Tài liệu DEVELOPMENTS KEY ECONOMIC AND PROSPECTS IN THE ASIA-PACIFIC REGION 2008 pdf

ECONOMIC AND SOCIAL COMMISSION FOR ASIA AND THE PACIFIC
IN THE ASIA-PACIFIC REGION
2008
PROSPECTS
DEVELOPMENTS
KEY ECONOMIC
AND
ESCAP is the regional development arm of the United Nations and serves as
the main economic and social development centre for the United Nations in
Asia and the Pacific. Its mandate is to foster cooperation between its 53
members and 9 associate members. ESCAP provides the strategic link
between global and country-level programmes and issues. It supports
Governments of countries in the region in consolidating regional positions and
advocates regional approaches to meeting the region’s unique socio-economic
challenges in a globalizing world. The ESCAP office is located in Bangkok,
Thailand. Please visit the ESCAP website at www.unescap.org for further
information.
The shaded areas of the map indicate ESCAP members and associate members.
This publication was prepared by the Poverty and Development Division of
ESCAP. For further information on publications in this series, please address
your enquiries to:
Director
Poverty and Development Division
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Asia and the Pacific (ESCAP)
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Cover design by Tjerah Leonardo
i
ECONOMIC AND SOCIAL COMMISSION FOR ASIA AND THE PACIFIC
United Nations
ESCAP
New York, 2007
KEY ECONOMIC DEVELOPMENTS
AND PROSPECTS IN THE
ASIA-PACIFIC REGION
2008
ii
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Sales No. E.07.II.F.28
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KEY ECONOMIC DEVELOPMENTS
AND PROSPECTS IN THE

ASIA-PACIFIC REGION
2008
iii
Key Economic Developments and Prospects in the Asia-Pacific Region 2008 is
the third publication in an annual series that provides an end-of-year report on
the region’s economic performance in a rapidly changing global and regional
environment. This year’s report highlights the fact that developing economies in
the Asian and Pacific region are estimated to have grown over 8 per cent in
2007. The economic powerhouses of China and India continue to drive regional
growth, with added impetus coming from the fast-growing Russian Federation.
The outlook for 2008 is robust, with developing economies projected to grow
by 7.8 per cent. However, the risks to the 2008 projections are increasingly
tilted to the downside. The full effect of the unravelling of the United States
subprime mortgage problem has yet to be seen. A significant slowdown of the
United States economy and further turmoil in financial markets, as a result,
cannot be ruled out. Thus far, the region has coped successfully despite
financial market instability, muted external demand and appreciating currencies.
Good macroeconomic fundamentals in the region will provide the policy space
to adapt to a possible worsening of the external environment.
Nonetheless, as the report highlights, policymakers in the region should care-
fully watch out for financial market volatility in the coming months. Policy
measures put in place to address rapidly appreciating regional currencies,
overheating in asset markets and burgeoning foreign reserves have been
effective in some cases but not so in others. These policies may not be
adequate to weather external shocks. The region needs urgently to get back
on the unfinished agenda of building strong and deep financial markets that
can accommodate such shocks with ease. It is my hope that this year’s report
will serve as a wake-up call for policymakers across the region to put financial
sector reforms high on their agenda.
Ravi Ratnayake

Director
Poverty and Development Division
FOREWORD
iv
The Key Economic Developments and Prospects in the Asia-Pacific Region
2008 was prepared under the overall guidance of Ravi Ratnayake, Director,
Poverty and Development Division. A team led by Shamika Sirimanne, Chief,
Socio-economic Analysis Section, comprising Shuvojit Banerjee and Somchai
Congtavinsutti prepared this report. The comments and inputs from Eugene
Gherman, Alberto Isgut, Muhammad H. Malik and Amornrut Supornsinchai are
noted with appreciation. Staff analysis was based on data and information
available up to the end of October 2007. All graphics work was done by
Somchai Congtavinsutti. The logistics of processing and administrative action
were handled by Metinee Hunkosol, Anong Pattanathanes and Woranut
Sompitayanurak. Contributions from the Editorial Unit and other divisions in the
ESCAP secretariat are noted with appreciation.
ACKNOWLEDGEMENTS
v
CONTENTS
Page
Foreword iii
Acknowledgements iv
Abbreviations viii
I. Asia-Pacific undaunted by global turbulence


1
Growth spurt of Japan stutters 3
China seeks growth with sustainability 4
Domestic demand cushions slower exports across

the region 4
Floods in South Asia devastate lives 6
Consumption buoyant in Central Asia but high energy
prices present challenges 6
Inflation contained 7
Oil reaches record highs 9
Inflation a major worry for China 10
Weaker export performance 11
Regional firms are becoming global players 11
Sovereign wealth funds offer risks and rewards 13
II. Key issue on the watch list – the economic impact of
capital-market volatility 15
Impact of the United States subprime fallout is still limited 15
Currency appreciation remains the core challenge 18
Measures to help exporters not effective 19
Reserve accumulation is having an adverse
impact on the real sector 19
III. 2008 forecast – domestic demand cushions blow
to growth 22
Cautious monetary policy 24
Coping with a United States slowdown 25
vi
FIGURES
Page
1. Rates of economic growth of developing and developed
economies in the ESCAP region, 2006-2007 1
2. Contribution of domestic demand to GDP for selected
developing Asian economies, 2006-2007 5
3. Rates of inflation of developing and developed economies
in the ESCAP region, 2006-2007 8

