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The views expressed in this document are those of the author and do not necessarily reflect
the views and policies of the Asian Development Bank or its Board of Governors or the
governments they represent.
Asian Development Outlook 2018
Maintaining Stability Amid Heightened
Uncertainty

Yasuyuki Sawada
Chief Economist
Asian Development Bank

EMBARGOED UNTIL 9:30 AM
Manila/Hong Kong, China/Singapore time
26 September 2018

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Key messages
• Developing Asia to continue solid growth at 6.0% in 2018 and
5.8% in 2019
• Robust consumption and expanding services boost growth in the
People’s Republic of China (PRC)
• India rebounding as headwinds fade

• Inflation under control despite rising fuel and food prices
• Largest downside risk stems from escalating US–PRC trade
conflict
• Heightened global uncertainty exposed pockets of vulnerability;
stabilization policy must be tapped when needed

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Developing Asia’s growth held up well…
Developing Asia
GDP growth (%) Developing Asia excluding NIEs
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6.6 6.4 6.6 6.5 6.5 6.4 6.3
6.0 5.9 6.1 6.0 6.0 5.9 5.8
6

4

2

0
2015 2016 2017 2018 2019
ADO Update ADO Update
Forecast
NIEs = newly industrialized economies of Hong Kong, China; Republic of Korea; Singapore; and Taipei,China
Source: Asian Development Outlook Database.
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…bolstered by strong domestic demand…
Demand-side contributions to growth, selected economies,
first half 2018
Percentage points
Consumption Investments Net exports GDP growth
15
NIEs ASEAN-5

10 8.2 6.3
6.8 7.1
4.0 5.2 4.9 4.8
2.8 4.2
5 3.2

0

-5
PRC IND HKG KOR SIN TAP INO MAL PHI THA VIE
Notes: ASEAN = Association of Southeast Asian Nations; NIEs = newly industrialized economies; GDP = gross domestic product;
HKG = Hong Kong, China; IND = India; INO = Indonesia; KOR = Republic of Korea; MAL = Malaysia; PHI = the Philippines; PRC =
People’s Republic of China; SIN = Singapore; TAP = Taipei,China; THA = Thailand. IND data refers to Q1 FY2018. Components
do not add up to total due to a statistical discrepancy.

Sources: Haver Analytics and CEIC Data Company (accessed 17 September 2018);
Asian Development Outlook database.

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…and continued robust growth in
major advanced economies
2016 2017 2018 2019
GDP growth (%)
Actual ADO Update ADO Update

Major industrial economies 1.6 2.3 2.3 2.3 2.0 2.0

United States 1.6 2.2 2.7 2.8 2.3 2.4

Euro area 1.8 2.5 2.2 2.0 1.9 1.9

Japan 1.0 1.7 1.4 1.1 1.0 1.0
a Averagegrowth rates are weighed by gross national income, Atlas method.
Sources: US Department of Commerce, Bureau of Economic Analysis, http://www.bea.gov; Eurostat,
http://epp.eurostat.ec.europa.eu; Economic and Social Research Institute of Japan, http://www.esri.cao.go.jp;
Consensus Forecasts; Bloomberg; CEIC Data Company; Haver Analytics; World Bank, Global Commodity Markets,
http://www.worldbank.org; ADB estimates.

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Outlook varies across countries
2018 2019 2018 2019
ADO Update ADO Update ADO Update ADO Update

