The Global Economy, The Regional EconomicOutlook for Asia Pacific, and Prospects for

th P ifi I l dthe Pacific Islands

Presentation to 2009 South Pacific Governors Meeting

December 2009

2

I Global Economic SnapshotI Global Economic SnapshotI. Global Economic SnapshotI. Global Economic Snapshot

3Financial stability risks have abated, due to policy actions and improved growth prospects

RisksEmerging market risks Credit risks

October 2009 GFSRApril 2009 GFSR

Market andMacroeconomic

April 2009 GFSR

liquidity risksrisks

i ifito center signifiessk or tighter conditions

Monetary and financial

ConditionsRisk appetite

4Credit market stress is continuing to ease

Corporate Spreads(basis points)

ree-month Libor – OIS Spreads(basis points)

2000

2500

US High GradeUS High Yield

U.S. dollarSterling

1500

2000US High YieldEurope High GradeEurope High Yield

Swiss francEuro area

1000

500

0Oct. 09Oct. 09

5Although the global economy is growing again,Although the global economy is growing again,recovery will be somewhat sluggishrecovery will be somewhat sluggish

(( li dli d))((percent; quarterpercent; quarter--overover--quarter, annualizedquarter, annualized))15

10

W ld

Emerging

5

Advanced

World

0Advanced

10

-5

-105 2006 2007 2008 2009 2010

6ouseholds in the U.S. and Euro area will continue to repair ouseholds in the U.S. and Euro area will continue to repair the damage to their balance sheets...the damage to their balance sheets...

United States and Euro Area: Household Net Wealth (ratio with disposable income)

United States and Euro Area: Household Saving

(ratio with disposable income)(ratio with disposable income) (ratio with disposable income)

6.5

Euro Area: Financial Wealth

US: Financial WealthUS: Total Wealth (right axis) 14

16

5.5

6.0

10

12

4.5

5.0

6

8

3.5

4.0

2

4

United States

Q4

Q2

Q4

Q2

Q4

Q2

Q4

Q2

Q4

Q2

Q4

Q2

Q4

Q2

Q4

Q2

Q4

Q2

Q4

Q2

3.00

Euro Area

7

...credit growth will remain anemic in the U.S. and Europe as ...credit growth will remain anemic in the U.S. and Europe as banks face further deleveraging pressuresbanks face further deleveraging pressuresbanks face further deleveraging pressuresbanks face further deleveraging pressures

Private Sector Credit GrowthBank Capital

20

25

(in percent of outstanding)(billions of U.S. dollars)

Capital raised to date

Capital needs: for 10% Tier 1/RWA

Capital needs: for 4% TCE/TA

15

20 U.K..Capital needs: for 4% TCE/TA

5

10

U.S.

Euro area

-5

0

ates

area

dom

rope

-101990 1995 2000 2005 2010

nite

d St

a

Euro

a

ed K

ingd

ther

Eur

8

...and labor markets will remain weak: another jobless ...and labor markets will remain weak: another jobless recovery?recovery?yy

United States and Euro Area: Unemployment Rate( t ll dj t d)

10

United States Euro area

(percent ; seasonally adjusted)

8

6

4

08 08 08 08 08 08 08 08 08 08 08 08 09 09 09 09 09 09 09 09 09

Jan-

0

Feb-

0

Mar

-0

Apr

-0

May

-0

Jun-

0

Jul-

0

Aug

-0

Sep-

0

Oct

-0

Nov

-0

Dec

-0

Jan-

0

Feb-

0

Mar

-0

Apr

-0

May

-0

Jun-

0

Jul-

0

Aug

-0

Sep-

0

9Large output gaps should keep inflation in check

Global Headline Inflation(Percent change from a year earlier)

E iEmerging

World

Advanced

10Q4

10

II Asia’s Reco e and O tlookII Asia’s Reco e and O tlookII. Asia’s Recovery and OutlookII. Asia’s Recovery and Outlook

11ortort--oriented economies have experienced a Voriented economies have experienced a V--shape recovery so far, shape recovery so far,

as global trade has normalizedas global trade has normalizedgg

Asia: Electronics and Non-electronics Exports1

U.S. Retail IT Inventories and Asian Electronics Exports

(3-month percent change of 3-monthJuly 2008 = 100, seasonally adjusted)

