## october-2023-apd-reo-ch1-2

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---

### CHALLENGES TO SUSTAINING GROWTH AND DISINFLATION — Recent developments
- Growth momentum in Asia and the Pacific is slowing, with slowing export-oriented economies and weak investment emerging as the main drag on domestic demand (IMF, Asia and Pacific Department - Regional Economic Outlook).
- Private consumption and services have held up, supported by household excess savings and retail sales growth; post-pandemic reopening has benefitted services (IMF staff calculations; Service Sector PMI diffusion index, 50 = no change).
- Financial conditions:
  - Financial conditions have tightened in advanced economies (AEs) but remain loose in emerging markets (EMs).
  - Asian currencies have regained some value against the US dollar and Chinese Yuan in 2023 (data as of September2023).
  - Change in 10-Year LCY sovereign yields shows limited increases across many EM Asian economies (IMF staff calculations).
- Inflation dynamics:
  - Headline inflation has come down in most of the region.
  - Core inflation is stickier in some economies such as Australia, New Zealand, and Japan (data as of October 18th,2023).

### CHALLENGES TO SUSTAINING GROWTH AND DISINFLATION — Outlook
- GDP growth forecasts (IMF World Economic Outlook, October 2023) indicate slower momentum across the region; forecasts and revisions include country-level adjustments.
- China’s post-COVID recovery:
  - The reopening boost is proving short-lived, especially in manufacturing and retail sales.
  - The real estate sector is experiencing further pressure, and investment is expected to fall further; the outlook for China is downgraded (IMF staff calculations; NBS data).
- Global growth spillovers:
  - An upward revision to US growth and a downgrade to China has a muted net benefit for the region because the US rotation from goods to services limits spillover benefits (Copestake et al (2023); IMF staff calculations).
- Inflation projection:
  - Inflation is projected to continue declining toward central bank targets as output gaps close.
  - Inflation is expected to return to target ranges by end-2024 (IMF World Economic Outlook).
  - Core inflation and output gaps are presented for 2023 and 2024, with expected core inflation relative to targets informing policy space.

### CHALLENGES TO SUSTAINING GROWTH AND DISINFLATION — Risks to the outlook
- China slowdown spillovers:
  - A further near-term slowdown in China would spill over into the rest of Asia; impact varies by shock source (overall activity, investment, consumption, property sector) and is larger for countries more exposed to Chinese investment and consumption (IMF staff calculations; Fernald and others (2021)).
  - Export value added to China is material for several economies (percent of GDP), with notable exposure across economies listed (KHM, HKG, BRN, VNM, LAO, MMR, PHL, MYS, TWN, KOR, IDN, SGP, AUS, NZL, IND, JPN).
- Commodity and labor market risks:
  - Commodity price risks are skewed to the upside (commodity price index series, 2022Q1 = 100; Crude Oil, Wheat, Natural Gas, Coal, Rice).
  - Tight labor markets in advanced Asia could keep core inflation higher.
  - Response of Asian core inflation to global shocks can raise core inflation by measurable percentage points (IMF staff estimates).
- Financial conditions tightening:
  - Financial conditions in the US and EM Asia are looser than historical averages and could revert abruptly, increasing growth-at-risk.
  - Growth spillovers from tighter US financial conditions are negative for Asia (Copestake et al (2023), IMF Staff).
  - Asia: Mean and Growth-at-Risk impacts from a one-standard deviation tightening in domestic financial conditions show both mean GDP declines and larger GaR effects for EM Asia.

### CHALLENGES TO SUSTAINING GROWTH AND DISINFLATION — Policies and recommendations
- Monetary policy response:
  - The pace of monetary tightening in the region has been sharper in the current cycle compared with previous cycles (monetary policy rates and LCY 10-year sovereign spreads; T = 0 is first month of tightening cycle).
  - Real interest rates remain around neutral levels in aggregate.
  - Monetary transmission is state dependent:
    - Loose financial conditions reduce the disinflationary impact of rate hikes.
    - Supportive fiscal policy improves monetary transmission (Deb et. al. (2023)).
- Fiscal policy and public debt:
  - Despite progress in fiscal consolidation, the fiscal burden of public debt is expected to remain above pre-pandemic levels.
  - Public debt burden as a share of revenue is still higher compared to pre-pandemic levels (Public Debt to Fiscal Revenue Ratio across country groupings and years).
  - Fiscal stance is projected to be contractionary in 2023 amid high debt and high inflation (fiscal impulse defined as negative changes in cyclically-adjusted primary balance).
- Revenue mobilization and subsidy reform:
  - Asia’s public revenue mobilization is still lower than peers in other regions (government revenue-to-GDP gaps, 2015-19 vs 2020-24).
  - Fuel subsidies remain significant (explicit and implicit subsidies measured in Million USD and percent of GDP).
  - Policy priority: comprehensive reform of subsidies hand-in-hand with strengthening weak social safety nets to enhance revenue mobilization and improve expenditure quality and effectiveness (IMF staff recommendations).

