WORLD BANK EAST ASIA AND PACIFIC ECONOMIC UPDATE OCTOBER 2018 Public Disclosure Authorized Public Disclosure Authorized NAVIGATING UNCERTAINTY Public Disclosure Authorized Public Disclosure Authorized WORLD BANK EAST ASIA AND PACIFIC ECONOMIC UPDATE OCTOBER 2018 Navigating Uncertainty © 2018 International Bank for Reconstruction and Development / The World Bank 1818 H Street NW, Washington, DC 20433 Telephone: 202-473-1000; Internet: www.worldbank.org Some rights reserved 1 2 3 4 22 21 20 19 This work is a product of the staff of The World Bank with external contributions. The findings, interpretations, and conclusions expressed in this work do not necessarily reflect the views of The World Bank, its Board of Executive Directors, or the governments they represent. The World Bank does not guarantee the accuracy of the data included in this work. 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Page 1: Nguyen Khanh / World Bank Page 69: Stanislas Fradelizi / World Bank Page 109: Wetlands International-China Office NAVIGATING UNCERTAINTY Contents List of Abbreviations xiii Preface and Acknowledgments xv Executive Summary xvii Part I. Recent Developments and Outlook 1 I.A. Recent Developments 2 Regional growth remained resilient in the first half of 2018, despite increased risks 2 Export growth peaked in early 2018 before easing over the year 9 Domestic demand remained robust across the region 10 Inflation is edging up, though rates generally remain below target levels 15 Heightened uncertainty has weighed on exchange rates and financial markets 16 Fiscal space in many regional economies is shrinking as governments adopt accommodative fiscal policies to support growth 20 Despite rising revenues, Pacific island countries continue to face a risk of debt distress, as well as the persistent threat of natural disasters 22 Poverty rates have continued to fall across the EAP region 23 I.B. Outlook and Risks 25 Growth is expected to moderate slightly but remain generally strong across the region 25 Domestic demand will continue to drive regional growth 30 Continued growth is expected to support further declines in poverty 31 Escalating protectionism could dampen the growth outlook for developing EAP 35 Heightened financial market turbulence would complicate macroeconomic management 42 The interaction of these risks could exacerbate short-term vulnerabilities and hinder growth prospects 48 Among the Pacific island countries, risks remain tilted to the downside 49 I.C. Policy Considerations 50 Mitigate short-term vulnerabilities and enhance preparedness 50 Strengthen and expand the global rules-based trade and investment framework, including through deeper regional integration 52 Deepen structural reforms to support medium-term growth 58 Enhance economic security and promote economic mobility 59 An agenda for the Pacific island countries 60 Part I References 64 LIST OF COnTEnTS III EAST ASIA AND PACIFIC ECONOMIC UPDATE OCTOBER 2018 Contents continued Part II. Medium-Term Development Agenda 69 II.A. Intergenerational Mobility in East Asia and the Pacific 70 Intergenerational mobility has profound implications for social and economic development 70 How is economic mobility across generations measured in this analysis? 72 Intergenerational mobility in the EAP region 74 Income mobility is closely aligned with education mobility in EAP 79 Economic growth can, but does not inevitably, promote mobility 80 Policies to enhance intergenerational mobility in EAP 81 II.B. Meeting the Jobs Challenge in Southeast Asia: Lessons from Cambodia, Myanmar, and Vietnam 86 Introduction 86 The key employment challenge facing the Mekong LMICs is not to create more jobs, but to create higher-quality, more-inclusive jobs 87 Inclusiveness in employment is also a challenge, as pockets of inequality persist 90 Job quality is improving among the Mekong LMICs, and jobs are becoming more inclusive, but progress has been slow 91 Among the Mekong LMICs, labor costs are increasing faster than labor productivity, and a reliance on low-value-added components of global value chains may hinder improvements in job quality, with especially negative consequences for young women 92 The domestic sectors in the Mekong LMICs face various obstacles that create perverse incentives for job creation and upgrading 94 The quality of agricultural jobs will likely improve, driven both by megatrends and continued structural change 96 A low-skilled workforce and an inadequate skills-development system may impede progress across all job types 97 Policy Implications 100 Conclusions 102 Part II References 104 Part III. Country Summaries and Key Indicators 109 Cambodia 110 Central Pacific Islands 113 China 116 Fiji 119 Indonesia 122 Lao PDR 125 Malaysia 128 Mongolia 131 IV LIST OF COnTEnTS NAVIGATING UNCERTAINTY Contents continued Myanmar 134 north Pacific Islands 137 Papua New Guinea 140 Philippines 143 Solomon Islands 146 South Pacific Islands 149 Thailand 152 Timor-Leste 155 Vietnam 158 LIST OF COnTEnTS V EAST ASIA AND PACIFIC ECONOMIC UPDATE OCTOBER 2018 List of Figures Part I. Recent Developments and Outlook I.A. Recent Developments Figure I.A.1. Growth among developing EAP economies has remained resilient in 2018 3 Figure I.A.2. Business confidence indicators have yet to show clear signs of slowing economic momentum among developing countries in East Asia and the Pacific 3 Figure I.A.3. Monthly indicators suggest that China’s economic momentum remains strong 9 Figure I.A.4. The region’s largest developing economies continued to register robust growth through Q2 2018 9 Figure I.A.5. Economic activity was generally solid across the region’s smaller economies 9 Figure I.A.6. Growth in export values peaked in early 2018… 10 Figure I.A.7. …as did growth in export volumes 10 Figure I.A.8. Strong domestic demand continued to underpin growth 11 Figure I.A.9. Robust net FDI inflows also supported the economic expansion 14 Figure I.A.10. Import growth has generally remained firm among the region’s major economies 15 Figure I.A.11. Current account developments have been mixed 15 Figure I.A.12. In recent months, inflation has begun to tick up across the region… 16 Figure I.A.13. …and rising producer prices suggest underlying price pressures may be building 16 Figure I.A.14. Converging risks triggered increased stock market volatility 17 Figure I.A.15. External corporate and sovereign bond spreads have continued to widen as uncertainty surrounding the economic outlook has intensified 17 Figure I.A.16. Equity markets have trended down amid heightened volatility… 18 Figure I.A.17. …as have the currencies of the region’s large economies 18 Figure I.A.18. Spreads with the U.S. Federal Reserve’s federal funds rate have narrowed as developing EAP central banks have maintained accommodative monetary policies to support growth 19 Figure I.A.19. Despite recent reductions, foreign reserves remain ample across the region’s major economies 19 Figure I.A.20. In most countries, credit growth rates either remain high or have recently increased 20 Figure I.A.21. The stock of private sector debt remains high but stable in China and Malaysia 20 Figure I.A.22. Fiscal deficits have generally remained contained 21 Figure I.A.23. The risk of external debt distress among Pacific island countries remains elevated 22 Figure I.A.24.