Asia Pacific
Economic
Outlook
May 2013
China
India
Malaysia
Thailand
The growth picture
China’s government reported that, in the first
quarter of 2013, real GDP was up 7.7 percent from
a year earlier. This was slower than expected and
slower than the 7.9 percent growth recorded in
the fourth quarter of 2012. This is the first time in
20 years that growth has been less than 8.0 percent
for four consecutive quarters. Growth of fixed-
asset investment, while strong at 20.6 percent, was
worse than the market expected. China is clearly
becoming a more mature economy with growth
that is more consistent with middle-income
affluence. So while many people will long for the
blistering 10–12 percent growth of the past, it is
entirely normal that China would shift to a lower
rate of growth, especially as labor force growth
has basically ceased. Thus the rapid growth that
was needed to absorb new entrants into the labor
force is no longer an issue. The government is
projecting growth of 7.5 percent going forward.
The real question is whether even this level can
be sustained given the severe imbalances in the
Chinese economy.
In addition, there is the question as to whether
the growth will continue to come from govern-
ment-financed investments in infrastructure, or
from domestic demand—principally consumer
demand—that is needed for a sustainable growth
path. It is not clear at this point if China is going
to make that transition anytime soon. In any
event, financial markets were disappointed with
the Chinese figures, especially as growth came in
lower than the market had predicted. Indeed the
market was hoping for acceleration in growth.
Equity markets across Asia declined on this news.
Going into the second quarter, there are signs
of weakness:
• In April, industrial production was up 9.3 per-
cent from a year earlier, and retail sales were
China
By Dr. Ira Kalish
Asia Pacific Economic Outlook—May 2013 1
up 12.8 percent over a year ago—both figures
represent a slowdown in growth.
• The government reported that its purchasing
manager’s index (PMI) for services fell from
55.6 in March to 54.5 in April. This indicates
continued moderate growth of services, but at
a slower pace.
• The government reported that the PMI for
manufacturing dropped from 50.9 in March
to 50.6 in April—just barely above the criti-
cal 50.0 level, below which output declines.
In addition, an index of new orders in China’s
manufacturing sector fell from 52.3 in March
to 51.7 in April. These reports mean that the
manufacturing sector is barely growing.
• The government reports that, in April, con-
sumer prices were up 2.4 percent over a year
ago. This is well below the government’s target
of 3.5 percent inflation. In addition, wholesale
prices fell 2.6 percent in April versus a year
ago. This is likely due to declining commodity
prices as well as excess capacity at factories.
The divergence of wholesale and retail prices
will boost the profit margins of retailers.
Declining wholesale prices are likely to lead to
lower consumer-price inflation in the coming
months. Lower inflation will give the govern-
ment leeway in deregulating the prices of
resources and utilities. Such price controls lead
to inefficient use of resources, which in turn
restrain productivity growth and contribute
to pollution.
The slowdown in economic activity, of course,
is partly due to policies implemented by the new
regime. The effort to scale back borrowing by
local governments is having a dampening impact
on fixed-asset investment—much of which is
financed by local governments. The anti-cor-
ruption campaign, including discouraging the
entertaining of government officials, appears to be
suppressing retail sales.
The question now is what the government does
next. Although inflation is modest, the central
bank may not want to ease policy further lest it
encourage excessive borrowing or more property
price increases. There is concern that, given the
excessive growth of credit and a property price
bubble, the government may not have the flexibil-
ity necessary to stimulate the economy.
An easing of monetary policy and the opening
of new sources of credit would only exacerbate
the credit market problems. More fiscal stimulus
would boost the parts of the economy that are
already growing rapidly, such as investment in
infrastructure, but it would do little to assist the
economy in shifting toward more sustainable
forms of growth, such as consumer spending. Yet
the government may decide to engage in more
investment-driven stimulus. In other words,
China appears constrained in its ability to under-
take reforms that are necessary for long-term
structural adjustments and sustainability.
China is clearly becoming a more mature
economy with growth that is more consistent with
middle-income affluence.
Asia Pacific Economic Outlook—May 2013 2
On the reform front
China’s government announced that it will
take action aimed at reducing capital controls.
