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World Economic and Financial Surveys

Regional Economic Outlook:
Asia and Pacific

May 2009

Ordering Information

The May 2009 Asia and Pacific REO looks at the impact of the global financial crisis on Asia. Chapter 1 argues that a sustained recovery will need to await an improvement in the global economy, given Asian economies’ specialization on advanced manufacturing and increasing financial ties with the rest of the world. Indeed, Chapter 2 shows that Asia has typically not recovered until exports have started to revive. An expansionary policy stance would provide insurance against the risks that a delayed global recovery could hurt the corporate and bank sectors, as discussed in Chapter 3. Some useful insights on how to deal with the adverse impact of the crisis may come from Japan’s experience during the 1990s, discussed in Chapter 4.

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Contents

Definitions
Executive Summary
I. Overview
  Why Has Asia Been So Hard Hit?
  External Shocks Have Rapidly Fed through to Domestic Demand
  A Long Recovery Ahead
  What Role for Policy?
II. Recessions and Recoveries in Asia: What Can the Past Teach Us about the Present Recession?
  Preliminary Considerations
  Recessions in Asia: How Long and Deep?
  Past Recoveries: How Vigorous?
  Policy Responses and Impacts
  Concluding Remarks
  Appendix 2.1
III. How Vulnerable Is Corporate Asia?
  How Badly Has the Corporate Sector Been Hit?
  How Large Are the Default Risks?
  How Large Are the Likely Default Losses?
  Why Is Asia’s Corporate Sector Expected to Remain So Resilient?
  How Badly Will the Banks Be Affected?
  Stress Testing the Corporate Sector
  Conclusions
  Appendix 3.1. Using Vector Autoregressions to Analyze the Transmission of Shocks across Sectors
  Appendix 3.2. Micro-Level Evidence on Real Macro-Financial Linkages
  Appendix 3.3. Computation of Banks’ Expected Losses from Corporate Sector Distress
  Appendix 3.4. Stress Testing Corporate Balance Sheets
IV. Revisiting Japan’s Lost Decade
  Background: Stylized Facts from Japan’s Lost Decade
  Fiscal Policy: Did Stimulus Work?
  Monetary Policy: The Bank of Japan’s Approach to Credit Easing
  Financial Sector Policies: Resolving Japan’s Banking Crisis and Fiscal Costs
  Conclusions
References
Boxes
1.1. How Did the Crisis Affect Low-Income Countries in Asia?
1.2. The Global Financial Crisis and Trade Finance in Asia
1.3. Housing Prices: Could Further Declines Threaten Growth?
1.4. Financial Conditions in Key Asian Economies
1.5. The Case for Fiscal Stimulus
3.1. How Is the Economic Downturn Affecting China’s Corporate Sector?
4.1. IMF Seminar on Japan-U.S. Parallels: Summary of Proceedings
4.2. Japan: Key Financial System Reforms, 1996–2003
Tables
1.1. Asia: Real GDP
2A.1. Asia: Identification of Previous Recessions since 1980
3.1. Selected Asia: Share of Debt of Firms with Interest Cover Ratio Less than One, by Size, 2007
3.2. Asia: Potential Impact on Bank Capital from Corporate Sector Distress
3A.1. Summary: Estimation Results
4.1. Key Events in Japan’s Banking Crisis
4.2. Japan: Major Tax Cuts during the 1990s
4.3. Japan: Estimated Multipliers
4.4. Summary of Bank Support Measures in Asia
Figures
1.1. Asia: 2008Q4 GDP Growth—Actual vs. Predicted
1.2. 2008Q4 GDP Growth
1.3. Asia: Export Exposure to G-2
1.4. Emerging Asia Intraregional Exports and United States Non-Oil Imports
1.5. Share of Advanced Manufacturing Value-Added in GDP
1.6. Share of Advanced Manufacturing Value-Added in GDP and 2008Q4 GDP Growth
1.7. Emerging Asia (Excluding China and India): Direction of Exports
1.8. China: Imports of Parts and Components
1.9. Changes in International Claims of Reporting Banks vis-à-vis Asia
1.10. Emerging Asia: External Bond Issuances
1.11. Emerging Markets: Stock Market Performance
1.12. Selected Asia: Nominal Effective Exchange Rate
1.13. Emerging Asia: Changes in Foreign Exchange Reserves
1.14. Selected Asia: Changes in Growth of Credit to Private Sector and Interest Rates
1.15. Selected Asia: Inventories and Shipments
1.16. Selected Emerging Asia: Contributions to 2008Q4 GDP Growth
1.17. Selected Asia: Real Private Investment in Machinery and Equipment and Real Residential Investment
1.18. Selected Asia: Employment Growth
1.19. Selected Asia: Unemployment Rate
1.20. Japan, China, and India: Contributions to Growth
1.21. Selected Asia: Contributions to Growth
