairs (EAPXT). The report was edited by Carollyne Hutter and designed and typeset by Budy Wirasmo. Developing East Asia and Pacific as used in this report includes China, Indonesia, Malaysia, Philippines, Thailand, Vietnam, Cambodia, Lao People’s Democratic Republic, Mongolia, Myanmar, Timor-Leste, Fiji, Papua New Guinea, Solomon Islands and other island economies in the Pacific. The Newly Industrialized Economies (NIEs) include Hong Kong, SAR China, the Republic of Korea, Singapore, and Taiwan, China. The ASEAN member countries are Brunei Darussalam, Cambodia, Indonesia, Lao PDR, Malaysia, Myanmar, Philippines, Singapore, Thailand, and Vietnam. The ASEAN-4 are Indonesia, Philippines, Thailand and Malaysia. Remaining Resilient x  | Executive Summary Executive Summary Economies in the East Asia and Pacific (EAP) region have generally remained resilient in 2012 amidst a lackluster and, at times, volatile external environment. In 2012, the region’s economy is projected to grow by 7.5 percent, lower than the 8.3 percent growth recorded in 2011, but set to recover to 7 .9 percent in 2013. Growth in EAP is still the highest of any developing region and constitutes almost 40 percent of global growth. With the weakness in global demand for exports, domestic demand has remained the main driver of growth for most economies. In 2012, aside from weak external demand, the region’s growth slowdown resulted from China’s economic performance, which is projected to reach 7 .9 percent in 2012, 1.4 percentage points lower than 2011 and the lowest annual growth rate since 1999. This decline is mainly due to lower domestic demand growth in the first part of 2012, driven by stabilization measures implemented in 2011. East Asia excluding China is expected to grow by 5.6 percent in 2012, one percentage point higher than in 2011. The rebound in economic activity in Thailand following the floods of 2011, strong growth in the Philippines, and relatively mild slowdowns in Indonesia and Vietnam contributed to this increase. Fiscal and monetary policies were generally supporting growth in 2012. More recently, monetary policy rates have rightly been held steady, as most economies now operate at or close to full capacity. For 2013, we expect the region to benefit from continued strong domestic demand and a mild global recovery that would nudge the contribution of net exports to growth back into positive territory, a trend projected to continue into 2014. For China, we expect this year’s monetary easing, local fiscal stimulus and more rapid approval of large investment projects to boost growth to about 8.4 percent. By 2014, China is projected to be growing at around 8 percent, which is in line with the country’s potential growth rate. This rate is gradually declining as productivity and labor force growth are tailing off. In the last few years, services contributed more to production growth in the region than manufacturing. In part, this reflects the strong growth in domestic demand relative to external demand. However, the current growth in the service sector represents longer-term trends that are driven by the growing middle class in the region, the low level of services-to-GDP ratios in many EAP countries, and the development of services export industries in the Philippines and elsewhere. As these trends continue, services can emerge as a new driver of growth for EAP . Most countries in the region have retained their strong macroeconomic fundamentals and should be able to withstand external shocks—but considerable risks remain. While the probability of a catastrophic event in the Eurozone is substantially lower than before, delays in implementation of the plans to solidify the institutional foundations of the Euro could cause renewed financial market volatility and renewed slowdown in global growth. In addition, the by now well known fiscal cliff in the USA could result in a loss of growth for EAP . And while a gradual decline in China’s investment growth is the base scenario, a sudden drop in investment growth could have ripple effects across the globe. In this eventuality, though, China’s authorities could use their ample fiscal space to counter the impact. Recent announcements by central banks in the G-3 have renewed concerns regarding the possibility of excessive capital inflows into the region that could render exchange rates uncompetitive, lead to asset price bubbles and excessive credit growth, raise the risk of future sudden outflows, or lead to costly sterilization measures from world bank east asia and pacific economic update 2012, vol.2 Executive Summary  |  xi monetary authorities. At the same time, monetary easing in advanced countries need not lead to more capital inflows into the region: QE1 did but QE2 did not. Moreover, the bulk of capital flows into EAP consists of FDI, which creates jobs and growth in production capacity. Nevertheless, monetary authorities should closely monitor developments on the capital account, especially in countries that have recently experienced rapid credit growth. In the short term, capital controls could play a role in dampening excessive inflows, but capital markets development and appropriate exchange rate arrangements offer the best cushion against volatile capital flows in the medium term. The macro-prudential measures that some countries in the region have recently shored up also protect their banking systems against the risks of excessive credit growth. If a shock to growth occurs, most countries could counter the impact by easing of fiscal policies. Countercyclical fiscal measures would ideally stimulate the economy in the short run as well as improve medium-term growth prospects. Investments in public infrastructure and other public goods are examples of such productivity enhancing measures. In practice, for EAP economies that face difficulties in budget execution, particularly of the capital budget, fiscal interventions aimed at increasing private domestic demand such as targeted social assistance or investment tax credits, are worth considering. This edition of the East Asia Half-Yearly Update introduces two new sections—one that looks at selected emerging issues in the region, including Myanmar, covered for the first time in this Update. The section on the medium term regional development agenda focuses on jobs and disaster risk management. Myanmar’s emergence from decades of relative isolation offers new opportunities and challenges as the country’s prospects for trade, investment and development aid improve. Growth in Myanmar in 2012 is expected at 5.5 percent, increasing to 6.3 percent in 2013. Myanmar is pursuing formidable reforms to create an enabling environment for the private sector, sustainably manage natural resources, effectively deliver public services, and alleviate infrastructure constraints. Tackling these challenges would allow Myanmar to capitalize on economic opportunities derived from its strategic location within a large regional and global export market, as well as vast untapped natural resources. While economic growth in East Asia has created jobs, the quality of jobs has become a growing concern. For Pacific Island countries, the large number of youths without jobs is the focus of attention. Implications for policy reflect the diversity of economies in the region: For rapidly urbanizing countries, the jobs policy priority is to make cities work, including good urban planning to increase flexibility of land use. This gives incentives for firms in cities and towns to grow and create jobs. For resource rich countries, macroeconomic management and fiscal policy are the most important policy areas to sustain employment creation, in order to diversify the economy and manage resource related risks such as currency appreciation and inflation. As the most disaster-stricken region in the world, disaster risk management is essential for supporting sustainable growth in EAP . Policy makers need to develop practical tools for risk identification and communication, invest in disaster preparedness and resilient development, and strengthen institutional capacity and coordination for recovery and reconstruction. Remaining Resilient   |  1 Part I. Recent developments and outlook Remaining Resilient 2  |  Part I. Recent Developments and Outlook I.A. Recent developments EAP countries remained resilient in 2012 Economies in the East Asia and Pacific (EAP) region remained resilient in 2012 amidst a lackluster external environment. While economic growth across developing economies in EAP is projected to decline to 7 .5 percent in 2012 from 8.3 percent in 2011, this decline has been driven mainly by the slowdown of the Chinese economy during the first part of the year. Growth rates in other major developing economies in the region have held up well in an unfavorable global context. With the rebound in economic activity in Thailand following Figure 1. EAP is resilient the floods of 2011, the strong growth performance real GDP growth, in percent of the Philippines, and the relatively mild slowdown 15 thus far in Indonesia and Vietnam, developing EAP excluding China is projected to grow 5.6 percent in 10 2012, up from 4.6 percent in 2011 (Figure 1). 5 China’s economic growth is expected to reach 7.9 percent in 2012, significantly down from 0 9.3 percent in 2011. This slowdown has been caused mainly by a slowdown in domestic demand following domestic policy tightening in late 2011 to -5 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 cool an overheating housing sector, although weaker China High-income countries EAP excl. China EAP external demand from high-income economies has Source: World Bank. also been a contributing factor. The slowdown in the Chinese economy appears to now have bottomed out. While third quarter growth, at 7 .4 percent year-on-year (yoy), is still low compared to last year, quarter-on-quarter growth has picked up notably, reaching 9.1 percent in the third quarter (seasonally-adjusted, annualized rate [saar]). The most recent data suggest that, despite further weakening in the external environment, China’s growth rate will continue to recover in the remainder of the year and into next year. Among other developing economies in the region, Fiji, Lao PDR, Myanmar, the Philippines, and Thailand are projected to record higher growth in 2012 as compared to 2011. With the exception of a few commodity exporters that experienced sharper drops in growth, most other EAP developing economies are generally projected to grow at the same or slightly lower rates than in 2011. Indonesia and Malaysia have both been affected by weak external demand and easing commodity prices, while Vietnam’s growth has slowed due to the impact of last year’s stabilization policies on investment growth, despite strong export performance. Thailand has been recovering well from the severe flooding in 2011, although residual effects continue to impact manufacturing production through the third quarter. The Philippines reported a remarkable 7 .1 percent growth in the third quarter (yoy), boosting its growth rate to 6.5 percent year-to-date, on the strength of private consumption and booming construction. Commodity exporters, such as Mongolia, Papua New Guinea and the Solomon Islands, have generally seen lower growth in 2012 relative to the very high levels recorded in 2011, due to lower prices and a sharp decline in demand, particularly from China. world bank east asia and pacific economic update 2012, vol.2 Part I. Recent Developments and Outlook  |  3 Throughout 2012, macroeconomic policies pursued by governments across the region have contributed to limiting the impact of unfavorable external conditions. Accommodative monetary policies and prudent fiscal policies supported growth and aided in maintaining consumer and investor confidence. The absence of any major supply side disruptions has also supported growth across the region, while recovery from last year’s disasters supported growth in some countries. Although the region’s growth rate of 7 .5 percent this year has been revised slightly downward from the May 2012 forecast of 7 .6 percent, growth remains the highest among developing regions. Figure 2. Projections for 2012 shifted over the past year real GDP growth, in percent 20 18 16 14 12 10 8 6 4 2 0 China Indonesia Malaysia High-income Developing Philippines EAP Thailand Vietnam Cambodia Fiji Lao PDR Mongolia Myanmar Papua New Guniea Solomon Islands Timor-Leste World 2012 Forecast in Nov-11 Forecast in May-12 Source: World Bank. Domestic demand made up for weak external demand With net exports proving a drag on overall Figure 3. Domestic demand supported GDP growth growth, the contribution of domestic demand, contribution of domestic demand to GDP growth in percentage points and GDP growth in percent, Q4-2011 to Q3-2012 both consumption and investment, has been 15 critical to sustaining growth. In particular, domestic demand in ASEAN-4 countries (Indonesia, Malaysia, 10 Thailand, and the Philippines) grew at 7 .0 percent in the third quarter (yoy), boosting the overall growth 5 rate (Figure 3). 0 Consumption growth was robust in the region. -5 In China, consumption accounted for 55 percent of the first three quarter GDP growth,1 supported -10 China Indonesia Malaysia Philippines Thailand by continued strong household income growth. Q4-11 (year to date) Q1-12 Q2-12 Q3-12 GDP growth Q4-11 to Q3-12 Malaysia’s consumption grew strongly partly due Source: Haver Analytics and national statistical agencies. to expansionary fiscal policy. In the Philippines, overseas remittances fuelled an increase in private 1 China does not publish quarterly data on the expenditure side of the national accounts. Retail sales and Fixed Asset Investment (FAI) are imperfect proxies for consumption and investment. Remaining Resilient 4  |  Part I. Recent Developments and Outlook consumption of 6.2 percent, which in turn contributed 4.3 percentage points to growth. Indonesia’s private consumption also continues to be a reliable engine of growth, and was up 5.7 percent in the third quarter (yoy). Investment has also been strong across the region. In China, fixed asset investment (FAI) grew by 21.1 percent in September (yoy), 3.6 percentage points higher than in August, due to the impact of policy easing earlier in the year and local government stimulus programs. Investment growth in China is expected to continue into 2013, as the authorities have accelerated the approval of large investment projects. Investment is also booming in the ASEAN-4. In Thailand, this reflects reconstruction following last year’s floods, while investment-to-GDP ratios in Indonesia have, for the first time, reached levels on a par with those recorded before the Asian Financial Crisis. In contrast, Vietnam’s investment growth slowed considerably in the past year, as the authorities have focused on fighting inflation and restructuring state-owned enterprises, banks, and the public investment system. Services grew robustly while manufacturing recovered On the supply side, the services sector has been the largest contributor to GDP growth in the ASEAN-4 and in Vietnam in 2012. Contributions ranged from 54 percent of growth in Vietnam to 80 percent in Thailand (Figure 4). Services are the largest sector in all of these countries, constituting roughly half of total GDP. The robust growth in services this year in part reflects strong domestic demand, but is also associated with longer- term trends caused by rising incomes. Figure 4. Services are contributing more to growth contributions to GDP growth, in percentage points 8 7 6 5 4 3 2 1 0 -1 -2 2010 2011 2012 2010 2011 2012 2010 2011 2012 2010 2011 2012 2010 2011 2012 Indonesia Malaysia Philippines Thailand Vietnam Agriculture Mining Manufacturing Electricity, gas & water Construction Services Source: Haver Analytics and national statistical agencies. Note: 2012 pertains to the first three quarters of the year. Notwithstanding the recent growth in the sector, many economies in East Asia have smaller services sectors than would be expected based on their income levels (Figure 5). This partially reflects the relative success of manufacturing among countries in the region. It may also stem from the limited adoption of high- value modern services, such as information and communication technology, finance, and professional business services in most countries.2 In particular, few EAP countries other than the Philippines have proved successful in developing robust industries focused on the export of modern services. 2 See ADB, 2012, Asian Development Outlook 2012 Update: Services and Asia’s Future Growth. world bank east asia and pacific economic update 2012, vol.2 Part I. Recent Developments and Outlook  |  5 Figure 5. Services still lagging in EAP Figure 6. Industrial production shows signs of picking up service as a share of GDP and per capita income quarterly growth in industrial production, seasonally adjusted annual rate 100 50 90 40 80 30 70 JPN SGP 20 60 WSM TON KOR PHL 10 50 MNG MYS 0 KHM THA 40 IDN CHN VNM EAP -10 30 average 20 PNG -20 10 -30 0 -40 800 8,000 80,000 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12 GDP per capita 2010 (in 2005 ppp $, log scale) China ASEAN-5 High-income countries World Source: World Bank World Development Indicators Source: World Bank. Note: East Asia (6) consists of ASEAN-4, China and Vietnam. Across EAP , the manufacturing sector contributed about one quarter of growth in 2012. Growth in manufacturing has been slowing in the region since a post-crisis peak in early 2010 and the sector’s contribution to growth is currently below its economy-wide share in all EAP countries for which data are available. In Thailand, the sector actually contracted in the first and third quarters due to the lingering effects of the 2011 flooding. In recent months, however, industrial production across EAP has started to rebound. Led by China and Indonesia, regional growth in industrial production reached 8.2 percent in the third quarter (Figure 6). Some countries are still struggling, but Malaysia and the Philippines appear to have bottomed out and recent indicators in Thailand have also been strong (the Manufacturing Production Index grew 36 percent in October [yoy]). Industrial production also recovered in other developing countries, growing by 5.5 percent in the third quarter (saar), but it continued to weaken in high-income countries, declining at a 3.4 percent pace.3 Current account surpluses shrank While the region’s overall trade balance stayed Figure 7. Export and import growth fell in tandem in surplus, trade as a whole did not contribute to growth rate, year on year, in percent the region’s growth in the first three quarters of 50 2012. East Asia’s exports continued to expand until 40 June, but fell in the third quarter, following the global 30 contraction in trade. Import growth followed suit, 20 as imports and exports are closely linked through 10 regional supply chains (Figure 7). 0 In China, export growth was only 1.4 percent (yoy) -10 in the third quarter, but the negative contribution -20 of net exports to output growth has narrowed to Oct-10 Feb-11 Jun-11 Oct-11 Feb-12 Jun-12 East Asia (6) import growth East Asia (6) export growth Source: Haver Analytics, Thomson Datastream. Note: East Asia (6) consists of ASEAN-4, China and Vietnam. 3 Industrial production declined by 0.4 percent in the U.S. and by 15.8 percent in Japan, and grew only modestly, by 0.7 percent, in the Euro area. Remaining Resilient 6  |  Part I. Recent Developments and Outlook -0.4 percentage points in the first three quarters from -0.7 percentage points in the first half of the year. Light manufactured goods contributed the most to export growth, while EAP countries were the destination that saw the fastest export growth. China’s trade balance was also supported by improving terms of trade, with export prices of manufacturing goods holding up better than the prices of imported commodities. In Indonesia and Thailand, exports declined by about 2 percent. This lackluster trade performance is in stark contrast with last year, when third-quarter export growth rates ranged from -14.3 percent (yoy) for the Philippines, 20.6 percent (yoy) for China to 39.6 percent (yoy) for Indonesia. Vietnam is an exception to this trend: exports grew by 18.4 percent in the first 10 months of 2012 (yoy), following impressive growth of 34 percent in 2011. Vietnam’s export performance is in part due to the slowdown in domestic demand in the course of stabilization, but also in part because new production capacity in a number of export-oriented foreign-owned enterprises, predominantly in electronics, came on line. This followed an impressive export growth rate of 34.2 percent in 2011. By September 2012, the decline in global trade seems to have bottomed out, and trade in most of the EAP countries has been recovering. The impact of the downturn through the first nine months of the year can be seen in the considerable narrowing of the collective current account surplus of the ASEAN-4 from 3 percent of the combined GDP for the same period last year to 0.1 percent this year. Malaysia’s current account surplus fell to 5.3 percent of GDP in the first three quarters of 2012 from 11.5 percent last year. Indonesia’s current account has turned into a deficit of around 2.4 percent of GDP this year to date, while Thailand’s current account turned into a slight surplus of under 1 percent after running a deficit in the first half of the year. China’s current account surplus shrank three quarters in a row until the first quarter of 2012, before bouncing back. Its current account surplus is around 2.6 percent of GDP this year to date, down from 2.9 percent for the same period last year. Helped by strong remittances, the Philippines has consistently run a current account surplus this year despite running a trade deficit. Capital inflows resumed in the second half of 2012, but are still below 2011 During the first half of 2012, capital generally flowed out of EAP , but the trend reversed in the second half of the year as Euro area bank deleveraging slowed and emerging market bond spreads declined to long- term average levels. Portfolio inflows jumped after the announcements of further monetary easing by the European, Japanese and US central banks (Figure 8), although given the pattern in capital flows that followed QE2, it is not altogether clear whether this will be sustained. Net FDI inflows to the region have remained robust, totaling approximately US$ 250 billion, about 70 percent of total net capital inflows, although declining somewhat from the previous two years ($290 billion and $275 billion for 2010 and 2011, respectively). Short term net debt inflows of $85 billion contributed about a quarter of net inflows. Capital inflows have been most notable in Indonesia and Thailand. Indonesia’s capital account surplus increased to 2.7 percent of GDP in the third quarter, compared to 1.5 percent of GDP for last year, as portfolio flows in the second and third quarters averaged $3.9 billion and FDI flows $4.4 billion. In Thailand, net capital inflows topped $9.9 billion in the first three quarters, reversing the net capital outflows of $5.2 billion recorded last year, while FDI inflows of $6.1 billion in the first eight months of the year surpassed levels attained over the same period last year. As a result of robust capital inflows, some of the region’s central banks resumed accumulating foreign reserves in the third quarter of 2012. world bank east asia and pacific economic update 2012, vol.2 Part I. Recent Developments and Outlook  |  7 Figure 8. Will renewed quantitative easing spark more capital inflows into EAP? portfolio net flows, in US$ billions 10 5 0 -5 -10 Jan-07 Apr-07 Jul-07 Oct-07 Jan-08 Apr-08 Jul-08 Oct-08 Jan-09 Apr-09 Jul-09 Oct-09 Jan-10 Apr-10 Jul-10 Oct-10 Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Jul-12 Equity fund net inflows Bond fund net inflows QE1 QE2 QE3 Source: EPFR Global. Note: Inflows are to China, Indonesia, Malaysia, Thailand and Vietnam. Inflation is receding Inflation receded in EAP over 2012. The ASEAN-4 Figure 9. Inflation has receded and China all had CPI inflation below 5 percent (yoy), percentage change in CPI Index ranging from China’s 1.7 percent to Indonesia’s 35 30 4.6 percent. Vietnam recorded inflation of 9 percent 25 in 2012, which, although high for the region, 20 represents a significant improvement over 2011, 15 during which inflation averaged 18.7 percent. 10 5 The recent global food price increases have had 0 limited impact on EAP , as the markets for rice, -5 the region’s main staple, have remained largely -10 unaffected. Global maize and wheat prices have been Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 China Indonesia Malaysia Philippines Thailand Vietnam more stable during the past two months, following Source: Haver Analytics and national statistical agencies. the 40 percent jump in the summer. However, in its September update, the USDA left the 2012/13 global crop outlook largely unchanged, implying that supply conditions for maize and wheat will remain tight. End- of-season stocks for these commodities are expected to be 10 percent lower than last season, with maize reaching its lowest level since 1973. In contrast, rice prices have been relatively stable, and may well decline, as stocks in Thailand, which continue to build as a result of the new floor price policy, are likely at some point to be released on the world market. In addition, good rice harvests in Cambodia, Vietnam and the Philippines also promise to limit price pressures on the international market. In contrast, prices of meat, in particular pork, could be affected by higher prices for maize and soybeans, which are important components of pigfeed. Food price inflation across the region has continued to come down in recent months (see Box 1). Remaining Resilient 8  |  Part I. Recent Developments and Outlook Box 1. Food price inflation is less of a concern for most EAP countries Food price increases in most EAP countries have been relatively muted. The regional food price inflation rate has generally fallen over 2011 and 2012 for two main reasons. First, the staples that have experienced international price increases, corn and wheat, are not principal staples in the Asian consumer basket. Second, the full magnitude of an international price shock is not fully transmitted to domestic prices, partly due to counteracting domestic policies (e.g., price controls). The exceptions to this overall trend are Mongolia, where wheat and corn are relatively important staples, and Indonesia, where domestic rice prices rose at the end of 2011 and have remained at elevated levels. The price of rice is of particular concern to EAP consumers and producers, but the probability of price spikes in the commodity is lower now than in 2008. In particular, the US dollar is currently stable against major currencies, thus reducing the pressure on Box Figure 1. Regional Food CPI less volatile than dollar denominated prices to adjust. Energy prices international market prices are also more stable and lower than they were in index, January 2007=100 2008, stabilizing the price of inputs for agriculture 300 and reducing the use of crops for fuel. In addition, 250 there is some evidence to suggest that rice prices in 200 the region are not likely to be as strongly affected as 150 in past crises, due to rising stocks (e.g., in Thailand 100 and Indonesia) and abundant harvests. However, 50 as the food crisis of 2008 demonstrated, national policies, especially those related to food exports and 0 Feb-05 Feb-06 Feb-07 Feb-08 Feb-09 Feb-10 Feb-11 Feb-12 stocks, could influence rice prices in ways beyond Soybeans Wheat Rice: nominal EAP food CPI what the global supply and demand conditions Source: World Bank DECPG. Note: The EAP food CPI is constructed as the population weighted average of indicate. country-level food CPIs. Values shown are three month moving average (nominal). Monetary policies loosened and credit growth has been rapid Monetary policy shifted to a more accommodative stance in most EAP countries in 2012 as inflationary pressures receded and concerns shifted back to growth. Most major central banks in the region lowered their policy rates in 2012, with the exception of Malaysia, which did not cut rates in light of strong domestic demand. The State Bank of Vietnam reduced interest rates most aggressively, cutting its refinance rate from 15 percent at the end of last year to 10 percent beginning in July. The Philippines’ Bangko Sentral trimmed the overnight reverse repo rate four times during the year, by a combined 100 basis points, the latest move done in October. China’s People’s Bank cut the prime lending rate twice, reduced reserve requirements and took other measures to increase liquidity, including repo transactions. Ample liquidity has fed buoyant credit growth in Indonesia and the Philippines and reignited credit growth in China in recent months. In China and the ASEAN-4, credit to the private sector has been growing at a faster rate over the last year than it had been in the five years (2003-2007) prior to the global financial crisis (Figure 11). Among these countries, the expansion in domestic credit growth has outpaced GDP growth world bank east asia and pacific economic update 2012, vol.2 Part I. Recent Developments and Outlook  |  9 Figure 10. Monetary stances became more Figure 11. Recent trends in credit growth accommodative in 2012 policy rates, percent per annum in percent 16 40 14 35 12 30 10 25 8 20 6 15 4 10 2 5 0 0 Jan-07 Nov-07 Sep-08 Jul-09 May-10 Mar-11 Jan-12 China Indonesia Malaysia Philippines Thailand Vietnam Vietnam Indonesia China Philippines Thailand 2003–07 average 2011 2012 Malaysia U.S. (fed. funds, effective) Source: Haver Analytics and national central banks. Source: IMF International Financial Statistics. rates, raising concerns about possible inflationary pressures and about the quality of banks’ credit portfolios. In Vietnam, however, the authorities have made concerted efforts to dampen credit growth following the overheating in 2009–2010. The recent rapid expansion in credit reflects Figure 12. Growth of credit to non-government medium-term trends. Specifically, between 1999 outstripped GDP growth over the last decade in percent in percent of GDP and 2012, growth in credit to the private sector 35 140 outstripped GDP growth by a large margin in some EAP countries, notably in Vietnam and Indonesia 30 120 and, to a lesser extent, in China and the Philippines 25 100 (Figure 12). While some of this expansion is due 20 80 to deepening of financial intermediation, the rapid 15 60 growth may nonetheless trigger inflation and a 10 40 deteriorating bank portfolio or financial bubbles, such as in the real estate sector. While such risks provide 5 20 cause for caution, a moderating factor is that, with 0 0 the exception of China, credit-to-GDP ratios remain China Indonesia Malaysia Philippines Thailand Vietnam Real output growth, annual average, 1999–2012 modest for most EAP economies relative to their Credit growth (to the private sector), ave. annual,1999–2012 income levels. Credit (to the private sector), in percent of GDP, end-Q2 2012 (rhs) Source: Haver Analytics and IMF International Financial Statistics. Fiscal policies became more supportive for growth Fiscal policies have generally been accommodative this year. In China, Indonesia, Mongolia, the Philippines, Thailand, and Vietnam, fiscal deficits in 2012 are set to increase relative to 2011. These deficits remain moderate, however, and are projected to come down in 2013 (Figure 13). In Cambodia, Lao PDR, Malaysia, and Myanmar, budget deficits as a share of GDP fell in 2012 and are projected to fall further in 2013, except in Lao PDR. Remaining Resilient 10  |  Part I. Recent Developments and Outlook Figure 13. Fiscal deficit as a share of GDP in percent 8 6 4 2 0 Cambodia China Indonesia Lao PDR Malaysia Mongolia Myanmar Philippines Thailand Vietnam 2010 2011 2012 2013 projections Source: World Bank and national statistical agencies. Factors underlying fiscal performance varied from country to country. Lower commodity prices played a role in some countries, while in others a more proactive policy to stimulate the economy or election related spending led to modestly higher deficits. In Mongolia, lower commodity prices and export volumes reduced revenues below expectations, while expenditures were largely maintained in the 2012 election year. In Vietnam, a combination of economic slowdown and tax relief for enterprises contributed to lower than expected domestic revenues. In the Philippines, government infrastructure spending accelerated, contributing to the strong growth performance in the first three quarters of the year, but the budget deficit was contained as revenue growth has been strong because of ongoing tax administration reforms and robust GDP growth. In China, several local governments started their own stimulus programs focused on infrastructure, despite concerns on local government debt. In Indonesia, the budget deficit is likely to come in at just above 2.5 percent of GDP , 1 percentage point higher than originally planned. Spending on fuel subsidies is expected to exceed last year’s level by 18 percent, while commodity-related revenues softened. However, disbursement challenges for core spending, particularly on infrastructure, will partly offset these factors. In Malaysia, the budget deficit widened to 3 percent of GDP in the first half of 2012, up from 1 percent in the same period in 2011, and is expected to reach 4.4 percent of GDP by year-end. Both expenditures and revenues were considerably higher than planned, with spending on infrastructure, civil service compensation, and cash transfers to households leading expenditure increases. world bank east asia and pacific economic update 2012, vol.2 Part I. Recent Developments and Outlook  |  11 I.B. Outlook and risks External conditions are expected to improve only slowly High income countries are expected to recover only slowly despite renewed monetary stimulus measures in the G-3. Fiscal consolidation and deleveraging in the banking systems continue to be a drag on growth, which is only partially offset by stronger net export contributions to growth. In 2013, high-income countries are projected to grow at 1.3 percent, only slightly faster than 2012, while global growth is expected to be around 2.4 percent. In 2014, global growth is forecast to reach 3.1 percent, aided by the recovery in both high-income and developing countries. Table 1. East Asia and the Pacific: GDP Growth Projections percent change form a year earlier Changes from May-12 Forecast (in percentage points) 2010 2011 2012 2013 2014 2012 2013 East Asia 9.3 7.1 5.8 6.6 6.6 -0.5 -0.4 Developing East Asia 9.7 8.3 7.5 7.9 7.6 -0.1 -0.1 China 10.4 9.3 7.9 8.4 8.0 -0.3 -0.2 Indonesia 6.2 6.5 6.1 6.3 6.6 0.0 -0.1 Malaysia 7.2 5.1 5.1 5.0 5.1 0.5 -0.1 Philippines 7.6 3.9 6.0 6.2 6.4 1.8 1.2 Thailand 7.8 0.1 4.7 5.0 4.5 0.2 0.0 Vietnam 6.8 5.9 5.2 5.5 5.7 -0.5 -0.8 Cambodia 6.0 7.1 6.6 6.7 7.0 0.0 0.0 Fiji 0.1 1.9 2.1 2.2 2.3 0.6 0.5 Lao PDR 8.5 8.0 8.2 7.5 7.5 -0.1 0.0 Mongolia 6.4 17.5 11.8 16.2 12.2 -5.4 4.4 Myanmar 5.3 5.5 6.3 6.5 6.6 .. .. Papua New Guinea 7.6 9.0 8.0 4.0 7.5 1.0 -1.0 Solomon Islands 7.8 10.5 5.3 4.0 3.3 -0.7 0.0 Timor-Leste 9.5 10.6 10.0 10.0 10.0 0.0 0.0 Developing East Asia excl. China 7.0 4.4 5.6 5.7 5.8 0.4 0.1 Assumptions about the external environment: World 4.3 2.7 2.3 2.4 3.1 -0.3 -0.6 High-income countries 3.3 1.6 1.3 1.3 2.0 -0.2 -0.6 Developing countries 7.5 5.9 5.1 5.5 5.8 -0.4 -0.2 Source: World Bank data and staff estimates. The EAP region will recover further next year In 2013, developing countries in EAP are expected to grow by 7.9 percent, 0.4 percent more than in 2012, and well above the developing country average of 5.5 percent. Developing countries in the region other Remaining Resilient 12  |  Part I. Recent Developments and Outlook than China are projected to grow slightly above that average, at 5.8 percent, supported by strong domestic demand and a slight recovery in external demand. China’s growth is projected to recover in 2013 to 8.4 percent due to the combination of lagging effects of earlier monetary expansions, local government fiscal stimuli, accelerated approval of central investment projects, and an upswing in the business cycle. China’s growth is, however, expected to slow slightly in 2014, in line with an expected gradual slowdown in potential growth. Continued high investment will add to potential growth, albeit at a declining rate. But China’s labor force growth will further moderate, and turn negative later this decade, thus lowering labor’s contribution to growth, and then reversing it. Productivity increases are also expected to slow from their brisk pace of the past, as the “easy” gains in productivity, notably those based on moving labor from low productivity agriculture to manufacturing and services will no longer be available, and instead China will have to rely more on innovation and better use of capital to achieve productivity increases.4 Indonesia, Malaysia and the Philippines are expected to continue their gradual recovery into 2014, with investment booms sustaining economic momentum. Indonesia and Malaysia are also likely to be helped in the coming years by favorable commodity prices. Vietnam is also expected to stay on its current path of moderate recovery, although additional banking sector and SOE reforms could deliver a significant boost to growth. For Thailand, 2013 is expected to be the first full year that it operates at full capacity since the 2011 floods. Growth is expected to moderate somewhat in 2014, as the low base effect dissipates, and as public investments slow after the completion of the bulk of water projects during the previous year. Mongolia’s growth rate is highly variable, mostly depending on the performance of the mining sector. It is expected to receive a one-off boost when Oyu Tolgoi, one of the largest copper-gold mines in the world, goes into production, currently expected in 2013. Growth is projected to moderate in 2014 to a rate similar to 2012. Poverty will continue to decline Figure 14. Poverty has fallen and is likely to continue to do so in percentage of population living under $2 a day 60 With the continuation of relatively high rates of 55 54 51.2 economic growth across developing countries in 48.6 50 EAP , poverty is expected to continue to decline 51.9 46.2 44 over the coming years. Specifically, the share of 45 47.4 41.9 40.8 39.8 people living under $2 per day in the region is forecast 40 43.3 37.4 36.2 35.1 39.6 34 32.9 to reach 23.3 percent by the end of 2014, down from 35 37.1 34.8 33 28.8 percent in 2010. However, maintaining the rate 30 31.1 of poverty reduction will be more difficult as growth 25 28.8 27.2 25.8 24.5 23.3 will have to reach the remaining poor, many of whom 20 reside in remote areas. One way of reaching them 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 EAP EAP without China is to ensure that as they continue to expand, the Sources: PovcalNet and World Bank Staff calculations. Note: Poverty estimates from PovcalNet until 2008. The projections beyond 2008 are economies in EAP also create jobs accessible to the based on the latest poverty estimate, the elasticity of growth, which is defined as a function of the change in poverty relative to the change in monthly per capita income/ poor (see Part III for the challenges in this regard). consumption between 2005 and 2008, and real GDP per capita growth and growth projections. 4 China 2030 sketches the medium term analysis on which this slowdown in total factor productivity is based. world bank east asia and pacific economic update 2012, vol.2 Part I. Recent Developments and Outlook  |  13 Several risks confront the EAP region The economic outlook of the Euro area remains uncertain although global financial conditions have improved significantly since July 2012. Continued improvement is contingent on progress implementing the structural and fiscal reforms. Failure to pursue these reforms, or a significant disappointment in growth, may prompt markets to lose confidence once again, potentially pushing the currency area into a serious crisis. Such an eventuality could cut regional growth in EAP by one or more percentage points due to reduced import demand from high-income countries, much tighter international capital conditions, and increased precautionary saving within the region. A second global risk is the “fiscal cliff” in the United States, which would create more headwinds in the global economy. The nature of this risk is less complex than the one associated with the Euro area, but the impact on global demand would nevertheless be substantial. Current legislation, unless modified, would impose a fiscal contraction representing 5 percent of GDP in 2013, as compared to 1.4 percent of GDP assumed in the baseline projection. Such an event would trigger a deep recession in the United States and would reduce the growth rate of the EAP region by around 1 percent of GDP . A third risk is capital inflows surging above what can be absorbed in productive investments, which would put pressures on prices and inflate asset bubbles. Even productive investments could set off a spiral by boosting the growth outlook of the economy, which in turn makes it more attractive to invest in the economy, increasing the likelihood of overheating. Rapid inflows also expose the economy to the possibility of rapid outflows when the tide turns. At high risk are countries that experienced rapid credit expansion, especially if the credit to GDP ratio is already high, and those with weak financial sector supervision. International experiences suggests that rapid credit expansion leads to declining quality of investments, as banking sector talent needed for assessing investments is stretched thin. Concerns remain over a further slowdown in China. There is a possibility that the uptick in growth observed in the third quarter may not be sustained. As policy makers attempt to balance support for growth with concerns of a rebound in housing prices, a reversal of short-term capital inflows, and goals of a more balanced development pattern, it seems unlikely that the government will introduce a major fiscal stimulus package. On the other hand, large investments already undertaken or approved this year are likely to continue to support growth next year, which makes the risk of a “hard landing” for the Chinese economy relatively small. While a slow progressive decline in China’s unusually high investment rate is the most likely outcome, if this position were to unwind abruptly there would be significant domestic and global consequences.5 If a major slowdown results from such an event, China’s authorities are likely to use their fiscal space to maintain growth at acceptable levels. Commodity export-dependent countries are most at risk in the event of a renewed global slowdown, while commodity importers will need to contend with inflationary pressures if commodity prices increase. Countries such as Mongolia, Lao PDR, Timor-Leste, and Papua New Guinea, for which commodity exports make up at least 80 percent of total exports, would experience a sharp terms of trade shock in the event of a major global slowdown. A further slowdown in China would affect commodity exporters in the region particularly strongly, since, with the exception of Timor-Leste, China is their major trade-partner in commodities. 5 For a more detailed discussion on the medium term challenge of China transitioning to lower investment equilibrium, see China 2030. The risk of not managing the transition process well is discussed in detail in the forthcoming Global Economic Prospects January 2013. Remaining Resilient 14  |  Part I. Recent Developments and Outlook Such a slowdown may also decrease private investments and government spending in natural resource sectors. Fiscal revenues from commodities are also relatively high for Indonesia and Malaysia, and particularly so in Timor-Leste. Timor-Leste would, however, be well placed to mitigate such risks given its large sovereign wealth fund of accumulated commodity revenues. Indonesia and Malaysia are hedged in part against the impact of oil price shocks on government revenues, as their spending on fuel subsidies would drop with increases in oil prices. EAP countries, especially the small Pacific Island countries, are the most exposed to natural disaster risks in the world. In 2011, losses caused by natural disasters reached a record of US$380 billion,6 almost doubling the previous record of $262 billion in 2005. Aside from the devastation and loss of lives that the Tohoku Earthquake and Tsunami and the Thai floods caused, these disasters also cascaded through supply chains worldwide. In 2011, East Asia and Pacific sustained 80 percent of global losses and, since 2000, more than 1.6 billion people—mostly the poor, vulnerable, and marginalized—have been affected by disasters in the region. Annual average expected losses are particularly high for Cambodia, Lao PDR, Myanmar, the Philippines, and Vietnam, while the small Pacific Island countries are among those most affected globally in terms of how the size of shocks compare to the overall economy and the budget. While urbanization is the main factor inflating the economic and human costs of disasters, these may be further aggravated in coming years by the effects of climate change. Accordingly, countries in EAP would do well to invest more in managing disaster risk (see Part III). 