Asia Pacific: Recent Economic and Trade Performance with
Focus on North and Central Asia
8 February 2016
Dr. Shamshad Akhtar
Under-Secretary-General of the United Nations
and Executive Secretary of ESCAP
Key findings and messages
• The Asia-Pacific region’s growth has plateaued around 5% -- 2015 registered slowdown relative to average growth of 9.4% between 2005-2007; outlook for 2016 and 2017 remains subdued as well.
– Deceleration in external demand persists – Domestic demand is also a constraint
• Commodity prices, especially oil, are hurting oil producers -- Russia and Kazakhstan in particular. Negative consequences felt across North and Central Asia --
– Economic diversification beyond resource-based sectors needs to be urgently pursued
• Regional trade growth remains low and is impacted by slowdown in China
• Room for fiscal and monetary policy constrained, even though need for countercyclical support is growing
• Key economic policy challenges include coping with rising private debt and higher financing costs
• Overarching medium-term priority is rebalancing growth and making it more inclusive, and strengthening productivity
2
Real GDP growth in Developing Asia-Pacific relative to Advanced Economies and the World, 2006-2016
3
Risk of Asia-Pacific no longer being able to drive global growth
2016 Outlook: North and Central Asia economies relative to Asia Pacific Developing Countries -- Real GDP and Inflation
4
Real GDP growth Inflation
(Percentage)
Latest estimates
Survey Year-end
Update 2015
Latest estimates
Survey Year- end Update
2015 2014 2015 2016 2015 2016 2014 2015 2016 2015 2016
Armenia 3.4 2.8 2.5 2.8 2.5 3.0 3.5 3.3 4.0 3.3
Azerbaijan 2.8 2.0 1.8 2.0 1.8 1.5 4.0 3.2 3.8 3.2
China 7.3 6.9 6.5 6.9 6.5 2.0 1.5 2.2 1.5 2.2
Georgia 4.8 2.7 2.6 2.7 2.6 3.1 4.9 5.1 4.9 5.1
India 7.3 7.4 7.5 7.4 7.5 6.0 5.0 5.5 5.0 5.5
Indonesia 5.0 4.8 5.3 4.8 5.3 6.4 6.4 5.3 6.6 5.3
Kazakhstan 4.3 1.2 2.1 1.3 2.1 6.7 6.6 8.8 7.0 8.8
Kyrgyzstan 3.6 3.5 3.9 4.3 3.9 7.5 6.6 6.0 6.8 6.5
Republic of Korea 3.3 2.6 2.9 2.6 2.9 1.3 0.7 1.6 0.7 1.6
Russian Federation 0.6 –3.9 –0.5 -3.9 -0.5 7.8 15.5 10.0 15.7 9.0
Tajikistan 6.7 4.0 4.5 4.0 4.5 6.1 5.6 5.0 5.6 5.0
Turkmenistan 10.3 8.5 8.9 8.5 8.9 6.0 7.0 6.0 7.0 6.0
Uzbekistan 8.1 6.8 7.0 6.8 7.0 8.4 9.7 9.2 9.7 9.2
North and Central Asia 1.3 -2.9 0.1 -2.9 0.1 7.5 14.1 9.6 14.3 8.7
North and Central Asia (excluding Russian Federation) 5.1 3.0 3.4 3.0 3.4 5.6 6.4 7.1 6.5 7.1
Developing ESCAP economies 5.3 4.5 4.9 4.5 5.0 4.2 4.2 4.1 4.2 4.0
Total ESCAP 3.5 3.2 3.6 3.2 3.6 3.7 3.0 3.0 3.0 2.9
Domestic demand is not growing in a robust manner
• Consumption being affected in some economies due to rapid accumulation in private debt and relatively high inflation
• Investment being affected by slow progress in reforms, a constrained private sector and high economic uncertainty.
5
Contributions of private consumption to economic growth in selected developing Asia-Pacific economies, 2012-2014
Contributions of fixed investment to economic growth in selected developing Asia-Pacific economies, 2012-2014
Emerging developments in China have consequences for global and regional economy
China growth contributions, by expenditure, 2005-2014 China slowdown in manufacturing and Industrial output, 2012-2015
• China is rebalancing the economy towards domestic demand, a welcome development – this has impacted (net) exports and investment though, which have declined
• Slower industrial production due to lower demand by advanced economies for Chinese exports and less domestic demand due to higher capacities from previous activity
China: Large Spillovers in the region
• Lower domestic demand by China is impacting regional trade.
