Asia Economic Monitor - December 2003

Asia Economic Monitor 2003
December 2003
The Asia Economic Monitor (AEM) is a quarterly review of East Asias growth and restructuring, financial and corporate sector reforms, and social developments. It covers the 10 Association of Southeast Asian Nations member countries plus the Peoples Republic of China and Republic of Korea.
http://aric.adb.org
Highlights
Growth and Restructuring in 2003
In the second half of 2003, East Asia emerged from the lackluster performance of the first half into a synchronized upswing in growth. Helped by the quick control of SARS and the improved external economic environment, growth strengthened across the region in the third and fourth quarters.
Contents
Regional Overview
Economic Performance in 2003 Financial Restructuring and Prudential Indicators Economic Outlook, Risks, and Policy Issues
3 10 16
Although there has been some increase in prices, inflation remains low except in a few countries. Most regional stock markets, after remaining subdued in the first quarter, have turned up since. Among the five crisis-affected countries, nonperforming loan ratios of banks continued to fall or remained steady, bank profitability generally improved, and asset management companies made further progress in debt restructuring. Prudential indicators also remain strong: most major countries are running current account surpluses, foreign exchange reserves are sizable, external debt-service ratios have declined from their peaks, and external debt indicators have improved.
Boxes
(1) Are Capital Flows Starting to Return to the Crisis Countries?
(2) Progress in Voluntary Corporate 11 Workouts (3) Supervisory and Regulatory Reforms
14 31 34 38 46 54 61 65 71 74 81 87 95
Country Chapters
Brunei Darussalam Cambodia China, People's Republic of Indonesia Korea, Republic of Lao PDR Malaysia Myanmar Philippines Singapore Thailand Viet Nam
Economic Outlook
Compared with the cautiously optimistic note of the July 2003 AEM, the outlook for East Asia is now more upbeat with the continuation of synchronized growth. The tentative US economic recovery that was evident a few months ago has strengthened and become more balanced. Japans economic recovery is becoming more broad-based. Although the economic situation in Europe is less encouraging, the worst appears to be over and a turn around is underway. The continued strength of domestic demand in most of East Asia is supporting the regional rebound. The rapid growth of the PRC economy and increase in its imports, together with the growth of intra-regional trade, is also providing an impetus for East Asias growth. The November survey by Consensus Economics Inc.1 projects East Asias average GDP growth for 2003 at 6.1%, higher than the July forecast of 5.6%.
Continued overleaf
How to reach us
Asian Development Bank Regional Economic Monitoring Unit 6 ADB Avenue, Mandaluyong City 0401 Metro Manila, Philippines Telephone (63-2) 632-5458/4444 Facsimile (63-2) 636-2183 E-mail aric_info@adb.org
Asian Development Bank
A private institution that collates forecasts from about 200 economic and financial forecasters from more than 70 countries.
Acronyms, Abbreviations, and Notes

ADB AEM AMC ARIC ASEAN BNM BSP CDRAC CPI FSC FSS GDP IBRA IIF IMF ISM JCI JITF KAMCO KLCI KOSPI Lao PDR LRC NASDAQ NPL OECD PCOMP PHIBOR PRC REMU ROA SARS SET SIBOR SPV STI TA M C WHO q-o-q y-o-y B CNY P RM Rp S$ W Asian Development Bank Asia Economic Monitor asset management company Asia Recovery Information Center Association of Southeast Asian Nations Bank Negara Malaysia Bangko Sentral ng Pilipinas Corporate Debt Restructuring Advisory Committee consumer price index Financial Supervisory Commission Financial Supervisory Service gross domestic product Indonesian Bank Restructuring Agency Institute of International Finance International Monetary Fund Institute of Supply Management Jakarta Composite Index Jakarta Initiative Task Force Korea Asset Management Corporation Kuala Lumpur Composite Index Korean Stock Price Index Lao Peoples Democratic Republic Legal Reform Committee for Development of Thailand National Association of Securities Dealers Automated Quotation nonperforming loan Organization for Economic Co-operation and Development Philippine Composite Index Philippine Interbank Offer Rate Peoples Republic of China Regional Economic Monitoring Unit (ADB) return on assets Severe Acute Respiratory Syndrome Stock Exchange of Thailand Singapore Interbank Offer Rate Special Purpose Vehicle Straits Times Index (Singapore) Thai Asset Management Corporation World Health Organization quarter-on-quarter year-on-year baht yuan peso ringgit rupiah Singapore dollar won yen
GDP growth in 2004 is expected to strengthen to 6.6%, with forecasts for most East Asian countries revised up in recent months.
Risks
Since the July AEM, risks to East Asia's growth prospects have receded, but some remain: SARS could possibly recur. Political uncertainties ahead of the elections in several countries might affect spending and investment. Terrorism or geopolitical tensions could escalate. The stalemate at the WTO trade negotiations and increased protectionism could harm the global trading environment. Large global current account imbalances could induce disorderly exchange rate adjustments.
Policy Issues
The improved outlook for the region provides a window of opportunity for action in several areas: Fiscal policies may have to shift from expansionary to a more neutral stance, while the current low interest rates could continue for some time. Changes in reserve management and foreign exchange policies, including exchange rate policy, could be considered by some countries. The remaining agenda of financial and corporate sector reforms and restructuring needs to be addressed expeditiously.
Note: In this publication, $ denotes US dollars, unless otherwise specified.
The Asia Economic Monitor December 2003 was prepared by the Regional Economic Monitoring Unit of the Asian Development Bank and does not necessarily reflect the views of ADB's Board of Governors or the countries they represent.
East Asias Growth and Restructuring Regional Overview

Economic Performance in 2003
Figure 1: Real GDP Growth (y-o-y, %)
12 8 4 0 -4 -8 01Q1 01Q3 02Q1 02Q3 03Q1 03Q3
China, People's Rep. of Indonesia Korea, Rep. of Malaysia
1
Real Sector Developments

Economic performance in East Asia1 has been much better in the second half of 2003 than it was in the first. The region moved from a lackluster performance into a synchronized upswing in growth. Growth in gross domestic product (GDP) across most of East Asia had slowed in the first half, mostly because the external environment turned unfavorable for the third time in as many years, and as a result of the outbreak of Severe Acute Respiratory Syndrome (SARS). As projected in the July 2003 Asia Economic Monitor (July AEM), with the control of SARS and the emergence of more positive economic news from the industrial countries, the decelerating trend in growth was generally reversed in the third quarter. Growth has strengthened across the region since then. All seven East Asian countries for which quarterly GDP data are availablePeoples Republic of China (PRC), Indonesia, Republic of Korea (Korea), Malaysia, Philippines, Singapore, and Thailandregistered higher growth in the third quarter than in the second (Figure 1). These seven countries,
Philippines Singapore Thailand1
Based on advance estimates for the third quarter, 2003. Source: ARIC Indicators.
Figure 2: Growth of Domestic Demand1 (y-o-y, %, at constant prices)

PRC Indonesia Korea, Rep. of Malaysia Philippines Singapore Thailand
-20 -10
03Q1
1
which account for 98% of East Asias total GDP, together grew by 6.4% in the third quarter compared with 4.7% in the second quarter.2 With the major exception of Korea, a strengthening of domestic demand underpinned the turn around in the third quarter (Figure 2). Domestic demand, which had slowed in the second quarter almost across the region primarily because of the SARS outbreak, turned around in the third quarter. Also, tourism recovered strongly across the region, except in Indonesia, where the recovery was delayed by the August terrorist attack in Jakarta. In most of these countries, private consumption bounced back from the SARS-induced slowdown in the second quarter. There are tentative signs that fixed investment is also picking up, after falling sharply in the immediate years after the 1997 financial crisis and remaining dormant since. In Korea, where the SARS-induced
0
03Q2
10
20
03Q3
Based on national income accounts except for PRC which is the sum of retail sales and fixed investment (at constant 1997 prices). Source: ARIC Indicators.
Defined here as the 10 members of the Association of Southeast Asian Nations (Brunei Darussalam, Cambodia, Indonesia, Lao Peoples Democratic Republic, Malaysia, Myanmar, Philippines, Singapore, Thailand, and Viet Nam) plus the Peoples Republic of China and Republic of Korea. Unless otherwise indicated, all growth figures are year-on-year.
REGIONAL OVERVIEW
Figure 3: Growth of Exports of Goods and Services 1 (y-o-y, %, at constant prices)

PRC Indonesia Korea, Rep. of Malaysia Philippines Singapore Thailand
-15 0
03Q1
1
disruption was perhaps least severe, faster export growth, rather than domestic demand, was the driving force behind higher GDP growth in the third quarter (Figure 3). Korean consumers are adjusting their balance sheets following a surge in consumer credit in previous years. As a result, consumer spending continued to contract in the third quarter. Although strengthening domestic demand and growth has been accompanied by some increase in prices, inflation remains low across the region with the exception of Indonesia3 (Figure 4). Consumer price inflation is below 2% in Singapore, Malaysia, Thailand, and PRC, and below 4% in the Philippines and Korea. Even in Indonesia, annual inflation declined from more than 10% at the end of 2002 to about 6% in 2003. For some countries, core inflation (excluding the more volatile food and energy prices) is even lower than headline inflation (Figure 5). For example, core inflation is now close to zero in Malaysia, Singapore, and Thailand, and just above 2% in Korea. Overall, therefore, there are few signs that the current economic rebound in the region is causing excess demand pressures. However in the PRC, the fast pace of fixed investment has prompted a tightening of monetary policy in recent months.
15
30
03Q2
45
60
03Q3
Based on national income accounts except for PRC which is based on merchandise exports at 1997 prices. Source: ARIC Indicators.
Figure 4: Headline Inflation (y-o-y, %)

Indonesia 18 15 12 9 6 3 Jan 2001 Others 8 6 4 2 0 -2 Nov May Nov 2002 2003 2003
Philippines Singapore Thailand
Financial Markets
East Asias stock markets, after remaining generally subdued in the first quarter, began rising in the second quarter. This turn around reflected a number of positive factors that improved the regions growth outlook and corporate earnings prospects. These included the reduction of uncertainties associated with the Iraq war, the emergence of several positive economic indicators from the US and Japan, continued low interest rates, and above all, the quick, effective control of SARS (See July 2003 AEM for a more detailed discussion). There was also a turn around in portfolio investment to the stock markets of the five crisisaffected countries this year (see Box 1). On top of their impressive gains in the second quarter, stock markets continued their buoyancy in the third quarter, except in the PRC. Since the beginning of the second quarter, gains in stock prices (in terms of local currency) were a whopping 78% in Thailand, followed by 60% in Indonesia, 44% in Korea, and between 2535% in Malaysia, Philippines,
Aug 2001
Mar 2002
Source: ARIC Indicators.
Figure 5: Core Inflation (y-o-y, %)

8 6 4 2 0 -2 Jan 2001
Aug 2001
Mar 2002
Oct 2002
May Nov 2003 2003

Singapore Thailand
and Singapore (Figure 6). These markets generally outperformed the US stock market. Relative to the broad Russell 3000 index in the US,
Korea, Rep. of Malaysia Philippines
Source: Bank of Thailand and REMU staff estimates.
Inflation remained high in Lao PDR (15% in August) and in Myanmar (61% in February).
REGIONAL OVERVIEW
Figure 6: Percent Change in the Composite Stock Price Indexes 1 (between end-March 2003 and week ending 5 Dec 2003, local index) PRC Indonesia Korea, Rep. of Malaysia Philippines Singapore Thailand
-20
1
Figure 7: Percent Change in Stock Market Index1 Relative to Russell 3000 Index (between end-March 2003 and week ending 5 Dec 2003) PRC Indonesia Korea, Rep. of Malaysia Philippines Singapore Thailand
20
40
60
80
1
-30
-15
15
30
45
Weekly averages of JCI (Indonesia), KLCI (Malaysia), PCOMP (Philippines), KOSPI (Korea), STI (Singapore), and SET (Thailand). For PRC, the index is based on the weekly average of the Shanghai A & B and Shenzen A & B indexes, weighted by the market capitalization of each market. Source: REMU staff calculations derived from Bloomberg data.
Weekly averages of JCI (Indonesia), KLCI (Malaysia), PCOMP (Philippines), KOSPI (Korea), STI (Singapore), and SET (Thailand). For PRC, it is an index based on the weekly average of the Shanghai A & B and Shenzen A & B indexes, weighted by the market capitalization of each market. Source: REMU staff calculations derived from Bloomberg data.
Figure 8: Exchange Rate Indexes (weekly average, last week of Dec 2002=100, $/local currency)
112 109 106 103 100 97 94 27 Dec 14 Mar 2002 2003 13 Jun 2003 12 Sep 2003 05 Dec 2003
stock price indexes in most of these countries were higher (by about 40% in Thailand, 27% in Indonesia, 14% in Korea, over 3% in the Philippines and Singapore), while Malaysias stock market performance more or less matched that of the US (Figure 7). This years poor performance of the PRCs stock market has been largely due to continued uncertainties over government plans to divest state ownership in listed companies. Investors concerns over the quality of corporate governance on the back of several recent corporate scandals also contributed to stock market weakness. Trends in regional exchange rates against the US dollar have been mixed (Figure 8). In the first 11 months of the year, while the Indonesian rupiah and the Thai baht appreciated against the US dollar (by 5% and 8% respectively), the Korean won and the Singapore dollar were little changed, as were the Malaysian ringgit and the PRC yuan which are de facto fixed to the US dollar. With about 4% depreciation against the US dollar, the Philippine peso bucked the regional trend. A number of factors contributed to the pesos weakness. These include concerns over fiscal sustainability, a worsening external payments position, and political uncertainties ahead of the 2004 elections. Regional currencies, however, generally depreciated in nominal effective terms, except the Thai baht, which appreciated by about 2%. The levels of depreciation varied across countries. During the year, nominal effective currency depreciations amounted to 8% for the Philippines,
Source: REMU staff calculations derived from Bloomberg data.
REGIONAL OVERVIEW
Box 1: Are Capital Flows Starting to Return to the Crisis Countries? The Institute of International Finance (IIF) estimates that net private capital flows to emerging markets will reach $161.9 billion in 2003 from a trough of $121.2 billion in 2002. In 2004, private flows to emerging markets are forecast to rise further to $185.7 billion. These improved prospects reflect both the expected recovery in the global economy and the positive shift in investor sentiment toward emerging markets. In terms of regional distribution of private capital, the Asia-Pacific region is expected to receive $84.2 billion this year, slightly over half of total private flows to emerging markets. After softening last year, private capital flows to emerging markets in Latin America are expected to reach $26.4 billion in 2003, a gain of $11.4 billion from 2002. Private capital flows to emerging markets in Europe are expected rise to $45.4 billion this year from $38.6 billion in 2002. For 2004, private capital flows are projected to increase in all regions, with emerging markets in Latin American posting the biggest gains. Net private capital inflows to the five crisis-affected countries in Asia (Indonesia, Korea, Malaysia, Philippines, and Thailand) are expected to have increased slightly in 2003 to $11.7 billion from $11.1 billion in 2002 and $9.1 billion in 2001 (see Table 1), mainly because of an increase in portfolio investment into stock markets. The five stock markets have drawn in an estimated net $4.6 billion because of improved prospects and lower returns elsewhere. This compares with a net portfolio outflow of $600 million in 2002. Other types of capital flows, however, have continued to slow this year. Net foreign direct investment into the five countries has fallen to an estimated $3.9 billion from $5.8 billion last year. Lending by commercial banks is down to $5 billion from $5.4 billion, and there has been a net outflow of $1.7 billion in nonbank credit as the countries repaid maturing debt. Only the Philippines and Korea were active in bond issuance. In 2004, net private capital inflows to the crisis-affected countries are expected to increase further to $13.4 billion, mainly from more rapid inflows of both portfolio capital and FDI. The latter is expected to increase from $3.9 billion to $5.8 billionthe first increase in the level of inflows since 1999and the former from $4.6 billion to $5.8 billion. Net borrowing from commercial banks is expected to decline further and nonbank credit is again likely to register an outflow as countries continue to pay down their debt.
Table 1: Net Private Capital Flows to the Five Crisis-Affected Countries ($ billion) 1998 Net private flows Equity investment, net Direct equity investment, net Portfolio equity investments, net Private creditors, net Commercial banks, credit flows, net Other private creditors, net
e = estimate; f = forecast Note: Data are as of September 21, 2003. Source: Institute of International Finance.
1999 -4.62 30.51 15.96 14.55 -35.12 -32.11 -3.01
2000 16.58 24.61 13.08 11.53 -8.03 -10.91 2.89
2001 9.07 19.52 9.88 9.64 -10.45 -8.17 -2.28
2002e 11.10 5.23 5.83 -0.60 5.87 5.37 0.50
2003f 11.69 8.45 3.90 4.55 3.24 4.96 -1.72
2004f 13.43 11.60 5.80 5.80 1.83 2.33 -0.49
-35.32 17.81 13.54 4.26 -53.12 -47.66 -5.46
5% for Malaysia and the PRC, 3% for Singapore, 2% for Korea, and 1% for Indonesia (Figure 9). Given the low inflation environment in the region, nominal effective depreciations have generally translated into real effective depreciations. With the exception of Thailand, Indonesia, and Korea, regional currencies depreciated in real effective terms (Figure 10). These real
REGIONAL OVERVIEW
Figure 9: Nominal Effective Exchange Rate (Dec 2002=100)

106 104 102 100 98 96 94 92 Dec 2002 Feb 2003 Apr 2003 Jun 2003 Aug 2003 Oct 2003 108 106 104 102 100 98 96 94
Figure 10: Real Effective Exchange Rate (Dec 2002=100)
Dec 2002
Feb 2003
Apr 2003
Jun 2003
Sep 2003
Note: An increase is an appreciation. Trade weights are total trade from top 10 trading partners. Source: REMU staff calculations.
Note: An increase is an appreciation. Trade weights are total trade from top 10 trading partners. Source: REMU staff calculations.
Figure 11: Policy Rates1 (end of week, % per annum)

Indonesia/Philippines 16 14 12 10 8 6 04 Jan 2002 Others 5 4 3 2 1 0 05 Dec 2003
effective depreciations ranged from about 3% for the PRC and Singapore to 5% for the Philippines.
Fiscal and Monetary Policies

Since July, central banks in the region have generally kept policy interest rates unchanged (Figure 11), and short-term interest rates have thus remained relatively stable, many of them at historic lows. Short-term interest rates are now below 1% in Singapore, marginally higher than 1% in Thailand, about 3% in PRC and Malaysia, and about 4% in Korea (Figure 12). Only Indonesia and the Philippines have relatively high short-term interest rates above 8%. Adjusted for the modest rise in inflation, real short-term interest rates have fallen further. Real rates are now just over zero in Thailand, Singapore and Korea, about 1.5% in the PRC and Malaysia, about 3% in Indonesia, and about 5% in the Philippines (Figure 13). For some time, rapidly rising foreign exchange reserves have made monetary management in some East Asian countries more challenging. Favorable current account balances, and more recently, increased capital inflows have led to large reserve accumulations by several
14 Jun 2002
13 Dec 2002
30 May 2003
Indonesia Korea, Rep. of Malaysia

1
Philippines Thailand
Indonesia: Deposit Facility Overnight Discount Rate; Korea: Overnight Call Rate; Malaysia: 3-month Intervention Rate; Philippines: Overnight Reverse Repurchase Rate; Thailand: 14-day Repo Rate. Source: Bloomberg.
REGIONAL OVERVIEW
Figure 12: Short-Term Interest Rates1 (nominal, end of month, % per annum)
Indonesia/Philippines 20 16 12 8 4 Jan 2001 Others 8 6 4 2 0 Nov 2003
Figure 13: Short-Term Interest Rates1 (real, end of month, % per annum)
10 8 6 4 2 0 -2 Jan 2001 Aug 2001 May 2002 Jan 2003 Nov 2003
Aug 2001
May 2002
Jan 2003
Source: ARIC Indicators. 1 Three-month interbank lending rates PRC: Average trading rate in interbank borrowing and lending market (Peoples Bank of China); Indonesia: Weighted average of banks interbank lending rates (Bank Indonesia); Korea: Certificate of deposit (3 months); Malaysia: Average of interbank deposit rates (Bank Negara); Philippines: PHIBOR (Bankers Association of the Philippines); Singapore: SIBOR (Association of Banks in Singapore); Thailand: Bangkok Banks interbank offer rate (Bangkok Bank).
Source: ARIC Indicators. 1 Three-month interbank lending rates.
Figure 14: Gross International Reserves Less Gold, End of Period ($ billion)
ASEAN5+21 PRC Korea, Rep. of Singapore Thailand Malaysia Indonesia Philippines
0 200 400 600 800
Latest Month2
1
countries (Figure 14). If unsterilized, these large reserve accumulations would have led to faster increases in reserve money and to a real appreciation of regional currencies. However, the PRC, Korea, Singapore, and Thailand, seem to have sterilized these reserve accumulations to varying degrees. In the last year or so, the growth in reserve money in these countries has been much lower than the growth in foreign exchange reserves would suggest (Figure 15). The effects of reserve accumulations on domestic money supply and exchange rates were thus muted to varying degrees. As noted in July, several countries continued to budget for moderately expansionary fiscal policies this year. The budgeted fiscal positions range from a surplus of 0.7% of GDP in Korea to a deficit of 4.7% of GDP in the Philippines (Figure 16). Subsequently, the original budgets were also supplemented by additional fiscal and quasi-fiscal stimulus packages equivalent to 2% of GDP in Malaysia, 0.7% of GDP in Korea, 0.2% of GDP in the PRC, and 0.1% of GDP in Singapore.
One Year Ago3
PRC, Indonesia, Korea, Malaysia, Philippines, Singapore, and Thailand. 2 Refers to September for Korea and Thailand; August for others. 3 From latest month. Source: International Monetary Fund, International Financial Statistics, November 2003.
REGIONAL OVERVIEW
Figure 15: Sources of Growth of Reserve Money (latest value1 compared with one year ago, %)
80 60 40 20 0 -20 -40 -60
C PR
Figure 16: Fiscal Balance 1 (% of GDP)

PRC Indonesia Korea, Rep. of Malaysia Philippines Singapore2 Thailand3
-6 -4
2001
-2
0
20024
4
20035
nd
e on
si
r Ko
ea
a re es nd si in po ila ay p l a a p a ng ili Th M Si Ph
Contribution of Net Foreign Assets Contribution of Net Domestic Assets Growth of Reserve Money
July for Korea; August for PRC, Malaysia, Singapore and Thailand; and September for Indonesia and Philippines. Source: REMU staff calculations based on data from the International Monetary Fund, International Financial Statistics, November 2003.
1
Data refer to central government for Korea, Philippines, Singapore, and Thailand; federal government for Malaysia; central and local government for PRC; and state budget for Indonesia. 2 Data are for fiscal year AprilMarch. Data for 2003 were calculated using GDP and CPI forecasts for 2003. 3 Data are for fiscal year OctoberSeptember. 4 Based on revised budget. 5 Based on programmed budget. Source: ARIC Indicators, national web sites, Asian Development Bank, Asian Development Outlook 2003 Update, IIF country reports.
1
During the course of the year, actual fiscal trends were more or less in line with the budgeted targets in Indonesia and the Philippines, but actual fiscal outcomes in other countries diverged to varying degrees. Through September, the fiscal deficit was about two-thirds of its full year target in Indonesia, while in the first 10 months, the actual fiscal deficit was about 80% of its full year target in the Philippines. In both these countries, actual revenues as well as expenditures were largely in line with their corresponding budgetary targets. In the first nine months of 2003, trends in actual revenue in the PRC were more or less in line with its target, but expenditure grew at a lower rate than anticipated in the budget. As a result, the first nine months of the year saw the PRC budget post a surplus of CNY87 billion, compared with the CNY320 billion deficit budgeted for the full year. The experiences of Korea and Singapore were similar to that of the PRC. In the first nine months of the year, because actual expenditure grew at a lower rate than budgeted, Korea posted a fiscal surplus that
REGIONAL OVERVIEW
was about twice the amount budgeted for the full year. Similarly, in April to September (the first six months of its fiscal year) Singapore posted a surplus of about S$9 billion, compared with the budget target of a deficit of S$1 billion for the full year. This was mostly due to shortfalls in actual expenditure from its budgeted level. In Malaysia, in the first six months of the year, expenditure trends were largely in line with the budget, but because revenue did not keep pace, the budget posted a deficit equivalent to the full year target. If these trends continue, the actual fiscal deficit for the year could far exceed the original budget. Thailands experience was in sharp contrast to Malaysias, with actual revenue growing much faster than budgeted, owing primarily to improved economic conditions and tax collections, and expenditures below the budgeted rate. In the fiscal year spanning October 2002 to September 2003, actual revenue collections were approximately 14.7% above amounts budgeted, while expenditures were about 3% lower. As a result, Thailand posted a surplus of B71.4 billion, compared with a deficit of B105.2 billion a year earlier.
Financial Restructuring and Prudential Indicators

Figure 17: NPLs1 of Commercial Banks (% of total commercial bank loans)
Indonesia2 Korea, Rep. of Malaysia Philippines3 Thailand3
0 4 8 12
Jun 03 Oct 03 Aug 03 Oct 03 Sep 03
Nonperforming Loans of Banks

In 2003, nonperforming loan (NPL) ratios of banks have either fallen or remained unchanged among the five crisis-affected countries, except in Korea where the ratio has increased marginally due to defaults on consumer loans. NPL ratios now range from about 2% in Korea to about 15% in the Philippines and Thailand, with Malaysia and Indonesia reporting NPL ratios of about 8% (Figure 17). These ratios are much lower than their peak levels at the height of the 1997 crisis. The reduction of NPL ratios is largely the result of the transfer of substantial portions of bad debts from banks to centralized AMCs. These were set up by governments after the 1997 crisis to help clean up bank balance sheets. To a lesser extent, the drop in NPL ratios was also the result of voluntary corporate workouts directly between banks and their debtors (see Box 2).
16
20
End-2000 End-2001
1
End-2002 Latest Available
Data on NPLs exclude those transferred to AMCs. NPLs are on a three-month accrual basis. 2 Data refer to NPLs in the banking sector. 3 NPL criteria were changed so no comparable data are available prior to 2002. Source: ARIC Indicators.
10
REGIONAL OVERVIEW
Box 2: Progress in Voluntary Corporate Workouts
In addition to NPL resolution through AMCs, banks in the five crisis-affected countries have been restructuring problem debts through voluntary corporate workout schemes. Indonesia The Jakarta Initiative Task Force (JITF) reported the completion of 96 debt restructuring cases out of 117 registered cases as of October 2003. The completed cases involved $20.5 billion, or 70% of the $29.3 billion total face value of all the registered cases. This is a significant 13 percentage point improvement over 2002. However, JITF still needs to complete restructuring of the remaining 21 cases, amounting to almost $8.8 billion before the end of the year. A key impediment to restructuring is the lack of acceptable mechanisms to force equity owners to abandon control. This has led to a standoff with creditors rejecting debt write-offs in the face of owners reluctance to relinquish corporate control. Korea The recent focus of chaebols workouts has been SK Global, now known as SK Networks, the trading arm of the SK Group and the countrys third largest chaebol. SK Global plunged into crisis in March 2003 after it was found to have inflated 2001 earnings by more than W1.5 trillion, hiding an additional W500 billion in bank loans. To save SK Global from bankruptcy, the SK Group proposed a workout plan in June 2003 involving a swap of about W850 billion in debt owed by SK Global to SK Corp., the flagship company of the SK Group, for newly issued shares in the trading company. This paved the way for domestic creditor banks of SK Global to approve its debt workout package in June to convert W2.4 trillion of their combined loans of W6.1 trillion into newly issued shares of SK Global. Despite these developments, the final fate of SK Networks is still unsettled, as its domestic
and foreign creditors have yet to reach an agreement on restructuring. In the meantime, under the formal out-of-court workout program introduced in June 1998 for medium-sized firms, 55 of a total 83 companies registered were dealt with through rehabilitation and/ or sell-offs. Eighteen firms, with no prospect of completing the workout, have been put under courtmandated reorganizations or set for liquidation. Consequently, the number of companies under the formal out-of-court workout program fell to 10 as of end-2002. Malaysia The Corporate Debt Restructuring Committee officially terminated operations in August 2002 after it completed restructuring 47 cases or 98% of those it accepted, worth RM43.97 billion in face value. Thailand As of end-September 2003, the Corporate Debt Restructuring Advisory Committee (CDRAC) had approved 15,386 cases of target debtors, with credits outstanding of B2,841.7 billion in face value, to enter the voluntary corporate workout process. Successfully restructured corporate debt totaled 10,346 cases with total credits outstanding of B1,398.3 billion, or 49.2% of CDRACs portfolio. But around 44.3% of the total debt involving 4,945 cases remained unrestructured, and were either in the process of being filed or have already been filed by creditors for legal action. The delay in the debt restructuring process was primarily due to the buildup of complex cases filed in the courts. Meanwhile, as of end-September 2003, financial institutions have successfully restructured 606,661 cases amounting to B2,924.4 billion in face value, while 30,233 cases worth B107.9 billion, or roughly 3.8% of total debt, are still in the process of restructuring.
As of mid-2003, the cumulative volume of NPLs acquired by centralized AMCs among the five crisis-affected countries ranged from $12.5 billion in Malaysia to $91.8 billion in Korea (Figure 18). The Philippines does not have a centralized AMC. Instead, the Government passed the Special Purpose Vehicle (SPV) Act in December 2002 that provides a regulatory framework for privately-owned SPVs to buy NPLs from banks. However, as of end-November 2003, only one SPV had been approved. Its first possible deal, currently being studied, is for purchasing assets
11
REGIONAL OVERVIEW
Figure 18: NPLs Purchased by AMCs ($ billion)