6 Figures from Munich Re NatCatService (2012). world bank east asia and pacific economic update 2012, vol.2 Part I. Recent Developments and Outlook  |  15 I.C. Policy considerations EAP economies are at capacity—continued preparedness against shocks is recommended Most countries in EAP appear to no longer be in a cyclical growth downturn—output is close to potential, in terms of historical trends—and macroeconomic fundamentals are strong (Table 2). Inflation is contained in most countries in the region, and, with the exception of Vietnam, credit growth is in line with output growth. Fiscal deficits of most countries are moderate or low and external balances are robust, with most countries reporting current account surpluses or modest deficits and holding sufficient international reserves to cover international payment obligations. China, the Philippines and Thailand may, in fact, have too many reserves as a result of strong capital inflows. Banking systems are also generally well-capitalized, profitable, and have relatively few non-performing loans (except in Vietnam and Timor-Leste). Central banks in the region have also introduced macro-prudential measures, such as high down-payments for mortgages in China and limits on vehicle loans in Indonesia, further solidifying the banks. The challenge for the authorities in the coming months is to maintain the momentum for economic growth and poverty reduction without much support from external demand, while enhancing the economies’ capacity to absorb shocks. Table 2. Most large EAP economies are growing close to capacity Domestic External Fiscal Monetary Reserves, Credit Current Policy rate months Deficit, Gov’t Debt, growth to Output gap Inflation Account, % relative to imports of % GDP % GDP GDP growth, GDP Taylor rule goods average China Indonesia Malaysia Philippines Thailand Vietnam Note on thresholds: 1. Output gap: green if output gap (actual – potential output) is below -0.75%, red if gap is above 0.75%, and yellow otherwise. 2. Inflation: red if inflation is approximately 10% or higher, yellow if approximately between 5% and 9%, and green if lower. 3. Current account: green if the current account deficit is approximately below 5% of GDP , red if above 10%, and yellow otherwise. 4. Reserve: red if less than 3 months of import cover or if the reserves deviate more than approximately 1.5 standard deviation (std.) from 1999–2007 average, green if the current reserves do not deviate more than approximately 0.5 std., and yellow otherwise. 5. Fiscal deficit: green if deficit does not deviate more than 0.5 std. from 1999–2007 average, red if the deviation is larger than 1.0 std., and yellow otherwise. 6. Debt: green if debt to GDP ratio is approximately below 30%, red if higher than 60%, yellow otherwise. 7. Deviation from Taylor: green if the real rate is significantly tighter than predicted by the Taylor rule, yellow if approximately par, and red if significantly looser. 8. Domestic credit growth to GDP growth (average of 1999–2011): green if less than twice, red if higher than four times, and yellow otherwise. Most EAP economies have the fiscal space to respond if the external environment deteriorates In the case of a major downturn, most countries have sufficient fiscal space to pursue expansionary measures, with the possible exceptions of Vietnam and Malaysia. Vietnam’s fiscal deficit in 2012 is relatively Remaining Resilient 16  |  Part I. Recent Developments and Outlook high (5.2% of GDP), but is expected to shrink in 2013–2014. Malaysia’s fiscal deficit (4.4% of GDP), is also higher than other countries’ in the region, but not particularly high relative to its own history and is in line with the government’s target for 2012 despite significant expenditure over-runs. Countercyclical fiscal measures would ideally stimulate the economy in the short run as well as improve medium-term growth prospects. Investments in public infrastructure and other public goods are often held up as examples of such productivity enhancing measures. In practice, in many EAP economies, difficulties in budget execution, particularly of the capital budget, limit the feasibility of quickly ratcheting up public investments in response to a downturn. Thus, fiscal interventions that are aimed more directly at increasing domestic demand from consumers or stimulating private investments, such as targeted social assistance or investment tax credits, are worth considering. There is less scope for monetary easing Monetary policy stances in the region are largely Figure 15. Taylor rule says policy rate are at par appropriate in the current environment, in which or slightly too low negative shocks remain a dominant concern. The 8 policy rates of China and Malaysia are roughly in 7 line with those suggested by the Taylor Rule7, which calls for raising rates if the inflation rate is above 6 the target8, or if the economy is overheating (Figure 5 15). In Indonesia, the Philippines and Thailand, the 4 current policy rates are lower than those implied 3 by the Taylor Rule, suggesting that monetary policy 2 is already relatively relaxed. Consequently, further 1 easing may be constrained in these countries unless 0 conditions change dramatically. This is particularly China Indonesia Malaysia Philippines Thailand Policy rate Rate implied by usual reaction of the Central Bank (Taylor rule) true for Thailand, which has a negative policy interest Source: World Bank staff estimates. rate in real terms. Receding inflation in most countries suggests that there is no need for immediate monetary tightening in the region in the absence of major shocks. One prominent exception is Mongolia where core inflation is over 10 percent, and stabilization is desirable. Indonesia and Vietnam would need to monitor inflation closely. Indonesia’s inflation is moderate, but it is projected to rise in 2013 on the back of high levels of consumer credit growth, the ongoing pass-through from the depreciation to date of the rupiah, and the possibility that planned increases in administered energy prices and minimum wages may trigger broader cost-push inflation. In Vietnam, inflation has started to increase again, albeit modestly, in response to renewed loosening of monetary 7 Computed by estimating it = πt+rt* + aπ (πt-πt*)+ay(yt -yt), where it is the target short-term nominal interest rate, πt is the rate of inflation as measured by the GDP deflator, πt* is the desired rate of inflation, rt* is the assumed equilibrium real interest rate, yt is the log real GDP and yt is the log potential output, as determined by a linear trend. For countries not targeting inflation, the historic average is used as a proxy. 8 Some central banks, such as Bank Indonesia and the Philippines’ Bangko Sentral, announce formally their target inflation rates, while others do not, but generally maintain implicit targets. world bank east asia and pacific economic update 2012, vol.2 Part I. Recent Developments and Outlook  |  17 policies earlier this year. In the event of a shock, such as a sharp increase in commodity prices as a result of a more rapid than expected global recovery, these three countries would need to tighten monetary policy. Intensifying capital inflows will have to be managed The recent resurgence in capital inflows to the region have not yet been associated with strong appreciation pressures on the currencies, due in part to the offsetting weakness in the current accounts. However, if the capital inflows continue, appreciation pressures may accumulate, raising the costs to the region’s central banks of sterilized intervention in the exchange rate market. Authorities would then face the decision to either reduce domestic interest rates, let the exchange rate appreciate, or control capital flows. According to the Taylor Rule, lowering the domestic interest rates is currently not a good option for most countries in the region, while appreciation of the local currency would make exports more expensive and is not widely considered an attractive option among policy makers in the region. Some recent studies have found that policies to moderate capital inflows may be desirable under certain circumstances, particularly where a country has a high level of debt denominated in foreign currency.9 The studies recommend such measures to tighten with the countries’ indebtedness, and to be tighter for foreign currency-denominated debt. However, such measures also have drawbacks and should not be introduced without thorough consideration of potential costs. Specifically, currency controls are a blunt instrument that could affect investor confidence to the detriment of the country, especially those that are pursuing investment grade status. In addition, controls are difficult to roll back once introduced, as they tend to create vested interests. Finally, uncoordinated imposition of controls could have negative effects on other recipient countries, or lead to competitive escalation of measures. If global liquidity expands further with renewed monetary stimulus by the ECB and the BOJ, short term capital flow warrants close monitoring by the region’s authorities. Countries that have experienced high credit growth should be particularly alert. In parallel with the deliberations on other policy options, efforts are needed to improve the effectiveness of banking sector supervision in crucial areas, such as risk management, information disclosure requirements and corporate governance, and to enhance macro-prudential regulations. It is advisable that such efforts are dispensed pre-emptively, as many commonly used barometers of banking sector health, such as non performing loans, are a lagging indicator, and do not have predictive power. 9 “The New Economics of Prudential Capital Controls: A Research Agenda” , Antonio Korinek, IMF Economic Review, August 2011. “Bubble Thy Neighbor: Direct , Kristin Forbes, Thomas Kotska and Roland Straub, NBER Working paper No. 18052, May 2012. “Multilateral Aspects of and Spillover Effects of Capital Controls” Managing the Capital Account” , Jonathan Ostry, Atish Ghosh and Anton Korinek, IMF Staff Discussion Note, September 2012. Remaining Resilient   |  19 Part II. Selected emerging issues Remaining Resilient 20  |  Part II. Selected emerging issues II.A. Introducing Myanmar A new reformist administration has been undertaking political, social, and economic reforms that have seen Myanmar emerge from decades of international isolation. In recognition of these reforms, the international community has been taking steps towards normalization of relations with the country by lifting various sanctions, establishing diplomatic relations, and through high profile visits to the country. Development partners, including the World Bank, have also been taking steps to resume normal development assistance through the provision of financial assistance and analytical and advisory services. This section provides a brief introduction to the country as it features for the first time in the EAP economic update. It briefly outlines the economic and development context in Myanmar, the triple transition that is underway, and the economic opportunities and challenges going forward. A. Economic and development context Myanmar is the largest country in mainland South East Asia in terms of land size. At 653,520 km2, it is second only to Indonesia (1,904,569 km2) in the ASEAN region. The last population census was conducted in 1983, but it is estimated that there may now be between 48–60 million people, which would put Myanmar around 5th position in the region after Indonesia, the Philippines, Vietnam, and Thailand. It shares borders with India, Bangladesh, China, Laos and Thailand. Myanmar is an ethnically diverse country. It is believed that there are at least 135 distinct ethnic groups and 108 different ethno-linguistic groups in Myanmar. Administratively, the country is divided into seven states and seven regions which represent the tier below the Union (Central) Government. It also has one union territory, Nay Pyi Taw, as the country’s capital. Agriculture is currently still the largest contributor to national output and to people’s livelihoods. It accounts for 43 percent of GDP , generates about 54 percent of employment, and provides livelihoods to more that 70 percent of the population. The major agricultural product is rice which covers about 60 percent of the country’s total cultivated land area and accounts for 97 percent of total food grain production by weight. Other prominent agriculture products are pulses, forestry products, fisheries, and livestock. The country has large natural gas reserves, with current production accounting for 33 percent of export revenues and 61 percent of Union fiscal revenues expected for 2012–13. The contribution of the gas sector will likely increase by 2014. Contracts were signed in July 2010 for two other gas fields (Shwe and Zawtika), with reserves that will almost double existing capacity and potential to increase annual production by about 60 percent in 2014–15. Apart from gas and agricultural products, Myanmar is also a major exporter of gems. Manufacturing is still in its infancy, and is largely limited to agro-processing. A substantial portion of economic activity in Myanmar is informal, with small and medium-sized enterprises accounting for over 90 percent of the country’s enterprises. The share of exports in GDP is roughly 20 percent, as is the share of imports. Myanmar’s trade has been limited to the region because of international sanctions. China has been the main source of imports while Thailand has been Myanmar’s main export destination. The country’s principal export product is natural gas. Other major exports are wood products, pulses and beans, fish, rice, clothing, jade and gems. Its principal world bank east asia and pacific economic update 2012, vol.2 Part II. Selected emerging issues  |  21 imports are fabrics, petroleum products and crude oil, fertilizer, plastics, machinery, transport equipment, cement and construction materials, and food products and edible oils. Myanmar is one of the poorest countries in the South East Asian region.10 Its GDP is currently estimated at approximately US$50 billion, and with population figures ranging between 48 million and 60 million, per capita income is estimated to be in the range of $800–$1,000. A nationwide integrated household living conditions survey conducted by UNDP , UNICEF , and SIDA in 2009/10 found that 26 percent of the population was living below the poverty line which was estimated at US$1 dollar a day11. The country’s level of infrastructure development is still very low. About 75 percent of the population has no access to electricity and power outages are common throughout the country. Almost half of the roads are not passable during the monsoon rainy season while railways are old and rudimentary, with few repairs since their construction in the late 19th century. Telecommunications and internet access is very limited. Most social indicators are also poor. For example, 32 percent of children under five suffer from malnutrition, the highest in the EAP . Myanmar’s government has been spending the least percentage of its GDP on health care of any country in the world. B. A Country in triple transition Myanmar can arguably be characterized best as a country on a triple transition path: (a) from military rule to a democratic and decentralized system of governance (b) from 60 years of internal conflict to peace in the border areas; and (c) from a centrally-directed socialist economy to a modern, market- oriented, and open economy. If successful, these transitions together present a chance for Myanmar’s positive transformation. In unfolding simultaneously, they also pose the risk that setbacks in any one of these realms will affect the others. Each of these transitions is complex and on their own would challenge the capacity of most states. Transition towards democracy under a decentralized system of government The administration of President Thein Sein, brought to office following elections in 2010, has signaled its intent to chart a new direction for the country. In his inaugural address in March 2011, President Thein Sein reached out to long-time critics of the former regime, urging that differences be put aside in order to work together for the good of the country, including through national reconciliation, good governance, and economic development. As part of this process, the Thein Sein administration has undertaken far-reaching moves towards political reconciliation with opposition groups. The government resumed a previously stalled dialogue with Aung San Suu Kyi that led to a historic meeting between President Thein Sein and Aung San Suu Kyi in August 2011 and the re-registration of her National League for Democracy (NLD) as a legal political party. Following parliamentary by-elections on 1 April 2012, the NLD became the largest opposition party in parliament, with Aung San Suu Kyi and 42 other NLD delegates taking their parliamentary seats in May 2012. There has also been large-scale releases of political prisoners (including in May and October 2011 and January and September 10 A key limitation in understanding the development challenges in Myanmar is the lack of accurate and consistent data, especially at the national level. 11 Caution is urged in the interpretation of data, since the surveys did not include populations in parts of the border areas, potentially masking large pockets of poverty and skewing final results. Remaining Resilient 22  |  Part II. Selected emerging issues 2012) and members of the Myanmar Diaspora are being welcomed back, including prominent critics of the government. These high-profile political developments have been accompanied by less reported but equally tangible changes in people’s everyday lives, in particular increased civil and political freedoms. Changes in the national legal framework allowed the formation of trade unions and public gatherings for the first time in 20 years. More broadly, an increased freedom of expression, including a new media law which reduces media and internet censorship, led to new public discussions of previously taboo topics such as poverty and corruption. The general elections scheduled for 2015 will be an important milestone and test of the democratic transition. Another key feature of Myanmar’s transition to democracy is the move towards a more decentralized system of Government. In line with the new constitution, Myanmar has from 2011 moved from a centralized unitary form of government to a hybrid system of central local relations, falling somewhere between unitary and federal systems. While the Union (central) level of government has sole legislative authority and key financing responsibilities, regions and particularly states (both first order sub-national government units) exercise varying degrees of autonomy in service delivery and administration. In particular, the 14 states and regions have their own parliaments and executive governments, headed by a Chief Minister. They also prepare their own budgets which have to be approved by their respective parliaments. However, unlike in fully fledged federal systems, the state and regional budgets also need to be approved by the national parliament. Further, there are no publicly known guidelines or formulae, if at all they exist, that guide vertical allocation of resources between central and the lower tier of government and horizontal allocation, amongst the 14 states and regions. Achieving peace in the Border States The second type of transition has focused on ensuring an end to conflicts in the border areas, many of which have been going on for 60 years. Myanmar has 11 major ethnic groups that have been involved in conflict, spread across seven states, and many smaller groups and militias. A series of ceasefires were reached in the 1980s and 1990s but these did not last. Soon after coming to power, the new administration made the need to achieve lasting peace in the conflict areas one of its top priorities. Ceasefires have been agreed or renewed with 10 out of the 11 groups. The conflict in the northwestern state of Rakhine poses another ongoing challenge. In order to improve the chances of finding long lasting peace, the Government is establishing a Peace Center whose role will be to improve the coordination of the peace process between government, international organizations, civil society, NGOs, and donors. Transition towards a modern, market-oriented, and open economy The third transition seeks to achieve economic development by moving away from an approach where the Government dominates the economic space to one where development is achieved through a flourishing private sector operating in a modern, market-oriented, and open economy. Myanmar’s centrally planned approach to economic management and development was adopted in 1962 when shortly after a military coup, the ruling Revolutionary Council introduced what was known as the “Burmese Way to Socialism” as a blueprint for economic development. In the context of this framework, some of the policies pursued between 1962 and 1988 included the following: most firms and businesses were nationalized to create State Economic Enterprises (SEEs) which received Government subsidies on foreign exchange and inputs; there were fixed multiple exchange rates and access to foreign exchange was strictly controlled; all land world bank east asia and pacific economic update 2012, vol.2 Part II. Selected emerging issues  |  23 rights belonged to the Government which would also dictate crop choices and require the sale of a portion of most farm produce to the government at prices below international levels; and the financial sector was heavily controlled and regulated. In 1987, some variations to the framework started being introduced. For example, farmers were given more freedom to sell surplus produce in private markets. Although rice export was still under the state monopoly, domestic paddy/rice marketing was deregulated, resulting in active participation by private traders. Similarly, following the official abandonment of the Burmese Socialism in 1988, SEEs started being privatized although many still remained under the direct control of government ministries. Transition to a market economy continued but many elements of a centrally planned economy remained. Like the other two transitions, the move to a market-based economy has received renewed impetus under the new administration which is operating under the framework of the new Constitution that has a clear provision for a market-based economy. Important steps already undertaken include the introduction of a managed float exchange rate system on April 1, 2012 leading to legal use of a realistic and less distortionary exchange rate; greater transparency in use of public funds through parliamentary discussion and approval and then publishing of the national budget; significantly increased budget allocations to health and education; providing greater economic decision making to regions and states; reduction in barriers to trade; and approval of a Foreign Direct Investment Law. These are critical initial steps, but much will depend on the implementation of these changes. There are a number of other economic reforms that are under discussion. These include, but are by no means limited to, the preparation of a new law to improve the functioning of the central bank; joining the open Government partnership and the Extractive Industries Transparency Initiative (EITI); financial sector liberalization; a new agricultural land law that allows farmers for the first time to sell or lease their farming rights; and a comprehensive education sector review. The scale of reform that is planned provides an opportunity to bring about significant improvement in people’s lives in Myanmar, but will challenge the Government’s ability to manage all these changes. C. Economic opportunities and challenges The country’s economic opportunities lie in its strategic location within a large regional and global export market, vast untapped natural resources, and the improving prospects for trade, investment, and development aid as it re-engages with the wider international community. Being close to the large export markets of China, India, and other countries in the ASEAN region places Myanmar in a uniquely advantageous position for an export-led transformation of its economy, particularly in areas where it has a comparative advantage such as natural gas, agriculture products, textiles, and minerals. While these are already prominent destinations for Myanmar’s exports, the market potential for Myanmar’s products in these countries remains large. In particular, the country has not fully utilized its location advantage by being more competitive in these markets. Second, there are still significant opportunities for Myanmar to increase production and export levels in its natural resource sector. Finally, with many Governments lifting sanctions on Myanmar and development partners re-engaging, the country will start enjoying favorable market access opportunities in OECD countries as well, and will have expanded opportunities for inflows of portfolio and direct investments. Similarly, the Remaining Resilient 24  |  Part II. Selected emerging issues country will also be able to benefit from financial and technical support from development partners. Reaching Myanmar’s potential will require addressing a number of challenges,including: the creation of an enabling environment for the private sector; the effective and sustainable management of natural resources and delivery of public services; effective use of public resources; initiatives for addressing infrastructure constraints particularly in power and transport sectors; reforms for improving the financial and telecommunication sectors; and, initiatives for improving the quality of statistics. world bank east asia and pacific economic update 2012, vol.2 Part II. Selected emerging issues  |  25 II.B. The near-term dynamics and long-term trends in exports of the ASEAN-4 economies The weak external environment has affected the exports of the ASEAN-4 While regional growth, and in particular Figure 16. Export growth of the ASEAN-4 has weakened, domestic demand, has generally held up in particularly for commodities… year-on-year growth of the three-month moving average of export values, 2012, the weakness in the external environment in percent has clearly affected the performance of regional 60 exports. Fragility in the Euro area, halting progress 50 in the U.S., and slower growth in China and Japan 40 have depressed the demand for East Asia’s exports. 30 20 International commodity prices have declined as 10 well. As of November, energy commodity prices 0 were down 13 percent, in U.S. dollar terms, from -10 their recent highs in March. Prices for some key -20 commodities for the region, such as coal and crude -30 palm oil, have fallen by considerably more. As a -40 Aug-07 Aug-08 Aug-09 Aug-10 Aug-11 Aug-12 result, the growth rate of total exports from the Total exports Manufactured goods Commodities ASEAN-4 (Indonesia, Malaysia, the Philippines, and Source: CEIC and World Bank staff calculations. Note: Commodity exports include oil and gas, coal, copper, and agricultural commodities. Thailand) turned negative by the middle of the year, with commodity exports particularly hit (Figure 16). Manufacturing exports have not been immune to the downturn… While the growth of manufacturing exports Figure 17. …as well as for manufactured goods from the ASEAN-4 economies has generally year-on-year growth of the three-month moving average of manufactured export values, in percent slowed, the picture is more mixed for individual 60 countries (Figure 17). Malaysia, with strong and 50 sizable links to high-income countries through 40 electronic and electrical product exports, has seen 30 little manufacturing export growth over the year 20 10 as personal consumption remains in the doldrums 0 in the high-income economies. In Thailand, the -10 devastating floods in 2011 knocked down industrial -20 production, sizably cutting manufacturing for export -30 through at least the first quarter of this year. In -40 Aug-07 Aug-08 Aug-09 Aug-10 Aug-11 Aug-12 addition, the commodity channel is also affecting Thailand Malaysia Indonesia Philippines commodity-related manufacturing exports in the Source: CEIC and World Bank staff calculations Remaining Resilient 26  |  Part II. Selected emerging issues region. Indonesia—which counts on agriculture commodity-based manufactured goods for 17 percent of its exports, in addition to commodities which comprise the bulk 46% of total exports—is particularly affected. The Philippines has been the exception, with manufacturing exports growing, albeit modestly at 7 .5 percent year- on-year through September, on a more diversified product mix. …with one channel of transmission running through regional production networks The emergence of regional production networks and the rising trade in intermediate goods means that lower demand from high-income countries affects manufacturing exports increasingly indirectly as well as directly.12 In the first eight months of 2012, the EU’s imports of manufactured goods from the ASEAN-4 fell by 2.5 percent (Figure 18). Over the same period, China’s imports from the ASEAN-4 declined by 4.8 percent. The latter reflects not only the slowdown in China’s final demand, but also the indirect impact of weakening demand from Europe13. Indeed, over this period, the EU’s imports of manufactured goods from China fell by 8.8 percent (Figure 19), principally affecting those manufactured goods—electric machinery, telecommunications products, and clothing and footwear—for which the ASEAN-4 countries have become key suppliers to China of inputs and components. Figure 18. The imports of manufactured goods by China Figure 19. …while the impact of Europe’s slowdown has and the EU from ASEAN countries have contracted… also been seen in its lower imports from China value of imports from ASEAN, January–August 2012, in US$ billions, and year- value of imports from China, January–August 2012, in US$ billions, and year- on-year growth, in percent on-year growth, in percent 9 120 30 300 7.3 7.2 6 80 20 200 3 3.1 40 1.8 10 100 0 0 6.9 6.9 4.0 4.1 -2.5 0 0 -3 -40 -5.2 -4.8 -6 -80 -10 -9.0 -8.8 -100 Total Manuf. Total Manuf. Total Manuf. Total Manuf. Total Manuf. Total Manuf. Total Manuf. EU-27 USA Japan China EU-27 USA Japan 2011 (rhs) 2012 (rhs) Growth (lhs) 2011 (rhs) 2012 (rhs) Growth (lhs) Source: CEIC and World Bank staff estimates. Source: CEIC and World Bank staff estimates. 12 Production networks appear to be more extensive in East Asia than in other regions and are the heart of the growth of intraregional trade. Much regional trade is accounted by a triangular pattern of exports, in which Japan and the NIEs export a significant share of parts and components to middle-income ASEAN and China where processing is completed. Final products are then exported to the European Union and the United States. See Homi Kharas and Indermit Gill, eds., An East Asian Renaissance: Ideas for Economic Growth, (Washington D.C.: World Bank), 2007 . 13 World Bank (2012), East Asia and Pacific Economic Update: Capturing New Sources of Growth. Box 3 provides further information on the centrality of China for East Asian trade with Europe. world bank east asia and pacific economic update 2012, vol.2 Part II. Selected emerging issues  |  27 China is likely to play a growing role in regional trade, presenting both opportunities and challenges… These recent developments reflect the medium-term trends in the region’s export patterns. China now accounts for a larger share of regional exports than five years ago. Overall, the relative importance of direct exports to higher-income markets, such as the U.S., Europe and Japan, has fallen. Intra-regional exports (within ASEAN-4 and with China) have risen (Table 3, Panels A and B), not only due to increasing relative income levels and growing market size in the region, but also in line with the closer linkages forged among the region’s exporters through international supply chains. Shifts in the manufacturing locations of multinationals are also changing the pattern of intra-regional trade, as companies relocate, for example, in response to labor cost pressures in China or in response to the production risks exposed by the natural disasters of last year, including the floods in Thailand. For the ASEAN-4 countries, much of the increase in intra-regional manufacturing exports has consisted of higher and rising exports to China (Figure 20). A recent IMF report estimates that China accounts for one half of all intra-regional intermediate goods imports in Asia and that a 1 percentage point drop in Chinese Figure 20. The share of ASEAN-4 manufacturing exports export growth would lower the growth of exports of to the region have risen ASEAN-4 manufacturing exports per destination, as a share of the ASEAN-4’s Asian economies to China by about two-thirds of a total exports, in percent percentage point14. 50 Looking ahead, the importance of the Chinese 40 economy for intra-regional trade is likely to grow 30 further, although the composition of this trade may change with the rebalancing of demand in 20 China. This process could yield sizable export gains to countries which are able to tap into this new 10 source of final goods demand in China. However, for countries which remain reliant on commodity 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 exports, the impact may be less benign as China’s G-3 China + ASEAN-4 China ASEAN-4 rates of fixed investment and construction decline. Source: U.N. COMTRADE and World Bank staff calculations. …but new extra-regional markets also provide real opportunities for export growth Other than the intra-regional market, developing country markets outside the region also offer considerable potential to East Asia’s exporters. The share of manufacturing exports from China and the ASEAN-4 headed to markets beyond the major trading blocs is sizable and growing. Over 2005 to 2011, the share in total exports of manufactured exports to economies outside the major trading blocs rose by 5.4 percentage points for the ASEAN-4 and by 10 percentage points for China (Table 3, Panel B). For the ASEAN-4, this increase was greater than the increases in export shares within the region. 14 IMF (2012), Regional Economic Outlook - Asia and Pacific: Managing Spillovers and Advancing Economic Rebalancing. Remaining Resilient 28  |  Part II. Selected emerging issues Table 3. Rising dependence on China and a higher share of commodity-based exports Panel A. The pattern of the major EAP countries’ manufacturing exports by destination, 2011 exports by category, as a share of total exports, in percent Export to: Exporter Export products: China ASEAN4 NIEs JPN EU25 USA RoW World Raw materials .. 0.4 0.8 0.5 0.5 0.3 1.1 3.5 Agri res-based manuf. .. 0.2 0.4 0.5 0.5 0.5 1.3 3.4 Other res-based manuf. .. 0.3 0.7 0.4 0.7 0.5 1.7 4.4 Textile, footwear, clothing .. 0.5 1.4 1.8 3.8 3.1 5.9 16.4 China Other low-tech manuf. .. 0.7 2.5 0.9 2.8 3.2 4.5 14.6 Mach, elec., proc. manuf. .. 2.8 13.6 3.9 10.6 9.8 16.9 57 .6 Total exports .. 5.0 19.4 8.0 18.8 17.5 31.4 100 Manufacture exports .. 4.6 18.5 7.5 18.4 17.2 30.3 96.5 Raw materials 3.7 2.2 4.9 6.1 1.4 1.5 5.9 25.6 Agri res-based manuf. 2.3 1.5 1.2 1.5 1.9 1.3 6.0 15.7 Other res-based manuf. 1.3 0.6 0.9 1.0 0.3 0.1 1.2 5.3 Textile, footwear, clothing 0.2 0.2 0.3 0.4 1.2 1.6 1.2 5.0 ASEAN4 Other low-tech manuf. 0.1 0.6 1.4 0.7 0.8 0.8 1.8 6.3 Mach, elec., proc. manuf. 5.2 4.9 8.2 4.0 5.0 4.0 10.9 42.2 Total exports 12.7 10.0 16.9 13.5 10.7 9.3 26.9 100 Manufacture exports 9.0 7.8 12.0 7.5 9.3 7.8 21.1 74.5 Panel B. Comparing the pattern of major EAP countries’ manufacturing exports by destination, 2005 and 2011 percentage point change in share of total exports, from 2005 to 2011 Export to: Exporter Export products: China ASEAN4 NIEs JPN EU25 USA RoW World Raw materials .. 0.0 -0.4 -0.3 0.0 -0.1 0.2 -0.6 Agri res-based manuf. .. 0.1 -0.1 -0.3 0.0 -0.1 0.6 0.1 Other res-based manuf. .. 0.1 -0.2 -0.1 -0.1 0.1 0.5 0.3 Textile, footwear, clothing .. 0.2 -1.5 -0.9 0.7 -0.5 0.6 -1.3 China Other low-tech manuf. .. 0.3 0.2 -0.2 -0.1 -1.4 1.7 0.5 Mach, elec., proc. manuf. .. 0.2 -1.6 -1.1 -0.9 -2.2 6.6 1.0 Total exports .. 1.0 -3.6 -3.0 -0.3 -4.3 10.2 .. Manufacture exports .. 1.0 -3.2 -2.6 -0.3 -4.2 10.0 0.6 Raw materials 1.8 0.4 1.4 1.6 0.4 0.3 2.0 7.8 Agri res-based manuf. 1.2 0.6 0.2 0.1 0.3 0.2 2.7 5.3 Other res-based manuf. 1.0 0.0 0.2 0.1 -0.1 -0.1 0.2 1.2 Textile, footwear, clothing 0.0 0.0 -0.1 0.0 -0.2 -1.0 -0.1 -1.5 ASEAN4 Other low-tech manuf. -0.1 0.1 0.5 -0.1 -0.3 -0.7 0.2 -0.4 Mach, elec., proc. manuf. 0.9 -0.5 -4.2 -2.2 -2.6 -6.3 2.5 -12.4 Total exports 4.8 0.5 -2.0 -0.5 -2.6 -7.6 7.4 .. Manufacture exports 3.0 0.1 -3.4 -2.1 -3.0 -7.9 5.4 -7.8 Source: U.N. COMTRADE and World Bank staff calculations. Note: In Panel A, a darker color indicates a larger share of total exports. In Panel B, the figures represent the percentage point changes in total exports from 2005 to 2011 (for example, the share of ASEAN-4 commodity exports to China grew by 1.8 percentage points from 1.9 percent in 2005 to 3.7 percent in 2001). Yellow represents little change, shades of red, levels of decline, and shades of green, levels of increase. world bank east asia and pacific economic update 2012, vol.2   |  29 Part III. The medium term development agenda Remaining Resilient 30  |  Part III. The medium term development agenda III.A. The jobs context in East Asia and the Pacific 15 Economic growth in the East Asia Pacific region has created jobs. A positive relationship between employment and GDP growth in the region was not as strong as in South Asian countries, but since 1991 matched and in some cases surpassed the average for low and middle-income countries. In fact, while the strength of the relationship between employment and growth varies considerably across countries, when taken in aggregate, growth in East Asia matched the long-run average for upper-middle-income countries (Figure 21).16 Job creation in the wake of growth was even faster in China, Malaysia, and Thailand from 2001 to 2011.17 Figure 21. Growth has created jobs, although less in EAP than in some other regions long-term employment elasticity to GDP growth 1.2 1.0 0.8 0.6 0.4 0.2 0 South Asia Sub-saharan Africa Eastern Europe/Central Asia East Asia Pacific Middle East/North Africa Latin America/Caribbean All sectors Agriculture Industry Services Source: Crivelli, E., D. Furceri and J.Toujas-Bernate (2012). Yet despite these trends, there is a growing preoccupation with jobs in the East Asia and Pacific region and globally. This rising concern was reflected in the presentation of the 2013 World Development Report (WDR) on Jobs18 in October at the annual meetings of the World Bank and the International Monetary Fund in Tokyo. This section summarizes the conceptual framework and main findings of the WDR on Jobs, and previews a program of analysis sponsored by the EAP Regional Chief Economist to synthesize the report’s implications for East Asia and Pacific countries. Growth in the region is characterized by a greater degree of export orientation and openness to world trade and especially between East Asian countries than in other low income and emerging market regions. Relatively high rates of growth have been sustained for longer periods than high growth spurts elsewhere. Perhaps reflecting hard-learned lessons during the region’s crisis in the late 1990s, countries in East Asia continued to generate employment even during the global economic slow-down and contraction of 2009, although with a substantial downward adjustment in earnings. 15 Prepared by EAP Jobs regional study team. , IMF Working Paper WP/12/218, 16 Crivelli, E., D. Furceri and J.Toujas-Bernate, 2012, “Can Policies Affect Employment Intensity of Growth? A Cross-Country Analysis” Washington DC. , World Bank Policy Research Working Paper 6156, Washington DC. 17 Hanusch, M., 2012, “Jobless Growth? Okun’s Law in East Asia” 18 World Bank, 2012, World Development Report 2013: Jobs, Washington DC: World Bank. world bank east asia and pacific economic update 2012, vol.2 Part III. The medium term development agenda  |  31 These contextual factors shape not only the speed of structural transformation, but the relative returns to labor, the skills profile required to maintain productivity, and the vulnerability of jobs to shocks. Although growth in East Asia has clearly resulted in a greater quantity of jobs, households and the governments that serve them are nonetheless concerned about the quality of jobs. In the island countries of the Pacific that experience very different economic forces, the substantial—even growing—share of youth in the population and the large number of these young people who are not working, provide similarly strong motivation for governments to pay attention to employment. A profile of EAP labor force: Who is working and where? What does the word “job” really mean in EAP countries where the share of the labor force engaged in small-scale agriculture is still large; where many working people are sole-traders and otherwise self-employed; and where “unemployment” -i.e. a lengthy period of search, without any remunerated activity- is rare? The WDR points out that the commonly understood concepts of “jobs” , “employment” and “unemployment” lose much of their meaning in countries where only a fraction of the labor force works for a wage or salary, and where the coverage of income support systems to protect household consumption during periods without work is scant. To be useful to policy makers in developing countries, the WDR uses jobs to refer to a broader variety of working forms, including farm employment, unpaid family work in household’s market- enterprise, self-employment, and casual labor. From the data presented in the charts below a profile of working people in EAP countries quickly becomes apparent. The data here are presented in cross section for two reasons. First, to show how East Asia Pacific countries as a group are different from other countries. Second, to show how different East Asian countries and particularly those in the Pacific are from each other. But an important dimension is not shown: the rapid changes over time, which as mentioned earlier have arguably been more dramatic in East Asian countries than elsewhere. Who is working in East Asia Pacific countries? The first important characteristic to note is that most people still live and work in rural areas. This is particularly apparent for Pacific countries. The share of the population living in towns and cities—although growing fast—remains lower than expected at their level of income. The second characteristic is that the share of the population participating in the labor force (working or seeking work), is higher in most EAP countries than in comparable countries elsewhere. And among people participating, women represent a larger share in most EAP countries than in other parts of the world (with the notable exception of Malaysia in East Asia and Fiji in the Pacific). In East Asian countries young people (ages 16–25) are more likely to be participating. And while falling fertility is causing East Asia’s populations to age quickly, older people (ages 56 and above) are more likely to be economically active than elsewhere. Inversely, Pacific populations are younger. Reflecting one of the contextual factors—the degree of regional and global integration of East Asian countries—the region is both a host to a large number of immigrants, as well as an exporter of labor. Pacific countries like Samoa and Tonga lead in sending emigrants as a share of their small populations. The Philippines is probably the best known country for exporting labor. Available data are inexact, but as of 2010 East Asia and Pacific countries hosted 7 million immigrants, and received US$90 billion in remittances from up to 21 million emigrants. Remaining Resilient 32  |  Part III. The medium term development agenda Figure 22. Participation rates are generally higher Figure 23. Also among women, but with important than elsewhere exceptions labor force participation rates women labor force participation 100 100 90 90 KHM LAO KHM LAO 80 MMR VNM CHN 80 VNM CHN PNG PNG 70 THA 70 THA VUT VUT 60 MNG 60 MNG SLB TON SLB TON PHL IDN IDN 50 50 PHL WSM MYS WSM MYS 40 TMP FJI 40 TMP FJI 30 30 20 20 10 10 5 6 7 8 9 10 11 12 5 6 7 8 9 10 11 log of GDP per capita, PPP (constant 2005 US $) log of GDP per capita, PPP (constant 2005 US $) Source: World Bank’s World Development Indicators. Source: World Bank’s World Development Indicators. Where are people working? Most working Figure 24. Open unemployment remained low people in East Asian countries—Malaysia, Thailand, average open unemployment rate, 2000–2010 40 Philippines and Indonesia—earn their living in small and medium enterprises. Indeed, in this regard 35 findings from the Jobs WDR counter widely held 30 assumptions that large firms are the engines of 25 job creation in low and middle income countries. 