– Most affected are commodity-exporters (e.g. Indonesia) and manufacturing exporters (e.g. Singapore, Republic of Korea, Taiwan Province of China)
• In 2015 this impacted both the equity and currency markets in China as well as the region; as seen again in January 2016
7
Growth of exports to China for selected Asia-Pacific economies, 2012-2015
Equity market performance for China and selected economies, 2015-2016
Moderate recovery in advanced economies also affecting the region given its export-led growth orientation
• Apart from slowing demand in China, slow recovery in advanced
economies is affecting exporting economies in region directly …
– Global trade in 2015 is expected to show slowest expansion since 2009
• …and indirectly through re-exports from China.
– China has seen consecutive months of export contraction over second half of 2015
– This translates into less demand for products from the region for
processing and onward export by China
8
Monthly export growth for selected AP economies, 2010-2015 Monthly export growth for selected North and Central Asian
economies, 2010-2015
Impact of high dependence on commodities in NCA economies
Fuel exports and export growth, 2015
FDI and Oil Price
• Many economies in the NCA region are dependent on revenues from natural commodities.
• Commodity-exporting economies have had to contend with significant
declines in export revenues.
• Poor economic performance and falling oil prices have eroded fiscal revenues.
• Weak resource sector has impacted investment.
• With lower oil prices, FDI may decline further.
• Low investment will constrain growth and prevent progress towards
diversification.
High concentration of commodity exports in NCA economies
Product and Market Concentration of Exports Complexity of Exports
Progress in trade facilitation…room for improvement
Average bilateral trade cost, 1996-2012
Based on trade-weighted average of bilateral trade costs with developed economies. East-Asia-3 includes the three largest economies in East-Asia: China, Japan and Republic of Korea. NCA-4 includes the four largest economies in North and Central Asia: Georgia, Kazakhstan, Kyrgyzstan and Russian Federation
International supply chain connectivity index, 2006 and 2015
Towards “Next Generation” Trade Facilitation in Asia-Pacific
Implementation of Trade Facilitation as a step-by-step process…
unnext.unescap.org/UNTFSurvey2015.asp
WTO TFA Full Compliance (Minimum implementation score associated with)
Little Diversification in FDI Structure in NCA economies
Investment heavily focused in natural-resources- related industries – diversification ongoing.
•Russian Federation
– Foreign MNEs increased their investment in energy and natural-resources-related projects. However, after a period of growth, this has come to a standstill.
– Recently leading international car manufacturers have established production facilities, prompted also by the country’s industrial assembly policy.
•Kazakhstan
– Geological exploration activities by foreign investors accounted for more than half of FDI stock.
•Azerbaijan
– Investments in the oil and gas industry accounted for three quarters of the total.
•FDI in Kyrgyzstan and Tajikistan dominated by China
•Russia is the largest investor in Uzbekistan but ROK and Singapore have created most jobs
Given current structure - Sustainability of FDI is a concern.
2011 2012 2013 2014 North and Central Asia 77 965 71 547 87 884 40 998
Armenia 515 489 370 383
Azerbaijan 1 465 2 005 2 632 4 430
Georgia 1 048 911 949 1 279
Kazakhstan 13 973 13 337 10 221 9 562
Kyrgyzstan 694 293 626 211
Russian Federation 55 084 50 588 69 219 20 958
Tajikistan 160 232 105 261
Turkmenistan 3 391 3 130 3 076 3 164
Uzbekistan 1 635 563 686 751
FDI inflows in North and Central Asia, million USD
Slower economic activity coupled with lower commodity prices driving inflation downwards
• An important factor behind inflation dynamics is the effect of commodity imports/exports on exchange rates
• For most commodity-importers, exchange rate impact is less
pronounced due to lower commodity prices
• E.g. lower imported inflation in South-East Asia and East & North East Asia
• For commodity-exporters, there is higher exchange rate depreciation due to low commodity prices.