4. Selected nominal commodity prices, 2006-2007 8
5. Nominal and real oil prices, 1970-2007 9
6. Movement of exchange rates for selected developing
ESCAP economies, 2007 17
7. Major holders of foreign reserves in the Asian and
Pacific region, 2006-2007 20
8. Money supply index for selected developing ESCAP
economies, 2006-2007 20
9. Real GDP growth forecast for selected developing
economies in the ESCAP region, 2007-2008 22
10. Consumer price inflation for selected developing
economies in the ESCAP region, 2007-2008 24
11. Current account balance for selected developing
economies in the ESCAP region, 2007-2008 25
vii
Page
1. Rates of economic growth and inflation of selected developing
economies of the ESCAP region and North and Central
Asian economies, 2005-2007 2
2. Current account balance as a percentage of GDP of selected
developing economies of the ESCAP region and North
and Central Asian economies, 2004-2007 12
3. Price/earnings ratios in Asia and the Pacific and international
equity markets, 2007 17
TABLES
viii
ADB Asian Development Bank
CIS Commonwealth of Independent States
CD-ROM compact disk read-only memory
CPI consumer price index

EIU Economist Intelligence Unit
FAO Food and Agriculture Organization
FDI foreign direct investment
GDP gross domestic product
IMF International Monetary Fund
OECD Organisation for Economic Co-operation and Development
OPEC Organization of Petroleum Exporting Countries
UNICEF United Nations Children’s Fund
ABBREVIATIONS
1
I. ASIA-PACIFIC UNDAUNTED
BY GLOBAL TURBULENCE
Sources: ESCAP, based on national sources; IMF, International Financial Statistics (CD-ROM) (Washington, D.C., IMF, July 2007); ADB,
Key Indicators of Developing Asian and Pacific Countries 2007 (Manila, ADB, 2007); website of the CIS Inter-State Statistical Committee,
<www.cisstat.com>, 6 October 2007; and ESCAP estimates.
Notes: Rates of real GDP growth for 2007 are estimates. Developing economies (including the Central Asian countries) comprise the
developing economies of the region, and the calculations are based on the weighted average of GDP figures in 2004 United States
dollars (at 2000 prices).
Figure 1. Rates of economic growth of developing and developed economies in the ESCAP region,
2006-2007
Developing economies of the region
East and North-East Asia
North and Central Asia
South and South-West Asia
South-East Asia
Developed economies of the region
0.0 1.0 2.0 3.0 4.0 5.0 6.0 7.0 8.0 9.0 10.0
Percentage
2006 2007
Developing economies in the ESCAP region are set to record an impressive

8.2 per cent growth rate in 2007, just ahead of the 8.1 per cent rate achieved
in 2006 (see figure 1). The growth was achieved despite a challenging
international environment of financial market instability, muted external demand
and appreciating currencies. The economic performance was backed by
strong domestic demand which countered a weakening in exports in many
countries. The region’s economic powerhouses, India and China, led the
expansion, while energy-exporting countries of Central Asia, and in particular
the Russian Federation, made significant contributions. Together, China, India
and the Russian Federation accounted for more than two thirds of the growth
of developing economies in Asia and the Pacific. At the same time, the
region’s developed economies grew at 2.2 per cent in 2007, unchanged from
the previous year.
Asia-Pacific economies are well prepared to manage continued uncertainty in
the external environment over the coming months. The region’s main strength
lies in healthy macroeconomic fundamentals enabling countries to adopt sup-
portive fiscal and monetary policies amid significantly declining export growth,
financial market volatility or inflationary pressures due to rising oil prices.
2
China and India continue to be the outstanding drivers of regional and global
economic growth, despite attempts to cool down those economies. China is
estimated to have raised its already blistering pace of GDP increase to 11.5
per cent in 2007 over the 11.1 per cent seen in 2006, while India slowed to a
still-robust 9 per cent growth rate in 2007 (see table 1).
Table 1. Rates of economic growth and inflation of selected developing economies of the ESCAP region
and North and Central Asian economies, 2005-2007
Real GDP growth Inflation
a
2005 2006 2007
b
2005 2006 2007