20 Taking account of a representative sample of firms 15 in emerging economies—and not just a sample 10 IDN of registered firms, which can “censor” small 5 PHL MNG FJI VUT CHN PLW MYS businesses—reveals that many new jobs are created 0 KHM LAOVNM TON THA in small enterprises. Relatedly, a large share of the 5.5 6.5 7.5 8.5 9.5 10.5 11.5 log of GDP per capita, PPP (constant 2005 US $) labor force works in the primary sectors. This ranges Source: World Bank’s World Development Indicators. from about 34% in the Philippines to 70% in Lao PDR. Finally, and critical to explaining why jobs are a growing policy concern in the region, employment in EAP is also characterized by a high degree “informality”—that is, work or other transactions on unregulated and untaxed markets. A large portion of this in countries like Lao PDR, Cambodia and PNG, is structural informality, explained by a large share of the labor force still working in subsistence or small-share holder farming. In most countries this portion decreases with the structural change out of mainly agrarian economies. However, setting aside people who are self-employed farmers or non-paid workers in a family business (what labor economists refer to as “residual earners”), in all middle-income countries, there is a persistent remainder that can vary widely in size. The remaining share of informal workers—whether measured by proxies such as non-farm self-employment, the share of people working in micro-enterprises with five or fewer workers, or the workforce that is not contributing for social security coverage—is higher in many EAP countries than in other parts of the world at similar levels of income. The share of the labor force in “formal” wage and salaried employment in EAP countries is among the lowest across low and middle income regions (surpassed only by countries in Sub-saharan Africa). world bank east asia and pacific economic update 2012, vol.2 Part III. The medium term development agenda  |  33 Figure 25. Primary industries dominate Figure 26. Vulnerable employment prevalent in percent in percent 100 100 90 90 80 80 70 70 60 60 50 50 40 40 30 30 20 20 10 10 0 0 LAO VNM KHM TMP MMR THA MNG CHN IDN PHL PNG MYS NZL PRK JPN AUS LAO MMR KHM TMP PNG VNM IDN THA MNG PHL MYS Primary Secondary Tertiary Agriculture Self employed non-ag Employer non-ag Unpaid non-ag Wage Source: Staff estimates using the World Bank’s International Income Distribution Database Source: Staff estimates using the World Bank’s International Income Distribution Database (I2D2). (I2D2). Jobs and the three “development transformations” in EAP The WDR 2013 argues that jobs (as the report broadly defines that term) link individual, household and societal assets such as education, land, and capital, to improving development outcomes. In doing so jobs are the conduits connecting and enabling three critical development transformations: gains in productivity, improvements in living standards, and greater social cohesion. These are the transformations that can pull a country form low to middle income and from middle to high income. Have these transformations been observed in East Asia? Probably more dramatically than in other emerging market regions. Productivity. In recent decades East Asian Figure 27. Labor productivity has risen across the region countries have experienced exceptionally GDP per person employed, index, 1990=100 550 strong economic growth. Rapid structural 500 change in tandem with large movements of 450 people into urban areas and into non-agricultural 400 work has propelled factor productivity. In EAP 350 the shift out of primarily agricultural economies 300 has been happening faster than in most other 250 low and middle-income country regions, with 200 the exception is South Asia. The shift of people 150 off the farm and into urban manufacturing and services has steadily increased the productivity 1990 1992 1994 1996 1998 2000 2002 2004 2006 2009 2010 Cambodia China Indonesia Malaysia Philippines of labor and changed the character of work. In Thailand Vietnam ECA, median LAC, median OECD, median recent years, the importance of human capital Source: ILO, Key Indicators of the Labor Market, and WB staff estimates. in raising productivity has grown even faster than the structural shift of the labor force. Living standards. High and sustained economic growth in the region has been accompanied by historic rates of poverty reduction in many countries. Indeed, poverty has declined more quickly in the EAP than in Remaining Resilient 34  |  Part III. The medium term development agenda any other developing region. The rise in average wages in the last fifteen years is China alone has propelled more people out of poverty and into middle-class than in any previous period.19 In the same sense, the rising tides of real wages in manufacturing have lifted many boats across the region. To cite evidence gathered for the WDR, in Vietnam “labor-related events” (finding a new job or increasing wages) accounted for 62% of movements out of poverty during the 1990s. In Indonesia job changes were the most important factor in explaining household income changes.20 In Thailand since 2000, rising agricultural labor income was the primary driver of falling poverty.21 In the Philippines earnings from non-farm work and remittances were the largest component of rising rural household incomes from late 1980s through 2000s.22 Figure 28. Real wages mostly rising Figure 29. Poverty has declined across the region real wage, index 2005=100 percent of population at $2/day 210 90 190 80 170 70 60 150 50 130 40 110 30 90 20 70 10 50 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 KHM CHN FJI IDN LAO MYS FSM PNG PHL THA TMP VNM Mongolia China Malaysia Thailand Indonesia 2002 2012 Source: Staff estimates using National Household Income and Expenditure Surveys, and Source: Staff estimates using National Household Income and Expenditure Surveys, and East Asia Poverty Database. East Asia Poverty Database. Social cohesion. As noted, the region’s success Figure 30. Inequality is on the rise in several in raising living standards and reducing poverty EAP countries gini coefficient, in percent has been driven by rising wages especially 50 for skilled workers. But with the premium FJI, 2003 THA, 1981 for skilled workers—still relatively rare in the 45 CHN, 2005 PHL, 2009 labor force—has also come rising earnings PHL, 1985 FJI, 2009 40 KHM, 1994 inequality. Inequality has risen in several East KHM, 2008 THA, 2009 TMP, 2001 VNM,1993 LAO, 2008 Asian countries between the late 1990s and 35 MNG, 1995 MNG, 2008 VNM, 2008 IND, 1983 2000s raising concerns among policy makers 30 IND, 2005 TMP, 2007 LAO, 1992 for widening disparities in the welfare of people CHN, 1981 in economically leading and lagging areas, as 25 well as the risk of increasing social polarization, 20 particularly in the region’s large, culturally 1980 1985 1990 1995 2000 2005 2010 Source: WDI Database, 2012. , Journal of Economic Perspectives – Volume 26, Number 4, pp. 57-74. 19 Li, Hongbin, Lei Li, Binshen Wu and YanYan Xiaong, 2012, “The End of Cheap Chinese Labor” , background paper for the WDR 2013 on Jobs, World Bank, Washington DC. 20 Inchauste, G., 2012, “Jobs and Transitions out of Poverty: A Literature Review” , 21 Inchauste, G., S. Olivieri, J. Saavedra and H. Winkler, 2012, “What is Behind the Decline in poverty Since 2000? Evidence from Bangladesh, Peru and Thailand” background paper for the WDR 2013 on Jobs, World Bank, Washington DC. 22 Estudillo, J., T. Matsumoto, H. Chowdhury, Z. Uddin, N. Kumanayake and K. Otsuka, 2012, “Labor Markets, Occupational Choice, and Rural Poverty in Selected , background paper for the WDR 2013 on Jobs, World Bank, Washington DC. Countries in Asia and Sub-Saharan Africa” world bank east asia and pacific economic update 2012, vol.2 Part III. The medium term development agenda  |  35 heterogeneous countries. In Indonesia, for example, wage inequality increased as salaried workers’ welfare grew 1.5 times faster than welfare of those of the poor who, as elsewhere in the region, remain concentrated in agricultural employment. A less widely prevalent concern for social cohesion is presented by high levels of youth unemployment, and particularly the high rates of young people not in employment, education or training (the so called “NEETs”). High levels of this indicator have been linked to violence, but even where violence is not a concern, high rates of disengagement among youth can have a lasting impact on their later economic prospects. In a global ranking of countries by young people NEET rates the placement of several countries in EAP raises concern. Some of the highest NEET rates in the world are found in the Pacific island countries of Tuvalu, Vanuatu, and Fiji. But the problem appears prevalent in Philippines and Indonesia as well. Figure 31. Youth unemployment youth (15–24) not in employment, education or training circa 2010, in percent 70 60 50 40 30 20 10 0 Costa Rica Indonesia Panama Hungary China Cambodia Vietnam Dominican Rep. Mongolia Argentina PNG Ecuador Romania Lithuania Honduras India Bangladesh Macedonia, FYR Lao PDR Peru Timor-Leste Turkey Fiji Bulgaria Malaysia Mauritius Serbia Greece Czech Rep. Mozambique Spain Nepal Poland Belgium Colombia Philippines Bolivia Brazil Slovak Rep. Sri Lanka Estonia Latvia Italy Botswana Vanuatu Pakistan Thailand Tanzania Paraguay Portugal Uruguay Mauritania El Salvador Croatia West Bank & Gaza Tuvalu Young men Young women Source: Staff estimates using the World Bank’s I2D2. More generally, however, is the prevalence Figure 32. Informality relatively high in the region of forms of work that may be self-employment (share of working people), average 2001–10 100 relatively more vulnerable to earnings-risks and 90 impoverishing shocks. By most proxy measures KHM LAO 80 of informal or “vulnerable” employment, as shown 70 VUT IDN in the previous section, EAP countries show higher 60 MNG THA levels than their level of development alone explains. 50 PHL Indeed, it is the prevalence of vulnerable -or informal- 40 FJI forms of work that are motivating calls to policy 30 MYS 20 makers for national “jobs strategies” . As discussed 10 below, the WDR provides plausible and insightful 0 explanations for why these calls are being made 5.5 6.5 7.5 8.5 9.5 10.5 11.5 log of GDP per capita, PPP (2005 US $) more frequently and becoming louder particularly in Source: Staff estimates using World Bank’s WDI. the East Asian middle-income countries. Remaining Resilient 36  |  Part III. The medium term development agenda The policy framework for jobs in East Asia & emerging job challenges Given calls for national jobs strategies, is the current policy framework in East Asian countries “pro jobs”? For policymakers in any country, establishing the fundamentals for private-sector led job creation involves actions that serve two purposes: reducing uncertainty and providing a basic level of public goods. Employers creating jobs, as well as working people, need to know how their investment of capital and work effort will yield returns and results—so the government has a role to foster stability. These public goods include macroeconomic stability and rule of law, together with investments in basic infrastructure and basic human capital. They also include other aspects of the enabling environment, for example making entry, operations and exit of private enterprises efficient, allowing the development of a financial sector that allocates resources to the most productive enterprises that can create jobs, and allowing competition that continuously reallocates resources to their most productive uses. Starting with macroeconomic management and fiscal policy, the East Asian model, made famous by the Tiger economies and the countries that have sought to emulate those successes, is stable and business friendly. The recent experience of East Asia’s emerging market economies has—with a few exceptions—been one of fast growth with price stability, and encouraging for employment creation. Inflation has slowed markedly since 2008. Fiscally, confidence in price stability is supported by generally modest government outlays and low levels of public debt. The average marginal tax rate on individual income is higher than in Latin America (reaching as high as 45% in China and 35% in Vietnam) however, the maximum corporate rate is relatively modest. The share of firms in East Asian countries that identify tax rates or dealing with tax administration as a “major constraint” is the lowest among all the countries for which the World Bank collects enterprise survey data. Also contributing to stability and confidence is increasing central bank independence, and a notable shift toward floating exchange rate regimes. Countries hit hardest by the East Asian crisis—experienced by many people as plunging wages, sudden job losses and protracted period of unemployment—have introduced floating exchange rates. Among these are Thailand, Indonesia, and the Philippines. All else equal, floating exchange rate regimes can better protect households from the risk of job-losses in the wake of external shocks. Turning to the business environment, despite the East Asian reputation of business friendly places for investment, the picture is mixed. Ranked by their score on the World Bank’s ease of doing business indicator, Thailand (17th) and Malaysia (18th) are among the most business friendly, China (91st) and Vietnam (98th) rank moderately, and Indonesia (129th), Philippines (138th) and Cambodia (140th), rank poorly. Labor policies—labor regulations, collective bargaining, active labor market programs and social protection—attempt to address the imperfections that exist in labor markets in the form of inadequate information, uneven bargaining power, limited ability to enforce long-term commitments, and insufficient insurance against work-related risks. The effects of these policies on job creation have long been debated, but there is broad consensus that at very high levels of regulation, these create distortions of their own, rather than correcting market imperfections. The WDR argues that the relatively modest impact of labor policies on the level of employment and wages doesn’t seem to merit the heated tones of the debate. Most countries are avoiding extremes of too little and too much regulation. However, even on a “plateau” between these two extremes where the impact on efficiency is modest, labor policies tend to redistribute gains toward middle- world bank east asia and pacific economic update 2012, vol.2 Part III. The medium term development agenda  |  37 aged men, at the expense of women and young people.23 This finding is no surprise, since most labor policies were first conceived at a time when men where the largest group in the labor force. In East Asia, higher income countries (Singapore, Korea and Japan) exhibit levels of regulation and protection more similar to Anglo-Saxon countries. Governments in many emerging market countries in East Asia have recently started to step into this area of policy making, but with an orientation similar to European countries. A simple reading of the labor codes in ASEAN member countries and China shows that the average level of employment protection is higher than the OECD average. In EAP , employment protection legislation (EPL) is most restrictive in Indonesia, where workers whose employment is regulated by the labor code enjoy more protection than workers in France, Portugal or Greece, and only a little less protection than workers in Spain. Figure 33. Regulation high in some countries 4.0 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0 ASEAN+ OECD-30 United States New Zealand Thailand China Singapore Malaysia Ireland Australia France Canada Cambodia Portugal United Kingdom Greece Brunei Darussalam Japan Switzerland Mongolia Korea, Rep. Denmark Slovak, Rep. Czech, Rep. Hungary Sweden Netherlands Finland Lao PDR Poland Austria Indonesia Philippines Vietnam Germany Iceland Italy Belgium Luxembourg Norway Spain Mexico Turkey ECA Specific requirements for collective dismissal Regulation on temporary forms of employment Protection of permanent workers against (individual) dismissal Source: Countries’ labor regulation surveyed for the EAP Jobs regional study, forthcoming. Notes: Score range from 0 (least stringent) to 6 (most restrictive). OECD and ASEAN unweighted average. OECD average includes a sample of 30 countries. OECD figures are for 2010. With high levels of structural informality and widespread avoidance of labor regulation in the manufacturing and service sectors, restrictive regulations on paper may have little direct relevance for most people employed. Indeed, the relatively restrictive labor codes in emerging East Asian economies has probably had only minor impact on the three transformations, relative to the impact of structural change. But this may not be sufficient reason for complacency, as explained below. When combined with poor implementation and enforcement capacity, even reasonable labor policies can aggravate the market failures that they were designed to overcome, creating segmentation and exclusion. Most of the policies that affect job creation and the ability of jobs to act as the conduits for the three development transformations, have to do with ensuring a stable economy, a fiscal stance that encourages investment and innovation, and a regulatory framework for factor and product markets that encourages enterprise, particularly for small and medium firms—the segment where most East Asians are working. Beyond these broadly accepted guidelines, the Jobs WDR offers a country typology of eight groups, each with its priority “jobs challenge” . The typology takes account of levels of development, demography, natural endowments, political situation, and which of these factors is dominant in shaping the opportunities and , background paper for the WDR 2013 on Jobs, World Bank, Washington DC. 23 Betcherman, G., 2012, “Labor Market Institutions: A Review of the Literature” Remaining Resilient 38  |  Part III. The medium term development agenda constraints on people offering and firms seeking labor. The eight country types, and their predominant features, are below (Figure 34, panel a). Figure 34. The eight country types of the WDR Agrarian Majority of the population lives in rural areas. Agrarian Cambodia, Lao PDR, Myanmar, Papua New Guinea, Thailand, Timor-Leste, Vietnam Con ict-affected Livelihoods altered by war and violence. Con ict-affected Timor-Leste, Solomon Islands Urbanizing Agricultural modernization and rural-urban migration Urbanizing China, Indonesia, Lao PDR, Malaysia, Mongolia, Philippines, rapidly taking place. Vietnam Resource-rich Extractive industries make a substantial contribution to exports. Resource-rich Myanmar, Mongolia, Papua New Guinea, Lao PDR, Timor-Leste, Indonesia The size of the population doesn’t support economies Fiji, Kiribati, Marshall Islands, Micronesia, Palau, Samoa, Small islands of scale or specialization. Small islands Solomon Islands, Tonga, Tuvalu, Vanuatu High youth Youth unemployment rates and idleness rates at High youth Indonesia, Mongolia, Philippines unemployment unusually high levels. unemployment Formalizing An urban middle class and a large share of informal Formalizing China, Malaysia, Mongolia, Philippines employment coexist. Aging Rapidly increasing old-age dependency ratios. Aging China, Indonesia, Thailand, Vietnam Source: WDR 2013 and EAP Jobs Regional Report (forthcoming). Reflecting the diversity in the region, most countries can reasonably be mapped to more than one type (see panel b). As an illustration, even among the most strictly defined type—‘small island’ countries—there are some affected by conflict, some that are rapidly urbanizing and others that are ageing. Indeed, in the East Asia and Pacific region the likelihood that a country can be mapped to more than one type, is greater than in other emerging market regions, like Europe and Central Asia (mostly ‘aging’), Latin America and the Caribbean (mostly ‘formalizing’), or Middle East and North Africa (mostly ‘high youth unemployment’). The typology is a useful tool not because it can correctly and exhaustively diagnose all of a country’s jobs challenges, but because it helps to identify which is likely to be the most pressing for policy makers to confront. What are the implications for policy? What guidance does the Jobs WDR offer? Many of the Bank’s clients in EAP fall indisputably in the ‘small island’ type. In small island countries, employment creation led by private enterprise is significantly constrained by small, dispersed populations. Outside of niche sectors, this makes it almost impossible to achieve sufficient scale. However, the Pacific island countries are additionally constrained by great distances, which conspire against their gaining competitiveness even in activities where endowments should otherwise have given them a comparative advantage. Under these constraints on jobs, policy makers have to focus on preparing young people with the human capital they will need to succeed abroad as migrant workers. In doing so, service provision itself, can become a force for job creation when populations are dispersed on difficult to reach islands. And while the Pacific island countries are too constrained by economic geography to compete in manufacturing or even processing their natural resources for export, managing the exploitation of these resources and tourism offer opportunities for jobs. Several countries in EAP are near or surpass the stylized threshold to be considered ‘resource rich’ (Figure 35). The obvious two are Mongolia and Papua New Guinea. But Myanmar, Indonesia, Vietnam, Lao PDR and Timor-Leste can also reasonably be included in this type. In these countries the most important challenges to jobs are price volatility and loss of competitiveness. Macroeconomic management and fiscal world bank east asia and pacific economic update 2012, vol.2 Part III. The medium term development agenda  |  39 policy become the most important arenas of policy Figure 35. Resource-rich EAP to sustain employment creation, in order to diversify natural resource exports as share of exports 2005–2010 the economy, and manage resource related risks 70 MMR such as currency appreciation and inflation. An 60 MNG active, export-oriented growth policy, and the 50 PNG AUS encouragement of foreign investment can create 40 the conditions for “spill-overs” and jobs connected 30 IDN to world markets. In resource rich countries 20 VNM Resource Rich cutoff (20%) with weak institutions, all of the above should be 10 MYS CHN underpinned with governance reform, transparency 0 PHL THA NZL KHM JPN and accountability. -10 KOR 0 5,000 10,000 15,000 20,000 25,000 30,000 35,000 log of GDP per capita, 2010 (2005 US $) Most people in EAP work in countries that are Source: Staff estimates, EAP Jobs regional study, forthcoming. nearing the end of the structural transition from Note: Size of the bubble reflects the size of the population. ‘agrarian’ to ‘urbanizing’ economies. Even in the small Pacific island countries, the rate of urbanization is picking up. For this reason, the guidance offered for these types of countries, is most salient for the region. During the transition from agrarian to urbanizing, the economic forces released from the large-scale movement of people from rural farms to urban factories and firms, are so powerful that they propel all three development transformations with only a minimal need for policy intervention. Gains in productivity, rising living standards and improvements in social cohesion happen in tandem. However, as the process of urbanization starts to peter out and countries enter a new stage—what the WDR calls ‘formalizing’—one or more of the three transformations can lag. The development trajectories of East Asia’s high-income country success stories—Japan, Singapore, Korea and others—also included these transition periods when similar calls for jobs strategies were heard. But the answers that made sense for those countries at the time may not be viable today. In the meanwhile, some helpful insights and guidance can already be ventured from the tools offered by the global report.24 For countries that are still mainly agrarian Figure 36. Rural EAP (Figure 36), the jobs policy priority is to increase share of total population living in rural areas, 2010 the productivity of agriculture, to free labor to 90 PNG 80 MMR KHM work in rural off-farm enterprise and eventually 70 TLS LAO VNM to migrate to towns and cities. The instruments THA Agrarian cutoff 60 for increasing agriculture productivity and facilitating 50 PHL CHN the structural transition are land reform, agriculture IDN 40 extension programs, deregulation, rural infrastructure MNG 30 MYS and good quality education and health services to KOR 20 build human capital. Policies and programs that 10 NZL AUS JPN create implicit or explicit restrictions to labor moving 0 off the farm and into rural non-farm industry and 1,000 2,000 4,000 8,000 16,000 32,000 log of GDP per capita, 2010 (2005 US $) to manufacturing and services in cities should be Source: Staff estimates, EAP Jobs regional study, forthcoming. identified and removed. Government action should Note: Size of the bubble reflects the size of the population. enable as fluid a structural transition as possible. The WDR showcases Vietnam’s experience in the 24 Readers are encouraged to avail of the extensive material available at www.worldbank.org/wdr2013 Remaining Resilient 40  |  Part III. The medium term development agenda 1990s and the first decade of the 21st century as Figure 37. Urbanizing EAP an example of success. The danger to be avoided is change in the share of total population living in urban areas, 2000–2010 urbanization in-spite of rather than enabled by policy, 16 14 characterized by unproductive use of land, migration CHN 12 in the search of better health and education services, LAO MNG 10 MYS cities unprepared for fast population growth, and 8 IDN rapid divergence in living standards between town VNM PHL 6 and country. Urbanizing cutoff 4 TLS KHM THA 2 For countries that are already rapidly urbanizing 0 (Figure 37), the jobs policy priority is to make cities -2 PNG work. Somewhat counter-intuitively in a discussion 500 1,000 2,000 4,000 8,000 16,000 log of GDP per capita, 2010 (2005 US $) of jobs, the factor market that policy makers should Source: Staff estimates, EAP Jobs regional study, forthcoming. pay the greatest attention to is the market for land. Note: Size of the bubble reflects the size of the population. Since land is the least mobile factor of production, good urban planning becomes the key to increase the flexibility of land use. Urban planning becomes Figure 38. Formalizing EAP the area of policy making with the greatest impact share of pension contributors in the labor force, 2010 on the incentives of firms in towns and cities to 100 JPN 90 form, to grow, to move up the value chain, and thus AUS 80 Formalizing upper to create and sustain jobs. Also important are urban 70 infrastructure and service provision, to ensure that 60 growing cities with plenty of skilled people, foster 50 MYS KOR economies from agglomeration rather than incur 40 MNG CHN burdening costs from congestion. Korea’s example 30 PHL Formalizing lower 20 VNM is instructive in this regard and provides valuable IDN THA 10 guidance for East Asian policy makers. 0 PNG 2,000 4,000 8,000 16,000 32,000 log of GDP per capita, 2010 (2005 US $) For countries where most people live in cities and Source: Staff estimates, EAP Jobs regional study, forthcoming. a rising share of economic activity is formalizing Note: Size of the bubble reflects the size of the population. (Figure 38) the priority jobs challenge lies in avoiding the formation or entrenchment of a policy and regulatory environment that causes Figure 39. Ageing EAP segmentation. Segmentation can be caused by old age dependency ratio, 2010 differences in how income from different sources 32 JPN is taxed; by rules for providing credit that explicitly or implicitly exclude self-employed people; by the NZL AUS types of work that are recognized in the labor code; 16 KOR THA and how non-wage social protection benefits are CHN designed and financed . The overarching principle VNM IDN 8 Aging cutoff to follow to avoid segmentation is neutrality. This MYS principle of neutrality can be applied across every TLS KHM LAO PHL MNG PNG arena of policy making, from monetary and fiscal, 4 to regulation. But it is most easily illustrated in 1,000 2,000 4,000 8,000 16,000 32,000 log of GDP per capita, 2010 (2005 US $) how social protection is offered formally in most Source: Staff estimates, EAP Jobs regional study, forthcoming. countries. Models that tie eligibility to certain forms Note: Size of the bubble reflects the size of the population. world bank east asia and pacific economic update 2012, vol.2 Part III. The medium term development agenda  |  41 of work, and are financed from mandatory contributions from employees and employers, are not neutral as they create segmentation by design, even when they are administered perfectly. In most countries segmentation by design is aggravated by institutional and administrative weaknesses. An example of following a neutral stance is to provide protection that is not specific to where or how a person works. An excellent recent example of a neutral approach is Thailand’s extension of health coverage enjoyed by people in every sector and without regard to the nature of their engagement in the labor market. Achieving a neutral policy and regulatory stance can encourage factor mobility and help countries make the difficult transition out of middle income, and grow in wealth before they enter the more difficult job challenges of an ageing economy (Figure 39). This is the current quandary of “trapped” middle income countries in Central Europe and the Southern Cone of Latin America that got old before they got rich. Their example should strike a note of caution for policy makers in East Asian countries where the average age of the labor force and the share of elderly in the population is quickly rising. Remaining Resilient 42  |  Part III. The medium term development agenda III.B. Towards managing disaster risk and building resilience in EAP 25 “We need a culture of prevention, no country can fully insulate itself from disaster risk, but every country can reduce its vulnerability. Better planning can help reduce damage—and loss of life—from disasters, and prevention can be far less costly than disaster relief and response. ” Jim Yong Kim World Bank Group President Summary East Asia and the Pacific is the most disaster-stricken region in the world. In relative terms, the small Pacific Island countries are among those most affected globally. In 2011, losses from disasters reached the historically unprecedented level of US$380 billion, of which East Asia and the Pacific suffered 80 percent in the first nine months alone.26 With increasing urbanization, one of the biggest drivers of risk is unplanned or poorly-planned cities which put more people and assets in harm’s way. To assuage these risks, the World Bank is supporting innovation in disaster risk management to assist decision-makers in developing practical tools for risk identification and communication; investing in disaster preparedness and resilient development; and strengthening institutional capacity and coordination for sustainable recovery and reconstruction. Part 1: Drivers of disaster losses East Asia and the Pacific is the most disaster-stricken region in the world. Since 2000, more than 1.6 billion people have been affected by disasters in East Asia and the Pacific.27 Disasters disproportionally affect the poor, vulnerable, and marginalized. Women, for instance, are more likely than men to die from natural disasters.28 Disasters can also push affected households further into debt with the poor carrying the greatest debt burden. In Myanmar, two years after Cyclone Nargis, for instance, indebtedness of laborers, small farmers and fishermen had more than doubled. The challenges of dealing with disaster are compounded in a region which has the second largest number of fragile and conflict-stricken states after Africa, with high rates of poverty and political insecurity. 25 This brief benefits from information from World Bank (Forthcoming) Strong, Safe, and Resilient: A Strategic Policy Guide for Disaster Risk Management in East Asia and the Pacific. Washington DC: The World Bank. 26 Figures from Munich Re NatCatService (2012). Note that estimates differ: EM-DAT (2012) estimates damage losses at US$366.1 billion for natural disasters that occurred in 2011. The Swiss Re estimate is US$370 billion. 27 EM-DAT (2012). Calculation based on EM-DAT data accessed online in September 2012. See Appendix Table 11. 28 Neumayer and Plümper (2007). world bank east asia and pacific economic update 2012, vol.2 Part III. The medium term development agenda  |  43 Figure 40. Global hazard losses classified by World Bank Figure 41. Growth of urban population in Asia regions, 2000–2011 in percent in thousands 3,000 61 2,500 2,000 1 1,500 3 5 1,000 19 11 500 0 1950 1960 1970 1980 1990 2000 2010 2020 2025 Sub-saharan Africa Middle East & North Africa Europe & Central Asia >500,000 500,000–1 million 1–5 million South Asia Latin America & Carribean East Asia & Pacific 5–10 million <10 milion Source: CRED EM-DAT. Source: UN 2011c. The risks in East Asia and the Pacific will continue Figure 42. Vulnerability of cities to multiple hazards to rise as urbanization increases.29 From 1980 in East Asia and the Pacific to 2010, Asia added over one billion people to its cities—more than all other regions combined— and another billion will live in cities by 2040.30 In 2010 Asia was home to over half, or 12 of 23, of the world’s megacities; by 2025 the number of megacities in Asia is expected to increase to 21 out of a global total of 37.31 Rapid and unplanned urbanization puts more people and assets in harm’s way. Due to the limited availability and affordability of land in megacities across the region, rapid urban growth will likely take the form of informal settlements located in areas at risk, placing a significant number of particularly vulnerable households in jeopardy. For example, in metropolitan Manila, it is estimated that about 800,000 people,32 mostly informal settlers, live in high-risk areas. Natural disasters often, however, bring broad-based economic consequences. In Ayutthaya province near Bangkok, industrial parks expanded across former swamps that used to yield good quality rice due to regular flooding. The 2011 Source: World Bank staff with data from UN DESA 2012 and CIESIN. 29 According to the IPCC SREX report (2012), globally, the growth of people and assets is by far the largest driver or risk. This agrees with findings of Barthel and Neumayer (2011a, 225) and Pielke, et al (2008) for example. 30 UN (2011a). 31 ADB (2012); UN (2011b). 32 The Greater Manila region, inhabited by some 17 million people, is exposed to flooding. The Greater region includes Metro Manila (home to some 12 million people) and the surrounding areas. Remaining Resilient 44  |  Part III. The medium term development agenda Thai floods besieged the six-meter high levees built to protect these estates, resulting in the closure of 891 factories that employed about 460,000 people.33 Figure 43. Hazard losses in East Asia and the Pacific, Urban flooding is becoming increasingly costly. 2000–2011 Over the past 30 years, EAP has accounted for in percent 40 percent of the total number of floods worldwide. Increasing urbanization, as well as the concentration of megacities along coastlines and major rivers, 39 16 is expected to result in some 410 million urban residents being placed at risk of coastal flooding 4 by 2025.34 This trend presents a major challenge for national disaster management agencies, and a major 7 threat for the poor population living in vulnerable 34 areas. The increasing cost of natural disasters is due Drought Earthquake (seismic activity) Extreme temperature Flood Mass movement wet to changes in the size, location and value wealth Source: CRED EM-DAT. of cities. Although climate change will have an increasing impact on growth in the future, the main cause of the rising cost of disasters is the increasing concentration of the world’s population and economic activity in vulnerable locations near earthquake faults, on subsiding river deltas, and along tropical coastal zones. Given uncertain future projections, the Intergovernmental Panel on Climate Change Special Report on Extreme Events reports that “long-term trends in normalized losses have not been attributed to natural or anthropogenic climate change” (IPCC SREX, 2012), with no significant changes in disaster damage between 1980 and 2009 once the growth of population and assets over time is accounted for.35 Complex networks and systems are at risk from failures with cross-boundary impacts. Many East Asian cities are part of complex global supply chains where single disasters can cause a cascading series of reactions which extend beyond the boundaries of an urban area, country, or region. In 2011, several developing countries Figure 44. East Asia and the Pacific disasters and economic losses in 2011 Great Tohoku earthquake Thailand ooding Christchurch earthquake Australia ooding Philippines ooding March 2011 September 2011 February 2011 January 2011 January 2011 The Japanese combined Flooding in September Flooding along earthquake and The Christchurch Flooding left and October Australia's east coast tsunami disasters earthquake 68 people dead, caused 680 deaths affected more than left 15,853 dead, left more than half a million homeless, and affected more than 3 million people 6,013 injured, 172 people dead and one million affected 13 million people and resulted in 22 deaths and 3,286 missing Damage Damage Damage Damage Damage US$210 billion US$46.5 billion US$12 billion US$9.8 billion US$4.5 billion Sources: Adapted from UN OCHA 2011 with data from CRED EM-DAT; for Japan, Ministry of Finance 2012. 33 Source: Thai Industrial Estate and Strategic Partners Association. 34 ADB (2012). 35 Barthel and Neumayer (2011a, 225) who argue that “[at a global scale] no significant trend is discernible. Similarly, we do not find a significant trend if we constrain ” See also Pielke et al. (2008). our analysis to non-geophysical disasters in developed countries. world bank east asia and pacific economic update 2012, vol.2 Part III. The medium term development agenda  |  45 in EAP experienced a decline in economic growth “due to lower-than expected growth in manufacturing exports that followed supply disruptions in the wake of the Japan earthquake and tsunami and the severe flooding in Thailand and Lao PDR” (World Bank [2011]).36 As a result, 2011 was the costliest year on record for economic losses due to natural disasters, with the 2011 figure of US$380 billion almost doubling the 2005 record of US$262 billion.37 Part 2: Fiscal Impacts 38 The region is exposed to large fiscal risks due to disasters. Cambodia, Lao PDR, Myanmar, the Philippines, and Vietnam face particularly high annual average expected losses relative to the size of their economies (Figure 45). Cambodia, Lao PDR, and the Philippines could face costs totaling 18 percent or more of total public expenditure in the event of a 1-in-200 year catastrophic event (Figure 46).39 On average, China incurs US$27 .4 billion (0.4 percent of GDP) of damages every year, although with large variation between years (Figure 46). Due primarily to the impact of the Sichuan earthquake, 2008 reported the highest losses on record. Figure 45. Annual expected economic losses Figure 46. 1-in-100 and 1-in-200 year probable maximum in ASEAN countries loss (PML) in percent of GDP in percent of GDP 1 16 0.9 14 0.8 12 0.7 0.6 10 0.5 8 0.4 6 0.3 4 0.2 0.1 2 0 0 MMR PHL VNM LAO KHM ASEAN IDN THA MYS BRN SGP LAO KHM PHL VNM IDN MYS ASEAN THA SGP PML (100-yr) PML (200-yr) Source: World Bank 2012a. Source: World Bank 2012a. Note: Original data from CRED EM-DAT and Willis Research Network. Note: Original data from CRED EM-DAT and Willis Research Network. In relative terms, Pacific Island countries are among the world’s most affected by natural disasters. Each year, on average, Pacific Island countries experience damage caused by natural disasters estimated at US$284 million, or 1.7 percent of regional GDP . In the Solomon Islands, the 8.1 magnitude earthquake and tsunami that struck in April 2007 induced losses estimated at 95 percent of the government’s budget and caused a short-term cash crunch alleviated only by donor assistance. The tsunami that hit Samoa in September 36 World Bank (2011). Capturing New Sources of Growth East Asia and Pacific economic Update. Volume 1. 37 Figures from Munich Re NatCatService. Note that estimates differ: EM-DAT estimates damage losses at US$366.1 billion for natural disasters that occurred in 2011. The Swiss Re estimate is US$370 billion. 38 This section benefits from information provided by the World Bank Disaster Risk Financing and Insurance (DRFI) team, and World Bank (2012a) ASEAN: Advancing Disaster Risk Financing and Insurance in ASEAN Countries: Framework and Options for Implementation. Volume 1. Washington, DC: World Bank. 39 World Bank (2012) ASEAN: Advancing Disaster Risk Financing and Insurance in ASEAN Countries: Framework and Options for Implementation. Vols. 1 and 2. Washington, DC: World Bank. Note that the availability of catastrophe risk assessment for financial applications is variable across countries in East Asia and the Pacific. Remaining Resilient 46  |  Part III. The medium term development agenda Figure 47. Disaster losses for China, 2002–2011 2009 caused losses estimated at 22 percent of GDP . in US $ million loss as percent of GDP Average annualized losses estimated for Vanuatu are 180 3.5 6.6 percent of GDP and 4.3 percent for Tonga (Figure 160 3.0 48). 140 2.5 120 The impact of a catastrophic event would 100 2.0 overwhelm the fiscal capacity of many small 80 1.5 states in the region. The contingent liability 60 1.0 estimates for Pacific Island countries and the 40 20 0.5 Association of Southeast Asian Nations (ASEAN) 0 0 member states are indicative of the significant fiscal 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 impacts of disasters (Figure 50).40 For the Pacific Hail Snow/cold Drought Earthquake Storm Floods L%GDP island countries, a 1-in-50 year earthquake, tsunami, Source: World Bank Disaster Risk Financing and Insurance (DRFI) Program, data from or cyclone is estimated to inflict emergency response Swiss Re 2012. Figure 48. Estimated average annual loss Figure 49. Estimated 75-Year and 250-Year probable maximum loss in percent of GDP in percent of GDP 7 100 90 6 80 5 70 4 60 50 3 40 2 30 20 1 10 0 0 VUT TON FSM SLB FJI MHL COK PLW WSM PNG TMP KIR TUV FSM TON PLW MHL COK VUT SLB TMP WSM FJI TUV PNG KIR 250-yr loss 75-yr loss Source: Pacific Catastrophe Risk Financing and Insurance Initiative (PCRAFI) 2011. Source: Pacific Catastrophe Risk Financing and Insurance Initiative (PCRAFI) 2011. Figure 50. Average annual fiscal burden Figure 51. 1-in-200-Year probable maximum loss annual expected fiscal burden as percent of government expenditure 1-in-200 year PML as percent of annual government expenditure 3.0 25 2.5 20 2.0 15 1.5 10 1.0 5 0.5 0 0 MMR PHL KHM LAO VNM IDN THA MYS SGP BRN ASEAN LAO PHL KHM VNM IDN MYS THA SGP ASEAN Recovery liability Reconstruction liability Recovery liability Reconstruction liability Source: World Bank. 2012a. Source: World Bank. 2012a. Note: Limited data were available for Myanmar, and therefore its average estimated loss Note: Myanmar and Brunei Darussalam did not present sufficient number of loss years, may not accurately reflect long-term average annual losses. either historically or simulated, to compute reliable PMLs. 40 World Bank (Forthcoming). Strong, Safe, and Resilient: A Strategic Policy Guide for Disaster Risk Management in East Asia and the Pacific. Limited information is available on the contingent liability of governments in East Asia and the Pacific to disasters. world bank east asia and pacific economic update 2012, vol.2 Part III. The medium term development agenda  |  47 costs of at least 10 percent of government expenditure; in many countries, this figure is even larger (Figure 51).41 In ASEAN member states, three governments spend at least 1 percent of their budget on recovery and reconstruction costs each year, with the potential for much greater fiscal impacts from more extreme events.42 Several governments in East Asia and the Pacific have insufficient funding in place for major disasters, which can exacerbate their adverse socioeconomic consequences. Available information suggests that governments in East Asia and the Pacific heavily rely on ex-post instruments—such as budget reallocation, debt, and donor assistance—to finance the costs of disasters. Over-reliance on such ex-post instruments entails significant fiscal uncertainty, because these require time to mobilize and can imply excess costs in a post-disaster environment.43 Part 3: Recommendations for a more resilient Asia Disaster risk management is essential for supporting sustainable growth in East Asia and the Pacific. Disaster risk management (DRM) is a pro-active and systematic approach to dealing with disaster impacts and seeks to reduce hazard exposure and vulnerability, manage residual risk and uncertainties, and strengthen institutions to prepare and respond to disasters. Through a comprehensive framework based on five core areas of DRM—risk identification, risk reduction, emergency preparedness, financial protection, and sustainable recovery and reconstruction—the World Bank supports countries in managing disaster and climate risks (3). Figure 52. Core areas of DRM Institutional, Political, Social, Economical and Financial context Risk Assessment and Communication Analysis and Advise •Risk Assessment Risk Identi cation •Hazard Mapping Technical Assistance •Tools for Resilience Structural & Non-structural Measures Capacity Building •Risk mitigation works Risk Reduction •Infrastructure retro tting •Land use planning, policies and regulations Strengthening Institutions Ex-ante and ex-post Financing •Reserve mechanism and budget planning Lending & Investment Financial Protection •Risk transfer, insurance, ART. •Budget appropriation and execution Leveraging Funds Hydromet and Early Warning Systems •Hydromet; alert and warning systems Emergency Preparedness •Response and contingency planning Regional cooperation and networks •Simulations, training Knowledge Sharing Resilient Recovery and Reconstruction Sustainable Recovery •Institutional planning and structures and Reconstruction •Rehabilitation plans Communities of Practice •Sustainable recovery Source: World Bank/Global Facility for Disaster Reduction and Recovery (GFDRR). 