WORLD BANK EAST ASIA AND PACIFIC ECONOMIC UPDATE OCTOBER 2017 Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Balancing Act Public Disclosure Authorized WORLD BANK EAST ASIA AND PACIFIC ECONOMIC UPDATE OCTOBER 2017 Balancing Act © 2017 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 20 19 18 17 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. The boundaries, colors, denominations, and other information shown on any map in this work do not imply any judgment on the part of The World Bank concerning the legal status of any territory or the endorsement or acceptance of such boundaries. Nothing herein shall constitute or be considered to be a limitation upon or waiver of the privileges and immunities of The World Bank, all of which are specifically reserved. Rights and Permissions This work is available under the Creative Commons Attribution 3.0 IGO license (CC BY 3.0 IGO) http://creativecommons.org/ licenses/by/3.0/igo. Under the Creative Commons Attribution license, you are free to copy, distribute, transmit, and adapt this work, including for commercial purposes, under the following conditions: Attribution—Please cite the work as follows: World Bank. 2017. “Balancing Act” East Asia and Pacific Economic Update (October), World Bank, Washington, DC. Doi: 10.1596/978-1-4648-1209-5 License: Creative Commons Attribution CC BY 3.0 IGO Translations—If you create a translation of this work, please add the following disclaimer along with the attribution: This translation was not created by The World Bank and should not be considered an official World Bank translation. The World Bank shall not be liable for any content or error in this translation. Adaptations—If you create an adaptation of this work, please add the following disclaimer along with the attribution: This is an adaptation of an original work by The World Bank. Views and opinions expressed in the adaptation are the sole responsibility of the author or authors of the adaptation and are not endorsed by The World Bank. Third-party content—The World Bank does not necessarily own each component of the content contained within the work. The World Bank therefore does not warrant that the use of any third-party-owned individual component or part contained in the work will not infringe on the rights of those third parties. The risk of claims resulting from such infringement rests solely with you. If you wish to re-use a component of the work, it is your responsibility to determine whether permission is needed for that re-use and to obtain permission from the copyright owner. Examples of components can include, but are not limited to, tables, figures, or images. All queries on rights and licenses should be addressed to World Bank Publications, The World Bank Group, 1818 H Street NW, Washington, DC 20433, USA; e-mail: [email protected]. ISBN (electronic): 978-1-4648-1209-5 DOI: 10.1596/ 978-1-4648-1209-5 Photo credits in this publication. Further permission required for reuse. • Cover: Hong Sar / World Bank. • Page 1: Josh Estey / World Bank • Page 73: Bart Verweij / World Bank • Page 107: Hong Sar / World Bank BALANCING ACT Contents List of Abbreviations xiii Preface and Acknowledgments xv Executive Summary xvii Part I. Recent Developments and Outlook 1 I.A. Recent Developments 2 A favorable global environment has contributed to improved economic performance in 2017 in developing East Asia and the Pacific 2 Domestic demand continues to drive economic performance in the region 7 Exports continue to grow across much of the region 10 Inflation remains low throughout most of the region 11 Private sector credit continues to expand in the region 13 Financial conditions and currencies stabilized during the first half of 2017 14 Recent developments in the Pacific Island Countries 20 Poverty rates have continued to fall across most of the EAP region 21 I.B. Outlook and Risks 29 Growth is expected to remain robust in the region 29 Poverty is projected to continue to fall—the pace of reduction across countries will depend on successful implementation of policies to make growth more inclusive 33 Domestic demand is expected to continue driving growth in the region 34 Continued uncertainty about global economic policies and the escalation of geopolitical tensions could jeopardize growth prospects 36 Financial sector vulnerabilities in many countries could be exacerbated by tightening in global financial markets 36 High budget deficits and rising public debt pose risks for many countries in the region 46 The Pacific Island Countries remain