### Banking sector risks and resilience
- Banks’ exposure to Commercial Real Estate (CRE):
  - "Banks' Commercial Real Estate Loans Exposure (Percent of Gross Loans; end-2022)" highlights cross-country variation in CRE loan shares as of end-2022.
  - Commercial Real Estate Prices are indexed to "End-2019= 100" to compare pandemic maximums and latest observations.
  - Charts indicate that an adjustment in commercial real estate prices and defaults could be a risk for countries with high bank exposure.
- Bank-level indicators:
  - "Bank Capital Adequacy and Profitability (In percent; latest observations)" present Return on Equity and Tier 1 Capital Adequacy Ratio.
  - Assessment: "Banking sector in Asia remains resilient with strong capital and profitability."
- Data sources: Bank for International Settlements; IMF, Financial Soundness Indicators; and IMF staff calculations.

### Output loss, inequality, and fiscal gaps
- Output loss:
  - "Output loss in Asia (Percent deviation from 2020 projections)" compares United States, Advanced Asia, China, India, and Emerging and Developing Asia excl. China and India for years 2019–2024.
  - Chart vertical axis range: -12 to 2 percent deviation.
  - Observation: "Advanced Asia has nearly recovered to pre-pandemic projections, but EMs are lagging."
- Inequality:
  - "Gini Index, Disposable Income (In units)" series for AE Asia, EM Asia, RoW AE, RoW EMDE from 1993–2021 indicates inequality in Asia is higher than in the rest of the world.
  - Inequality measure defined as disposable income (gross income minus direct taxes).
  - AE Asia includes Hong Kong SAR, Taiwan Province of China and Singapore. EM Asia includes Indonesia, Philippines, Thailand and Vietnam.
- Fiscal needs:
  - "Additional Spending Gap to Achieve SDG in 2030 (In Percentage Points of GDP)" signals that "a lot more needs to be spent to ensure inclusive growth."
- Data sources: SWIID; IMF staff calculations; IMF World Economic Outlook; Fiscal Monitor (2023).

### Climate change and disaster impacts
- Temperature trends:
  - "Temperature Change (In celsius)" with baseline period 1951-1980 (annual estimates of mean surface temperature change) shows a rising trend for Asia and Rest of the World.
  - Chart vertical scale includes -0.5 to 2.
- Natural disaster damage:
  - "Total Damage from Natural Disasters (In billion USD; inflation adjusted)" plotted by decade from 1940s to 2010s with series for AE Asia, EM Asia, and Rest of world.
  - Observation: Asia’s loss from natural disasters represents around half of the world’s total.
- Climate adaptation financing:
  - "Climate Adaptation Needs (percentage points of GDP)" indicates that investment in adaptation in Asia is largely in line with other continents; empty circles denote weighted averages of country groups.
- Data sources: IMF Climate Change Dashboard; EM DAT; Alighieshev, Bellon and Massetti (2022); IMF staff calculations.

### Policy priorities for Asia
- Structural policies:
  - Renew mutual cooperation and boost regional integration and productivity to address medium-term growth slowdown and risk from geoeconomic fragmentation.
  - Priorities include education, digitization, product and labor market reforms, and facilitating a green transition.
- Fiscal policy:
  - Continue consolidation to support disinflation, with greater emphasis on credible medium-term frameworks for debt sustainability.
  - Rising debt service-to-revenue ratios call for enhanced tax mobilization measures and debt management strategies.
  - For some EMDEs with debt distress, faster and more efficient coordination on debt resolution is needed.
- Monetary, exchange rate and financial policy:
  - Maintain restrictive monetary policy until inflation is reliably within target.
  - Use macroprudential policies to tackle pockets of vulnerabilities; strengthen bank resolution and insolvency frameworks.
  - A "higher for longer" global interest rate environment requires an integrated policy response to cushion potential shocks.
- Key drivers and context:
  - Inflationary pressure is easing but upside risks remain and financial conditions are loose, providing scope for maintaining a tighter stance for longer without hurting growth.
  - Structural reforms, regional cooperation, and measures to manage fiscal and financial vulnerabilities are central to restoring sustained and inclusive growth.