41 World Bank (Forthcoming). Strong Safe, and Resilient. This is a conservative estimate which does not take into account reconstruction costs which could be significant. 42 World Bank (Forthcoming). Strong Safe, and Resilient. 43 Cummins and Mahul (2009:1). Remaining Resilient 48  |  Part III. The medium term development agenda The World Bank report ‘Strong, Safe, and Resilient: A Strategic Policy Guide for Disaster Risk Management in East Asia and the Pacific’ takes stock of the key challenges in the region, and provides decision-makers with concrete recommendations and examples how of the World Bank can support their decisions and investments. There are three guiding principles for mainstreaming DRM into development: 1. Preventive investments in risk reduction and emergency preparedness are cost-effective and can greatly reduce the impact of natural hazards. In the United States, cost-benefit analyses found that every US$1 spent on mitigation saved countries US$3 to US$4.1.44 For instance, investments in hazard forecast and hydrometeorological services provide a high benefit-cost ratio. In China, the cost- benefit ratio of strengthening national meteorological services was estimated to range between 1:35 and 1:40. Evidence suggests that in East Asia and the Pacific, limited funds are allocated for DRM45, although data is limited46.  To reduce the liquidity problems that governments commonly face after natural disasters, the World Bank is helping countries to develop risk financing strategies that help fund emergency and recovery needs. A number of countries in East Asia and the Pacific are moving to an ex-ante approach to disaster risk financing. In December 2011, the Philippines became the first country in the region to benefit from the World Bank’s contingent financing facility, the Catastrophe Deferred Drawdown Option (Cat- DDO), with a US$500 million loan. As part of the Pacific Catastrophe Risk Assessment and Financing Initiative (PCRAFI)47, a pilot program covering five Pacific countries will test the feasibility of a regional catastrophe financing pool to mitigate budgetary shocks caused by catastrophic natural disasters. Based on parametric triggers and state-of-the-art catastrophe risk models, the pilot program allows country-specific catastrophe risks to be transferred to the international reinsurance market as a single, well-diversified portfolio with an aggregate of coverage around US$50 million. 2. It is important to strike a balance between engineered and non-engineered solutions. Non- engineered measures include institutional arrangements, land-use regulations, enforcement of building codes, public education, and social protection. For example, after the 2006 earthquake and the 2010 volcanic eruption in Yogyakarta, Indonesia, the World Bank supported the adoption of a risk- based approach to reconstruction, with resettlement offered to communities when risks could not be mitigated by other means. Often, restoring natural ecosystems, such as mangroves, can be more cost-effective than engineered solutions. In Vietnam, the protection of 12,000 hectares of mangroves cost US$1.1 million and provided cost reductions in dike maintenance of US$7 .3 million per year and improved livelihoods of 7,750 families. In the Philippines, the cost-benefit ratio for protecting the city 48 44 U.S. Department of Homeland Security (2012) cites Congress of the United States, Congressional Budget Office, Potential Cost Savings from the Pre-Disaster Mitigation Program (Washington, DC, 2007); and National Institute of Building Sciences, The Multihazard Mitigation Council, Natural Hazard Mitigation Saves: An Independent Study to Assess the Future Savings from Mitigation Activities (Washington, DC 2005). 45 World Bank (2012a). 46 World Bank (2010, 106–10). DRM expenditures are often difficult to track; most preventive measures are embedded in the design and construction of infrastructure or other sectoral spending. 47 Launched in 2007 , PCRAFI is an effort to provide disaster risk assessment and modeling tools for enhanced disaster risk management and climate change adaptation in the Pacific region. PCRAFI is a joint initiative of the World Bank, the Secretariat of the Pacific Community (SPC), and the Asian Development Bank with the financial support of the Government of Japan, the Global Facility for Disaster Reduction and Recovery (GFDRR) and the European Union. The Pacific Catastrophe Risk Insurance Program is piloted in the Republic of Marshall Islands, the Independent State of Samoa, the Solomon Islands, the Kingdom of Tonga, and the Republic of Vanuatu. The participating countries purchase catastrophe risk coverage against earthquake or tropical cyclones, with premium subsidies funded by the Government of Japan. 48 Kay et al. (2002). world bank east asia and pacific economic update 2012, vol.2 Part III. The medium term development agenda  |  49 of Angeles from lahar flows was calculated as 30-to-1 for rain forestation farming, 14.7-to-1 for bamboo plantations, and 3.5-to-1 for river channel improvement.49  Investing in reliable risk information at the national, regional, city and community levels helps to assess and communicate disaster impacts, formulate effective disaster risk management strategies, and guide development plans and practices. Making use of local-level information and empowering communities with tools to develop their own risk information with local technology has a high-return potential for disaster risk reduction. The Indonesia Scenario Assessment for Emergencies, (InaSAFE), is a free and publicly available tool that analyzes disaster impacts and helps keep Indonesia one step ahead on emergency planning. Participatory mapping, through OpenStreetMap tools for example, allows local knowledge about critical infrastructure and social vulnerability to be included in preparedness planning. 3. Effective resilience requires cooperation among multiple levels of government, the private sector, civil society, and the international community. Encouraging greater openness in collecting, managing, and sharing disaster risk information can be beneficial, especially in areas of weather and hazard forecasting, early warning systems, emergency preparedness, risk financing, and insurance. The Pacific Catastrophe Risk Assessment and Financing Initiative, (PCRAFI), is helping the region collect and share risk information through an open-source platform for projects on urban development, risk financing, and emergency and reconstruction planning. This initiative leverages the efforts of various development partners for the benefit of the local stakeholders. Through partnerships with ASEAN, JAXA, Republic of Korea NEMA, AusAID and AIFDR, SOPAC, NASA and many others, the World Bank—together with the Global Facility for Disaster Reduction and Recovery (GFDRR)—has worked to put the latest disaster risk solutions in the hands of emergency planners. 49 Tidwell (2005). Remaining Resilient 50  |  Part III. The medium term development agenda References ADB (Asian Development Bank). 2012. “Green Urbanization in Asia Key. ” Special chapter in Indicators for Asia and the Pacific 2012. Manila: Asian Development Bank. Barthel, Fabian and Neumayer, Eric. 2011a. ‘A trend analysis of normalized insured damage from natural disasters’ in Climatic Change 2012. 113:215–237 . Barthel, Fabian and Eric Neumayer. 2011b ‘Normalizing Economic Loss from Natural Disasters: A Global Analysis’, in: Global Environmental Change, Vol. 21, Issue 1, 2011, pp. 13-24. Buendnis Entwicklung Hilft. 2012. World Risk Report 2011. Focus: Governance and civil society. In cooperation with United Nations University – Institute for Environment and Human Security. Center for Research and Environmental Decisions. Psychology of climate change communication. Cummins, J David and Olivier Mahul, 2008. Catastrophe Risk Financing in Developing Countries: Principles for Public Intervention – Overview. Washington, DC: The World Bank. DHS (U.S. Department of Homeland Security). 2012. “Survey of Hazard Mitigation Planning. ” EM-DAT. 2012. The International Disaster Database. Brussels: Centre for Research on the Epidemiology of Disasters (CRED). Haldane, Andrew G.; and Madouros, Vasileios, 2012. ‘ The dog and the frisbee’ Speech given at the Federal Reserve Bank of Kansas City’s 36th economic policy symposium, “The Changing Policy Landscape” , Jackson Hole, Wyoming 31 August 2012. Bank of England. Hallegatte, S. 2011. “How Economic Growth and Rational Decisions Can Make Disaster Losses Grow Faster Than Wealth. ” Policy Research Working Paper 5617 , World Bank, Washington, DC. IPCC. 2012. Managing the Risks of Extreme Events and Disasters to Advance Climate Change Adaptation. Special Report of Working Groups I and II of the Intergovernmental Panel on Climate Change. Edited by C. B. Field, V. Barros, T. F. Stocker, D. Qin, D. J. Dokken, K. L. Ebi, M. D. Mastrandrea, K. J. Mach, G.-K. Plattner, S. K. Allen, M. Tignor, and P. M. Midgley. Cambridge: Cambridge University Press. Lall, Somik V, Uwe Deichmann. 2009. Density and Disasters: Economics of Urban Hazard Risk. Policy Research Working Paper 5161, Washington DC: The World Bank. Little, Richard. 2009. Managing the Risk of Cascading Failure in Complex Urban Infrastructure. Little, Richard. 2010. Disrupted Cities: When Infrastructure Fails. Munich Re. 2012. NatCatSERVICE Natural Catastrophes Worldwide 2011. Neumayer, Eric, and Thomas Plümper. 2007 . “The Gendered Nature of Natural Disasters: The Impact of Catastrophic Events on the Gender Gap in Life Expectancy, 1981–2002. ” Annals of the Association of American Geographers 97 (3): 551–66. Pielke, Roger A. Jr.; Gratz, Joel; Landsea, Christopher W.; Collins, Douglas; Saunders, Mark A.; and Musulin, Rade. 2008. Normalized Hurricane Damage in the United States: 1900–2005, in Natural hazards Review/February. Rohan, Kay, and Ian Wilderspin. 2002. “Box 4.4.: Mangrove Planting Saves Lives and Money in Vietnam. ” In World Disaster Report Focus on Reducing Risk, p. 95. Geneva: International Federation of Red Cross and Red Crescent Societies (IFRCRCS). Satterthwaite, D., S. Huq, M. Pelling, H. Reid and P . Lankao (2007). Adapting to Climate Change in Urban Areas, The possibilities and constraints in low- and middle-income nations. Human Settlements Discussion Paper Series No 1. Not stated: International Institute for Environment and Development. Tidwell, Mike. 2005. “Goodbye, New Orleans: It’s Time We Stopped Pretending. ” Web article. UN (United Nations). 2011a. United Nations Global Assessment Report on Disaster Risk Reduction. New York: United Nations. world bank east asia and pacific economic update 2012, vol.2 Part III. The medium term development agenda  |  51 ———. 2011b. “World Population Prospects: The 2010 Revision. ” Population Division of the Department of Economic and Social Affairs of the United Nations Secretariat, United Nations, New York. http://esa. un.org/wpp/index.htm. ———. 2011c. “World Population Prospects: The 2011 Revision. ” Population Division of the Department of Economic and Social Affairs of the United Nations Secretariat, United Nations, New York. http://esa. un.org/wpp/index.htm. UN ISDR. 2011. Global Assessment Report on Disaster Risk Reduction: Revealing Risk, Redefining Development. UNISDR Practical Action, 2012. UN OCHA. 2011. “Humanitarian Funding Update First Quarter 2011. ” Brief. Weber, Elke. 2011. The State of Research on Behavior and Climate Applications. PPT March. World Bank. Forthcoming. Strong, Safe, and Resilient: A Strategic Policy Guide for Disaster Risk Management in East Asia and the Pacific. Washington, DC: The World Bank. World Bank. Forthcoming. Building Urban Resilience: Principles, Tools, Practice, World Bank. Washington, DC. World Bank. Forthcoming. Understanding Risk, Best Practices in Disaster Risk Assessment, Proceedings from the 2012 UR Forum. World Bank. 2012a. ASEAN: Advancing Disaster Risk Financing and Insurance in ASEAN Countries: Framework and Options for Implementation. Vols. 1 and 2. Washington, DC: World Bank. World Bank. 2012b. Improving the Assessment of Disaster Risks to Strengthen Financial Resilience. Experience and Policy Lessons from the Work of the World Bank (2012). Chapter 1 in Improving the Assessment of Disaster Risks to Strengthen Financial Resilience: A Special Joint G20 Publication by the Government of Mexico and the World Bank, World Bank: Washington, DC, 2012. World Bank. 2012c. Sendai Report. World Bank: Washington DC. World Bank. 2012d. Inclusive Green Growth. The Pathway to Sustainable Development. World Bank; and others. World Bank. 2011. Indonesia: Advancing a National Disaster Risk Financing Strategy—Options for Consideration. Washington, DC: World Bank. World Bank and United Nation. 2010. Natural Hazards, Unnatural Disasters. The Economics of Effective Prevention. Washington, DC: World Bank. Remaining Resilient   |  53 Country Pages and Key Indicators Remaining Resilient 54  |  Country Pages and Key Indicators Cambodia first half of 2012 (compared to 18 percent of the same period last year), while apparel exports to the EU expanded by only 29 percent (compared to 61 percent of the same period last year). The overall impact on the industry sector is somewhat mitigated by the strong performance of the construction sector in the first half of 2012, witnessing a three- fold growth (in dollar terms) of new projects approved in Phnom Penh and 36 percent growth of projects approved nationwide. The industry sector growth (which includes construction) is, therefore, estimated to slow down to 9.7 percent for 2012 Population 14.3 million (against 14.5 percent last year). In the meantime, a Population growth 1.2 percent stronger than expected service sector cushions the GDP (PPP , int’l US$ billions) 33.9 GDP per capita (PPP , int’l US$) 2,372 economy and is projected to expand by 6.8 percent Surface area 181,040 sq. km. this year (against 5.0 percent in 2011). The strength Capital Phnom Penh of the service sector is led by booming tourism and Source: World Development Indicators. financial sector. The arrival of international tourists jumped up by 27 percent in the first half of 2012 (against 14 percent of the same period last year). The Recent Economic Developments country is expected to welcome 3.4 million visitors this year, representing an increase of 18 percent. Cambodia recorded very strong economic growth At the same time, the financial sector became last year (2011), reaching a four-year high of very vibrant with deposits estimated to increase by 7.1 percent, which resulted from a strong recovery 24 percent to $6.4 billion50 and lending projected to of the agricultural sector and expansion of an go up by 34 percent to $5.7 billion by the year-end increasingly diversified export portfolio, private and 2012. public investment, and consumption. The growth for 2012 is projected to continue its strong trajectory Despite experiencing some sporadic drought and but at a slower pace with an estimated rate of seasonal floods, the agricultural sector is anticipated 6.6 percent (the same projection World Bank did in to remain unfaltering with a forecasted growth of April 2012). However, the country’s future prospect 3.0 percent in 2012. The dollar value of milled rice is seen to remain healthy with forecasted medium- exports increased by 15 percent compared to the term growth averaging about 7 .0 percent per annum first half of 2011, even though lower quantity of over the next five years. milled rice exports was recorded in the first half of 2012 (76 thousand tons in first half of 2012 against An expected slower merchandise export mainly to 85 thousand tons during the same period of 2011). the U.S. and EU markets mainly explain the slower Being able to penetrate such new markets as China growth pace of 2012. Country merchandise exports (Cambodia exported nearly 1,300 tons during the are estimated to expand by about 11 percent this year first six months of 2012) and Africa provides potential (against 34 percent in 2011). The projected slower opportunities for Cambodia’s rice market to develop. merchandise export is based on the slowdown of France, by far, remains the single most important export growth to the U.S. and EU markets over the destination market, absorbing nearly a third of the first six months being expected to continue over the rest of the year. Garment exports to the United States actually grew by 2.0 percent only during the 50 All dollar amounts are U.S. dollars unless otherwise indicated. world bank east asia and pacific economic update 2012, vol.2 Country Pages and Key Indicators  |  55 country total milled rice exports in the first half of price inflation, which cooled down during the first 2012. half of 2012, is estimated to shrink slightly to around 4 percent by year-end 2012 (from 4.9 percent last An important part of Cambodia’s growth, private year), on the back of relatively stable foods—which consumption continued to expand, representing account for nearly half of Cambodia’s consumer 87 percent of gross domestic product (GDP) by 2011 price inflation basket—and energy prices. (up from 84 percent of GDP in 2010). Cambodia’s real private per capita expenditure rose by 9 percent over The nominal exchange rate in the meantime has these two years and nearly doubled, if compared to remained stable, appreciating by 1.3 percent against the past decade, reflecting strong private activities. the U.S. dollar in June 2012 (end-of-period rate). Similarly, Cambodia‘s real effective exchange rate The external sector is expected to slightly also appreciated by 3 percent against a basket of nine deteriorate for 2012 owing to weakening exports. other garment exporters, posing risks of weakening Current account balance deficit is projected to competitiveness in its exports. The National Bank increase to 10 percent of GDP (up from 8.7 percent of Cambodia’s intervention policy has continued: of GDP last year). Foreign direct investment inflow it injected $117 million worth of local currency into is expected to account for 9.3 percent of GDP for the market during the first half of 2012. The sale 2012. Seventy-two new projects were approved in or purchase of foreign exchange is believed to be the first half of 2012, led by Chinese and Korean efficient in maintaining the riel stability in Cambodia investors (compared to 57 projects approved over given the relatively small amount of riels in the the same period last year). In the meantime, the economy. number of new firms registered at the Ministry of Commerce also increased by 10 percent to 1,712 The financial sector has continued to expand in an new firms approved during the first half of 2012 environment of high dollarization. The euro crisis (compared to 1,563 of the same time last year). appears to have minimally impacted Cambodia’s Gross foreign reserves continue rising, reaching banking system or portfolio investment as the $3.2 billion mark by June 2012 and are projected to country has limited global financial integration. The amount to $3.5 billion by year-end 2012,representing newly run Credit Bureau Cambodia (launched in 4.5 months of imports. March 19, 2012) will play an increasingly important role in helping safeguard and reduce credit risk and The impact of the recent international food price support the growth of the banking system. By June increases on Cambodia’s consumer price inflation 2012, there were 39 commercial banks operating in has been relatively muted. Global food prices rose the country (four new banks entered the market over in the recent months, with the World Bank food the past 12 months) with bank lending continuing its price index—which measures international prices of impressive growth. Bank lending growth averaged a basket of commodities, such as grains, vegetable 34 percent per month over the past six months (nearly oil, and meat—reaching the 2008 food crisis levels half of this lending focusing on wholesale/retail in July 2012. However, the main price increases trade, tourism-related activities, and manufacturing), so far have been on wheat, corn and soya, which reflecting continued strong growth of private sector, do not represent a significant share of the food but also pointing to potential financial risks and consumption basket in Cambodia. Consumer price supervisory capacity challenges. The National Bank stability in Cambodia was maintained during the first of Cambodia (Central Bank) recently has increased half of this year with the price of rice—the main food the rate of reserve requirement from 12 percent to staple—increasing only slightly (averaging 3 percent 12.5 percent, a move to tighten the monetary policy over this period while average rice prices in the and to precautionarily address the credit boom in international market rose by 12 percent). Consumer recent months. July 2008, the Central Bank raised Remaining Resilient 56  |  Country Pages and Key Indicators the reserve requirement rate from 8 percent to borrowing, including Chinese credit disbursements. 16 percent to prevent spillover impacts of global The trend of strong capital investment expenditure financial crisis. Later in January 2009, it dropped is expected to continue for 2012 and 2013. In the the rate from 16 percent to 12 percent, to stimulate meantime, domestically financed spending for the economic activities. social sector, namely for the health and education sectors, continues to receive high priority, as well as On the fiscal front, the government continues its timelier disbursements. efforts to strengthen revenue administration and enhance public financial management reform. Prospects for fiscal balance are anticipated to The government’s recent introduction of using the improve this year and the next year, too, as revenue banking system for tax collections, implementing collection has improved. Revenue collection more forcefully the property tax, and expanding the increased by 29 percent in the first half of 2012, customs automation system to cover more customs compared to the same periond last year, which is sites will help revenue collection prospect in the attributed to growth of direct and indirect taxes medium term. The National Assembly on January (35 percent and 28 percent, respectively, over that of 3, 2012 enacted the Public Procurement Law to the first half of 2011). While the fiscal management boost the fiduciary administration. The Revenue remains under control, it is increasingly vulnerable Mobilization Strategy has been drafted and expected to unpredictable external financing and increased to be submitted for the government’s endorsement pressure of operation and maintenance budget. next year. However, as revenue collection did not increase much in 2011 (at 13.2 percent of GDP in The Executive in October 2012 prepared and 2011, similar to that of 2010) and general government endorsed the draft 2013 Budget Law, which has now outlays were unchanged at 20.6 percent of GDP in been transmitted to the Legislature (the National 2011, the fiscal deficit remained relatively at a similar Assembly) for final approval. The Draft 2013 Budget level of year 2010, recording at 7 .4 percent of GDP seeks to raise domestic revenues by 0.5 percentage in 2011(compared to 7 .5 percent of GDP in 2010 point of GDP with spending limits at a similar level when the government exercised an aggressive cut of last year (around 20 percent of GDP). Capital of non-essential current expenditures). Fiscal deficit expenditures for development investment projects remained higher than the last five-year average but remain a priority of the government with targeted on balance it is expected to improve in the medium outlays at a similar level as last year’s Budget (around term as public financial management reform is 8 percent of GDP). To finance this, the Executive (in strengthened and the revenue mobilization strategy the 2013 Budget Law) proposes to borrow up to SDR is in place. Government has not yet been able to 600 million for the development investment projects achieve its precrisis saving levels, which would be for year 2013. The government, in the meantime, needed to build a precautionary buffer to address plans to increase civil servants salary by 20 percent potential shocks. Government reserves stood at for 2013. This is the eighth consecutive year of civil 4.2 percent of GDP in June 2012 (compared to service wage bill increase since 2005. 6.4 percent of GDP in June 2008). Strong current and capital spending (mainly led by government development investment projects) continue to lead the fiscal outlay in 2011. Capital expenditure of public investment projects in 2011 is estimated at 8.7 percent of GDP , higher than 7 .2 percent of the past five year average, largely attributable to the increase of concessional world bank east asia and pacific economic update 2012, vol.2 Country Pages and Key Indicators  |  57 Key Indicators Cambodia:  2010 2011e 2012f 2013f 2014f Year Year Year Year Year Output, Employment and Prices Real GDP (% change y-y) 6.0 7.1 6.6 6.7 7.0 Domestic demand (% change y-y) 10.7 11.8 13.0 13.4 13.8 Industrial production index (2000=100) 263 301 316 341 370 (% change y-y) 13.6 14.5 5.0 8.0 8.5 Consumer price index (% change y-y) 3.1 4.9 4.0 5.0 5.0 Public Sector Government revenues (% GDP) 13.1 13.2 13.8 14.2 14.5 Government expenditures (% GDP) 20.6 20.6 20.0 20.0 20.0 Government balance (% GDP) -7.5 -7.4 -6.2 -5.8 -5.5 Foreign Trade, BOP and External Debt Trade balance (millions US$) -1,582 -1,490 -1,680 -1,807 -1,941 Exports of goods (millions US$) 3,884 5,220 5,768 6,460 7,235 (% change y-y) 29.7 34.4 10.5 12.0 12.0 Key export (% change y-y) 1/ 24.4 31.7 15.0 15 15 Imports of goods (millions US$) 5,466 6,710 7 ,448 8,267 9,176 (% change y-y) 21.7 22.7 11.0 11.0 11.0 Current account balance (millions US$) -1,171 -1,122 -1,400 -1,350 -1,200 (% GDP) -10.4 -8.7 -10.0 -8.7 -7.0 Foreign direct investment (millions US$) 2/ 762 1,332 1,300 1,352 1,406 External debt (millions US$) 3,206 3,611 3,992 4,336 4,337 (% GDP) 29 28 29 28 25 Short-term debt (millions US$) 262 264 268 270 275 Debt service ratio (% exports of g&s) 1.4 1.2 1.2 1.4 1.6 Foreign exchange reserves, gross (millions US$) 2,653 3,032 3,456 3,871 4,335 (months of imports of g&s) 4.5 4.5 4.5 4.5 4.5 Financial Markets Domestic credit (% change y-y) 35.3 37.7 33.0 25.0 25.0 Short-term interest rate (% p.a.) 15.0 15.0 15.0 15.0 15.0 Exchange rate (Riel/US$, eop) 4,053 4,039 4,100 4,100 4,100 Real effective exchange rate (2000=100) 122.5 124.8 126.2 ,, ,, (% change y-y) -0.4 1.9 1.1 ,, ,, Memo: Nominal GDP (millions US$) 11,242 12,828 13,944 15,473 17,053 Sources: National data sources, IMF , and World Bank staff estimates. e = estimate f = forecast 1/ Garments 2/ From 2011, includes FDI related to public-private power sector projects Remaining Resilient 58  |  Country Pages and Key Indicators China highway construction projects, 10 city infrastructure projects, and seven ports and waterways projects totaling more than 1 trillion yuan were announced in September. One area where FAI growth rate slowed was the real estate sector as the central government sought to cool down the housing market, which has been showing signs of overheating. However, some policy fine-tuning was seen recently, for example, on housing provident fund and mortgage subsidies. Consumption growth was robust, accounting for 55 percent of the first three quarter GDP growth, Population 1.344 billion supported by continued household income growth. Population growth 0.5 percent Labor market conditions were favorable, with GDP (PPP , int’l US$ billions) 11,379.2 GDP per capita (PPP , int’l US$) 8,466 employment growing robustly, and demand for Surface area 9,598,088 sq. km. labor still outnumbering supply. Wage growth was Capital Beijing 7.7 percent in the third quarter. Inflationary pressure Source: World Development Indicators. remains at bay. Consumer price index (CPI) grew by 1.7 percent (year on year) in October, marginally lower than 1.9 percent (year on year) in September. Recent Economic Developments With the slowing domestic economy and weak global demands, producer price index. (PPI) growth The growth rate of China’s economy in the third has declined for the eight consecutive month, quarter was 7 .4 percent (year on year), below the reaching -2.8 percent (year on year) in October, historic trend and the lowest in the past 14 quarters. driven by falling commodity (raw materials) prices. However, the data on industrial production and fixed asset investments suggested that China’s economy On the external front, real exports grew by was bottoming out. Quarter on quarter growth 11.1 percent, and imports, by 4 percent (year on (seasonally adjusted annualized rate) picked up from year) in September, a rebound from 1.4 percent, 8.2 percent in second quarter to 9.1 percent in third and 1.7 percent, respectively, in August. Light quarter. The negative contribution of net exports to manufactured goods were the biggest contributor gross domestic product (GDP) growth also narrowed to export growth. While exports growth to the three from -0.7 percentage points in the first half to -0.4 major trade partners (United States, EU, and Japan) percentage points in the first three quarters. slowed, those to the rest of the world remained robust, and the export to Asia, excluding Japan, grew On the domestic front, fixed asset investment (FAI) fastest. China’s external terms of trade continue to growth increased, mainly in government-influenced improve as import prices of commodities decelerate sector. In September, FAI grew by 21.1 percent more rapidly than export prices of manufactured (year on year) in real terms, 3.6 percentage points goods. Foreign direct investment remained weak, higher than in August. FAI-financed by state budget, growing only by 3.8 percent (year on year) in the bank loans, and SOEs picked up, as the impact of first three quarters. These developments dampened easing credit conditions and public investment in foreign exchange accumulation. infrastructure is beginning to show. The impact is expected to continue to be felt into 2013, as The monetary stance has been accommodating the authorities have accelerated the approval of in the third quarter, leading to an increase of total large projects: some 25 urban rail projects, three social financing. People’s Bank of China decreased world bank east asia and pacific economic update 2012, vol.2 Country Pages and Key Indicators  |  59 the benchmark interest rate by 0.25 percent in June a structural reform to shift away from investments. and then again in July, which was the first cut since Given China’s still significant fiscal space and the 2008. In the third quarter of 2012, the traditional bank already accommodative monetary stance, the loans grew 16.1 percent (year on year) on average. burden of any countercyclical response should fall Meanwhile, corporate bond financing expanded on fiscal policy. Currently, most of the stimulus sharply, growing 78 percent (year on year) in the first policy is still through the government-influenced three quarters, albeit from a low base. infrastructure investment. However, the policy response would need to be crafted with longer-term effects and objectives in mind. Relative to previous Outlook and Emerging Challenges episodes, fiscal stimulus would ideally be less credit-fueled, less local government-funded, and Our projections for GDP growth in 2012 and 2013 less infrastructure-oriented. Fiscal measures, such are 7 .9 percent and 8.4 percent, respectively, as targeted tax cuts, social welfare spending, and reflecting weak external environment, property other social expenditures to support consumption, market corrections, and impact of supportive policy should attract first priority. measures. CPI inflation is likely to stay on its declining trend and average 2.8 percent for 2012 as growth stays moderate, commodity prices weaken, and asset price increase decelerate. It is expected to rise slightly to 3.3 percent in 2013 from a growth pickup and the lagged effects of the loose monetary stance in the second half of 2012. With uncertainties in the global economy, rising labor costs, and a recovery in domestic demand, China’s current account surplus is estimated to narrow from 2.8 percent of GDP in 2011, to 2.3 percent in 2012, and 2.2 percent in 2013. However, downside risks remain in the uncertainty of the euro area, China’s biggest trade partner. In the longer run, GDP growth is projected to moderate somewhat because of the structural shift of the economy, which is anticipated to move away from investment- and export-driven growth. The anticipated slow recovery of the global economy, ebbing effects of this round of domestic stimulus, and the aging population contribute to this forecast. Consumption is projected to remain strong and inflation to remain moderate at around 3 percent, but investment growth will likely slow. World Bank forecasts are consistent with the government’s target annual growth rate in the new five-year plan of 7.5 percent. China’s near-term policy challenge is about balancing the trade-off between supporting growth and reforming. There are concerns about the inertia for Remaining Resilient 60  |  Country Pages and Key Indicators  ey Indicators China: K 2010 2011 2012f 2013f 2014f 2011 2012 2012 Year Year Year Year Year Q4 Q1 Q2 Q3 Jul Aug Sep Oct Output, Employment and Prices Real GDP (% change y-y) 10.4 9.3 7.9 8.4 8.0 8.9 8.1 7.6 7.4 .. .. .. .. Domestic demand (% change y-y) 8.9 8.6 .. .. .. .. .. .. .. .. .. .. .. Industrial production index /1 .. .. .. .. .. .. .. .. .. .. .. .. .. (% change y-y) 12.1 10.7 .. .. .. 12.8 11.6 9.5 9.1 9.2 8.9 9.2 .. Unemployment (%) 2/ 4.1 4.1 .. .. .. 4.1 4.1 4.1 .. .. .. .. .. Real wages (% change y-y) 9.7 8.5 .. .. .. .. .. .. .. .. .. .. .. Consumer price index (% change y-y) 3.3 5.4 2.8 3.3 3.0 4.6 3.8 2.9 1.9 1.8 2.0 1.9 .. Public Sector Government revenues (% GDP) 20.7 22.0 22.1 21.9 21.6 .. .. .. .. .. .. .. .. Government expenditures (% GDP) 22.4 23.1 24.6 24.8 24.5 .. .. .. .. .. .. .. .. Government balance (% GDP) -2.5 -1.8 -2.5 -2.9 -2.9 .. .. .. .. .. .. .. .. Domestic public sector debt (% GDP) /3 16.8 20.0 .. .. .. .. .. .. .. .. .. .. .. Foreign Trade, BOP and External Debt Trade balance (billions US$) 184.5 157.9 163.0 182.0 180.0 48.1 1.1 68.8 79.5 25.1 26.7 27.7 .. Exports of goods (billions US$) 1,578.4 1,899.3 2,032.0 2,183.0 2,342.0 506.7 430.1 524.6 541.3 176.9 178.0 186.3 .. (% change y-y) 4/ 31.3 20.3 7.0 7.4 7.3 14.3 7.6 10.5 4.5 1.0 2.7 9.8 .. Key export (% change y-y) 5/ 31.4 20.2 .. .. .. 14.2 7.8 11.3 4.9 1.6 3.1 10.3 .. Imports of goods (billions US$) 1,393.9 1,741.4 1,869.0 2,001.0 2,162.0 458.6 428.9 455.7 461.8 151.8 151.3 158.7 .. (% change y-y) 4/ 38.9 24.9 7.3 7.1 8.0 20.6 7.1 6.5 1.6 5.7 -2.7 2.3 .. Current account balance (billions US$) 237.8 201.7 195 207 203 60.5 23.5 53.7 70.6 .. .. .. .. (% GDP) 3.9 2.7 2.3 2.2 1.9 .. .. .. .. .. .. .. .. Foreign direct investment (billions US$) /6 105.7 116.0 .. .. .. 29.3 29.5 29.6 24.3 7.6 8.3 8.4 .. External debt (billions US$) 558.3 685.4 645.0 618.0 .. .. .. .. .. .. .. .. .. (% GDP) 9.1 9.3 7.8 6.6 .. .. .. .. .. .. .. .. .. Short-term debt (billions US$) 348.0 477.0 .. .. .. .. .. .. .. .. .. .. .. Debt service ratio (% exports of g&s) 1.6 1.7 .. .. .. .. .. .. .. .. .. .. .. Foreign exchange reserves, 2,853.8 3,187.6 3,490.0 3,881.0 4,180.0 3,187.7 3,311.6 3,246.6 3,291.7 3,246.6 3,279.5 3,291.7 .. gross (billions US$) (months of imports of g&s) 24.6 22.0 21.5 22.2 22.0 20.9 23.2 21.4 21.4 21.4 21.7 20.7 .. Financial Markets Domestic credit (% change y-y) 19.9 14.3 .. .. .. 15.8 15.7 16.0 16.3 16.0 16.1 16.3 .. Short-term interest rate (% p.a.) 7/ 3.3 3.3 .. .. .. 3.3 3.3 3.3 3.3 3.3 3.3 3.3 .. Exchange rate (RMB/US$, eop) 6.62 6.30 6.30 6.24 6.24 6.33 6.31 6.32 6.34 6.33 6.34 6.34 .. Real effective exchange rate (2000=100) 109.2 115.8 .. .. .. 115.8 116.5 116.8 115.6 116.8 116.4 115.6 .. (% change y-y) 4.3 6.1 .. .. .. 6.1 8.8 9.3 1.5 8.9 6.1 1.5 .. Stock market index (Dec. 19, 1990=100)/8 2,808 2,199 .. .. .. 2,199 2,263 2,225 2,086 2,104 2,048 2,086 .. Memo: Nominal GDP (billions US$) 6,062.7 7,505.0 8,303.0 9,386.0 10,425.0 .. .. .. .. .. .. .. .. Source: National data sources. f = forecast 1/ Annual data are not comparable with the quarterly and monthly data. Annual data cover all industrial enterprises while the quarterly and monthly ones only refer to those enterprises with sales value above RMB 5.0 million. 2/ Official urban unemployment only, not including laid-off workers 3/ Includes treasury bonds, policy financial bonds and other financial bonds (end-period outstanding) 4/ Nominal growth rate 5/ Manufactured exports 6/ Gross FDI utilized 7/ Central Bank loans to financial institutions, less than 20 days 8/ Shanghai Stock Exchange A-Share Price Composite world bank east asia and pacific economic update 2012, vol.2 Country Pages and Key Indicators  |  61 Fiji sector value of work put in place and new building permits increased by 7 .5 and 14.7 percent year- on-year, respectively in the first quarter of 2012. Reconstruction activities related to the two floods earlier in 2012 drove the uptick in the construction sector, but government infrastructure spending, as well as tourism and mining investments, also provided a boost. Mining investments include bauxite and iron-sand projects. The Reserve Bank of Fiji expects total investment to reach 18 percent of gross domestic product (GDP) in 2012 from 16 percent in 2011. Population 868,000 Population growth 0.9 percent Inflation moderated in 2012 to 3.7 percent in GDP (PPP , int’l US$ billions) 4.2 GDP per capita (PPP , int’l US$) 4,787 September as the effects of one-off factors—such as Surface area 18,270 sq. km. the 2011 increase in VAT rate—abated. Food prices Capital Suva have also declined steadily, despite the swings in Source: World Development Indicators. commodity prices. The large number of items under price control could explain this decline. Inflation is projected to moderate further, to 3.5 percent by Recent Economic Developments year-end. As a consequence of the Global Economic Crisis Foreign reserves remain adequate, at $89151 in 2008, Fiji’s economy contracted by 1.3 percent million at the end of October 2012, equivalent to in 2009, and was followed by marginal growth in five months of imports of Goods and Non-Factor 2010. The economy picked up in 2011, with growth Services. Slower growth in Australia, one of the reaching 1.9 percent. Growth was largely driven by major trading partners, could have a negative impact a recovery in tourism and related sectors, as well as on the external accounts. in agriculture, which recovered well from the 2010 cyclones. Growth is expected to continue in 2012, The monetary stance remains accommodative led by continued strength in tourism and a pick-up in 2012 to encourage growth. The policy rate was in the industrial sector. However, the Fijian economy reduced to 0.5 percent earlier in 2012 and has remains vulnerable and policy space to respond to remained at that level. Other policy measures, such as future external shocks, such as a global economic increasing bank lending requirements to agriculture downturn or a commodity price shock, is limited. and renewable energy sectors, were also employed to encourage credit growth. The accommodative Fiji’s economy is projected to grow by more than monetary policy has resulted in ample liquidity 2 percent in 2012, led by continued strength in the (F$577 million at the end of September 2012) and tourism sector and improvements in manufacturing, a pick-up in credit growth, with private sector credit construction, and mining. Travel-related cash receipts rising by 6.3 percent in June, after a growth of rose by 7 percent year-on-year in the first seven 3.5 percent in the previous quarter. Bank lending months of 2012, with Australia and New Zealand rates have fallen from around 7 .5 percent a year ago, continuing to be the main source countries. Growth to under 7 percent as at September 2012. is expected to continue as the supply of rooms and facilities increases in line with the completion of new tourism projects in 2013/14. Construction 51 All dollar amounts are U.S. dollars unless otherwise indicated. Remaining Resilient 62  |  Country Pages and Key Indicators Consumption has shown some signs of recovery highway, which is expected to be completed over in 2012, as indicated by a 14.2 percent increase in the next two and half years. The government is domestic VAT collections, for the period to August also expected to complete the issuance of new 2012. Labour market conditions have also shown Fiji Infrastructure Bonds in the domestic market, positive signs, with the job advertisement survey totalling F$196 million (2.9 percent of GDP) by the showing a 14 percent rise in vacant positions for end of 2012. State guarantees are expected to the year to August. Inward remittances on the other increase with the provision of a guarantee for the hand declined by 8.2 percent in the first half of 2012, F$120 million (1.8 percent of GDP) structured trade compared to the same period in 2011, possibly finance facility for FSC. reflecting weak labour markets abroad. The effects of the income tax measures introduced as part of In the October monetary policy statement, the the 2012 budget is not yet clear. The impact of any Reserve Bank noted that downside risks have increase in consumption on the domestic economy worsened for Fiji, pointing to subdued demand may be tempered by the fact that a large portion of in major trading partner economies. The tourism current consumption spending is on imported items. sector, which underpinned the economic recovery, particularly depends on tourists from Australasia and The budget deficit for 2012 is forecast to be less is vulnerable to a further deterioration in the global than 2.0 percent of GDP compared to the budgeted economy. Remittances are also contingent on global 2.5 percent deficit.The improved budget performance economic conditions. In addition, Fiji is vulnerable is largely based on higher revenue expectations. to international commodity price shocks, which may Revenues (estimated at 28.7 percent of GDP) rose result in a slowdown to mining-related earnings and significantly compared to 2011, possibly due to investments, or a rise in cost of food and fuel imports. implementation of revenue measures announced Although reserve levels remain adequate, fiscal and in the 2012 budget, including higher collection monetary policy space to respond to exogenous targets for VAT and departure tax and a modified events is limited. Rising government debt would personal income tax structure. Current expenditure tend to constrain the government’s ability to provide (estimated at 22.3 percent of GDP) rose compared to fiscal stimulus and the space for further monetary 2011, largely because of a 3 percent general pay rise easing is constrained given the low existing policy for civil servants. Net capital expenditure, including rate. capital transfers (estimated 8.1 percent of GDP), fell compared to 2011 because of a smaller allocation for the restructuring of Fiji Sugar Corporation (FSC). The recently announced 2013 budget projects a widening of the deficit (2.8 percent of GDP) which is largely explained by a 30 percent increase in infrastructure spending. Fiji’s public sector debt stood at 52 percent of GDP as at the end of 2011. Public sector debt consists of mainly domestic debt (40 percent of GDP), with external debt at 12 percent of GDP . The government is expected to fund a portion of the capital projects identified in the 2012 budget with debt financing. The government has signed a F$220 million loan (3.3 percent of GDP) with China Export-Import Bank, for the sealing of the Dreketi to Nabouwalu world bank east asia and pacific economic update 2012, vol.2 Country Pages and Key Indicators  |  63 Fiji:Key Indicators 2010 2011 2012f 2013f 2014f Year Year Year Year Year Output, Employment and Prices Real GDP (% change y-y) 0.1 1.9 2.1 2.2 2.3 Tourist arrivals (thousands) 632 678 703 .. .. (% change y-y) 16.5 7.3 3.7 .. .. Unemployment rate (%) .. .. .. .. .. Consumer price index (% change y-y) 5.0 7.7 3.5 .. .. Public Sector Government revenues (% GDP) 24.9 25.6 28.7 .. .. Government expenditures (% GDP) 27 .0 29.1 30.5 .. .. Government balance (% GDP) -2.1 -3.5 -1.7 .. .. Domestic public sector debt (% GDP) 45.8 40.6 39.7 .. .. Foreign Trade, BOP and External Debt Trade balance (millions US$) -753 -867 .. .. .. Exports of goods (millions US$) 520 502 .. .. .. (% change y-y) 32.2 -3.4 .. .. .. Key export (% change y-y) 1/ -61.8 147 .3 .. .. .. Imports of goods (millions US$) 1,556 1,728 .. .. .. (% change y-y) 25.3 11.1 .. .. .. Current account balance millions US$) -248 -379 .. .. .. (% GDP) -7.7 -9.9 .. .. .. Foreign direct investment (millions US$) 189 211 .. .. .. Total external debt (millions US$) 431 589 .. .. .. (% GDP) 12.7 15.9 .. .. .. Short-term debt (millions US$) .. .. .. .. .. Debt service ratio (% exports of g&s) 2.5 11.1 .. .. .. Foreign exchange reserves, gross (millions US$) 2/ 716 831 .. .. .. (months of imports g&s) 4.1 4.6 .. .. .. Financial Markets Domestic credit (% change y-y) 3/ 3.1 7.6 .. .. .. Short-term interest rate % p.a.) 3.6 2.2 .. .. .. Exchange rate (FJ$/US$, eop) 1.82 1.82 .. .. .. Real effective exchange rate (2000=100) 87.9 91.9 .. .. .. (% change y-y) -2.7 4.6 .. .. .. Memo: Nominal GDP (millions US$) 3,226 3,754 3,746 .. .. Source: National data sources. e = estimate f = forecast 1/ Sugar. 2/ Rise in debt service ratio in 2011 reflects the maturity of the US$150 million global bond, which may be refinanced. 