Indonesia
Aug 03
worth an estimated P14 billion from Metrobankthe countrys largest commercial bank. Outside the five crisis-affected countries, NPL ratios vary. The four stateowned commercial banks in the PRC had an average NPL ratio of about 20% as of June 2003, a reduction of 3.5 percentage points from the January 2003 figure. Data on NPLs in the other East Asian countries are not readily available, but they are believed to be significant in Cambodia, Lao PDR, and Viet Nam.
Korea, Rep. of
Jul 03
Malaysia Thailand
0
Sep 03
Jun 03
25
50
75
100
Dec 00 Dec 01
Dec 02 Latest Available
Capital Adequacy and Bank Profitability

The capital positions of banking systems in the five crisis-affected countries have strengthened in recent years. Publicly funded bank recapitalization programs and consolidation initiatives including closure of weak banks, mergers, and acquisitions are the main reasons. The latest available data show that among the five countries, the risk-weighted capital adequacy ratios of commercial banks stood at 24% in Indonesia, 17% in the Philippines, more than 13% in Malaysia and Thailand, and about 10% in Korea (Figure 19). While these figures compare favorably with the 8% Basel norm, there are concerns that the capital adequacy figures in some of these countries may not truly reflect the current conditions of their banking systems because of potentially inadequate provisions for nonperform-
Source: REMU staff calculations based on data from IBRA, KAMCO, Danaharta, and TAMC.
Figure 19: Capital Adequacy Ratios of Commercial Banks (%)

Indonesia1 Korea, Rep. of Malaysia Philippines Thailand
0 5 10
Sep 03 Jun 03 Oct 03 Sep 02 Sep 03
15
20
25
ing assets. Bank profitability, after recovering from negative levels during the crisis years, continued to improve in most crisis-affected countries. A combination of the overall improvement in economic conditions, higher interest margins, better cost controls, and lower provisioning contributed to the improvement. Latest available data show that the rate of return on assets (ROA) ranged from 0.2% in Korea to more than 2% in Indonesia, with Malaysia, Philippines, and Thailand reporting figures of about 1% (Figure 20).
Dec 00 Dec 01
1
Refers to CAR of the banking system. Source: ARIC Indicators.
Figure 20: Banking Sector Profitability1 (%)

2.5 2.0 1.5 1.0 0.5 0.0 -0.5 2000 2001 2002 2003
Asset Resolution by Asset Management Companies

As noted in July, the pace of asset resolution by AMCs varied significantly across the five crisis-affected countries, as did the recovery rate from the assets resolved.4 The percentage of assets resolved by the AMCs ranged from about 61% in Korea to 100% in Malaysia, with the AMCs in both Indonesia
Indonesia Korea, Rep. of Malaysia2

1
Return on assets of commercial banks, latest available. 2 Malaysia data from 2001. Sources: World Bank, East Asia and Pacific Regional Overview, October 2003; Ministry of Finance and Economy, Korea.
Asset resolution means the sale or restructuring of nonperforming assets.
12
REGIONAL OVERVIEW
Figure 21: NPLs Resolved by AMCs1 (% of NPLs purchased)

Mar 03
and Thailand now completing resolution of about 70% of assets acquired from financial institutions (Figure 21). Since the beginning of 2003, progress made by the Indonesian Bank Restructuring Agency (IBRA) has been particularly impressive. With improvements in sales mechanisms and market conditions, 70% of the NPLs acquired by IBRA were resolved by September. This represents a dramatic increase from the 20% asset resolution posted at end-2002. IBRA now aims to complete asset resolution by February 2004, when its mandate expires. Similarly, considering that the Thai Asset Management Company (TAMC) started its operations in June 2002, the 70% asset resolution achieved to date compares favorably with other countries in the region, although there are concerns that the TAMCs cash collection has been slow. Half of the asset resolution done by the TAMC was for debt restructuring, with the rest involving foreclosure of collateral. TAMC expects to complete restructuring of all NPLs in its portfolio, amounting to B759 billion in book value, by the end of 2003. Latest available data show that the recovery rate of the assets resolved by the AMCs was highest in Malaysia (58% as of September 2003), followed by Korea (47% as of July 2003), Thailand (46% as of June 2003), and Indonesia (27%).
Aug 03
Jul 03
Thailand
0 20 40 60
Jun 03
80
100
Dec 00 Dec 01
1
Refers to those held by IBRA in Indonesia, KAMCO in Korea, Danaharta in Malaysia, and TAMC in Thailand, as of dates indicated. Source: ARIC Indicators.
Supervisory and Regulatory Reforms

In an effort to reduce the vulnerability of financial and corporate sectors to future shocks, governments and other regulatory agencies among
Figure 22: Real Bank Credit1 Five Crisis-Affected Countries, seasonally adjusted (Jan 2001=100)
140 130 120 110 100 90 80 Jan 2001 Aug 2001 Apr 2002 Dec 2002 Sep 2003
the crisis-affected countries have continued to streamline supervisory and regulatory frameworks governing their financial and corporate sectors (see Box 3).
Trends in Bank Credit

Except for the Philippines, all the crisis-affected countries saw the stock of real bank credit to the private sectora composite indicator of banking and corporate sector healthincreasing in recent years. Even in the Philippines, credit rose in recent months, possibly on the expectation that the burden of bad loans on banks will gradually drop with the implementation of the SPV Act (Figure 22). Despite these recent improvements, however, credit-deposit ratios of banks another composite indicator of banking and corporate sector health remain subdued and far below precrisis levels. This indicates that the

1
Claims on the private sector: deposit money banks. Source: ARIC Indicators.
13
REGIONAL OVERVIEW
Box 3: Supervisory and Regulatory Reforms
Indonesia The Government issued an Economic Policy Package (White Paper) in September 2003. A main pillar of the package is the financial sector program, which includes policies to strengthen the financial sector safety net, continue bank restructuring, bolster state bank governance, and improve capital market supervision. Bank Indonesia (BI) is also working on the design of the Indonesian Banking Landscape, which will be completed by the end of 2003 and implemented in stages by 2014. The focus of the design is to improve and close gaps in many areas of the banking industry including the structure of the system, regulation and supervision, internal control and management, supporting infrastructure, and protection and empowerment of users of banking services. Progress has also been made in regulatory reform of the financial sector. In 2004, BI intends to initiate the implementation of the Basel Core Principles. Korea The Financial Supervisory Commission (FSC) and Financial Supervisory Service (FSS) in July 2003 instructed overseas units of domestic financial institutions to review and step up the internal controls for, and compliance with, the local laws and regulations in the prevention of money laundering. As part of efforts to help financial institutions provide improved credit access to corporate borrowers, FSC/FSS also announced in July a new plan to conduct a comprehensive review of regulations on corporate financing in light of the continuing slump in business investments and corporate financing. In August, the revised Bank of Korea Act was passed, and it will be implemented starting in 2004. The revised Act is expected to help strengthen the Bank of Koreas oversight function over payment and settlement systems. Also in August, the FSC/FSS announced new legislative and supervisory measures to ensure safe and uninterrupted operations of the electronic network systems of financial service providers in the event of work strikes, natural disasters, or in other emergencies. In terms of corporate reform, the new insolvency bill is currently under review by the related committees of the National Assembly. The new bill aims to consolidate and strengthen three separate bankruptcy codes on corporate failure, composition, and liquidation. Another bill, on the introduction of class action suitswhich will promote the rights of minority shareholders and transparency in the management of companiesis pending in the legislative agenda.
Malaysia The blueprint for the development of the financial sector is outlined in the Financial Sector Masterplan that was introduced in 2000. As part of that Masterplan, Bank Negara Malaysia (BNM) proposed a broad framework for the implementation of a deposit insurance scheme in August 2003. To further enhance the legislative framework for Islamic banking operations, BNM formed the Law Review Committee in June 2003 to review specific legislation affecting Islamic banking operations. To create conditions for more market-driven corporate restructuring, the 1965 Malaysian Companies Act has been amended to ensure that an ailing company cannot make an ex parte application to a court for a restraining order against probable action by creditors. Further, the government introduced special powers under the Danaharta Act, which allows for the appointment of special administrators to manage distressed companies. Philippines Bangko Sentral ng Pilipinas (BSP), the countrys central bank, has continued to introduce measures to implement the General Banking Law that was enacted in 2000. Key focuses this year have been on the establishment of real time gross settlement system compatible with international standards, aimed to reduce the settlement risk for high value payments among banks and the improvement of corporate governance in banks. To facilitate the implementation of the SPV Act of 2002, BSP issued accounting guidelines in September 2003 on the sale of nonperforming assets to SPVs. BSP is also working closely with other regulatory agencies such as SEC and Bureau of Internal Revenue in implementing the SPV Act. Finally, Congress is expected to pass the Securitization Bill soon, which will promote corporate restructuring by giving SPVs more flexibility in supervising and disposing acquired assets. Thailand The Bank of Thailand completed its financial sector blueprint in May 2003. Next steps consist of broad consultation with key stakeholders, development of an action plan, and implementation. After more than two and a half years of review, the Legal Reform Committee for Development of Thailand (LRC) finally submitted a three-point revision of the Bankruptcy Act on 15 September 2003. The LRC recommended the reform of the legal framework of bankruptcy liquidation for individual debtors. Currently, the bankruptcy act is in the parlimentary process.
14
REGIONAL OVERVIEW
postcrisis agenda for financial and corporate restructuring is far from over (Figure 23).
Prudential Indicators
As for East Asias vulnerability to external shocks, most prudential indicators in the region remain strong. First, most major countries in the region continue to run current account surpluses (Figure 24). Second, bolstered by these surpluses and with larger capital inflows in recent months, foreign exchange reserves are sizable and have been on the rise. Third, external debt-service ratios are now lower than at the height of the crisis, except in the Philippines (Figures 25a and 25b). And finally, the ratio of external debt (both
Figure 23: Credit-Deposit Ratios of Commercial Banks (%)

180 150 120 10 90 60 30 1997 1999 2001 20031
1
Figure 24: Current Account Balance (% of GDP)

30 20
0 -10 1997 1999 2001 20031

Philippines Singapore Thailand China, People's Rep. of Indonesia Korea, Rep. of Malaysia China, People's Rep. of Indonesia Korea, Rep. of Malaysia
2003 refers to July 2003 for Korea and August 2003 for other countries. Source: International Monetary Fund, International Financial Statistics, November 2003.
1
Data refer to 2003Q1 for Indonesia, 2003Q1 Q3 for Singapore and 2003Q1Q2 for others. Source: ARIC Indicators.
Figure 25a: Total Debt Service (% of exports of goods and services)

40 30 20 10 0 1996 1998 2000 2002
Malaysia Philippines Thailand China, People's Rep. of Indonesia Korea, Rep. of
Figure 25b: Interest Payments (% of exports of goods and services)

16 12 8 4 0 1996 1998 2000 2002
Source: Institute of International Finance.
Source: Institute of International Finance.
15
REGIONAL OVERVIEW
Figure 26: Short-Term External Debt (% of gross international reserves)

Others 150 125 100 75 50 25 0 1997 1999 2001 2003
1
Figure 27: Total External Debt (% of gross international reserves)

900 750 600 450 300 150 0 1997 1999 2001 2003
Korea, Rep. of 360 300 240 180 120 60 0

China, Peoples Rep. of2 Korea, Rep. of Malaysia Philippines Thailand
Data refers to end-September 2003 for Thailand and end-June 2003 for others. 2 External debt definition changed in 2001 (revisions in the coverage). Source: ARIC Indicators.
1
1 Data refer to end-September 2003 for Thailand and end-June 2003 for others. 2 External debt definition changed in 2001 (revisions in the coverage). Source: ARIC Indicators.
short-term and total) to foreign exchange reserves has fallen in recent years (Figures 26 and 27). Coupled with improved bank balance sheets and reduced debt-equity ratios in corporate sectors, the strong external payments position has significantly reduced the vulnerability of most East Asian countries to possible external shocks. This has led to a better perception of credit risk in the region, as shown by the sovereign ratings of several countries. Ratings for the PRC, Indonesia, Malaysia, Singapore, and Thailand were all raised by at least one of the three global rating agencies. Only the sovereign credit rating of the Philippines was lowered this year because of weaknesses in public finances and balance of payments, and the political uncertainties associated with the next years presidential election.
Economic Outlook, Risks, and Policy Issues

External Economic Environment
Since the July AEM, the external economic environment facing East Asia has improved significantly. In July, there were tentative signs of a
16
REGIONAL OVERVIEW
Figure 28: OECD Leading Indicators

140 130 120 110 100 Sep 2002 Dec 2002
France Japan
modest global economic upturn, with a rebound in stock markets around the world and improvements in several forward-looking economic indicators in the US. Developments since give cause for greater optimism. First, supported by encouraging corporate earnings, the global stock market rally has continued. Second, driven by strong domestic demand (partly supported by substantial monetary and fiscal stimulus) and rapid productivity growth, the US economic rebound has strengthened. Third, in recent months there has been a consolidation of Japans economic recovery. Finally, even in Europe, where GDP
Mar 2003
Jun 2003
Sep 2003
Italy
stagnated in the first half of 2003, a gradual turn around is underway. Composite leading indicators for the major industrial countries also point to a strengthening of growth in the months ahead (Figure 28). The tentative economic recovery in the US, evident a few months ago, has strengthened and become more balanced. This is borne out by a number of recent economic trends. Forward-looking indicators such as consumer confidence, business sentiment, ISM surveys of business activity, and the stock market indexes generally continue to improve (Figures 2932). At the same time, actual economic performance also improved significantly. First, driven by strong growth in domestic demand, third quarter GDP growth came in at an annualized rate of 8.2%, the highest quarterly growth in 20 years, beating market forecasts (Figure 33). Second, heralding the much-awaited turn around in capital spending, business fixed investment (real equipment and
Germany US
Source: OECD web site.
Figure 29: US Consumer Confidence Index

120 110 100 90 80 70 60 Sep 2001 Mar 2002 Oct 2002 Apr 2003 Nov 2003
Figure 30: US Business Confidence Index (Conference Board)

70 60 50 40 30 00Q1
Conference Board (1985=100) University of Michigan (1966=100)

Note: Conference Board numbers are released in the fourth week of every month based on surveys conducted in the first half of each month. Michigan sentiment index is published weekly. Source: Bloomberg.
01Q1
02Q1
03Q1
Source: Bloomberg.
17
REGIONAL OVERVIEW
Figure 31: Surveys of US Business Activity

70 65 60 55 50 45 40 Sep 2001 Mar 2002 Oct 2002 Apr 2003 Nov 2003
Figure 32: US Stock Market Indexes (weekly average, week ending Dec 2002=100)
150 140 130 120 110 100 90 27 Dec 14 Mar 2002 2003
Dow Jones Nasdaq
Institute for Supply Management (ISM) Manufacturing ISM Non-Manufacturing

Source: Bloomberg.
13 Jun 2003
05 Sep 2003
05 Dec 2003
Russel 3000 S&P 500
Source: REMU staff calculations derived from Bloomberg.
software spending) grew at an annualized rate above 15% in the third quarter on top of an 8% increase in the second quarter. Finally, there are signs that pressure on the job market is easingemployment grew for the fourth month in a row in November, and the unemployment rate fell from 6.1% in September to 5.9% in November (Figure 34). Considering that the current US recovery is the only one in post-war history that has gone on for close to two years without producing a sustained rise in employment, these employment figures of recent months are encouraging. Taking these factors into account, full year
Figure 33: G3 GDP Growth Rates (q-o-q, %, annualized)

9 6 3 0 -3 -6 01Q1 01Q3 02Q1 02Q3 03Q1 03Q3
EU Japan US
Figure 34: US Unemployment Rate (%)

6.5 6.0 5.5 5.0 4.5 4.0 Jan 2001
Sep 2001
May 2002
Feb 2003
Nov 2003
Source: Bloomberg.
Source: Bureau of Economic Analysis (US), Economic and Social Research Institute (Japan), European Union On-Line.
18
REGIONAL OVERVIEW
Figure 35: Consensus Forecasts of 2003 G3 GDP Growth (y-o-y, %)

3.0 2.5 2.0 1.5 1.0 0.5 0.0 Jan 2003 Mar 2003
EU
Figure 36: Consensus Forecasts of 2004 G3 GDP Growth (y-o-y, %)

5 4 3 2 1 0
May Jul Sep 2003 2003 2003 Forecast Date

Japan US
Nov 2003
Jan 2003
EU
Jun Apr Aug 2003 2003 2003 Forecast Date

Japan US
Nov 2003
Source: Consensus Economics Inc., Consensus Forecasts, various issues.
Source: Consensus Economics Inc., Consensus Forecasts, various issues.
Figure 37: Nikkei 225 (weekly average, week ending Dec 2002=100)
130 120 110
-20 10 0 -10
Figure 38: Japan Tankan SurveyBusiness Conditions Indicator1
100 90 27 Dec 14 Mar 2002 2003
-30 -40 01Q1 01Q3 02Q1 02Q3 03Q1 03Q3

1
13 Jun 2003
05 Sep 2003
05 Dec 2003
Source: REMU staff calculations derived from Bloomberg.
Large enterprise manufacturing. Source: Bloomberg.
US GDP growth for 2003 is now placed at 2.9%, higher than the July forecast of 2.2% (Figure 35). Similarly, the GDP growth forecast for the US in 2004 has been revised to 4.2%, up from the 3.6% figure projected in July (Figure 36). Japans second and third quarter GDP growth was 2.4% and 1.4% respectively, and other economic indicators improved. The stock market continues to be buoyant, and business sentiment continues to improve (Figures 3738). Corporate bankruptcies are declining (Figure 39),
19
REGIONAL OVERVIEW
Figure 39: Japan: Bankruptcy Cases 1

1,900 1,800 1,700 1,600 1,500 1,400 1,300 1,200 Jan 2001
1
suggesting that the worst of corporate distress may be over, and deflation is slowly but steadily waning (Figures 40 and 41). Because of this, Japans GDP growth forecast for 2003 has been revised up sharply from 0.9% in July to 2.4%. Helped partly by recent aggressive monetary policy initiatives and partly by the recent banking reforms and corporate restructuring, business investment is now forecast to grow by close to 10% this year, as compared with the July forecast of less than 4%. Similarly, private consumption this year is now forecast to grow by 1%, double the rate forecast in July. Looking ahead, business investment
Aug 2001
May 2002
Jan 2003
Oct 2003
growth is forecast to slow from this years level, leading to a slower GDP growth of 1.3% in 2004. Even then, the new projection is more than double the July forecast. Although the economic situation in Europe continues to be less encouraging, the worst appears to be over and a turn around is underway. Germany, Italy, and Netherlands were all in recession in the first half of this year. But for the third quarter, all three posted positive growth. GDP for the European Union (EU) as a whole, after stagnating in the first two quarters, posted an annualized 1.6% growth in the third quarter. Several forward-looking indicators in Europe also point to gradual improvements over the next six months or so. First, the business confidence index for the EU economies, after declining in the
Companies with total debts of 10 million or more. Source: Bloomberg.
Figure 40: Japan: Consumer Price Index (y-o-y, %)

0.0 -0.4 -0.8 -1.2 -1.6 Jan 2001
-0.5 -1.0 -1.5 -2.0 -2.5 -3.0
Figure 41: Japan: GDP Deflator (y-o-y, %)
Aug 2001
May 2002
Jan 2003
Oct 2003
-3.5 01Q1 01Q3 02Q1 02Q3 03Q1 03Q3

Source: Economic and Social Research Institute, Japan.
Source: Bloomberg.
20
REGIONAL OVERVIEW
Figure 42: European Union Consumer Confidence 1 and Business Climate Indicators2
Consumer Confidence 5 0 -5 -10 -15 -20 Jan 2001 Business Climate 1.4 0.8 0.2 -0.4 -1.0 -1.6 Nov 2003
first seven months, started edging up since July (Figure 42). Second, the German IFO business confidence index, which began trending up in April, continued its rise in recent months (Figure 43). Third, the consumer confidence index for the EU countries, taken together, has increased in six consecutive months since March. Coupled with low interest rates, expansionary fiscal policies, and some of the recent structural reform initiatives in Germany and France, these factors indicate that a gradual turn around is underway. The first half slowdown will, however, pull down the EUs GDP growth for this year as a whole to 0.8%. GDP growth next year is expected to improve to 2%.
Sep 2001
May 2002
Feb 2003
Euro-15 Consumer Confidence Euro-15 Business Climate (Common Factor Industry)
Regional Economic Outlook

Greater optimism over the external economic environment in the US and Japan, and to a lesser extent in Europe, has improved growth prospects for East Asian countries. Compared with the cautiously optimistic note of the July AEM, the outlook is now more upbeat with the continuation of synchronized growth. In addition to the improving external environment, two other factorsthe continued strength in domestic demand in several countries and the sharp rebound of the PRC economy from its second quarter slowdownaugur well for East Asias immediate economic prospects.
Consumer Confidence Indicator: The arithmetic average of the answers (balances) to four questions on the financial situation of households and general economic situation (past and future) together with that on the advisability of making major purchases. 2 Business Climate Indicator: Movement of indicator is linked to the industrial production of the euro area. May be interpreted as a survey result; a high level indicates that, overall, the survey points to a healthy cyclical situation. Source: Bloomberg.
1
Figure 43: German Business Climate Index (IFO Survey)

100 96 92 88 84 Jan 2001
In part because of the progress in postcrisis restructuring and the fiscal and monetary easing of recent years, continued strength in domestic demand will support the regional rebound. A key positive trend in the region in recent years is stronger consumer spending, spurred by lower interest rates, fiscal stimulus measures, the success in recapitalizing and restructuring financial and corporate sectors, and a switch to consumer lending by financial institutions. In the last 18 months, consumer spending accounted for more than one-third of the growth in GDP in Indonesia and the Philippines, and more than half in
Sep 2001
May 2002
Feb 2003
Nov 2003
Thailand. There are also tentative signs that private investment, after remaining subdued for some time, is starting to pick up in several crisisaffected countries, Thailand in particular. The rapid growth of the PRC and the increase in its imports, together with the growth of intra-regional trade, is also providing impetus for East Asian growth. The last two years have seen a surge in production and trade integration between the PRC and the rest of East Asia. In particular, the PRC has emerged as a center for global production networks and a market for exports of specialized components and
Source: Bloomberg.
21
REGIONAL OVERVIEW
Figure 44: Real GDP Growth East Asia (%)

8 6 4 2 0 1997 1999
Actual
other intermediate inputs. The PRCs importance as the driver of intraregional trade is increasing. This years combined GDP growth for the East Asian countries is now estimated at 6.1%, higher than the July forecast of 5.6% (Figure 44). Since July, growth forecasts have been revised up for Thailand (by 1.5 percentage points), the PRC (by 1 percentage point), Malaysia (by 0.7 percentage point), and Indonesia (by 0.3 percentage point). They have been revised down for Korea (by 0.6 percentage point), Lao PDR (by 0.5 percentage point), and Singapore (by 0.4 percentage point). For the other countries, growth forecasts have not varied significantly. (Figure 45 and Table 2). In 2004, combined GDP growth for the region is forecast to strengthen to 6.6%. This figure is 0.3 percentage point higher than the July forecast, with an upward revision for most countries. Compared with this year, growth next year is expected to strengthen in all East Asian countries, with the exception of the PRC, where it will slow somewhat as part of the Governments plan to engineer a soft-landing of the economy (Figure 46). Despite this moderation, the PRCs projected growth of about 8% means it will likely remain the fastest growing economy in the region.
2001
2003
Jul 03 forecast Nov 03 forecast
Sources: ARIC Indicators; Consensus Economics Inc., Asia Pacific Consensus Forecast (July and November 2003); World Bank, World Development Indicators.
Figure 45: Consensus Forecasts of 2003 GDP GrowthASEAN5+2 (y-o-y, %)

Others 6 5 4 3 2 1 0 Jan 2003 Mar 2003 May Jul 2003 2003 Forecast Date
China, People's Rep. of Indonesia Korea, Rep. of Malaysia Philippines Singapore Thailand
Figure 46: Consensus Forecasts of 2004 GDP GrowthASEAN5+2 (y-o-y, %)

Others 6.5 6.0 5.5 5.0 4.5 4.0 China, Peoples Rep. of 9.0 8.5 8.0 7.5 7.0 6.5
China, Peoples Rep. of 11 10 9 8 7 6 5 Sep 2003 Nov 2003
Jan 2003
Apr Jul 2003 2003 Forecast Date

Nov 2003
Source: Consensus Economics Inc., Asia Pacific Consensus Forecasts, various issues.
Source: Consensus Economics Inc., Asia Pacific Consensus Forecasts, various issues.
22
REGIONAL OVERVIEW
Table 2: Annual GDP Growth Rates (%)

Nov 2003 Forecasts 1997 1998 1999 2000 2001 2002 2003 2004 Difference 1 2003 2004 Average 19982002
Brunei Darussalam Cambodia China, Peoples Rep. of Indonesia Korea, Rep. of Lao PDR Malaysia Myanmar
3
3.6 6.8 8.8 5.0 6.9 7.3 5.7 5.2 8.5 8.2 6.4
-4.0 3.7 7.8 -6.7 4.0 -7.4 5.8 -0.6 -0.9 4.4 0.4 -6.7 -6.7 0.4 -7.8
2.6 10.8 7.0 0.8 10.9 7.3 6.1 10.9 3.4 6.4 4.4 4.7 7.0 7.0 4.1 7.0 7.2
2.8 7.0 7.6 4.9 9.3 5.8 8.5 13.7 6.0 9.4 4.6 6.1 7.7 7.7 6.4 7.7 7.6
3.0 5.7 7.3 3.4 3.1 5.8 0.3 11.1 3.0 -2.4 1.9 5.8 4.9 2.3 1.7 4.9 2.7
3.4 5.5 8.0 3.7 6.3 5.9 4.1 ... 4.4 2.2 5.3 6.4 6.6 5.1 4.1 6.6 5.4
4.02 5.0 8.5 3.8 2.7 5.5 4.6 ... 3.7 0.8 6.0 7.0 6.1 3.5 4.0 6.1 3.6
... 5.5 7.9 4.4 5.2 6.0 5.4 ... 4.0 4.9 6.1 7.4 6.6 5.2 5.1 6.6 5.1
0.0 0.0 1.0 0.3 -0.6 -0.5 0.7 ... -0.1 -0.4 1.5 0.1 0.5 0.0 0.4 0.5 0.0
... 0.0 0.4 0.2 0.0 -0.5 0.3 ... -0.2 0.3 1.1 0.1 0.3 0.2 0.4 0.3 0.2
1.6 6.5 7.5 -0.1 4.6 5.8 2.4 ... 3.2 3.0 1.2 5.5 5.3 3.1 1.9 5.3 3.0
4.7 -13.1
Philippines Singapore Thailand Viet Nam East Asia4,5 East Asia exc PRC ASEAN4,5 ASEAN5+2
5 4,5
-1.4 -10.5
4.7 4.4 6.4 4.2
Five Crisis-Affected5
. . . = not available 1 Difference between November 2003 forecasts and the July 2003 forecasts. 2 Upper end of government forecast of GDP growth of 34% for 2003 from the Department of Economic Planning and Developments Brunei Economic Bulletin. 3 For FY AprilMarch. 4 Excludes Myanmar for all years and Brunei Darussalam in 2004. 5 Aggregates are weighted according to gross national income levels from the World Banks World Development Indicators. Sources: ARIC Indicators for 1997-2002; Consensus Economics Inc., Asia Pacific Consensus Forecasts, November 2003 for ASEAN5+2 and Viet Nams 20032004 forecasts; Asian Development Bank, Asian Development Outlook Update 2003 for other forecasts, except for Brunei Darussalam.
Individual Country Prospects