East Asia 6.0 6.0 5.8 5.7 ↓ South Asia 7.0 7.0 7.2 7.2
China, People’s Rep. of 6.6 6.6 6.4 6.3 ↓ Bangladesh 7.0 7.9 ↑ 7.2 7.5 ↑
Hong Kong, China 3.2 3.7 ↑ 3.0 3.0 India 7.3 7.3 7.6 7.6
Korea, Rep. of 3.0 2.9 ↓ 2.9 2.8 ↓ Pakistan 5.6 5.8 ↑ 5.1 4.8 ↓
Taipei,China 2.9 3.0 ↑ 2.8 2.8
Central Asia 4.0 4.1 ↑ 4.2 4.2
Southeast Asia 5.2 5.1 ↓ 5.2 5.2 Azerbaijan 1.7 1.7 2.0 2.0
Indonesia 5.3 5.2 ↓ 5.3 5.3 Kazakhstan 3.2 3.7 ↑ 3.5 3.9 ↑
Malaysia 5.3 5.0 ↓ 5.0 4.8 ↓
Philippines 6.8 6.4 ↓ 6.9 6.7 ↓ The Pacific 2.2 1.1 ↓ 3.0 3.1 ↑
Singapore 3.1 3.1 2.9 2.9 Fiji 3.6 3.6 3.3 3.3
Thailand 4.0 4.5 ↑ 4.1 4.3 ↑ Papua New Guinea 1.8 0.5 ↓ 2.7 3.0 ↑
Viet Nam 7.1 6.9 ↓ 6.8 6.8

Developing Asia 6.0 6.0 5.9 5.8 ↓ Excluding NIEs 6.5 6.5 6.4 6.3 ↓

Notes: ↑ Upgraded forecast; ↓ Downgraded forecast; and no symbol = unchanged.

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PRC growth on track,
amidst downside risks in trade
Demand-side contributions to Confidence indicators
growth Purchasing manager's index
Net exports Consumer confidence
percentage
points Investment
55 125
Consumption
10 Gross domestic product Jul-18
expansion optimism

5
Aug-18

50 100
0

contraction pessimism
-5
Q1 Q3 Q1 Q3 Q1
2016 2017 2018 45 75
Jan-15 Jan-16 Jan-17 Jan-18

Source: National Bureau of Statistics of China (accessed 17 Source: CEIC Data Company (accessed 22
September 2018). September 2018).
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India growth picks up as headwinds fade
Demand-side contributions to growth Confidence indicators
Net exports Purchasing manager's index
Gross fixed capital formation Consumer confidence
percentage points Government consumption 60 120
12 Private consumption
Gross domestic product
expansion optimism

8
Aug-18

4 50 100

Jun-18

0 contraction pessimism

-4
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 40 80
2016 2017 2018 Jan-15 Jan-16 Jan-17 Jan-18
Note: Refers to fiscal years, Q1 refers to data for April–June. Supply-side output
at basic prices. Excludes other expenditures such as valuables, changes in Source: CEIC Data Company (accessed 22 September
inventories, and statistical discrepancy. 2018).
Source: CEIC Data Company (accessed 17 September 2018). 9
Inflation in check
despite rising global commodity prices
Inflation (%)
5
10-year average (2008–2017)
4 3.7

3.0 2.9 2.8 2.9 2.8
3
2.4
2.1 2.2
2

1

0
2013 2014 2015 2016 2017 2018 2019
ADO Update ADO Update
Forecast
Source: Asian Development Outlook database.

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Trade conflict is main risk to the outlook…
Trade conflict chronology

Note: ‘Current scenario’ includes all tariffs implemented as of today among US, PRC and other countries. ‘US-PRC escalation
scenario’ includes measures in the current scenario and a 25% levy on all remaining bilateral US-PRC trade.
* The $35.8 billion in retaliatory tariffs against US steel and aluminum tariffs are by Mexico, EU, Canada, India, Russia, and Turkey. It
excludes pending cases filed by EU (US$ 4.1 bn) and Japan (US$ 1.9 bn) via the WTO dispute settlement mechanism.
Source: ADB staff estimates based on published official information.

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…with the PRC most affected
GDP impact of trade conflict by economic region
“Current” scenario “PRC-US escalation” scenario
% of own GDP Direct and Indirect Effects
0.8 Trade Redirection Effects
Net Impact (with partial redirection) 0.34 0.41
0.4
0.11
0.11 0.09 0.08
0.05 0.02
0

-0.08 -0.12
-0.4 -0.15 -0.20

-0.48
-0.8

-1.2 -1.03
World PRC USA JPN NIEs ASEAN- Rest of World PRC USA JPN NIEs ASEAN- Rest of
5 Asia 5 Asia

NIEs = newly industrialized economies of Hong Kong, China; Republic of Korea; Singapore; and Taipei,China. ASEAN-5 = Indonesia, Malaysia,
Philippines, Thailand, and Viet Nam. Rest of Asia = Bangladesh, Bhutan, Brunei Darussalam, Cambodia, Fiji, India, Lao People's Democratic
Republic, Maldives, Mongolia, Pakistan, and Sri Lanka.
Source: ADB Staff estimates.