1.22. Asia: Output Gap and Potential Output Growth
1.23. Asia: Consumer Prices
1.24. Asia: Current Account Balance
1.25 Emerging Asia: Net Private Capital Flows
1.26 Asia: GDP Growth
1.27 Asia: Effect on GDP Growth from Weaker Consumption Growth
1.28 Foreign Reserves over External Financing Requirements
1.29 Selected Emerging Asia: Projected Net Private Capital Flows
1.30. Asia: Risk Factors
1.31. Asia: Policy Rates
1.32. Central Bank Balance Sheet: Total Assets
1.33. Discretionary Fiscal Measures, 2009 and 2010
1.34. Composition of Fiscal Stimulus Measures, 2009
1.35. Real Private Consumption Expenditure
2.1. Recessions, Recoveries and Expansion
2.2. Recession Timeline since 1980
2.3. Asia and United States: Recession Timeline since 1980
2.4. Asia: Previous Recessions since 1980 (Median real level, peak of the recessions=100)
2.5. Cumulative Output Loss in Previous Recessions since 1980
2.6. Asia: Previous Recessions since 1980 (Median)
2.7. Asia: Credit to Private Sector during Previous Recessions since 1980
2.8. Asia by Regional Groups: Cumulative Output Loss during Previous Recessions since 1980
2.9. Asia by Type of Export Activity: Real Gross Domestic Product during 2000–01 Recession
2.10. Asia: Response of Real Gross Fixed Investment Growth to a Shock to Real Export Growth
2.11. Asia: Real Gross Fixed Investment during Previous Recessions since1980
2.12. Selected Asia: Real Private Consumption Expenditure during the Asian Crisis
2.13. Asia: Real Exports of Goods and Services during Previous Recessions since 1980
2.14. Asia: Real Effective Exchange Rate during Previous Recessions since 1980
2.15. Asia: Previous Recessions since 1980 by Type of Export Intensity of the Economies
2.16. Average Quarterly Growth during Recovery Phase
2.17. Asia: Change in Trend GDP Growth during Previous Recessions since 1980
2.18. Asia: Nominal Policy Rates during Previous Recessions since 1980
2.19. Asia: Fiscal Indicators during Previous Recessions since 1980
2.20. Asia: Impact of Policy Actions during Previous Recessions since 1980
2.21. Asia: Change in Fiscal Balance in Selected Recessions
3.1. Selected Asia: Decline in Industrial Production
3.2. Asia: Share of Debt of Firms with Interest Cover Ratio Less than One
3.3. Selected Asia: Corporate Bankruptcies
3.4. Emerging Asia: Stock Market Performance
3.5. Asia Excluding Japan: Equity Performance by Sector
3.6. Korea: Lending by Size of Companies
3.7. Asia: Credit Default Swap Spreads
3.8. Asia: One-Year-Ahead Default Probability of Nonfinancial Corporates
3.9. Selected Asia: Historical Expected Default Frequency
3.10. Asia: Change in Industrial Production—Actual vs. Predicted
3.11. Expected Implication of Higher Default Risks on Firm Investment
3.12. Selected Asia: Cumulative Impact on Banks’ Default Probabilities from Shock to Corporate Default Probabilities, after 10 months
3.13. Asia: Nonfinancial Corporate Sector—Annual Average Expected Losses One Year Ahead
3.14. Asia: Leverage (Debt-to-Equity Ratio)
3.15. Asia: Profitability (Return on Assets)
3.16. Asia: Liquidity (Quick Ratio)
3.17. Asia: Banking Sector—Expected Losses from Corporate Sector Distress One-Year-Ahead
3.18. Profit Shock vs. Interest Rate Shock: Share of Firms with Interest Cover Ratio Less than One
3.19. Profit Shock vs. Interest Rate Shock: Share of Impaired Debt of Firms with Interest Cover Ratio Less than One
3.20. Share of Debt of Firms with Interest Cover Ratio Less than One, by Size
3.21. Share of Debt of Firms with Interest Cover Ratio Less than One, by Sector
4.1. Japan’s Twin Bubbles: Stock Market and Real Estate
4.2. Japan: Growth and Unemployment
4.3. Japan: Inflation and Output Gap
4.4. Japan: “Three Excesses” of Corporate Sector
4.5. Japan: Fiscal Situation of the General Government
4.6. Japan: GDP Growth and Supplementary Fiscal Stimulus Package
4.7. Japan: Structural Balance of the General Government
4.8. Japan: Central Government Public Investment
4.9. Japan: Real Public Investment
4.10. Japan: Financial Surplus of Nonfinancial Corporate Sector
4.11. Japan: Share of Central Government Spending
4.12. Japan: Fiscal Balance and General Government Debt
4.13. Japan: Interest Rates
4.14. Japan: Bank Lending
4.15. Japan: Credit Spreads
4.16. Bank of Japan: Assets and Balance of Banknotes in Circulation
4.17. Japan: Monetary Aggregates
4.18. Japan Premium
4.19. Cumulative Loans Losses of Japanese Banks since 1992
4.20. Japan: Nonperforming Loan