Brunei Darussalam. GDP growth this year will likely exceed the Governments forecast of 3-4%. With regional economies recovering from SARS and a global rebound gathering pace in the second half, growth prospects for next year in the non-oil sector have improved. However, this could be offset by a projected decline in oil prices. The main challenge facing the government is to reduce the countrys vulnerability to oil price fluctuations. Cambodia. GDP is forecast to grow by 5% this year, down from 5.5% in 2002. The slowdown is due mainly to the adverse effects on tourism following the SARS outbreak and uncertainties related to this years elections and subsequent delay in forming a new government. Supported by stronger exports, particularly garments,
23
REGIONAL OVERVIEW
higher commodity prices, and increased tourism receipts, growth is expected to strengthen to about 5.5% in 2004. With the central government fiscal deficit exceeding 6% of GDP the past two years, and with lower-than-expected revenue collection, fiscal sustainability continues to be a policy concern. PRC. Driven by strong fixed investment, steady private consumption, and a vibrant export sector, the PRCs GDP growth is expected to be 8.5% this year, higher than the July forecast of 7.5%. The upward revision reflects a substantial markup of fixed investment and export growth. Fixed investment is expected to grow by more than 20%, while the dollar value of exports is expected to grow by 30%. With fixed investment increasing rapidly, monetary policy has been tightened in recent months. This should help cool fixed investment growth, and lead to a modest reduction in GDP growth to 7.9% in 2004. With the economy booming, there is little reason for continued fiscal stimulus. Fiscal policy could thus shift to a more neutral stance a process already becoming evident. There may also be a need for continuing to tighten monetary policy as in recent months to further rein in fixed investment and credit expansion. Indonesia. Driven largely by robust private consumption, Indonesias GDP is now expected to grow 3.8% this year, compared with the 3.5% July forecast. In 2004, growth is forecast to reach 4.4%, supported by improved exports from the rebound in the global economy and continued strength in domestic demand. Indonesia has done significant fiscal consolidation in recent years. And the improved economic outlook gives further room to continue the process. This is more important now, as macroeconomic stability next year will be a challenge given scheduled presidential elections. The Government is well aware of this, and has outlined a mediumterm program to preserve macroeconomic stability, strengthen the financial sector, and promote investment, exports and employment. Korea. Despite impressive export growth of 17% over the first three quarters, Koreas GDP is forecast to grow by 2.7% this year, down from the 3.3% July forecast. The downward revision largely reflects a sharp slowdown in private consumption, from about 7% growth in 2002 to close to zero this year. In response, the Government introduced a series of measures, including supplementary budgets, along with tax and interest rate cuts in the second half of the year. These measures should help reinvigorate private consumption. Coupled with the increasing pace of the global rebound, they should
24
REGIONAL OVERVIEW
help spur growth to over 5% next year. Monetary policy in Korea could continue to be accommodative. Given the comfortable public finance position, Korea maintains ample scope for fiscal pump priming should the need arise. But, as previously noted, it needs to address persistent difficulties in implementing budgeted fiscal programs during the course of the year. Lao PDR. GDP is expected to grow about 5.5% this year, down from the 6% forecast made in July. The downward revision comes from slower credit growth and weaker private investment, and the SARS-induced weakness in tourism. With a more favorable external environment in 2004, a pickup in tourism and an increase in private investment, GDP growth should rise to 6.0%. Maintaining macroeconomic stability remains a key challenge for the Government, as inflation is expected to accelerate to 14% this year from 11% in 2002. Malaysia. Malaysias GDP is expected to grow by 4.6% this year, higher than the 3.9% July forecast. An upward revision in private consumption, subdued in the second quarter due to SARS, is behind this markup in growth. Stronger domestic demand and a pickup in export growth should help GDP growth reach 5.4% in 2004. In recent years, Malaysia used fiscal policy as a key countercyclical tool to deal with the external economic slowdown. With growth prospects improving, the Governments plans for fiscal consolidation and a balanced budget in 2006 are appropriate. With low inflation, comfortable foreign exchange reserves, and a current account surplus, Malaysia should be able to maintain low interest rates for some time. Coupled with faster operational restructuring of the corporate sector, this should help reinvigorate private investment, which continues to remain weak. Myanmar. GDP growth this year is likely to be lower than the Governments target of 10.7% set in the latest five-year plan period (20012005). The weaker growth performance was caused by a number of factors, including slower growth in natural gas production and sluggish manufacturing, which continues to suffer from shortages of power and essential imported inputs. Growth prospects for 2004 are uncertain, as continued sanctions are likely to affect the countrys exports. Philippines. GDP is forecast to grow by 3.7% this year (more or less the same as the July forecast), driven largely by private consumption, which, in turn, has been supported by significant increases in overseas remittances. However, given the better-than-expected
25
REGIONAL OVERVIEW
growth in the third quarter, full year growth could surprise the current forecasts on the upside. Growth is expected to be about 4% in 2004. Much of this improvement, however, hinges on favorable developments in the political, security, and fiscal situations. The Government was successful for the first 10 months in keeping its fiscal deficit within budgeted levels in 2003. Looking ahead, there is a need to move beyond short-term achievements and focus on sustained improvements in tax collection. Moreover, the quasi-fiscal deficits arising from public sector enterprises need to be better addressed. Singapore. Expected 2003 GDP growth has been reduced from 1.2% in July to 0.8%. The downward revision reflects slower growth in fixed investment and a larger-than-anticipated contraction in the second quarter. With substantial improvement in both exports and domestic demand, GDP growth is forecast to accelerate to 4.9% next year. Given comfortable public finances, Singapore is well placed to ease fiscal policy if the need arises. However, the effects of any easing could be small, given the countrys high dependence on international trade and tourism. Moreover, Singapores actual fiscal performance on expenditures in the first six months of this year was well off budgeted levelsa pointer to possible difficulties in implementing fiscal stimulus measures. Thailand. As anticipated in July, forecasts of Thailands GDP growth for this year and the next have been revised up. Growth in 2003 is expected to reach 6.0% (from the 4.5% July figure), while next years growth is projected at 6.1% (from the 5% July figure). A markup of all major components of demandprivate consumption, fixed investment, and exportsunderpin the upward revisions. Helped by better-than-expected revenue collections and lower-thanexpected expenditures, Thailand achieved notable fiscal consolidation in the past two years. Public debt, which had increased sharply in the postcrisis years, has now fallen below 50% of GDP. However, the recent rise in credit from state-owned banks to fund off-budget expenditures should be monitored closely to limit any potential increase in nonperforming loans of banks and contingent liabilities of the Government. Viet Nam. GDP is forecast to grow by 7% this year, slightly higher than the July forecast. Currently, Viet Nam is the fastest growing ASEAN country. GDP growth is projected at 7.4% in 2004 because of continued strong domestic demand and exports. With good revenue collection, the fiscal deficit for 2003 is likely to be lower
26
REGIONAL OVERVIEW
than earlier projected. The Government continued its reform efforts, including restructuring state-owned banks, reforming state-owned enterprises, liberalizing trade, creating a more favorable environment for foreign investment, promoting the private sector, and strengthening economic cooperation with neighboring countries. Continuation of these efforts is essential for sustaining this impressive growth into the medium term.
Risks to the Regional Outlook and Policy Issues

Since July, risks to the regions growth prospects receded significantly. The July AEM cautioned that if the emerging positive trends in industrial economies did not solidify, East Asias immediate growth prospects would dim. With third quarter growth strengthening in major industrialized countries, that risk has diminished. In July, there were also concerns that the region could fall into a deflationary spiral, although the probability of that happening appeared low. Developments since then further support that assessment. Although inflation continues to be low regionally, it has either stabilized or edged up slightly since mid-year. Still, despite this recent decline in both external and domestic risks, growth forecasts continue to face a number of risks. These include: a recurrence of SARS; possible political uncertainties associated with forthcoming elections in several countries; an escalation of terrorism or increase in geopolitical tensions; creeping global protectionism and; large and growing global current account imbalances. Although SARS is under control, the World Health Organization cautions its recurrence cannot be ruled out, especially in the winter months. If this occurs, regional growth prospects could be set back, although now most countries have systems in place to manage any recurrence. Forthcoming legislative/presidential elections in several countries in the region (Indonesia, Korea, Malaysia, Philippines, and Thailand) over the coming 18 months, and the economic uncertainties these elections may bring, pose another risk to the regions economic prospects. Also, while countries have made significant progress in the fight against terrorism, it is always a risk. The possibility of a rise in geopolitical tensions on the Korean peninsula remains an issue as well. Externally, large global current account imbalances remain a source of concern, especially if they induce disorderly exchange rate adjustments
27
REGIONAL OVERVIEW
and/or increased trade friction among countries. Protectionism, along with the stalemate at the WTO trade negotiations, pose risks to the global trading environment. An open global trading environment is crucial for East Asia, as the region relies heavily on foreign trade and investment. With the improved economic outlook and reduction of risks, fiscal policies may have to shift from expansionary to more neutral stances. However, the current low interest rates could be maintained for some time. In an effort to counter the recent economic slowdown, fiscal easing in several countries helped. But now that growth is on an upward track and likely to strengthen, there is no compelling case for continuing fiscal expansion. For countries such as the PRC, Malaysia, and Thailand that followed expansionary policies, this provides an opportunity to move toward more neutral fiscal policies, as improved economic activity will draw extra revenue as well as a reduction in cyclically-sensitive government expenditures. With actual revenues increasing faster than budgeted, and/or expenditures growing below budgeted rates, budget deficits are starting to come under control or move into surplus. For those countries with more significant structural fiscal problems such as the Philippines, and to a lesser extent Indonesia, which achieved significant fiscal consolidation the past two or three years this provides an opportunity to further consolidate fiscal positions. However, given the low inflation and large excess capacity in the region, current monetary policies of maintaining low interest rates could continue for some time (with the possible exceptions of the PRC and the Philippines). Improved economic prospects also provide a window of opportunity for countries to focus on issues related to reserve management and foreign exchange policies, including exchange rate policy. The continued accumulation of large amounts of foreign reserves has significant opportunity costs, especially now as the return on these reserves is low. Large reserve accumulation also complicates macroeconomic management. If unsterilized, it leads to faster growth in base money and credit expansion, and potentially excessive investment and asset price inflation. This can result in a build up of vulnerabilities similar to those that existed at the time of the 1997 crisis. Sterilization has its own limitations, as it could lead to higher interest rates, which in turn could lead to larger capital inflows and the need for ever larger levels of sterilization. In order to manage such risks, there may be merit for countries in the region to take a fresh look at reserve management and foreign exchange policies, including exchange rate policy.
28
REGIONAL OVERVIEW
The increased growth momentum in the region also provides an opportunity to address expeditiously the remaining agenda of financial and corporate sector reforms and restructuring. Although the health of the regions banking systems is better today than at the height of the 1997 crisis, governments faced significant challenges in implementing and enforcing the measures introduced in the postcrisis years to strengthen financial sector regulation and supervision. Also, faster progress needs to be made in the operational restructuring of corporate sectors by addressing the weaknesses in legal frameworks for insolvency. This is especially important to support the nascent revival in private investment currently underway. The mandates of asset management companies and the voluntary out-of-court mechanisms set up in the aftermath of the 1997 crisis have either expired or are about to do so. In some countries, a large number of cases have been transferred to the courts, further underscoring the need for strong legal frameworks to speed resolution. Moreover, as banks increasingly enter consumer financea trend already evident in many countries they are likely to face many difficult challenges, as developing an efficient consumer finance business is often more difficult than lending to corporate borrowers. It would be easier for governments to address these weaknesses during the upward phase of the business cycle than during a downturn.
29
Brunei Darussalam
Figure 1: Average Weighted Price of Crude Oil ($/barrel)
40 35 30 25 20 15 Jan 2000
Higher oil prices boosted first-half economic growth. Brunei benefited significantly from the 28% increase in oil prices in the first half of 2003. (Figure 1). The oil and gas sector accounts for about one third of GDP and almost 90% of merchandise exports and government revenue. Consequently, the economy expanded 7.3% in the first quarter and 8.3% in the second. The oil and gas sector grew 14.5% in the second quarter. But the non-oil and gas sector rose an anemic 1.4%. The hotel and restaurant sector, along with transport and communications, performed poorly in the quarter because of SARS. Bruneis economy grew 3.4% in 2002 (Figure 2). The budget swung into surplus in the first half. The Governments fiscal position strengthened in the second quarter with a surplus of Br$317.6 million, up about Br$80 million from the first quarter, and reversing the Br$417.5 million deficit of a year earlier.
Nov 2000
Sep 2001
Jul 2002
Jun 2003
Source: Brunei Economic Bulletin.
Figure 2: Real GDP Growth (%)

4 2 0 -2 -4 1996 1998 2000 2002
Source: National Development Committee, Eighth National Development Plan 20012005.
Revenues rose 16%, driven by a 20% increase in oil and gas receipts. Expenditures fell 39% from a year ago, reflecting a decline in both current and capital expenditures. Project disbursements continued to lag behind allocations, as they did in the previous two years, despite efforts to streamline administrative procedures. The Eighth National Development Plan 20012005 allocates Br$1 billion, equivalent to about 10% of GDP, for development projects in 2003. Cumulative disbursements for projects in the first half were 41% of the target. Spending on public utility projects reached 53% of the target for the first half, but projects in new sectors such as information, communications, and technology were proceeding at a glacial pace of just 3% of target. Prices edged up in the first half after declining in 2002. Consumer prices increased an estimated 0.3% in the first half from a
Figure 3: Exchange Rate Index, Weekly Average (last week of Dec 2001=100, $/Br$)
109 106 103 100 97 28 Dec 2001 14 Jun 2002 06 Dec 2002 30 May 2003 21 Nov 2003
year earlier, after a 2.3% decline in 2002. The slight increase in the price level may suggest that domestic demand is stabilizing, although import data still show some weakness. Monetary stability is underpinned by the currency peg to the Singapore dollar under a currency board arrangement (Figure 3). The trade surplus widened sharply. Total merchandise exports grew 24.4% in the second quarter as a result of a 28.4% rise in oil and gas exports. Liquefied natural gas, which accounts for about 46% of oil and gas exports, rose 65%. Nonoil and gas exports declined 2.9%. Garment shipments, comprising two-thirds of non-oil and gas exports, were flat. Imports fell 4.6% in the second quarter, suggesting that the spillover effects from increased
BRUNEI DARUSSALAM
oil and gas receipts on domestic demand remain weak. Imports of manufactured goods, 26% of total imports, fell 13%. Given these trade patterns, the trade surplus recorded a strong 48% increase in the second quarter and was up 46% in the first half. More labor market reforms are required. The unemployment rate rose to 5.6% in 2001, the latest year data are available. Of the total 145,600 people employed, 67% were in the private sector, with 71% of these foreign workers. The increase in unemployment has been attributed to the residual effects of the Asian financial crisis, the preference among residents to be employed in the public sector, which is more lucrative but has a limited potential to absorb workers, and the perceived lack of local skills relative to foreign workers. One solution to the unemployment problem calls for reducing the relative size of the public sector and modifying its incentive structure while raising the skills of local residents. The Government implemented several programs to partially address these issues, including job placement and training schemes. The economic recovery program initiated in 2001 targeted small and medium enterprises (SMEs) estimated to account for about 70% of total private sector employment. The program includes the Public Housing Development Scheme to help local contractors and provision of working capital to SMEs in diverse sectors. In the latter scheme, the government guarantees 75% of the principal payment on loans to SMEs by participating banks. Growth is likely to exceed official projections of 3-4% this year. Buoyant oil prices and improved prospects for growth globally make it likely that Bruneis GDP growth in 2003 will exceed the official projection of 3-4%. Oil prices declined from their peaks for the year but remain above year-earlier levels. The recovery in tourism and a better outlook for exports should assist the non-oil and gas sectors, especially if the authorities are able to speed up the implementation of planned development projects. However, with the expected further drop in oil prices in 2004, growth may return to the 3-4% range. The Government outlines a strategy to diversify the economy. Over the medium to longer term, the main challenge facing the authorities is to reduce the vulnerability of the economy to the vagaries of oil prices. Early this year, the Government announced an ambitious strategy to diversify the economy. The plan aims to attract local and foreign investment of $4.5 billion over several years and create 6,000 permanent jobs for its citizens. Planned projects include an aluminum smelter, power plant, and a container port facility. The Government
32
BRUNEI DARUSSALAM
also intends to develop clusters in tourism, financial services, business services, and transportation and logistics. A study to define human resource development policies to ensure a well-equipped workforce in these sectors is being considered.
33
Cambodia
Growth is expected to slow to about 5% in 2003. Growth in 2003 is expected to slow to about 5% from last years 5.5% (Table 1).The impact on tourism and investment from the regional SARS outbreak, anti-Thai disturbances, and political uncertainties due to Cambodias national elections and the subsequent delay in forming a new government contributed to the slowdown. Still, garment exports have been strong and consumption has been supported by higher public spending. Agricultural production recovered from a drought in 2002 and the stronger garment exports have boosted manufacturing.
Table 1: GDP Growth and Projections (%)

1996 Official 1 1997 1998 3.7 1999 10.8 2000 7.0 2001 5.7 2002 5.5 2003 5.0 2004 5.56
5.0
6.8
ADB 2 IMF3 WB
1
5.0 4.7 4.8
5.5 5.8 5.8
National Institute of Statistics; Ministry of Economy and Finance for 2003 and 2004 projections 2 ADB, Asian Development Outlook 2003 Update, October 2003 3 IMF, World Economic Outlook, September 2003 4 World Bank, East Asia Update Regional Overview, October 2003
The fiscal deficit remains significant. The fiscal deficit is expected to exceed the Governments target of 6% of GDP. The budget posted a surplus in the first quarter, but fell into deficit in the second quarter as revenue declined while expenditure
Figure 1: Real Bank Credit Growth and Inflation Rate (%)
40 30 20 10 0 -10 98Q1 99Q1 00Q1 01Q1 02Q1 03Q1
Growth in Real Bank Credit to Private Sector, End of Period (y-o-y) Inflation Rate (y-o-y)
increased markedly. Election-related spending and a fall in revenue from trade and tourism accounted for part of the fiscal slippage. Over the past few years, Cambodias budget gap has been in the range 56.5% of GDP, financed mainly by foreign aid. Despite measures to improve tax collection, the revenue base remains weak, which has continued to constrain public investment. Inflation declined below 1% in the third quarter. Inflation declined to 0.8% in the third quarter from 3% at end-2002 (Figure 1). Recent data show inflation slowed further to 0.6% in October. This was partly attributed to a broadly stable exchange rate, a drop in rice and property prices, and slower monetary growth. M2 grew 11.5% year-on-year in June, compared with 24.8% in March and 33.4% in June last year.
Source: IMF, International Financial Statistics CD-ROM.
US quota increase helps exports. Exports to the US, which accounted for over 70% of the countrys total merchandise exports, surged 22% in the first three quarters of 2003, following an 18% increase in garment export quotas to the US. Import growth also has been strong. Energy imports (diesel and gasoline), for example, grew 25-28% in the first seven months. Imports from Thailand, the countrys main source of imports, expanded 39% in the nine months to September. Thus, both trade and current account deficits this year are expected to widen from last years estimated $434 million and $132 million, respectively. A poor performance from the tourist sector will also contribute to a widening of the current account gap to about 11% of GDP from 10% in 2002. Tourist arrivals fell about 20% in the first half because of SARS, regional terrorism concerns and uncertainty ahead of Cambodias general elections.
Figure 2: International Reserves and External Debt ($ billion)
1997 1998 1999 2000 2001 2002 20031 0.0 0.2 0.4 0.6 0.8 1.0 1.2
Gross International Reserves Total External Debt Short-Term External Debt As of September Source: Joint BIS-IMF-WB-OECD statistics on external debt.
1
The riel remains broadly stable against the US dollar. The dollar value of the riel has remained broadly stable during the last five years. The riel appreciated 0.5% against the US dollar over the 12 months to October but depreciated 11% against the yen, 16% against the euro, and 8.5% against the baht during this period. International reserves, excluding gold, stood at $712 million in September, enough to finance about three months of imports (Figure 2). Restructuring of the banking system continues. The banking sector is being restructured under a banking and financial institutions law of November 1999. The re-licensing of all private commercial banks was completed by April 2002, based on viability and capital adequacy. The number of banks was thus cut to 17 in 2002 from 31 in 1999. The liquidation of 10 non-viable banks was completed in 2002 and others are being liquidated under court supervision. To further reduce direct involvement by the Government in the financial sector, the Foreign Trade Bank was separated from the National Bank and became an independent state-owned financial institution in August 2002. In January 2003, the Foreign Trade Bank announced plans to privatize and seek strategic investors with international banking experience. Growth is expected to improve to 5.5-6% in 2004. The Government expects growth to improve to 5.5-6% in 2004 with higher exports, increased tourism receipts, and a stronger performance from the construction sector. Exports will benefit from an improved global economy and higher world commodity prices. Cambodias entry into
35
the WTO in September also augurs well for its external sector, although a reduction in tariffs on farm-product imports could hurt the agricultural sector. Tourism should rebound in 2004, but the deficit on the services account could widen as a result of WTO-related services liberalization. The current account deficit is expected to return to around the 10% of GDP level. Inflation will be moderately higher, reflecting a rise in world food prices. The fiscal deficit is expected to be 5-6% of GDP. Building stronger foundations is the key for sustained growth. Despite some improvements in economic performance over recent years, Cambodias foundations for sustained growth remain weak. The Government set a target of 6-7% growth over the medium term in its Poverty Reduction Strategy Paper. To reach this, industry must diversify from its current garment-based focus. Textiles and clothing represent 75% of total exports. The scheduled 2005 phase-out of garment and apparel export quotas makes this particularly urgent. In agriculture, which accounts for about 40% of GDP, more investment is required to improve irrigation. An improved investment climate, supported by greater flexibility in the labor market, along with reforms in the financial sector, is required to enhance competitiveness and create the potential for broad-based economic growth. Progress has been made in restructuring the banking system, strengthening customs and tax administration, and revising laws on investment and taxation. However, more effort is needed. The budget deficit and associated public debt must be addressed in the medium term for sustainable economic growth.
36
Cambodia: Selected ARIC Indicators

1996 Output and Prices GDP Growth (%) Agricultural Sector Growth (%) Services Sector Growth (%) Industry Sector Growth (%) Inflation Rate (%) Unemployment Rate (%) Monetary and Fiscal Accounts Growth of Broad Money, M2 (%)1 Growth in Real Bank Credit to Private Sector (%) Government Expenditure on Education (% of Total) Government Expenditure on Health (% of Total) Fiscal Balance as % of GDP External Account, Debt, and Exchange Rate Gross International Reserves less Gold ($ Billion)1 Total External Debt as % of GDP Short-term Debt as % of Gross International Reserves1 Short-term Debt as % Total Debt Current Account Balance as % of GDP Growth Rate of Merchandise Exports ($ fob, %) Growth Rate of Merchandise Imports ($ cif, %) Net Foreign Direct Investment ($ Billion) Real Effective Exchange Rate (1995=100)2 Average Nominal Exchange Rate (Riel per $) 0.3 ... 5.6 2.4 ... 10.0 20.4 0.3 105.8 ... 0.3 15.3 9.5 5.0 -8.2 81.0 5.8 0.2 101.7 2,625 0.3 23.3 10.4 4.8 -6.9 13.1 1.6 0.3 98.7 3,761 0.4 23.9 10.6 5.3 -7.8 17.9 27.0 0.2 119.9 3,814 0.5 25.3 18.7 11.0 -12.3 44.6 33.8 0.2 110.2 3,828 0.6 28.1 13.7 8.2 -9.7 10.8 6.9 0.2 98.3 3,837 0.8 ... 6.0 3.9 -9.8 17.0 13.2 0.1 103.2 3,836 0.5 ... ... ... ... ... ... 0.04 117.2 3,809 0.5 ... ... ... ... ... ... 0.05 112.9 3,816 0.5 ... ... ... ... ... ... 0.03 107.8 3,859 0.5 ... ... ... ... ... ... 0.03 103.1 3,829 0.5 ... ... ... ... ... ... 0.04 101.2 3,833 0.5 ... ... ... ... ... ... 0.05 95.0 3,833 0.6 ... ... ... ... ... ... 0.02 97.1 3,834 0.6 ... ... ... ... ... ... -0.01 100.0 3,846 0.6 ... ... ... ... ... ... 0.02 101.9 3,839 0.7 ... ... ... ... ... ... 0.03 102.8 3,834 0.8 ... ... ... ... ... ... ... 106.1 3,834 0.8 ... ... ... ... ... ... ... 101.8 3,834 0.8 ... ... ... ... ... ... ... 101.6 3,822 0.7 ... ... ... ... ... ... ... ... 3,816 0.7 ... ... ... ... ... ... ... ... 3,817 40.4 34.6 6.4 3.2 ... 16.6 34.2 6.9 3.6 -4.0 15.7 -9.2 6.7 2.8 -5.5 17.3 17.2 11.3 5.2 -3.9 26.9 18.7 9.0 5.9 -5.0 20.4 4.6 9.0 5.5 -5.5 31.1 9.1 ... ... -6.5 31.8 14.3 ... ... ... 39.1 23.6 ... ... ... 27.5 22.2 ... ... ... 26.9 18.7 ... ... ... 9.6 16.7 ... ... ... 8.4 9.8 ... ... ... 18.5 7.1 ... ... ... 20.4 4.5 ... ... ... 26.8 4.8 ... ... ... 33.4 -5.1 ... ... ... 28.9 -5.5 ... ... ... 31.1 9.0 ... ... ... 24.8 12.9 ... ... ... 11.5 29.8 ... ... ... ... ... ... ... ... 5.0 1.0 7.8 5.2 7.2 0.9 6.8 6.4 3.4 19.6 8.0 0.7 3.7 5.8 4.8 -2.5 14.8 5.3 10.8 3.4 10.9 19.3 4.0 0.6 7.0 -1.5 5.7 30.7 -0.8 2.6 5.7 2.2 4.7 12.9 -0.6 ... 5.5 -2.7 4.5 17.7 3.3 ... ... ... ... ... 0.1 ... ... ... ... ... -2.3 ... ... ... ... ... -1.4 ... ... ... ... ... 0.5 ... ... ... ... ... -1.0 ... ... ... ... ... 0.2 ... ... ... ... ... -0.2 ... ... ... ... ... -1.4 ... ... ... ... ... 3.3 ... ... ... ... ... 3.1 ... ... ... ... ... 3.5 ... ... ... ... ... 3.0 ... ... ... ... ... 2.2 ... ... ... ... ... 1.6 ... ... ... ... ... 0.8 ... 1997 1998 1999 2000 2001 2002 00Q1 00Q2 00Q3 00Q4 01Q1 01Q2 01Q3 01Q4 02Q1 02Q2 02Q3 02Q4 03Q1 03Q2 03Q3
Note: Real effective exchange rates are based on REMU staff calculations. 1 End of period. 2 Trade weighted using WPI for trading partners and CPI for the home country. Sources: Data on output, fiscal balance, current account balance, and merchandise exports and imports, are from Asian Development Outlook 2002, 2003, 2003 Update; M2, inflation rate,real bank credit to the private sector, gross international reserves, and net foreign direct investment are from IMF, International Financial Statistics, CD-ROM; unemployment and central government expenditure on health and education are from ADB Key Indicators 2003; nominal exchange rates are from Bloomberg; total and short-term external debt are from Joint IMF-WB-OECD-BIS Statistics on External Debt.
People's Republic of China

Real Sector
The economy has rebounded strongly in the second half. After slowing from 9.9% in the first quarter to 6.7% in the second quarter due to the outbreak of SARS, GDP growth accelerated to 9.1% in the third quarter, driven by strong domestic demand, export growth, and a recovery in the services sector. According to a recent report by the National Bureau of Statistics, growth for 2003 could top 8.5%, which is 1.5 percentage points higher than its earlier forecast and up from 8% in 2002 (Table 1).