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A diverse set of sectors impacted…
GDP impact of trade conflict by sector

Note: Values in red are in $ billion.

NIEs = newly industrialized economies of Hong Kong, China; Republic of Korea; Singapore; and Taipei,China. ASEAN-5 = Indonesia, Malaysia,
Philippines, Thailand, and Viet Nam. Rest of Asia = Bangladesh, Bhutan, Brunei Darussalam, Cambodia, Fiji, India, Lao People's Democratic
Republic, Maldives, Mongolia, Pakistan, and Sri Lanka.
Source: ADB Staff estimates.
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Electronics the hardest hit in the escalation scenario,
but also trade and business services.
GDP impact of trade conflict by sector

Note: Values in red are in $ billion.

NIEs = newly industrialized economies of Hong Kong, China; Republic of Korea; Singapore; and Taipei,China. ASEAN-5 = Indonesia, Malaysia,
Philippines, Thailand, and Viet Nam. Rest of Asia = Bangladesh, Bhutan, Brunei Darussalam, Cambodia, Fiji, India, Lao People's Democratic
Republic, Maldives, Mongolia, Pakistan, and Sri Lanka.
Source: ADB Staff estimates.
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Other risks to the outlook
also on the downside

● Interest-rate induced capital flow shifts
➢ Baseline assumes rising path of US Fed interest rates
➢ A more aggressive stance could reverse Asia’s capital flows

● Volatile oil prices
➢ Uncertain geopolitical developments add to financial market
jitters

Improved fiscal and financial positions
bolster developing Asia’s resilience to shocks

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Interest rate-induced capital flow shifts if
policy rates rise even faster
Federal Funds rate, United States
Actual ADO 2018 Update

% Fed Funds rate to reach around 3% by end-2019 as per ADO Update
3.5

3.0

2.5

2.0

1.5

1.0

0.5

0.0
Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3
2014 2014 2016 2016 2017 2017 2018 2018 2019 2019
Source: US Federal Reserve Board and staff estimates.

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..and volatile oil and commodity prices.
Brent crude prices Food price index
$/barrrel Spot 2010 = 100 Monthly
120 Annual average 120 Annual average
Baseline forecast Baseline forecasts
100
110
80
100
60

90
40

20 80
2014 2015 2016 2017 2018 2019 2014 2015 2016 2017 2018 2019

Sources: Bloomberg; World Bank. Commodity Price Data (Pink Sheet). http://www.worldbank.org (accessed 13 September 2018).

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Theme chapter:
Maintaining stability
amid heightened uncertainty

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Emerging sources of vulnerability
and policy responses

Main sources of vulnerability Policy tools

• Volatile capital flows • Conventional macro
• Currency pressures policies
– Fiscal
• Debt buildup
– Monetary
• Rising house prices – Exchange rate
• Cross-border contagion • Unconventional policies
– Macroprudential
– Capital flow management

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Sudden capital flow reversals may imperil
stability and weaken currencies
Capital flows to selected Asian economies Nominal exchange rate and foreign exchange reserve,
selected Asian economies
$ billion Index, 2006=100 Quantitative Taper $ billion
easing talk
400 115 6500

200 Exchange rate
110 5200

0
105 3900
-200
Other investment
100 Foreign 2600
-400 Portfolio investment
exchange
Foreign direct investment
reserves
Net flow 95 1300
-600

-800 90 0
2000 2002 2004 2006 2008 2010 2012 2014 2016 2000 2003 2006 2009 2012 2015 2018

Notes: Selected Asian economies consists of Hong Kong, China; India; Indonesia; Malaysia; People’s Republic of China; the
Philippines; the Republic of Korea; Singapore; Taipei,China; Thailand; and Viet Nam. In the chart on the right panel, a
depreciation is represented as an increase in the index; an appreciation by a decrease.