(3 month percent change of 3 month moving average, SAAR)

20 80

U.S. retail IT inventories (left scale)

Asian electronics exports (right scale)

Electronics exports

Nonelectronics exports

0

10

0

40

-10

0

-40

0

-20 -80

-30

05 06 06 06 07 07 07 08 08 08 09 09

-120

Jul-

08

Aug-

08

Sep

-08

Oct

-08

Nov-

08

Dec

-08

Jan-0

9

Feb-0

9

Mar

-09

Apr

-09

May

-09

Jun-0

9

Jul-

09

Aug-

09

12Domestic demand also contributed to Asia’s rebound, thanks to Domestic demand also contributed to Asia’s rebound, thanks to the large fiscal stimulus...the large fiscal stimulus...

Asia: Impact of Fiscal Stimulus on 2009H1 Real GDP

sia: Contribution to Growth –Recent Trough to 2009Q2

Impact from stimulus only in individual economy oreconomy group

Impact factoring in country, regional, and globalstimulus

2009H1 Real GDP (percent deviation from baseline)

Gross real exportsReal domestic demand

Recent Trough to 2009Q2ent; seasonally adjusted; non-annualized)

2.0

2.5stimulusReal domestic demand

GDP growth

1.0

1.5

0.5

0.0Australia -

NewJapan Korea China ASEAN-4,

HongJapan Australia-New

Z l dEmerging Asia 1/

13...and a rapid normalization of both external and domestic ...and a rapid normalization of both external and domestic financial conditions financial conditions

merging Asia: Net Capital Inflows

(In billions of U.S. dollars)

Emerging Markets: Bank Credit to Private Sector

(Six-month percent change, annualized rate)

36

42Asia (excluding China)Latin AmericaEuropeMiddle East and Africa

24

30

Middle East and Africa

18

24

6

12

06:Q

2

06:Q

3

06:Q

4

07:Q

1

07:Q

2

07:Q

3

07:Q

4

08:Q

1

08:Q

2

08:Q

3

08:Q

4

09:Q

1

09:Q

2 0

08 08 08 08 09 09 09 09 09 09

14oreover, both Australia and New Zealand (important for PICs) oreover, both Australia and New Zealand (important for PICs) have implemented stimulus packages. Australia was able to have implemented stimulus packages. Australia was able to

l t ti l d t t bli d bt t t t f i il t ti l d t t bli d bt t t t f i implement stimulus due to no net public debt at start of crisis. mplement stimulus due to no net public debt at start of crisis. ustralian stimulus is estimated to raise total growth potential ustralian stimulus is estimated to raise total growth potential

by between 5 ¼ and 12 ¾ percent over 2008 by between 5 ¼ and 12 ¾ percent over 2008 –– 1212

3.0

3.5Australia: Fiscal Stimulus Package(In percent of nominal GDP )

2.0

2.5

3 0

Investment

Consumption

1.0

1.5

0.0

0.5

2008/09 2009/10 2010/11 211/12

15

New Zealand composition of fiscal stimulusNew Zealand composition of fiscal stimuluse ea a d co pos t o o sca st u use ea a d co pos t o o sca st u us

New Zealand: Fiscal Stimulus

2.5Individual Income Tax Cuts Corporate Income Tax Cuts

Public Investment Public Consumption

(In percent of GDP)

1.5

2Public Investment Public Consumption

0 5

1

0

0.5

2008 2009

Source: IMF

16Growth in Australia and New Zealand is projectedGrowth in Australia and New Zealand is projectedto reboundto rebound

0 10

Real GDP Growth(Year-on-year percentage change)

8

0

8

10

AustraliaNew Zealand

4

6

4

6

0

2

0

2

4

2

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011-4

-2

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011urces: Australian Bureau of Statistics; Statistics New Zealand; and Fund staff estimates.