1998 1999 2000 2001 2002 2003 2004
Official 1 ADB IMF3 World Bank4 Consensus Economics 5

1 2 3
7.8
7.0
7.6
7.3
8.0
8.5 7.8 7.5 7.8 8.5
7.0 7.9 7.5 7.4 7.9
National Bureau of Statistics. ADB, Asian Development Outlook 2003 Update, October 2003. IMF, World Economic Outlook, October 2003. 4 World Bank, East Asia Update Regional Overview, October 2003. 5 Consensus Economics Inc., Asia Pacific Consensus Forecasts, November 2003.
Figure 1: Growth of Real Retail Sales and Public Sector Fixed Investment (y-o-y, %)
40 30 20 10 0 -10 98Q1 99Q1 00Q1 01Q1 02Q1 03Q1
Retail Sales Source: ARIC Indicators. Fixed Investment
A surge in fixed investment drives domestic demand. Strong domestic demand was underpinned largely by a surge in fixed investment. Total fixed investment grew about 30% in real terms in the nine months to September, eight percentage points higher than that for the same period last year. Public sector fixed investment, which accounted for 77% of the total, grew by 31% in real terms, to a large extent driven by local governments (Figure 1). The surge in fixed investment was fueled by rapid expansion of bank credit, strong FDI inflows, and a property market boom. About 25% of public sector fixed investment went to real estate development, which led to concern over the possibility of a boom-bust cycle in the property sector. The latest data show that growth of public sector fixed investment remained at about 30% in October. Private consumption growth recovers to pre-SARS levels. Consumer spending slowed during the SARS outbreak, with growth of retail sales dropping to about 7.4% in real terms in the second quarter
PEOPLE'S REPUBLIC OF CHINA
from 9.5% in the first. In the third quarter, however, retail sales growth rebounded to 10.6%, bringing the increase over the first nine months to 9.3%. Sales of cars and appliances were particularly robust, fueled by rising incomes, an increasing array of consumer credit products offered by financial institutions, and lower prices attributable to WTOinduced tariff reductions. The steady growth in consumer spending was driven largely by urban households, which spent 9.8% more compared to the same period last year. The growth in spending by rural households was slower at 6.4%. This reflects in part the urbanrural income gap. In the first nine months, per capita disposable incomes of urban households rose 9% in real terms, while per capita real cash income of rural households grew at a much smaller 3.8%. Thus the urban-rural income gap has continued to widen. The latest data suggest that retail sales growth remained strong in October, at about 10% in real terms. Industrial value-added growth accelerated to 17.2% in October. On the supply side, growth has been driven by the industrial sector.
Figure 2: Sectoral GDP Growth (y-o-y, %)
18 15 12 9 6 3 0 98Q1 99Q1 00Q1 01Q1 02Q1 03Q1
Agriculture Industry
Partly spurred by strong demand for electronic products, automobiles, and construction materials, industrial value-added rose 16.5% in the first three quarters, 4.3 percentage points higher than a year ago, and grew 17.2% in October. The agricultural sector grew 2.8% in the first three quarters. As a result of reductions in the area planted, natural disasters, and lower profitability for grain production compared with some other crops, total grain output is expected to be below 2002 levels. While the SARS outbreak had a limited impact on the industrial and agricultural sectors, it affected the services sector significantly. Growth in services dropped to 0.9% in the second quarter from 7.6% in the first quarter, but recovered to 7.5% in the third quarter, bringing the nine month level to 5.4% (Figure 2).
Services
Fiscal and Monetary Developments

Fiscal policy remains proactive. The Government has maintained its deficit spending program for the past six years to support growth. The projected fiscal deficit for 2003 is CNY319.8 billion, equivalent to about 2.9% of GDP, or 0.1 percentage point lower than last year. The Government budgeted for both revenues and expenditures to rise 8% in 2003. In the first 10 months, revenues increased 21.1%, making the official projection look conservative. The
39
difference partly reflects official concerns over the global economy when the budget was prepared. Expenditures grew 12.9% through October. Spending on capital construction and social security programs was below last years levels. However, expenditures for education and health care rose 12.4%, partly due to efforts to contain SARS. Spending on government administration jumped 42.4%. Given the much betterthan-expected revenue performance, the fiscal deficit is expected to remain within the budgetary target for the full year. To finance deficit spending and repayment of maturing debt, the Government planned to issue CNY640 billion in Treasury bonds this year, up from CNY568 billion in 2002. Government took measures to control excessive credit expansion. Growth in the money supply has accelerated since early this year, resulting in an expansion of credit. Large inflows of foreign capital have been a major driving force. Despite strong efforts to sterilize the liquidity injected from such inflows into the domestic monetary system, money supply continued to grow rapidly. The average monthly growth of M2 reached 20% in the first ten months, 5.3 percentage points higher than a year earlier. By end-October, M2 had increased 21%, with M1 up 19.6%. Domestic banks extended CNY2.5 trillion in new loans in the first nine months, significantly higher than the CNY1.8 trillion for 2002 as a whole. The rapid monetary growth and credit expansion have led to sharp increases in fixed investment, some of it into risky areas such as real estate. The Peoples Bank of China (PBC), the countrys central bank, took several steps to control money supply growth. In April, it began issuing short-term central bank bills to sterilize the influx of
Figure 3: Short-Term Interest Rate, Real Bank Credit Growth, and Inflation Rate (%)
25 20 15 10 5 0 -5 98Q1 99Q1 00Q1 01Q1 02Q1 03Q1
Three-Month Interbank Lending Rate, End of Period Growth in Real Bank Credit, End of Period (y-o-y) Inflation Rate (y-o-y) Source: ARIC Indicators.
foreign capital. By end-September, these bills amounted to CNY550 billion. In June, the PBC issued more prudential regulations to control property loans, particularly in high-end housing projects. Then, in September, it raised the bank reserve requirement ratio one percentage point to 7%. As a result of these measures, there appeared to be some easing in monetary and credit growth in recent months. Growth in outstanding bank loans slowed from 7% during the second quarter to about 4.7% during the third quarter. Consumer prices reverse last years fall. The rapid monetary growth and credit expansion thus far have not sparked inflationary pressures. But consumer prices reversed the downward trend of 2002, with inflation at 0.8% in the first 10 months of this year, mainly as a result of increases in prices of food and services (Figure 3). Price increases in the services sector reflected strong
40
demand for education, medical services, and housing. Prices of most non-food consumer goods continued to fall, due to ample supplies, tariff reductions, and strong price competition. The retail commodity price index fell 0.4% on average in the first ten months. Producer price rises were more significant as a consequence of the investment boom. In the first nine months, industrial producer prices increased 2.4% on average, with oil up 24.9%, steel products up 13-20%, and other raw materials and energy up 4.5%. Although producer price increases slowed in recent months, there are concerns that they may be transmitted to consumer prices and thus intensify inflationary pressure in the future.
Balance of Payments
Figure 4: Growth of Merchandise Exports and Imports, Dollar Value (y-o-y, %)
60 45 30 15 0 -15 98Q1 99Q1 00Q1 01Q1 02Q1 03Q1
Exports Imports
Trade surplus has narrowed in 2003. The growth of external trade accelerated further in 2003. Merchandise exports grew 32.8% in the first 10 months, while merchandise imports, boosted by the investment boom and WTO-related trade liberalization, shot up at the even faster rate of 40.4% (Figure 4). As a result, the trade surplus narrowed to $14.8 billion, down more than 40% from a year ago. Because of increased intra-regional trade, exports to and imports from other Asian countries such as Japan, Korea, and ASEAN increased 28.3% and 43.8%, respectively, in the first 10 months. Although the PRCs overall trade surplus is declining, it has a $47.4 billion trade surplus with the US that offsets trade deficits with other countries, particularly in East Asia. The large trade surplus with the US is causing trade tensions between the two countries. The PRC has attempted to ease trade tensions by reducing export rebates, and in November, it placed orders of $1.7 billion for big-ticket US products. Foreign reserves rise above $400 billion. The drop in the trade surplus combined with a fall in receipts from services, in particular tourism due to SARS, led to a decline in the current account surplus, which at $11.1 billion in the first half, was 20% lower than a year earlier. The current account surplus for the full year is expected to be below 2% of GDP. The PRC has continued to attract large foreign capital inflows. In the first nine months, committed FDI reached $79.2 billion and disbursed FDI was $40.2 billion, 36% and 11.9% higher, respectively, than the same period in 2002. There were also inflows of foreign capital destined for other investments, such as bank loans, some
41

98Q2 98Q4 99Q2 99Q4 00Q2 00Q4 01Q2 01Q4 02Q2 02Q4 03Q2 03Q4
1
of which were possibly related to speculation of a currency revaluation. This and the FDI inflows led to a continued surge in foreign reserves, which reached $401 billion in October, an increase of $114.6 billion from the start of 2003. Recent data show that, as of mid-2003, total external debt reached $182.6 billion, equivalent to 14.1% of GDP, with short-term debt accounting for about 35% (Figure 5). Exchange rate policy remains unchanged. The exchange rate of the yuan remains within a narrow band around CNY8.277 per dollar. However, the strong balance of payments position, along with the continued accumulation of foreign reserves, weakening of the US dollar, and the resulting depreciation of the real effective exchange rate, have led to calls by some trading partners, particularly the US, for a more flexible exchange rate policy and a revaluation of the yuan. The Government has stated that there is no immediate plan to change its exchange rate policy, and a flexible exchange rate regime will be a long-term goal in conjunction with financial market reform. In the meantime, the Government has sought to contain the large balance of payments surplus and resulting upward pressures on the exchange rate by continued trade liberalization, including reductions of tariffs and export rebates, and a relaxation of restrictions on foreign exchange transactions.
70
140
210
280
350
420
Gross International Reserves Total External Debt Short-Term External Debt

1 As of October Source: ARIC Indicators.
Financial and Corporate Restructuring

A new Commission assumes bank regulatory functions. As part of efforts to speed up bank restructuring and financial reform, the China Banking Regulatory Commission (CBRC) was established in April to take over the functions of bank regulation and supervision from the central bank. The CBRC has a mandate to regulate and supervise all deposit-taking institutions, asset management companies, and trust and investment companies. Among other tasks, it will formulate supervisory rules and regulations, oversee bank operations and evaluate qualifications of senior bank managers, conduct off-site surveillance, on-site examinations, and propose ways to deal with problem deposit-taking institutions. The establishment of the CBRC is a significant step in reforming the financial system. It signals a commitment of the Government to address long-standing issues of the state-owned banks.
42
Regulations tightened to curb money laundering. The PBC tightened regulations in March to curb money laundering. Financial institutions are now required to report large-value or suspicious transactions to the central bank if denominated in yuan, and to the State Administration of Foreign Exchange if denominated in foreign currencies. The PBC will set up a payment transaction monitoring system, and financial institutions are now required to establish internal anti-money laundering mechanisms.
Prospects and Policy Issues

Growth could top 8.5% in 2003. Despite the adverse impact of SARS, the 8.5% GDP growth for the first three quarters exceeded the Governments 7% target for 2003. Strong fixed investment and exports are expected to remain the main drivers of growth in the fourth quarter. The Government now expects growth for 2003 to top 8.5%, while the latest Consensus Economics projection is for 8.5%. In 2004, with continued improvement in the global economy, benefits from the WTO accession, and the countrys competitive edge, exports are expected to remain strong and continue as a major source of growth. Fixed investment, however, should cool off somewhat as a result of recent Government measures to control credit expansion. After six successive years, deficit spending should also begin to taper off, given current concerns over the investment boom, largely driven by the enterprise sector. The Consensus Economics projection for GDP growth for 2004 is 7.9%, above a recently announced government target of 7%. Despite rises in prices of some industrial goods, the Consensus Economics projection for inflation is 0.8% for 2003 and 1.4% for 2004, suggesting a consensus view that inflation should not be a major concern at this stage. Financial sector reform will continue to top the agenda. The financial system remains weak, despite the reforms taken in recent years and the progress made. The Government considers the weak financial system a key constraint to moving toward more flexible interest rate and exchange rate regimes. Dominated by four wholly state-owned commercial banks, the financial system remains burdened with high levels of NPLs. The official estimate of the average NPL ratio of the four state-owned commercial banks was 23.1% at end-2002. Some
43
independent estimates suggest that actual NPLs were higher than the official estimate. Although the official estimate of the NPL ratio fell to 19.6% in June, there are concerns that the reduction was from sharp increases in loans rather than any improvement in asset quality. There are also concerns that the recent credit expansion could lead to a further deterioration in the asset quality of banks because lending often is based on non-market mechanisms, such as local government directions. Recognizing the need to strengthen the financial system, the Government in recent years has stepped up the pace of reform. The strategy envisages a three-stage process. First, state-owned commercial banks need to improve their financial performance through better management. Second, they need to be transformed into jointstock banks. And third, when qualified, commercial banks need to be allowed to list their shares on stock exchanges. The PBC also set a target of reducing the NPL ratio to below 15% by 2005. The Government faces a daunting task in achieving these targets.
44
People's Republic of China: Selected ARIC Indicators

1996 Output and Prices GDP Growth (%) Agricultural Sector Growth (%) Value-added of Industry Growth (%) Services Sector Growth (%) Inflation Rate (%) Unemployment Rate (%) Monetary and Fiscal Accounts Growth of Broad Money, M2 (%)1 Three-Month Interbank Lending Rate (%)1 Growth in Real Bank Credit,* End of Period (y-o-y)1 Average Stock Price Index Central Government Fiscal Balance as % of GDP External Account, Debt, and Exchange Rates Growth of Merchandise Exports ($ fob, %) Growth of Merchandise Imports ($ cif, %) Current Account Balance as % of GDP Net Foreign Direct Investment ($ Billion) Net Portfolio Investment ($ Billion) Gross International Reserves ($ Billion)1 Total External Debt as % of GDP1 1.5 5.1 0.9 ... 1.7 105.0 14.1 21.0 2.5 3.3 45.3 6.8 139.9 14.5 12.7 13.9 121.3 8.3 0.5 -1.5 3.1 45.5 -3.7 145.0 15.2 11.6 11.9 131.5 8.3 6.1 18.2 1.6 40.3 -11.2 154.7 15.3 9.6 10.0 124.2 8.3 27.8 35.8 1.9 40.8 -4.0 165.6 13.5 7.8 9.0 122.3 8.3 6.8 8.2 1.5 46.8 -19.4 212.2 14.7 ... ... 131.1 8.3 22.4 21.2 2.9 52.8 -10.3 286.4 13.6 18.2 31.4 131.8 8.3 39.1 41.0 ... 7.1 ... 156.8 ... ... ... 127.0 8.3 37.8 32.5 ... 10.0 ... 158.6 ... ... ... 121.1 8.3 25.0 43.1 ... 9.5 ... 160.1 ... ... ... 120.0 8.3 15.4 28.8 ... 14.1 ... 165.6 13.5 7.8 9.0 121.1 8.3 13.8 17.3 ... 8.0 ... 175.8 ... ... ... 134.1 8.3 4.6 11.4 ... 12.6 ... 180.8 15.2 31.3 33.8 131.7 8.3 3.8 6.5 ... 11.5 ... 195.8 ... ... ... 129.5 8.3 6.5 0.2 ... 14.7 ... 212.2 14.7 ... ... 129.3 8.3 10.0 5.1 ... 10.1 ... 227.6 ... ... ... 142.7 8.3 17.8 15.0 ... 14.5 ... 242.8 14.2 20.5 29.9 132.9 8.3 28.7 29.2 ... 15.0 ... 253.1 ... ... ... 126.2 8.3 30.5 33.0 ... 13.2 ... 286.4 13.6 18.2 31.4 125.3 8.3 33.6 52.3 ... 13.1 ... 316.0 ... ... ... 132.1 8.3 34.3 38.2 ... 17.2 ... 346.5 14.1 18.3 35.2 127.0 8.3 29.7 34.3 ... 10.0 ... 383.9 ... ... ... 124.6 8.3 ... ... ... 236.6 -0.8 19.6 8.3 ... 409.3 -0.8 14.8 6.6 17.5 412.4 -1.2 14.7 6.8 12.7 438.1 -2.1 12.3 5.5 9.8 623.7 -2.8 14.4 2.4 9.7 612.9 -2.6 16.8 2.8 17.7 480.3 -3.0 13.0 2.6 12.6 532.7 2.8 13.7 4.4 7.9 615.0 -0.5 13.4 4.4 9.2 660.8 -1.3 12.3 5.5 9.8 669.9 -9.5 13.2 5.5 8.6 655.3 4.3 14.3 3.5 12.5 682.6 -0.1 13.6 3.5 12.2 610.7 -1.8 14.4 2.4 9.7 509.8 -10.1 14.4 3.2 14.3 461.6 1.4 14.7 3.3 14.5 493.2 0.02 16.5 4.0 16.7 514.2 -2.41 16.8 2.8 17.7 445.6 -9.02 18.5 2.0 18.1 442.3 5.57 20.8 3.5 22.4 450.8 -0.09 20.7 4.8 ... 417.7 -1.45 ... ... ... ... 8.3 3.0 ... ... ... ... 2.9 3.1 7.8 3.5 8.9 7.6 -0.8 3.1 7.0 2.8 8.9 7.5 -1.4 3.1 7.6 2.4 11.4 7.8 0.3 3.1 7.3 2.8 9.9 7.4 0.9 3.6 8.0 2.9 12.6 7.3 -0.8 4.0 8.1 3.0 10.7 7.5 0.1 ... 8.3 0.7 11.6 8.7 0.1 ... 7.0 3.0 12.4 8.1 0.3 ... 7.3 2.7 10.9 7.2 0.9 ... 8.1 3.0 11.2 7.4 1.3 ... 7.8 2.1 10.8 6.6 1.6 ... 7.0 2.6 8.9 7.0 0.8 ... 6.6 3.2 8.9 8.3 -0.1 ... 7.6 3.5 10.9 8.0 -0.6 ... 8.0 2.6 12.4 9.1 -1.6 ... 8.1 4.6 13.2 10.0 -0.8 ... 8.1 1.7 13.7 3.5 -0.6 ... 9.9 3.5 17.2 7.6 0.5 ... 6.7 2.3 15.3 0.9 1.2 ... 9.1 2.9 17.1 7.5 0.8 ... 1997 1998 1999 2000 2001 2002 00Q1 00Q2 00Q3 00Q4 01Q1 01Q2 01Q3 01Q4 02Q1 02Q2 02Q3 02Q4 03Q1 03Q2 03Q3
Short-Term Debt as % of Gross International Reserves1 13.2 Short-Term Debt as % of Total Debt1 Real Effective Exchange Rate (1995=100)2 Average Exchange Rate (Local Currency to $) 12.1 112.2 8.3
Note: All growth rates are on a year-on-year basis. . . . = not available. 1 End of period. 2 Trade weighted using wholesale price index for trading partners and consumer price index for the home country. Sources: Data on output and prices, central government fiscal balance, government expenditure on education and health, merchandise exports and imports, current account balance, net foreign direct investment, gross international reserves, and total and short-term external debts are from national sources. Data on M2, real bank credit to private sector, and net portfolio investment are from the International Monetary Fund, International Financial Statistics. Data on interbank lending rate, average stock price index, and average exchange rate are from Bloomberg, LP. Real effective exchange rates are based on REMU staff calculations. *Growth in Real Bank Credit to Non-Central Government Sector.
Indonesia
Real Sector
The economy grew 3.7% in the first three quarters. The economy grew in a 3.5-4% range in each of the first three quarters, in spite of adverse effects from the 2002 Bali bombing, the outbreak of SARS in the region, and the Iraq war. GDP increased 3.9% in the third quarter, bringing growth for the first three quarters to 3.7%. The August terrorist bombing at Jakartas Marriott Hotel had only a limited impact on growth, but it did slow the recovery of tourism. The Government has retained its forecast of about 4% growth this year, slightly higher than 2002s actual growth (Table 1).

1997 1998 1999 2000 2001 2002 2003 2004
Official 1 ADB 2 IMF3 World Bank4 Consensus Economics 5

1 2 3
4.7
-13.1
0.8
4.9
3.4
3.7
4.0 3.4 3.5 3.5 3.8
4.5 4.0 4.0 4.0 4.4
Badan Pusat Statistik, 19972002; Ministry of Finance projections, 2003, 2004. ADB, Asian Development Outlook 2003 Update, October 2003. IMF, World Economic Outlook, October 2003. 4 World Bank, East Asia Update Regional Overview, October 2003. 5 Consensus Economics Inc., Asia Pacific Consensus Forecasts, November 2003.
Figure 1: Growth of GDP Expenditure Components (y-o-y, %)

60 30 0 -30 -60 98Q1 99Q1 00Q1 01Q1 02Q1 03Q1
Private Consumption Gross Domestic Investment Public Consumption Gross Fixed Capital Formation
Consumer spending stays strong, but investment is weak. Consumer spending continued to provide the main impetus to growth, with household expenditures contributing 3.3 percentage points in the third quarter (Figure 1). A sharp decline in deposit rates and continued easy access to credit enabled consumers to increase spending. Real exports were weak, with an increase of less than 1% in each of the three quarters. The continued slump in tourism and a 38% appreciation of the real effective exchange rate since end-2000 hurt export earnings. Nonetheless, import compression allowed net exports to contribute to growth. Real imports fell 5.7% in the third quarter, compared with a 3.6% rise in the first half, reflecting weak investment. Fixed investment was flat in the third quarter, compared with 3.5% growth in the first half. As a share of GDP, capital formation remains subdued at 19.9%, only slightly above the postcrisis trough of 19.5% in mid-1999 and well below the 29-30% rate before the 1997 crisis.

20 0 -20 -40 -60 98Q1 99Q1 00Q1 01Q1 02Q1 03Q1
Agriculture Construction Source: ARIC Indicators. Manufacturing Services
Agriculture and manufacturing were weak in the third quarter. Agricultural expansion slowed to 0.8% in the third quarter from 3.5% in the first half as drought and floods damaged production (Figure 2). Manufacturing output rose a moderate 2.4% in the third quarter, similar to the rate in the first half, reflecting weak exports and subdued investment. In contrast, the services sector expanded a healthy 5.1% in the third quarter from 4.4% in the first half, even though the Marriott bombing set back tourism.

The budget deficit was revised up marginally. The Government marginally revised up the targeted budget deficit for this year to 1.9% of GDP from 1.8%. The deficit for the first three quarters was Rp22.6 trillion, below the official target of Rp25.6 trillion and the projected full year deficit of Rp34.5 trillion. Non-oil and gas tax revenues are rising at slower-than-expected rates, but this is being offset by an increase in oil and gas receipts, net of subsidies. Expenditures, including development projects, also are behind target. Total interest payments have been contained by the substantial decline in the three-month SBI interest rate. The authorities have again given priority to fiscal consolidation next year. The draft budget for 2004 targets a surplus in the primary account, which excludes interest payments, of 2.2% of GDP, similar to this years, and the overall deficit is expected to shrink to 1.2% of GDP. Realization of primary surpluses, combined with lower interest rates, currency stability, and asset sales have contributed to a fall in the public sector debt/GDP ratio from a peak of over 100% to around 70% this year. Financing next year will rely heavily on the domestic bond market. With the exit from the IMF loan program and consequent ineligibility for Paris Club debt relief, financing next year will lean more heavily on domestic sources. The Government plans to raise Rp28 trillion (1.3% of GDP) in the local bond market, up from a targeted Rp11.7 trillion this year. It also intends to draw down Rp26 trillion (1.2% of GDP) from its reserves at the central bank. Net issuance in the bond market will still
47
80 40 0 -40 -80 98Q1 99Q1 00Q1 01Q1 02Q1 03Q1
Three-Month Interbank Lending Rate, End of Period Growth in Real Bank Credit to Private Sector, End of Period (y-o-y) Inflation Rate (y-o-y) Source: ARIC Indicators.
remain modest at Rp3.5 trillion, so by itself should not exert much pressure on interest rates. However, the integrity of the budget and its financing will depend on maintaining overall stability during the 2004 elections. Inflation has eased to around 6%, the lowest level in three years. Inflation slowed to 6.1% in the third quarter, the lowest since the last quarter of 2000 (Figure 3). The Government revised down its year-end forecast to 6% from 9%. A stronger currency, a more prudent monetary policy and lower food prices all had moderating effects. The rupiah appreciated 5% against the US dollar and is 6% stronger in real effective terms through November 2003 (Figure 4). Also, base money has remained well below IMF program targets. The central bank has lowered its year-end projection of base money growth by three percentage points to 10.8%.
Figure 4: Exchange Rate Index, Weekly Average (last week of Jun 1997=100, $/Rupiah)
120 100 80 60 40 20 0 27 Jun 1997 22 Jan 1999 09 Jan 2000 12 Apr 2002 21 Nov 2003
Short-term interest rates have dropped to record lows. The moderation in inflation and increased currency stability have allowed Bank Indonesia to guide short-term interest rates to record lows. The one-month and three-month SBI rates have fallen to about 8.5% from 12.9% at end-2002, following a 4.5 percentage point decline last year. Bank deposit rates declined with the SBI rates. However, lending rates have proved to be stickier, with working capital rates declining to 16.4% from 18.3% at end-2002. Commercial bank credit has been growing at a double-digit pace since February in both nominal and real terms. Consumer lending has increased at an annual rate of about 30%, and its share of total credit edged up to 23.5% as of August from 21.8% at end-2002. In recent quarters, loans to private firms also have expanded. Banks may be resuming intermediary functions after a long hiatus, partly as interest income from government bond holdings decline.
Balance of Payments
Exports weakened, but the current account surplus remains large. The dollar value of exports weakened through the first three quarters (Figure 5). Merchandise exports fell 1.9% in September, after starting
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75 50 25 0 -25 -50 98Q1 99Q1 00Q1 01Q1 02Q1 03Q1
Exports Imports Source: ARIC Indicators.
the year with a gain of 22%. Much of the 7.5% increase in exports in the first nine months came from oil and gas shipments. Non-oil and gas exports grew a modest 3.6%. Imports tracked the deceleration in exports, reflecting subdued investment and the likely high import component of manufactured exports. The merchandise trade surplus in the first nine months was $21.6 billion, about 7% higher than a year earlier. This surplus helped offset some of the decline in tourism revenue. The market consensus is for a $6.7 billion (about 3% of GDP) current account surplus for the full year, compared with $7.5 billion (4.3% of GDP) realized last year. Tourist arrivals hit a six-year low in April as the Bali bombing and SARS took their toll, but arrivals posted a strong 25% average month-on-month growth in May-June. Following the Marriott bombing, arrivals declined in August and September to 9% below the year-earlier period. Capital account improves with slower private sector outflows. Net private capital outflows slowed to a total of $1.8 billion in the four quarters to March from $6.1 billion a year earlier, reflecting debt restructuring, including write-offs, and portfolio inflows. In spite of large asset sales, net foreign direct investment has continued in deficit. Most recent data shows an outflow of $2.65 billion in the first quarter, underscoring a poor investment climate. A 3.7% rise in foreign investment approvals in the first nine months, to $6.2 billion, was likely a result of asset sales by IBRA. Approvals of new projects were still below year-ago levels, suggesting that investor confidence remains weak.

98Q1 98Q3 99Q1 99Q3 00Q1 00Q3 01Q1 01Q3 02Q1 02Q3 03Q1 03Q3
Higher reserves should help fund next years increased obligations. Foreign exchange reserves rose to $34.7 billion in November from $31.6 billion at end-2002 (Figure 6), equivalent to about six months of imports and over twice the level of short-term external debt. The exit from the IMF loan program at the end of 2003 and the consequent ineligibility for Paris Club debt relief mean that external financing requirements will rise by about $3 billion next year. The current account surplus and increase in reserves provide room to pay the Governments higher debt obligations without putting undue pressure on the rupiah. Current
40
80
120
160
Gross International Reserves Total External Debt

account surpluses and debt restructuring enabled total outstanding external debt to decline to $132.8 billion as of end-September from a peak of $150.9 billion in 1998. As a share of GDP, total public and private external debt was about 70%, compared with 157% in 1998.
49

IBRA is making significant progress on asset sales. IBRA realized Rp12.7 trillion from asset sales by the end of August, exceeding its target for the period and almost half the Rp26 trillion goal set for 2003. Proceeds from bank sales have exceeded the fullyear target and loan disposals appear on track, with 45% of the target met. But the sale of companies acquired from former shareholders of insolvent banks is lagging. IBRA intends to sell most remaining assets by February 2004, when its mandate expires. Corporate debt restructuring has progressed. Apart from loans resolved by IBRA, corporate sector debt restructuring advanced significantly under the Jakarta Initiative. Between its inception in 1998 and 10 October 2003, the Jakarta Initiative Task Force (JITF) successfully mediated memoranda of understanding in 96 cases with debt of $20.5 billion, about 70% of total debt registered. Of this amount, $1.9 billion was mediated this year, less than the amounts in previous years, probably because later cases tend to be more complex. Resolution of NPLs increasingly will depend on the courts. Headline nonperforming loans declined to 8.3% of total loans in September from a peak of 49.2% in January 1998. System-wide NPLs, including those in IBRA, are higher. With the JITFs mandate to end this year and IBRA to close in February, the pace of debt restructuring will depend more heavily on the market mechanism and, therefore, on the courts. The Governments program for legal reforms, including an amendment of the bankruptcy law and general improvement of commercial courts performance, will assume added significance.