3/ Includes foreign assets of non-bank financial institutions. 4/ Domestic credit to the private sector. Remaining Resilient 64  |  Country Pages and Key Indicators Indonesia year in the third quarter. Strong investment spending has also been a notable feature of growth so far in 2012, with investment rising 12.3 percent year-on- year in the second quarter and 10 percent year-on- year in the third quarter. However, while capital spending remains at high levels, investment growth has decelerated recently, dropping 0.4 percent on a seasonally adjusted quarter-on-quarter basis in the third quarter. Although the large share of private domestic demand in the economy has helped shield Indonesia from Population 242.3 million the worst effects of a weaker global economy, the Population growth 1 percent impact has clearly been felt in the external accounts. GDP (PPP , int’l US$ billions) 1,131 GDP per capita (PPP , int’l US$) 4,668 Net exports were a significant drag on growth in Surface area 1,904,570 sq. km. the last quarter of 2011 and the first half of 2012, Capital Jakarta subtracting 3.7 percent from cumulative growth of Source: World Development Indicators. 4.8 percent over this period. In dollar terms, exports fell 1.7 percent in the first half of 2012 compared The Indonesian economy is set to record strong with the same period in 2011, while imports were growth for 2012 as a whole, powered by robust up 15.4 percent. In the third quarter, exports domestic demand. In the baseline scenario, this remained under pressure, dropping 2.4 percent on should continue into 2013. However, there are some a seasonally adjusted quarterly basis, but imports signs of moderation in investment spending, while fell even more sharply, contracting 8.7 percent on the commodity-intensive export sector remains a seasonally adjusted quarterly basis (the decline in under pressure. So much depends on developments imports in part reflects weaker demand for export- in the external environment. Slower growth in China related inputs). Consequently, net exports added presents the key external risk. On the domestic to quarterly GDP growth for the first time in 2012, front, it will be important to maintain policy clarity boosting seasonally adjusted quarterly growth by a and continuity ahead of the 2014 elections, while substantial 2.3 percent. continuing to improve the quality of public spending. From a supply side perspective, economic growth remains broad-based. The manufacturing sector Recent Economic Developments performed particularly strongly in the third quarter, with growth picking up to 6.4 percent year on year, Indonesia’s economy has grown robustly so far in up from 5.5 percent in the second quarter. Service 2012. Since the World Bank’s May 2012 regional sector growth also remains robust, though the pace update, GDP expanded by 6.4 percent in the second moderated in the third quarter to 7.3 per cent year on quarter and by 6.2 percent in the third quarter. On year (compared with 8.1 percent year on year in the a seasonally adjusted quarterly basis, the pace of second quarter). However, tepid global commodity growth moderated from 1.6 percent in the second demand has been felt in mining and quarrying, quarter to 1.3 percent in the third quarter, slightly with this sector recording the weakest growth below its post-global financial average (from 2009 performance in the third quarter of all major sectors, to present) of 1.5 percent per quarter. Private contracting 0.1 per cent year-on-year. consumption demand continues to be a reliable engine of growth, and was up 5.7 percent year-on- world bank east asia and pacific economic update 2012, vol.2 Country Pages and Key Indicators  |  65 The sharp drop in imports seen in the third quarter While Bank Indonesia has maintained its policy rate helped narrow the current account deficit to at a record low of 5.75 percent since February, it 2.4 percent of GDP , compared with 3.5 percent of tightened monetary policy in August by raising the GDP in the second quarter. Meanwhile, Indonesia lower bound of the interbank rate corridor (its deposit has continued to attract sizable net foreign direct facility [FASBI] rate) by 25 basis points to 4 percent. investment, totaling $13.252 billion in 2012 through With global economic conditions set to remain soft, the third quarter, compared with $19.2 billion Bank Indonesia will need to balance the need to for the whole of 2011. Along with sizable inward support growth while remaining watchful for any portfolio investment (totaling close to $4 billion in incipient inflation pressures, including managing the both the second and third quarters), this situation risks of these being triggered by future administered has resulted in large financial and capital accounts price increases. surpluses. In the third quarter, the more modest current account deficit coupled with strong capital Following the missed opportunity to raise subsidized inflows resulted in the overall balance of payments fuel prices in 2012, the approved government budget moving into a modest surplus of $800 million, for 2013 allows for a possible increase should reversing four consecutive quarters of net balance economic developments deviate substantially from of payment outflows. Foreign exchange reserves the official assumptions. The 2013 Budget also allows stood at $110.2 billion in September, having dipped for a phased 15 percent increase in electricity tariffs. to $106.5 billion in the second quarter. An orderly Meanwhile, subsidy spending, particularly on fuel, depreciation of the rupiah facilitated the adjustment remains high. The government has projected that of Indonesia’s external balances to weaker global energy subsidy spending will reach IDR 306 trillion in conditions. For the year to the end of October, the 2012, exceeding the allocation in the revised budget rupiah was 6 percent weaker against the U.S. dollar. by IDR 94 trillion (or 44 percent). The overspending on this subsidy, coupled with moderating income Inflation has thus far held at moderate levels, despite tax revenues and lower receipts from commodity- the robust pace of domestic demand and the related activities, lead the World Bank to project a weaker currency. Both headline and core consumer 2012 Budget deficit of 2.5 percent of GDP , somewhat price index (CPI) inflation stood at 4.6 percent year- higher than the government’s revised estimate on-year in October. This is close to the midpoint of 2.2 percent of GDP . Overall, however, the fiscal of Bank Indonesia’s 2012 inflation target range of stance remains conservative, with the planned 2013 4.5 +/- 1 percent. The stability of headline inflation Budget deficit narrowing to 1.7 percent of GDP , and suggests that inflation expectations have, to date, the Medium-Term Budget Framework targeting a been contained in the absence of large administered gradual move to a surplus of 0.3 percent of GDP by price shocks and subdued commodity price shocks, 2016. offsetting any pass-through from the nominal currency depreciation over the year. However, it will be important to watch for signs of future inflationary Outlook and Emerging Challenges pressures in the general economy and in particular sectors, for example, certain property markets that The baseline scenario sees Indonesia’s economy have seen strong recent increases. Nominal credit maintaining its solid performance. GDP growth is growth also remains high at 22.9 percent year-on- projected at 6.1 percent for 2012, accelerating to year in September, although this has slowed from a 6.3 in 2013 as global economic conditions improve. high of 26 percent in May. The risks to this forecast remain to the downside, largely because of ongoing external uncertainties, notably over sovereign debt and banking sector 52 All dollar amounts are U.S. dollars unless otherwise indicated. developments in the euro area, the U.S. fiscal outlook Remaining Resilient 66  |  Country Pages and Key Indicators in 2013, and the slowdown in China’s economic Maintaining policy consistency and clarity, growth compared to previous years. Another key particularly in the area of business and investment uncertainty is the impact on international portfolio regulation, furthers both of these objectives. It capital flows and commodity prices of renewed will be important to avoid policy missteps, such as monetary easing by major central banks. A repeat policies that aim to address a near-term issue, yet of the large inflows to emerging market assets, may carry longer-term risks and costs. In addition, including to Indonesia, that were seen in 2010 is maintaining a clear and consistently reform-oriented possible and would raise significant monetary and policy framework will be particularly important given fiscal policy challenges. However, such a repeat is the likely rise in political uncertainty in the lead-up to by no means guaranteed given the current policy national elections in 2014 and the continued fragility uncertainties weighing on investor sentiment and of investor confidence around the globe. More developments in the international economy since measures are needed to increase the flexibility to the more immediate post-global financial crisis respond to any downturn in growth, which remains period. limited by disbursement challenges in infrastructure and the continued burden of energy subsidies Of particular interest, given its role as a major (accounting for one quarter of central government engine of Indonesia‘s domestic demand growth, spending, excluding regional transfers, in the 2013 is how any spillovers from developments in China budget). Therefore, there is a need to improve further affect domestic investment in Indonesia, which the quality of both the allocation and the efficiency is still strong, but is showing some signs of of spending. Failure to make such improvements in moderating. Investment has tended to be closely the medium-term could lower the growth outlook positively correlated with global commodity prices going forward and the government’s ability to meet and the pace of investment growth may yet its development objectives. prove susceptible to external headwinds. Even if economic growth as a whole proves relatively robust to softening commodity prices, households and businesses in regions highly dependent on commodities for livelihoods and income could feel significant localized impacts. The ongoing uncertainties of the international environment raise the importance of Indonesia continuing to build on the progress it has already had in making its economy more resilient. This will equip the country to benefit fully from the gradual improvement in global growth expected in the baseline outlook, as well as to weather any further deterioration in external conditions, should this occur. Therefore, the policy challenge for Indonesia, as well as across developing economies, is to maintain a twin focus on short-term crisis preparedness and on longer-term structural measures (such as support for the development of infrastructure, skills, and education) aimed at boosting the sustainable growth rate. world bank east asia and pacific economic update 2012, vol.2 Country Pages and Key Indicators  |  67 Key Indicators Indonesia:  2010 2011 2012f 2013f 2014f 2011 2012 2012 Year Year Year Year Year Q4 Q1 Q2 Q3 Jul Aug Sep Oct Output, Employment and Prices Real GDP (% change y-y) 1/ 6.2 6.5 6.1 6.3 6.6 6.5 6.3 6.4 6.2 .. .. .. .. Domestic demand (% change y-y) 5.3 5.7 7.5 5.9 7.0 6.4 6.4 7.4 6.1 .. .. .. .. Industrial production index 134.6 140.0 .. .. .. 139.7 139.4 143.9 .. .. .. .. .. (2000=100) (% change y-y) 4.6 4.1 .. .. .. 22.9 23.3 21.2 .. .. .. .. .. Unemployment (%) 7.1 6.6 6.3 .. .. .. .. .. .. .. .. .. .. Real wages (% change y-y) 0.4 4.7 .. .. .. .. .. .. .. .. .. .. .. Consumer price index 7.0 3.8 4.4 5.1 5.0 3.8 4.0 4.5 4.3 4.6 4.6 4.3 4.6 (% change y-y) 2/ Public Sector 3/ Government revenues (% GDP) 15.5 16.3 15.9 16.3 16.6 .. .. .. .. .. .. .. Government expenditures (% GDP) 16.2 17 .4 18.2 17 .9 18.0 .. .. .. .. .. .. .. .. Government balance (% GDP) -0.7 -1.1 -2.2 -1.7 -1.4 .. .. .. .. .. .. .. .. Government debt (% GDP) 26.1 24.3 24.1 22.9 21.5 24.3 23.4 23.4 23.7 .. .. .. .. Foreign Trade, BOP and External Debt Trade balance (billions US$) 4/ 21.3 24.2 -18.9 -23.5 -25.9 3.5 1.7 -2.1 0.6 -0.3 0.0 0.8 .. Exports of goods (billions US$) 5/ 158.1 200.8 236.8 245.8 275.9 50.7 48.4 47.5 45.6 15.7 13.7 16.1 .. (% change y-y) 32.1 27.0 17 .9 3.8 12.2 10.6 5.3 -8.2 -13.0 -6.9 -26.0 -4.8 .. Key export (% change y-y) 6/ 39.0 32.8 .. .. .. 19.6 11.0 -4.2 -20.7 .. .. .. .. Imports of goods (billions US$) 5/ 127 .4 166.0 227.4 238.4 268.5 44.1 44.5 46.7 42.5 16.0 13.7 15.3 .. (% change y-y) 43.7 30.3 37 .0 4.9 12.6 20.5 21.6 9.7 -0.3 1.1 -6.7 2.8 .. Current account balance 5.1 1.7 -21.2 -16.4 -20.1 -2.3 -3.1 -7.7 -5.3 .. .. .. .. (billions US$) (% GDP) 0.7 0.2 -2.3 -1.6 -1.7 -1.1 -1.4 -3.5 -2.4 .. .. .. .. Foreign direct investment 13.8 19.2 .. .. .. 5.4 4.5 3.2 5.5 .. .. .. .. (billions US$) External debt (billions US$) 202.4 224.8 240.1 236.9 234.7 224.8 228.8 235.4 237.6 241.8 241.3 244 .. (% GDP) 28.6 26.5 26.8 23.1 19.8 26.4 26.4 27 .0 27 .3 .. .. .. .. Debt service 54.3 92.8 .. .. .. .. .. .. .. .. .. .. .. (% exports of g&s) 34.4 46.2 .. .. .. .. .. .. .. .. .. .. .. Foreign exchange reserves, 96.2 110.1 110.2 123.4 143.6 110.12 110.49 106.50 110.17 106.6 109.0 110.2 110.3 gross (billions US$) (months of imports of g&s) 7.5 6.7 4.7 5.0 5.2 6.7 6.4 6.0 6.2 .. .. .. .. Financial Markets Domestic credit (% change y-y) 17 .5 24.4 .. .. .. 25.4 24.7 25.9 23.9 25.2 23.6 22.9 .. Short-term interest rate (% p.a.) 7/ 6.5 6.6 .. .. .. 6.2 5.8 5.8 5.8 5.8 5.8 5.8 5.8 Exchange rate (Rupiah/US$, ave) 9,090 8,770 9,350 9,400 9,400 9,024 9,088 9,412 9,544 9,485 9,560 9,588 9,615 Real effective exchange rate 160.4 160.1 .. .. .. 159.6 159.8 159.4 157.3 158.9 157.8 155.3 154.6 (2000=100) (% change y-y) 12.7 -0.1 .. .. .. 0.5 0.7 -0.9 -2.4 -1.6 -2.3 -3.4 -3.3 Stock market index 3,095 3,746 .. .. .. 3,776 4,016 3,990 3,977 4,142 4,060 4,263 4,350 (Aug. 1982=100) 8/ Memo: Nominal GDP (billions US$) 708.1 846.8 897.6 1,024.0 1,186.6 212.9 217.6 218.0 222.4 .. .. .. .. Source: National data sources and World Bank staff estimates f = forecast 1/ Based on GDP 2000 base 2/ End of period. 3/ Government projections 4/ Goods and services trade balance 5/ Goods trade on BOP basis from Bank Indonesia with exception of monthly figures from BPS 6/ Crude oil and gas exports 7/ Policy rate 8/ Jakarta Composite Index, end of period Remaining Resilient 68  |  Country Pages and Key Indicators Lao People’s Democratic Republic lower than the projection of 8.3 percent in May because of a projected fall in garment export this year. Nevertheless, growth will remain strong at above 8 percent for the third consecutive year. One key driver on the demand side is the surge in investment this year in infrastructure and housing, along with the preparation for the 9th Asia-Europe Meeting (ASEM) in Vientiane Capital. On the supply side, this development has a positive spillover to manufacturing sectors through demand for cement and construction materials. In addition, food and beverages benefit from boosted domestic demand. Population 6.3 million Upgraded and new mining projects offers a higher Population growth 1.4 percent contribution to growth compared to last year as GDP (PPP , int’l US$ billions) 17.7 GDP per capita (PPP , int’l US$) 2,809 shown in the positive performance in the past Surface area 236,800 sq. km. three quarters. Additionally, the service sector will Capital Vientiane benefit from higher trading, tourism, transport, and Source: World Development Indicators. telecommunication, while agriculture will recover from the impact of last year’s floods. Summary Inflation has trended downward, driven by lower food and energy inflation. The headline inflation fell Lao People’s Democratic Republic (PDR) continues notably from 5.3 percent (year on year) in March 2012 to maintain robust growth this year, but faces a to 3.5 percent in October. Food inflation significantly challenge to manage domestic demand. The Lao declined from 8.2 percent in March to 3.6 percent economy is expected to benefit from both resource in October, driven by the continuous drops in rice and nonresource sectors growth this year. Even with prices, which resulted from the government control robust growth, inflation has been declining, mainly of rice exports. The rice price reduction has offset because of lower food and fuel price inflation. Fiscal the increase in meat and vegetable prices, which is performance in FY2011–12 is expected to improve associated with higher demand from local residents due to revenue growth while further expansionary as well as inflow foreign workers. However, fuel fiscal stance will take place in FY12–13 because inflation has significantly declined from 7 .9 percent of a substantial wage increase. Home-grown year on year in March to 3.8 percent in October. Core and external risks associated with low reserves inflation has picked up moderately from 3 percent coverage, increased exposure to mining revenues, year on year in March to 3.5 in October, mainly fast banking expansion with limited supervision, because of higher prices of construction materials, and a large number of newly announced large cooked food, and electricity tariffs. projects warrant close monitoring to preserve macroeconomic stability and sustainability. The overall fiscal deficit for FY11–12 is lower than initially projected because of higher revenue performance and grants. The overall fiscal deficit Recent Economic Developments is estimated to decline to 2.3 percent of gross domestic product (GDP) from 2.7 percent. Higher- The Lao economy is expected to grow at than-expected grants to support the ninth ASEM 8.2 percent in 2012, benefiting from construction, preparation and outperformance in domestic manufacturing, mining, and services. This is slightly revenue are likely to drive total revenue from world bank east asia and pacific economic update 2012, vol.2 Country Pages and Key Indicators  |  69 18.6 percent of GDP to 19.7 percent in FY11–12. megaprojects54 call for enhanced scrutiny over debt Domestic revenue is estimated to outperform the management and sustainability. The government has plan by about 5 percent resulting from a combination now deployed a Debt Management and Financial of i) higher gold and copper output, ii) higher hydro Analysis System (DMFAS) and has developed a revenue, and iii) nonresource revenues, especially Presidential Decree on Public Debt management. turnover, value added tax, and income tax. On the All these efforts are steps in the right direction and expenditures side, recurrent spending and public should be sustained together with the development investment, some of which related to ASEM, drive of a debt management strategy. total public spending. Despite improvement in overall fiscal deficit, the nonmining and nonresource Credit growth remains high and puts a pressure on fiscal deficits are expected to worsen from 7 .7 and falling reserves. Credit growth has picked up from 8.3 percent in FY10–11 to 8.2 and 9.2 percent in 33 percent (year on year) in June 2011 to 47 percent FY11–12, respectively, indicating the increased (year on year) in June 2012 driven by credit to exposure to mining revenue. private sector and state-owned enterprises (SOEs). Buoyant growth in construction, manufacturing, The planned wage increase will add to the fiscal and service sectors is driving private sector credit. deficit in FY12–13 estimated at 2.7 percent. Wage Central Bank disbursements to local infrastructure expenditure is expected to increase significantly by projects have moderated compared to the peak in 35 percent (0.5 percent of GDP). As a result, total 2009 while continuing only on the basis of previous spending as a ratio to GDP is expected to climb commitments. to 22.5 percent in FY12–13. On the other hand, the total revenue as share of GDP will stabilize Continued strong domestic demand puts pressure at previous year’s level at 19.7 percent due to a on external reserves, which are reaching a critical decline of grants as percent of GDP because of low, raising concerns over the country’s capacity mostly once-off ASEM-related spending in FY11– to absorb any adverse external shock. The overall 12. Domestic revenue as a ratio to GDP is likely to balance of payment is expected to remain in a climb to 17 .6 percent, attributable to higher mining deficit of 0.7 percent of GDP at the end of 2012 extraction and increased income tax following the as a result of continued demand for imports. The wage increase. expected gains from investments in both resource55 and nonresource sectors56 are to be offset by the Lao PDR’s risk of debt distress is reclassified deterioration of the current account deficit to from high to moderate following the country’s 16.3 percent of GDP due to growing imports and improved policy performance.53 According to the higher net income payment from the resource 2012 Debt Sustainability Analysis, the Public and sector. As a result, foreign reserves are expected Publically Guaranteed (PPG) debt stock as ratio to to fall by about 9 percent year on year, reaching a GDP declined from 50.3 percent to 44.4 percent in critical low level of $62057 million in December, or 2011 because of strong economic growth and the 2.5 months of nonresource imports. Slowing down Kip appreciation against the U.S. dollar. Multilateral internal demand through fiscal and credit tightening creditors still hold majority of the public external would be essential. debt. However, bilateral creditors have an increasing share in external PPG debt. The recently announced 54 These projects include the satellite, radio, and television project, fiber optic project, Lao-China railway project, and others (KPL Newspaper November 2012, page 7) 55 Hydro projects under construction and mining upgrade and new projects. 53 The average rating of Country’s Policy and Institutional Assessment for Lao PDR has been above 3.25 thresholds for two consecutive years, bringing 56 These include hotels and constructions most of which are related to the Lao PDR’s policy performance from weak to medium. This is based on the preparation for the ASEM. Joint IMF-WB Debt Sustainability Framework for Low Income Countries. 57 All dollar amounts are U.S. dollars unless otherwise indicated. Remaining Resilient 70  |  Country Pages and Key Indicators The Bank of Lao PDR has consistently pursued Finally, since the Lao economy is exposed to a managed floating exchange rate regime as developments in the region, particularly neighboring the main instrument to maintain exchange rate countries, a downside deviation from their current stability. The Lao Kip has appreciated marginally by projected growth may negatively affect Lao PDR. 0.3 percent against the U.S. dollar during January to October 2012 while depreciated against Thai Lao PDR’s accession to the World Trade Organization baht by 2.8 percent in the same period because of (WTO) is one important step but this action would the appreciation of baht against the U.S. dollar. The require continued reform efforts in order to fully exchange rate interventions, including the recent reap the benefits. After 15 years of preparation, Lao removal of the foreign currency exchange cap, also PDR has been accepted as the 158th member in contribute to the pressure on reserves. The real 2012 after Russia and Vanuatu. This means signing effective exchange rate has continued to appreciate up for the WTO core principles of nondiscrimination, both in nominal term and, to a greater extent, in real transparency, and predictability and ensuring that term. these principles are incorporated into Lao law. In addition, the accession calls for a series of more substantial reforms to bring Lao legislation into Outlook and Emerging Challenges line with the WTO agreements on issues, such as subsidies, price controls, restrictions, and state Taking into account uncertainties in the global enterprises. While this achievement is an important economy and continued implications to regional externally verified signal of reforms and sustained economic developments, Lao PDR’s medium-term commitment to reforms, the implementation of growth outlook is projected at 7 .6 percent on an identified commitments and avoidance of backsliding annual average. This outlook assumes successful after accession will be a challenge to realizing operations of key large power projects under potential benefits from this WTO membership. constructions and pipeline.58 The nonresource sector is expected to maintain dynamic growth in the context of continued strong domestic consumption and sustained demand from key trading partners. Nevertheless, risks and challenges on both external and domestic fronts are foreseen in the near to medium term. Recent commitments to finance large- scale infrastructure projects with possible public or publically guaranteed borrowing raise concerns over public debt sustainability and over the country’s absorptive capacity. Strong domestic demand expansion pushed by large inward investments and high credit growth translates into high import and falling foreign reserves. Tightening domestic demand through credit and fiscal policies would be important to building up reserves and promote more resilience. 58 Hongsa Lignite power plant, Xepian-Xenamnoi, Nam Khan 2, and other potential projects. world bank east asia and pacific economic update 2012, vol.2 Country Pages and Key Indicators  |  71  ey Indicators Lao PDR: K 2010 2011e 2012f 2013f 2014f Year Year Year Year Year Output, Employment and Prices Real GDP (% change y-y) 8.5 8.0 8.2 7.5 7.5 Consumer price index (% change y-y) 6.0 7.6 5.5 6.0 6.0 Public Sector 1/ Government balance (% GDP) 2/ -4.9 -2.7 -2.3 -2.7 -2.7 Foreign Trade, BOP and External Debt Trade balance (millions US$) -424 -827 -1,317 -1,577 -1,818 Exports of goods (millions US$) 2,149 2,619 2,845 3,003 3,023 (% change y-y) 44.3 21.9 8.6 5.5 0.7 Key export (% change y-y) 43.4 16.2 11.7 4.2 -1.3 Imports of goods (millions US$) 2,573 3,446 4,162 4,580 4,842 (% change y-y) 16.2 33.9 20.8 10.1 5.7 Current account balance (millions US$) -446 -937 -1,539 -1,884 -2,159 (% GDP) -6.2 -11.4 -16.3 -18.1 -19.0 Foreign direct investment (millions US$) 770 1,128 1,621 1,857 1,894 External debt (millions US$) 6,719 7,623 8,887 10,419 12,181 (% GDP) 88 83 88 94 102 Debt service ratio (% exports of g&s) 80.9 63.2 60.5 78.5 76.0 Foreign exchange reserves, gross (millions US$) 3/ 730 679 690 799 888 (months of imports of g&s) 3.2 2.3 1.9 2.0 2.1 Financial Markets Domestic credit (% change y-y) 4/ 46.0 38.2 32.9 26.5 24.7 Short-term interest rate (% p.a.) 5/ 7.0 7.0 .. .. .. Exchange rate (Kip/US$, ave) 8,259 8,052 7,932 7,900 7,939 Real effective exchange rate (2000=100) 122.3 127 .2 .. .. .. (% change y-y) 3.6 4.0 .. .. .. Memo: Nominal GDP (millions US$) 7,156 8,194 9,430 10,411 11,371 Source: National data sources e = estimate f = forecast 1/ Fiscal year basis 2/ After grants 3/ Excluding gold 4/ Excludes government lending funds 5/ Treasury bill rate Remaining Resilient 72  |  Country Pages and Key Indicators Malaysia significant market for fuels and commodity-related manufacturing) spread weakness to commodity- related exports, which had been performing well until recently. Meanwhile, shipments of noncommodities remained subdued in line with the weak economy in the major importing countries (the United States and especially Europe). Investment from both public and private sources was a key driver of growth. Gross fixed capital formation surged in the first three quarters of 2012, taking the share of investment in GDP to 27 percent, the Population 28.9 million highest level since 1997. Growth slowed in the third Population growth 1.6 percent quarter to 7 .3 percent (quarter-on-quarter, SAAR) GDP (PPP , int’l US$ billions) 449.9 GDP per capita (PPP , int’l US$) 15,589 following rapid growth of 29.1 and 31.7 percent in Surface area 329,740 sq. km. the previous two quarters, respectively. The private Capital Kuala Lumpur sector represented about 65 percent of the expansion Source: World Development Indicators. in fixed investment, with the public sector (including government-linked companies) contributing the additional 35 percent. Inventories were a drag on Recent Economic Developments growth as expected, following several quarters of restocking. Overall investment (fixed and inventory) The Malaysian economy maintained a vigorous pace expanded by 22 percent in the first three quarters in the first nine months of 2012, despite external of the year. headwinds. GDP expanded by 5.3 percent in the first three quarters of 2012 compared to the same Domestic demand was broad-based, as both period in 2011. The pace of GDP growth decelerated private and public consumption remained robust. to 4.6 percent in the third quarter (quarter-on-quarter, Cash transfers, a tight job market and higher civil SAAR) from 6.9 percent in the second quarter and service wages helped prop up private consumption 4.8 percent in the first quarter of 2012. Malaysia’s in the face of softer commodity prices, somewhat performance in the first nine months of 2012 stricter credit conditions, and greater uncertainty continues a trend of the past two years in which on the external front. Consumption indicators domestic demand absorbs rapid expansion of value- demonstrated a mixed trend, with spending on big- added (and, in parallel, production by domestically ticket items (such as cars) perhaps circumscribed oriented industries), while external demand (and by the imposition of new rules for household loan externally oriented industries) stagnates. applications, but otherwise keeping to the vigorous pace observed in 2011. Meanwhile, after a strong Exports slowed down further as commodity expansion in the second quarter (10.9 percent) shipments moderated and noncommodity because of higher spending on public wages and performance remained subdued. Exports of goods supplies and services, public consumption growth and services grew by 2.6 percent in nominal terms moderated to 2.3 percent in the third quarter, (0.6 percent in real terms) in the first nine months bringing growth in the first three quarters of the year of 2012, slowing down from a 7 .9 percent expansion to 7.2 percent from the same period in 2011. This pace in the same period of 2011. The effect of moderating represents a sharp reduction from the 16.1 percent demand from China and Japan (Malaysia’s largest growth registered by public consumption in 2011. markets for agricultural commodities and a world bank east asia and pacific economic update 2012, vol.2 Country Pages and Key Indicators  |  73 Robust domestic demand was linked to a strong revenues. Operating expenditures (81 percent of performance of domestically oriented industries. On estimated 2012 expenditures) were up 18 percent the supply-side, the strongest-performing sectors— in the first half of 2012 and are expected to increase construction and services—produce primarily for by 11 percent for the year as a whole, exceeding Malaysia’s domestic market. In line with the surge the original budget allocation by 11.5 percent. of investments in structures, the construction sector Capital expenditures are estimated to shrink for the expanded an average of 18.7 percent for the first year as a whole, but considering the increase in nine months of 2012. The services sectors expanded the amount of government guarantees, it appears by 6.7 percent in the first three quarters of the year. that some capital expenditure has been moved off- The performance of externally oriented industries budget. Overall expenditures for the first half of reflected developments in export markets, with 2012 increased by 20 percent from the same period continued weakness in electrical and electronic in 2011, suggesting that government spending equipment and a deceleration in commodity-related supported the outperformance of GDP in the sectors. Primary commodity sectors slowed the second quarter. Overall, the government is likely to most, while commodity-related manufacturing meet its deficit targets and public debt is expected was up. Manufacturing of electrical and electronic to close the year at about 52 percent of GDP , below products remained sluggish, gaining 1.6 percent in the government’s self-imposed 55 percent ceiling. the first nine months of the year. Heightened external risks and declining inflation Inflation continued to decline into the third quarter of have been offset by domestic strength, leading 2012 as food prices stabilized and fuel prices declined. Bank Negara Malaysia to keep monetary policy in Consumer price inflation has been on a downward a holding pattern throughout the year. Monetary trend in 2012, decelerating from 2.3 percent in the policy has been pulled in two directions in 2012. first quarter to 1.7 percent in the second quarter On the one hand, factors calling for a resumption of and 1.4 percent in the third quarter. Benign inflation the normalization of interest rates initiated in 2010 dynamics were underpinned primarily by a decline in include the strength in domestic demand, rising fuel prices following trends in global oil prices, and real estate prices, and a positive output gap. On the by a moderation in food inflation, which declined other hand, factors that suggest further monetary from 5.2 percent in the fourth quarter of 2011 to accommodation include declining inflation rates, 2.6 percent in the third quarter of 2012. Although heightened external risks, and further monetary headline inflation declined uniformly across the easing by Group of 3 (United States, Japan, and country, food inflation was higher in Sarawak, the economies of the euro zone) and other ASEAN where it averaged 3.9 percent in the third quarter central banks. Given these opposing forces, Bank compared to 2.4 percent for peninsular Malaysia and Negara Malaysia (BNM) has decided to keep its 2.8 percent in Sabah. benchmark interest rate (the overnight policy rate [OPR]) unchanged at 3 percent throughout 2012. At The government is likely to meet its deficit target 0.6 percent, the real policy rate remains below its for 2012, despite significant expenditure overruns. 2007 level, and monetary policy remains supportive Revenue collections for 2012 are likely to exceed of economic growth but watchful of emerging risks. significantly their target on improvements on both tax and nontax receipts. Oil-related revenues are The overall current account balance registered the expected to comprise 33 percent of revenues in smallest surplus in 10 years. This was attributed 2012. The nonoil primary deficit is likely to come to the slower growth of exports of commodities, in between 9.5 and 10 percent of GDP , below its but primarily to the sharp deterioration of the level in 2011. However, additional government noncommodity current account balance, which has consumption is expected to absorb additional been negative since the first quarter of 2011. The Remaining Resilient 74  |  Country Pages and Key Indicators slowdown in the commodity balance reflected mainly This fairly benign outlook comes with important lower production and prices of, respectively, crude caveats. First, although the global outlook for 2013 palm oil and rubber during the period. Manufacturing is weak, it is still expected to be an improvement exports expanded moderately as electrical and over 2012. Should a new shock lead to a significant electronics exports remained weak owing to slower deviation from this baseline, exports would contract external demand. In contrast, imports of capital and commodity prices would decline, which would and consumption goods were strong, driven by the unravel the favorable dynamics described above. robust expansion in domestic demand, particularly Second, domestic fiscal policy will have to walk investments in construction-related activities. a fine line toward needed consolidation without Foreign direct investment inflows picked up in the disrupting the growth momentum. first half of 2012, driven by direct investments in the mining, construction, and agriculture sectors. Most importantly, the sustainability of Malaysia’s Portfolio flows turned negative in the second favorable near-term outlook into the medium- quarter because of heightened concerns regarding term hinges on the implementation of structural the euro-zone debt crisis. This was despite a solid reforms. Malaysia’s near-term outlook owes much performance of Malaysian stock markets and a major to commodity sectors. A significant portion of initial public offering, (Felda Global Ventures, an oil investments has been directly in the oil and gas palm plantation). Increasing reserves in the third sector; the expansion in public consumption and quarter suggest that capital flows have returned in capital formation has been financed to a significant the wake of aggressive measures by central banks degree by commodity revenues (present and future); in advanced economies. and investments in real estate are, to some extent, also linked to the recycling of commodity revenues. These investments are part of a sound strategy to Outlook and Emerging Challenges ensure that the resource sector continues to provide revenues in years to come, but by themselves they Propelled by domestic demand, Malaysia’s economy bring risks related to possible shocks to commodity is likely to weather a weak global environment and prices and, conversely, higher commodity prices may grow by 5.0 percent in 2013. In 2012, Malaysia lead to “Dutch disease” and a loss of competitiveness performed well in the context of weakening in tradable manufacturing and services sectors. To demand from advanced economies as well as mitigate these risks, Malaysia needs to accelerate China. This dichotomy can be sustained into 2013 the implementation of productivity-enhancing because of three factors. First, there is momentum reforms to boost capabilities and competition, and in investment growth. A number of projects that thus raise productivity of noncommodity sectors. contributed to the surge in investment in the first half of 2012 will continue to contribute a larger amount of value-added to the economy in the near term. Second, there is a positive feedback loop among the implementation of investment projects, fiscal policy, and private consumption. This feedback loop operates primarily through the labor markets, which have been tight and will support continued growth in consumption. Finally, commodity prices are unlikely to decline significantly in 2013, providing support to fiscal policy, as well as investment growth, much of which is linked to commodities. world bank east asia and pacific economic update 2012, vol.2 Country Pages and Key Indicators  |  75 Key Indicators Malaysia:  2010 2011 2012f 2013f 2014f 2011 2012 2012 Year Year Year Year Year Q4 Q1 Q2 Q3 Jul Aug Sep Oct Output, Employment and Prices Real GDP (% change y-y) 7.2 5.1 5.1 5.0 5.1 5.2 5.1 5.6 5.2 .. .. .. .. Domestic demand (% change y-y) 10.4 7.3 10.9 6.5 7.4 7.5 9.5 12.2 13.9 .. .. .. .. Industrial production index 107 .1 108.4 .. .. .. 110.6 111.4 111.2 112.1 110.7 110.9 114.7 .. (2000=100) (% change y-y) 7.2 1.2 .. .. .. 2.3 3.5 4.9 2.4 2.5 -0.2 4.8 .. Unemployment (%) 3.2 3.1 .. .. .. 3.1 3.0 3.0 3.0 3.1 2.7 .. .. Real wages (% change y-y) 1/ 6.4 0.6 .. .. .. 4.0 5.9 4.6 3.0 1.8 3.5 3.7 .. Consumer price index 1.7 3.2 2.0 3.0 3.0 3.2 2.3 1.7 1.4 1.4 1.4 1.3 1.3 (% change y-y) Public Sector Government revenues (% GDP) 2/ 20.1 21.0 21.7 21.1 21.2 .. .. .. .. .. .. .. .. Government expenditures 25.5 25.9 26.1 25.4 25.1 .. .. .. .. .. .. .. .. (% GDP) 2/ Government balance (% GDP) 2/ -5.4 -4.8 -4.4 -4.3 -3.9 .. .. .. .. .. .. .. .. Domestic public sector debt 51.2 51.8 52.1 52.1 51.1 51.8 52.5 52.3 .. .. .. .. .. (% GDP) 2/ Foreign Trade, BOP and External Debt Trade balance (billions US$) 3/ 42.5 45.8 38.3 35.6 30.8 10.5 10.5 8.3 7.1 .. .. .. .. Exports of goods (billions US$) 199.2 227.8 .. .. .. 57.6 56.9 57.1 55.9 18.5 17.9 19.6 .. (% change y-y) 26.6 14.3 .. .. .. 9.7 4.4 3.1 -1.2 -2.6 -4.5 2.6 .. Key export (% change y-y) 4/ 5.3 9.4 .. .. .. 4.5 -7.9 -5.7 -3.6 -8.5 -5.2 3.1 .. Imports of goods (billions US$) 157 .3 179.4 .. .. .. 45.9 45.2 47.6 47 .8 17.3 15.6 17.5 .. (% change y-y) 34.0 14.0 .. .. .. 8.7 7.1 8.5 7.0 9.5 2.8 9.6 .. Current account balance 27 .4 31.8 .. .. .. 7.1 5.9 3.1 3.0 .. .. .. .. (billions US$) (% GDP) 11.1 11.0 7.7 5.8 3.7 9.7 8.0 4.1 4.0 .. .. .. .. Foreign direct investment 9.1 12.0 .. .. .. 2.1 2.4 2.0 3.1 .. .. .. .. (billions US$) 5/ External debt (billions US$) 73.6 81.0 .. .. .. 81.0 81.3 84.5 .. .. .. .. .. (% GDP) 29.8 28.1 .. .. .. 28.1 27.8 28.6 .. .. .. .. .. Short-term debt (billions US$) 25.8 32.7 .. .. .. 32.7 33.0 34.6 .. .. .. .. .. Debt service ratio 7.7 10.3 .. .. .. 10.3 8.3 12.6 .. .. .. .. .. (% exports of g&s) Foreign exchange reserves, 106.5 133.6 .. .. .. 133.6 135.7 134.2 137.5 134.4 134.9 137.5 138.3 gross (billions US$) (months of imports of g&s) 3/ 5.5 6.1 .. .. .. 7.1 7.3 6.9 7.1 .. .. .. .. Financial Markets Domestic credit (% change y-y) 6/ 11.3 13.2 .. .. .. 13.1 12.1 12.3 12.4 13.0 12.4 11.9 .. Short-term interest rate (% p.a.) 7/ 2.50 2.92 .. .. .. 3.00 3.00 3.00 3.00 3.00 3.00 3.00 3.00 Exchange rate (Ringgit/US$, eop) 3.08 3.18 .. .. .. 3.18 3.07 3.19 3.07 3.14 3.13 3.07 3.06 Real effective exchange rate 100.0 99.9 .. .. .. 97.9 100.4 99.3 99.0 98.5 99.3 99.3 99.8 (2000=100) 8/ (% change y-y) 5.2 -0.1 .. .. .. -2.2 -1.2 -0.9 -0.7 -1.9 -0.8 0.6 2.0 Stock market index 1,379 1,509 .. .. .. 1,531 1,596 1,599 1,637 1,632 1,646 1,637 1,673 (Jan. 1, 1997=100) 9/ Memo: Nominal GDP (billions US$) 247.5 288.1 .. .. .. 