b
Developing economies of the ESCAP region
c
7.7 8.1 8.2 4.3 4.5 5.0
East and North-East Asia 8.1 8.8 8.9 2.0 1.7 3.6
China 10.4 11.1 11.5 1.8 1.7 4.5
Hong Kong, China 7.5 6.9 6.4 0.9 2.0 1.8
Republic of Korea 4.2 5.0 4.9 2.7 2.2 2.6
Taiwan Province of China 4.1 4.7 4.4 2.3 0.6 1.6
North and Central Asia 7.1 7.6 8.1 11.8 9.4 8.8
Kazakhstan 9.7 10.6 9.0 7.6 8.6 8.5
Kyrgyzstan – 0.2 2.7 8.5 4.3 5.6 5.0
Russian Federation 6.4 6.7 7.5 12.7 9.7 8.6
Turkmenistan 9.0 9.0 10.0 10.7 10.5 11.3
Uzbekistan 7.0 7.3 9.1 6.9 7.5 10.0
South and South-West Asia
d
8.0 7.9 7.5 6.7 8.5 8.0
Bangladesh 6.0 6.6 6.5 6.5 7.2 7.2
India 9.0 9.4 9.0 4.4 6.7 5.5
Iran (Islamic Republic of) 5.4 6.2 5.8 12.1 14.6 17.0
Pakistan 9.0 6.6 7.0 9.3 7.9 7.8
Turkey 7.4 6.0 5.2 8.2 9.6 9.0
South-East Asia 5.6 6.0 6.2 6.0 6.7 3.7
Indonesia 5.7 5.5 6.2 10.5 13.1 6.2
Malaysia 5.3 5.9 5.6 3.0 3.6 2.1
Philippines 5.0 5.4 7.0 7.6 6.3 2.8
Singapore 6.6 7.9 7.8 0.5 1.0 1.8
Thailand 4.5 5.0 4.5 4.5 4.7 2.2
Viet Nam 8.4 8.2 8.3 8.3 7.5 7.4

Developed economies of the ESCAP region 2.0 2.2 2.2 0.0 0.5 0.2
Sources: ESCAP, based on national sources; IMF, International Financial Statistics (CD-ROM) (Washington, D.C., IMF, July 2007); ADB,
Key Indicators of Developing Asian and Pacific Countries 2007 (Manila, ADB, 2007); website of the CIS Inter-State Statistical Committee,
<www.cisstat.com>, 6 October 2007; and ESCAP estimates.
a
Changes in the consumer price index.
b
Estimates.
c
Based on data for 38 developing economies representing more than 95 per cent of the population of the region (including
the Central Asian countries); GDP figures at market prices in 2004 United States dollars (at 2000 prices) have been used
as weights to calculate the regional and subregional growth rates.
d
The estimates for these countries relate to fiscal years defined as follows: fiscal year 2006/07 = 2006 for India and the
Islamic Republic of Iran; and fiscal year 2005/06 = 2006 for Bangladesh, Nepal and Pakistan.
3
The last few years have seen the emergence of the Russian Federation as a
potent growth performer, with growth rates exceeding 6 per cent annually since
2003. The country has increased its share in global output by 20 per cent in
the last 10 years and in 2007 became the world’s eighth largest economy in
terms of purchasing power parity. The Russian Federation saw its GDP growth
increase significantly to 7.5 per cent in 2007 over the 6.7 per cent growth in
2006.
East and North-East Asia maintained its position as the fastest-growing
subregion in Asia and the Pacific. This performance was overwhelmingly due to
the dynamism of China, with most economies in the subregion experiencing
somewhat reduced growth. North and Central Asia experienced rapid and
broad-based growth from energy exports and domestic demand supported by
energy revenues. South and South-West Asia benefited from another year of
dynamic, though slightly lower, domestic demand-led GDP growth. South-East

Asia experienced the lowest growth rate of all the subregions, as export-
dependent economies grappled with slowing United States demand and appre-
ciating currencies.
Growth spurt of Japan stutters
In contrast to the robust performance of other major economies in the region,
Japan has recently shown signs of a slowdown. Japan has yet to fulfil the
expectations of becoming an alternative growth engine for the region to
counteract the slowdown of the United States economy. Economic growth in
the second quarter contracted slightly owing to weak export performance,
while then recovering marginally in the third quarter. The importance of the
export sector ties the economic performance of Japan closely to the growth
prospects of its trading partners, particularly the United States. Domestic
demand is not providing support. Residential investment has been restrained.
Capital investment, an important GDP driver at the beginning of 2007, also
slowed in the second quarter, while improving somewhat in the third quarter.
Private consumption, which constitutes 55 per cent of GDP, has continued to
remain muted over the past few quarters. Although company profits are
growing, weak wage growth has ensured that consumers are reluctant to
spend. While unemployment has reached its lowest rate in nine years,
new employment has so far been concentrated in low-wage industries and
part-time employment.
Weak domestic demand has led to inflation in the economy remaining close
to zero for the year. Sluggish increase in consumer prices and concerns
about the fallout of the subprime crisis have prevented an increase in
interest rates despite concern about asset price rises. The real estate market
in Japan has seen rapid price increases in recent years, boosted by foreign
institutional buyers. Prices in prime areas of Tokyo rose by 30-40 per cent in
2006 and real estate investment trusts (J-REITs) have also performed
strongly.
1