Growth in 2004 is forecast at 4.4%. The Consensus Economics survey forecasts GDP growth at 3.8% this year, rising to 4.4% in 2004. Slightly stronger growth next year appears achievable if the global environment improves further, the Government makes progress on its post-IMF reform agenda, and risks related to
50
the long electoral season remain modest. Low interest rates and ample access to credit should support private consumption. And while investment may remain subdued, its effect on GDP could be offset by a concomitant weakness in imports. Macroeconomic stability needs to be preserved. With electoral uncertainty likely to persist for the first 10 months of 2004, market confidence must be retained to preserve the gains made over the past 18 months. The Governments White Paper on policies to be implemented after its exit from the IMF loan program provides a useful road map for investors. These reforms are broadly classified into three areasmacroeconomic stability, financial sector reforms, and policies to increase investment, exports, and employment. Continued vigilance over monetary policy by the central bank and coordination with Government will become more important in 2004. The drawdown of government reserves at the central bank for budget financing could have an undesirable expansionary impact on base money growth. The central bank and the Government also plan to cooperate on the relatively large value of bonds to be issued, so that systemic liquidity and interest rates can be managed. Meeting fiscal targets will depend on further tax reforms, including the expansion of the tax base and more efficient collection. The budgets reliance on asset sales as a source of funds will drop next year. However, further progress on disposal of IBRAs unsold assets, including majority stakes in Bank Lippo and Bank Permata, would help investor sentiment and enhance efficiency. Stronger investment flows would enable faster long-term growth. Policies to improve the investment climate have lagged. Indonesias export performance, for example, should arguably have been stronger this year given the rise in non-oil commodity prices. Structural and institutional problems continue to hinder investment and productivity growth. It is also possible that Indonesia is losing price competitiveness as its real effective exchange rate appreciated 38% over the past three years. While much of this strength likely reflects a correction of the sharp plunge during the 1997-98 crisis and a marked improvement in macroeconomic fundamentals since, there are concerns that exports are now less competitive. Over the longer-term, without a sustained increase in investment, growth is unlikely to accelerate at rates sufficient to reduce unemployment and poverty. The World Bank estimates that 52.3% of Indonesians live in poverty in 2003, using the $2-a-day benchmark. Cognizant of this imperative, the White Paper addresses the main impediments to investment, including legal and governance
51
reforms, rationalizing labor laws, harmonizing and simplifying central and regional regulations, and buttressing security against terrorism and crime. Progress in these areas could lead to higher investment over the longer term, given the size of the market, abundance of natural resources, and a literate workforce.
52
Indonesia: Selected ARIC Indicators

1996 Output and Prices GDP Growth (%) Private Consumption Expenditure Growth (%) Public Consumption Expenditure Growth (%) Gross Domestic Investment Growth (%) Gross Fixed Investment Growth (%) Agricultural Sector Growth (%) Manufacturing Sector Growth (%) Construction Sector Growth (%) Services Sector Growth (%) Exports of Goods and Services Growth (%) Imports of Goods and Services Growth (%) Inflation Rate (%) Unemployment Rate (%) Monetary and Fiscal Accounts Growth of Broad Money, M2 (%)1 Three-Month Interbank Lending Rate (%)1 Growth in Real Bank Credit to Private Sector (%)1 NPL Ratio of the Banking System1 Average Stock Price Index National Government Fiscal Balance as % of GDP Central Government Debt as % of GDP2 Government Expenditure on Education (% of Total) Government Expenditure on Health (% of Total) External Account, Debt, and Exchange Rates Growth of Merchandise Exports ($ fob, %) Growth of Merchandise Imports ($ cif, %) Current Account Balance as % of GDP Net Foreign Direct Investment ($ Billion) Net Portfolio Investment ($ Billion) Gross International Reserves ($ Billion)1 Total External Debt as % of GDP1 Real Effective Exchange Rate (1995=100)3 Average Exchange Rate (Local Currency to $) 9.7 5.7 -3.4 6.2 5.3 18.3 ... 109.5 2,327 7.3 -2.9 -2.2 4.7 -5.0 16.6 61.4 104.6 -8.6 -34.4 4.3 -0.4 -13.5 23.6 157.1 52.7 -0.4 -11.2 4.1 -2.7 -7.2 27.3 105.2 74.5 7,848 27.7 38.1 5.3 -4.6 -5.4 29.4 93.9 70.3 -9.3 -7.6 4.9 -5.9 -2.4 28.0 93.9 69.5 1.5 1.1 4.3 -7.1 4.9 31.6 75.8 85.3 9316 39.1 18.0 4.8 -1.5 -0.5 28.3 96.9 77.1 7,391 32.1 20.4 3.6 -0.4 -2.4 27.5 94.8 69.8 8,243 25.0 51.0 6.0 -0.9 -1.8 28.1 92.4 67.5 8,740 18.0 59.1 6.8 -1.7 -0.8 29.4 93.9 66.8 9,241 5.1 40.5 5.8 -2.2 -0.9 28.7 94.7 67.3 -4.8 18.6 4.1 -1.9 -0.6 28.6 97.6 63.3 -14.3 -26.0 6.2 -1.1 -1.4 29.0 96.3 74.3 -21.2 -39.6 3.2 -0.6 0.4 28.0 93.9 73.0 -13.6 -28.0 4.2 -1.2 0.0 28.0 90.8 80.2 1.0 -14.2 4.2 -2.2 1.6 29.3 84.5 86.8 9,105 5.1 20.1 5.0 -1.6 1.7 30.2 80.0 86.2 8,950 15.8 43.4 3.7 -2.1 1.7 31.6 75.8 88.0 9,043 17.9 28.7 2.0 -2.7 2.1 32.6 71.4 88.2 8,901 4.7 4.4 ... ... . . . 34.1 69.6 92.1 8,485 1.3 -3.4 ... ... .. . 34.0 ... 93.4 8,433 29.6 ... 14.0 ... 585.1 1.2 24.2 9.2 2.9 23.2 25.8 17.2 ... 606.7 -0.7 24.0 8.0 2.7 62.4 41.3 -25.3 49.2 416.8 -3.0 70.1 7.0 3.2 11.9 12.6 -56.7 33.0 547.3 -1.2 53.9 6.3 2.7 15.6 14.7 10.2 18.8 507.4 -1.2 49.0 5.4 1.8 13.0 17.9 -1.4 12.1 404.4 -3.8 49.0 5.0 2.0 4.7 13.8 7.4 8.1 452.9 -1.8 42.4 ... ... 8.8 12.0 -36.6 ... 620.3 ... 50.6 ... ... 11.2 12.2 -8.4 30.0 513.9 ... 50.3 ... ... 5.2 13.5 -16.0 26.9 478.5 ... 49.5 ... ... 15.6 14.7 10.2 18.8 420.9 ... 49.7 ... ... 16.8 15.6 12.7 18.1 414.2 ... 49.3 ... ... 16.4 16.9 13.2 16.6 386.1 ... 50.9 ... ... 14.1 17.8 11.2 14.7 435.3 ... 52.6 ... ... 13.0 17.9 -1.4 12.1 379.2 ... 50.4 ... ... 8.4 17.3 -8.9 12.8 446.9 -1.4 49.5 ... ... 5.3 16.0 -11.2 11.8 526.4 -0.6 47.4 ... ... 9.8 14.2 -1.3 10.8 448.9 0.1 44.8 ... ... 4.7 13.8 7.4 8.1 383.6 -5.1 43.1 ... ... 5.6 12.1 15.4 8.2 396.3 1.1 40.8 ... ... 6.6 10.0 18.4 8.0 470.1 -1.7 ... ... ... 6.0 9.0 15.2 8.3 536.9 -4.5 ... ... ... 7.8 9.7 2.7 4.9 14.5 3.1 11.6 12.8 6.8 7.6 6.9 8.0 4.9 4.7 7.8 0.1 6.3 8.6 1.0 5.2 7.4 5.6 7.8 14.7 6.2 4.7 -13.1 -6.2 -15.4 -39.0 -33.0 -1.3 -11.4 -36.4 -16.5 11.2 -5.3 58.0 5.5 0.8 4.6 0.7 -23.2 -18.2 2.2 3.9 -1.9 -1.0 -31.8 -40.7 20.7 6.4 4.9 1.6 6.5 12.9 16.7 1.9 6.0 5.6 5.2 26.5 25.9 3.8 6.1 3.4 4.4 9.0 6.3 7.7 1.0 4.1 4.2 4.6 1.9 8.0 11.5 8.1 3.7 4.7 12.8 -12.5 -0.2 1.7 4.0 4.1 4.4 -1.2 -8.3 11.9 9.1 4.1 1.5 2.9 4.9 9.8 -1.8 6.6 7.3 5.5 15.3 8.4 -0.6 4.1 5.1 2.3 0.3 -12.4 18.4 3.8 6.5 5.1 5.2 32.1 9.2 1.6 ... 4.0 1.0 11.7 10.8 21.3 1.0 6.2 5.3 4.7 25.8 28.2 5.8 6.1 6.4 1.6 12.1 49.7 17.4 8.1 4.6 5.0 5.4 32.3 56.4 8.8 ... 4.0 2.2 6.1 43.6 22.0 -2.8 4.4 6.9 5.2 18.4 50.8 9.3 8.1 4.2 2.7 4.7 54.2 13.2 1.7 5.0 6.5 4.9 8.0 37.2 11.1 ... 3.8 5.6 11.0 -4.3 1.9 5.4 4.0 2.8 4.4 -2.6 -3.6 12.8 8.1 1.7 7.0 14.0 -40.4 -3.9 -0.4 3.0 1.0 3.9 -12.9 -29.9 12.6 ... 2.7 5.6 6.6 -32.9 -8.9 -3.1 5.6 1.9 4.1 -4.5 -25.7 14.5 8.1 3.9 4.9 9.0 -20.0 -4.6 3.9 3.9 3.2 4.3 -6.6 -20.8 12.6 ... 4.2 4.0 16.9 1.1 4.6 3.8 4.2 5.4 4.7 2.6 2.8 10.4 9.1 3.8 4.5 17.9 15.8 8.9 2.4 2.4 5.9 4.3 4.4 19.8 10.3 ... 3.5 3.9 6.3 12.6 5.5 4.9 2.1 5.3 4.3 0.7 9.4 7.7 ... 3.8 4.4 10.7 -4.3 1.6 2.1 2.5 5.8 4.5 0.2 -2.2 7.0 ... 3.9 4.8 9.6 -9.2 0.0 0.8 2.4 6.2 5.1 0.7 -5.7 6.1 ... 1997 1998 1999 2000 2001 2002 00Q1 00Q2 00Q3 00Q4 01Q1 01Q2 01Q3 01Q4 02Q1 02Q2 02Q3 02Q4 03Q1 03Q2 03Q3
2,890 10,224
8,405 10,256
9,778 11,226
9,717 10,303 10,176
Note: All growth rates are on a year-on-year basis. . . . = not available. 1 End of period. 2 Central government debt refers only to governments and state enterprises outstanding external debt. 3 Trade weighted using wholesale price index for trading partners and consumer price index for the home country. Sources: Data on output and prices, M2, real bank credit to private sector, nonperforming loan ratios of the banking system, national government fiscal balance, central government debt, government expenditure on education and health, merchandise exports and imports, current account balance, net foreign direct and portfolio investment, gross international reserves, and total external debt are from national sources. Data on interbank lending rate, average stock price index, and average exchange rate are from Bloomberg LP. Real effective exchange rates are based on REMU staff calculations.
Republic of Korea
Real Sector
Figure 1: GDP Growth Rates (%)
20 10 0 -10 -20 -30 98Q1 99Q1 00Q1 01Q1 02Q1 03Q1
q-o-q annualized, seasonally adjusted y-o-y
Exports helped to pull the economy out of recession. Growth slowed sharply to just 2.6% in the first three quarters from 6.2% a year earlier. Indeed, the Korean economy technically was in recession in the first half, when GDP contracted on a quarter-on-quarter basis in both the first and second quarters as a slump in private consumption spending and investment more than offset rising exports. Year-on-year GDP growth improved in the third quarter to 2.3%, lifted by further gains in exports (Figure 1). But the weak first-half performance prompted downgrades in full-year predictions. The Korea Development Institute revised down its full-year growth forecast to 2.6% from 3.1% (Table 1). That compares with 6.3% growth in 2002.

1997 1998 1999 2000 2001 2002 2003 2004
Official 1 ADB IMF3 World Bank4 Consensus Economics 5

1 2 3
5.0
-6.7
10.9
9.3
3.1
6.3
2.6 3.1 2.5 3.0 2.7
4.8 5.0 4.7 5.1 5.2
Korea Development Institute, October 2003. ADB, Asian Development Outlook 2003 Update, October 2003. IMF, World Economic Outlook, October 2003. 4 World Bank, East Asia Update Regional Overview, October 2003. 5 Consensus Economics Inc., Asia Pacific Consensus Forecasts, November 2003.

40 20 0 -20 -40 -60 98Q1 99Q1 00Q1 01Q1 02Q1 03Q1
Private Consumption Public Consumption Gross Domestic Investment
Deteriorating household credit portfolios hurt spending. After a surge that buoyed the economy in 2002, private consumption was nearly flat in the first quarter of 2003, then contracted about 2% in the next two quarters as a result of the high number of household debt defaults. Domestic investment started the year with a strong 6.7% expansion in the first quarter, mainly due to higher construction activity. However, as investment in machinery and equipment fell, overall investment growth slowed to 1.9% in the second quarter and investment contracted 4.9% in the third quarter (Figure 2). By contrast, government consumption spending accelerated in the first three quarters, reflecting counter-cyclical fiscal measures adopted to spur growth.
REPUBLIC OF KOREA

30 20 10 0 -10 -20 98Q1 99Q1 00Q1 01Q1 02Q1 03Q1
The manufacturing sector performed poorly. Softening domestic demand, and the fact that exports could not fully cover the slack, led to a buildup in inventories in the first half. This, and labor strikes in some industries, dragged down manufacturing growth to 2.2% and 2.4% in the second and third quarters, respectively, from 5.2% in the first quarter. Other major sectors performed poorly as well. Agricultural output, hit by bad weather and a typhoon, declined in the second and third quarters. The services sector reflected the downturn in domestic demand with modest rates of growth. But a booming real estate market kept construction strong, expanding about 8% in each of the three quarters (Figure 3).

The Government acted to spur growth with higher spending. The weak economic performance prompted the Government to adopt an expansionary fiscal policy, running a budget deficit equivalent to 4.4% of GDP in the second quarter compared with a budget surplus of 7% in the first quarter. Through August, Korea posted a fiscal surplus of W1.5 trillion, down sharply from W23.3 trillion a year earlier. Expenditure exceeded year-earlier figures by W29.4 trillion. Two supplemental budgets were enacted. W4.5 trillion was appropriated
24 18 12 6 0 98Q1 99Q1 00Q1 01Q1 02Q1 03Q1
Three-Month Certificate of Deposit Rate, End of Period Growth in Real Bank Credit to Private Sector, End of Period (y-o-y) Inflation Rate (y-o-y)
for public spending in July, while some taxes were cut to spur consumption and support SMEs. A second supplemental budget of W3 trillion was adopted later to repair damage caused by the most powerful typhoon ever to hit Korea. The fiscal surplus for 2003 is thus expected to fall to 0.7% of GDP from 3.8% in 2002.
Inflation remains in check and the Bank of Korea cut rates. Inflation fell from 4.1% in the first quarter to 3.2% in the third, contained by soft domestic demand and lower food and oil prices (Figure 4). The latest data show inflation of 3.4% in November. Core inflation remains within the Bank of Koreas 2003 target of 2.5%-3.5%. The moderate inflationary pressures allowed the central bank to reduce its policy rate 25 bps in May and again in July, providing additional economic stimulus. The cuts brought the policy rate down to 3.75%. Short-term
55
REPUBLIC OF KOREA
market rates followed the downward trend. Monetary and credit aggregates also supported economic growth. Money supply gained pace early in 2003 and grew 4.9% in August. Credit growth remained at double-digit rates in the first half, although growth rates trended down as banks curtailed lending. Household borrowing slowed as the Government took steps to rein in credit. Real consumer credit growth fell from 31% in the third quarter of 2002 to 7% in the second quarter of 2003.
Balance of Payments
60 40 20 0 -20 -40 98Q1 99Q1 00Q1 01Q1 02Q1 03Q1
Exports Imports Source: ARIC Indicators.
Exports recovered after a brief SARS-induced slowdown. Korea has recorded double-digit export growth for most of 2003, although exports slowed briefly in the second quarter as SARS took a heavy toll on shipments to the PRC, now Koreas top export destination (Figure 5). As the impact of SARS dissipated, exports recovered. In November, they shot up 23%. Electronic products such as semiconductors, wireless communications equipment, and computers drove the growth. Imports slackened because of weak demand for capital goods and lower volumes of oil purchases. The trade surplus for the first 11 months rose $3.7 billion from a year ago to $13.5 billion. Despite a drop in tourism receipts and higher interest payments on external debt, the current account surplus improved to $5 billion for the first nine months, up $850 million. The capital account strengthens as portfolio inflows rise. The surplus in the capital and financial accounts nearly tripled to $8 billion the first nine months. A net inflow of foreign portfolio investment occured as foreign investors switched from being net sellers to net buyers. By contrast, direct investment abroad by Koreans continued to outpace foreign direct investment into Korea during the period because of excess capacity from the slump in domestic demand and the increase in labor unrest. Strong external borrowing contributed to the capital account surplus. External debt totaled $144 billion at

98Q2 98Q4 99Q2 99Q4 00Q2 00Q4 01Q2 01Q4 02Q2 02Q4 03Q2 03Q4
1
midyear, up $13 billion from end-2002. The ratio of external debt to

0 40 80 120 160
GDP rose to 28.5% from 27.4% at end-2002. Short-term debt totaled $57.1 billion, up $7.3 billion. The favorable balance of payments position lifted international reserves to $150.3 billion by November (Figure 6).
As of November Source: ARIC Indicators.

1
56
REPUBLIC OF KOREA
Figure 7: Exchange Rate Index, Weekly Average (last week of Jun 1997=100, $/Won)
A strong external payments position bolsters the won. An accounting fraud at SK Global and mounting consumer credit card delinquencies caused the won to weaken early in the year, pushing it to an eight-month low in March. However, the strong balance of payments position helped the currency recover (Figure 7). Large-scale net purchases of Korean equities by foreign investors after May also lifted the won. The Government signaled its desire to maintain the wons competitiveness by issuing foreign exchange stabilization bonds after raising their limit, and by building international reserves. Still, the wons real effective exchange rate, on average, appreciated about 2.9% in the first three quarters.

Retail credit expansion results in higher NPL ratios. Moves by banks to gain market share in 2002 led to inadequate credit risk analysis and brought on a large number of defaults, particularly for advances extended through credit cards. Loan defaults by SK Global aggravated the NPL situation. Consequently, the NPL ratio of commercial banks rose from 1.9% at end-2002 to 2.3% in June. Loans to SK Global, consumer credit problems, and valuation losses on securities of Hynix and Hyundai Engineering & Construction forced higher provisioning for bad debts. Steps have been taken to address consumer credit problems. New legislation in early 2003 directed credit card companies to slow down lending, insist on credit checks and reduce cash loans. This led to lower credit card usage in the second quarter. In addition, the Government arranged a W10 trillion financial package to help distressed credit card companies. This included W4.6 trillion from major shareholders. The economic downturn, however, forced the Government to backtrack and soften credit card restrictions. Moreover, the Korea Asset Management Corporation planned to bail out one million card defaulters by writing off up to 70% of their total debt. This could stimulate credit and spur consumption, but the Government obviously needs to continue to guard against irresponsible borrowing and lending.
57
REPUBLIC OF KOREA
More corporate reforms are in the pipeline. The problems at SK Global cast doubt on the extent of the restructuring of Koreas chaebols. The Government has promised continued and deeper reforms. The Korea Fair Trade Commission is considering a three-year reform plan for chaebols, focusing on ownership issues and stronger corporate governance. A bill to introduce class action suits to protect minority shareholders is being considered. Another reform bill proposes more frequent disclosure of consolidated financial statements by large companies, more independent audits, mandatory rotation of outside auditors, and the establishment of firewalls between audit and nonaudit services of outside auditors. To improve bankruptcy procedures, a draft bankruptcy bill that consolidates three separate laws on corporate failure, composition, and liquidation has been prepared.

Growth is expected to accelerate to 5.2% in 2004. The strong export growth is expected to partly overcome weaknesses in consumption and investment, allowing the economy to grow about 2.7% in 2003, according to the Consensus Economics survey. The survey shows that growth is expected to increase to 5.2% in 2004, supported by the Governments countercyclical measures and the likely recovery of the global economy. Much will depend on resolution of consumer debt and corporate sector problems, and on reducing political uncertainty that could put the economic recovery and the reform agenda at risk. A slow workout of the household debt issue would damp consumption spending, while continued corporate problems could hurt long-term growth. The property boom should be guided to a soft landing. The real estate boom has moderated and the Government needs to engineer a soft landing for the sector. It should ensure the asset price bubble does not burst, causing financial problems for companies heavily exposed to property. A hard landing would aggravate the countrys bad debt issue, for both households and firms. Corporate reforms require a renewed push. There has been considerable improvement in corporate performance, but many weak companies remain. Accounting irregularities at SK Global
58
REPUBLIC OF KOREA
showed that the restructuring of Koreas chaebols is far from complete, particularly in terms of corporate governance. Areas for reform include strengthening of shareholder rights, clearer responsibilities for external directors, improvements in disclosure procedures, and an upgrading of accounting/auditing standards to meet international best practices. There is also room for more improvement in the framework for corporate restructuring. Market-driven corporate restructuring, through the strengthening of court-supervised insolvency procedures, should be pursued. The ability of dissenting creditors to block agreements on restructuring plans until their demands are met remains an impediment. A better balance between the rights of debtors and creditors needs to be reached. Current efforts to consolidate and strengthen bankruptcy laws is a positive step toward addressing this issue.
59
Republic of Korea: Selected ARIC Indicators

1996 Output and Prices GDP Growth (%) Private Consumption Expenditure Growth (%) Public Consumption Expenditure Growth (%) Gross Domestic Investment Growth (%) Gross Fixed Investment Growth (%) Agricultural Sector Growth (%) Manufacturing Sector Growth (%) Construction Sector Growth (%) Services Sector Growth (%) Exports of Goods and Services Growth (%) Imports of Goods and Services Growth (%) Inflation Rate (%) Unemployment Rate (%) Monetary and Fiscal Accounts Growth of Broad Money, M2 (%)1 Three-Month Certificate of Deposit Rate (%)1 Growth in Real Bank Credit to Private Sector (%) 1 NPL Ratio of the Financial System1 NPL Ratio of the Commercial Banking System1 Average Stock Price Index Central Government Fiscal Balance as % of GDP Central Government Debt as % of GDP1 Government Expenditure on Education (% of Total) Government Expenditure on Health (% of Total) External Account, Debt, and Exchange Rates Growth of Merchandise Exports ($ fob, %) Growth of Merchandise Imports ($ cif, %) Current Account Balance as % of GDP Net Foreign Direct Investment ($ Billion) Net Portfolio Investment ($ Billion) Gross International Reserves ($ Billion)1 Total External Debt as % of GDP1 3.7 11.3 -4.4 -2.3 15.2 33.2 ... 5.0 -3.8 -1.7 -1.6 14.3 20.4 33.2 312.1 39.9 100.3 948 -2.8 -35.5 12.6 0.7 -1.9 52.0 46.4 59.1 20.6 83.1 1,396 8.6 28.4 6.0 5.1 8.7 74.1 33.7 53.0 28.6 90.8 1,188 19.9 34.0 2.7 4.3 12.0 96.2 28.6 49.9 36.4 94.1 1,131 -12.7 -12.1 1.9 1.1 6.6 102.8 27.8 39.9 34.5 91.5 1,289 8.0 7.8 1.3 -0.7 0.2 121.4 27.4 41.0 38.0 98.0 1,249 29.8 51.9 1.5 0.4 7.1 83.6 33.4 53.2 31.4 93.7 1,127 21.5 38.4 2.6 1.9 1.9 90.2 31.8 53.8 34.6 94.2 1,116 26.5 35.8 3.6 -0.1 2.1 92.5 30.3 54.2 36.2 94.9 1,115 6.1 16.2 2.9 2.0 1.0 96.2 28.6 49.9 36.4 93.5 1,167 2.2 -1.8 2.6 0.5 0.8 94.4 27.5 48.9 36.9 90.4 1,271 -11.6 -13.4 3.6 0.3 2.7 94.3 27.3 46.7 36.2 90.6 1,305 -19.8 -15.5 1.2 0.6 -0.6 100.1 27.7 44.6 37.0 91.3 1,291 -19.6 -17.1 0.5 -0.2 3.6 102.8 27.8 39.9 34.5 93.8 1,289 -11.1 -11.4 1.5 0.0 -1.5 106.1 27.4 38.6 34.6 95.4 1,317 4.9 7.8 1.4 -0.5 -3.8 112.4 28.1 42.2 38.1 97.0 1,266 15.9 13.8 0.8 -0.2 1.0 116.7 28.1 45.0 40.7 99.7 1,196 24.6 23.1 1.5 0.1 4.5 121.4 27.4 41.0 38.0 99.7 1,219 20.8 30.9 -1.4 -0.5 -1.1 123.8 27.7 45.0 40.6 99.9 1,201 14.5 12.1 2.0 -0.2 3.8 131.7 28.5 43.4 39.6 99.2 1,208 16.3 10.4 ... -0.5 7.7 141.5 ... ... ... 101.5 1,174 15.8 13.3 14.4 ... ... 90.5 0.3 ... 19.7 0.9 14.1 25.0 14.4 ... ... 67.9 -1.5 11.1 19.9 1.0 27.0 7.7 4.3 ... ... 46.8 -4.2 16.1 18.4 1.1 27.4 7.4 18.9 11.3 8.3 96.1 -2.7 18.6 17.5 1.0 25.4 6.9 15.4 8.1 6.6 92.3 1.3 19.3 17.1 ... 13.2 4.9 10.3 5.0 2.9 71.2 1.3 20.8 ... ... 6.4 4.9 16.3 3.5 1.9 95.1 3.8 21.2 ... ... 26.0 7.0 14.6 10.8 8.0 114.3 9.3 18.7 ... ... 37.7 7.1 17.7 10.7 8.7 96.9 3.4 18.9 ... ... 28.3 7.1 16.0 9.7 7.9 89.8 2.2 19.1 ... ... 25.4 6.9 15.4 8.1 6.6 67.2 -8.4 19.3 ... ... 17.9 5.7 10.7 7.2 5.4 72.0 9.5 19.4 ... ... 14.5 5.6 9.5 6.4 4.1 71.9 0.6 19.8 ... ... 16.5 4.4 11.9 6.0 3.8 66.9 -1.9 20.2 ... ... 13.2 4.9 10.3 5.0 2.9 74.3 -2.1 20.8 ... ... 17.5 4.8 15.6 4.6 2.5 99.1 5.9 21.3 ... ... 13.5 4.9 15.5 3.8 1.9 105.6 5.3 21.1 ... ... 9.5 4.9 12.9 3.9 1.9 90.9 8.2 21.1 ... ... 6.4 4.9 16.3 3.5 1.9 85.3 -3.3 21.2 ... ... 3.8 4.7 13.1 ... 2.2 75.1 7.0 21.0 ... ... 4.2 4.3 12.9 ... 2.3 79.0 -4.4 21.4 ... ... ... 3.9 ... ... ... 93.2 ... ... ... ... 6.8 7.1 8.2 8.7 7.3 3.3 6.8 6.9 7.8 11.2 14.2 4.9 2.0 5.0 3.5 1.5 -7.5 -2.2 4.6 6.6 1.4 5.4 21.4 3.2 4.4 2.6 -6.7 -11.7 -0.4 -38.4 -21.2 -6.6 -7.4 -8.6 -7.2 14.1 -22.1 7.5 6.8 10.9 11.0 1.3 29.5 3.7 5.4 21.0 -9.1 11.9 15.8 28.8 0.8 6.3 9.3 7.9 0.1 11.2 11.4 2.0 15.9 -3.1 9.5 20.5 20.0 2.3 4.1 3.1 4.7 1.3 -2.4 -1.8 1.9 2.1 5.6 3.9 0.7 -3.0 4.3 3.7 6.3 6.8 2.9 4.3 4.8 -4.1 6.3 3.2 8.8 14.9 16.4 2.8 3.0 13.1 11.9 0.5 31.1 22.8 4.8 22.9 -7.0 12.4 26.9 31.6 1.5 5.1 10.2 9.7 0.2 11.4 13.2 1.6 17.1 -3.7 10.7 20.2 20.5 1.4 3.8 10.0 6.6 -0.7 14.6 10.9 0.1 18.5 -1.7 9.3 21.9 22.4 3.2 3.6 5.0 3.9 0.5 -2.0 2.0 2.6 6.9 -1.1 6.1 14.3 8.0 2.9 3.7 3.8 1.9 0.6 -8.3 -4.9 2.5 4.6 1.9 3.6 9.0 0.3 4.2 4.9 3.0 4.4 1.0 -6.9 -5.2 5.7 2.5 1.4 3.9 0.6 -7.5 5.3 3.6 2.1 5.3 1.9 -1.1 -2.5 0.2 -0.8 7.7 4.0 -4.4 -5.8 4.3 3.3 3.5 7.2 1.5 4.3 4.9 0.9 2.4 9.7 4.2 -1.9 0.9 3.4 3.3 6.2 8.9 5.3 9.8 6.6 0.7 4.2 8.6 8.1 2.4 6.5 2.5 3.7 6.6 7.9 4.4 9.5 5.4 -3.7 6.6 3.1 9.2 12.8 18.8 2.7 3.0 5.8 6.2 1.5 -2.1 0.5 -2.2 5.5 -3.8 9.5 20.3 20.5 2.5 2.8 6.8 4.3 1.0 2.4 6.8 -6.3 8.8 6.3 8.6 24.2 20.0 3.3 2.9 3.7 0.7 4.0 6.7 4.8 4.8 5.2 8.7 2.0 17.2 17.9 4.1 3.6 1.9 -2.2 3.6 1.9 3.5 -1.4 2.2 8.0 0.7 10.2 7.5 3.3 3.3 2.3 -1.9 2.4 -4.9 2.3 -5.6 2.4 8.3 1.8 15.2 9.1 3.2 3.3 1997 1998 1999 2000 2001 2002 00Q1 00Q2 00Q3 00Q4 01Q1 01Q2 01Q3 01Q4 02Q1 02Q2 02Q3 02Q4 03Q1 03Q2 03Q3
Short-Term Debt as % of Gross International Reserves1 281.1 Short-Term Debt as % of Total Debt1 Real Effective Exchange Rate (1995=100)2 Average Exchange Rate (Local Currency to $) 57.1 104.5 801
Note: All growth rates are on a year-on-year basis. . . . = not available. 1 End of period. 2 Trade weighted using wholesale price index for trading partners and consumer price index for the home country. Sources: Data on output and prices, M2, nonperforming loan ratios of the financial and commercial banking system, central government fiscal balance, central government debt, government expenditure on education and health, merchandise exports and imports, current account balance, net foreign direct and portfolio investments, gross international reserves, and total and short-term external debts are from national sources. Data on real bank credit to private sector are from the International Monetary Fund, International Financial Statistics. Data on three-month certificate of deposit rate, average stock price index, and average exchange rate are from Bloomberg LP. Real effective exchange rates are based on REMU staff calculations.
Lao People's Democratic Republic

GDP grew 5.5-6% in the fiscal year to September 2003. The economy grew an estimated 5.5-6% in the fiscal year ended September 2003, below the Governments target of 6-7% (Table 1). Growth came from industrial and agricultural production, but tourism was depressed by the impact of SARS in the first half. On the demand side, growth was constrained by weakness in private investment, partly as a result of more cautious bank lending policies and also a reduced inflow of foreign direct investment.