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Debt buildups can weigh on real economy

Total debt relative to GDP Private debt relative to GDP
% of GDP % of GDP
GFC GFC
250 250
East Asia

200 Developing
200 East Asia

Asia
Developing
Asia
150 Southeast
150
Asia
South Asia
100 100 Southeast
Asia
Central Asia
South Asia
50 The Pacific
50 Central Asia

The Pacific
0 0
1997 2000 2003 2006 2009 2012 2015 1997 2000 2003 2006 2009 2012 2015

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Deeper integration
compounds susceptibility to shocks

ASEAN4 = Association of Southeast Asian Nation (Indonesia, Malaysia, Philippines, and Thailand); AUS = Australia; EUA = euro area; HKG =
Hong Kong, China; IND = India; JPN = Japan; KOR = Republic of Korea; PRC = People’s Republic of China; SIN = Singapore; UK = United
Kingdom.

Notes: The figure displays the returns-based network of 15 equity markets and regional groupings from 1 March 1995 to 30 December
2016. Edges were calculated using bivariate Granger causality tests between markets at the 5% level of significance. The thickness of the
lines indicates the average relative strength of each market (or regional grouping). The size of the nodes increases with the number of
outward links of each respective market (or regional grouping). 22
Implement policy carefully
to manage multiple risks effectively
Macroeconomic
stabilization tools

• Fiscal policy • Capital flow
• Monetary policy management
• Hybrid policies
• Exchange rate • Macroprudential
regime policy

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Safeguarding Asia
against heightened uncertainty
• Macroeconomic management requires close
monitoring of vulnerabilities
• Policy tools are plentiful, but favorable results
require coordination:
✓ Domestic policy coordination to boost effectiveness
✓ Cross-border cooperation to avoid unwanted external
spillovers
• Stabilization policies work best where fundamentals
are strong

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ADO Update - Summary
• Developing Asia to continue solid growth at 6.0% in 2018 and
5.8% in 2019
• Robust consumption and expanding services boost growth in the People’s
Republic of China (PRC)
• India rebounding as headwinds fade

• Inflation under control despite rising fuel and food prices
• Largest downside risk stems from escalating US–PRC trade
conflict
• Heightened global uncertainty exposed pockets of vulnerability;
stabilization policy must be tapped when needed

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APPENDIX

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Trade growth moderated slightly January-July 2018
Change in Nominal Exports Value Change in Nominal Imports Value
2016 Jan to Jul 2017 Jan to Jul 2018 2016 Jan to Jul 2017 Jan to Jul 2018
Sri Lanka
Philippines
Hong Kong, China
Bangladesh
Pakistan
Republic of Korea
Brunei Darussalam
Hong Kong, China
Viet Nam
Brunei Darussalam
Taipei,China
Taipei,China
Republic of Korea
Thailand
Singapore
India
Thailand
Indonesia
Singapore Cambodia

Nepal India

Sri Lanka Philippines

People's Rep. of China Malaysia

Cambodia Myanmar

Tajikistan Kazakhstan

Pakistan People's Rep. of China

Viet Nam Georgia
Mongolia Indonesia
Armenia Bangladesh
Malaysia Tajikistan
Azerbaijan Armenia
Kazakhstan Nepal
Georgia Azerbaijan
Myanmar Mongolia

-40 -20 0 20 40 60 -40 -20 0 20 40 60

Note: YTD 2018 refers to data as of July, except for BAN and SRI (Jun 2018); BRU, CAM, MYA and TAJ, (May 2018); and KAZ (Mar 2018).
Sources: CEIC Data Company and Haver Analytics (accessed 11 September 2018).
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…and some depreciations putting upward price
pressure…
Local Currency against US$, % change Nominal effective exchange rates
31 Jan to 31 Mar 2018 31 March to 13 Sep 2018
UZB NIEs, PRC and India
MLD Hong Kong, China Republic of Korea
HKG Singapore Taipei,China
AZE People's Republic of China India
BAN depreciation Jan 2018= 100
ARM 108
KGZ
CAM appreciation
VIE 104
LAO
BRU
100
PHI
MON
SRI
appreciation 96
SIN depreciation
THA
KOR 92
TAP Jan-18 Feb-18 Mar-18 Apr-18 May-18 Jun-18 Jul-18
PAK
TAJ
MAL
ASEAN
INO Indonesia Malaysia Philippines Thailand
GEO
PRC Jan 2018 = 100
AFG 104 appreciation
NEP
IND
MYA 100
KAZ