1
Financial Times, “Alarm raised over Japan real estate”, 6 September 2007.
Japan has yet
to fulfil the expectations
of becoming an
alternative growth
engine for the
region
“
”
4
China seeks growth with sustainability
China continues to be beset by its inability to rein in its supercharged
economy. China saw growth accelerate from 11.1 per cent in 2006 to an
estimated 11.5 per cent this year. Investment and net exports continue to be
the main drivers of GDP growth. The contribution of investment to GDP growth
increased from 34.4 to 37.6 per cent, while net exports increased their share
from 25.6 to 28.9 per cent.
The need to cool down the economy has become more pressing during the
year, as inflation rose to a 10-year high in August (year-on-year) and the
Shanghai Stock Exchange doubled in value. Property prices have also surged,
with housing prices in 70 cities jumping by 8.2 per cent in August compared
with a year earlier; prices rose in July around 20 per cent year-on-year in
Shenzhen and over 10 per cent in Beijing.
2
The destabilizing effect of the current structure of growth on the environment is
becoming more apparent. Figures published in 2007 indicate that air pollution,
especially in large cities, is leading to a higher incidence of lung disease,
including cancer and respiratory system problems. Water pollution is also
causing growing levels of digestive system cancer and diarrhoea, particularly in

children under-five years of age.
3
Food security has become increasingly
affected, as arable land has been lost to other uses such as manufacturing
and construction. The country has lost 8 million hectares, or 6.6 per cent of its
arable land, in the past decade.
4
Furthermore, the risk of a protectionist backlash from major economies as a
result of the country’s booming exports is an ongoing concern. The Govern-
ment of China has responded by pledging to eliminate export tax rebates for
553 highly energy-consuming and resource-intensive products, such as cement,
fertilizer and non-ferrous metals. Rebates for another 2,268 products, consid-
ered liable to trigger trade friction, are to be slashed from 8-17 per cent to 5-
11 per cent.
5
These measures have yet to bear fruit, as export growth
continues to accelerate.
Domestic demand cushions slower exports
across the region
The year 2007 has seen domestic demand emerging as the engine of growth
for many countries in the region while export performance has subdued (see
figure 2). The key elements of strong domestic demand have been accelerating
investment and private consumption growth.
2
Bloomberg, “China raises rates for fourth time to cool inflation”, 21 August 2007 and “China
raises rates for fifth time to cool economy”, 14 September 2007.
3
World Bank, The Cost of Pollution in China: Economic Estimates of Physical Damage
(Washington, D.C., World Bank, 2007).
4

China Daily, “Measures taken to increase arable land”, 8 August 2007.
5
China Daily, “Tax rebates removed, cut to curb exports”, 20 June 2007.
The need to
cool down the Chinese
economy has become
more pressing during
the year
“
”
5
Most economies in East and North-East Asia experienced a marginal slowdown
in 2007. However, the better-than-expected performance over the course of the
year was mainly due to robust domestic demand. Hong Kong, China; Taiwan
Province of China; and the Republic of Korea all witnessed improving
consumption and investment in 2007. Exports to China also helped to mitigate
the effects of slowing demand in the United States.
South and South-West Asia recorded robust economic growth of 7.5 per cent, a
pace of increase marginally slower than in 2006. South Asian countries have
enjoyed strong domestic demand, while their merchandise trade deficits have
widened due to imports of oil and consumption goods. India continues to
display buoyant consumption and investment as a consequence of four years of
dynamic economic growth. Exports were weak in Pakistan but the country has
benefited from surging fixed investment and private consumption. Record levels
of workers’ remittances in Bangladesh have supported private consumption.
Economic growth in South-East Asia has held up well despite the challenging
international environment faced by several economies. Weakness in the United
States market as well as currency appreciation against the United States dollar
has hurt exports in many countries. The Philippines however has seen strong
domestic demand on the back of record remittances and Malaysia has

experienced strong private and public investment as well as private consump-
tion. The exports of Indonesia have held up well in the commodities sector and
Figure 2. Contribution of domestic demand to GDP for selected developing Asian economies,
2006-2007
Sources: Calculated based on CEIC Data Company Ltd.; and EIU, Country Forecast (London, 2007).
Note: Figures for 2007 are estimates.
2006
2007
100
80
60
40
20
0
–20
China
Hong Kong, China
Republic of Korea
Taiwan Province
of China
India
Pakistan
Indonesia
Malaysia
Philippines
Singapore
Thailand
Percentage
Private consumption Investment Public consumption Net exports
Weakness in the

United States market
as well as currency
appreciation has hurt
exports in many
South-East Asian
countries
“
”
6
consumption responded positively to declining interest rates. Singapore has
benefited from domestic demand bolstered by new major commercial construc-
tion projects, a thriving financial sector and rising real wages and property
prices. The outstanding growth of Viet Nam is increasingly focused on the
domestic economy, with rising demand for manufactures and services as well
as growing investment by foreign enterprises. Thailand remains the weakest
performer among its neighbours, as its exports have exhibited vulnerability in
the current external environment, and domestic demand has failed to take up
the slack amid continuing political uncertainty.
Floods in South Asia devastate lives
The devastating floods in South Asia in 2007 have killed more than 4,000
people and left millions homeless.
6
Those affected most have been the poorest
of the poor, living in rural communities in Bangladesh, India and Nepal. Losses
have been estimated to be at least $1 billion and major outbreaks of water-
borne diseases such as diarrhoea, typhoid and hepatitis have occurred. There
is potential for food and other commodity prices to rise, further exacerbating
the hardships of those affected. Agricultural production will be affected due to
the loss of animals and unfavourable crop prospects following damage to
recently planted crops. While the impact on overall GDP is likely to be small,