Specifically, it will allow freer movement of cur-
rency in and out of the country. In addition, it will
create a mechanism to allow the Chinese to invest
money outside of China. These initial steps could
later be followed by measures to remove obstacles
to foreign portfolio investment in China’s equity
and bond markets, as well as measures to allow
the Chinese to borrow money overseas. The
reduction in capital controls is ultimately aimed at
allowing free movement of the exchange rate and
making the renminbi a fully convertible currency.
This would help to boost the use of the renminbi
in trade and reserve accumulation. It is likely that
if the renminbi were to become convertible, then
more trade and investment would take place in
renminbi, thus removing some of the currency
risk that Chinese businesses face. In addition,
allowing the Chinese to invest overseas could
remove some of the upward pressure on the value
of the currency.
The deregulation of capital flows is highly
relevant. It has been reported that capital flow
into China accelerated sharply—likely due to two
factors. First, quantitative easing in the United
States, Japan, and United Kingdom has led to
very low interest rates in those countries. This
in turn has led investors to seek higher returns
elsewhere, including in China. Moreover, Chinese
enterprises are increasingly borrowing abroad
and bringing hard currency back through vari-
ous channels, including export invoicing. Second,
some investors now expect an increase in the
value of the renminbi. Consequently, they are
putting money into China in anticipation of a
currency appreciation. The irony is that the inflow
of capital is putting upward pressure on the cur-
rency. The government must decide to either allow
the currency to rise or purchase foreign currency
reserves in order to prevent appreciation. The
latter would entail increasing the money supply
when the leadership is concerned about inflation.
It is reported that, in the first three months of
the year, the government purchased $157 billion
in foreign reserves, thereby preventing apprecia-
tion. However, in April the government allowed
some appreciation.
Finally, the Chinese government announced
that other reform efforts will be speeded up,
including new controls over local government
debt. The government said that the national
government agency responsible for approval of
local government debt issuance will more closely
scrutinize debt issuance. Specifically, it is expected
to pay more attention to debt issuance when the
vehicles used by local governments have a low
bond rating and when debt levels are already high.
The government is keen to limit local government
debt, which has already grown explosively and
poses a risk to the financial system. Actually, local
governments are forbidden by law from issuing
debt or borrowing from banks; however, they have
established an estimated 10,000 special-purpose
vehicles to issue bonds to pay for infrastructure
development. For projects that fail to generate a
positive return, local governments service these
debts through the sale of land use rights.
Asia Pacific Economic Outlook—May 2013 3
India
By Dr. Rumki Majumdar
ThE Indian economy is caught between low growth and stubbornly high inflation. Last
month, the International Monetary Fund (IMF)
revised the year-over-year GDP growth forecast
of India to 5.7 percent for 2013, down from its
January estimate of 5.9 percent. The IMF attrib-
uted structural factors as the primary reasons
for the poor performance, rather than the cycli-
cal factors cited by the government last month.
Additionally, the IMF expects consumer-price
inflation to remain at around 10 percent in 2013
due to a rise in food and fuel prices. Lately, there
have been signs of easing inflationary pres-
sures. The wholesale-price inflation has steadily
decreased since late 2012, while consumer-price
inflation went below 10 percent this May, as the
economy operates below capacity. However, the
government’s attempt to reduce the fuel subsidy
bill by raising administered fuel prices will likely
reverse the fall in inflation in the remaining part
of the year.
The policy dilemma
The situation for India is unique because both
fiscal and monetary policies have had limited
flexibility to bail out the economy. High fiscal and
current-account deficits restrict the government’s
ability to undertake proactive stimulus programs
to boost the economy. The level of domestic infla-
tion remains higher than the Reserve Bank of
India’s (RBI’s) comfort level, which limits the RBI’s
ability to ease monetary policy further. Despite
such pressures, the RBI is expected to reduce the
policy rates, though marginally, in order to boost
economic activity in the country.
Asia Pacific Economic Outlook—May 2013 4
Last month, the International Monetary Fund revised
the year-over-year GDP growth forecast of India to 5.7
percent for 2013, down from its January estimate of
5.9 percent.