17

… and unemployment is expected to peak at relatively… and unemployment is expected to peak at relativelyl tl tlow rateslow rates

Unemployment Rate

8

9

8

9

A t li N Z l d

Unemployment Rate(Seasonally adjusted)

7

8

7

8Australia New Zealand

5

6

5

6

3

4

3

4

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Sources: Australian Bureau of Statistics; Statistics New Zealand; and Fund staff estimates

18

No decoupling: Asia’s exporting economies remain highly No decoupling: Asia’s exporting economies remain highly dependent on external demand…and their suppliers of raw dependent on external demand…and their suppliers of raw p ppp pp

materials are, in turn, reliant on themmaterials are, in turn, reliant on them

Selected Asia: Contribution of Final E te nal Demand to Total Val e AddedExternal Demand to Total Value Added

(percent)

80 Asian external demand

40

50

60

70

80 Asian external demandNon-Asian external demand

Average over 1995-2000

Average over 2001-2008

0

10

20

30

40

0

Sing

apor

e

Mal

aysi

a

vinc

e of

Chi

na

Thai

land

Indo

nesi

a

Kor

ea

Chi

na

Japa

n

an P

rov

19

recovery is expected to continue into 2010, but growth will remain recovery is expected to continue into 2010, but growth will remain b lb l i i t d di i t d dbelow prebelow pre--crisis standardscrisis standards

Asia: Real GDP(Year-on-year percent change)

2008 2009 2010 2009 2010

Latest projections

Difference from May

2009 forecast

Industrial Asia -0.2 -4.4 1.7 1.0 1.2Japan -0.7 -5.4 1.7 0.8 1.2Australia 2.4 0.7 2.0 2.2 1.3New Zealand 0.2 -2.2 2.2 -0.2 1.7

Emerging Asia 6.8 5.1 7.0 1.8 1.6NIEs 1.5 -2.3 3.7 3.3 2.8 NIEs 1.5 2.3 3.7 3.3 2.8

Hong Kong SAR 2.4 -3.6 3.5 0.9 3.0Korea 2.2 -1.0 3.6 3.0 2.0Singapore 1.1 -1.7 4.3 8.3 4.4Taiwan Province of China 0.1 -4.1 3.7 3.3 3.7

China 9.0 8.5 9.0 2.0 1.5India 7.3 5.4 6.4 0.8 0.8

ASEAN-5 4.8 0.7 4.0 0.7 1.7Indonesia 6.1 4.0 4.8 1.5 1.3Malaysia 4.6 -3.6 2.5 -0.1 1.2Philippines 3.8 1.0 3.2 1.0 2.2Thailand 2.6 -3.5 3.7 -0.5 2.7Thailand 2.6 3.5 3.7 0.5 2.7Vietnam 6.2 4.6 5.3 1.3 1.4

Emerging Asia (excluding China) 4.8 1.7 4.9 1.6 1.7

20

Main risks to the outlook for Asia Main risks to the outlook for Asia

The tentative recovery in advanced economies could stall. Benefits from The tentative recovery in advanced economies could stall. Benefits from “cash“cash--forfor--clunker” schemes and other overseas stimulus measures could clunker” schemes and other overseas stimulus measures could wane though recent G20 commitment indicates stimulus will continuewane though recent G20 commitment indicates stimulus will continuewane, though recent G20 commitment indicates stimulus will continue.wane, though recent G20 commitment indicates stimulus will continue.

A return of risk aversion could lead to capital outflows, with knock on effects A return of risk aversion could lead to capital outflows, with knock on effects on equity prices and confidence. Also, Asian corporate refinancing needs on equity prices and confidence. Also, Asian corporate refinancing needs remain significantremain significantremain significant.remain significant.

Asian corporations could reassess their mediumAsian corporations could reassess their medium--term growth prospects, term growth prospects, shedding labor and keeping investment low. This could reduce demand for shedding labor and keeping investment low. This could reduce demand for raw materialsraw materialsraw materials.raw materials.

Australian growth could taper off if rate hikes continue to erode consumer Australian growth could taper off if rate hikes continue to erode consumer confidence, if stimulus is insufficient, and/or if growth in China slows after confidence, if stimulus is insufficient, and/or if growth in China slows after inventories are rebuiltinventories are rebuiltinventories are rebuilt.inventories are rebuilt.