there may be risks for some export industries, such as the garment industry in
Bangladesh.
Consumption buoyant in Central Asia but high
energy prices present challenges
North and Central Asia grew at 8.1 per cent in 2007, compared to 7.6 per cent
in 2006. Countries benefited from the increase in domestic consumption as a
consequence of buoyant energy prices. Rapid growth has been broad-based
across countries. Kyrgyzstan saw the most dramatic increase in economic
growth, from 2.7 per cent in 2006 to 8.5 per cent in 2007, driven largely by
construction and services. The Russian Federation also saw its GDP growth
rising significantly, with high domestic demand from energy export revenues
leading to buoyant construction and manufacturing sectors. The good
performance of Turkmenistan was driven by exports and construction, while
Uzbekistan benefited from significant investment in its export and service
sectors in 2007.
Countries across the subregion nevertheless continued to grapple with the
economic downside of booming energy receipts. Inflation remains high across
the subregion, as a consequence of the liquidity generated by buoyant energy
exports and energy-related investment inflows. Kazakhstan, while perhaps the
best example of a country investing its energy surpluses effectively, has seen
inequality widen along with dynamic growth. The economy remains insufficiently
6
UNICEF, “Millions still affected by floods in South Asia”, 21 September 2007 (Press
Release).
Those affected
most by devastating
floods in South Asia
have been the poorest
of the poor
“

”
7
diversified with manufacturing suffering from a highly appreciated exchange
rate. Turkmenistan similarly suffers from high inequality as well as persistent
poverty. Investment in energy production has stalled and the lack of technical
skills presents a challenge to the sector.
Inflation contained
Inflation has generally been contained across the region (see figure 3).
Currency appreciation for most economies has moderated the impact of
high international oil and food prices. Monetary policy has varied according
to inflationary concerns. The Republic of Korea and Taiwan Province of
China have been raising interest rates while Malaysia has kept them steady.
In contrast, Indonesia, the Philippines and Thailand have been easing rates.
Rising food prices have put upward pressure on inflation in developing coun-
tries in the region, and internationally. Countries are faced with surging prices
for basic food imports, such as wheat, corn and sorghum (see figure 4). Wheat
prices reached a record $8.86 per bushel in September, an increase of 60 per
cent during the year. Corn prices, at nearly $4 a bushel, are almost double
their level in 2005. While the rise in prices is partly due to the strong demand
from developing countries, the depreciation of the United States dollar (in
which most internationally traded food is priced) and increasing oil prices, one
of the major factors driving food price increases in 2007 has been the biofuel
industry’s appetite for grain. These demand effects have been exacerbated by
a supply contraction in 2007 due to weather-related factors among major food
exporters. Drought in Australia in 2006 affected the country’s wheat crop;
flooding in China in 2007 curtailed wheat and rapeseed production and dry
weather in Europe lowered grain yields.
Rising food prices, most sharply for pork, spurred the record inflation in China
in 2007. The increase in the CPI in August of 6.5 per cent year on year was
led by food price inflation of 18.2 per cent. Pork prices in China, the world’s

largest producer and consumer of pork, rose 49 per cent in August compared
with a year earlier. While pork prices have risen mainly because of internal
factors, particularly disease, and reduced supply due to low prices in the
previous year, external factors have also been important, such as the rise in
international animal feed prices. The share of feed in the total cost of raising
swine is half for large farms and slightly less for smaller farms.
7
Food prices are a bigger inflation concern than oil prices for many countries in
the region. This is because food accounts for a far higher proportion of
consumer spending, as seen from the weighting of food in the consumer price
index calculation. For example, in the Philippines food accounts for 50 per cent
of CPI as opposed to 7 per cent for energy. In India, food represents 46
per cent of CPI; in Indonesia, 42 per cent and in China, 33 per cent.
Food price inflation also disproportionately affects low and average income
households.
7
China National Development and Reform Commission, Department of Price, Cost of Production
Estimates, <www.chinaprice.gov.cn>
One of the
major factors driving
food price increases
has been the biofuel
industry’s appetite
for grain
“
”
8
Source: IMF, International Financial Statistics (CD-ROM) (Washington, D.C., September 2007).
Figure 4. Selected commodity prices (nominal), 2006-2007
200

180
160
140
120
100
80
Index
Jan-06
Feb-06
Mar-06
Apr-06
May-06
Jun-06
Jul-06
Aug-06
Sep-06
Oct-06
Nov-06
Dec-06
Jan-07
Feb-07
Mar-07
Apr-07
May-07
Jun-07
Jul-07
Maize Sorghum Wheat Soybean oilCoconut oil Soybeans
Sources: ESCAP, based on national sources; IMF, International Financial Statistics (CD-ROM) (Washington, D.C., IMF, July 2007); ADB,
Key Indicators of Developing Asian and Pacific Countries 2007 (Manila, ADB, 2007); website of the CIS Inter-State Statistical Committee,
<www.cisstat.com>, 6 October 2007; and ESCAP estimates.