High twin deficits may limit
government actions
Fiscal deficit is expected to be 5.3 percent of
GDP in 2012–2013, while the current account
recorded the largest-ever deficit of 6.7 percent
of GDP in the third quarter of 2012–2013. The
government’s strategy of fiscal consolidation has
repeatedly gone off course since 2008 due to a
series of unfavorable developments. Since last
September, the government has taken bold mea-
sures to cut down fuel subsidies to prop up public
finance, helping the government to restrict the fis-
cal deficit within the revised target of 5.1 percent
of GDP. However, with general elections being
just a year away, progress in this direction will be
limited and even likely reverse.
On the other hand, the fall in external demand
for exports and the rise in import bills due to
an increase in fuel prices and gold resulted in a
record-high current-account deficit. The March
data shows some improvement in the current-
account balance due to a rise in merchandise
exports and recent moderation in commodity
prices, especially in international oil and gold
prices. However, it is the capital-account growth
that can play an important role in swinging the
balance of payments to a surplus. Recent govern-
ment reforms in the retail and aviation sectors and
the establishment of a ministerial panel to fast-
track industrial projects may improve investment
sentiments and capital inflows. However, more
than 40 percent of the capital flow in 2012–2013
has been institutional in nature, and the risk of a
reversal of capital flows is very high.
Easy monetary policies
may not help after all
The combination of low growth, high inflation,
and high current-account deficit has induced the
RBI to manage liquidity through the calibrated
use of various monetary policy instruments.
The government’s recent fiscal consolidation has
provided some space to the RBI to ease monetary
policy in order to support growth. The RBI has
cut interest rates thrice this calendar year and
undertaken durable liquidity injections through
outright purchases of government securities as a
part of open-market operations. However, despite
policy easing, interbank liquidity conditions tight-
ened, especially since November 2012, mainly
due to large and persistent buildups in govern-
ment cash balances and strong currency demand.
Credit demand has remained low due to sluggish
domestic demand as well deterioration of bank-
ing asset quality. In addition, poor investment
growth and an expected low rate of returns from
investment are likely to limit the impact of easing
monetary policy.
Asia Pacific Economic Outlook—May 2013 5
The problem lies elsewhere
The issues in India are structural, with sup-
ply factors (such as labor-market bottlenecks and
poor infrastructure) and domestic policy fac-
tors (such as policy uncertainty and regulatory
obstacles) contributing to the fall in investments.
The pace of reforms is slow as governance con-
cerns and delay in approvals continue to weigh on
business confidence.
It will be difficult to sustain growth without
a revival of investment growth in the economy.
As long as inflation, especially consumer-price
inflation, remains high, growth in consumption
demand will be gradual, in turn keeping invest-
ments low. On the brighter side, growth in the
Indian economy is expected to bottom out as the
IMF expects that the government’s recent reform
measures, improving external demand, and a
better monsoon season will likely boost economic
activity. However, the pace will likely remain
gradual until the next elections as uncertain poli-
cies fail to address the core structural problems.
Asia Pacific Economic Outlook—May 2013 6
Malaysia
By Navya Kumar
MAlAysiA maintained status quo in Q1 2013. Not only was the country’s 56-year-
old government re-elected for another five-year
term, signaling policy stability, the economy also
expanded in the 5–6 percent range, as it has on
an average since 2011. However, amid the several
positives for Malaysia, there are a few pockets of
concern. On the political front, the opposition
is calling for nationwide protests against alleged
election irregularities, even as the Malaysian
economy faces struggling exports and a potential
credit bubble.
Real GDP grew 5.6 percent year over year in
Q1 2013, boosted by higher domestic demand,
even as real exports declined an estimated 1
percent. In fact, private consumption, which
accounts for nearly 50 percent of the GDP, has
been a major driver of the Malaysian economy
for the past eight quarters, with growth signifi-
cantly exceeding exports. Exports in Q1 2013
were limited by falling sales of vegetable oils and
manufactured goods, which together constitute
more than 60 percent of Malaysia’s total exports.