1997 1998 1999 2000 2001 2002 2003 2004
Official ADB 2 IMF3 WB 4

1 2 3
6.9
4.0
7.3
5.8
5.8
5.9
5.5 6.0 5.5
6.0 7.0 5.9
National Statistical Centre. ADB, Asian Development Outlook 2003 Update, October 2003. IMF, World Economic Outlook, September 2003. 4 World Bank, East Asia Update Regional Overview, October 2003.
Revenue and spending fell below initial targets. The budget deficit is estimated to have widened in fiscal 2002/03 from the previous fiscal years 5% of GDP. Both revenue and spending fell below initial targets. Revenue collections were affected by stricter enforcement of a log export ban that reduced timber royalties and a drop in the turnover tax on domestic products. On the expenditure
Figure 1: Real Bank Credit Growth and Inflation Rate (%)
160 120 80 40 0 -40 98Q1 99Q1 00Q1 01Q1 02Q1 03Q1
Growth in Real Bank Credit to Private Sector, End of Period (y-o-y) Inflation Rate (y-o-y)
side, stricter controls prevented a repeat of the 2002 sharp rise in spending on un-budgeted projects. Inflation rose to 18% in the second quarter, then started to slow. Inflation accelerated to nearly 18% in the second quarter from 16% in the first. Prices were pressured upward by a weakening of the kip against the baht in 2002 and increases in prices for food, water, electricity, and petroleum (Figure 1). Inflation slowed to 15% in August because of the steadier exchange rate and government measures to restrain excessive credit growth. The Government expects further moderation in inflation. Broad money (M2) still grew about 25% during the first half from a year earlier, though this was down from about 30% growth in 2002.

200 150 100 50 0 -50 98Q1 99Q1 00Q1 01Q1 02Q1 03Q1
Exports Imports
Exports rose in the first half; imports also increased. Merchandise exports rose about 23% in the first half, with rises in lumber, garments, and electricity from the countrys hydropower plants. Imports increased about 16%. Both exports and imports had declined in 2002 (Figure 2). The first-half trade deficit was little changed from the year-earlier level of around $88 million. For 2003, the current account deficit is expected to decline as a percentage of GDP from about 6% in 2002. Foreign exchange reserves totaled $191 million in August, equivalent to about five months of imports (Figure 3). Steps have been taken to restructure state commercial banks. Excessive credit growth, with a high proportion of lending to stateowned enterprises (SOEs), contributed to a high ratio of nonperforming loans at state commercial banks in recent years. The Government is restructuring the banking sector to encourage a more commercially based lending system. International bank advisors were appointed to

1997 1998 1999 2000 2001 2002 20031 0.0 0.3 0.6
assist the development of state banks, including their credit appraisal systems. Two small state banks were merged. Reforms of state enterprises are moving ahead slowly. The Government initiated restructuring of some state-owned water, electricity, and airline companies. However, progress has been slow and the restructuring proposals so far focus on seeking additional financial support, which will be met through the sale of non-core assets and with capital injections from new partners. The economy is expected to grow about 6% in 2004. GDP growth in 2004 is projected at about 6%. Growth is expected to be helped by increased private investment, a modest recovery in tourism, and higher exports of garments and agricultural products. Planned road, bridge, and power generation projects will stimulate growth in construction. However, structural weakness will continue to restrict the performance of financial services. Inflation remains an issue and rising world commodity prices could push inflation higher. Deepening reforms would help to ensure economic stability. Several steps toward reform have been taken in several key areas, but more needs to be done to ensure macroeconomic stability. Revenue collection must be improved and expenditure control tightened if the budget deficit is to be controlled. This requires stronger fiscal management. There are concerns that recently introduced tax incentives to promote private investment risk further eroding revenues, at
0.9
1.2
1.5

As of August Source: Joint BIS-IMF-WB-OECD statistics on external debt.
1
62
least in the short-term. The regulatory and supervisory capacity of the Bank of Lao PDR needs to be strengthened and the restructuring of the banking system pushed forward. And the pace of reform in stateowned enterprises should be accelerated. Necessary reforms here include imposition of stricter budget constraints, greater use of marketdriven pricing of goods, and strengthening of management through private sector partnerships and a trend toward privatization.
63
Lao PDR: Selected ARIC Indicators

1996 Output and Prices Real GDP Growth (%) Agricultural Sector Growth (%) Services Sector Growth (%) Industry Sector Growth (%) Inflation Rate (%) Unemployment Rate (%) Monetary and Fiscal Accounts Growth of Broad Money, M2 (%)1 Growth in Real Bank Credit to Private Sector( %) Government Expenditure on Education (% of Total) Government Expenditure on Health (% of Total) Fiscal Balance as % of GDP2 External Account, Debt, and Exchange Rate Gross International Reserves less Gold ($ Billion)1 Total External Debt as % of GDP 0.2 45.4 0.1 43.1 9.1 1.1 -16.2 11.2 2.4 91.5 973 0.1 47.2 12.2 1.3 -10.1 2.9 -21.7 57.8 1,877 0.1 57.1 7.9 0.7 -8.9 -15.9 -5.1 65.7 5,042 0.1 61.0 5.2 0.7 -8.4 6.3 2.0 70.5 7,563 0.1 56.5 4.7 0.5 -7.0 0.3 -1.4 67.1 7,620 0.2 ... 7.8 1.2 -5.6 -10.1 -18.3 65.6 7,602 0.1 ... ... ... ... 42.9 -28.9 70.7 7,539 0.1 ... ... ... ... 4.0 -23.4 72.4 7,582 0.1 ... ... ... ... 8.7 27.1 71.1 7,576 0.1 ... ... ... ... -12.5 4.8 67.9 7,567 0.1 ... ... ... ... -4.7 72.4 67.8 7,592 0.1 ... ... ... ... -19.8 -0.9 69.2 7,600 0.1 ... ... ... ... -3.2 -38.0 66.3 7,678 0.1 ... ... ... ... 7.8 5.0 65.2 7,617 0.1 ... ... ... ... -12.2 -7.9 66.4 7,611 0.2 ... ... ... ... -0.1 -10.0 66.4 7,599 0.2 ... ... ... ... -4.8 -13.1 65.7 7,599 0.2 ... ... ... ... 0.3 -36.5 64.2 7,600 0.2 ... ... ... ... 24.2 -1.3 65.1 7,574 0.2 ... ... ... ... 21.8 38.9 67.9 7,563 ... ... ... ... ... ... ... ... 7,562 26.7 11.4 ... ... -8.9 65.8 25.5 ... ... -8.8 113.3 -23.0 9.3 5.9 -12.9 78.4 -16.5 5.4 3.0 -9.0 46.0 33.4 4.8 4.8 -6.0 13.7 17.2 8.1 2.2 -7.6 37.6 -14.8 ... ... -4.8 58.3 -11.7 ... ... ... 7.9 -28.8 ... ... ... 49.7 14.8 ... ... ... 46.0 33.4 ... ... ... 31.0 26.9 ... ... ... 17.8 30.0 ... ... ... 23.0 35.6 ... ... ... 13.7 17.2 ... ... ... 34.0 14.2 ... ... ... 30.0 -4.8 ... ... ... 28.8 -10.6 ... ... ... 37.6 -14.8 ... ... ... 24.2 -10.8 ... ... ... 26.7 -4.9 ... ... ... ... ... ... ... ... 6.9 ... ... ... 13.0 3.1 6.9 ... ... ... 27.5 3.9 4.0 3.1 5.5 9.2 91.0 5.6 7.3 8.2 6.7 8.0 128.4 6.8 5.8 4.9 4.9 8.5 24.9 7.3 5.8 3.8 5.7 10.1 7.8 ... 5.9 4.0 5.7 10.3 10.6 ... ... ... ... ... 61.4 ... ... ... ... ... 30.9 ... ... ... ... ... 10.6 ... ... ... ... ... 11.7 ... ... ... ... ... 9.2 ... ... ... ... ... 7.5 ... ... ... ... ... 7.1 ... ... ... ... ... 7.6 ... ... ... ... ... 7.2 ... ... ... ... ... 7.7 ... ... ... ... ... 12.8 ... ... ... ... ... 14.5 ... ... ... ... ... 16.3 ... ... ... ... ... 17.6 ... ... ... ... ... ... ... 1997 1998 1999 2000 2001 2002 00Q1 00Q2 00Q3 00Q4 01Q1 01Q2 01Q3 01Q4 02Q1 02Q2 02Q3 02Q4 03Q1 03Q2 03Q3
Short-term Debt as % of Gross International Reserves1 17.6 Short-term Debt as % Total Debt Current Account Balance as % of GDP Growth Rate of Merchandise Exports ($ fob, %)3 Growth Rate of Merchandise Imports ($ cif, %)3 Real Effective Exchange Rate (1995=100)4 Average Nominal Exchange Rate (Kip per $) 3.5 -16.5 3.8 17.1 95.5 920
Note: Real effective exchange rates are based on REMU staff calculations. 1 End of period. 2 Fiscal year ending September. 3 Basic data are dollar values which are directly obtained from the IFS CD-ROM. 4 Trade weighted using WPI for trading partners and CPI for the home country. Sources: Data on fiscal balance and current account balance are from Asian Development Outlook 2002, 2003, 2003 Update; output is from National Statistical Centre; M2, inflation rate, real bank credit to the private sector, merchandise exports and imports, and gross international reserves are from IMF, International Financial Statistics, CD-ROM; unemployment is from ADB Country Economic Review 2001; central government expenditure on health and education are from ADB Key Indicators 2003; nominal exchange rates are from Bloomberg; total and short-term external debt are from Joint IMF-WB-OECD-BIS Statistics on External Debt.
Malaysia
Real Sector
Economic recovery is gaining momentum. Malaysias economy grew 4.7% in the first three quarters of 2003, well above the year-earlier pace of 3.7%. GDP rose 5.1% in the third quarter, indicating that the economy gained momentum. The official forecast for full-year growth is 4.5%, up from 2002s actual growth of 4.1% (Table 1).

1997 1998 1999 2000 2001 2002 2003 2004
Official ADB 2 IMF3
7.3
5
-7.4
6.1
8.5
0.3
4.1
4.5 4.1 4.2 4.6 4.6
4.9 5.3 5.4 5.4
World Bank4 Consensus Economics

1 2 3
Ministry of Finance, September 2002. ADB, Asian Development Outlook 2003 Update, October 2003. IMF, World Economic Outlook, October 2003. 4 World Bank, East Asia Update Regional Overview, October 2003. 5 Consensus Economics Inc., Asia Pacific Consensus Forecasts, November 2003.

60 40 20 0 -20 -40 -60 98Q1 99Q1 00Q1 01Q1 02Q1 03Q1
Private consumption spending is sustained. The unfavorable global economic climate in the first half slowed Malaysias export growth. Shipments of electronic goods fell 5.9% in the 10 months to October. However, soft external demand was offset by solid domestic demand, stimulated by robust growth in public sector spending in the first half. The public sector has made a substantial contribution to GDP growth in recent years, with much of the spending allocated to development programs. Fiscal stimulus in 2002 helped sustain private consumption expenditure into 2003 (Figure 1). But private investment continued to falter, leaving total gross fixed capital formation growth at just 2.4% for the first three quarters. This was a slight improvement over 2002, when total gross fixed capital formation was virtually flat. In 2001, it contracted 2.8%. Manufacturing and agriculture turned in solid performances. Manufacturing expanded about 6% in the first half, accelerating to a robust 8.5% in the third quarter, despite the weakness in electronics. The industrial production index for October showed strong 14.6%

40 20 0 -20 -40 98Q1 99Q1 00Q1 01Q1 02Q1 03Q1
expansion in manufacturing for that month from a year earlier. Agriculture had a particularly strong second quarter, recording 10.4% growth, followed by 6.3% in the third quarter. But services and construction were in sharp contrast. Services, hurt by a SARS-affected contraction in the hotel and restaurant industry during the first half, grew 3.9% over the first three quarters. Construction recorded just 1.7% growth (Figure 2).

The budget deficit is expected to be 5.4% of GDP. Fiscal policy is the main countercyclical tool under the present exchangerate system. The Government introduced a $1.9 billion economic stimulus package in late May, equivalent to 2% of GDP. Measures were aimed at helping SARS-affected industries, and included tax exemptions
12 8 4 0 -4 98Q1 99Q1 00Q1 01Q1 02Q1 03Q1
Three-Month Interbank Lending Rate, End of Period Growth in Real Bank Credit to Private Sector, End of Period (y-o-y) Inflation Rate (y-o-y)
and extra government spending. This is expected to widen the Government deficit to around 5.4% of GDP from an earlier target for this year of 3.9%. Last year the deficit was 5.6% of GDP. The deficit did not lead to a rise in interest rates because of sluggish private investment and ample liquidity in the banking system. Interest rates were cut to a 10-year low in May. Monetary policy has remained accommodative. Bank Negara Malaysia lowered its three-month intervention rate 50 basis points to 4.5% in May, a 10-year low. The result was a significant rise in broad money growth in June. Outstanding bank credit increased 5.2% in the 12 months to September. Inflation has been fairly stable, even as domestic demand strengthened. CPI-based inflation slowed from 1.7% in January to 1.1% in September (Figure 3). The rise in the producerprice index decelerated to 1.4% in September from 12.9% in January, in response to more moderate increases in prices of raw materials such as crude oil, mineral fuels, and palm oil.
Balance of Payments
The current account surplus rose sharply in the first half. The decline in electronics exportsthe largest export componentwas offset in part in the first half by chemical products and manufactured
66

40 20 0 -20 -40 98Q1 99Q1 00Q1 01Q1 02Q1 03Q1
Exports Imports
metal exports. Total exports grew 5.2% in the first three quarters. Imports declined 2.9%, reflecting soft investment spending (Figure 4). As a result, the trade surplus increased sufficiently to overcome the deficit in the services account, and that produced a substantial rise in the current account surplus in the first half.
The overall BOP position remains healthy. The capital and financial account registered a first-half deficit of RM10.1 billion, widening from a deficit of RM1.8 billion a year earlier. Inflows of FDI decreased, overseas direct investments by Malaysians increased, and other investment outflows also rose. Covering loans, trade credits, and bank deposits, these other investments recorded a net outflow of RM7.6 billion in the first half, double the outflow of a year earlier, partly as a result of higher net loan repayments. Portfolio investments, however, recorded a lower net outflow of RM1.3 billion in the first half compared with a net outflow of RM2.1 billion a year earlier. The overall BOP surplus in the first half was RM9.5 billion, slightly below the RM10.5 billion a year earlier.

98Q1 98Q3 99Q1 99Q3 00Q1 00Q3 01Q1 01Q3 02Q1 02Q3 03Q1 03Q3
International reserves rose to $43.6 billion. Gross international reserves rose to $43.6 billion by October from $34.6 billion at the start of 2003 (Figure 5). This is equivalent to about 6.7 months of imports. Bank Negara Malaysias intervention rate was kept above international interest rates to deter capital outflows and assist in accumulating foreign reserves. Total external debt was equivalent to 51% of GDP at midyear, down slightly from 51.4% at end-2002. Short-term debt as a ratio of gross international reserves rose to 26%, still well below the 79% level at the time of the 1997
10
20
30
40
50
60

financial crisis.
The ringgit has depreciated in nominal and real terms. With the continued weakness of the US dollar, the pegged ringgit depreciated against other major currencies. The ringgit dropped 8.6% against the yen and 9.8% against the euro by mid-November. It has also depreciated against most regional currencies, from 0.6% against the Indonesian rupiah to 7.9% against the Thai baht. The Malaysian currency has edged up against the Philippine peso and Singapore dollar, though. Since appreciating through the first quarter of 2002, the real effective exchange rate has declined nearly 10%.
67

Bank capitalization remains high and the NPL ratio has improved. The risk-weighted capital ratio of Malaysian banks was 13.1% in June, little changed from 13.2% at end-2002, but well above the BISrecommended ratio of 8%. Progress has been largely a consequence of consolidation, with the number of banks reduced from 60 before the 1997 financial crisis to 30. Banking authorities insisted on better capitalized, larger, and more diversified domestic banks. Reforms also were initiated to consolidate the insurance and stock-brokerage industries to create stronger and more diversified firms. The NPL ratio (three-month basis) of commercial banks has continued to improve, falling to 8.3% by October from 9.3% at end-2002. Much of this decline reflected new lending. The NPL ratio of merchant banks remained high at 32% at the start of 2003. Danahartas asset disposal is nearly complete. Danaharta, the national asset management company, has recovery plans and restructuring solutions for all loans in its portfolio. A 58% recovery rate was targeted for the RM52.30 billion of loans it acquired, and it will focus on these until its mandate ends in 2005.

Growth in 2004 is forecast at 5.4%. Malaysias economy will expand around 4.6% this year, according to the Consensus Economics survey. With fiscal policy expected to remain expansionary into 2004 in the run-up to national elections, and the more favorable global economy, growth should rise to 5.4% next year, according to the survey. The transition to a new Prime Minister in late 2003 was announced well in advance and there has been continuity of major economic policies. Fiscal consolidation should be a priority. Additional fiscal stimulus this year moved the Government target for a balanced budget out by one year to 2006. The 2004 budget gap was planned to be limited to 3.3% of GDP, but some economists anticipate election-related spending will stretch this to about 4%. Thus, there
68
will need to be a clear trend in 2005 toward a balanced budget. In the past, deficit spending supported the private sector by improving competitiveness and encouraging diversification. However, continued fiscal slippage may crowd out private investment and make it less likely the Government can act on a request from the business sector to lower the corporate tax rate. A tax rate reduction could stimulate private investment. Private investment needs to be strengthened. Malaysias investment rate, or the ratio of gross domestic investment to GDP, has not returned to its pre-crisis level. Constraints on private investment include a shortage of skilled labor, technological capabilities and, according to a World Bank study, a significant regulatory burden. The Government is aware of these concerns and is trying to transform Malaysia into a knowledge-based economy. In particular, its Multimedia Super Corridor provides infrastructure to support this strategy. An impact survey of the facility indicates progress in jobs created, export sales, and technology. By May, 55 companies had established businesses there. But more needs to be done to rekindle investment. Plans include reducing the regulatory burden to stem the decline of FDI. Rules governing company and property ownership by foreigners will be relaxed. In addition, the central bank lifted capital controls directly limiting operations of foreign banks and foreign multinationals. Since the early 1980s, the central bank required multinationals operating in Malaysia to raise a minimum of 50% of their banking credit from local sources.
69
Malaysia: Selected ARIC Indicators

1996 Output and Prices GDP Growth (%) Private Consumption Expenditure Growth (%) Public Consumption Expenditure Growth (%) Gross Domestic Investment Growth (%) Gross Fixed Investment Growth (%) Agricultural Sector Growth (%) Manufacturing Sector Growth (%) Construction Sector Growth (%) Services Sector Growth (%) Exports of Goods and Services Growth (%) Imports of Goods and Services Growth (%) Inflation Rate (%) Unemployment Rate (%) Monetary and Fiscal Accounts Growth of Broad Money, M2 (%)1 Three-Month Interbank Lending Rate (%)1 Growth in Real Bank Credit to Private Sector (%)1 NPL Ratio of the Financial System1 NPL Ratio of the Commercial Banking System1 Average Stock Price Index Central Government Fiscal Balance as % of GDP Central Government Debt as % of GDP1 Government Expenditure on Education (% of Total) Government Expenditure on Health (% of Total) External Account, Debt, and Exchange Rates Growth of Merchandise Exports ($ fob, %) Growth of Merchandise Imports ($ cif, %) Current Account Balance as % of GDP Net Foreign Direct Investment ($ Billion)2 Net Portfolio Investment ($ Billion)2 Gross International Reserves ($ Billion)1 Total External Debt as % of GDP1 5.9 0.1 -4.8 2.0 1.6 27.8 38.5 0.4 0.7 -5.2 5.6 -4.4 15.7 48.5 59.8 25.3 105.5 2.8 -6.8 -26.1 13.5 2.2 -6.9 26.2 61.9 36.9 21.1 86.8 3.9 15.3 12.1 15.9 2.3 -3.9 30.9 53.9 19.3 13.8 87.6 3.8 16.1 25.4 9.1 1.8 -2.5 29.9 47.0 15.7 10.9 86.2 3.8 -10.4 -10.0 8.3 0.3 -0.6 30.8 51.9 20.7 13.8 92.9 3.8 5.9 8.0 7.8 1.3 -1.7 34.6 51.4 24.6 17.3 95.3 3.8 22.1 26.7 12.9 0.5 1.4 34.0 50.7 16.0 12.8 85.8 3.8 16.8 31.8 7.8 0.2 -1.7 34.0 49.0 15.5 12.5 85.7 3.8 21.6 33.4 7.2 0.4 -1.2 32.3 47.6 16.0 12.2 85.8 3.8 5.8 11.5 8.6 0.6 -0.9 29.9 47.1 15.7 10.9 87.4 3.8 1.7 7.0 8.5 0.3 -0.6 27.2 46.3 17.6 11.2 91.0 3.8 -8.9 -10.5 8.0 0.3 -0.2 26.0 46.9 18.2 11.1 92.8 3.8 -19.4 -22.5 9.8 0.6 0.6 29.7 49.5 18.1 12.0 92.7 3.8 -13.1 -10.5 6.7 -0.9 -0.4 30.8 51.9 20.7 13.8 95.1 3.8 -4.9 -5.0 8.8 0.6 0.8 32.7 53.4 22.0 15.2 99.0 3.8 5.1 9.8 6.7 0.0 -1.3 33.6 51.8 18.8 13.5 95.8 3.8 14.3 19.6 7.4 0.6 -0.4 34.0 50.8 20.3 14.6 93.1 3.8 9.7 8.6 8.4 0.1 -0.8 34.6 51.4 24.6 17.2 93.2 3.8 8.0 2.6 12.6 -0.6 -0.2 34.9 50.4 23.4 16.3 90.9 3.8 6.1 -5.0 12.0 0.3 0.2 37.1 51.0 25.5 18.4 90.9 3.8 1.8 -5.7 ... ... ... 40.7 ... ... ... 90.9 3.8 ... ... 22.3 ... ... 1,134.8 0.7 35.3 21.4 19.0 22.7 ... 20.2 ... ... 972.6 2.4 31.9 21.3 17.9 1.5 6.5 -2.3 13.6 10.3 515.9 -1.8 36.4 21.4 17.9 13.7 4.0 -0.6 11.0 8.8 696.3 -3.2 37.3 22.1 17.7 5.2 3.2 4.9 9.7 8.3 841.4 -5.8 36.7 23.7 16.8 2.2 3.2 3.3 11.5 10.5 636.7 -5.5 43.6 25.0 16.2 5.8 3.0 5.0 10.2 9.3 710.7 -5.6 45.7 ... ... 10.1 3.2 3.4 10.7 8.9 950.1 1.2 36.4 ... ... 6.8 3.2 5.4 10.4 8.6 892.8 -1.9 37.0 ... ... 4.9 3.3 1.4 10.1 8.5 792.0 -5.2 36.9 ... ... 5.2 3.3 4.9 9.7 8.3 734.8 -16.4 36.7 ... ... 3.6 3.0 3.7 10.6 9.3 694.7 -2.0 37.5 ... ... 3.0 3.0 3.7 11.4 10.3 579.2 2.2 37.8 ... ... 5.0 3.3 4.7 11.7 10.7 646.7 -3.6 40.8 ... ... 2.2 3.3 3.3 11.5 10.5 632.7 -18.6 43.6 ... ... 6.1 3.2 4.0 11.5 10.6 720.2 -1.6 43.6 ... ... 6.1 2.8 3.2 11.0 10.0 767.5 -4.5 44.0 ... ... 4.4 2.8 2.9 10.5 9.6 712.0 -5.5 44.9 ... ... 5.8 3.1 5.0 10.2 9.3 642.5 -10.3 45.7 ... ... 5.6 2.9 6.1 9.9 9.1 647.9 -7.3 47.2 ... ... 8.6 2.9 6.4 9.5 8.8 652.3 -8.4 48.2 ... ... 9.0 8.3 730.7 ... ... ... ... 10.3 2.9 10.0 ... ... ... ... 4.5 18.2 16.2 8.9 ... ... 3.5 2.5 7.3 4.3 5.7 12.2 9.2 0.7 10.1 10.6 9.9 5.0 5.8 2.7 2.6 -7.4 -10.2 -8.9 -43.5 -43.0 -2.8 -13.4 -24.0 -0.4 0.9 -18.8 5.3 3.2 6.1 2.9 17.1 -3.9 -6.5 0.5 11.7 -4.4 4.5 13.2 10.6 2.8 3.4 8.6 13.0 1.6 28.0 25.7 2.6 18.3 0.6 6.7 16.1 24.4 1.4 3.1 0.3 2.4 17.0 -9.4 -2.8 -0.9 -5.8 2.1 5.8 -7.5 -8.6 1.4 3.7 4.1 4.4 12.2 8.9 0.3 3.0 4.0 2.3 4.1 3.6 6.2 1.8 3.5 11.4 15.3 3.6 15.8 23.1 2.8 24.2 0.7 7.6 21.4 25.8 1.5 3.0 8.3 13.6 9.9 29.1 33.8 -2.9 19.2 1.0 6.3 16.8 27.9 1.3 3.3 8.1 12.3 -7.2 49.5 34.7 4.9 18.1 -0.2 5.9 19.2 32.3 1.4 3.1 6.7 11.0 2.7 18.2 12.5 5.7 12.7 0.7 7.0 8.3 12.8 1.6 3.0 2.9 3.4 14.2 0.9 8.3 10.7 1.3 0.6 5.2 6.4 7.5 1.5 4.0 0.4 1.3 12.7 -9.5 0.2 0.1 -7.2 2.9 6.7 -6.0 -8.1 1.6 3.7 -1.0 1.8 17.8 -19.1 -10.2 -6.2 -8.7 2.4 6.0 -16.3 -20.1 1.4 3.3 -0.8 2.9 21.3 -7.4 -8.1 -5.8 -8.1 2.2 5.2 -12.0 -10.5 1.2 3.7 1.2 3.3 11.4 4.1 -8.5 -3.6 -2.3 2.9 4.5 -6.5 -4.8 1.5 3.7 4.0 5.6 12.8 9.4 -2.0 1.4 5.5 3.4 4.0 3.1 6.6 2.0 3.8 5.8 4.2 19.2 13.5 2.8 8.3 7.3 2.6 3.4 11.2 15.6 2.1 3.2 5.4 4.6 6.5 8.3 10.0 5.6 5.7 0.5 4.6 7.2 8.1 1.8 3.2 4.6 4.3 18.9 0.1 3.8 3.4 5.8 1.2 4.5 1.9 1.6 1.3 3.8 4.5 3.4 7.2 -3.3 0.4 10.4 6.5 1.4 2.9 0.2 -2.9 0.9 4.0 5.1 5.4 -1.6 10.8 3.2 6.3 8.5 2.4 4.2 -5.0 -5.1 1.0 ... 1997 1998 1999 2000 2001 2002 00Q1 00Q2 00Q3 00Q4 01Q1 01Q2 01Q3 01Q4 02Q1 02Q2 02Q3 02Q4 03Q1 03Q2 03Q3
Note: All growth rates are on a year-on-year basis. . . . = not available. 1 End of period. 2 Quarterly figures were converted to dollars from ringgit using the quarterly average exchange rate. 3 Trade weighted using wholesale price index for trading partners and consumer price index for the home country. Sources: Data on output and prices, nonperforming loan ratios of the financial and commercial banking system, central government fiscal balance, central government debt, government expenditure on education and health, merchandise exports and imports, current account balance, net foreign direct and portfolio investments, gross international reserves, and total and short-term external debts are from national sources. Data on M2, and real bank credit to private sector are from the International Monetary Fund, International Financial Statistics. Data on interbank lending rate, average stock price index, and average exchange rate are from Bloomberg, LP. Real effective exchange rates are based on REMU staff calculations.
Myanmar
Growth is likely to be below the official target. GDP growth for the current fiscal year (April 2003/March 2004) will likely be lower than the Governments target of about 10%, as set in the 2001-2005 five-year plan. The reasons include slower growth in natural gas production and sluggish manufacturing output, which continues to suffer from shortages of power and essential imported inputs. Growth has also been adversely affected by economic sanctions that hurt both exports and FDI. GDP grew by an average of 8.5% over the previous plan period 19962001, according to the Government.
Figure 1: Central Bank Rate, Real Bank Credit Growth, and Inflation Rate (%)
60 40 20 0 -20 98Q1 99Q1 00Q1 01Q1 02Q1 03Q1
Central Bank Rate, End of Period Growth in Real Bank Credit to Private Sector, End of Period (y-o-y) Inflation Rate (y-o-y)
The inflation rate remains very high. Inflation reached 61% year-on-year in February 2003, compared with an average of 57% for 2002 (Figure 1). Monetization of the fiscal deficit was largely the cause for the 40% growth in M1 in January, and high growth of the money supply continues to fuel domestic prices. Supplyside constraints contributed to price increases for items such as food, as did some panic buying of essential goods reported early in 2003 when the Government imposed limits on cash withdrawals to avert a banking crisis. The fiscal deficit narrowed as a percentage of GDP. The budget deficit as a percentage of GDP narrowed to an estimated 4.5% in fiscal 2002/03 from around 6% in the previous fiscal year. The Government is targeting a lower level of deficit as a percentage of GDP for fiscal 2003/04. To curb the budget deficit, the Government has been taking measures to improve the tax administration and collection system and it has cut expenditure in recent years. However, fiscal consolidation

150 120 90 60 30 0 -30 -60 99Q1 00Q1
Exports
faces challenges from military spending, the need to subsidize inefficient state-owned enterprises, and a poor revenue base. Export growth is expected to slow further. Export growth slowed from about 45% in 2001 to 28% in 2002 and is likely to have eased further in 2003 as economic sanctions continue and the growth of gas production flattened (Figure 2). However, there is positive news on the export front. Demand from the PRC, India, and Thailand for Myanmars exports remains strong, and will compensate for the tougher US sanctions on garments and textiles, in particular. An
01Q1
Imports
02Q1
anticipated increase in world prices of metals, food, and foodstuffs will provide additional income. Gas shipments will continue to contribute a significant share of total exports.
But the trade account still could be in surplus. Although growth in exports is slowing, imports have also been weak because of import restrictions, weak domestic demand, and foreign exchange shortages. The trade account is expected to be in surplus. However, anticipated declines in tourism receipts and remittances from overseas workers could mean the current account returns to deficit in 2003 from the 2002 estimated surplus.
1997 1998 1999 2000 2001 2002 20031 0 1 2
3 4 5
The kyat has weakened in the parallel market. High inflation has led to a further weakening of the kyat in the parallel foreign exchange market. In 2002, the free-market exchange rate traded at a US dollar value about 130 times lower than the official exchange rate of around MK6.6. The kyat reportedly depreciated by more than 10% during this years second quarter alone. As of June, the countrys foreign reserves, minus gold, stood at $526 million, enough to service 2.7 months of imports (Figure 3). New money laundering and rice trade policies are implemented.