Notes: Inflation rates refer to changes in the consumer price index. Inflation rates for 2007 are estimates. Thirty-eight developing
economies (including the Central Asian countries) comprise the developing economies of the region, and calculations are based on the
weighted average of GDP figures in 2004 United States dollars (at 2000 prices).
Figure 3. Rates of inflation of developing and developed economies in the ESCAP region, 2006-2007
Developing economies of the region
East and North-East Asia
North and Central Asia
South and South-West Asia
South-East Asia
Developed economies of the region
0.0 1.0 2.0 3.0 4.0 5.0 6.0 7.0 8.0 9.0 10.0
Percentage
2006 2007
(January 2006 = 100)
9
Oil reaches record highs
Oil prices continued their volatile but upward trend over 2007. By early
November the price for Brent crude reached the new record $93 a barrel. In
real terms, oil is at its most expensive level in more than 20 years. However, it
is still below the 1979 real oil price (see figure 5).
The recent surge in oil prices was triggered by the strong demand for oil, declining
oil inventories, bad weather in the Gulf of Mexico and continued geopolitical
uncertainties in the Middle East. The weakening United States dollar has added to
the intensity of the price hike. United States inventories reported in September
2007 stood at 322.6 million barrels, their lowest level in eight months. In response
to the increasing demand, for the first time in two years the Organization of
Petroleum Exporting Countries agreed to increase its production, from November
2007
8
. However, the increase has been judged by the market to be an insufficient

measure for pushing prices down. Oil-producing countries are treading a difficult
middle path. They do not wish to encourage a global economic slowdown through
high oil prices but are also wary of increasing supply excessively.
So far the impact of high oil prices on the region has been limited for several
reasons that were discussed in the Key Economic Developments and Prospects
in the Asia-Pacific Region 2006. First, the appreciation of regional currencies
against the United States dollar has muted the impact of rising oil prices.
140
120
100
80
60
40
20
0
1970
1975
1980
1985
1990
1995
2000
2005
2006
2007
Nominal (US Dollars per Barrel) Real (US CPI, 1980 = 100)
Figure 5. Nominal and real oil prices, 1970-2007
Sources: IMF, International Financial Statistics (CD-ROM) (Washington, D.C., September 2007); PTT Public Company Limited; and
ESCAP calculations.
Notes: Oil prices refer to Brent. Real oil prices are calculated only to September 2007.

The impact of
high oil prices on the
region has so far been
limited
“
”
8
Financial Times, “OPEC agrees to lift oil production”, 11 September 2007.
10
Second, the continuous rise in oil prices in recent years has been driven
mainly by strong global demand, not supply disruptions as had occurred in the
past. An increase in oil prices regardless of the sources of shocks would lower
economic growth and lead to inflation. However, the magnitude of the adverse
effect on growth is far lower in terms of a demand-driven price rise than one
which is caused by a disruption in supply – where physical shortage of oil
leads to a direct disruption in overall economic activity. Third, inflationary
expectations are lower worldwide, compared with those related to previous
oil shocks. Finally, the oil intensity of consumption and production, particularly
in major economies, is significantly lower than in the 1980s, reducing the
economic impacts of a higher oil price.
Nonetheless, for those countries that are facing overheating pressures, such as
China and India, the rising oil prices have produced an added challenge in
containing inflation. For low-income oil importers, in addition to inflationary
concerns, addressing deteriorating external balances would be a challenge.
Inflation a major worry for China
There have been growing fears of overheating in the two major emerging
economies of the region, China and India. China is witnessing its highest level
of inflation in 10 years. While supply-side factors through the global increase in
oil and food prices have also contributed to the inflation jump, demand-side
pressure continues through increases in the money supply. Currency manage-

ment coupled with booming export receipts has led to the unabated injection
of money into the domestic economy. Loan growth continues to advance at a
rapid pace. The Government of China has taken several measures to control
investment and speculation in the stock and property markets. During 2007,
interest rates have been raised five times in order to control fixed asset
investment, while bank reserve ratios have been raised nine times. To discour-
age speculation activities in property markets, interest rates on second homes
and commercial real estate have been raised, as have the minimum down
payment requirements for property purchases. Deposit rates have been
increased more than lending rates, and the tax on interest income was
reduced to discourage the withdrawal of deposits by citizens to fund asset
market purchases. Household bank deposits have been on a downward slide,
falling $5.5 billion in August compared with the previous month. However, the
effects of the cooling measures are still to be seen in the economy as
investment growth has declined only marginally.
India has fought a pitched battle with inflation in 2007. After rising rapidly over the
past few quarters, inflation in India has been brought down by a combination of
tight monetary policy and currency appreciation. Interest rates have been raised
nine times since October 2004 to reach 7.75 per cent in July 2007, while the
reserve ratio of banks has been lifted five times to reach 7.5 per cent by
November. In response, prices and credit growth declined considerably over the
course of the year. The benchmark wholesale price index inflation rate eased to
3.1 per cent by mid-October from its peak of 6.4 per cent in early April; the rate
has been below the central bank’s target of 5 per cent since June.
9
9
Reserve Bank of India, Mid-Term Review of Annual Policy for The Year 2007-2008, 30 October 2007.
India has fought
a pitched battle with
inflation in 2007