*IMF, Asia and Pacific Department — Regional Economic Outlook (October 2023).*

### Section 1

### CHALLENGES TO SUSTAINING GROWTH AND DISINFLATION

### Recent developments
- Growth momentum in Asia and the Pacific is slowing, with slowing export-oriented economies and weak investment emerging as the main drag on domestic demand (IMF, Asia and Pacific Department - Regional Economic Outlook).
- Private consumption and services have held up, supported by household excess savings and retail sales growth; post-pandemic reopening has benefitted services (IMF staff calculations; Service Sector PMI diffusion index, 50 = no change).
- Financial conditions are diverging:
  - Financial conditions have tightened in advanced economies (AEs) but remain loose in emerging markets (EMs).
  - Asian currencies have regained some value against the US dollar and Chinese Yuan in 2023 (data as of September2023).
  - Change in 10-Year LCY sovereign yields shows limited increases across many EM Asian economies (IMF staff calculations).
- Inflation dynamics:
  - Headline inflation has come down in most of the region.
  - Core inflation is stickier in some economies such as Australia, New Zealand, and Japan (data as of October 18th,2023).

### Outlook
- GDP growth forecasts (IMF World Economic Outlook, October 2023) indicate slower momentum across the region; forecasts and revisions include country-level adjustments (see IMF World Economic Outlook, October 2023).
- China’s post-COVID recovery is losing steam:
  - The reopening boost is proving short-lived, especially in manufacturing and retail sales.
  - The real estate sector is experiencing further pressure, and investment is expected to fall further; the outlook for China is downgraded (IMF staff calculations; NBS data).
- Global growth spillovers:
  - An upward revision to US growth and a downgrade to China has a muted net benefit for the region because the US rotation from goods to services limits spillover benefits (Copestake et al (2023); IMF staff calculations).
- Inflation projection:
  - Inflation is projected to continue declining toward central bank targets as output gaps close.
  - Inflation is expected to return to target ranges by end-2024 (IMF World Economic Outlook).
  - Core inflation and output gaps are presented for 2023 and 2024, with expected core inflation relative to targets informing policy space.

### Risks to the outlook
- China slowdown spillovers:
  - A further near-term slowdown in China would spill over into the rest of Asia; impact varies by shock source (overall activity, investment, consumption, property sector) and is larger for countries more exposed to Chinese investment and consumption (IMF staff calculations; Fernald and others (2021)).
  - Export value added to China is material for several economies (percent of GDP), with notable exposure across economies listed (KHM, HKG, BRN, VNM, LAO, MMR, PHL, MYS, TWN, KOR, IDN, SGP, AUS, NZL, IND, JPN).
- Commodity and labor market risks:
  - Commodity price risks are skewed to the upside (commodity price index series, 2022Q1 = 100; Crude Oil, Wheat, Natural Gas, Coal, Rice).
  - Tight labor markets in advanced Asia could keep core inflation higher.
  - Response of Asian core inflation to global shocks can raise core inflation by measurable percentage points (IMF staff estimates).
- Financial conditions tightening:
  - Financial conditions in the US and EM Asia are looser than historical averages and could revert abruptly, increasing growth-at-risk.
  - Growth spillovers from tighter US financial conditions are negative for Asia (Copestake et al (2023), IMF Staff).
  - Asia: Mean and Growth-at-Risk impacts from a one-standard deviation tightening in domestic financial conditions show both mean GDP declines and larger GaR effects for EM Asia.

### Policies and recommendations
- Monetary policy response:
  - The pace of monetary tightening in the region has been sharper in the current cycle compared with previous cycles (monetary policy rates and LCY 10-year sovereign spreads; T = 0 is first month of tightening cycle).
  - Real interest rates remain around neutral levels in aggregate.
  - Monetary transmission is state dependent:
    - Loose financial conditions reduce the disinflationary impact of rate hikes.
    - Supportive fiscal policy improves monetary transmission (Deb et. al. (2023)).
- Fiscal policy and public debt:
  - Despite progress in fiscal consolidation, the fiscal burden of public debt is expected to remain above pre-pandemic levels.
  - Public debt burden as a share of revenue is still higher compared to pre-pandemic levels (Public Debt to Fiscal Revenue Ratio across country groupings and years).
  - Fiscal stance is projected to be contractionary in 2023 amid high debt and high inflation (fiscal impulse defined as negative changes in cyclically-adjusted primary balance).
- Revenue mobilization and subsidy reform:
  - Asia’s public revenue mobilization is still lower than peers in other regions (government revenue-to-GDP gaps, 2015-19 vs 2020-24).
  - Fuel subsidies remain significant (explicit and implicit subsidies measured in Million USD and percent of GDP).
  - Policy priority: comprehensive reform of subsidies hand-in-hand with strengthening weak social safety nets to enhance revenue mobilization and improve expenditure quality and effectiveness (IMF staff recommendations).