72.9 73.9 74.6 76.0 .. .. .. .. Source: National data sources, World Bank staff estimates. f = forecast 5/ Inward FDI 1/ Manufacturing wages only 6/ Total loans in the banking system 2/ Federal government only 7/ Overnight Policy Rate (OPR) 3/ Balance of goods and services 8/ Source: BIS 4/ Thermionic valves & tubes, photocells, etc. 9/ FTSE Bursa Malaysia Composite, end-period Remaining Resilient 76  |  Country Pages and Key Indicators Mongolia and 14.8 percent growths during the same period last year, driven by declining commodity exports, transport sector bottlenecks, and limited absorptive capacity in the economy. Mongolia made a successful debut in the international financial market by issuing a US$ 1.5 billion sovereign bond on November 28. The oversubscription (of ten times the issue amount) demonstrated the rising interest of the international financial community in the fast growing Mongolian economy. The external borrowing is equivalent to around 15 percent of Population 2.8 million GDP . Given the massive size of the bond issue and Population growth 1.6 percent signs of overheating of the economy, it will be an GDP (PPP , int’l US$ billions) 13.3 GDP per capita (PPP , int’l US$) 4,764 important task for Mongolia going forward to use the Surface area 1,566,500 sq. km. proceeds in a way that meets urgent infrastructure Capital Ulaanbaatar and development demands in an economically and Source: World Development Indicators. fiscally sustainable manner. Despite the recent slowing trend of economic Recent Economic Developments expansion, Mongolia’s medium-term prospects look promising. As the OT and Tavan Tolgoi (TT) mines The Mongolian economy is at the start of a huge go into production, economic growth is projected expansion as it begins to develop its mineral wealth. to be in the double digits, with sustained increases The construction of the Oyu Tolgoi (OT) copper- in exports and fiscal receipts. The World Bank has gold mine—among the five largest in the world— recently revised Mongolia’s growth for 2012 down lifted gross domestic product (GDP) growth at 17 .5 to 11.8 percent from original forecast of 17.2 percent, percent in 2011, making the country the fastest given the short term risks and barring any severe growing economy in the world. However, the negative shock.59 pace of economic growth has been experiencing constant slowdown in 2012 .The economic growth However, the economy faces significant risks in rate decelerated to 5.6 percent year on year in real the near term, as reflected in the steep drop in terms in the third quarter, down from 16.5 percent exports since April of this year. These risks reflect an and 11 percent in the first and second quarters of uncertain global economic outlook, slowing growth the year. As a result, the growth of the economy in China, and procyclical fiscal policy over the past slowed to 10.2 percent (year on year) during the three years with large increases in government three quarters of 2012 from 16.5 percent during the spending contributing to high inflation and pressures same period of the previous year. The significant on the balance of payments. Any delay in commercial economic slowdown in 2012 was mainly because production at the OT mine could also impact the near of shrinking commodity demand in China, which term growth trend. Mongolia set up a stabilization challenged volume and price of Mongolian mineral fund in 2011 as required by the Fiscal Stability Law exports, the major drivers for the highest growth. (FSL) and so far it has saved only a small amount Construction and transportation industries led the (about 2.2 percent of GDP), which is likely to be significant slowdown of growth during the first nine months, showing only 15.3 percent and 3.1 percent growth, respectively, from staggering 81.3 percent 59 The World Bank. October 2012. Mongolia Quarterly Economic Update. world bank east asia and pacific economic update 2012, vol.2 Country Pages and Key Indicators  |  77 insufficient in case of substantial shock. The 2013 could pose risks to individual banks and to the overall budget, which Parliament has just passed, should financial system going forward. present an opportunity to mitigate these risks by reining in spending and anchoring fiscal policy to the FSL that goes into effect on January 1, 2013. Outlook and Emerging Challenges The external balance remains under heavy pressure. Mongolia’s policy makers need to be cautious Exports fell by 39 percent and 21 percent year on given the macroeconomic risks and the prospect of year in July and August, which were considered as continued slow growth of the global economy. The the largest fall since mid-2009, followed by further immediate requirement is a more conservative and pressures in an already overheating economy. macroeconomically sustainable fiscal policy stance, The nationwide headline rate was 14.8 percent in calling for the government spending not to increase September, driven mostly by the food (meat) prices. faster than the GDP . The government spending needs Core inflation (excluding all food and energy prices) to be prioritized in a way that unlocks infrastructure also remains over 10 percent since the start of the bottlenecks and promotes long-term growth through year, reaching 10.7 percent in September. investments in social sectors. The recently approved 2013 budget should provide an opportunity to rein The fiscal deficit for 2012 is projected to increase in government spending (both on and off-budget via from the original target of 1 percent to 4.2 percent the DBM) and to abide by the rules of the FSL that as per the September amended budget, on account goes fully into effect in January 2013. Safeguarding of weak revenue growth because of the slowdown the FSL will also require correcting some of the in exports, lower commodity prices, and sustained weaknesses in the Law of the Development Bank. expenditure increases. The actual outturn may turn The BoM should maintain the floating exchange rate out to be worse as budgeted expenditures have not regime with interventions in the foreign exchange been reduced significantly and growth forecasts market limited to market smoothing operations that remain overly optimistic. These numbers also do not do not attempt to reverse the underlying market reflect the significant off-budget financing of capital forces, while remaining vigilant with respect to expenditures by the DBM and by construction banking sector risks. companies on the condition of repayment by the budget (“build-transfer” schemes), which will also likely impact the budget next year and beyond. Including the DBM spending, the deficit could reach 9 percent of GDP in 2012. Although the OT mine is expected to start producing early next year, net revenues from the mine are only expected to enter the budget with a lag (around 2015–16). The financial market also remains vulnerable. Monetary tightening over the past year has helped to slow the pace of credit growth from 73 percent at the end of 2011 to 35 percent in September; however, it is still high. Mongolia’s banking system remains highly dollarized, with one third of deposits (32.7 percent as of September) denominated in dollars and easy convertibility out of the Togrog. A sharp economic slowdown or escalated macroeconomic instability Remaining Resilient 78  |  Country Pages and Key Indicators Key Economic Indicators Mongolia:  2010e 2011 2012f 2013f 2014f Year Year Year Year Year Output, Employment and Prices Real GDP (% change y-y) 6.4 17.5 11.8 16.2 12.2 Industrial production index .. .. .. (% change y-y) 10.0 9.7 8.0 51.0 35.0 Consumer price index (% change y-y) 14.3 11.1 13.0 12.0 12.0 Public Sector Government revenues (% GDP) 36.6 44.2 36.5 31.4 29.9 Government expenditures (% GDP) 36.6 40.6 41.5 32.4 31.2 Government balance (% GDP) 0.0 -3.6 -6.0 -1.0 -1.3 Non-mineral government balance (% GDP) -10.5 -16.0 -28.7 -13.1 -8.0 Total public sector debt (% GDP) 42.2 47.1 47 .6 39.8 33.0 Foreign Trade, BOP and External Debt Trade balance (millions US$) -379 -1,049 -1,312 181 850 Exports of goods (millions US$) 2,899 3,825 3,978 5,529 6,525 (% change y-y) 52.0 31.9 4.0 39.0 18.0 Imports of goods (millions US$) 3,278 4,874 5,290 5,348 5,674 (% change y-y) 53.8 53.4 8.0 1.1 6.1 Current account balance (millions US$) -887 -2,587 -2,664 -269 435 (% GDP) -14.3 -15.1 -18.0 -1.5 3.0 Foreign direct investment (millions US$) 1,630 5,310 1,500 1,996 842 External debt (millions US$) 2,022 1,902 1,743 2,017 1,814 (% GDP) 30.2 21.7 17.0 13.9 12.5 Foreign exchange reserves, gross (millions US$) 2,288 2,984 3,302 3,679 3,976 (month of imports of g&s) 4.2 4.9 5.8 6.2 6.7 Financial Markets Domestic credit (% change y-y) 26.7 72.8 40.0 .. .. Short-term interest rate (% p.a.) 1/ 11.0 12.3 13.3 .. .. Exchange rate (Tugrik/US$, eop) 1,257 1,265 1,360 .. .. Real effective exchange rate (2000=100) .. .. .. .. .. (% change y-y) 26.9 -4.6 .. .. .. Stock market index (Dec. 2000=100) 1/ 2,931 4,059 .. .. .. Memo: Nominal GDP (millions US$) 6,694 8,767 10,255 14,508 14,509 Sources: Bank of Mongolia, National Statistical Office, Ministry of Finance, IMF and World Bank staff estimates. e = estimate f = forecast 1/ Yield on 14-day bills until 2006 and on 7-day bills for 2007 onward 2/ Top-20 index world bank east asia and pacific economic update 2012, vol.2 Country Pages and Key Indicators  |  79 Myanmar Myanmar will likely be at low risk of debt distress following clearance of these arrears. The main risks to Myanmar’s economic prospects come from limited capacity to design and implement reforms, opposition to specific reforms, and an escalation of internal conflict. Recent Economic Developments The Myanmar economy continued to accelerate in 2011-12. Real GDP growth has increased steadily Population 48.3 million from 3.6 percent in 2008-09 to 5.5 percent in 2011-12 Population growth 0.8 percent and is expected to increase to 6.3 percent in 2012- GDP (PPP , int’l US$ billions) .. GDP per capita (PPP , int’l US$) .. 13.60 On the supply side, the manufacturing and Surface area 653,520 sq. km. services sectors drove this acceleration: real growth Capital Nay Pyi Taw in agricultural value-added (43 percent of total GDP) Source: World Development Indicators. fell from 4.7 percent in 2009-10 to 4.4 percent per annum in 2010-11 and 2011-12. Heavy flooding in some parts of the country in August 2012 may Summary further negatively affect real agricultural growth. Demand-side drivers included higher fiscal spending The Myanmar economy continued to accelerate before the 2012 by-elections held in April, growth in in 2011-12 with GDP growth at 5.5 percent and commodity exports, and strong investment. expected to end the 2012-13 fiscal year at 6.3 percent. Inflation remains low (in single digit), but has been on the rise in recent months and is projected to Inflation end higher (6.1 percent) in 2012-13 compared to last fiscal year (4 percent). The consolidated fiscal Inflation remains low (in single digit) but has been deficit was at 6.0 percent of GDP in 2011/12 and is on the rise in recent months and is projected to projected to improve to 5.3 percent in 2012-13. The end higher than last fiscal year. After declining current account deficit has also been increasing due from 8.9 percent in 2010-11 to 4 percent in 2011- to higher growth of imports compared to exports 12, inflation (year-on-year) continued to decline while the international reserve position is improving at the start of 2012-13 mainly due to falling food and expected to close the 2012-13 fiscal year with prices and reduced levels of deficit monetization. 4 months of import cover. With portfolio capital However, it has recently been increasing, driven by flows still limited, the capital account is dominated higher international food prices as well as increasing by foreign direct investment. A deficit of -1.0 percent prices of non-food commodities such as housing. on the overall external balance registered in 2011- In the month of August, headline inflation had 12 is projected to turn into a surplus of 2.1 percent reached 2.2 percent, year-on-year. It is projected to in 2012-13 due to a significant projected increase in end the 2012-13 fiscal year higher than last year, at foreign direct investment. After a heavily overvalued 6.1 percent. exchange rate for decades, considerable progress has been made since April towards unifying the exchange rate. With good prospects for clearing its 60 IMF staff estimates. Official estimates are twice as high and flat through arrears to Japan and multilateral lenders in early-2013, 2010-11. Official estimates for 2011-12 are not available yet. Remaining Resilient 80  |  Country Pages and Key Indicators Monetary and Exchange Rate Developments It initially showed an appreciating trend that worried policy makers and exporters alike as it risked eroding The conduct of monetary policy has been consistent Myanmar’s export competitiveness. More recently, with macroeconomic stability although the with the continued surge in imports following the framework is still rudimentary, relying mostly on removal of various restrictions, the Kyat has been direct monetary policy instruments such as reserve depreciating but in a steady manner. Overall, the requirements and interest rate controls. Growth in nominal exchange rate has depreciated by about broad money supply (M2) has slowed in 2011-12 4 percent since it was floated. In November 30, to 26.3 percent from 36.3 percent in 2010-11. It is 2012, it was trading at 852 Kyats per one US dollar expected to increase to 28.6 percent in 2012-13. compared to 819 Kyats on the first day of trading Growth in private sector credit exceeded that of net when it was floated in April. credit to the government for the first time in many years, increasing by 65.4 percent in 2010-11 and 60.1 percent in 2011-12. By contrast, net credit to the Fiscal Developments government grew by 28.5 percent and 16.6 percent, respectively, in the same years. The administratively The fiscal deficit of the consolidated government controlled central bank policy rate was reduced to worsened from -5.5 percent of GDP in 2010-11 10 percent at the start of 2012-13 from 12 percent to -6.0 percent in 2011-12. While total revenues previously. In addition, since September 2011, the remained unchanged at 13.0 percentage of GDP , deposit and lending rates were cut by a cumulative expenditures increased from 18.4 percent to 4 percentage points to 8 and 13 percent, respectively. 19.0 percent of GDP . As a consequence, the stock The September adjustment also placed the Treasury of domestic public debt grew from 22.9 percent bond rates above the minimum deposit rate, which of GDP in 2010-11 to 25.1 percent of GDP in 2011- provides an incentive for banks to hold Treasury 12. It is projected that the fiscal deficit will close at bonds, and helped reduce deficit monetization. -5.3 percent of GDP in 2012–13, lower than in 2011- 12. This is due to a number of factors. First, the 2012- On April 1, 2012, a land mark reform on exchange 13 budget received a significant boost from higher rate policy was introduced. In particular, a managed fiscal revenues in the export sector, particularly float system of exchange rate determination was from natural gas, due to the application of a higher adopted so that the local currency (the Kyat) could exchange rate for valuation after the introduction of trade at exchange rates that reflect more closely a managed float exchange rate regime. Second, the market realities. This marked a significant first step Government has introduced a limit on the subsidy toward a unified exchange rate regime. Before this for financing the raw materials of State Economic reform, there were a number of official exchange Enterprises (SEEs). In particular, the subsidy in rates that were administratively fixed and applied for 2012-13 budget is capped at 22 percent of raw different purposes and players in the economy. For material costs down from 100 percent previously. example, Foreign Exchange Certificates (FECs) were Finally, although the 2012-13 budget has increased a separate currency introduced to prevent foreigners allocations to education and health, these will partly from using the local currency. As part of the broad be funded by reductions in expenditures on other economic reforms currently underway, the authorities areas. have committed to remove the remaining foreign exchange distortions and to phase out FECs in order to have a unified exchange rate regime by the end of External Position 2013. Meanwhile, in the first few months following the introduction of a managed float exchange rate Myanmar’s current account deficit has been regime, the exchange rate has been relatively stable. increasing recently while the international reserve world bank east asia and pacific economic update 2012, vol.2 Country Pages and Key Indicators  |  81 position is improving. In 2011-12, the current Outlook and Emerging Challenges account deficit was at -2.5 percent of GDP , up from -1.2 percent in 2010-11. This was because of a There is a risk that limited capacity could hinder worsening trade balance as imports grew at a much implementation of reforms leading to deterioration higher rate (24.4 percent) than exports (13.3 percent). in the macroeconomic framework. The IMF is The Government has been easing restrictions on providing support on macroeconomic issues, imports as well as exports, and this development including through intensive monitoring. Second, shows that the response has been stronger on there are risks to the macroeconomic program that the imports side. The current account deficit is could emanate from events on the political front. The projected to increase further to -3.9 percent of GDP key ones are the emergence of alliances of vested in 2012-13. Although the current account deficit has interests seeking to disrupt the reform process and increased, gross international reserves have been the prospect of escalation in internal strife in some accumulating. They are projected to end the 2012-13 of the border areas and resumption of conflict where fiscal year at US$5.1 billion which is equivalent to ceasefire agreements have been signed. 4 months of imports, up from US$3.8 billion in 2011- 12 which was equivalent to 3.3 months of import cover. There have been limited movements on the capital account in the past due to sanctions. However, in the wake of recent reforms, the capital account is now having a noticeable impact on the overall external balance. Portfolio capital flows remain limited and therefore recent developments have mostly been on account of inflows of foreign direct investments. In 2011-12, the overall external balance registered a deficit of -1.0 percent of GDP . However, due to the projected increase in foreign direct investment from 3.8 percent of GDP to 4.5 percent, it is expected that the overall external balance in 2012-13 will register a surplus of 2.1 percent. Myanmar’s total external debt including arrears in 2011-12 was estimated at US$15 billion, equivalent to 28 percent of GDP . Of this amount, 72 percent or US$11 billion was arrears to various creditors of which 60 percent (US$6.6 billion) are owed to Japan. A coordinated international effort is currently underway to help resolve these arrears. A recent debt sustainability analysis (DSA) conducted jointly by the World Bank and the IMF shows that due to its large arrears, Myanmar is assessed as being in debt distress. However, it would move to a low risk of debt distress once arrears are resolved. It is noted that significant progress has been made to clear arrears to Japan and multilateral institutions. Remaining Resilient 82  |  Country Pages and Key Indicators Myanmar:Key Indicators 2010/11 2011/12 2012/13f 2013/14f 2014/15f Fiscal Year Fiscal Year Fiscal Year Fiscal Year Fiscal Year Output, Employment and Prices Real GDP (% change y-y) 1/ 5.3 5.5 6.3 6.5 6.6 Industrial production index 2/ (% change y-y) 6.3 6.5 7.2 7.2 7.2 Consumer price index (% change y-y) 8.2 4.0 6.1 5.7 5.1 Public Sector Government revenues (% GDP) 3/ 13.0 13.0 19.3 19.8 20.3 Government expenditures (% GDP) 3/ 18.4 19.0 24.6 25.0 25.3 Government balance, official (% GDP) 3/ -5.5 -6.0 -5.3 -5.2 -5.0 Domestic public sector debt (% GDP) 22.9 25.1 25.3 25.6 26.0 Foreign Trade, BOP and External Debt Trade balance (millions US$) 796 -10 -1,313 -1,077 -776 Exports of goods (millions US$) 8,980 10,170 11,308 12,907 15,170 (% change y-y) 25.8 13.3 11.2 14.1 17.5 Imports of goods (millions US$) 8,184 10,180 12,621 13,984 15,946 (% change y-y) 15.8 24.4 24.0 10.8 14.0 Current account balance including grants (millions US$) -526 -1,299 -2,010 -2,280 -2,844 (% GDP) -1.2 -2.5 -3.9 -4.0 -4.6 Foreign direct investment (millions US$) 969 1,992 2,325 1,811 2,050 External debt arrears (millions US$) 4/ 9,850 10,592 2,372 0 0 Total External debt including arrears (millions US$) 13,643 14,632 12,251 11,230 12,666 (% GDP) 30.1 27.8 23.6 19.8 20.6 Debt service ratio (% exports of g&s) 5.1 8.5 1.9 1.8 2.4 Foreign exchange reserves, gross (millions US$) 3,309 3,818 5,071 5,697 6,134 (months of imports of g&s) 3.5 3.3 4.0 3.9 3.8 Financial Markets Domestic credit (% change y-y) 34.4 25.1 28.0 23.7 .. Short-term interest rate (% p.a.) .. .. .. .. .. Official exchange rate (Kyat/US$) 5/ 5.4 5.2 864.0 .. .. Parallel effective exchange rate 5/ 861.0 824.0 864.0 .. .. (% change y-y) -14.3 -4.3 4.9 .. .. Memo: Nominal GDP (millions US$) 6/ 45,380 52,663 51,849 56,661 61,468 Sources: Myanmar Central Statistics Office, Ministry of Finance and Revenue, Central Bank of Myanmar, IMF 12/104, and World Bank staff estimates. 1/ Staff working estimates 2/ Including manufacturing, power, construction, energy and mining. 3/ Consolidated public sector including Union Government and State Economic Enterprises. 4/ For 2012/13, incorporates the terms of bilateral arrears clearance agreement with Japan. 5/ Authorities adpopted a managed float on April 1, 2012. 6/ Before FY2012/13, GDP converted at a weighted exchange rate, where the official and FEC market rates are weighted with about 8 and 92 percent, based on the respective shares of the public and private sectors in GDP. world bank east asia and pacific economic update 2012, vol.2 Country Pages and Key Indicators  |  83 Papua New Guinea in 2012. Wholesale and retail trade, transport, and communications activity are expected to expand only a little less rapidly than construction in 2012, following several years of 10 to 20 percent annual growth. All these sectors are benefiting from the one- off surge in demand associated with the PNG-LNG project, which will reverse as construction winds down in 2013 and 2014; however, there also appears to be a component of this growth that reflects a boost to domestic firms’ physical and organizational capacity that can be sustained beyond the PNG-LNG project. Population 7.0 million Population growth 2.2 percent The first half of 2012 was also notable for the GDP (PPP , int’l US$ billions) 18.9 GDP per capita (PPP , int’l US$) 2,695 deteriorating fiscal position and stimulus to domestic Surface area 462,840 sq. km. consumption as government funds were spent in Capital Port Moresby the lead-up to the elections midyear. Government Source: World Development Indicators. spending was faster than usual, with 40 percent of the 2012 appropriation spent by the end of June, 25 percent more than was disbursed in the first six Recent Economic Developments months of 2011. Meanwhile revenues were weaker than expected. Midyear forecasts were for tax Papua New Guinea’s (PNG) economy continued to collections in 2012 to be PGK 341 million (5 percent) expand strongly through the first half of 2012, albeit below budget, with the deterioration entirely less quickly than in 2010 and 2011. Over 2012, the because of weaker mining and petroleum receipts. economy appears to be on track to grow by around The ensuing deficit has been funded through 8 percent, compared with growth of near 9 percent issuance of 6 to 12 month Treasury bonds and by in 2011. Domestic demand remained the key driver, drawing down the government’s cash reserves. At with pre-election spending of government funds the same time, deposits in trust accounts, earmarked augmenting the effects of ongoing construction of for future spending (held at both Bank of Papua New the PNG-LNG (liquefied natural gas) project and spin- Guinea [BPNG] and commercial banks), fell by PGK off investments. The appreciation of the Kina (PGK) 732 million in the first six months of the year. About in 2011 and early 2012 and weakening international one-third of this draw down was attributable to the commodity prices into the second half of 2012 both first payments under the government’s new tuition reduced rural incomes and government receipts, fee subsidy program. while also slowing the growth in urban consumer prices. The 2012 national and provincial elections led External conditions have become less favorable for to the re-election of Peter O’Neill as Prime Minister. commodity exporters. Copra, cocoa, and coffee His predecessor and main rival, Sir Michael Somare, farmers all saw their incomes compressed by supported Mr. O’Neill in the parliamentary vote. the falls in international prices through the first half of 2012, amplifying the appreciation of the Construction of PNG-LNG and of the various spin- PGK in 2011. Domestic factors, such as the shut- off investments remained the key drivers of PNG’s down of processing mills and supply chain issues, economic growth into the second half of 2012. The further reduced production. Minerals production Treasury Department’s midyear expectations were was hampered by wetter-than-usual weather and for construction activity to grow by over one-fifth infrastructure problems in the first half of the Remaining Resilient 84  |  Country Pages and Key Indicators year. Although Treasury still expects output to rise BPNG broadly held the stance of monetary policy by almost 9 percent in real terms in 2012, lower between February and November 2012. On the international prices will dampen the value of exports. one hand, it took advantage of the fall in inflation The Ramu Nickel/Cobalt mine started operations in to lower the Kina Facility Rate (KFR) by 100 basis the second quarter of 2012 and is expected to reach points to 6.75 percent in October. This is the first full production by late 2013, several years later than easing since 2009, and follows a total increase of expected following repeated court injunctions related 100 bps in 2011. But the KFR tends to have limited to its deep-sea tailings outfall system, among other effect because of the high level of excess liquidity in issues. The mine is expected to employ 700 PNG the banking system. In June BPNG sought to reduce nationals by late 2013, but it will not contribute to this liquidity while protecting its balance sheet, by tax revenues until a ten-year tax holiday has expired. raising banks’ reserve requirements 100 bps to 8.0 percent. Perhaps the most effective influence The PNG-LNG project manager reported in mid- on inflationary pressures, given the nature of recent November 2012 that 70 percent of construction shocks, has been the controlled appreciation of the had been completed and the project remained on PGK. BPNG allowed the exchange rate to appreciate schedule for first deliveries in 2014. However, the by 27 percent against the U.S. dollar between June project would cost significantly more to develop 2010 and April 2012, at the same time as it expanded than originally estimated: $1961 billion, compared its foreign exchange reserves by nearly $ 1.8 billion. with an initial estimated cost of $15 billion. Project developers attributed the higher costs to currency movements, especially the stronger AUD, work Outlook and Emerging Challenges stoppages and land access issues, and wetter- than-normal weather, which aggravated logistical The government’s 2013 budget represents a challenges. These higher development costs are significant shift from recent years. It targets a one- likely to require the government to contribute quarter increase in spending, largely allocated to approximately $180 million to maintain its equity new and rehabilitated infrastructure, increased share. Offsetting the higher development costs direct funding to district and local-level governments will be upward revisions to expected production by and constituency funds (PGK 1.5 billion compared 5 percent and expected prices by 30 percent. with less than PGK 200 million in 2012), plus some additional allocations for subsidized health and Inflation slowed through the first three quarters of education services. The government argues that 2012. The expanded tuition fee subsidy, pass-through the deeper decentralization of spending responds of the stronger Kina into the prices of imported to limited implementation capacity in national items, and the ongoing effects of the government’s institutions. The government expects improvements tariff reduction program have all contributed to the in the global economy and commodity prices and slower rate of growth of consumer prices. Headline ongoing strength of the domestic economy to raise inflation fell to 1.4 percent in the year’s second government revenues by over 6 percent in 2013. quarter, and was 2.0 percent in the third quarter, With these projections, the government projects compared with rates near or above 6 percent since a budget deficit of 7 .2 percent of GDP in 2013, the economy accelerated out of the global downturn following a deficit a little over 1½ percent of GDP in 2009. The central bank has assessed underlying in 2012. Despite weakening in minerals revenues inflation to be at 3 to 3½ percent. in 2014 and 2015, the government expects to be able to return the budget to surplus by 2017 . The government expects that financing these deficits, largely through domestic borrowing, will raise 61 All dollar amounts are U.S. dollars unless otherwise indicated. the debt ratio to around 35 percent of GDP (not world bank east asia and pacific economic update 2012, vol.2 Country Pages and Key Indicators  |  85 including contingent and off-balance sheet liabilities. incentives for public servants with the community’s This will require a revision of the Medium-Term Debt interests, can help achieve the government’s public Strategy, to target maintaining debt-to-GDP below service delivery goals, even when resources are 35 percent in 2013 and 2014, before returning the scarcer. target ceiling to 30 percent from 2015. In 2013 and 2014 aggregate gross domestic product (GDP) growth is expected to slow, as construction of the PNG-LNG project and spin-off private sector investments conclude, partially offset by the commissioning of the Ramu Nickel/Cobalt mine. In 2014 and 2015 aggregate and nonmineral GDP are expected to diverge significantly. Production from PNG-LNG will raise the level of aggregate GDP by around 20 to 25 percent; however, growth of the nonmineral economy will slow further on the decline in construction and transport activity and loss of an important impulse for domestic demand. The stabilization in international commodity prices may abate the decline in cash crop production. The pipeline of new resource projects may create some additional impetus to the nonresource economy in 2014 or 2015, although the probability of major new constructions being approved has declined somewhat, alongside international commodity prices and investors’ ease of access to finance. The revenue and spending pressures surrounding the 2013 budget are likely to intensify mid-decade. Revenue growth is expected to slow further, while it may be difficult to reverse many of the new spending commitments in the 2013 budget. The pressure to respond to PNG’s significant human development needs will continue to grow. The 2009-2010 PNG Household Income and Expenditure Survey data, released by the government in August, found large ongoing challenges, including high rates of malnutrition among children, limited physical assets for most households, and significant exposure to violent disputes, while also finding areas of change, such as improving literacy among younger Papua New Guineans, and the importance of mobile phones and income transfers for many households. Stronger institutions of governance and accountability across the public sector, supported by aligning the Remaining Resilient 86  |  Country Pages and Key Indicators Key Indicators Papua New Guinea:  2010 2011e 2012f 2013f 2014f Year Year Year Year Year Output, Employment and Prices Real GDP (% change y-y) 7.6 9.0 8.0 4.0 7.5 Real non-mineral GDP (% change y-y) 8.5 10.8 7.5 3.9 4.0 Formal employment (BPNG index, % change y-y) 1.1 6.5 6.0 2.0 -1.0 Consumer price index (% change y-y) 6.0 8.4 3.0 6.0 6.5 Public Sector Government revenues (% GDP) 31.3 30.0 30.1 29.3 28.1 Government expenditures (% GDP) 28.2 28.9 32.3 36.6 34.0 Government balance (% GDP) 3.1 1.1 -2.2 -7.3 -5.9 Nonmineral government balance (% GDP) -3.6 -5.1 -5.7 -10.7 -9.6 Public and publically-guaranteed debt (% GDP) 1/ 25.6 25.2 27.0 32.2 34.8 Foreign Trade, BOP and External Debt Trade balance (millions US$) 1,582 861 1,325 1,998 2,792 Exports of goods (millions US$) 5,843 7,047 7 ,788 7,944 8,738 (% change y-y) 29.5 20.6 10.5 2.0 10.0 Key export (% change y-y) 2/ 29.1 17.3 14.0 2.0 10.0 Imports of goods (millions US$) 4,261 6,186 6,463 5,946 5,946 (% change y-y) 30.8 45.2 4.5 -8.0 0.0 Current account balance (millions US$) -2,532 -4,605 -4,374 -3247 -2365 (% GDP) -25.6 -35.0 -30.0 -20.0 -13.0 Foreign direct investment (millions US$) 858 1750 1200 1000 1800 External debt (millions US$) 6.7 11.7 14.6 17.9 16.7 (% GDP) 67.2 91.9 95.0 105.6 90.0 Debt service ratio (% exports of g&s) 14.7 15.7 16.5 15.3 31.0 Foreign exchange reserves, gross (millions US$) 2,895 4,126 4,099 4,487 4,619 (months of imports of g&s) 4.3 4.9 4.5 5.3 9.3 Financial Markets Domestic credit (% change y-y) 25.2 17 .0 15.0 12.0 10.0 Short-term interest rate (% p.a.) 7.0 7.8 7.8 .. .. Exchange rate (Kina/US$, eop) 2.64 2.15 2.06 2.10 2.15 Real effective exchange rate (2005=100) 113.0 127 .4 149.4 153.0 150.0 (% change y-y) -2.8 12.7 17 .3 2.4 -2.0 Memo: Nominal GDP (billions US$) 10.0 12.7 15.4 17.0 18.6 Source: National data sources, IMF , and World Bank staff estimates. e = estimate f = forecast 1/ Not including debts of state-owned enterprises, or assets of Bank of Papua New Guinea. 2/ Mineral exports world bank east asia and pacific economic update 2012, vol.2 Country Pages and Key Indicators  |  87 Philippines Construction grew by 24.3 percent, its fastest pace in nearly two years, and contributed 1.9 percentage points (ppt) to GDP growth. Private construction grew by over 25 percent as demand for office and residential buildings increased with the rapid growth of the business process outsourcing (BPO) industry and the low interest rate environment. Growth in public construction (i.e., infrastructure) was equally impressive although this reflects more the recovery of infrastructure spending from last year’s slump (i.e., the base effect) rather than Population 94.9 million new infrastructure spending. Government Population growth 1.7 percent consumption grew by 12 percent (from GDP (PPP , int’l US$ billions) 392.7 GDP per capita (PPP , int’l US$) 4,140 6.8 percent in 2Q), contributing 1.2 ppt to Surface area 300,000 sq. km. growth following the release of the 4th tranche Capital Manila of the government-wide salary increase and an Source: World Development Indicators. acceleration of government disbursements for program and project implementation, notably in social services. As in previous years, private Recent Economic Developments consumption, supported by large inflows of overseas worker remittances, was the underlying The Philippines economy has emerged as one of the source of growth. It grew by 6.2 percent y-o-y in fastest growing economies in East Asia, with growth 3Q and contributed 4.3 ppts to overall growth. accelerating to 7 .1 percent in the third quarter. Higher economic growth was driven by the strong A more diversified export basket allowed overall performance of the construction sector and buoyed exports to grow despite the decline in electronics by robust private consumption and the recovery of exports. Exports have recovered from last year’s government spending. The acceleration of domestic slide mainly supported by growing demand for non- demand since the first quarter of 2012 reflects the electronics and service exports. Despite weak off- country’s strong macroeconomic fundamentals, shore demand for electronics, exports rebounded stronger government finances, and high confidence strongly this year, growing by 6.9 percent in 3Q in the Aquino government’s commitment to reflecting rising shipments of non-electronics reform. Stronger macroeconomic fundamentals, in exports (mostly to Japan) and buoyant services particular, as seen in low inflation, and large current exports growth. However, equally strong growth account surpluses and foreign exchange reserves, in imports of 8.6 percent, mostly fuel, consumer have continued to shield the economy from external goods, industrial machinery and transport equipment headwinds while a more diversified export basket resulted in a negative growth contribution of net allowed overall exports to grow despite the decline exports (-0.7 ppt). in electronics exports. Overall, the economy is expected to expand by over 6 percent this year from On the production side, the resilient services 3.9 percent last year. sector continues to be the key driver of growth. The 7 percent growth in the sector was led by the trade 1. Higher economic growth in Q3 was driven by subsector and the real estate, renting, and business the strong performance of the construction activity subsector, which includes the fast growing sector and recovery of government spending. BPO industry. Manufacturing growth improved to Remaining Resilient 88  |  Country Pages and Key Indicators around 6 percent in line with the revival in exports 2012,62 and sufficient to cover one year’s worth of in the first nine months, in turn contributing to pull imports, or 658 percent of the country’s short-term up growth in the industrial sector to a stronger external debt based on residual maturity. 8.1 percent in the third quarter. Growth in agriculture increased at a faster pace to 4.1 percent (from Amid a benign inflation environment, the central 0.4 percent in the second quarter), notwithstanding bank has cut policy rates to further boost domestic the crop production disruptions from typhoons and demand and curb speculative foreign exchange monsoon rains in July and August. inflows. Headline inflation which averaged 3.2 percent through October on the back of lower Despite higher spending compared to last year, the food price inflation, remains within central bank government’s budget deficit stood at Php115 billion target of 3 to 5 percent. The Monetary Board has (1.1 percent GDP) through September, significantly cut policy rates by a cumulative 100 bps to a low of below government target of 2.7 percent of GDP for 5.5 percent and 3.5 percent for the overnight lending the year. Efforts to improve the pace and efficiency and borrowing rates respectively, as of October. The of public spending was reflected in the 14.4 percent interest rates for special deposit accounts were growth in government expenditures for the first nine also cut. Bank lending grew on the back of the low months of the year, following the transparency and interest rate environment. In particular, exposure to accountability measures introduced in government’s the real estate sector has increased to an all-time implementing agencies in 2011. The government high of 15 percent of banks’ total loan portfolio in continues to improve tax administration as the main June. The central bank asserts that these are well vehicle for generating more tax revenues. Revenue below the cap of 20 percent of total loan portfolio. collection grew by 10 percent from last year, on Bank balance sheets remain healthy with non- account of improved tax administration. On tax performing real-estate loans below 5 percent, lower policy, the Lower and Upper House recently passed than last year. the excise tax reform bill estimated to yield 0.3 to 0.4 percent of GDP in additional revenues, which will be earmarked for the universal healthcare program Outlook and Emerging Challenges and assistance to tobacco farmers who will shift to other crops. Going forward, the country’s high growth could be sustained and made more inclusive provided that The global environment had a limited impact on the (i) economic reforms are aggressively pursued to economy and the country’s external position remains create more and better jobs and reduce poverty at a healthy. The Philippines has become less dependent faster rate, (ii) more revenues are raised to finance on exports compared to its regional peers with the higher spending in physical and human capital, and share of exports to GDP falling from 70 to 30 percent (iii) global growth is supportive and rebalancing in in last decade. Merchandise exports grew modestly the region continues. Baseline growth projection by 8 percent through September 2012 thanks to a for the Philippines is at 6.0 percent for 2012 and diversified product mix (e.g., electronics, minerals, 6.2 percent for 2013. Consumption, which accounts agriculture and furniture). Remittance growth has for 75 percent of GDP , is expected to drive overall not been affected greatly by global trends, growing growth underpinned by continued growth in by 5.5 percent through September. The sustained remittances and higher government spending inflows of foreign currencies led to record high with the national elections next year. The current levels of gross international reserves. They rose to account is projected to remain in surplus, driven $82 billion in October, about 30 percent higher than the country’s external debt of $62.5 billion in June 62 Latest available figure. Government definition. world bank east asia and pacific economic update 2012, vol.2 Country Pages and Key Indicators  |  89 by remittances and some recovery in electronics exports early in the year. Risks to the growth projection remain on the downside—the continued high levels of global economic uncertainty combined with weak economic activity in the G3, diminishing returns to quantitative easing in the United States (of which a third round has just been launched) and the looming United States fiscal cliff, and a slowing Chinese economy are weighing down on global growth prospects. For the Philippines, a window of opportunity exists today to accelerate reforms that become a platform for more inclusive and higher growth. The country is currently benefiting from strong macroeconomic fundamentals, political stability, and a popular government that is seen by many as committed to improving the lives of the people. Several reforms have successfully started, notably in public financial and debt management, anti-corruption, and tax policy. With further structural reforms, especially in areas which will have more impact on the lives of the poor, along with investments in infrastructure, education, and health, the Philippines can take advantage of new opportunities arising from the global economic rebalancing and the strong growth prospects of the East Asia region. By building on its previous and current successes and by ensuring that it is prepared to take advantage of the opportunities that are coming its way, the government stands to make a significant difference in the lives of Filipinos. Remaining Resilient 90  |  Country Pages and Key Indicators  ey Indicators Philippines: K 2010 2011 2012f 2013f 2014f 2011 2012 2012 Year Year Year Year Year Q4 Q1 Q2 Q3 Jul Aug Sep Oct Output, Employment and Prices Real GDP (% change y-y) 1/ 7.6 3.9 6.0 6.2 6.4 4.0 6.3 6.0 7.1 .. .. .. .. Industrial production index 92.0 93.0 .. .. .. 93.1 97.1 96.2 .. 101.8 .. .. .. (1994 = 100) (% change y-y) 23.2 1.1 .. .. .. -8.9 7.2 4.0 .. 4.7 .. .. .. Unemployment (%) 2/ 7.3 7 .1 .. .. .. 6.4 7.2 6.9 7.0 .. .. .. .. Nominal wages (% change y-y) 3/ 3.8 4.6 .. .. .. 5.4 5.4 7.1 4.7 4.7 4.7 4.7 4.7 Real wages (% change y-y) 3/ -0.1 0.6 .. .. .. 1.6 2.5 4.7 1.0 1.6 0.2 1.1 1.8 Consumer price index 3.9 4.7 3.5 4.0 4.0 4.7 3.1 2.9 3.5 3.2 3.8 3.6 3.1 (% change y-y) Public Sector Government balance (% GDP) 4/ -3.6 -2.1 -2.4 -2.3 -2.1 -1.5 -0.3 0.0 -0.7 .. .. .. .. Domestic public sector debt 41.4 49.0 .. .. .. 49.0 .. .. .. .. .. .. .. (% GDP) 5/ Foreign Trade, BOP and External Debt Trade balance (billions US$) 6/ -11.0 -15.5 .. .. .. -4.7 -4.0 -2.4 .. .. .. .. .. Exports of goods (billions US$) 6/ 50.7 47 .2 .. .. .. 10.6 12.7 13.8 .. .. .. .. .. (% change y-y) 34.9 -6.9 .. .. .. -17.7 5.8 11.7 .. .. .. .. .. Key export (% change y-y) 7/ 38.9 -21.3 .. .. .. -31.4 6.1 -3.5 -7.1 -20.3 -10.9 9.8 .. Imports of goods (billions US$) 6/ 61.7 62.7 .. .. .. 15.3 16.7 16.2 .. .. .. .. .. (% change y-y) 32.9 1.6 .. .. .. -5.0 5.1 4.0 .. .. .. .. .. Current account balance 8.9 7.1 8.1 8.5 8.9 1.8 0.9 2.8 .. .. .. .. .. (billions US$) 8/ (% GDP) 4.5 3.1 3.2 2.9 2.7 2.9 1.5 4.6 .. .. .. .. .. Foreign direct investment 0.7 1.3 1.5 2.0 2.5 0.5 0.7 -0.4 .. .. .. .. (billions US$) External debt (billions US$) 9/ 60.0 61.7 .. .. .. 61.7 62.9 62.5 .. .. .. .. .. (% GDP) 30.1 27 .5 .. .. .. 27.5 25.6 26.6 .. .. .. .. .. Short-term debt (billions US$) 9/ 6.3 7.0 .. .. .. 7.0 7.4 7.0 .. .. .. .. .. Debt service ratio 8.7 8.9 .. .. .. 8.9 7.1 7.1 .. .. .. .. .. (% exports of g&s) Foreign exchange reserves, 62.4 75.3 83.2 83.4 83.6 75.3 76.1 76.1 82.0 79.76 80.73 82.03 82.09 gross (billions US$) 9/ (months of imports of g&s) 10/ 9.5 11.1 11.8 11.2 10.6 11.1 11.2 11.0 11.9 11.52 11.66 11.85 11.86 Financial Markets Domestic credit (% change y-y) 11/ 8.7 5.2 .. .. .. 5.2 12.5 13.5 12.4 14.6 10.5 12.0 .. Short-term interest rate 4.2 4.6 .. .. .. 4.7 4.4 4.1 3.9 4.1 3.9 3.9 3.8 (% p.a.) 12/ Exchange rate (Peso/US$, ave) 45.1 43.3 .. .. .. 43.5 43.0 42.8 41.9 41.9 42.0 41.7 41.5 Real effective exchange rate 126.8 127 .2 .. .. .. 127.9 128.6 131.2 .. 135.5 135.0 .. .. (2000=100) (% change y-y) 13/ 4.6 0.4 .. .. .. .. .. .. .. .. .. .. .. Stock market index 3,524 4,189 .. .. .. 4,240 4,819 5,092 5,249 5,252 5,234 5,261 5,402 (Jan. 2, 1985=100) 14/ Memo: Nominal GDP (billions US$) 199.6 225.9 254.3 287.7 326.3 54.7 56.3 61.3 .. .. .. .. .. Source: National data sources f = forecast 7/ Electronics and other electronics 1/ The GDP series has a break in 2000. 8/ Estimates 2/ New methodology. Figures are based on the 2000 census. 