vulnerable to shocks, highlighting the importance of savings and stabilization mechanisms 47 I.C. Policy Considerations 48 Improving prospects for global growth provide an opportunity to address vulnerabilities 48 Accelerating reforms for sustained and inclusive growth 53 An agenda for the Pacific Island Countries 64 References 69 LIST oF ConTEnTS III EAST ASIA AND PACIFIC ECONOMIC UPDATE oCToBER 2017 Contents continued Part II. Medium-Term Development Agenda 73 II.A. Raising the Bar: From Reducing Poverty to Fostering Inclusive Growth in East Asia And Pacific 74 Introduction 74 Using economic classes to characterize inclusive growth 77 The three pillars of inclusive growth 80 Conclusion 84 References 85 II.B. TourisminDevelopingEastAsia:ManagingGrowthandMaximizingFutureBenefits 87 Tourism and its economic significance in developing East Asia 87 Tourism drivers and challenges 93 Policy Priorities 98 Conclusion 103 References 104 Part III. Country Summaries and Key Indicators 107 Cambodia 108 China 111 Fiji 114 Indonesia 117 Lao PDR 120 Malaysia 123 Mongolia 126 Myanmar 129 Papua New Guinea 132 Philippines 135 Small Pacific Island Countries 138 Solomon Islands 145 Thailand 148 Timor-Leste 151 Vietnam 154 IV LIST oF ConTEnTS BALANCING ACT List of Figures Part I. Recent Developments and Outlook I.A. Recent Developments Figure I.A.1. Growth in developing EAP continued to prove resilient 5 Figure I.A.2. The region’s large economies continued to perform strongly 6 Figure I.A.3. The manufacturing Purchasing Managers’ Index points toward continued expansion in most major countries 6 Figure I.A.4 Performance is mixed across the region’s smaller economies 7 Figure I.A.5. Domestic demand continued to drive growth in 2017 8 Figure I.A.6. Countries’ record on public investment spending is mixed 9 Figure I.A.7. After widening in 2016, fiscal deficits in some of the large economies started to stabilize in 2017 9 Figure I.A.8. Budget deficits are large in other countries 9 Figure I.A.9. Export values continued to recover in second half of 2017… 10 Figure I.A.10. …as have export volumes 10 Figure I.A.11. Inflation is benign in the region and declined in most countries toward mid-2017 11 Figure I.A.12. Core inflation remains muted 12 Figure I.A.13. Producer prices increased rapidly in late 2016, but decelerated in 2017 12 Figure I.A.14. Most larger countries have held policy rates constant or reduced them slightly in 2017 13 Figure I.A.15. Real interest rates in large economies have been declining, and in most cases are significantly below their long-term average 13 Figure I.A.16. Credit growth has slowed over the past year, but remains rapid and showed signs of modest acceleration in some countries in 2017 13 Figure I.A.17. The stock of private sector debt remains elevated in several economies 14 Figure I.A.18. The increase in capital outflows experienced in late 2016 have begun to reverse 14 Figure I.A.19. net FDI inflows increased in 2016 and 2017 in many of the larger economies 15 Figure I.A.20. Net FDI outflows from China exceeded net inflows during most of 2016, but the balance may have shifted in 2017 15 Figure I.A.21. Financial markets saw increased volatility in end-2016, but have since recovered 15 Figure I.A.22. Stock prices 19 Figure I.A.23. External corporate and sovereign bond spreads have narrowed 19 Figure I.A.24. Many major currencies have appreciated against the U.S. dollar during 2017 19 Figure I.A.25. Indonesia and Thailand show appreciation in real, trade-weighted terms 19 Figure I.A.26. Reserve coverage for the major economies in the region remains broadly adequate 20 Figure I.A.27. The prevalence of poverty has continued to decline across the region 21 LIST oF ConTEnTS V EAST ASIA AND PACIFIC ECONOMIC UPDATE oCToBER 2017 List of Figures continued I.B. Outlook and Risks Figure I.B.1. Domestic demand is projected to remain the primary contributor to growth of regional GDP… 34 Figure I.B.2. …in most large economies 35 Figure I.B.3. …and in the smaller economies 35 Figure I.B.4. Nonperforming loans are steadily increasing across the region 41 Figure I.B.5. Debt service ratio of private nonfinancial sector 41 Figure I.B.6. Fiscal deficits are high or rising in many countries 46 Figure I.B.7. Government debt is also high or rising in many countries 46 Part II. Medium-Term Development Agenda II.A. RaisingtheBar:FromReducingPovertytoFosteringInclusiveGrowthinEastAsiaAndPacific Figure II.A.1. Poverty trends 2002–15 75 Figure II.A.2A. The evolution of poverty in EAP, 2002–15 79 Figure II.A.2B.