AUS
96
EUR
JPN
depreciation
-20 -10 0 10 20 30 92
% change Jan-18 Feb-18 Mar-18 Apr-18 May-18 Jun-18 Jul-18

Source: Bloomberg (accessed 13 September 2018). Source: Haver Analytics (accessed 13 September 2018).
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Developing Asia had a good run since the AFC
and weathered the GFC well…

a. Contributions to the global growth b. Extreme poverty incidents in developing Asia
Rest of the world
Developing Asia % 2002 2008 2013
Global growth 60

Percentage points
50
6 AFC GFC 45.2%
(4M)
40 38.6%
(546M)
4 33.7%
31.9% (1110M)
31.2% 24.7%
30 (22M)
(409M) 30.3%
(128M)
(3M)

2 15.1%
20 (253M)

0
10 8.4% 8.9%
(7M) 7.2% (331M)
1.8% (43M)
(25M)
-2 0 0 1 2 3 4 5 6 7

1990 1993 1996 1999 2002 2005 2008 2011 2014 2017 Central East Pacific South Southeast Developing
Asia Asia Asia Asia Asia

Note: The bubbles represent the proportion of population in
extreme poverty (<1.9 USD/day, 2011 PPP).

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Countercyclical fiscal policy can stabilize
business cycle fluctuations and prevent a deep
slowdown provided there is ample fiscal space

Global average cyclical behavior of fiscal policy
Average measure of global procyclicality
1.0
0.8
0.8 0.7
0.7
0.6 0.5

0.4

0.2

0.0
1981-1989 1990-1998 1999-2007 2008-2016

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Independent monetary policy and flexible
exchange rate regimes matter for stabilization

1.0
Countercyclical to HKG Countercyclical to
(Credit to GDP cycle and Interest rates)

business cycle, both business cycle
procyclical to and credit cycle
credit cycle
Correlation coefficients

0.5
INO

TAP
KOR
PHI THA
0.0

IND
MAL
-0.5
Procyclical to
Procyclical to business cycle,
SIN
both business cycle countercyclical to
and credit cycle credit cycle
-1.0
-1.0 -0.5 0.0 0.5 1.0
Correlation coefficients (Business cyle and Interest rates)
1 = pre-announced peg, 2 = crawling peg, 3 = managed float, 4 = flexible.
Note: Average of the exchange rate regimes in India, Indonesia, Malaysia, the People's
Republic of China, the Philippines, the Republic of Korea, Singapore, Thailand, and Viet
Nam.
Sources: IMF Annual Report on Exchange Arrangements and Exchange Restrictions
(AREAER) database; Ilzetzki, E., C. M. Reinhart, and K. S. Rogoff. 2017. Exchange
Arrangements Entering the 21st Century: Which Anchor Will Hold?, National Bureau of
Economic Research, NBER Working Paper No. 23134.

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Capital account policies were used quite actively
in Asia and macroprudential policies have
gained more popularity since GFC
Capital restriction indices Observed interventions in Asia by episodes, by target
a. Total inflow restriction index
Index
1.3

0.8

0.3

-0.2
1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015

b. Total outflow restriction index

Index
1.3

0.8

0.3

-0.2
1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015
Asia includes Australia, PRC, Georgia, Hong Kong, China,
Hong Kong,China India Indonesia India, Indonesia, Kazakhstan, Korea, Malaysia, Mongolia,
Korea, Rep of Malaysia PRC
Philippines Singapore Thailand New Zealand, Pakistan, Philippines, Singapore, Sri Lanka,
Vietnam Taipei,China, Thailand, and Vietnam

Source: Fernández, Klein, Rebucci, Schindler and Uribe (2016) updated in 2017 32