1
Myanmar introduced a law in 2002 to combat money laundering and the financing of terrorism. The Government is drafting rules and regulations to implement this law. A new rice trading policy is also being implemented. Under this policy, there will be no involvement of state organizations in the trading of rice and the market will determine prices. The aim is to raise rice production and quality, increase exports, and stabilize rice prices in the domestic market. Fiscal reform is the key to macroeconomic stability. The annual growth target of about 10% under the latest five-year plan will be difficult to achieve without macroeconomic stability, which requires the Government to control its fiscal deficit and change the practice of financing deficits through the central bank. Myanmar needs to widen its revenue base through effective tax reform. On the expenditure side, a shift is required from defense spending and subsidizing state-owned enterprises to restoring the countrys physical and social infrastructure. Comprehensive structural changes are needed in the longer term. In the longer term, the country needs more comprehensive and deeper structural reforms for sustainable growth and to achieve tangible progress in poverty reduction. These reforms include the privatization of state-owned enterprises, the development of the private sector, further liberalization of agriculture and trade, steps to unify the exchange rate, and reforms to strengthen the financial sectors regulation and supervision.
As of June Source: Joint BIS-IMF-WB-OECD statistics on external debt.
72
Myanmar: Selected ARIC Indicators

1996 Output and Prices Real GDP Growth (%) Agricultural Sector Growth (%) Services Sector Growth (%) Industry Sector Growth (%) Inflation Rate (%) Unemployment Rate (%) Monetary and Fiscal Accounts Growth of Broad Money, M2 (%)1 Growth in Real Bank Credit to Private Sector( %) Government Expenditure on Education (% of Total) Government Expenditure on Health (% of Total) External Account, Debt, and Exchange Rate Gross International Reserves less Gold ($ Billion)1 Total External Debt as % of GDP Short-term Debt as % of Gross International Reserves1 Short-term Debt as % Total Debt Current Account Balance as % of GDP Growth Rate of Merchandise Exports ($ fob, %)3 Growth Rate of Merchandise Imports ($ cif, %)3 Net Foreign Direct Investment ($ Billion) Real Effective Exchange Rate (1995=100)4 Average Nominal Exchange Rate (Kyat per $) 0.2 3.8 10.8 0.5 -0.3 -12.4 1.7 0.3 113.1 5.8 0.2 2.3 41.3 2.4 -0.2 16.0 50.0 0.4 142.2 5.9 0.3 1.9 44.9 3.0 -0.1 23.2 31.0 0.3 208.5 6.3 0.3 1.6 60.5 2.9 ... 5.4 -13.8 0.3 240.6 6.3 0.2 1.3 93.6 4.1 0.0 44.9 3.4 0.3 225.9 6.3 0.4 ... 47.5 4.2 ... 44.7 19.8 0.2 272.9 6.6 0.5 ... 120.2 11.2 ... 27.9 -18.4 ... 435.8 6.6 0.3 ... ... ... ... -4.26 0.3 ... ... ... ... 1.82 0.3 ... ... ... ... 33.30 -0.84 0.1 225.8 6.3 0.2 ... ... ... ... 78.34 0.2 ... ... ... ... 0.2 ... ... ... ... 0.4 ... ... ... ... 66.84 47.76 0.0 292.0 6.7 0.4 ... ... ... ... 2.01 0.5 ... ... ... ... 44.11 0.5 ... ... ... ... 2.09 0.4 ... ... ... ... 39.10 0.5 ... ... ... ... 59.41 31.38 ... 527.7 6.5 0.5 ... ... ... ... ... ... ... ... 6.2 ... ... ... ... ... ... ... ... ... 6.2 ... ... ... ... ... ... ... ... ... 6.2 38.9 24.7 14.2 4.3 28.8 16.4 11.4 4.0 34.2 -8.1 7.7 2.2 29.7 11.5 8.8 2.6 42.4 51.1 ... ... 43.9 3.4 ... ... 34.6 -7.0 ... ... 31.4 16.0 ... ... 37.1 31.9 ... ... 38.8 43.3 ... ... 42.4 51.1 ... ... 47.4 47.1 ... ... 49.1 35.6 ... ... 44.3 13.4 ... ... 43.9 3.4 ... ... 43.2 2.0 ... ... 35.6 -9.9 ... ... 37.1 -6.2 ... ... 34.6 -7.0 ... ... 18.4 ... ... ... ... ... ... ... ... ... ... ... 6.4 5.0 6.5 10.7 16.3 4.1 5.7 3.7 6.7 8.9 29.7 4.1 5.8 4.5 7.0 6.1 51.5 4.1 11.0 11.5 9.2 13.8 18.4 4.1 13.7 11.1 13.7 21.3 -0.1 ... 11.1 ... ... ... 21.1 ... ... ... ... ... 57.1 ... ... ... ... ... 3.5 ... ... ... ... ... 2.4 ... ... ... ... ... -1.6 ... ... ... ... ... -7.1 ... ... ... ... ... 0.0 ... ... ... ... ... 10.7 ... ... ... ... ... 28.4 ... ... ... ... ... 46.0 ... ... ... ... ... 53.5 ... ... ... ... ... 56.5 ... ... ... ... ... 57.9 ... ... ... ... ... 59.4 ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... ... 1997 1998 1999 2000 2001 2002 00Q1 00Q2 00Q3 00Q4 01Q1 01Q2 01Q3 01Q4 02Q1 02Q2 02Q3 02Q4 03Q1 03Q2 03Q3
62.36 146.95 48.48 0.1 248.5 6.7
39.45 -12.06 0.1 229.1 6.3 0.0 230.0 6.3
-7.00 -15.11 0.0 218.8 6.4 0.1 224.4 6.6
2.42 -20.04 -42.77 -21.77 0.1 326.6 6.6 ... 348.4 6.6 ... 397.8 6.7 ... 469.5 6.7
Note: Real effective exchange rates are based on REMU staff calculations. 1 End of period. 2 Fiscal year ending September. 3 Basic data are dollar values which are directly obtained from the IFS CD-ROM. 4 Trade weighted using WPI for trading partners and CPI for the home country. Sources: Data on output and current account balance are from Asian Development Outlook 2002, 2003, 2003 Update; M2, inflation rate,real bank credit to the private sector ,merchandise exports and imports, and gross international reserves are from IMF, International Financial Statistics, CD-ROM; unemployment is from ADB Country Economic Review 2001; central government expenditure on health and education are from ADB Key Indicators 2003; nominal exchange rates are from Bloomberg; total and short-term external debt are from Joint IMF-WB-OECD-BIS Statistics on External Debt.
Philippines
Real Sector
12 9 6 3 0 -3 -6 98Q1 99Q1 00Q1 01Q1 02Q1 03Q1
q-o-q annualized, seasonally adjusted y-o-y
Growth slowed in the first half, then picked up in the third quarter. Economic growth slowed to 4.5% in the first quarter and 4% in the second quarter because of weakness in the agricultural sector, sluggish exports, and a tightening of fiscal policy. A drop in tourism-related income as a result of SARS also hurt. During the third quarter, however, growth increased to 4.4%, bringing the expansion for the first three quarters to 4.3% (Figure 1). The Government forecasts growth for all of 2003 at 4.2-5.2% (Table 1).

1997 1998 1999 2000 2001 2002 2003 2004
Official 1 ADB 2 IMF3 World Bank

4
5.2
-0.6
3.4
6.0
3.0
4.4
4.25.2 4.0 4.0 4.0 3.7
4.95.8 4.5 4.0 4.2 4.0
Consensus Economics 5
1 2 3
NEDA, Press Release, October 2003; NEDA Web site. ADB, Asian Development Outlook 2003 Update, October 2003. IMF, World Economic Outlook, October 2003. 4 World Bank, East Asia Update Regional Overview, October 2003. 5 Consensus Economics Inc., Asia Pacific Consensus Forecasts, November 2003.

30 15 0 -15 -30 98Q1 99Q1 00Q1 01Q1 02Q1 03Q1
Overseas remittances continue to support consumer spending. Domestic investment supported growth in the first quarter, increasing 17.4%. However, the investment was largely attributable to inventory accumulation, and in the second quarter domestic investment grew at a slower rate of 2.7% (Figure 2). Fixed investment grew just 3.5% in the first quarter, contracting 2% in the second because of a downturn in construction. In the third quarter, however, domestic investment rose 7.7%, with a surge in investment in machinery and equipment. Consumer spending, helped by an increase in remittances from overseas Filipinos, grew 5% in the three quarters to September. Export growth remained weak and government consumption contracted as fiscal policy tightened.
P H I L I P P I N E S

40 30 20 10 0 -10 -20 98Q1 99Q1 00Q1 01Q1 02Q1 03Q1
Agriculture Construction Manufacturing Services
Agriculture recovered in the third quarter. Although second-quarter growth was slightly affected by the SARS impact on foreign tourism and related industries, services helped to drive the economy in the first three quarters, expanding 5.6%. Manufacturing posted robust growth of 5.3% in the first quarter, but weakness in electronics exports brought it down to 4.6% in the second quarter (Figure 3). The sector remained soft in the third quarter, with growth trimmed further to 4.4%. Drought, caused by the El Nino phenomenon, and typhoons in the second quarter pulled down agricultural growth to 1.6% from 3% in the first quarter. Agriculture showed a strong recovery in the third quarter, expanding 5.5%. Construction fell in the first three quarters as public construction was cut back.

The budget deficit was within target for the first 10 months. Improved revenue collection and restrained spending enabled the Government to contain the budget deficit for the first 10 months to P163.9 billion, within the target. This was a welcome reversal from last years fiscal slippage. However, third quarter overspending made the Government miss the deficit target for that period. In October, expenditure exceeded the target by 10%. But higher-than-expected revenue kept the deficit for the month within the target. Fiscal authorities are confident they can meet the planned full-year budget deficit of P202 billion, or 4.7% of GDP. Faced with substantial financing requirements for the deficit, the central government debt (including domestic and external debt) rose to P3.2 trillion by August from P2.8 trillion at end-2002. The debt burden remains substantial at 71% of GDP, although much is medium or long term. Monetary policy was tightened, eased, then tightened again. The Bangko Sentral ng Pilipinas (BSP) tightened monetary policy in March to pre-empt inflationary risks arising from market concerns over the budget deficit, the Iraq war, and a weakening of the peso. The central bank increased bank liquidity reserves and, while rates were maintained, it removed its rate tiering system. This effectively lowered the yields on placements with the BSP. Monetary policy was eased midyear when the BSP re-established the tiering system and lowered
75
policy rates 25 bps. However, the unsuccessful mutiny by a small group of military officers in late July and the court decision ordering the suspension of the BSP governor in mid-August (although he remains in office pending appeal) jolted financial markets. This prompted the BSP to tighten monetary policy by again removing the tiering system in late
20 10 0 -10 -20 98Q1 99Q1 00Q1 01Q1 02Q1 03Q1
August. Later political developments, including corruption allegations against the Presidents family and attempted removal of the chief justice of the Supreme Court, kept financial markets unsettled and reduced chances of monetary easing. Inflation is benign as a result of subdued domestic demand. The patchy economy and continued accumulation of bad debts by banks have hampered lending. Real credit growth was an anemic 2.2% in the first quarter and 1% in the second, even while interest rates remain relatively low. Subdued domestic demand and weak credit growth have helped to keep prices under control. Inflation edged up from 2.9% in the first quarter to 3.1% in the third (Figure 4). It inched higher to 3.3% in November as the peso weakened and petroleum prices rose. The BSPs inflation outlook for 2003 is 2.9-3.2%, below its original target of 4.5-5.5%.
Balance of Payments
30 15 0 -15 -30 98Q1 99Q1 00Q1 01Q1 02Q1 03Q1
Exports Imports
Overseas remittances buoy the current account. Electronic products make up more than 60% of the countrys exports, so weakness in the global IT industry depressed total exports, which grew a meager 1% in the first 10 months. In October, though, export growth picked up to 6.2%. Imports, meanwhile, rose 4.8% in the first nine months, spurred by increases in imports of raw materials and crude oil in the run-up to the Iraq war (Figure 5). This brought the nine-month trade deficit to $1.7 billion, three times the year-earlier gap. Still, a strong flow of remittances from overseas Filipinos left a current account surplus of $1.1 billion for the first seven months. Maturing loans helped cause capital account deficit. Weak investment inflows and large net repayment of maturing loans resulted in a net outflow of $2.1 billion in the capital and financial accounts in the first seven months, compared with a year-earlier net inflow of $504 million. Many foreign companies delayed expansion plans because of the slack global economy. Thus, foreign direct investment
76
totaled just $139 million in the first seven months, down from $760 million a year earlier. Portfolio investment yielded an inflow of $1 billion during the same period, down from $1.3 billion a year earlier, largely because of weak corporate earnings and increased investment in foreign securities by residents.
98Q1 98Q3 99Q1 99Q3 00Q1 00Q3 01Q1 01Q3 02Q1 02Q3 03Q1 03Q3 0 10 20 30 40 50 60
The balance of payments shifts into deficit. The balance of payments moved into a $239 million deficit in the seven months to July, from a year-earlier surplus of $1.1 billion. Gross international reserves rose from $16.2 billion at the start of the year to $16.8 billion in November, when the Government and central bank increased foreign-currency borrowings. The amount covers 4.7 months of imports of goods and services, and is 2.8 times the level of short-term external debt based on original maturity or 1.4 times based on residual maturity. Total external debt at mid-year was $56.1 billion, with shortterm external debt comprising 11.1%, or $6.24 billion (Figure 6). The peso has weakened in volatile trading. The peso has been volatile but overall weak in 2003 (Figure 7). Early in the year, market concerns over the Iraq war and the budget deficit kept the currency soft against the dollar. Monetary tightening, seasonal inflows of remittances, and the better fiscal performance helped the peso recover from late March to early June, while downgrades in sovereign debt ratings eroded the gains. The July mutiny attempt started another run on the peso and further political uncertainties and the resignation of the finance secretary kept it weak. The currency depreciated 4% by late November from the start of the year. The BSP introduced measures such as limiting the tenor of forward contracts to reduce currency speculation and imposed sanctions against banks violating BSP foreign-exchange regulations. The peso depreciation, however, did allow the country to maintain its competitiveness, with the real effective exchange rate index showing a real depreciation of 8.3% on average during the first three quarters.

Figure 7: Exchange Rate Index, Weekly Average (last week of Jun 1997=100, $/Peso)
110 100 90 80 70 60 50 40 30 27 Jun 1997 22 Jan 1999 09 Jan 2000 12 Apr 2002 21 Nov 2003

The NPL ratio improved to 14.5% by September. The NPL ratio began 2003 at 15%, increased slightly through the first half, then improved to 14.5% in September. The BSP plans to introduce several measures to reduce risky lending, including tightening the rules
77
for lending to a banks own directors, officers, and stockholders. The banking system remains healthy in terms of capital, with its risk weighted capital adequacy ratio 16.6% at end-2002, well above the 8% BIS norm. Banks return on assets increased to 0.8% in June from 0.6% a year earlier. Only one SPV is registered so far. A Special Purpose Vehicle (SPV) law was enacted in January 2003 to address the accumulation of banks nonperforming assets. Relying largely on private sector initiatives, the law aims to speed up disposal of nonperforming assets without directly using public funds or creating a state-owned asset management company. Instead, tax incentives and fee abatements will encourage banks to sell bad assets and attract investors to set up SPVs. A two-year window, which began in April, allows banks to transfer assets to privately funded independent SPVs. According to the central bank, domestic banks have indicated they are likely to transfer as much as 50% of their eligible nonperforming assets into SPVs. It had approved four certificates of eligibility to transfer such assets by late in the year. But the establishment of SPVs has been slow, with the SEC approving the registration of only one since the law was passed. The SEC moves to improve corporate governance. To improve corporate governance, the Securities and Exchange Commission (SEC) issued the Code of Corporate Governance. This code requires that financial statements of listed companies and other issuers of public securities be audited by an accredited external auditor. The SEC plans to extend this requirement to companies holding secondary franchises from the SEC, including brokers, dealers, and investment houses.

GDP growth in 2004 is forecast at 4%. The Consensus Economics survey forecasts that GDP growth will be 3.7% in 2003, against the Government prediction of 4.25.2%. For 2004, the Consensus Economics survey puts growth at 4%. The outlook for Philippine exports of electronics goods is healthy, assuming the global recovery stays on track. Consumption will continue to be aided
78
by strong remittances from overseas Filipinos. And agricultural production is likely to recover after the drought and typhoons of this year. However, as national and local elections are scheduled for next May, politics will take center stage during the first half of 2004. Policies concerning the economy and restructuring might have to take a back seat until the new Government is in place. Also, investors may take a wait-and-see attitude until the outcome of the elections is known. Fiscal credibility and continued tax reform are required. The authorities will have to look beyond limited short-term gains and focus on needed structural adjustments for fiscal sustainability. Reaching this years fiscal targets would be a positive step toward improved fiscal credibility. More effort is required to reform the tax system. Broadening the narrow tax base is imperative because restraining public spending to meet fiscal targets can sacrifice important public services, and may be counterproductive over the long run. A bias toward revenue generation over spending restraints should be reflected in the mediumterm fiscal program, which targets a near-balanced budget by 2009. Real credit expansion is needed to spur economic growth. Credit growth must accelerate if the economy is to move to a higher growth path. With the benign inflation environment, there may be room for further easing monetary policy. The SPV law is a positive step toward providing a framework to resolve the bad-debt problem, and to encourage banks to resume lending. In addition, the monetary authorities must closely supervise the financial system to prevent excessive risk taking.
79
Philippines: Selected ARIC Indicators

1996 Output and Prices GDP Growth (%) Private Consumption Expenditure Growth (%) Public Consumption Expenditure Growth (%) Gross Domestic Investment Growth (%) Gross Fixed Investment Growth (%) Agricultural Sector Growth (%) Manufacturing Sector Growth (%) Construction Sector Growth (%) Services Sector Growth (%) Exports of Goods and Services Growth (%) Imports of Goods and Services Growth (%) Inflation Rate (%) Unemployment Rate (%) Monetary and Fiscal Accounts Growth of Broad Money, M2 (%)1 Three-Month Interbank Lending Rate (%)1 Growth in Real Bank Credit to Private Sector (%)1 NPL Ratio of the Financial System1 NPL Ratio of the Commercial Banking System1 Average Stock Price Index Central Government Fiscal Balance as % of GDP Central Government Debt as % of GDP1 Government Expenditure on Education (% of Total) Government Expenditure on Health (% of Total) External Account, Debt, and Exchange Rates Growth of Merchandise Exports ($ fob, %) Growth of Merchandise Imports ($ cif, %) Current Account Balance as % of GDP Net Foreign Direct Investment ($ Billion) Net Portfolio Investment ($ Billion) Gross International Reserves ($ Billion)1 Total External Debt as % of GDP1 17.8 22.2 -4.8 ... ... 11.7 50.3 22.8 10.8 -5.3 ... ... 8.8 55.8 115.7 29.4 111.0 29.6 16.9 -17.5 2.4 ... ... 10.8 71.1 77.8 23.2 94.0 40.8 18.8 3.6 9.2 1.9 4.94 15.0 71.1 43.4 17.3 100.8 39.1 8.7 12.3 8.4 1.5 0.2 15.0 69.4 45.6 17.0 91.0 44.3 -15.6 -4.2 1.8 1.1 1.0 15.7 58.1 45.0 22.5 88.2 51.0 9.5 7.2 5.4 1.0 1.9 16.2 69.5 42.3 10.3 90.5 51.6 9.6 17.5 4.4 0.6 0.7 16.0 68.0 42.3 11.5 96.4 40.7 13.3 3.8 8.5 0.3 -0.3 15.4 67.6 44.0 11.3 94.2 41.9 5.1 12.4 10.6 0.3 0.0 14.9 67.6 43.2 10.8 89.2 45.1 7.8 15.7 9.9 0.2 -0.2 15.0 69.7 45.6 11.4 84.4 49.4 -0.5 -0.4 1.7 0.3 -0.6 14.7 68.3 40.9 10.4 88.4 49.2 -17.6 9.9 -3.3 0.2 0.3 14.6 71.1 42.7 10.6 87.9 50.8 -22.5 -5.3 0.2 0.3 0.7 14.5 73.9 47.4 11.1 87.1 52.1 -19.5 -19.6 7.8 0.4 0.6 15.7 72.7 45.0 11.6 89.3 51.8 -5.3 -12.5 9.5 0.8 1.8 17.4 73.4 37.1 10.4 93.9 51.2 15.9 5.8 2.1 0.0 0.0 16.9 73.7 40.6 10.6 92.8 50.4 18.9 14.7 2.8 0.2 -0.6 16.0 70.3 44.1 11.0 89.2 51.5 10.2 23.6 7.3 0.0 0.8 16.2 69.2 42.3 10.3 86.3 53.3 4.9 22.4 1.5 0.0 0.4 16.0 71.0 49.3 11.5 83.4 54.1 -0.5 0.0 3.0 0.0 -0.2 15.9 71.0 48.7 11.1 85.6 52.9 -2.6 -4.0 ... ... ... 16.2 ... ... ... 83.7 54.6 15.8 12.2 38.8 . 1.0 3,053 0.3 53.2 18.0 2.8 20.5 16.3 20.2 ... 4.7 2,591 0.1 55.7 19.3 3.0 8.0 17.5 -15.5 11.0 10.4 1,792 -1.9 56.1 19.9 2.6 19.3 11.1 -6.3 ... ... 2,170 -3.8 59.6 19.6 2.5 4.8 12.1 -1.2 ... ... 1,584 -4.1 65.5 17.3 2.3 6.9 12.2 -5.6 ... ... 1,347 -4.0 65.5 18.0 2.1 9.6 6.9 -1.8 14.6 15.0 1,212 -5.2 70.0 ... ... 17.4 9.3 -3.6 ... 14.1 1,882 -2.9 61.9 ... ... 11.5 9.4 -2.0 ... 14.6 1,575 -3.2 62.5 ... ... 9.1 12.1 1.8 ... 15.7 1,487 -4.3 63.3 ... ... 4.8 15.9 -1.2 14.9 15.1 1,399 5.4 65.5 ... ... 12.2 11.6 -0.2 16.6 16.6 1,582 4.5 64.3 ... ... 13.4 10.7 -3.8 17.0 17.0 1,435 4.5 65.0 ... ... 10.7 15.2 -8.3 17.4 17.9 1,300 -4.9 65.0 ... ... 6.9 12.6 -5.6 16.9 17.3 1,065 -2.4 64.9 ... ... 8.6 7.1 -7.2 17.6 18.0 1,350 -6.7 66.7 ... ... 5.1 7.1 -6.2 17.6 18.1 1,326 -6.1 69.2 ... ... 9.1 6.2 -4.6 16.2 16.4 1,130 -4.7 69.5 ... ... 9.5 7.1 -1.8 14.6 15.0 1,044 -3.8 70.0 ... ... 4.6 8.6 2.2 15.2 15.5 1,032 -5.9 70.4 ... ... 6.0 9.2 1.0 15.0 15.2 1,113 -2.0 71.0 ... ... 3.2 7.4 3.5 ... 14.5 1,263 ... ... ... ... 5.8 4.6 4.1 13.3 12.0 3.8 5.6 10.9 6.4 15.4 16.7 9.0 7.4 5.2 5.0 4.6 11.7 11.5 3.1 4.2 16.2 5.4 17.2 13.5 5.9 7.9 -0.6 3.4 2.0 -16.3 -11.2 -6.4 -1.1 -9.6 3.5 -21.0 -14.7 9.8 9.6 3.4 2.6 6.7 -2.0 -2.3 6.5 1.6 -1.6 4.0 3.6 -2.8 6.6 9.6 6.0 3.5 6.2 23.9 19.9 4.3 5.6 26.3 4.4 17.0 4.3 4.3 10.1 3.0 3.6 -5.3 2.1 -3.7 3.7 2.9 -5.0 4.2 -3.4 3.5 6.1 9.8 4.4 4.1 2.4 -3.5 2.4 3.3 3.5 -3.3 5.4 3.6 4.8 3.1 10.2 5.3 3.2 0.3 18.5 18.3 0.6 6.0 26.9 4.2 14.3 5.8 3.0 9.5 6.1 3.2 6.0 20.4 16.6 4.2 6.2 19.7 5.0 16.9 -3.4 3.9 13.9 7.2 3.7 9.6 30.6 22.9 7.7 6.1 31.5 5.0 16.1 -0.4 4.5 11.2 5.3 4.0 8.8 27.3 22.1 5.2 4.4 27.2 3.5 20.8 16.9 5.9 10.1 2.3 3.5 -4.2 -0.7 -4.9 3.0 3.4 -14.7 4.4 6.8 4.7 6.8 11.3 3.1 3.3 -3.0 14.2 2.9 4.0 2.4 0.2 3.4 -2.8 15.6 6.6 13.3 2.5 3.7 -6.4 -2.5 -9.9 3.2 2.6 -10.1 4.2 -4.2 2.1 6.4 10.1 3.8 3.8 -7.8 -1.8 -2.7 4.5 3.2 5.4 4.9 12.4 -7.2 4.7 9.8 3.8 3.5 -1.9 -11.1 -2.4 4.8 2.4 -7.7 4.8 -5.1 -5.1 3.6 10.3 4.1 3.8 5.1 -13.1 0.5 1.9 4.8 -8.4 5.4 6.8 4.6 3.4 13.9 3.8 4.3 3.6 -4.0 5.9 -0.4 2.7 3.0 5.0 8.1 5.0 2.8 11.2 5.8 4.6 2.2 14.7 6.0 6.0 4.0 -0.5 6.4 4.5 14.9 2.6 10.2 4.5 4.9 -1.5 17.4 3.5 3.0 5.3 -3.6 5.5 3.6 24.0 2.9 10.6 4.0 5.1 -12.0 2.7 -2.0 1.6 4.6 -9.5 5.6 1.2 6.4 3.0 12.2 4.4 4.9 -0.6 7.7 1.3 5.5 4.4 -10.7 5.6 0.0 2.6 3.1 12.7 1997 1998 1999 2000 2001 2002 00Q1 00Q2 00Q3 00Q4 01Q1 01Q2 01Q3 01Q4 02Q1 02Q2 02Q3 02Q4 03Q1 03Q2 03Q3
Note: All growth rates are on a year-on-year basis. . . . = not available. 1 End of period. 2 Trade weighted using wholesale price index for trading partners and consumer price index for the home country. Sources: Data on output and prices, M2, real bank credit to private sector, nonperforming loan ratios of the financial and commercial banking system, central government fiscal balance, central government debt, government expenditure on education and health, merchandise epxorts and imports, current account balance, net foreign direct and portfolio investments, gross international reserves, and total and short-term external debts are from national sources. Data on interbank lending rate, average stock price index, and average exchange rate are from Bloomberg LP. Real effective exchange rates are based on REMU staff calculations.
Singapore
Real Sector
20 15 10 5 0 -5 -10 -15 98Q1 99Q1 00Q1 01Q1 02Q1 03Q1
q-o-q annualized, seasonally adjusted y-o-y Source: ARIC Indicators.
Growth has returned in the second half after a sharp contraction. The SARS outbreak, combined with weak global demand for electronics, caused Singapores economy to contract a sharp 3.8% in the second quarter, after 1.6% growth for the first three months. However, strong external demand and a surge in private consumption expenditure revived growth in the third quarter, when GDP rose 1.7% (Figure 1). This still was not enough to prevent GDP from contracting 0.2% in the first three quarters. The official forecast is for full-year growth in the range 0.5-1%, compared with 2.2% actual growth in 2002 (Table 1).