9/ Central bank data, % of annual GDP for quarterly figures 3/ Non-agriculture minimum wage, National Capital Region 10/ Based on end-of-period gross international reserves 4/ IMF Government Financial Statistics (GFS) basis 11/ Based on Depository Corporations Survey 5/ Total public sector domestic debt 12/ Interbank call rate 6/ Central bank data, Balance-of-payments basis 13/ World Bank staff estimates 14/ PSEi Composite, period average for annual figures world bank east asia and pacific economic update 2012, vol.2 Country Pages and Key Indicators  |  91 Small Pacific Island Countries Inflation has fallen over the recent months with ongoing declines in global food and fuel prices and recent recovery of local fruit and vegetable production after weather-related disruption early in the year. It is expected to average 6 percent for the year. The Central Bank of Samoa (CBS) has maintained an accommodative monetary since the onset of the global economic crisis, with official interest rates at close to 0 percent. With monetary transmission mechanisms weak, as in many Pacific countries, monetary policy has had a limited impact on credit growth and inflation. CBS has also pursued Source: World Development Indicators. on-lending programs through the Development Bank of Samoa and the Samoa Housing Corporation, providing private sector credit at rates below those Summary offered by commercial banks to assist with post- tsunami reconstruction. The small Pacific Island economies (Samoa, Tonga, Kiribati, and Tuvalu) are facing common challenges The fiscal deficit has been declining gradually from to growth and fiscal sustainability in the context a peak of 7 .5 percent of gross domestic product of continued global economic uncertainty and (GDP) immediately following the tsunami in vulnerability to external shocks. Traditional drivers FY2010. The fiscal deficit for FY2012 was 6 percent of growth—remittances, aid expenditure, and (0.5 percent higher than budgeted largely because tourism—are impacting unevenly, as governments of supplementary appropriations), unchanged work to consolidate public expenditure and from FY2011. Revenues remain slightly below the strengthen revenue to rebuild fiscal buffers. projected level (25 percent of GDP , down from 28 percent in FY2011), reflecting lower imports and a delay in implementing excise tax increases. The Recent Economic Developments current account deficit has widened sharply over recent years, to around 11 percent of GDP in FY2012, The economy of Samoa grew by around 1.5 percent driven by high imports for reconstruction and slow in FY2012, with growth of 1.9 percent expected in recovery in tourism and exports. Foreign reserves FY2013. Subdued growth reflects the winding down have declined, but remain at comfortable levels of stimulus from reconstruction spending following (about 4.3 months of next year’s imports). According the 2009 tsunami. Continued remittance growth to the IMF , the currency may be overvalued by 11 to (10 percent year-on-year increase for the first eight 25 percent. Steps to address the overvaluation to months of FY2012) has partially offset the impact of improve the external position would need to take declining agriculture and fisheries exports, and falling account of impacts on external debt dynamics and tourism receipts. Over the medium-term, growth is inflation. expected to return to around 2.5 percent, but this is subject to substantial downside risks, given the Samoa faces important challenges in reducing its possibility of weakening global demand impacting fiscal deficit and public debt, while maintaining the Samoan economy through declines in exports, economic growth and living standards. To reduce tourism receipts, and remittances. current levels of debt (46 percent of GDP), the fiscal deficit will need to be reduced significantly over coming years. Given ongoing needs for Remaining Resilient 92  |  Country Pages and Key Indicators infrastructure investment, difficult reductions in remain at comfortable levels—around 5.9 months recurrent expenditure are likely to be required. of import cover—largely because of donor inflows. Improvements in the current account position and Tonga’s economy grew by only 1.3 percent in adequacy of reserves remain subject to recovery in FY2012, down from 4.7 percent in FY2011. Declines tourism and remittances over the medium-term. in growth reflect the winding down of major debt- financed development projects in the context of a Government faces challenges in maintaining service difficult international environment. Remittances, delivery in the context of sluggish growth, weak which are equivalent to around 20 percent of GDP , revenue performance, possible permanent declines continued a prolonged decline, falling a further in remittances, and growing debt-repayment 23 percent year-on-year, during the first ten months obligations. Debt servicing is expected to increase of FY2012, before ticking up slightly. While tourist rapidly over coming years, to reach 16 percent of visitor numbers increased slightly, tourism receipts total revenue by FY2016. Medium-term priorities fell by 7.9 percent for the year because of shorter include administrative and policy reforms to improve stays and price discounting. Growth for FY2013 is revenue performance and continued reallocation of projected to fall slightly to 1 percent as infrastructure expenditure toward policy priorities, including social projects are completed. Downside risks include and economic sectors. further declines in remittances and tourism earnings. The economy of Kiribati grew by around 2 percent Inflation peaked at 8.5 percent in FY2011, and has in 2011, following several years of weak and volatile since been on a downwards path. Inflation declined growth. Growth of 2.5 percent is expected for 2012, to 4.6 percent in FY2012 due to moderating global driven by a vibrant retail sector and an influx of food and fuel prices and exchange rate appreciation. aid spending associated with major infrastructure Moderate inflation of 4.5 percent is expected in projects. Over the medium-term, growth will depend FY2013. Despite a continued accommodative heavily on the implementation of planned donor monetary stance by the National Reserve Bank projects and the commencement and expansion of of Tonga, credit to the private sector continues a new fish processing operation in Betio. to decline, with loans to firms falling a further 24.7 in the year to April 2012. Despite amble Inflation remains subdued, with consumer prices liquidity, commercial banks remain risk-averse expected to increase by 2.5 percent during 2012. following a lending surge during FY2009-10 which While world prices for most import products are has left a large proportion of non-performing loans continuing to decline, constraints on shipping on commercial bank balance sheets (15.2 percent at capacity may lead to some price pressure in the end of FY2011). context of donor project-driven demand. Inflation is expected to remain at similar levels in 2013. Government revenues fell slightly in nominal terms during FY2012, with a total 17 percent fall Kiribati faces severe challenges to fiscal sustainability in tax revenues since FY2009. Government has because of declining revenues and insufficient consolidated expenditure, and with the assistance expenditure restraint. Compliance problems have of budget support grants is projecting a small deficit led to steady revenue declines, while recurrent (0.3 percent of GDP) for FY2013 to be financed from expenditure has exceeded budgeted levels. After cash reserves. It maintains its policy of avoiding any fiscal deficits averaging 19 percent of GDP between new debt, but debt remains at 39 percent of GDP . 2009 and 2011, unexpectedly high fishing license The current account deficit widened to 6.1 percent fees during 2012 helped offset continued weak of GDP during FY12, reflecting increased imports for import, personal tax, and company tax revenue major capital projects. Foreign exchange reserves performance. A deficit of around 14 percent of world bank east asia and pacific economic update 2012, vol.2 Country Pages and Key Indicators  |  93 GDP is expected for 2012. Deficits have been to around 11 percent of GDP (versus a sustainable primarily financed by drawdowns from the Revenue target level of around 45 percent of GDP). The current Equalization Reserve Fund (a trust fund that was account deficit reached 8 percent of GDP in 2011, initially capitalized from proceeds of phosphate with a trade deficit of 58 percent of GDP financed mining) and nonconcessional borrowing from a largely by donor grants and income from foreign commercial bank. The current account balance assets and fishing revenues. The current account (including official transfers) reached 23.6 percent of deficit is expected to reduce to 3 percent of GDP in GDP in 2012, up slightly from 22.7 percent in 2011, 2012, with foreign exchange reserves remaining at with the impact of increased imports for donor comfortable levels (currently 6.7 months of import projects offset by historically high fishing license fee cover, largely from aid grants). receipts. Downside risks are significant given Tuvalu’s Over the medium-term, fiscal imbalances need exposure to external economic shocks and natural to be addressed. Drawdowns from the Revenue disasters (vulnerabilities include further declines in Equalization Reserve Fund have substantially demand for seafarer labor and further declines in exceeded sustainable limits, while the accumulation trust fund asset values). The only policy instrument of commercial debt has imposed avoidable financing for dealing with external shocks is fiscal policy, given costs. Government is working to improve compliance Tuvalu’s use of the Australian dollar, heavy reliance on and is introducing a VAT to broaden the tax base and imported goods, and minimal financial diversification. reduce reliance on trade taxes. On the expenditure Accumulation of adequate fiscal buffers to manage side, efforts to restrain expenditure remain priorities, future shocks is, therefore, crucial. Improving including reducing subsidy payments to state-owned tax compliance, especially among SOEs, is a key enterprises (SOEs) and avoiding further expansion in priority along with implementing planned increases the number of temporary public service workers. in value-added tax (VAT) rates. On the expenditure side, government is working toward continued After two years of contraction, Tuvalu’s economy consolidation and tighter prioritization of public grew by 1.1 percent in 2011. Growth of 1.2 percent investment toward basic healthcare and education. is expected in 2012. Increased competition in the Progress with reform of public enterprises needs retail sector has driven recovery, while remittances to continue in order to reduce the current drain on from seafarers (Tuvalu’s primary source of private- public resources. sector employment) continue to lag in the context of uncertain international economic conditions. Inflation is expected to remain moderate (2 to 3 percent) in 2012, although up from 0.5 percent in 2011. Increased retail competition and currency appreciation have helped to keep prices down in light of movements to global commodity prices. Fiscal consolidation continues, following a period of expansionary fiscal policy during the global economic crisis during which the fiscal deficit reached 30 percent of GDP . A fiscal surplus equal to 4.2 percent of GDP is expected in 2012, following a small surplus (1.1 percent of GDP) in 2011, mostly attributable to reduced expenditure. Despite consolidation, fiscal buffers remain inadequate, with trust fund resources available to government in addressing any further shocks equal Remaining Resilient 94  |  Country Pages and Key Indicators Solomon Islands are reducing output. The central bank’s index of production of major commodities declined for three consecutive quarters leading to the second quarter, before rebounding in the third quarter, but was still 7.6 percent lower than a year earlier. Farmers have been responding to lower prices. Copra production was one-quarter lower in the first half of 2012 than in the corresponding period in 2011, as domestic prices fell from a record high of over SBD 6 per kilogram in March 2011 to SBD 2.35 per kilogram in June 2012. Cocoa production, Population 552 thousand the other key source of rural cash incomes, followed Population growth 2.6 percent a similar pattern, with output in second quarter GDP (PPP , int’l US$ billions) 1.6 GDP per capita (PPP , int’l US$) 2,943 2012 one-quarter lower than a year earlier as Surface area 28,900 sq. km. prices weakened. In contrast, palm oil production Capital Honiara rose slightly, while prices were only a little weaker Source: World Development Indicators. (palm oil in Solomon Islands is mostly produced on larger plantations). Lower copra and cocoa prices and production are reducing revenue received by Summary farmers, who are largely in rural areas where there are few alternative sources of cash income: for The Solomon Islands economic growth slowed example, farmers received SBD 20 million from through the middle quarters of 2012. This was copra in second quarter 2012, 60 percent less than largely because of weaker prices of exports and in the corresponding period in 2011, according to stabilizing output from earlier drivers of growth, such central bank estimates. as logging and the opening of the Gold Ridge mine. Meanwhile, fiscal policy took a more expansionary Other key drivers of Solomon Islands production stance, raising concerns around the sustainability and revenue growth stabilized through mid-2012. and the quality of spending. Inflationary pressures Log production was affected by rains in second slowed, and external balances remained relatively quarter, but overall exports were comparable to the strong. first half of 2011, at almost 1 million cubic meters (well above most estimates of sustainable logging rates). Receipts, however, weakened over the four Recent Economic Developments quarters to mid-2012 because of lower international prices, attributed by the central bank to weaker The Solomon Islands economy is on course to demand from China. Gold production from the Gold expand by around 5 to 5½ percent in 2012, following Ridge mine, plus alluvial extraction, stabilized in growth near 10½ percent in 2011. Mining is the first half of 2012 at fewer than 36,000 ounces. estimated to again contribute around 2 percentage Production, which was affected once again by points to 2012 growth. The slowdown in aggregate unplanned operational issues, was 20 to 25 percent growth is due to lower production across a range below pre-reopening estimates of the mine’s of major commodities. As global prices weaken capacity. With the weakening in external conditions, and the incremental appreciation of the Solomon the number of new and scale of applications for Islands dollar (SBD) relative to the U.S. dollar (in foreign direct investment retreated in second quarter which most exports are denominated), producers from recent record highs. Despite the weakness in world bank east asia and pacific economic update 2012, vol.2 Country Pages and Key Indicators  |  95 the external sectors, domestic demand remained the impact of an increase in the tax-free threshold. robust through mid-2012. Manufacturing (largely The strength of imports supported trade tax receipts, for domestic consumption) and urban building despite the weakening in exports. Improved continued recent upward trends. A notable boost compliance is likely to have further supported trade to private consumption and government spending tax receipts. Total government spending in the came from the Festival of Pacific Arts (FoPA), which second quarter 2012 was 28 percent more than in was held around Honiara in July. corresponding period of 2011, largely because of strong spending on goods and services ahead of The deterioration in export production and prices, the FoPA. Development budget spending remained in contrast to the robustness of domestic demand, slow—less than a quarter of the development brought the trade balance back to deficit in the June budget was disbursed in the first half of the year, quarter, after a record four consecutive quarters compared with 20 percent in 2011. The government of surpluses. Several of the factors behind this may also be delaying earlier plans to repay some debt deterioration may be temporary or reflect timing (for ahead of schedule, given that only 29 percent of the example, the FoPA and delays in fish shipments), and amount budgeted to service debt was disbursed in preliminary data for third quarter show a rebound the first half of 2012. Nonetheless, the stock of debt in export values, returning the trade balance to a declined slightly and, for the second consecutive small surplus. Overall, the current account was in quarter, the government made significant advanced surplus over the first half of 2012, largely because payments on outstanding restructured domestic of donors’ budget support grants offsetting private bonds. Solomon Islands was again assessed to be outflows. The exchange appreciated to 7 .1 SBD per at a “moderate” risk of debt distress under the IMF- U.S. dollar in October 2012, 1.0 percent stronger World Bank Debt Sustainability Analysis. than in January 2012, while foreign exchange reserves also increased (to $47063 million in October Resurgent international prices for wheat, corn, 2012 compared with $435 million in January, and some other foods have not affected Solomon near 10 months’ import cover). The central bank Islands. Indeed, inflation has slowed on improved announced that from September 2012, it would local growing conditions and stable import prices target a basket of currencies in its exchange rate for rice (the main imported food, which is especially policy, rather than the U.S. dollar alone. important for poorer urban households lacking access to gardens), wheat, and fuel (which affects Weaker revenues and overspending shifted fiscal all prices through high transport and electricity policy to a much more expansionary stance up to generation costs). The food component of the CPI August 2012 relative to the previous two years. peaked in April 2012 and, combined with the fall in The weakening in exports and production slowed local fuel prices, overall CPI inflation has slowed to growth in government revenues over the first 4.4 percent. Monetary conditions remain stable and half of 2012 compared with budget projections, appear to be consistent with price stability. Excess although revenues were still 7 percent higher than liquidity remains high, but banks continue to struggle the equivalent period in 2011, reflecting improved to find new opportunities to lend that comply with compliance and growth in domestic consumption. their prudential standards. Growth in the money The cost of tax exemptions was about double the supply has largely been due to the growth in foreign budgeted amount, while PAYE (pay as you earn) exchange reserves. income tax receipts were quarter below budget forecasts, in part because of an underestimation of The government continues to make progress on an ambitious reform agenda, including some notable policy achievements but for the most part focused 63 All dollar amounts are U.S. dollars unless otherwise indicated. on strengthening technical and process issues. The Remaining Resilient 96  |  Country Pages and Key Indicators Honiara Club agreement that followed Solomon returning fiscal policy to a sustainable footing after Islands sovereign debt defaults of the early 2000s the slippages in 2012, with growing demands for was renegotiated following an improvement in better service delivery met through increasing the the country’s debt sustainability assessment. The effectiveness of spending, rather than the amount. government can now borrow on concessional terms within certain limits intended to maintain debt sustainability. Public financial management systems are being upgraded. The transparency around the use of public resources has improved and the first steps are being taken to develop greater social accountability for government spending. Significant liquidity and cross-debt issues between the two key utilities have been resolved and the utilities’ tariffs placed on to a sustainable footing. A new Public Finance and Audit Act is being prepared. The scale of the reform program has added to pre- existing capacity constraints, with a focus for the remainder of 2012 and 2013 shifting to ensuring that recent reforms are secured and routinized and that a more sustainable, long-term agenda is developed, especially in light of the transition from the large RAMSI advisory support programs to support provided through bilateral aid programs. Political instability continued, including ongoing efforts by the parliamentary opposition to pass a no- confidence motion in the government. These have failed through lack of political support, although the opposition is developing a reputation for acting as a watchdog around issues of public resource use and spending management. Outlook and Emerging Challenges The outlook is for a further moderation in the rate of growth of the Solomon Islands economy. A modest further increase in production from the Gold Ridge mine is expected in 2013, but this is likely to be offset by some unwinding from recent, unsustainable logging rates associated with weaker global timber prices and improvements in revenue collection. Demand in the nonresource economy has benefited from both donor flows and government spending; both are likely to follow cash crop receipts to be weaker in coming years than in the recent past. This weaker outlook emphasizes the importance of world bank east asia and pacific economic update 2012, vol.2 Country Pages and Key Indicators  |  97 Key Indicators Solomon Islands:  2010e 2011 2012f 2013f 2014f Year Year Year Year Year Output, Employment and Prices Real GDP (% change y-y) 7.8 10.5 5.3 4.0 3.3 Real non-mineral, non-logging GDP (% change, y-y) 5.4 7.3 3.4 3.3 4.0 Consumer price index (% change y-y) 0.9 7.4 4.8 4.5 5.0 Public Sector Government revenues (% GDP) 62.6 60.2 58.8 57 .8 57.0 Government expenditures (% GDP) 56.4 51.2 59.4 59.0 59.0 Government balance (% GDP) 6.2 9.0 -0.6 -1.2 -2.0 Public sabd publicly-guaranteed debt (% GDP) 28.5 22.7 18.3 15.0 14.0 Foreign Trade, BOP and External Debt Trade balance (millions US$) -218 -47 -66 -159 -141 Exports of goods (millions US$) 330 557 601 601 601 (% change y-y) 40.6 68.5 8.1 0.0 0.0 Imports of goods (millions US$) 548 604 667 761 743 (% change y-y) 59.2 10.3 10.5 0.0 -2.4 Current account balance millions US$) -210 -52 -58 -116 -102 (% GDP) -30.8 -6.0 -5.8 -10.9 -9.0 Foreign direct investment, net (millions US$) 236 257 115 93 91 Total external debt (millions US$) 218 223 219 224 227 (% GDP) 31.9 25.7 21.6 20.9 20.0 Debt service ratio (% exports of g&s) 4.7 2.5 2.6 2.7 3.5 Foreign exchange reserves, gross (millions US$) 2/ 266 412 465 465 450 (months of imports g&s) 5.8 8.2 8.4 7.3 7.3 Financial Markets Domestic credit (% change y-y) 3/ -6.8 3.9 4.9 6.0 8.0 Exchange rate (SBD$/US$, eop) 7 .80 7.25 7.15 7.36 7.51 Real effective exchange rate (2005=100) 108.0 116.0 116.0 116.0 116.0 (% change y-y) -4.4 7.4 0.0 0.0 0.0 Memo: Nominal GDP (millions US$) 682 869 1,012 1,071 1,134 Source: National data sources, IMF , and World Bank staff estimates e = estimate f = forecast n.i. = no issues 1/ 2/ Includes foreign assets of non-bank financial institutions. 3/ Domestic credit to the private sector. Remaining Resilient 98  |  Country Pages and Key Indicators Thailand Policies of which impacts are to be monitored next year include the paddy pledging scheme and the nation-wide rise in minimum wages. The Thai economy in 2011 was severely affected by the earthquake in Japan, the Eurozone crisis and the severe flood during the last quarter of 2011. The Manufacturing Production Index (MPI) sharply dropped by 8.1 percent year on year in April last year after the Japan earthquake before contracting by 34 percent yoy in the last quarter when the industrial estates were flooded. As a result, exports, Population 69.5 million household consumption and investments fell yoy in Population growth 0.6 percent the final quarter of 2011. Real GDP in the last quarter GDP (PPP , int’l US$ billions) 605 GDP per capita (PPP , int’l US$) 8,703 of 2011 contracted by 8.9 percent year-on-year, Surface area 513,120 sq. km. dragging growth of the entire 2011 down to only Capital Bangkok 0.1 percent. Source: World Development Indicators. The economy this year, while recovered from last year’s floods, will be affected by the Eurozone Recent Economic Developments crisis and will grow by 4.7 percent. Manufacturing production has begun to recover in April from the The Thai economy this year has rebounded from the floods after contracting year-on-year since October severe floods at the end of 2011 in the second half last year64. However, it contracted year-on-year of this year but continued to be negatively affected sharply again since June onwards as the impact by the slowdown in the global economy; the full of the Eurozone crisis was more severely felt. recovery next year should help raise exports and Sectors that contracted most are those whose hence GDP growth. Real GDP this year is projected final export destination is the Eurozone—hard disk to grow by 4.7 percent supported mainly by the drive, integrated circuits, and apparels. This is also rebound in household consumption and greater reflected in the year-on-year contraction of exports investments by both the private and public sectors to the European Union and of total exports since as part of flood rehabilitation. Net exports, on the June this year. other hand, contributed negatively to GDP growth as exports were affected by production disruptions Exports, the major engine of growth of the Thai in the first half of the year and the sharp slowdown economy, will mostly likely grow by less than in demand from the EU, China, and ASEAN in the 5 percent this year in US dollar terms. Affected by second half. Nevertheless, capital inflows especially both the incomplete recovery of the manufacturing foreign direct investment (FDI) remains strong. sector from the floods in the first half of the year and Inflation also remains low at around 3 percent the intensifying impact of the Eurozone crisis in the and is expected to be so next year. The economy second half, export growth this year is dampened. should be able to grow by 5 percent next year as This is particularly true for manufactured exports manufacturing production fully recovers from the which are affected both directly and indirectly by floods. Moreover, domestic demand, particularly the Eurozone slowdown. Moreover, agricultural investments, will continue its momentum from this year as FDI rises sharply and the Government steps 64 Data from the Ministry of Industry shows that the manufacturing sector up its investments in water management projects. has almost fully recovered by the end of the second quarter. world bank east asia and pacific economic update 2012, vol.2 Country Pages and Key Indicators  |  99 products has also declined sharply mainly from the year. This is particularly true for real imports of capital fall in rice exports by almost half that of last year’s goods, domestic machinery sales, and commercial after the introduction of the aggressive paddy car sales. For the second half of the year, private pledging program since last October. The program investment growth should continue to be at a has raised Thai rice prices to around US$200 above similar pace as or slightly higher than in the first half. international market prices. As a result, exporters Although investments for flood rehabilitation may have so far been unable to export rice, while the slow down, but investment approvals of the BOI and Government has so far not release the rice stocks foreign direct investments which have been growing on to the global markets. firmly over the past quarters indicate that future investments will continue to expand. In addition, Imports have also risen sharply in the first half of the given the low base in 2011Q4, year-on-year growth year in part from the imports of machineries to replace of private investment in the last quarter of this year those damaged by the floods, but will slowdown in should be in the double digits. Private investment the second half of the year. Imports grew by around should be able expand by around 11 percent in real 10 percent year-on-year in the first two quarters of terms this year, compared to 7 .2 percent last year. this year before slowing down in the third quarter. Imports of raw materials and intermediate goods, Flows of foreign direct investment (FDI) into Thailand which include fuels, have contracted in the third were not deterred by the floods and continued quarter year-on-year as manufacturing production to be strong into the first half of this year. FDI65 contracted and fuel prices softened. As a result, into Thailand peaked in the last quarter of 2011 at Imports (in US dollar terms) will grow by less than almost US$3.5 billion as a result of the increase in 10 percent this year. Japanese investments into Thailand as part of the diversification plan after theTohoku earthquake earlier Domestic demand, on the other hand, has last year. FDI continued into Thailand throughout the expanded continuously in all quarters of this year. first eight months of this year with the amount of Household consumption and private investments US$ 6.2 billion, surpassing that in the same period of have contributed most to the expansion of domestic 2012. Moreover, FDI from the European Union has demand this year. Household consumption in the been positive since the second quarter of last year, first half of the year has been expanding rapidly as European firms diversify to East Asia, including year-on-year as households rehabilitate from the Thailand where markets and their prospects are severe floods in the last quarter of 2011. Household stronger than that in the Eurozone. consumption continues to expand sharply in the second half of the year as the as the impact of the Following the relaxation of Bank of Thailand’s government policies to stimulate consumption is investment rules for Thai investment abroad, Thai realized plus the effect of the low base in the final direct investments abroad have increased since quarter of last year. Moreover, inflation has been the last quarter of 2010. Major market for Thai low at less than 3.5 percent and real deposit rate investments remains in ASEAN. In 2011, major has been hovering around zero. Private investments investment abroad by Thai firms included additional have also expanded as recovery from the floods had stakes of BANPU in Australia’s coal market and PTT started in the first quarter of this year. Exploration and Production purchase of a 40 percent equity stake in a major Norwegian oil firm. Going Private investment which had contracted during the forward, Thai FDI overseas will likely rise as pressures floods had gained strength since the beginning of from the minimum wage increase in Thailand plus the this year. Private investment has rebounded with a 9.2 percent and 11.8 percent year-on-year growth in real terms in the first and second quarters of the 65 FDI comprises of equity, debt, retained earnings. Remaining Resilient 100  |  Country Pages and Key Indicators prospects from the ASEAN Economic Community Inflation will average around 3 percent for both 2012 2015 prompt firms to increasingly invest abroad in and 2013. Inflation was low at less than 3 percent order to maintain their competitiveness. from April to August before accelerating slightly to 3.38 percent and 3.32 percent in September and Public investment, which had contracted last year, October, respectively. Although a new excise tax should see an expansion this year. Public investment rate has been imposed upon tobacco and liquor in 2011 contracted by 8.7 percent from the delay products in August and electricity (Ft) charge rates in the implementation of the FY 2012 budget have been raised, theses will be outweighed by a (October 2011-September 2012) after the change in slight drop in both crude oil and commodity prices Government in July 2011. Moreover the floods during resulting from a slowdown in global economy, thus, the last quarter of 2011 have also delayed public demand. Moreover, the Government continues investments. Public investment from the second to control the food, fuel and commodity prices, quarter of 2012 onwards expanded as the FY2012 especially the diesel and NGV retail prices which budget was implemented beginning in February. will continue to be fixed in order to avoid the higher These should help raise public investments in 2012 public transportation cost. Therefore, headline by around 7 percent in real terms. inflation next year should be no more than 3 percent and core inflation at around 2 percent. Budget deficit was 2.7 of GDP in FY2012 and will be at 2.54 percent of GDP for FY2013 with Interest rates remain low and accommodative to additional off budget spending for water resource growth. The Monetary Policy Committee (MPC) has management projects in FY2013, possibly raising cut the one-day repurchase rate by 25 basis points public debt66 close to 50 percent of GDP by end- to 2.75 percent, which is the first rate cut since 2013. The budget for FY2013 is THB2.4 trillion, a the cut from 3.25 to 3.00 percent in January. The 0.8 percent increase from that of last year. Budget main reason for the rate cut mainly was to keep deficit for FY2012 was THB400 billion while that of the domestic demand growth momentum amidst FY2013 is at THB300 billion. The government has negative impacts from the sluggish global economy. earlier this year issued the off-budget Emergency Decree on Investment Loan for Water Resource With the large capital inflows into Thailand as well Management and Future Development in an as other East Asian countries, there is pressure amount of THB 350 billion (USD 11 billion) to finance on baht to appreciate. Net capital inflows reached investments in water management projects over USD 9.9 billion in the first three quarters of this year the next 3–4 years. Around THB10 billion has been compared to an outflow of USD5.2 billion last year. disbursed this year, while another THB60 billion is The large inflows so far and expected inflows in the expected to be disbursed next year. This would raise foreseeable future will put pressure on the baht to public investment growth in real terms to 15 percent appreciate. The Bank of Thailand continues to closely in 2013 from around 6 percent in 2012. Should the monitor and smooth exchange rate volatilities. The government borrow THB350 billion by June 2013 baht has appreciated from THB31.2 to the USD in as stipulated in the Emergency Decree, public debt December 2011 to THB30.7 in October this year, could rise from 45 percent as of August this year to while the real effective exchange rate (REER) close to 50 percent next year. appreciated by 1.4 percent. Outlook and Emerging Challenges 66 Public debt includes central government debt and debts of state-owned enterprises which are guaranteed and non-guaranteed by the central In 2013, the Thai economy should continue to grow government. It also includes FIDF debt since the East Asian Crisis (around 10 percent of total public debt). by 5 percent as it fully recovers from the impact of world bank east asia and pacific economic update 2012, vol.2 Country Pages and Key Indicators  |  101 the severe floods. Manufacturing production next impact on the fiscal stance will need to be monitored year will be able to operate at full capacity for the as it will be realized only when the Government sells entire year in 2013 compared to this year when it stocks. production only fully recovered in the third quarter. Exports growth could accelerate but only slightly Similarly, the impact of the increase in the minimum due to the sight improvement in the global economy wages on employment and firms will need to be and world trade. However, import growth will monitored as minimum wages rise to THB300 decelerate as imports of machineries as part of flood per day nation-wide next year. On April 1, 2012, rehabilitation has been mostly completed this year. minimum wages have been raised to THB300 per Hence, foreign demand will post a positive growth in day in only Bangkok and 5 vicinity provinces of 2013 compared to a negative on this year. Bangkok plus Phuket province; it was raised by 40 percent in the rest of the country. On January, Domestic demand will continue to grow in 2013. 2013, the THB300 per day will apply nation-wide. Household consumption will continued to be This represents an additional nation-wide, average supported by the Government’s consumption/ increase of 22.4. The impact on firm’s operation and income stimulating policies such as the paddy employment so far has not been large as most firms pledging program for rice farmers. Public investments were already paying a daily rate plus benefits which will also see a pickup in 2013 as implementation is similar to the minimum wages announced on April of the water management projects which was 1st. However, the impacts vary across sectors with initiated in 2012 begins. This includes an additional firms in sectors that employ low-skill worker, such amount of THB350 billion (USD11.7 billion) which is as construction, being affect most. Further impacts off-budget. Private investment growth will remain will need to be closely monitored when the new respectable as greater foreign direct investments minimum wages take effect next year. will enter Thailand as seen by the increased Board of Investment applications and approvals over the last 2 years and the historically high inflows of FDI funds this year. These growths will continue to be in a low inflation environment. Over the next year or so, the impact of the paddy pledging scheme will need to be assessed. Thailand’s paddy pledging scheme has been expanded to cover all rice production since October 2011. The pledged price is set at around 50 percent above market price or around USD200 above international rice prices per metric ton of white rice. This scheme has cost the government around THB376 billion (USD12 billion) for the 2011/2012 harvest season (October 2011-September 2012) or around 3.4 percent of GDP . The Government is expected to use almost THB440 billion (USD 14.7 billion) or around 3.7 percent of GDP for the 2012/2013 harvest season as the pledged amount is expected to rise from 21.8 million metric tons last year to 25 million this year. The Government has not sold its stock so far. The actual losses from the program and the Remaining Resilient 102  |  Country Pages and Key Indicators Key Indicators Thailand:  2010 2011 2012f 2013f 2014f 2011 2012 2012 Year Year Year Year Year Q4 Q1 Q2 Q3 Jul Aug Sep Oct Output, Employment and Prices Real GDP (% change y-y) 7.8 0.1 4.7 5.0 4.5 -9.0 0.4 4.2 4.5 .. .. .. .. Domestic demand (% change y-y) 10.3 1.0 7.9 5.1 4.7 -3.1 6.9 10.1 4.6 .. .. .. .. Industrial production index 190.0 172.6 177.8 184.0 189.5 125.1 174.9 178.9 175.6 178.7 174.4 173.4 173.9 (2000=100) 1/ (% change y-y) 14.4 -9.3 3.0 3.5 3.0 -34.2 -6.8 -1.5 -10.2 -5.5 -11.2 -15.9 36.1 Unemployment (%) 1.0 0.7 0.8 0.8 0.8 0.6 0.7 0.9 0.6 0.6 0.6 0.6 .. Real wages (% change y-y) 2/ 3.3 7.2 .. .. .. 8.0 8.8 14.5 10.3 7.7 5.0 .. .. Consumer price index 3.3 3.8 3.0 2.8 2.8 4.0 3.4 2.5 2.9 2.7 2.7 3.4 3.3 (% change y-y) Public Sector Government revenues (% GDP) 3/ 16.9 18.0 17.7 17.6 .. 16.5 14.5 22.4 18.9 13.4 16.4 26.9 16.1 Government expenditures (% GDP) 17 .7 20.7 20.5 20.1 .. 20.0 27.9 16.4 19.0 18.9 16.8 23.9 33.4 Government balance (% GDP) 4/ -1.0 -1.0 -2.7 -2.5 .. -10.5 -10.1 7.5 0.8 -5.0 0.7 6.8 -1.5 Public sector debt (% GDP) 5/ 41.9 42.2 44.8 47 .5 .. 40.8 39.9 42.8 44.1 43.8 45.0 44.1 44.1 Foreign Trade, BOP and External Debt Trade balance (billions US$) 6/ 31.8 17.0 8.6 7.9 8.0 -0.7 1.2 1.5 5.0 0.5 1.5 3.0 -0.1 Exports of goods (billions US$) 7/ 193.7 219.1 227.0 239.5 258.0 47.7 53.8 56.7 59.3 19.2 19.6 20.5 19.1 (% change y-y) 28.4 13.1 3.6 5.5 7.7 -5.2 -3.9 -1.1 -6.3 -3.9 -5.1 -0.1 14.4 Key export (% change y-y) 8/ 20.9 -2.5 .. .. .. -29.0 -8.3 3.8 -14.7 -14.9 -14.5 -14.7 16.7 Imports of goods (billions US$) 9/ 161.9 202.1 218.4 231.5 250.0 48.4 52.6 55.2 54.3 18.8 18.0 17 .5 19.3 (% change y-y) 37 .0 24.9 8.1 6.0 8.0 12.2 9.6 10.3 -2.4 13.3 -11.0 -7.2 21.2 Current account balance 10.0 5.9 0.6 -1.1 -1.5 0.4 1.4 -2.4 2.7 0.1 0.9 1.8 -0.2 (billions US$) 6/ (% GDP) 3.1 1.7 0.2 -0.3 -0.4 0.6 1.6 -2.7 3.1 .. .. .. .. Foreign direct investment 9.1 7.8 7.0 .. .. 1.9 2.5 1.8 1.7 0.8 1.0 -0.1 1.9 (billions US$) 10/ External debt (billions US$) 11/ 100.6 104.6 .. .. .. 104.6 116.9 119.9 127.3 122.5 123.9 127.3 129.4 (% GDP) 31.6 30.3 .. .. .. 30.3 32.4 33.2 35.3 34.0 34.3 35.3 35.9 Short-term debt (billions US$) 11/ 50.7 47.3 .. .. .. 47.3 57.5 58.9 59.2 59.4 59.5 59.2 59.9 Debt service ratio 4.7 3.4 .. .. .. 3.8 4.6 3.3 .. .. .. .. .. (% exports of g&s) Foreign exchange reserves, 172.1 175.1 183.3 .. .. 175.1 179.2 174.7 183.6 175.4 179.2 183.6 181.4 gross (billions US$) 6/ (months of imports of g&s) 12.8 10.4 10.1 .. .. 8.7 9.9 9.7 10.2 9.7 9.9 10.5 9.4 Financial Markets Domestic credit (% change y-y) 12/ 13.4 16.2 .. .. .. 16.2 15.5 16.1 15.7 16.5 16.0 15.7 15.2 Short-term interest rate 1.5 3.0 3.0 .. .. 3.3 3.0 3.0 3.0 3.0 3.0 3.0 2.8 (% p.a.) 13/ Exchange rate (Baht/US$, ave) 31.7 30.5 31.0 .. .. 31.0 31.0 31.3 31.4 31.7 31.4 31.0 30.7 Real effective exchange rate 105.3 100.9 .. .. .. 100.9 102.5 102.0 102.4 101.9 102.0 102.4 103.1 (2000=100) 14/ (% change y-y) 7.8 -4.1 .. .. .. -4.1 0.4 0.6 0.5 0.0 -0.3 0.5 2.1 Stock market index 1,033 1,025 .. .. .. 1,025 1,197 1,172 1,299 1,199 1,227 1,299 1,299 (Dec. 1996=100) 15/ Memo: Nominal GDP (billions US$) 318.7 345.7 360.9 397.4 424.0 79.1 90.3 89.8 89.3 .. .. .. .. Source: National data sources, World Bank staff estimates. f = forecast 8/ Electronics 1/ Manufacturing Production Index 9/ Import figures readjusted to comply with HS2012 2/ Average wage of employed person, using the National Statistical Office Labor Force Survey, 10/ Net FDI of all sectors. Bank of Thailand data, using BPM6. deflated by CPI inflation 11/ Bank of Thailand data 3/ Refers to central government only. Fiscal Policy Office data. 12/ Private credits from domestically registered commercial banks, branches of foreign 4/ Cash balance of central government before financing banks, international banking facilities, finance companies, specialized banks, thrift and credit 5/ Includes domestic central government (CG) debt, domestic debt of non-financial state cooperatives, and money market mutual funds. enterprises, and the Financial Institutions Development Fund (FIDF) debt. The 2013 forecast is 13/ One-day repurchase rate, average based on the Public Debt Management Office’s 2013 Plan. 14/ Bank of Thailand data 6/ Revised from BPM5 to BPM6 15/ Bangkok SET 7/ Export figures readjusted to comply with HS2012 world bank east asia and pacific economic update 2012, vol.2 Country Pages and Key Indicators  |  103 Timor-Leste motorcycle and car purchases, remain flat in 2012 relative to 2011. In addition, slower than expected government spending in the last two months of the financial year, as the new government finds its feet, may dampen growth. Estimates suggest that the UN mission’s direct contribution to total 2011 GDP (oil and nonoil) was around 1 percent, which is equivalent to 4.4 percent of nonoil GDP . Four-fifths of this contribution is local payments to international staff. The UN drawdown is, therefore, estimated to have a limited overall economic impact. However, the government should remain alert to specific risks. For Population 1.2 million instance, not all East Timorese staff being released, Population growth 2.9 percent in particular security guards may find alternative GDP (PPP , int’l US$ billions)* 1.9 GDP per capita (PPP , int’l US$)** 1,588 employment, and demand for accommodation and Surface area 14,870 sq. km. leisure services may decline. Capital Dili Source: World Development Indicators. *The equivalent in 2011 non-oil GDP at current market prices is US$ 1.054 billion. **The equivalent in 2011 non-oil GDP per capita at The government recently published its National current market prices is US$ 893. Accounts for 2004–10, the second release in the country’s history, with plans for annual releases henceforth. The National Accounts confirm the Recent Economic Developments dominance of the oil sector in Timor-Leste’s economy. The sector represented $3.367 billion, Parliamentary elections were held on July 7 , 2012. or 79 percent, of total GDP in 2010. The National Xanana Gusmao was re-elected as Prime Minister Accounts also show that government expenditure and formed the Fifth Constitutional Government of (final consumption and gross fixed capital formation) Timor-Leste with a majority coalition of incumbent contributed 7 percentage points of the 9.5 percent parties CNRT and PD and newcomers F-Mudanca. nonoil growth in 2010, emphasizing the importance The new government’s five-year Policy Program of maintaining a high quality of public spending for provides continuity to the previous government’s sustained growth. 