“
”
11
India is not however out of the woods as the underlying causes of inflation still
remain. While both benchmark and core (benchmark excluding food and fuel)
inflation figures are within the central bank’s desired limit of 5 per cent, there
has been recent upward pressure from rising oil and food prices. For example,
the annual CPI inflation for industrial workers showed a sharp increase to 7.3
per cent in August 2007 compared with 6.3 per cent a year previously.
Managing currency appreciation through the accumulation of reserves contin-
ues to build excess liquidity in the economy. Renewed capital inflows to
India after the unravelling of the United States subprime mortgage problem in
July and August have led to reserves growing to a record $220 billion in
September.
Weaker export performance
Exports across the region have suffered as currencies have appreciated
relentlessly on the back of strong portfolio flows and current account surpluses
(see chapter II). Weakening demand due to slow economic growth in the
United States has also had an adverse impact on exports in the second half
of 2007. Import volume growth in the United States is expected to drop
significantly in 2007 to 2 per cent from 6 per cent in 2006
10
. Nonetheless,
current account balances have held up well in many of the economies of the
region as appreciating currencies have reduced import prices, particularly
offsetting continuing high international oil prices (see table 2).
South East Asia was expected to show recovery in its key electronics export
sector in the second half of the year. However, the expected improvement has
been muted by weak exports to the United States and Japan as a result of
currency appreciation and low consumption growth in the United States.

Growth projections for electronics and semiconductor exports for 2007 have
been revised downwards during the course of the year. Electronics exporters
have however benefited from strong sales to Europe.
Regional firms are becoming global players
Enterprises from developing countries in the region have been increasingly
active in the acquisition of developed country companies. The rapidly rising
outward foreign direct investment (FDI) is an emerging trend to watch. Outward
FDI by firms from the region has been particularly notable in the United States,
where it reached record levels this year. The value of announced deals by non-
Japanese Asian companies reached $16.1 billion by August 2007, vastly
surpassing the previous year’s level of $3.9 billion.
11
The objectives of the
acquisitions have been to globalize operations by securing international market
share and to improve technological capability in medium and high-technology
sectors. Strong growth in domestic markets has provided acquiring firms with
strong balance sheets and ample access to finance to expand into overseas
markets.
10
Economist Intelligence Unit, Country data, as of 3 December 2007.
11
Financial Times, “Asian group on US asset spree”, 3 September 2007.
Rapidly rising
outward foreign
direct investment by
Asia-Pacific companies
is an emerging trend
to watch
“
”

12
India has been the most prominent source of booming outward FDI. A
landmark deal was the acquisition in October 2006 of the European steelmaker
Corus by the Tata Group for $12.5 billion. The share of India in global outward
investment has trebled in the last four years. In fact, the country’s outward FDI
is rapidly approaching the scale of its inward FDI. The enabling environment
was created in 2005 when the limit on outward FDI was increased from $100
million to the net worth of companies. The bulk of the flows has been from the
manufacturing sector, particularly in the IT, pharmaceutical and automotive
sectors. Preferred destinations are the United States, and countries in Europe
and Africa. Other than mergers and acquisitions, companies have been active
in greenfield investments, such as establishing manufacturing operations and
training centres.
Table 2. Current account balance as a percentage of GDP of selected developing economies of the
ESCAP region and North and Central Asian economies, 2004-2007
2004 2005 2006 2007
a
East and North-East Asia
China 3.5 7.1 9.5 10.5
Hong Kong, China 9.5 11.4 10.8 11.2
Republic of Korea 4.1 1.9 0.7 0.4
Taiwan Province of China 5.7 4.6 6.9 6.5
North and Central Asia
Kazakhstan 0.8 –1.8 –2.2 –3.6
Kyrgyzstan – 4.6 – 9.3 – 16.8 –12.6
Russian Federation 10.1 11.0 9.7 6.3
Turkmenistan 0.6 5.1 15.3 12.4
Uzbekistan 10.1 14.3 19.5 16.1
South and South-West Asia
Bangladesh 0.9 – 0.6 1.2 1.1

India – 0.4 – 1.1 – 1.1 –1.5
Iran (Islamic Republic of) 0.9 7.4 8.2 7.5
Nepal 2.9 2.2 2.4 2.5
Pakistan 1.8 – 1.4 – 3.9 – 4.9
Sri Lanka – 3.4 – 3.1 – 4.9 – 4.2
Turkey – 5.2 – 6.2 – 7.9 –7.3
South-East Asia
Indonesia 0.6 0.3 2.7 2.4
Malaysia 12.6 15.3 17.2 13.6
Philippines 1.9 2.4 4.3 4.7
Singapore 20.1 24.5 27.5 27.3
Thailand 1.7 –4.4 1.4 4.6
Viet Nam – 2.1 0.4 0.5 –1.6
Sources: ESCAP, based on IMF, International Financial Statistics (CD ROM) (Washington, D.C., IMF, July 2007); ADB, Key Indicators of
Developing Asian and Pacific Countries 2007 (Manila, ADB, 2007); EIU, Country Reports and Country Forecasts (London, 2007), various
issues and national sources.
a
Estimate.
13
Markets in Asia and the Pacific as well as further afield will increasingly see
the impact of private portfolio investment by China. In 2007, the country eased
restrictions on portfolio investment by private individuals and companies. To
date most outward financial investment by China has been by the Government
in United States assets as part of its currency management scheme.
Sovereign wealth funds offer risks and rewards
State investment funds, or so-called sovereign wealth funds, are becoming
increasingly important players in global capital markets. Sovereign wealth funds
seek to diversify foreign exchange assets and earn a higher return by investing
in a broad range of asset classes.
12