Sales of electronics and electrical goods were par-
ticularly hit. Geographically, while the country’s
exports to the slowdown-affected markets of the
European Union and United States suffered, sales
to the ASEAN Free Trade Area (AFTA) increased
in double digits. The AFTA now accounts for
nearly 30 percent of Malaysia’s exports, up from
27 percent in 2012. For Q2 2013, GDP will likely
continue expanding in the 5–6 percent range, sup-
ported by robust domestic demand.
The industrial production index for Malaysia
registered a 0.2 percent year-over-year decline
in Q1 2013, due to lackluster performance by
the manufacturing and mining sectors. While
business closure for the Lunar New Year celebra-
tions suppresses output in the first quarter of
each year, this year was particularly impacted by
Asia Pacific Economic Outlook—May 2013 7
In fact, private consumption, which accounts for nearly
50 percent of the GDP, has been a major driver of the
Malaysian economy for the past eight quarters, with
growth significantly exceeding exports.
export challenges. However, the outlook for the
rest of 2013 appears encouraging, with positive
consumer and business sentiment. Even as local
consumption will likely remain upbeat, exports
could demonstrate a slight uptick in the second
half. In addition, the growing economy is forecast
to attract higher foreign direct investment (FDI)
this year in various sectors, including electri-
cal and electronics, real estate, aerospace, solar
energy, and medical services. Low rates of infla-
tion (below 2 percent) also ensure lower risk to
investment returns. The government expects FDI
of $12 billion in 2013, compared to nearly $10 bil-
lion in the last year.
However, a lingering concern in the Malaysian
economy is the level of debt fueling domestic
demand. Household loans and liabilities rose
13 percent year over year in Q1 2013 and are
estimated at more than 150 percent of the per-
sonal disposable income. Loans and liabilities are
expected to continue their double-digit rise in Q2
2013, with no increase likely in the benchmark
interest rate, which has remained at 3 percent
since Q3 2011. With nearly half the household
debt incurred to buy houses, the economy is
vulnerable to any sudden slump in home prices,
which have risen an average 9.5 percent year over
year for the past eight quarters.
Government debt is also at the highest level
in 19 years, at 54 percent of the GDP, with the
increase likely to fund the government’s expen-
diture on infrastructure projects and subsidies.
Higher expenses resulted in a fiscal deficit of 3.9
percent in Q1 2013. In order to improve its budget
balance, the government plans to introduce new
goods and service tax this year, as well as rational-
ize subsidies. In addition, the government plans to
divest nearly 30 state-owned enterprises.
Overall, the first quarter has been fairly posi-
tive for the Malaysian economy, registering steady
growth despite external headwinds. The com-
ing quarter will likely be similar, with domestic
demand driving the economy but exports remain-
ing a challenge and high levels of household debt
posing a persistent risk.
Asia Pacific Economic Outlook—May 2013 8
Thailand
By Dr. Rumki Majumdar
RObust growth, low unemployment, stable inflation, strong currency, and a growing
equity market—the year 2012 was marked by sig-
nificant improvements in Thailand with respect to
all economic parameters. The economy bounced
back with a strong growth of 6.4 percent year over
year after a dismal growth of 0.1 percent year over
year in 2011 because of the devastating flood. Q4
2012 saw the biggest-ever jump (19 percent) in
year-over-year performance of real GDP due to
very strong growth in private investment, change
in inventories, and services export. The growth
in consumption demand was also robust during
the quarter. The spending power of the grow-
ing middle class, augmented by income tax cuts
and rise in general wages in 2012, along with the
government’s intense efforts to build infrastruc-
ture, helped overall spending growth. Recently,
the World Bank revised its forecast for Thailand’s
GDP to 5.3 percent in 2013, up from its earlier
prediction of 5 percent, citing the resilience of
the economy.
The factors that helped
The consumer confidence index has been
rising for six consecutive months and, this April,
reached its highest level since 2006. It played an
important role in boosting private consumption
demand in 2012, which grew at 6.6 percent year
over year, the highest rate since 2008. Accounting
for more than half of the GDP, consumption
demand is expected to remain strong this year
and will be an important factor driving growth.
The business confidence index too has been
improving on the back of rising domestic demand,
better export performance, and a stable political
environment. Growth in industrial production
Asia Pacific Economic Outlook—May 2013 9