*IMF, Asia and Pacific Department - Regional Economic Outlook, October 24, 2023.*

### Section 2

### october-2023-apd-reo-ch1-2 - Section 2

### Banking sector risks and resilience
- Banks’ exposure to Commercial Real Estate (CRE) shown as "Banks' Commercial Real Estate Loans Exposure (Percent of Gross Loans; end-2022)" highlights cross-country variation in CRE loan shares as of end-2022.
- Commercial Real Estate Prices are indexed to "End-2019= 100" to compare pandemic maximums and latest observations.
- Charts indicate that an adjustment in commercial real estate prices and defaults could be a risk for countries with high bank exposure.
- Bank-level indicators: "Bank Capital Adequacy and Profitability (In percent; latest observations)" present Return on Equity and Tier 1 Capital Adequacy Ratio, supporting the assessment that the "Banking sector in Asia remains resilient with strong capital and profitability."
- Data sources cited: Bank for International Settlements; IMF, Financial Soundness Indicators; and IMF staff calculations.

### Output loss, inequality, and fiscal gaps
- Output loss depiction: "Output loss in Asia (Percent deviation from 2020 projections)" compares United States, Advanced Asia, China, India, and Emerging and Developing Asia excl. China and India for years 2019–2024; the chart range shows -12 to 2 percent deviation on the vertical axis.
- Observation: "Advanced Asia has nearly recovered to pre-pandemic projections, but EMs are lagging."
- Inequality: "Gini Index, Disposable Income (In units)" series for AE Asia, EM Asia, RoW AE, RoW EMDE from 1993–2021 indicates inequality in Asia is higher than in the rest of the world.
- Fiscal needs: "Additional Spending Gap to Achieve SDG in 2030 (In Percentage Points of GDP)" signals that "a lot more needs to be spent to ensure inclusive growth."
- Data sources cited: SWIID; IMF staff calculations; IMF World Economic Outlook; Fiscal Monitor (2023).
- Note: Inequality measure defined as disposable income (gross income minus direct taxes). AE Asia includes Hong Kong SAR, Taiwan Province of China and Singapore. EM Asia includes Indonesia, Philippines, Thailand and Vietnam.

### Climate change and disaster impacts
- Temperature trends: "Temperature Change (In celsius)" with baseline period 1951-1980 (annual estimates of mean surface temperature change) shows a rising trend for Asia and Rest of the World; chart vertical scale includes -0.5 to 2.
- Total damage from natural disasters: "Total Damage from Natural Disasters (In billion USD; inflation adjusted)" plotted by decade from 1940s to 2010s with series for AE Asia, EM Asia, and Rest of world; observations indicate Asia’s loss from natural disasters represents around half of the world’s total.
- Climate adaptation financing: "Climate Adaptation Needs (percentage points of GDP)" indicates that investment in adaptation in Asia is largely in line with other continents; empty circles denote weighted averages of country groups.
- Data sources cited: IMF Climate Change Dashboard; EM DAT; Alighieshev, Bellon and Massetti (2022); IMF staff calculations.

### Policy priorities for Asia
Structural policies
- Renew mutual cooperation and boost regional integration and productivity to address medium-term growth slowdown and risk from geoeconomic fragmentation.
- Priorities include education, digitization, product and labor market reforms, and facilitating a green transition.

Fiscal policy
- Continue consolidation to support disinflation, with greater emphasis on credible medium-term frameworks for debt sustainability.
- Rising debt service-to-revenue ratios call for enhanced tax mobilization measures and debt management strategies.
- For some EMDEs with debt distress, faster and more efficient coordination on debt resolution is needed.

Monetary, exchange rate and financial policy
- Maintain restrictive monetary policy until inflation is reliably within target.
- Use macroprudential policies to tackle pockets of vulnerabilities; strengthen bank resolution and insolvency frameworks.
- A "higher for longer" global interest rate environment requires an integrated policy response to cushion potential shocks.

Key drivers and context
- Inflationary pressure is easing but upside risks remain and financial conditions are loose, providing scope for maintaining a tighter stance for longer without hurting growth.
- Structural reforms, regional cooperation, and measures to manage fiscal and financial vulnerabilities are presented as central to restoring sustained and inclusive growth.

---


_Source: https://www.imf.org/-/media/files/oap/oap-home/2023/october-2023-apd-reo-ch1-2.pdf_