Buoyant reserve accumulation by coun-
tries in the region is adding to the stock of capital for existing wealth funds.
Reserves are increasingly being accumulated not for prudence in times of crisis
but as a result of managing currency appreciation. Therefore, there is no limit
to the level of reserve accumulation.
It has become increasingly important for Governments to consider setting up
sovereign funds as a strategy to obtain a reasonable level of return on their
burgeoning capital. In addition, such funds serve to reduce risk by diversifying
the assets in which foreign reserves are invested. Existing sovereign funds
are also allocating more of their capital to riskier assets. For instance, the
Russian Federation uses its stabilization fund partly to meet emergency budget
shortfalls and partly for investment purposes.
Sovereign wealth funds have a major potential impact on movements in
international financial markets. The volume of capital under their management
is at least twice as much as that of hedge funds. Estimates put the current
size of the world’s 25 sovereign funds at about $2.5 trillion, with a rise of
$450 billion in 2007. It has been forecast that the resources at the disposal
of sovereign funds could rise to $12 trillion by 2015.
13
The region’s
major established funds are the Government Investment Corporation of
Singapore, with holdings of $330 billion; the stabilization fund of the Russian
Federation, with assets of about $100 billion; and the Investment Agency of
Brunei Darussalam with $30 billion.
14
The Republic of Korea also began its
own fund, the Korea Investment Corporation, in 2006 with capital of $20
billion.
The desire to obtain healthy returns on their bulging reserves is also leading
other countries in the region to consider setting up their own wealth funds. The

year 2007 saw the formation by China of a sovereign wealth fund to invest
$200 billion of its foreign reserves in other investments. Investments by the
country’s new State Foreign Exchange Investment Corporation will be in
financial and strategic assets around the world.
12
Typical asset classes are longer-term government bonds, asset-backed securities, corporate
bonds, equities, commodities, real estate, derivatives, alternative investments, and foreign
direct investment.
13
Morgan Stanley, “How big could sovereign wealth funds be by 2015?”, 4 May 2007.
14
Ibid.
Sovereign
wealth funds have a
major potential impact
on movements in
international financial
markets
“
”
14
Sovereign wealth funds present a number of challenges for their owners. One
is that they are prone to protectionist sentiment from investment-receiving
countries because the funds are government entities. In this context, the extent
to which investment in a company by a sovereign wealth fund results in voting
rights or management control is important. A reasonable amount of information
on the investment strategy and portfolio holdings of sovereign wealth funds
would also help to reduce concerns from investment-receiving countries.
Currently, most funds are opaque about internal checks and balances, invest-
ment strategy and commercial goals. The sovereign funds of Norway and

Singapore offer the best examples of good governance and accountability.
15
Regional financial and currency markets have been volatile in recent months.
The year 2007 began with regional currencies rapidly appreciating against the
United States dollar on the back of portfolio inflows. For a short period in the
second half of the year countries witnessed rapid depreciation of currencies
during the fallout caused by the United States subprime crisis, followed by
renewed appreciation during the last months of the year. Managing the impact
of volatility in capital inflows on regional economies is likely to remain a serious
challenge for the near future as the United States subprime mortgage crisis
plays out and global imbalances remain wide.
Impact of the United States subprime fallout
is still limited
Financial markets in Asia and the Pacific are witnessing the fallout from the
contraction of the subprime mortgage lending market in the United States.
Subprime mortgages have been the most vulnerable class of mortgages to be
affected by the slowdown in the United States housing market. International
financial institutions, primarily hedge funds and banks, have suffered losses in
their holdings of products based on subprime mortgages.
To date, most Asia-Pacific banks have not revealed significant exposure to
such investments. However, concern has been voiced about the lack of
transparency in some of the banking sectors of the region. Furthermore, in
common with banks outside the region, there has been a lack of consistency
in valuation methods for estimating possible losses on subprime investments.
While central banks in the United States and the European Union have had to
be active in providing liquidity to stimulate lending in their economies, the Asia-
Pacific region has seen no such need as of yet.
Problems in the United States subprime mortgage market have spilled over to
international financial markets through the unwillingness of banks to lend to
each other. This credit crunch is due to a perceived lack of information about

possible losses in the investment portfolio of banks related to subprime
holdings. Banks have been owners of some of the entities, known as conduits
and special investment vehicles (SIVs),
15
invested in subprime paper and other
structured financial products.

Bank-sponsored conduits and SIVs are estimated
II. KEY ISSUE ON THE WATCH
LIST – THE ECONOMIC
IMPACT OF CAPITAL
MARKET VOLATILITY
15
Conduits and special investment vehicles (SIVs) are entities designed to profit from the difference
between short-term borrowing rates and longer-term returns from structured product investments.
These entities invest in high-yield, long-term credit market instruments, such as subprime paper,
financing their purchases by short-term borrowing. This short-term borrowing has to be refinanced
constantly and a withdrawal of liquidity can cause conduits and SIVs to have difficulties rapidly.