Upside risks: possibility of faster improvement in global financial conditions, Upside risks: possibility of faster improvement in global financial conditions, diminishing “fear” could boost consumption and investment.diminishing “fear” could boost consumption and investment.

21

III. Impact of the Global Crisis on the Pacific III. Impact of the Global Crisis on the Pacific ppIsland CountriesIsland Countries

22

Key transmission channels for PICs during the crisisKey transmission channels for PICs during the crisist id 2009t id 2009up to mid 2009up to mid 2009

ower commodity prices generally helped to contain inflation and ower commodity prices generally helped to contain inflation and y p g y py p g y pmprove external balances and terms of trade.mprove external balances and terms of trade.

ut…ut…

educed external demand led to falling remittances, tourism educed external demand led to falling remittances, tourism eceipts and exports.eceipts and exports.

ower trade volumes reduced tax revenue and raised fiscal ower trade volumes reduced tax revenue and raised fiscal eficits.eficits.

apital losses of between 10apital losses of between 10--20 percent for Trust Funds in 2008 20 percent for Trust Funds in 2008 affecting Kiribati, Tuvalu and the Compact Trust Fund).affecting Kiribati, Tuvalu and the Compact Trust Fund).

23

Impact on macroeconomic stabilityImpact on macroeconomic stabilityDrop in commodity prices Drop in commodity prices helped ease inflationary and helped ease inflationary and external pressuresexternal pressures

But lower trade volumes and But lower trade volumes and value affect tax revenue putting value affect tax revenue putting pressure on fiscal balances pressure on fiscal balances

302008 2009

Tax Revenue(In percent of GDP)

2007 2008 2009

CPI Inflation(In percent)

15

20

252007 2008 2009

5

10

15

0

New

Gui

nea

Pala

u

hall

Isla

nds,

ep

ublic

of

Kiri

bati

Vanu

atu

Fiji

Sam

oa

mon

Isl

ands

Tong

a

Sam

oa

ll Is

land

s

Vanu

atu

Fiji

pua

New

Gui

nea

Tong

a

Kirib

ati

n Is

land

s

Papu

a

Mar

s h Re

Solo

Mar

sha

Pap G

Solo

mo

24Nonetheless, growth in most PICs stayed positive and is Nonetheless, growth in most PICs stayed positive and is expected to remain so in view of rebounding globalexpected to remain so in view of rebounding global

and Asian growthand Asian growthand Asian growthand Asian growth

cific Islands: Real GDP Growth(In percent)

6

Real GDP Growth(In percent)

PPP weight Average

2

4

6

2009 2010

-2

0

2

-6

-4

2

2004 2005 2006 2007 2008 2009 2010

6

Fiji

Tong

a

Kiri

bati

Vanu

atu

Sam

oa

Papu

a N

ewG

uine

a

Solo

mon

Isl

ands

World Economic Outlook; IMF APDLISC database.S

Source: IMF APDLISC database.

25

Commodity prices have rebounded strongly and this is Commodity prices have rebounded strongly and this is elping drive growth in Australia; good for tourism but, on elping drive growth in Australia; good for tourism but, on e p g d e g o t ust a a; good o tou s but, oe p g d e g o t ust a a; good o tou s but, o

balance, a downside risk to PICs’ external positionsbalance, a downside risk to PICs’ external positions

ommodity Price Index WTI Oil Price Prospects

Non- Fuel Commodity Price Index

Commodity Price Index250

95% confidence interval86% fid i l

(In US dollars per barrel)

150

20086% confidence interval68% confidence intervalFutures

100

Oct

-06

an-0

7

Apr-

07

Jul-

07

Oct

-07

an-0

8

Apr-

08

Jul-

08

Oct

-08

an-0

9

Apr-

09

Jul-

09

07 08 09 10 11 120

50

O Ja A J O Ja A J O Ja A J

World Economic Outlook.

07 08 09 10 11 12

Sources: Bloomberg; and IMF staff calculations.