• E.g. higher imported inflation in North and Central Asia
Inflation for developing Asia-Pacific region, 2009-2016
Oil and commodity price trends, 2009-2015
Currency depreciation has accelerated:
US MP normalization, decline in oil price and Chinese growth concerns
General outflow of portfolio capital
• While initial US rate impact in December 2015 was factored in, uncertainty
regarding path of increase is
contributing to financial market volatility
• Weaker economic data from China and managed depreciation of the Renminbi is a growing concern, as seen again in January 2016
Countries have allowed currency weakness due to concerns about export prospects
• Oil price decline in NCA region has gone hand-in-hand with currency depreciation.
• However, competitive devaluations are not beneficial.
15
Exchange rate indices in selected Asia-Pacific economies, 2013-2015
Note: A declining trend represents depreciation and vice versa
Monetary policy constrained by capital outflow concerns
• Most economies have lowered policy rates recently, with the exception of some Central Asian economies
• Despite subdued growth and inflation outlook, risk of
capital outflow and financial stability considerations
further hampers monetary easing
• Countries more at risk of excessive outflow are those with weak macroeconomic fundamentals and substantial commodity dependence
Policy rates in selected developing Asia
2012-2015
Domestic financing costs in the region may rise due to increase in US interest rate
• US federal funds rate expected to gradually rise in 2016 and could reverse part of the flow of foreign funds invested in the region
– Impact on equity and debt market and cross-border bank loans, and pressure on exchange rates
• Whether domestic interest rates will increase accordingly depends on
country-specific factors, such as...
– Exchange rate regime, external debt, asset prices, effectiveness of macro- prudential measures, etc.
Asia-Pacific policy rate and United States federal funds rate, 2012-2015
Household, corporate and sovereign debt in 2014, % of GDP
Rapid increases in private debt call for vigilance
• Household debt in Malaysia, Thailand on a par with OECD levels, while China holds more corporate debt than the US
– Exposure to real estate sector and concentration in low income
households and low profit firms
• Risks for financial stability and economic growth prospects
– Pressure on debt servicing capacity if financing costs rise when income growth is slowing
Debt service ratios (DSR) for the private non-financial sector
Household debt, % of GDP
Non-performing loans ratio
Indebtedness in NCA has also increased
• Levels of household debt have increased in NCA region.
– Weak economic outlook may encourage households and businesses to deleverage.
• Non-performing loan ratios have increased in many economies.
– Impact of currency depreciation may further affect financial sector.
Fiscal policy can play a proactive role, though some economies face constraints
• …to stabilize the economy
– More countercyclical and
expansionary policy can be adopted
• … and support inclusive, long- term growth
– Spending on education, health and infrastructure is low or uneven
• Fiscal space contingent on tax and other reforms
– But there are no mechanical and universally accepted thresholds
20
Fiscal balance, regional average, 2001-2016
Medium term economic challenge is to strengthen productivity and make economic growth more inclusive
• Despite tremendous progress,
development has not been inclusive in the region.
• Higher economic growth has not created enough decent jobs, and higher labour productivity has not translated into commensurate increases in real wages.
• With growth of total factor
productivity having declined in recent years, greater effort is needed to
strengthen productivity and ensure that its benefits are passed on to the labour force.
Labour income share in Asia and the Pacific from 1991 to 2011 (in per cent of output)
Annual percentage growth rate of total factor productivity and labour productivity, 1991-2013
Five takeaways
1. A “new normal” of slower economic growth continues amidst weak global trade and China’s slow growth; AP economies will need to look more towards domestic and regional demand.
2. Fiscal policy can tackle cyclical and long-term challenges, and relieve pressure on monetary policy, provided tax revenues are
strengthened.
3. Economies in NCA need to diversify and reduce dependence on commodities.
4. Rapid increases in private debt call for vigilance, especially as financing costs are likely to increase in the region.
5. Productivity growth should be accelerated and its benefits adequately shared with the labour force.
6. With the adoption of 2030 Agenda for Sustainable Development, it is not just about economic growth anymore ---- we live in the era of sustainable development.
2 2