2011–30 Strategic Development Plan, emphasizing public investment in agriculture, tourism, and a downstream petro-chemical industry. The United Fiscal Nations (UN) is on track to complete the withdrawal of its integrated mission by the end of 2012. The 2012 nonoil fiscal deficit is projected to be roughly 123 percent of nonoil GDP , although may improve if end-year government expenditures do Growth not keep pace with previous years. At the end of October, just 52 percent of the $1.674 billion budget Nonoil gross domestic product (GDP), the preferred had been executed, compared with 59 percent measure of economic activity in Timor-Leste, is in October 2011. This is largely because of a low forecast to grow by 10 percent in 2012 relative execution rate for capital spending (34 percent at to 10.6 percent in 2011. On the upside, there is the end of October). Capital spending constitutes evidence of a bumper maize and rice crop this year. On the downside, proxies for economic activity, such as total electricity consumption and 67 All dollar amounts are U.S. dollars unless otherwise indicated. Remaining Resilient 104  |  Country Pages and Key Indicators half the total budget and is managed through the of the year (food constitutes 60 percent of the CPI infrastructure fund. basket and imported food represents just over half of household food consumption). The government The 2012 budget includes $136 million of domestic is raising its full year 2012 inflation forecast from revenues, representing 9 percent of nonoil GDP , and 8 percent. Further upside risks include recent rises 6.6 percent of the budget. By the end of October, in global food prices, high global oil prices, and 81 percent of this had been collected, compared further depreciation of the U.S. dollar (Timor-Leste’s with 78 percent at the same time last year. In currency) against the Singapore and Australian dollar. addition, by August the government had drawn However, this could be partially offset by continued down $795 million in revenues from the Petroleum appreciation of the U.S. dollar against the Indonesian Fund, $130 million more than its full year estimated Rupiah, and lower than anticipated second half 2012 sustainable income (ESI, computed as 3 percent public spending. of the nation’s estimated Petroleum Wealth) and nearly double the amount drawn down at the same Credit growth to the private sector is accelerating, but time last year. Petroleum revenues flowing into the access to finance remains a constraint to economic Petroleum Fund are on track to exceed the estimated growth in Timor-Leste. Credit grew 18.6 percent in $2.1 billion for the year, with just over $2.0 billion in the first three quarters of 2012 to $155.8 million, receipts recorded by the end of August alone. This compared with 18.5 percent growth for the full over-performance will lift the fiscal surplus (including year 2011. But credit is growing from a low level of petroleum revenues) above the 44 percent of nonoil 12.5 percent of nonoil GDP in 2011, constrained by GDP forecast for 2012. limited lending opportunities and a lack of collateral given uncertainty around land tenure, as well as The Parliament in October debated and approved a anecdotal evidence of commercial bank risk aversion rectification budget to accommodate the restructured and comfortable profit margins. Deposit rates were government, including new ministries, but without 0.6 percent in September, the same as in in January, expanding the FY12 budget. A total of $54 million in although spreads have widened with lending rates unspent allocations ($50 million capital budget from (6 month LIBOR plus Spread) passing 12.3 percent the $168 million allocated to the Tasi Mane South in September. The Construction and Transport and Coast Development and $4 million from funds for Communication sectors together absorb just under installation of electricity meters) were used, among half of private sector credit, and individual borrowers others, to make one-off corrections to veterans’ account for nearly 40 percent. Nonperforming loans pensions ($26.9 million added to $80.4 million) and (NPLs), the majority of which are a legacy from the old age pensions ($7 .1 million added to $35.9 million). period around the 2006/2007 security crisis, continue Early indications from the Ministry of Finance are to decline, reaching 31 percent in September, from that the FY13 budget will be very close to the FY11 36 percent at the end of 2011. Loan loss provisions budget of $1.3 billion. The approval of the FY13 were $62.7 million, or 129 percent of the value of budget is now likely to slip into early 2013. NPLs, effectively mitigating systemic risk to the banking system. Inflation and Financial Sector Issues External Balance Inflation fell from a peak of 17 .7 percent in January 2012 (headline inflation is consumer price index Official trade data at the end of June 2012 suggests [CPI] in Dili) to 10 percent in March, before gradually a first half trade deficit of $197 million based on climbing to 11.5 percent in October. The moderation imports of $209 million and exports of $11 million, in international food prices helped in the first half and compared with a full year projected deficit world bank east asia and pacific economic update 2012, vol.2 Country Pages and Key Indicators  |  105 of $795 million. Coffee, which dominates Timor- global commodity prices, and occasional import Leste’s exports, is projected to reach $30 million of supply bottlenecks have led to high and volatile $33 million total merchandise exports in 2012. First inflation. Although two fuel shortages in the last half coffee exports were similar to 2011 volumes of six months were quickly resolved, together they 700 tons. However, in value terms exports receipts raised fuel prices by roughly 15 percent. Despite will be lower owing to the roughly 35 percent year ample generation capacity, power outages are again on year decline in Arabica prices. observed to be affecting the capital Dili. Electricity transmission infrastructure needs to be further Petroleum revenues are recorded as income in strengthened to reduce outages, which tend to raise the current account. This helps transform a 2012 the cost of production and service delivery. projected trade deficit of 63 percent of non-oil GDP into a projected current account surplus of 142 percent of non-oil GDP . The anticipated over performance on petroleum revenues and lower than expected merchandise imports could lead to a higher than projected current account surplus in 2012. The Petroleum Fund, Timor-Leste’s sovereign wealth fund, was worth $10.8 billion at the end of August 2012, compared with an end 2011 value of $9.3 billion, or nearly nine times nonoil GDP . At the end of September, official reserves were $538 million, or 15 months of 2012 imports. Adding the Petroleum Fund increases this to roughly 325 months of cover. Outlook and Emerging Challenges There has been recent, and widely reported, jostling between the government and two major oil companies involved in developing Timor-Leste’s present petroleum fields over allegedly unpaid production taxes. This has brought attention, and also some uncertainty, to the ongoing discussions about the development of the Greater Sunrise field in the Timor Sea. Prudently, Timor-Leste’s current economic development plans, and estimated financing from the Petroleum Fund, are only based on fields currently under production. However, uncertainty of this nature and the sensitivity of finite petroleum revenues to global oil prices, reinforce the need to pay attention to fiscal sustainability and value for money in public spending. Rapid growth in aggregate demand, combined with limited local productive capacity, fluctuating Remaining Resilient 106  |  Country Pages and Key Indicators  ey Indicators Timor-Leste: K 2010 2011 2012f 2013f 2014f Year Year Year Year Year Output, Employment and Prices Real non-oil GDP (% change y-y) 9.5 10.6 10.0 10.0 10.0 Consumer price index (% change y-y, annual average) 6.8 13.1 8.0 8.0 8.0 Public Sector Government revenues (% GDP) 75.2 68.1 54.6 68.1 62.3 Government expenditures (% GDP) 24.8 30.3 43.3 37.0 39.3 Government balance (% GDP) 50.4 37.8 11.3 31.1 23 Non-oil government balance (% GDP) -22.2 -25.4 -31.4 -33.2 -34.9 Non-oil government balance (% non-oil GDP) -81.1 -113.6 -130.0 -92.8 -82.7 Public sector debt (% GDP) /1 0.0 0.0 1.1 3.0 4.9 Foreign Trade, BOP and External Debt Trade balance (millions US$) -374 -667 -796 -861 -909 Exports of goods (millions US$) 18 22 33 29 43 (% change y-y) 100 22 50 -12 48 Imports of goods (millions US$) 392 689 829 890 952 (% change y-y) 1.8 75.8 20.3 7.4 7.0 Current account balance (millions US$) 1,538 2,375 1,773 1,506 1,158.0 (% GDP) 48.1 55.0 43.5 36.2 27.6 Foreign direct investment (millions US$) 5 46 55 64 75.0 External debt (millions US$) 0 0 43 123.0 204.0 (% GDP) 0.0 0.0 1.1 3.0 4.9 Debt service ratio (% exports of g&s) 0.0 0 0.0 0.0 0.1 Public foreign assets, gross (millions US$) 2/ 7,310 9,743 11,487 13,013 14,202 Foreign exchange reserves, gross (millions US$) 406 405 565 716 862 (months of imports of g&s) 21.8 28.6 40.8 48.8 57.8 Financial Markets Domestic credit (% change y-y) 5.9 23.6 .. .. .. Short-term interest rate (% p.a.) 11.10 .. .. .. .. Real effective exchange rate (2000=100) (period average) 102.3 103.9 .. .. .. (% change y-y) -2.7 1.6 .. .. .. Memorandum items: Memo: Nominal GDP (millions US$) 3,199 4,315 4,073 4,161 4,190 Source: National data sources, IMF, and World Bank staff estimates. e = estimate f = forecast 1/ External debt 2/ Central bank foreign exchange reserves + Petroleum Fund balance world bank east asia and pacific economic update 2012, vol.2 Country Pages and Key Indicators  |  107 Vietnam help mainly domestic small and medium enterprises (SME; Resolution 13), after sluggish GDP growth of 4 percent in the first quarter. Growth subsequently picked up at 4.7 percent in the second quarter and 5.4 percent in the third, raising real GDP growth to 4.7 percent for the January to September 2012 period. The World Bank expects the economy to grow at 5.2 percent in 2012, which is the slowest growth rate Vietnam has experienced in a decade. Current Inflation Cycle Reaches its Trough Population 87.8 million Population growth 1.0 percent The year-on-year headline inflation fell from GDP (PPP , int’l US$ billions) 301.7 GDP per capita (PPP , int’l US$) 3,435 23 percent in August 2011 to 5 percent in August Surface area 329,310 sq.km. 2012. This was due to a fall in the price of food and Capital Hanoi foodstuff from 34 percent to 2 percent over the same Source: World Development Indicators. period, and to tighter fiscal and monetary policies until earlier this year. Prices in September jumped 2.2 percent, primarily on account of higher prices Summary of medicine, health-care services, and petroleum products. Another factor was the cost of educational Tightened monetary and fiscal policies in 2011 have services, which increased due to higher back-to helped restore macroeconomic stability. Inflation has school spending. Year-on-year inflation stood at fallen significantly, but the economy has also slowed 7 percent in October 2012, signaling that inflation had down. In response, the government has lowered key bottomed out at 5 percent in August 2012, and will policy rates and introduced tax relief measures. But be on an upward trajectory until the first quarter of the supply side response has been muted because 2013. Inflationary pressures may reemerge through domestic firms are highly leveraged and credit the lagged effects of accommodative policies and growth has fallen sharply. Export-oriented foreign heightened global food and oil prices. enterprises are performing well, but a prolonged global growth slowdown could adversely affect exports over the medium-term. Moreover, there is Export Sector Continues to Perform Well slow progress on structural challenges (state-owned enterprise [SOEs], banks, and public investment), Vietnam’s external balance position remains strong. which heightens Vietnam’s vulnerability to shocks. Total export turnover between January and October 2012 is estimated at $93.568 billion, rising 18.4 percent from the same period last year. Export-oriented Recent Economic Developments foreign enterprises have performed well relative to the sluggish domestic enterprise sector. This is Stabilization measures and an unfavorable external partly because stabilization policies have affected environment have led to slower growth 2012. In domestic enterprises more, and partly because of response, the State Bank of Vietnam (SBV) cut recent coming on stream of production capacity interest rates by 500 basis points between March and July 2012. In addition, the government in May 2012 introduced a number of tax relief measures to 68 All dollar amounts are U.S. dollars unless otherwise indicated. Remaining Resilient 108  |  Country Pages and Key Indicators in a number of foreign enterprises predominantly higher than what was budgeted, and tax collections in electronics—this situation causes domestic may increase in the last quarter as the economy enterprises, particularly SOEs, to lose market gathers pace. The preliminary estimates for the 2013 share. Total imports are estimated at $93.8 billion, Budget show efforts to bring the fiscal deficit down up 6.8 percent year on year. The trade balance to 3.8 percent of GDP , including a possible small has improved, which could contribute to a current reduction in on-budget capital expenditure. account surplus this year. International reserves have built up from less than seven weeks of import cover (at the end of 2011) to about 10 weeks (June Structural Challenges are 2012), which amounts to roughly $20 billion. a Drag on the Economy Vietnam’s slower growth in recent years (average Monetary Policy has Loosened 6.1 percent in 2008–11 compared to 8.3 percent and Exchange Remains Stable in 2003–07) is due to falling productivity growth resulting from a slow pace of structural reforms. The SBV has cut key policy rates by 500 basis Inefficiencies in SOEs, banks, and public investments points between March and July 2012. However, as are a drag on Vietnam’s long-term growth potential. of mid September, total credit has grown by only The government has prioritized reforms in these 2.35 percent since the beginning of the year, which areas, but progress needs to accelerate. There are is considerably lower than the 15 percent target for concerns over the health of the financial sector. 2012. At the same time the loan to deposit ratio Nonperforming Loans (NPLs) are officially reported has gone from 100–120 percent between 2009 and to be around 8.6 percent of total loans outstanding 2011, to 90 percent in July 2012. The exchange rate but in reality could be much higher. This is closely has been stable since the beginning of 2012. The linked to the banking system’s exposure to poorly reference rate on the VND has remained the same performing SOEs. There is an urgent need to clean at VND 20,828 per U.S. dollar for nearly a year. The up banks’ balance sheets to avoid further escalation demand for foreign currencies may rise in the last of costs. quarter to repay loans and pay import bills. But these pressures are likely to be limited in 2012 because of slower growth. Banking Sector and SOE Reforms Could Unlock Growth Potential Slower Domestic Revenue Collection The government in March adopted a decision to deal in the First Nine Months of 2012 with weak banks, setting out targets to reduce NPLs and increase provisioning. Under this decision, the A combination of economic slowdown and tax government is pursuing several options, including relief for enterprises has contributed to lower than the following: acquisition of weak banks’ equity by expected domestic revenues in the first nine months the SBV for eventual divestiture; allowing increased of 2012. Revenues have declined 0.6 percent in foreign ownership of domestic banks; incentives for nominal terms compared to the same period last State-Owned Commercial Banks (SOCBs) and joint year. Government expenditure in the first nine stock commercial banks to purchase weak banks’ months of 2012 has remained on track. Discipline assets; and selling off bad debts. In parallel to this, over capital expenditure has been maintained. The the government plans to significantly strengthen overall impact on the government’s 2012 fiscal banking sector supervision by introducing new deficit target is still uncertain though may increase regulatory measures. This is the most concerted to around 5.2 percent of GDP . Oil revenue will be effort to date in trying to address banking sector world bank east asia and pacific economic update 2012, vol.2 Country Pages and Key Indicators  |  109 challenges. But implementation will be a challenge, including absorption of fiscal costs from potential bank recapitalization. In July 2012, the government adopted a decision to restructure Economic Groups (EGs) and General Corporations (GCs), which are the largest state enterprises in Vietnam. EGs and GCs are preparing restructuring plans to accelerate equitization (that is, diversifying ownership, attracting strategic investors, and promoting capital market development), strengthen corporate governance, and better monitor performance of and fiscal risks from state enterprises. The government is also introducing new measures to help strengthen regulation and oversight of state enterprises. There has been some progress. As of mid-October, around 53 EGs and GCs have prepared restructuring plans, 26 of which the government has approved. In October 2012, the Prime Minister ended the pilot of two out of twelve EGs: the Vietnam Industry Construction Group and the Housing Urban Development Group. These are welcome, although the restructuring plans are likely to require further work, and the slowdown in domestic and foreign investments will make it difficult to meet equitization targets. Outlook and Emerging Challenges The worsening global economy and limited policy space to maneuver domestically could jeopardize the macroeconomic stabilization gains achieved in 2012. There is an increasing degree of uncertainty in the financial markets about the state of the economy and policy directions. This uncertainty will require a delicate balancing of growth and stability objectives even during this economic downturn. Without credible restructuring of SOEs and banks, the upside growth potential will remain highly limited. Remaining Resilient 110  |  Country Pages and Key Indicators  ey Indicators Vietnam: K 2010 2011e 2012f 2013f 2014f Year Year Year Year Year Output, Employment and Prices Real GDP (% change y-y) 6.8 5.9 5.2 5.5 5.7 Domestic demand (% change y-y) 10.3 -0.5 3.3 4.4 5.0 Industrial production index 1/ (% change y-y) 9.3 6.8 5.5 6.0 6.5 Unemployment (%) 2/ 4.3 3.6 4.0 4.0 4.0 Consumer price index (% change y-y) 9.2 18.6 9.0 8.5 7.3 Public Sector Government revenues (% GDP) 29.6 27 .7 26.1 25.4 25.5 Government expenditures (% GDP) 32.7 30.9 31.3 29.2 29.1 Government balance, official (% GDP) 3/ -0.7 -1.5 -3.7 -2.3 -2.0 Government balance, general (% GDP) 4/ -3.1 -3.2 -5.2 -3.8 -3.5 Public sector debt (% GDP) 5/ 54.0 55.4 53.7 53.3 53.1 Foreign Trade, BOP and External Debt Trade balance (billions US$) -5.1 -0.5 6.4 5.8 5.7 Exports of goods (billions US$) 72.2 96.9 113.4 129.5 149.2 (% change y-y) 26.4 34.2 17.0 14.2 15.3 Key export (% change y-y) 6/ -23.0 45.9 15.0 5.0 5.0 Imports of goods (billions US$) 84.8 106.7 116.3 134.4 156.0 (% change y-y) 21.2 25.9 9.0 15.5 16.1 Current account balance (billions US$) -4.3 0.2 3.7 1.9 1.4 (% GDP) -4.1 0.2 2.7 1.3 0.9 Foreign direct investment (billions US$) 7.1 7.1 7.2 7.3 7.5 External debt (billions US$) 5/ 45.4 50.1 54.7 59.8 63.5 (% GDP) 43.8 40.8 40.2 39.8 38.6 Debt service ratio (% exports of g&s) 3.3 2.8 3.4 3.7 3.1 Foreign exchange reserves, gross (billions US$) 12.4 13.6 .. .. .. (months of imports of g&s) 1.8 1.5 .. .. .. Financial Markets Domestic credit (% change y-y) 32.4 14.3 6.0 12.0 15.0 Short-term interest rate (% p.a.) 7/ 11.6 14.9 9.0 .. Exchange rate (Dong/US$, eop) 8/ 19,498 20,828 20,828 .. .. Real effective exchange rate (2000=100) 117.4 122.7 .. .. .. (% change y-y) 1.0 4.5 .. .. .. Stock market index (Jul. 2000=100) 9/ 484.7 351.6 382.1 .. .. Memo: Nominal GDP (billions US$) 103.6 122.7 135.9 150.0 164.6 Sources: Vietnam Government Statistics Office, State Bank of Vietnam, IMF , and World Bank staff estimates. e = estimate f = forecast . 1/ The industrial production index (IPI) is a new series replacing previous “industrial production value in constant 1994 price” 2/ Urban areas 3/ Excludes off-budgetary items 4/ Includes off-budgetary items 5/Public and publicly-guaranteed debt. Forecast by Debt Sustainability Analysis 2012 6/ Crude oil (value) 7/ Three-month deposit, end-of-period. Data for 2012 is as of December 4. 8/ Central Bank’s interbank exchange rate. Data for 2012 is as of December 4. 9/ Ho Chi Minh Stock Index. Data for 2012 is as of December 4. world bank east asia and pacific economic update 2012, vol.2   |  111 Appendix Tables Remaining Resilient 112  | Appendix Tables Appendix Table 1. Real GDP Growth - % Change Year Ago percent change from a year earlier Hong Kong Korea, Taiwan, China Indonesia Malaysia Philippines Thailand Vietnam SAR, Singapore East Asia China Rep. China Q1-2007 14.0 6.1 5.2 6.3 4.6 7.7 5.9 4.5 8.1 4.5 6.6 Q2-2007 13.8 6.7 5.9 7.6 4.6 7.8 6.2 5.3 9.7 5.7 9.9 Q3-2007 13.4 6.7 6.4 6.3 5.5 8.2 6.7 4.9 11.0 7.1 9.9 Q4-2007 12.1 5.8 7.6 6.3 5.4 8.5 7.0 5.7 6.7 6.5 9.2 Q1-2008 11.3 6.2 7.6 4.0 6.3 7.5 7.0 5.5 8.1 7.5 9.0 Q2-2008 10.1 6.3 6.6 4.3 5.2 6.5 4.0 4.4 3.2 5.7 7.6 Q3-2008 9.0 6.3 5.1 5.3 3.1 6.3 0.9 3.3 -0.3 -1.2 5.9 Q4-2008 6.8 5.3 0.3 3.1 -4.1 6.2 -2.7 -3.3 -3.7 -7.5 2.4 Q1-2009 6.6 4.5 -5.8 1.0 -7.0 3.1 -7.8 -4.2 -8.8 -8.1 1.5 Q2-2009 8.1 4.1 -3.7 1.6 -5.2 3.9 -3.1 -2.1 -2.0 -6.6 3.3 Q3-2009 9.6 4.3 -1.1 0.5 -2.8 4.6 -1.7 1.0 1.9 -1.4 5.3 Q4-2009 10.7 5.6 4.5 1.4 5.9 5.5 2.5 6.3 5.3 8.8 8.4 Q1-2010 12.1 5.9 10.1 8.4 12.0 5.9 7.9 8.7 16.5 13.1 11.1 Q2-2010 10.3 6.3 9.0 8.9 9.2 6.2 6.4 7.6 19.8 12.9 9.8 Q3-2010 9.6 5.8 5.2 7 .3 6.6 6.6 6.6 4.5 10.6 11.6 8.4 Q4-2010 9.8 6.8 4.8 6.1 3.8 6.8 6.4 4.9 12.5 6.2 8.1 Q1-2011 9.8 6.4 5.0 4.9 3.2 5.6 7.8 4.2 9.1 7.4 8.0 Q2-2011 9.5 6.5 4.3 3.6 2.7 5.6 5.1 3.5 1.2 4.6 7 .1 Q3-2011 9.1 6.5 5.7 3.2 3.7 5.8 4.3 3.6 6.0 3.5 7 .0 Q4-2011 8.9 6.5 5.2 4.0 -8.9 5.9 2.8 3.3 3.6 1.2 6.1 Q1-2012 8.1 6.3 5.1 6.3 0.4 4.0 0.7 2.8 1.6 0.6 5.7 Q2-2012 7.6 6.4 5.6 6.0 4.4 4.4 1.2 2.3 2.5 -0.1 5.4 Q3-2012 7.4 6.2 5.2 7.1 3.0 4.8 1.3 1.6 0.3 1.0 5.2 Source: Haver Analytics and national sources. Quarterly data for China uses annual production side GDP data. Quarterly data for Vietnam are year-to-date. world bank east asia and pacific economic update 2012, vol.2 Appendix Tables  |  113 Appendix Table 2. Real GDP and Components of Aggregate Demand percent change from a year earlier Hong Kong Korea, Singapore Taiwan, Indonesia Malaysia Philippines Thailand SAR, S.E. Asia NIEs  China Rep. China 2007 6.3 6.3 6.6 5.0 6.5 5.1 8.9 6.0 6.0 5.9 2008 6.0 4.8 4.2 2.5 2.1 2.3 1.7 0.7 4.5 1.8 2009 4.6 -1.5 1.1 -2.3 -2.5 0.3 -1.0 -1.8 1.0 -0.8 2010 6.2 7.2 7.6 7.8 6.8 6.3 14.8 10.8 7.0 8.5 GDP 2011 6.5 5.1 3.9 0.1 4.9 3.6 4.9 4.1 4.2 4.1 Q1-2012 6.3 5.1 6.3 0.4 0.7 2.8 1.6 0.6 4.6 1.7 Q2-2012 6.4 5.6 6.0 4.4 1.2 2.3 2.5 -0.1 5.7 1.5 Q3-2012 6.2 5.2 7.1 3.0 1.3 1.6 0.3 1.0 5.4 1.3 2007 5.0 10.4 4.6 1.8 8.6 5.1 6.8 2.1 5.2 4.9 2008 5.3 8.7 3.7 2.9 1.9 1.3 3.3 -0.9 5.1 1.0 2009 4.9 0.6 2.3 -1.1 0.8 0.0 0.1 0.8 2.1 0.3 Private 2010 4.7 6.6 3.4 4.8 6.3 4.4 6.5 4.0 4.9 4.8 Consumption 2011 4.7 7.1 6.3 1.3 8.2 2.3 4.1 3.1 4.7 3.6 Q1-2012 4.9 7.4 5.1 2.9 6.4 1.6 4.4 1.9 5.0 2.8 Q2-2012 5.2 8.8 5.9 5.3 3.1 1.1 1.7 1.6 6.1 1.7 Q3-2012 5.7 8.5 6.2 6.0 2.8 1.5 1.1 0.9 6.4 1.6 2007 9.3 10.4 5.2 1.5 3.2 4.2 17 .4 0.6 6.8 4.2 2008 11.9 2.4 3.2 1.2 1.4 -1.9 13.0 -12.4 5.6 -2.9 2009 3.3 -2.7 -1.7 -9.2 -3.5 -1.0 -2.9 -11.2 -1.9 -4.4 2010 8.5 10.4 19.1 9.4 7.4 5.8 7.0 24.0 10.9 11.3 Fixed Investment 2011 8.8 6.5 0.2 3.3 7.5 -1.1 3.3 -3.9 5.5 -0.2 Q1-2012 10.0 16.2 3.9 5.2 12.6 4.6 18.5 -10.2 9.0 3.0 Q2-2012 12.3 26.1 11.8 10.2 5.7 -2.1 4.9 -7.7 14.5 -1.8 Q3-2012 10.0 22.7 8.7 15.5 8.7 -2.0 -0.9 -0.5 13.7 0.1 2007 8.5 3.8 6.7 7.8 8.3 12.6 15.4 9.6 7.1 11.4 2008 9.5 1.6 -2.7 5.1 2.5 6.6 -26.7 0.9 4.6 1.3 2009 -9.7 -10.9 -7.8 -12.5 -10.2 -1.2 24.2 -8.7 -10.3 -2.3 Exports of Goods 2010 15.3 11.3 21.0 14.7 16.8 14.7 39.7 25.7 15.3 20.5 & Services 2011 13.6 4.2 -4.2 11.1 4.1 9.5 3.4 4.5 8.0 6.7 Q1-2012 7.9 2.8 10.9 -3.2 -3.5 4.7 -11.8 -3.4 4.7 -0.4 Q2-2012 2.2 2.1 8.3 1.1 0.4 3.2 -1.7 -2.5 3.0 0.7 Q3-2012 -2.8 -3.0 6.9 -2.8 3.1 2.6 -8.5 1.8 -1.1 1.4 Source: Haver Analytics, national data sources, and World Bank staff estimates. Regional averages are 2000 US$ GDP weighted. Remaining Resilient 114  | Appendix Tables Appendix Table 3a. East Asia - Merchandise Export Growth in U.S. dollars, percent change from a year earlier 2007 2008 2009 2010 2011 Q4 2011 Q1 2012 Q2 2012 Q3 2012 Jul-12 Aug-12 Sep-12 Oct-12 East Asia (10) 17.0 13.6 -16.2 29.7 17 .8 9.8 4.7 4.3 0.3 -2.7 -2.3 6.2 .. China 25.7 17 .4 -15.9 31.3 20.3 20.1 6.8 6.6 1.4 1.0 2.7 9.9 11.6 S.E. Asia 13.8 15.3 -16.8 29.2 18.5 11.5 7.0 7.8 2.0 -3.7 -9.7 2.0 .. Indonesia 13.2 20.1 -15.0 35.5 28.7 8.7 6.9 -9.0 -14.1 -7.6 -24.7 -9.4 -7.6 Malaysia 9.5 13.4 -21.2 26.3 14.9 8.6 3.5 -0.4 -4.6 -7.9 -8.6 2.8 .. Philippines 7.1 -2.7 -21.7 34.0 -6.5 -17.5 5.4 10.5 6.2 6.0 -9.0 22.8 .. Thailand 18.6 15.5 -14.3 26.8 15.1 -6.1 -1.4 2.0 -3.8 -4.5 -7.0 0.2 15.6 Vietnam 25.0 29.2 -10.1 26.9 32.9 29.3 28.3 23.4 13.1 9.3 11.5 19.4 23.0 NIEs 10.9 9.3 -16.2 28.3 14.7 7.1 1.3 -1.3 -2.6 -6.6 -4.5 3.7 0.8 Hong Kong 8.8 5.3 -12.2 22.5 9.9 6.7 -1.1 2.0 4.3 -3.1 1.1 15.8 -2.5 SAR, China Korea, Rep. 14.1 13.6 -13.9 28.3 19.0 9.0 3.0 -1.6 -5.7 -8.8 -6.2 -2.0 1.1 Singapore 10.1 12.9 -20.2 30.5 16.4 7.1 5.9 -0.6 -5.8 -3.3 -9.0 -4.8 5.9 Taiwan, 10.3 3.7 -20.5 35.0 11.6 3.7 -4.5 -6.0 -2.4 -11.9 -3.8 10.1 -1.8 China Source: Haver Analytics Appendix Table 3b. East Asia - Merchandise Import Growth in U.S. dollars, percent change from a year earlier 2007 2008 2009 2010 2011 Q4 2011 Q1 2012 Q2 2012 Q3 2012 Jul-12 Aug-12 Sep-12 Oct-12 East Asia (10) 15.0 18.1 -17.7 34.2 20.9 14.3 6.3 4.0 0.0 2.4 -4.4 2.2 .. China 20.8 18.5 -11.2 38.8 24.9 20.1 6.8 6.6 1.4 4.7 -2.5 2.4 2.4 S.E. Asia 14.0 26.2 -22.2 33.4 22.0 17.9 7.7 7.2 1.3 7.2 -4.3 0.2 .. Indonesia 22.0 73.5 -25.1 40.1 30.8 23.9 17.9 13.2 -2.0 0.9 -8.4 1.2 10.8 Malaysia 12.1 7.0 -20.9 33.0 13.9 5.6 6.4 5.4 3.9 3.5 -1.6 9.9 .. Philippines 7.2 2.2 -24.1 27.4 11.1 3.4 -0.7 2.2 0.8 -0.8 -0.4 3.6 .. Thailand 8.7 28.0 -25.4 36.8 25.1 12.8 10.4 9.2 -1.7 13.7 -8.8 -7.7 21.6 Vietnam 32.2 32.6 -11.3 21.6 24.4 16.2 7.8 9.6 6.8 16.9 6.4 -1.5 11.2 NIEs 11.3 14.7 -21.2 30.3 16.5 9.1 4.2 -0.6 -2.0 -2.2 -6.4 3.0 3.4 Hong Kong 10.0 5.6 -10.6 24.7 11.6 9.1 1.0 2.3 5.0 -1.4 1.4 15.5 3.7 SAR, China Korea, Rep. 15.3 22.0 -25.8 31.6 23.3 13.4 7.7 -2.5 -7.1 -5.4 -9.7 -6.1 1.7 Singapore 10.2 21.5 -23.1 26.5 17.7 11.2 11.6 2.5 -2.9 2.2 -11.2 1.4 9.6 Taiwan, 8.3 9.7 -27.5 44.4 12.0 -1.0 -5.9 -5.9 -3.2 -3.2 -7.6 1.3 -1.7 China Source: Haver Analytics world bank east asia and pacific economic update 2012, vol.2 Appendix Tables  |  115 Appendix Table 4. East Asia and the Pacific: GDP Growth Projections percent change form a year earlier Forecast Forecast Forecast 2007 2008 2009 2010 2011 2012 2013 2014 East Asia 10.1 6.3 4.9 9.3 7.1 5.8 6.6 6.6 Developing East Asia 12.3 8.5 7.5 9.7 8.3 7.5 7.9 7.6 China 14.2 9.6 9.2 10.4 9.3 7.9 8.4 8.0 Indonesia 6.3 6.0 4.6 6.2 6.5 6.1 6.3 6.6 Malaysia 6.3 4.8 -1.5 7.2 5.1 5.1 5.0 5.1 Philippines 6.6 4.2 1.1 7.6 3.9 6.0 6.2 6.4 Thailand 5.0 2.5 -2.3 7.8 0.1 4.7 5.0 4.5 Vietnam 8.5 6.3 5.3 6.8 5.9 5.2 5.5 5.7 Cambodia 10.2 6.7 0.1 6.0 7.1 6.6 6.7 7.0 Fiji -0.9 1.0 -1.3 0.1 1.9 2.1 2.2 2.3 Lao PDR 7.5 7.6 7.5 8.5 8.0 8.2 7.5 7.5 Mongolia 10.2 8.9 -1.3 6.4 17.5 11.8 16.2 12.2 Myanmar .. 3.6 5.1 5.3 5.5 6.3 6.5 6.6 Papua New Guinea 7.2 6.7 6.1 7.6 9.0 8.0 4.0 7.5 Solomon Islands 10.7 7.1 -4.7 7.8 10.5 5.3 4.0 3.3 Timor-Leste 11.7 14.6 12.8 9.5 10.6 10.0 10.0 10.0 East Asia NIEs 5.9 1.8 -0.8 8.4 4.1 1.7 3.3 4.0 Hong Kong SAR, China 6.5 2.1 -2.5 6.8 4.9 1.3 3.2 4.3 Korea, Rep. 5.1 2.3 0.3 6.3 3.6 2.2 3.1 4.0 Singapore 8.9 1.7 -1.0 14.8 4.9 1.3 2.0 4.0 Taiwan, China 6.0 0.7 -1.8 10.7 4.0 1.2 4.0 4.0 Source: World Bank data and staff estimates. Remaining Resilient 116  | Appendix Tables Appendix Table 5. Regional Aggregates for Poverty Measures in East Asia $1.25 –a-day $2-a-day Mean Consumption Population (2005 PPP$/month) Headcount Number of Headcount Number of (million) Index (%) Poor (million) Index (%) Poor (million) EAP 1990 47.79 54.96 881.76 80.97 1,299.12 1,604.41 1993 54.69 50.72 848.46 75.76 1,267.24 1,672.77 1996 67.19 35.90 623.43 63.97 1,110.79 1,736.37 1999 70.74 35.58 639.04 61.74 1,108.86 1,795.97 2002 85.64 27.61 509.97 51.93 959.23 1,847.03 2005 107.07 17.11 323.78 39.57 748.88 1,892.72 2008 127.40 14.34 277.49 32.94 637.17 1,934.41 EAP excluding China 1990 67.32 40.38 189.48 70.73 331.89 469.23 1993 74.04 42.57 210.42 67.94 335.87 494.33 1996 86.16 34.65 179.75 61.03 316.65 518.82 1999 82.71 35.46 192.61 62.54 339.74 543.23 2002 89.65 25.67 145.44 53.96 305.78 566.63 2005 104.96 19.28 113.53 46.21 272.20 589.00 2008 114.30 17.53 106.89 40.74 248.44 609.76 South East Asia (Indonesia, Malaysia, Philippines, Thailand) 1990 75.07 32.72 105.12 66.26 212.85 321.26 1993 81.96 37.97 128.37 63.92 216.09 338.07 1996 95.84 30.05 106.57 56.32 199.69 354.59 1999 90.47 32.29 119.99 59.08 219.51 371.56 2002 97.70 21.50 83.60 49.81 193.68 388.82 2005 113.56 16.90 68.54 43.60 176.85 405.65 2008 122.78 16.85 70.94 39.05 164.34 420.89 Lower-Income East Asia (Cambodia, Laos, PNG, Vietnam) 1990 37.82 69.13 58.00 87.83 73.69 83.90 1993 44.29 59.84 53.39 83.14 74.18 89.22 1996 50.14 51.74 48.82 78.67 74.24 94.36 1999 53.90 47 .16 46.83 75.46 74.92 99.28 2002 59.73 41.07 42.53 69.41 71.87 103.54 2005 72.93 28.04 30.17 55.90 60.15 107 .60 2008 82.59 20.01 22.31 47.01 52.43 111.52 Source: World Bank PovcalNet 2012, World Development Indicators, and staff calculations. world bank east asia and pacific economic update 2012, vol.2 Appendix Tables  |  117 Appendix Table 6. East Asia: Exchange Rates local currency per U.S. dollar, end-of-period Hong Kong Korea, Taiwan, China Indonesia Malaysia Philippines Thailand Vietnam SAR, Singapore Japan China Rep. China Jan-2007 7.78 9,090 3.50 49.03 35.76 16,036 7.81 940.9 1.54 32.95 121.68 Feb-2007 7 .74 9,160 3.51 48.29 35.39 15,990 7.81 938.3 1.53 32.95 118.48 Mar-2007 7.73 9,118 3.46 48.26 34.97 16,023 7.81 940.3 1.52 33.09 117.65 Apr-2007 7.71 9,083 3.42 47.51 34.74 16,046 7.82 929.4 1.52 33.28 119.60 May-2007 7.65 8,828 3.40 46.27 34.60 16,079 7.81 929.9 1.53 33.02 121.62 Jun-2007 7.62 9,054 3.45 46.33 34.50 16,113 7.81 926.8 1.53 32.74 123.23 Jul-2007 7.57 9,186 3.45 45.61 33.76 16,127 7.83 923.2 1.51 32.81 118.95 Aug-2007 7.56 9,410 3.50 46.70 34.29 16,226 7.80 939.9 1.52 33.00 116.20 Sep-2007 7.51 9,137 3.42 45.06 34.21 16,092 7.77 920.7 1.49 32.58 115.05 Oct-2007 7.47 9,103 3.34 43.95 33.96 16,083 7.75 907.4 1.45 32.41 114.75 Nov-2007 7.40 9,376 3.36 42.80 33.81 16,044 7.79 929.6 1.45 32.27 110.30 Dec-2007 7.30 9,419 3.31 41.40 33.72 16,010 7.80 938.2 1.44 32.44 114.00 Jan-2008 7.19 9,291 3.24 40.65 32.98 15,971 7.80 943.9 1.42 32.20 106.36 Feb-2008 7 .11 9,051 3.19 40.36 31.85 15,931 7.78 937.3 1.39 30.95 104.73 Mar-2008 7.02 9,217 3.19 41.87 31.46 16,105 7.79 991.7 1.38 30.41 100.10 Apr-2008 7 .00 9,234 3.16 42.19 31.70 16,116 7.80 999.7 1.36 30.45 104.08 May-2008 6.95 9,318 3.24 43.88 32.40 16,246 7.80 1,031.4 1.37 30.41 105.66 Jun-2008 6.86 9,225 3.27 44.76 33.48 16,842 7.80 1,043.4 1.36 30.35 106.40 Jul-2008 6.84 9,118 3.26 44.14 33.48 16,755 7.80 1,008.5 1.37 30.59 107 .99 Aug-2008 6.83 9,157 3.39 45.69 34.12 16,525 7.80 1,081.8 1.42 31.52 109.10 Sep-2008 6.82 9,378 3.46 46.92 34.00 16,575 7.77 1,187.7 1.43 32.13 104.30 Oct-2008 6.83 10,995 3.56 48.75 34.93 16,813 7.75 1,291.4 1.48 33.00 98.30 Nov-2008 6.83 12,151 3.62 48.88 35.38 16,974 7.75 1,482.7 1.51 33.30 95.25 Dec-2008 6.83 10,950 3.46 47.49 34.90 17 ,433 7.75 1,257 .5 1.44 32.86 90.75 Jan-2009 6.84 11,355 3.61 47.08 34.88 17 ,475 7.75 1,368.5 1.51 33.80 89.60 Feb-2009 6.84 11,980 3.69 48.24 36.00 17 ,475 7.75 1,516.4 1.54 34.95 97.55 Mar-2009 6.84 11,575 3.65 48.42 35.48 17 ,756 7.75 1,377 .1 1.52 33.92 98.10 Apr-2009 6.83 10,713 3.56 48.70 35.27 17 ,784 7.75 1,348.0 1.48 33.23 97.60 May-2009 6.83 10,340 3.51 47.55 34.33 17,784 7.75 1,272.9 1.45 32.65 96.50 Jun-2009 6.83 10,225 3.52 48.31 33.98 17,801 7.75 1,284.7 1.45 32.82 95.95 Jul-2009 6.83 9,920 3.52 48.12 33.99 17 ,815 7.75 1,240.5 1.44 32.82 95.33 Aug-2009 6.83 10,060 3.53 48.91 33.97 17,823 7.75 1,244.9 1.44 32.92 92.70 Sep-2009 6.83 9,681 3.47 47.59 33.51 17,841 7.75 1,188.7 1.41 32.20 89.77 Oct-2009 6.83 9,545 3.41 47.73 33.39 17,862 7.75 1,200.6 1.40 32.54 91.38 Nov-2009 6.83 9,480 3.39 46.75 33.16 18,485 7.75 1,167.4 1.38 32.19 86.75 Dec-2009 6.83 9,400 3.42 46.36 33.32 18,472 7 .76 1,167.6 1.40 32.03 92.06 Jan-2010 6.83 9,365 3.41 46.74 33.10 18,472 7 .76 1,156.5 1.40 31.99 89.85 Feb-2010 6.83 9,335 3.41 46.26 33.03 18,925 7 .76 1,158.4 1.41 32.09 89.25 Mar-2010 6.83 9,115 3.27 45.22 32.32 19,080 7.77 1,130.8 1.40 31.82 93.25 Apr-2010 6.83 9,012 3.19 44.64 32.25 18,960 7.77 1,115.5 1.37 31.42 94.06 May-2010 6.83 9,180 3.25 46.21 32.49 18,980 7.79 1,200.2 1.40 32.23 91.30 Jun-2010 6.79 9,083 3.26 46.31 32.40 19,065 7.79 1,210.3 1.40 32.28 88.60 Jul-2010 6.78 8,952 3.19 45.81 32.22 19,095 7.77 1,187.2 1.36 32.05 86.50 Aug-2010 6.81 9,041 3.14 45.18 31.25 19,485 7.78 1,189.1 1.36 32.10 84.25 Sep-2010 6.70 8,924 3.09 43.90 30.37 19,485 7 .76 1,142.0 1.32 31.33 83.40 Oct-2010 6.69 8,928 3.11 43.18 29.97 19,495 7.75 1,126.6 1.30 30.78 80.58 Nov-2010 6.68 9,013 3.16 44.26 30.22 19,498 7.77 1,157.3 1.32 30.85 84.15 Dec-2010 6.62 8,991 3.08 43.89 30.15 19,498 7.78 1,138.9 1.29 30.37 81.45 Jan-2011 6.59 9,057 3.06 44.09 31.14 19,498 7.80 1,114.3 1.29 29.30 82.05 Remaining Resilient 118  | Appendix Tables Hong Kong Korea, Taiwan, China Indonesia Malaysia Philippines Thailand Vietnam SAR, Singapore Japan China Rep. China Feb-2011 6.58 8,823 3.05 43.84 30.62 20,875 7.79 1,127.9 1.27 29.75 81.70 Mar-2011 6.56 8,709 3.03 43.43 30.30 20,908 7.78 1,107.2 1.26 29.42 83.13 Apr-2011 6.50 8,574 2.97 43.02 29.94 20,625 7.77 1,072.3 1.23 28.76 82.06 May-2011 6.48 8,537 3.01 43.29 30.31 20,535 7.78 1,080.6 1.23 28.77 80.85 Jun-2011 6.47 8,597 3.02 43.49 30.75 20,565 7.78 1,078.1 1.23 28.80 80.72 Jul-2011 6.44 8,508 2.96 42.23 29.75 20,555 7.79 1,052.6 1.20 28.89 77.55 Aug-2011 6.39 8,578 2.98 42.51 30.03 20,822 7.80 1,071.7 1.20 29.02 76.59 Sep-2011 6.35 8,823 3.19 43.64 31.17 20,822 7.79 1,179.5 1.30 30.51 76.63 Oct-2011 6.32 8,835 3.07 43.03 30.67 20,999 7.77 1,104.5 1.25 29.93 79.20 Nov-2011 6.35 9,170 3.17 43.81 31.22 20,999 7.79 1,150.3 1.30 30.35 78.05 Dec-2011 6.30 9,068 3.18 43.93 31.69 21,024 7.77 1,153.3 1.30 32.29 77.72 Jan-2012 6.31 9,000 3.05 42.95 31.04 20,981 7.76 1,125.0 1.25 29.62 76.36 Feb-2012 6.29 9,085 3.00 42.86 30.25 20,830 7.76 1,126.5 1.25 29.42 80.65 Mar-2012 6.29 9,180 3.07 43.00 30.84 20,810 7.77 1,137.8 1.26 29.53 82.15 Apr-2012 6.28 9,190 3.03 42.44 30.73 20,860 7.76 1,134.2 1.24 29.23 81.15 May-2012 6.34 9,565 3.18 43.45 31.90 20,855 7.76 1,177.8 1.29 29.86 78.80 Jun-2012 6.32 9,480 3.19 42.28 31.83 20,873 7.76 1,153.8 1.27 29.90 79.30 Jul-2012 6.33 9,485 3.14 41.91 31.58 20,850 7.75 1,136.2 1.25 30.01 78.15 Aug-2012 6.34 9,560 3.13 42.32 31.37 20,840 7.76 1,134.6 1.25 29.97 78.45 Sep-2012 6.34 9,588 3.07 41.88 30.83 20,863 7.75 1,118.6 1.23 29.34 77.57 Oct-2012 6.30 9,615 3.06 41.26 30.70 20,833 7.75 1,094.1 1.22 29.26 79.58 Sources: Haver Analytics, Datastream. world bank east asia and pacific economic update 2012, vol.2 Appendix Tables  |  119 Appendix Table 7. East Asia: Foreign Reserves Minus Gold in billions of U.S. dollars Hong Kong Korea, Taiwan, China Indonesia Malaysia Philippines Thailand Singapore Total SAR, China Rep. China Jan-2007 1,106.8 43.3 83.2 20.7 65.0 133.7 240.2 134.6 266.0 2,093.4 Feb-2007 1,159.4 45.7 86.6 21.6 66.4 136.2 242.7 137 .1 268.0 2,163.6 Mar-2007 1,204.0 47.2 88.3 21.7 69.1 135.3 243.8 137 .7 267 .5 2,214.7 Apr-2007 1,248.6 49.3 91.3 22.0 69.3 136.8 247.2 140.0 266.5 2,271.0 May-2007 1,294.6 50.1 98.1 22.6 69.3 136.2 250.7 140.9 265.7 2,328.2 Jun-2007 1,334.6 50.9 98.1 23.5 71.3 136.3 250.6 144.1 266.1 2,375.3 Jul-2007 1,387.2 51.9 98.2 25.0 72.2 137 .0 254.8 147 .0 266.3 2,439.5 Aug-2007 1,410.6 51.4 96.5 27.4 72.6 138.3 255.2 147 .6 261.4 2,461.0 Sep-2007 1,435.6 52.9 97.9 27.9 78.7 140.8 257.2 152.5 262.9 2,506.4 Oct-2007 1,456.9 54.2 99.3 29.1 80.3 142.2 260.1 158.2 265.9 2,546.2 Nov-2007 1,498.9 54.9 100.8 29.4 82.5 150.3 261.9 160.7 270.1 2,609.5 Dec-2007 1,530.3 56.9 101.1 30.2 85.2 152.6 262.1 163.0 270.3 2,651.7 Jan-2008 1,591.9 56.0 109.0 31.0 90.3 159.8 261.8 167 .6 272.8 2,740.2 Feb-2008 1,649.2 57.1 116.0 32.2 97.9 160.2 262.3 171.7 277 .8 2,824.5 Mar-2008 1,684.3 59.0 120.0 32.8 107 .5 160.7 264.2 177.5 286.9 2,892.7 Apr-2008 1,758.7 58.8 123.8 32.8 107 .4 159.8 260.4 175.8 289.4 2,966.9 May-2008 1,799.2 57.5 124.9 32.4 106.6 158.9 258.1 175.8 290.1 3,003.5 Jun-2008 1,811.1 59.5 125.5 32.7 103.2 157 .5 258.0 176.7 291.4 3,015.5 Jul-2008 1,847.4 60.6 124.8 33.0 102.3 157 .6 247.4 175.0 290.9 3,038.9 Aug-2008 1,886.3 58.4 122.3 33.2 99.0 158.0 243.1 170.1 282.1 3,052.5 Sep-2008 1,907.7 57.1 109.5 32.8 100.0 160.5 239.6 168.8 281.1 3,057.2 Oct-2008 1,881.7 50.6 99.9 32.4 101.2 154.8 212.2 162.2 278.2 2,973.2 Nov-2008 1,887.9 50.2 97.4 33.0 104.1 165.9 200.4 165.7 280.7 2,985.3 Dec-2008 1,949.3 51.6 91.2 33.2 108.7 182.5 201.1 174.2 291.7 3,083.4 Jan-2009 1,916.6 50.9 91.0 34.7 108.2 181.7 201.7 167.1 292.7 3,044.4 Feb-2009 1,915.1 50.6 90.7 34.2 110.7 177.0 201.5 163.5 294.2 3,037.6 Mar-2009 1,956.8 54.8 87.4 34.5 113.7 186.2 206.3 166.3 300.1 3,106.2 Apr-2009 2,012.0 56.6 87.8 34.9 114.4 193.4 212.4 170.1 304.7 3,186.2 May-2009 2,093.1 57.9 87.9 34.7 118.9 205.1 226.7 171.8 312.6 3,308.6 Jun-2009 2,135.2 57.6 91.3 34.8 118.3 206.9 231.7 173.2 317.6 3,366.5 Jul-2009 2,178.2 57.4 90.8 35.3 120.9 218.0 237.4 174.1 321.1 3,433.3 Aug-2009 2,223.9 57.9 93.3 36.7 124.8 223.2 245.4 176.3 325.4 3,506.8 Sep-2009 2,288.5 62.3 94.8 37.5 129.1 226.8 254.2 182.0 332.2 3,607.4 Oct-2009 2,344.3 64.5 94.9 37.9 132.5 240.0 264.1 184.3 341.2 3,703.7 Nov-2009 2,405.3 65.8 95.0 38.5 136.7 256.2 270.8 188.9 347 .2 3,804.4 Dec-2009 2,416.0 66.1 96.4 38.8 135.5 255.8 269.9 187 .8 348.2 3,814.5 Jan-2010 2,432.0 69.6 95.7 40.2 139.5 257 .0 273.6 189.6 350.7 3,847.8 Feb-2010 2,441.2 69.7 95.6 40.2 138.8 258.2 270.6 187 .6 352.7 3,854.6 Mar-2010 2,463.5 71.8 94.0 39.6 141.1 258.8 272.3 196.9 355.0 3,893.0 Apr-2010 2,506.9 78.6 94.7 40.6 144.4 259.2 278.8 203.2 357 .6 3,963.9 May-2010 2,456.2 74.6 96.2 41.0 140.2 256.1 270.1 198.1 360.1 3,892.7 Jun-2010 2,471.2 76.3 93.3 41.8 143.4 256.7 274.1 199.7 362.4 3,919.1 Jul-2010 2,556.4 78.8 93.6 42.4 147 .7 260.6 285.9 206.7 370.1 4,042.2 Aug-2010 2,565.3 81.3 93.8 42.8 151.2 261.3 285.3 206.2 372.1 4,059.2 Sep-2010 2,666.9 86.6 107.5 46.4 159.0 266.0 289.7 214.5 380.5 4,216.9 Oct-2010 2,779.8 91.8 114.1 50.3 166.7 267 .0 293.3 221.2 383.8 4,368.0 Nov-2010 2,786.2 92.8 104.3 53.7 163.5 266.0 290.2 217.4 379.3 4,353.1 Dec-2010 2,866.1 96.2 104.9 55.4 167 .5 268.6 291.5 225.5 382.0 4,457.7 Jan-2011 2,952.4 95.3 106.5 57.0 169.7 273.1 295.9 226.9 387 .1 4,563.8 Remaining Resilient 120  | Appendix Tables Hong Kong Korea, Taiwan, China Indonesia Malaysia Philippines Thailand Singapore Total SAR, China Rep. China Feb-2011 3,012.2 99.6 108.1 56.9 174.9 272.6 297.6 230.7 390.7 4,643.3 Mar-2011 3,067.2 105.7 112.2 58.9 176.5 272.5 298.5 234.0 392.6 4,718.2 Apr-2011 3,168.5 113.8 128.3 60.9 184.4 276.8 307.1 242.3 399.5 4,881.7 May-2011 3,188.3 118.1 131.1 61.3 180.1 275.8 305.0 239.7 398.7 4,898.0 Jun-2011 3,219.8 119.7 132.6 61.4 178.8 277.1 304.4 242.1 400.3 4,936.1 Jul-2011 3,267.4 122.7 133.7 64.2 181.0 278.7 309.7 248.9 400.8 5,007.0 Aug-2011 3,284.4 124.6 134.5 68.4 180.3 279.4 310.9 249.0 400.3 5,031.8 Sep-2011 3,223.0 114.5 129.1 67.7 172.1 277.5 302.1 233.4 389.2 4,908.6 Oct-2011 3,295.5 114.0 132.9 67.9 173.5 281.6 309.7 245.2 393.3 5,013.6 Nov-2011 3,242.2 111.3 132.9 68.1 169.6 282.4 306.5 240.8 388.0 4,941.8 Dec-2011 3,202.8 110.1 131.8 67.3 167.4 285.3 304.2 237.5 385.5 4,892.0 Jan-2012 3,275.8 112.0 132.2 68.5 170.0 292.7 309.2 245.3 390.3 4,995.9 Feb-2012 3,331.3 112.2 132.9 68.1 172.0 294.6 313.6 246.8 394.4 5,066.0 Mar-2012 3,326.6 110.5 133.7 65.7 171.0 294.5 313.8 243.4 393.9 5,053.0 Apr-2012 3,320.6 116.4 134.0 66.2 170.7 295.5 314.7 245.9 395.1 5,059.0 May-2012 3,226.6 111.5 134.0 66.4 164.0 291.8 308.7 237.5 389.3 4,929.8 Jun-2012 3,260.7 106.5 132.4 66.1 166.8 294.9 310.2 243.2 391.2 4,971.9 Jul-2012 3,260.2 106.6 132.6 69.7 167.4 296.2 311.4 243.9 391.1 4,979.0 Aug-2012 3,292.7 109.0 133.1 70.2 170.9 298.1 313.9 246.0 394.2 5,027.9 Sep-2012 3,305.3 110.2 135.4 71.0 174.9 301.1 319.0 251.9 398.0 5,066.7 Oct-2012 .. 110.3 136.2 71.2 172.9 301.6 320.5 254.0 399.2 .. Sources: Haver Analytics, Thomson Datastream, and IMF International Financial Statistics. world bank east asia and pacific economic update 2012, vol.2 Appendix Tables  |  121 Appendix Table 8a. East Asia: Balance of Payments in percent of GDP Overall Balance Current Account Capital Account 1/ 2007 2008 2009 2010 2011 2007 2008 2009 2010 2011 2007 2008 2009 2010 2011 East Asia (11) 8.7 6.7 8.3 7.0 4.4 8.4 7.2 5.5 4.5 3.5 0.3 -0.5 2.7 2.5 0.9 China 13.1 10.6 8.0 7.9 5.3 10.1 9.3 4.9 3.9 2.7 3.1 1.3 3.1 4.0 2.6 S.E. Asia 5.6 1.4 3.0 4.6 3.0 5.0 2.7 5.2 3.0 2.5 0.5 -1.3 -2.2 1.7 0.5 Indonesia 2.9 -0.4 2.3 4.3 1.4 2.4 0.0 2.0 0.7 0.2 0.5 -0.4 0.3 3.5 1.2 Malaysia 6.8 -2.4 1.9 -0.3 10.7 15.4 17 .1 15.5 11.1 11.0 -8.6 -19.5 -13.6 -11.4 -0.3 Philippines 5.7 0.1 3.8 7.2 4.5 4.9 2.1 5.6 4.5 3.1 0.8 -2.0 -1.8 2.7 1.4 Thailand 6.4 8.9 9.1 9.8 0.4 6.3 0.8 8.3 3.1 1.7 0.1 8.2 0.8 6.7 -1.3 Vietnam 14.4 0.5 -9.1 -1.7 0.9 -9.8 -12.0 -6.6 -4.1 0.2 24.1 12.5 -2.5 2.4 0.7 NIEs 2.1 0.7 13.1 6.1 2.3 7.1 5.1 7.8 7.3 6.7 -5.0 -4.5 5.4 -1.2 -4.4 Hong Kong 3.9 13.1 36.9 3.3 4.5 13.0 15.0 9.5 6.6 6.5 -9.1 -1.9 27.4 -3.2 -2.0 SAR, China Korea, Rep. 1.4 -6.0 8.1 2.7 1.2 2.1 0.3 3.9 2.9 2.3 -0.6 -6.3 4.3 -0.2 -1.1 Singapore 10.9 6.9 6.1 18.5 6.6 25.8 13.9 16.2 24.4 21.9 -14.8 -7.0 -10.1 -5.9 -15.3 Taiwan, China -1.0 6.6 14.3 9.3 1.3 8.9 6.9 11.3 9.3 8.9 -10.0 -0.3 3.0 0.1 -7 .6 Median 5.7 6.6 8.0 7.2 4.5 8.9 6.9 8.3 4.5 3.1 -0.6 -1.7 0.8 1.5 -1.1 Sources: IMF , Haver Analytics, national sources. 1/ Capital Account + Financial Account + Errors and Omissions Appendix Table 8b. East Asia: Financial Account Components in percent of GDP Net FDI Net Portfolio Investment Net Other Capital 2/ 2007 2008 2009 2010 2011 2007 2008 2009 2010 2011 2007 2008 2009 2010 2011 East Asia (11) 2.1 1.6 1.0 2.0 1.8 -1.3 -0.5 -0.1 0.1 -0.1 -0.5 -1.6 1.9 0.5 -0.8 China 4.0 2.5 1.7 3.1 2.3 0.5 0.8 0.5 0.4 0.3 -1.4 -2.0 0.9 0.5 0.0 S.E. Asia 1.2 0.8 0.4 1.2 0.8 1.4 -2.3 0.3 2.8 1.3 -2.1 0.2 -3.0 -2.4 -1.6 Indonesia 0.5 0.7 0.5 1.6 1.4 1.3 0.3 1.9 1.9 0.5 -1.3 -1.4 -2.0 0.1 -0.6 Malaysia -1.4 -3.4 -3.1 -1.7 -1.1 2.8 -11.0 0.1 6.0 2.9 -10.0 -5.1 -10.5 -15.7 -2.1 Philippines -0.4 0.7 1.0 0.3 0.6 3.1 -2.1 -0.4 2.2 2.5 -1.9 -0.7 -2.4 0.2 -1.6 Thailand 3.1 1.6 0.3 1.4 -0.1 -2.5 -0.8 -2.1 3.1 1.0 -0.5 7.3 2.7 2.2 -2.2 Vietnam 9.2 10.3 7.4 6.9 5.3 8.8 -0.6 -0.1 2.3 1.2 6.2 2.9 -9.8 -6.7 -5.7 NIEs -0.9 -0.4 -0.9 -1.0 0.8 -6.3 -2.2 -2.5 -3.3 -2.4 2.2 -1.8 8.8 3.1 -2.8 Hong Kong -2.7 4.5 -1.7 -6.9 3.7 -0.7 -16.5 -18.7 -24.9 0.2 -5.7 10.1 47.8 28.5 -6.0 SAR, China Korea, Rep. -1.7 -1.8 -1.8 -2.2 -1.5 -2.5 -0.3 5.9 4.2 1.2 3.6 -4.3 0.1 -2.2 -0.8 Singapore 5.6 2.6 3.6 12.0 14.9 -26.7 6.1 -21.6 -11.8 -11.0 6.2 -15.7 7.9 -6.1 -19.2 Taiwan, China -0.8 -1.2 -0.8 -2.1 -3.2 -10.2 -3.1 -2.7 -4.8 -7 .7 1.1 4.0 6.5 7.0 3.2 Median -0.4 0.7 0.3 0.3 0.6 -0.7 -0.8 -0.4 1.9 0.5 -1.1 -1.0 0.8 1.1 -0.8 Sources: IMF , Haver Analytics, national sources. 3/ Net Other Investment + Net Financial Derivatives Remaining Resilient 122  | Appendix Tables Appendix Table 9. East Asia: Nonperforming Loans in percent of total loans 2007 2008 2009 2010 2011 2012 Mar Jun Sep Dec Mar Jun Sep Dec Mar Jun Sep Dec Mar Jun Sep Dec Mar Jun Sep Dec Mar Jun Sep China 1/ 6.6 6.5 6.2 6.2 5.8 5.6 5.5 2.4 2.0 1.8 1.7 1.6 1.4 1.3 1.2 1.1 1.1 1.0 .. .. .. .. .. Indonesia 2/ 6.0 5.8 6.2 4.1 4.6 4.3 3.9 3.2 3.7 4.0 3.9 3.3 3.4 3.0 3.0 2.6 2.9 2.8 2.8 2.3 2.3 2.2 2.0 Malaysia 3/ 4.4 4.1 3.5 3.2 3.0 2.6 2.4 2.2 2.2 2.2 2.1 1.8 1.9 2.1 2.1 2.3 2.2 2.0 2.0 1.8 1.8 1.5 1.5 Philippines 4/ .. .. .. 4.9 5.0 4.5 4.6 4.1 4.3 4.3 4.0 3.7 3.9 3.9 3.9 3.6 3.7 3.1 3.1 2.9 3.0 .. .. Thailand 5/ 7.5 7.9 8.0 7.3 6.8 6.5 6.1 5.3 5.5 5.4 5.3 4.9 4.6 4.5 4.2 3.6 3.2 3.0 2.8 2.7 2.7 2.5 2.4 Korea, Rep. 6/ 0.9 0.8 0.8 0.7 0.8 0.7 0.8 1.1 1.5 1.5 1.5 1.2 1.5 1.9 2.3 1.9 2.0 1.7 1.7 1.4 1.51 1.49 .. Source: National data sources. 1/ Covers only the major commercial banks for 2002–04, and all commercial banks for 2005–10. 2/ Excludes IBRA’s AMC. Data for 1997 to 2002 excludes state banks; the data source is the Monetary Division of Bank Indonesia. Data from 2003 covers all commercial banks including state banks; the data source is the Banking Supervision Division of Bank Indonesia. 3/ Excludes Danaharta. This series, used by Bank Negara Malaysia, is net of provisions and excludes interest in suspense. Beginning financial year 2010, banking institutions are required to report impaired loans in accordance with the Guideline on the Classification and Impairment Provisions for Loans/Financing. The reporting of non-performing laons has since been discontinued. 4/ Includes interbank loans. 5/ Excludes transfers to AMCs. The jump in headline NPLs in December 2002 was a one-off increase, reflecting a change in definition and did not affect provisioning. 6/ Excludes KAMCO/KDIC. world bank east asia and pacific economic update 2012, vol.2 Appendix Tables  |  123 Appendix Table 10. East Asia: Financial Market Indicators Stock Market Index, end-of-period, Dec. 31, 2007 = 100 Jun-07 Dec-07 Jun-08 Dec-08 Jun-09 Dec-09 Jun-10 Dec-10 Jun-11 Dec-11 Jun-12 Oct-12 China 72.6 100.0 52.0 34.6 56.3 62.3 45.5 53.3 52.4 41.7 42.2 39.2 Indonesia 77.9 100.0 85.6 49.4 73.8 92.3 106.1 134.9 141.6 139.2 144.1 158.4 Malaysia 93.7 100.0 82.1 60.7 74.4 88.1 90.9 105.1 109.3 105.9 110.7 115.8 Philippines 101.1 100.0 67.9 51.7 67.3 84.3 93.1 116.0 118.5 120.7 129.3 149.8 Thailand 90.5 100.0 89.6 52.4 69.6 85.6 92.9 120.4 121.4 119.5 136.6 151.4 Vietnam 110.5 100.0 43.1 34.0 48.4 53.4 54.7 52.3 46.7 37.9 45.6 41.9 Hong Kong SAR, China 78.3 100.0 79.5 51.7 66.1 78.6 72.4 82.8 80.5 66.3 69.9 77.8 Korea, Rep. 91.9 100.0 88.3 59.3 73.3 88.7 89.5 108.1 110.7 96.2 97.7 100.8 Singapore 100.3 100.0 85.1 50.8 67.3 83.6 81.8 92.0 90.0 76.4 83.1 87.7 Taiwan, China 104.4 100.0 88.4 54.0 75.6 96.3 86.2 105.5 101.7 83.1 85.8 84.2 Source: Thomson Datastream. Yields, 10-year local-currency government bonds, end-of-period, in percent Jun-07 Dec-07 Jun-08 Dec-08 Jun-09 Dec-09 Jun-10 Dec-10 Jun-11 Dec-11 Jun-12 Oct-12 China 4.4 4.5 4.5 2.8 3.2 3.6 3.3 3.9 3.9 3.4 3.3 3.6 Indonesia 9.0 10.0 13.4 11.9 11.1 10.1 8.4 7.6 7.5 6.0 6.2 5.7 Malaysia 5.0 4.1 4.9 3.2 4.4 4.3 4.0 4.0 3.9 3.7 3.5 3.5 Philippines 7.4 6.6 9.4 7.4 8.1 8.1 7.9 6.1 6.6 5.4 5.9 5.1 Thailand 4.5 5.0 5.9 2.7 3.7 4.2 3.1 3.7 3.9 3.3 3.5 3.3 Vietnam 7.8 9.1 16.0 10.2 9.7 11.5 11.5 11.8 12.5 12.5 10.0 10.4 Hong Kong SAR, China 4.8 3.4 3.5 1.9 2.6 2.6 2.3 2.9 2.3 1.5 1.0 1.0 Korea, Rep. 5.5 5.7 6.0 4.2 5.2 5.4 5.0 4.5 4.3 3.8 3.6 3.0 Singapore 2.9 2.7 3.6 2.1 2.6 2.7 2.4 2.7 2.3 1.6 1.6 1.3 Taiwan, China 2.5 2.6 2.7 1.4 1.6 1.5 1.4 1.6 1.6 1.3 1.2 1.1 Source: Bloomberg. Foreign-Currency Government Bond Spreads (EMBIG), end-of-period, in basis points over U.S. Treasuries Jun-07 Dec-07 Jun-08 Dec-08 Jun-09 Dec-09 Jun-10 Dec-10 Jun-11 Dec-11 Jun-12 Oct-12 China 54 120 137 228 122 104 86 126 155 278 222 161 Indonesia 165 275 381 762 433 230 274 183 178 274 273 187 Malaysia 75 119 153 119 167 136 171 117 131 178 174 111 Philippines 155 172 303 546 324 206 266 163 160 242 206 129 Vietnam 122 203 368 747 379 314 338 323 329 510 425 306 Source: JP Morgan, Bloomberg. Credit Default Swap (CDS) Spreads on Foreign-Currency Government Bonds, 5-year, end-of-period, in basis points Jun-07 Dec-07 Jun-08 Dec-08 Jun-09 Dec-09 Jun-10 Dec-10 Jun-11 Dec-11 Jun-12 Oct-12 China 13 29 75 188 75 73 91 68 85 144 121 68 Indonesia 110 154 286 638 317 188 186 133 141 202 192 129 Malaysia 16 44 116 225 105 90 102 74 93 144 125 75 Philippines 111 153 266 384 217 168 174 130 138 185 161 104 Thailand 39 55 135 256 110 96 134 99 136 179 153 93 Hong Kong SAR, China 5 18 42 104 68 48 57 46 54 91 75 47 Korea, Rep. 17 47 107 319 182 85 131 98 103 156 123 67 Singapore .. .. .. 45 45 35 45 45 90 83 .. .. Source: Thomson Datastream (data through December 2011), Bloomberg (data for 2012). Remaining Resilient 124  | Appendix Tables Appendix Table 11. Global hazard losses 2000–2011 in US $ Earthquake Mass Extreme Drought (seismic temperature Flood movement Storm Volcano Total activity) wet Sub-Saharan Africa ND 257m ND 2.4b ND 678m 9m 3.3b Middle East and North Africa 4.2b 6.3b 0.8m 2.3b ND 0.2m ND 12.8b Europe and Central Asia 3.7b 2.9b 2.8b 13.9b 43m 1.9b ND 25.4b South Asia 1.8b 12.1b 400m 36.8b 68m 4.9b ND 56.3b Latin America and Caribbean 2.5b 42.4b 510m 17.1b 586m 30.7b 160m 93.9b East Asia and Pacific 11.8b 100.8b 21.4b 115.3b 1b 47.9b 4.7m 298.5b Total 24b 165b 25b 188b 1.7b 86b 174m 490b Source: EM-DAT. Note: ND stands for no data available. world bank east asia and pacific economic update 2012, vol.2 WORLD BANK EAST ASIA AND PACIFIC ECONOMIC UPDATE 2012, VOLUME 2 Remaining Resilient