26

Tourism departures to the Pacific have picked up Tourism departures to the Pacific have picked up tl f k t itl f k t irecently from key source countriesrecently from key source countries

Departures for the Pacific('000 p J t A t t l )

Departures for the Pacific(p thl % h )

240 Australia

('000 persons, Jan to Aug totals)

40Australia

(persons; monthly, y-o-y% change)

180New Zealand

20

New Zealand

60

120

0

01999 2001 03 05 07 09

-20Aug08 Oct Dec Feb09 Apr Jun Aug

Sources: ADB, ABS and New Zealand Ministry of Tourism.

27

acific Island nominal exchange rates visacific Island nominal exchange rates vis--àà--vis bulk vis bulk i t k t d i ti t dili t k t d i ti t dilurist markets are depreciating steadily…urist markets are depreciating steadily…

Tala per currency unit(index = 100 on 8/30/08)

FJD per currency unit(index = 100 on 8/30/08)

140 0

120 0

130.0

140.0

USD

AUD

NZD

100 0

110.0

120.0USD

AUD

NZD

80.0

90.0

100.0

33 65 97 129 161 193 225 257 289 321 353 385 417 1 33 65 97 129 161 193 225 257 289 321 353 385 417

28

Pa'anga per currency unit(index = 100 on 8/30/08)

Vatu per currency unit(index = 100 on 8/30/08)

105

95

USDAUD

USDAUD

75

85 NZDNZD

651 28 55 82 109 136 163 190 217 244 271 298 325 352 379 406 4339 57 85 113 141 169 197 225 253 281 309 337 365 393 421

29

But…REERs have been appreciating for years and But…REERs have been appreciating for years and i k f titii k f titimay pose risks for competitivenessmay pose risks for competitiveness

Real Effective Exchange Rate0 140

Fiji Samoa

(2000 = 100)

0

0

120

130

Vanuatu Palau

0 110

0

0

00 01 02 03 04 05 06 07 08 0990

100

00 01 02 03 04 05 06 07 08 09

ces: IMF, Information Notice System ; APDLISC database; and Fund staff estimates.

30

And public debt is high in many Pacific countries, And public debt is high in many Pacific countries, th b t i i ti f ti lth b t i i ti f ti lthereby constraining options for stimulusthereby constraining options for stimulus

Public Debt

60

70

(For 2008, in percent of GDP)

40

50

60

;

10

20

30

Palau Vanuatu Papua NewGuinea

SolomonIslands

Tonga Samoa Fiji 1/ Marshall Islands0

10

e: APDLISC database.Fiji Central government debt

31

Conclusion: The Pacific Island CountriesConclusion: The Pacific Island Countriesf i d i tf i d i tface a very mixed pictureface a very mixed picture

Uncertainty about growth prospects globally and in Asia/Oceania Uncertainty about growth prospects globally and in Asia/Oceania remains highremains highremains high.remains high.The benefits of lower commodity prices have been offset by falling The benefits of lower commodity prices have been offset by falling exports, remittances, and tourism receipts, and rising fiscal deficits.exports, remittances, and tourism receipts, and rising fiscal deficits.Current rebound globally and particularly in AsiaCurrent rebound globally and particularly in Asia--extending to extending to A t li d N Z l dA t li d N Z l d i i i th t f PICi i i th t f PICAustralia and New ZealandAustralia and New Zealand--is improving growth prospects for PICs, is improving growth prospects for PICs, assuming that stimulus packages are not withdrawn prematurely, assuming that stimulus packages are not withdrawn prematurely, growth becomes selfgrowth becomes self--sustaining, and rising unemployment eases sustaining, and rising unemployment eases soon.soon.Tourism, which is key to the PICs, is showing signs of recovering.Tourism, which is key to the PICs, is showing signs of recovering.Real exchange rate appreciation in PICs with pegged exchange rates Real exchange rate appreciation in PICs with pegged exchange rates have eroded competitiveness for years.have eroded competitiveness for years.Policy options are constrained in those PICs with high public debtPolicy options are constrained in those PICs with high public debtPolicy options are constrained in those PICs with high public debt Policy options are constrained in those PICs with high public debt and low reserve cover, and by the facts that financial markets are and low reserve cover, and by the facts that financial markets are very thin and the monetary transmission mechanism is weak.very thin and the monetary transmission mechanism is weak.