1997 1998 1999 2000 2001 2002 2003 2004
Official ADB 2 IMF3
8.5
5
-0.9
6.4
9.4
-2.4
2.2
0.51.0 0.5 0.5 1.0 0.8
4.5 4.2 4.7 4.9
World Bank4 Consensus Economics

1 2 3
Ministry of Trade and Industry, Economic Survey of Singapore Third Quarter 2003, November 2003. ADB, Asian Development Outlook 2003 Update, October 2003. IMF, World Economic Outlook, October 2003. 4 World Bank, East Asia Update Regional Overview, October 2003. 5 Consensus Economics Inc., Asia Pacific Consensus Forecasts, November 2003.

50 25 0 -25 -50 98Q1 99Q1 00Q1 01Q1 02Q1 03Q1
Domestic demand generally has been soft. Among expenditure categories, only private consumption and net exports increased in the first three quarters from 2002 levels, by 1.6% and 39%, respectively (Figure 2). Strong demand for motor vehicles stirred private consumption growth. Gross fixed investment contracted 0.9% in the third quarter, the tenth consecutive quarter of decline, mainly the result of a weak construction sector caused by high vacancy rates and falling property prices. Public investment in housing also declined. However, a third-quarter increase in durable equipment expenditures mitigated the decline in gross fixed investment. Manufacturing is recovering. Sectors hit badly by SARS comprised 30% of GDP. Not surprisingly, hotels and restaurants were hurt, with value-added in the sector falling 29% in the second quarter, after a 5.5% decline in the first quarter. It slipped

20 10 0 -10 -20 98Q1 99Q1 00Q1 01Q1 02Q1 03Q1
Construction Services Source: ARIC Indicators. Manufacturing
a further 9.7% in the third quarter. Air and land transport, along with retail trade and real estate, also suffered. A pharmaceuticals-led recovery in manufacturing in the first quarter fizzled out, and electronics remained in a slump as demand in the US stayed weak. In the third quarter, though, manufacturing, along with wholesale and retail trade, rose as external demand and private consumption rebounded (Figure 3). These sectors grew 0.4% and 4.7%, respectively, in the first three quarters. Manufacturing production in October jumped 19.3%, indicating a strong start to the fourth quarter. However, construction declined in the third quarter for the tenth successive period.

Singapore records a third year of budget deficits. Expansionary fiscal policies and lower operating revenue are expected to widen the Government deficit to 1.4% of GDP this fiscal year ending March 2004, a third straight year that Singapore incurs a budget deficit. The Government announced a S$230 million SARS relief package and a S$600 million plan to accelerate public infrastructure projects to support construction. It also raised environment-related spending, reflecting in part the effort to contain SARS. Meanwhile, direct tax collections fell as a result of lower rates and subdued economic activity. Indirect taxes were lower, too, because of the slowdown in private consumption in the second quarter. A proposed increase to 5% in the goods and services tax was trimmed to 4%, with a further 1% increase delayed until 2004.
20 15 10 5 0 -5 -10 98Q1 99Q1 00Q1 01Q1 02Q1 03Q1
Monetary policy is accommodative and interest rates are stable. The Monetary Authority of Singapore in July de facto eased policy by lowering the midpoint of the band governing the trade-weighted nominal effective exchange rate. The MAS left its exchange rate stance unchanged in an October policy statement, maintaining its accommodative position. As a result of the economic downturn and easy liquidity in the domestic money market, interest rates have stayed low and stable. This was helped by relatively low global rates and the MASs exchange rate policy. The three-month interbank rate was 0.8% at the end of the third quarter, equal to its level at end-2002. Prices rose by an average 0.5% in the 10 months to October. The consumer price index rose by an average of 0.5% in the 10 months to October compared with a 0.4% decline over all of 2002 (Figure 4).
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The slight increase in prices mainly was the result of a 1% increase in the goods and service tax, an upward revision in excise duties on alcoholic drinks and tobacco, and price hikes for oil-related items. The depreciation of the Singapore dollar also lifted some prices.
Balance of Payments
30 15 0 -15 -30 98Q1 99Q1 00Q1 01Q1 02Q1 03Q1
Exports Imports
Trade, current account and balance of payments surpluses increased. Despite unfavorable global economic conditions, Singapores trade and current account surpluses rose in the first three quarters. Weak demand for electronics was more than offset by exports of high value-added pharmaceutical ingredients, especially in the first quarter. Export values of oil products shot up in the first half as a result of the Iraq war. Meanwhile, import growth slowed because of the soft domestic demand (Figure 5). The services account posted a larger surplus in the first three quartersS$4.5 billion versus S$3.3 billion a year earlierdespite the problems of the travel industry. The higher current account surplus more than compensated for a net outflow of S$18.3 billion in the capital and financial accounts for the first three quarters, which reflected a net outflow of portfolio investment and residents switching funds into dollar-denominated assets. The balance of payments registered a surplus of S$8.8 billion during the period, more than triple the surplus of a year earlier. Gross international reserves rose to $93.9 billion in November from $82.3 billion at end-2002. The Singapore dollar has depreciated in real terms. The Singapore dollars exchange rate against the US dollar has hardly changed in 2003, even though the US dollar generally weakened against many other currencies (Figure 6). The main reason was the Singapore economys second quarter contraction, which led to capital outflows. With a stable exchange rate against the US dollar, the Singapore dollar depreciated against the euro and yen, resulting in a 3% depreciation in the real effective exchange rate for the nine months to September.
Figure 6: Exchange Rate Index, Weekly Average (last week of Jun 1997=100, $/Singapore $)
100 95 90 85 80 75 27 Jun 1997
22 Jan 1999
09 Jan 2000
12 Apr 2002
21 Nov 2003

The Government moves to lower Singapores cost structure. A major issue was the relatively high cost structure of the economy. The possibility of further erosion in Singapores competitiveness
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prompted parliament to cut the mandatory contribution from employers to the Central Provident Fund (CPF) beginning October. The Government also plans to implement a progressive reduction in the wage ceiling to which these contributions apply. Since the CPF is used as a funding pool for household mortgages, these measures will likely hurt consumption. To offset the impact of lower CPF contributions, the Government allocated a S$1 billion relief package aimed at boosting consumer sentiment and supporting SMEs. The reduction in employers contributions to the CPF should help the labor market as well. Singapores unemployment rate will average about 4.8% over 2003, up from 4.4% in 2002.
Growth is forecast to rise to 4.9% in 2004. Fiscal and monetary stimuli, along with recoveries in Japan and the US, brought the economy out of its second-quarter decline and will likely produce full-year GDP growth around 0.8%, according to the Consensus Economics survey. Accommodative domestic economic settings will promote economic activity into next year and, if the US recovery is sustained, should allow the economy to grow 4.9% in 2004, the survey forecasts.
Maintaining competitiveness remains a key issue. Singapores Economic Review Committee published a report on how the country can restructure to take full advantage of the globalized economy. Detailed recommendations cover changes in policies on taxation, wages and CPF, land, measures to enhance entrepreneurship, to reinvigorate manufacturing and services, and ways to develop human resources. These recommendations are expected to guide economic policy in the coming years.
Bilateral economic agreements are being pursued. Singapore has pursued bilateral economic agreements, reaching accords with the European Free Trade Association, Australia, the US, and New Zealand during the first half of 2003. The agreement with the US brings preferential access to the local banking sector while waiving
84
quantitative restrictions on wholesale and full foreign bank licenses for US-based banks. Discussions are underway for trade agreements with Mexico, Canada, and the PRC. In mid-August Singapore and India concluded a third round of talks in New Delhi.
85
Singapore: Selected ARIC Indicators

1996 Output and Prices GDP Growth (%) Private Consumption Expenditure Growth (%) Public Consumption Expenditure Growth (%) Gross Domestic Investment Growth (%) Gross Fixed Investment Growth (%) Manufacturing Sector Growth (%) Construction Sector Growth (%) Services Sector Growth (%) Net Exports of Goods and Services Growth (%) Inflation Rate (%) Unemployment Rate (%) Monetary and Fiscal Accounts Growth of Broad Money, M2 (%)1 Three-Month Interbank Lending Rate (%)1 Growth in Real Bank Credit to Private Sector (%)1 Average Stock Price Index Central Government Fiscal Balance as % of GDP Central Government Debt as % of GDP1 Government Expenditure on Education (% of Total) Government Expenditure on Health (% of Total) External Account, Debt, and Exchange Rates Growth of Merchandise Exports ($ fob, %) Growth of Merchandise Imports ($ cif, %) Current Account Balance as % of GDP Net Foreign Direct Investment ($ Billion)2 Net Portfolio Investment ($ Billion)2 Gross International Reserves ($ Billion)1 Real Effective Exchange Rate (1995=100)3 Average Exchange Rate (Local Currency to $) 5.7 5.5 15.2 3.1 -17.0 77.0 104.0 1.4 -0.1 0.8 15.7 4.4 -14.2 71.4 107.6 1.5 -11.9 -23.2 22.6 7.1 -9.4 75.0 106.5 1.7 4.2 9.2 18.7 7.8 -8.9 77.2 102.8 1.7 20.1 21.1 14.5 6.4 -13.5 80.4 101.2 1.7 -11.6 -13.8 19.0 1.3 -11.1 75.8 103.9 1.8 2.8 0.4 21.5 2.0 -12.7 82.3 102.6 1.8 23.2 24.9 16.0 2.2 -4.7 74.8 101.3 1.7 18.0 22.1 15.6 0.8 -2.7 77.7 99.8 1.7 25.2 21.9 18.3 1.3 -2.9 78.1 100.9 1.7 14.9 16.4 8.7 2.2 -3.3 80.4 102.8 1.7 7.3 5.8 16.4 1.8 -3.2 77.7 104.7 1.8 -7.5 -12.4 22.5 1.5 -2.6 74.7 102.5 1.8 -20.7 -20.4 17.1 -5.0 -2.8 75.5 105.0 1.8 -21.7 -24.4 20.2 3.1 -2.5 75.8 103.6 1.8 -15.3 -16.3 20.1 1.6 -2.3 75.9 103.8 1.8 2.9 3.6 17.9 0.5 -3.9 80.4 102.3 1.8 12.5 6.5 23.5 -0.5 -3.9 80.7 102.3 1.8 13.2 9.8 24.7 0.4 -2.5 82.3 102.1 1.8 23.0 15.3 30.0 1.1 -2.8 83.6 99.3 1.7 8.7 3.0 28.2 1.1 -2.3 86.6 99.4 1.7 10.9 5.0 30.6 0.8 -2.4 91.1 99.6 1.8 9.8 ... 13.6 557.7 16.4 72.9 3.2 1.2 10.3 ... 10.4 488.9 12.6 72.3 3.2 1.1 30.2 ... 9.6 348.8 16.9 84.0 3.6 1.4 8.5 2.8 -3.7 523.6 10.0 91.2 3.7 1.3 -2.0 2.6 3.7 557.0 11.5 85.2 4.0 1.0 5.9 1.9 17.0 428.0 -0.3 96.7 4.4 ... -0.3 0.9 -9.0 417.9 -1.7 100.7 ... ... 5.6 2.4 -2.3 612.6 2.7 90.2 ... ... 2.3 2.5 0.1 542.9 16.8 89.2 ... ... -2.2 2.6 2.4 559.4 28.6 87.2 ... ... -2.0 2.8 3.7 512.4 -2.3 85.2 ... ... 2.2 2.4 7.1 487.8 -3.0 86.6 ... ... 1.9 2.3 7.9 428.3 12.9 87.2 ... ... 5.0 1.9 17.5 410.1 6.0 91.0 ... ... 5.9 1.3 17.0 388.8 -17.2 96.7 ... ... 3.5 1.1 4.8 458.1 -7.8 99.8 ... ... 2.5 0.9 2.1 448.1 8.1 98.3 ... ... 1.0 1.4 -6.6 401.5 2.9 100.5 ... ... -0.3 0.8 -9.0 364.8 -10.1 100.7 ... ... 0.5 0.7 -1.4 347.4 -3.7 102.5 ... ... 2.9 0.6 1.3 365.7 11.8 104.7 ... ... 4.8 0.8 2.0 427.6 11.2 ... ... ... 8.1 5.8 19.7 15.0 25.0 2.8 23.1 9.4 -2.8 1.4 2.0 8.5 5.5 7.5 18.9 10.1 4.3 16.6 9.7 -6.4 2.0 1.8 -0.9 -4.2 8.3 -21.5 -6.0 -0.7 2.4 -0.9 70.3 -0.3 3.2 6.4 8.2 6.8 5.8 -4.9 13.0 -9.0 5.6 5.4 0.03 3.5 9.4 14.0 17.6 16.6 7.9 15.1 -1.8 7.7 -12.4 1.4 3.1 -2.4 2.3 8.2 -24.1 -5.8 -11.5 -3.2 2.0 23.0 1.0 3.3 2.2 0.9 4.4 -10.7 -9.7 8.3 -10.8 1.5 19.3 -0.4 4.4 9.6 14.4 11.3 20.9 7.2 12.9 -9.9 9.5 -13.8 1.1 2.8 8.2 15.3 8.4 15.3 4.3 13.5 -2.1 6.2 -13.9 0.8 4.4 10.0 14.3 8.9 10.4 9.2 15.2 3.6 7.9 2.1 1.5 2.1 9.7 12.3 43.8 21.4 10.7 18.6 1.2 7.3 -23.5 2.0 3.0 4.1 9.6 -1.6 -2.4 6.8 2.4 2.9 5.0 9.3 1.7 2.0 -1.2 3.0 27.9 -20.6 -3.3 -8.8 -1.2 2.5 16.3 1.7 3.4 -5.7 0.1 32.4 -27.5 -12.1 -18.9 -4.6 0.5 5.2 0.8 3.0 -6.1 -2.9 -7.3 -39.7 -12.8 -18.5 -9.1 0.3 67.1 -0.2 4.9 -1.5 -1.4 0.7 -19.0 -13.4 -4.7 -8.8 0.6 22.5 -0.9 3.7 3.8 0.0 14.5 9.6 -4.5 13.5 -11.1 1.7 -1.6 -0.4 5.2 3.8 -0.1 6.8 -17.5 -11.4 15.5 -11.5 1.6 35.4 -0.4 3.8 3.0 5.2 -1.0 -18.8 -9.0 9.9 -11.9 1.9 20.4 0.1 4.7 1.6 0.9 -2.6 -46.0 -5.9 5.8 -13.6 0.9 54.9 0.7 3.7 -3.8 0.2 -0.3 -40.6 -9.8 -7.1 -9.0 -2.8 43.4 0.2 5.4 1.7 3.8 -5.7 -28.7 -0.9 3.3 -9.1 1.7 25.5 0.5 4.9 1997 1998 1999 2000 2001 2002 00Q1 00Q2 00Q3 00Q4 01Q1 01Q2 01Q3 01Q4 02Q1 02Q2 02Q3 02Q4 03Q1 03Q2 03Q3
Note: All growth rates are on a year-on-year basis. . . . = not available. 1 End of period. 2 Quarterly figures were converted to dollars from Singapore dollar using the quarterly average exchange rate. 3 Trade weighted using wholesale price index for trading partners and consumer price index for the home country. Sources: Data on output and prices, M2, central government fiscal balance, central government debt, government expenditure on education and health, merchandise exports and imports, current account balance, net foreign direct and portfolio investments, and gross international reserves are from national sources. Data on real bank credit to private sector are from the International Monetary Fund, International Financial Statistics. Data on interbank lending rate, average stock price index, and average exchange rate are from Bloomberg, LP. Real effective exchange rates are based on REMU staff calculations.
Thailand
Real Sector
20 10 0 -10 -20 98Q1 99Q1 00Q1 01Q1 02Q1 03Q1
q-o-q annualized, seasonally adjusted y-o-y Source: ARIC Indicators.
This years economic performance is robust. Thailands economy has been resilient in the face of setbacks caused by the slack global economy and SARS. GDP grew 5.8% in the second quarter, slower than the first-quarter pace of 6.7%, but still robust (Figure 1). Thailand is growing at rates not seen since the onset of the 1997 crisis. After the second quarter, tourism rebounded and domestic confidence returned to record highs, coupled with continued signs of global economic recovery. Although monthly indicators from the central bank indicate a marginal deceleration in Thailands growth in the third quarter, the Ministry of Finance estimates an increase in growth to 6.4% for that period, and 6.4% for the whole of 2003. The Bank of Thailand and the National Economic and Social Development Board estimate growth at 5.75-6.25% this year, up from 5.3% in 2002 (Table 1).

1997 1998 1999 2000 2001 2002 2003 2004
Official 1 ADB 2 IMF3 World Bank4 Consensus Economics 5

1 2 3 4 5
-1.4
-10.5
4.4
4.6
1.9
5.3
6.4 6.0 5.0 5.8 6.0
7.5 6.0 5.1 6.0 6.1
National Economic and Social Development Board, 19972002; Ministry of Finance projections, 2003, 2004. ADB, Asian Development Outlook 2003 Update, October 2003. IMF, World Economic Outlook, October 2003. World Bank, East Asia Update Regional Overview, October 2003. Consensus Economics Inc., Asia Pacific Consensus Forecasts, November 2003.

30 15 0 -15 -30 -45 -60 98Q1 99Q1 00Q1 01Q1 02Q1 03Q1
Private consumption has been the main driver of growth. Continuing the trend since the onset of the crisis, private consumption has provided the main impetus to expansion, accounting for about 60% of GDP growth in the second quarter (Figure 2). Low deposit rates, increased access to borrowing, a sharp rise in farm prices and incomes, and record consumer confidence helped. Private investment rose 17.5% in the first half, after a 13.3% increase in 2002, a result of expansion of investment in both construction and equipment. Public investment continued to decline, though, so total investment rose 7.7% in the first half. Combined investment was about 20% of GDP, close to the postcrisis trough and well below the precrisis rate of 42%.
Capacity utilization in electronics is above precrisis levels. The monthly manufacturing production index rose 10.5% in September, almost twice the rate in August. Seasonally adjusted production was the highest since April, just before the effects of SARS intensified. For the third quarter as a whole, manufacturing growth slowed to 9% from 14% in the second. Vehicles, petroleum, electronics and food production recorded the strongest increases in production. Capacity utilization rates in these sectors are close to, and, in the case of electronics, higher than, precrisis levels.
20 10 0 -10 -20 -30 -40 -50 98Q1 99Q1 00Q1 01Q1 02Q1 03Q1
Agriculture Construction Manufacturing Services
Tourism rebounded in the third quarter. The services sector slowed to 2.3% growth in the second quarter from 3.9% in the first, as the sharp downturn in inbound tourism resulted in a 14% contraction in the hotels and restaurants sector (Figure 3). A rebound in tourism in the third quarter to the year-earlier level, after a 40% decline in the second quarter, suggests a recovery in services is underway. Agricultural production, supported by a 17% rise in farm prices this year, expanded 5.2% in the first half, well above the 0.5% increase a year earlier. Public construction remained weak. Private construction investment has been rising at double-digit rates since the last quarter of 2001.

Fiscal consolidation has advanced rapidly. The Governments budget recorded a surplus of B71.4 billion in the fiscal year ended September, equivalent to 1.2% of GDP, a sharp contrast to the B175 billion (3.1% of GDP) deficit projected in the original budget. The result is an improvement of 3.3% of GDP from a realized deficit in FY2001/02, and is the first surplus since the onset of the crisis. A sharp increase in revenue was the primary reason, reflecting stronger growth, better tax collection, and the expiration of a fiveyear period when companies were allowed to carry over losses incurred during the height of the crisis. Spending also declined. The reorganization of the civil service in 2002 seems to have contributed to a shortfall in disbursements relative to targets.
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Off-budget stimulus has supported domestic demand. The Government has relied on off-budget measures to stimulate demand at a cumulative cost of an estimated 6% of GDP since 2001. Some of these costs have been partially incorporated in the budget. For example, the costs of the Village Fund and the provision for temporary debt suspension of farmers have been included. The cost of some other measures, however, including provision of credit to SMEs, and housing projects, are borne by state-owned banks.
Public debt declined to 49% of GDP by August. Total public sector debt, including that of the Government, non-financial state enterprises and the Financial Institutions Development Fund (FIDF), declined from a peak of 57% of GDP in 2001 to 49% of estimated 2003 GDP as of August. Factors that contributed to the decline include fiscal consolidation, a fall in the growth-adjusted real interest rate on public debt, a stronger currency, and the sale of some of FIDFs assets. Potential losses from FIDFs rehabilitation of the financial sector are still uncertain. Current trends show that the Governments longer-term target of limiting debt to a maximum of 60% appears within reach.
30 20 10 0 -10 -20 98Q1 99Q1 00Q1 01Q1 02Q1 03Q1
Monetary policy is accommodative. The central bank reduced the 14-day repurchase rate in June by 50 basis points to 1.25%. The reduction was made to support domestic demand and to keep the Thai-foreign short-term interest rate differential from widening, which would put upward pressure on the currency. Thailands inflation remains subdued (Figure 4). Headline inflation moderated to 1.2% in October from this years peak of 2.2% in August. Consumer prices on average rose 1.8% in the nine months to September. A stronger currency, excess capacity, and increased competitive pressures offset the impact of higher oil prices. With the lowering of the policy rate, commercial banks again trimmed lending and deposit rates. Bank rates have declined 100 basis points this year. But their loan-deposit ratio has remained flat, around 105% over the past year as credit to the corporate sector remains weak. Stronger companies are raising funds internally or in the capital markets to finance investment. Total bank lending to the private sector, after accounting for write-offs and loans transferred to asset management companies, increased 2.5% in September from a year ago, partly a consequence of the strength in consumer lending.
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Balance of Payments
50 25 0 -25 -50 98Q1 99Q1 00Q1 01Q1 02Q1 03Q1
Exports Imports
Merchandise exports continue to grow. Exports and imports, in dollar terms, slowed to about 11% year-onyear growth in the third quarter from 19% and 16%, respectively, in the first half (Figure 5). However, recent data and prospects for firmer external and domestic demand, along with the strength in commodity prices, suggest that the tradable sectors will continue to perform well. The ASEAN region, greater China, and Korea have accounted for more than half of export growth this year. In spite of a stronger baht exchange rate against the US dollar (Figure 6), the real effective exchange rate has risen more modestly, reflecting the appreciation of regional currencies against the dollar and weak domestic inflationary pressures.
Figure 6: Exchange Rate Index, Weekly Average (last week of Jun 1997=100, $/Baht)
The central bank moved to slow the pace of currency appreciation. The central bank took several steps to slow the pace of currency appreciation, in addition to the June reduction in the policy rate and periodic intervention in foreign exchange markets. In July, it eased restrictions on investment in foreign-currency debt securities by domestic institutional investors. In September, the central bank limited baht borrowing by domestic financial institutions from non-residents. And in October, non-residents were prohibited from holding more than B300 million in onshore accounts. Domestic financial institutions were also barred from paying interest on non-resident baht accounts with less than six-month maturities.
The current account surplus rose in the third quarter. The current account surplus in the third quarter rose to $1.8 billion from $1.2 billion in the second as tourism recovered. The surplus in the first three quarters was $5.6 billion, 18% above a year ago. The fourquarter rolling sum of the current account surplus is still around 6% of GDP, similar to that in 2002. The overall balance of payments recorded a deficit of $322 million in the first three quarters, swinging from a $3.1 billion surplus a year earlier. Much of this reversal came from the Bank of Thailands early repayment of about $4 billion of loans contracted under the IMF support program, as well as banks accumulation of foreign assets. The other components of the capital account have
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98Q1 98Q3 99Q1 99Q3 00Q1 00Q3 01Q1 01Q3 02Q1 02Q3 03Q1 03Q3
improved. Net foreign direct investment rose to $1.1 billion in the first eight months from $900 million in all of 2002. Net repayment of loans by the private sector and outflows of portfolio investment have also slowed. External debt continued to fall to $52.9 billion as of August, equivalent to 40% of GDP, from $59.5 billion at end-2002. Short-term debt remained stable at $11.9 billion during the period. The decline in short-term debt, from a peak of $38 billion in 1997, has probably run its course. With foreign exchange reserves of $40.5 billion, there is a better cushion to absorb external shocks (Figure 7).
20
40
60
80
100 120
Gross International Reserves Total External Debt Short-Term External Debt Source: ARIC Indicators.
A rise in re-entry NPLs keeps banking system NPLs around 15%. NPLs in the banking system remained steady at 15.3% of total loans compared with 15.7% at end-2002, mainly because of a rise in reentry NPLs. This suggests that past rescheduling may not have adequately accounted for debtors prospects. Robust economic growth appears to have limited the increase in new NPLs. System-wide NPLs, including those transferred to asset management companies, remain high at close to 30% of total loans.
Corporate restructuring efforts are proceeding. The Thai Asset Management Corporation (TAMC) made considerable progress in out-of-court resolution of NPLs. As of June, the agency concluded cases worth B576 billion in book value out of the total B784 billion that it acquired mainly from state-owned financial institutions. About 45% of these finalized cases initially involved uncooperative debtors or those with businesses deemed unviable. Under the credible threat of special powers granted to TAMC to foreclose on loans, the agency offered these debtors an opportunity to renegotiate agreements and succeeded in restructuring loans with a book value of B47 billion. The remaining cases will be terminated by foreclosure if renegotiations are unsuccessful.
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The economy is expected to expand faster in 2004. Thailands adjustment since the onset of the crisis and the authorities proactive policies have well-placed the economy to benefit from the likely upturn in global growth. The Consensus Economics survey shows market forecasts of 6% GDP growth for this year and 6.1% in 2004. Growth next year could exceed the forecast, given the expected strength in external demand, high commodity prices, low interest rates, the Governments measures to stimulate the economy, and buoyant domestic confidence. The Ministry of Finance recently projected a 7.5% growth for 2004. With a large current account surplus, modest inflationary pressures, an improved fiscal position, the rise in foreign exchange reserves, and the fall in external debt, there is sufficient scope to accommodate the rise in domestic demand without exerting financing pressures. One area of policy focus is the need to monitor consumer lending closely to reduce longer-term vulnerability to a rise in interest rates or reductions in income. For now, the extent of consumer debt seems manageable. The increase in consumer lending led to a rise in household debt to 51% of disposable income in 2002 from 49% in 2001. This remains modest by regional standards. Structural reforms are incomplete. The recent recovery in private investment, albeit from depressed levels, augurs well for sustainability of growth over the longer term. However, investment as a share of GDP is less than half the level of the precrisis years. Although much of the investment before 1997 reflected misallocation, and the efficiency of capital may have increased since, a durable increase in the quantity of investment is required to sustain strong growth. Further progress in corporate restructuring, redeployment of excess capacity, and resumption of private bank lending to companies are probably necessary to raise investment and support longer-term growth. The workout of NPLs is incomplete. Legal reforms, including administrative measures to clear the large backlog of cases and amendments to the corporate bankruptcy law, will be important to resolve NPLs and build on the progress made by TAMC and the voluntary Corporate Debt Restructuring Advisory Committee mechanism. Greater transparency of quasi-fiscal programs is needed. Greater transparency and prudential monitoring of loans from stateowned institutions to support the Governments programs would limit
92
the potential increase in their NPLs and the contingent liabilities of the Government. Although the size of the current programs supported by these institutions is manageable, their inclusion in the Governments accounts would reduce uncertainties about the strength of the overall fiscal position.
93
Thailand: Selected ARIC Indicators

1996 Output and Prices GDP Growth (%) Private Consumption Expenditure Growth (%) Public Consumption Expenditure Growth (%) Gross Domestic Investment Growth (%) Gross Fixed Investment Growth (%) Agricultural Sector Growth (%) Manufacturing Sector Growth (%) Construction Sector Growth (%) Services Sector Growth (%) Exports of Goods and Services Growth (%) Imports of Goods and Services Growth (%) Inflation Rate (%) Unemployment Rate (%) Monetary and Fiscal Accounts Growth of Broad Money, M2 (%)1 Three-Month Interbank Lending Rate (%)1 Growth in Real Bank Credit to Private Sector (%)1 NPL Ratio of the Financial System1 NPL Ratio of the Commercial Banking System1 Average Stock Price Index Central Government Fiscal Balance as % of GDP Central Government Debt as % of GDP Government Expenditure on Education (% of Total) Government Expenditure on Health (% of Total) External Account, Debt, and Exchange Rates Growth of Merchandise Exports ($ fob, %) Growth of Merchandise Imports ($ cif, %) Current Account Balance as % of GDP Net Foreign Direct Investment ($ Billion) Net Portfolio Investment ($ Billion) Gross International Reserves ($ Billion)1 Total External Debt as % of GDP1 -1.9 0.6 -7.9 1.4 3.7 37.7 ... 3.8 -13.4 -2.0 3.3 4.6 27.0 69.4 146.3 35.0 102.4 31.1 -6.8 -33.8 12.7 7.4 0.3 29.5 93.1 98.7 27.1 90.0 41.2 7.4 16.9 10.2 5.7 -0.1 34.8 77.7 57.4 20.6 93.5 37.9 19.5 31.3 7.6 3.4 -0.7 32.7 65.0 45.9 18.4 86.9 40.2 -6.9 -2.8 5.4 3.5 -0.9 33.0 58.6 41.4 19.8 85.3 44.5 5.7 4.4 6.1 0.8 -1.6 38.9 47.1 31.3 20.1 89.7 43.0 27.8 42.7 10.1 0.7 -0.1 32.3 73.9 56.8 19.6 92.0 37.7 15.1 28.0 5.4 0.7 0.1 32.1 69.9 54.3 19.6 89.3 38.7 22.4 33.8 7.4 0.7 -0.6 32.2 67.4 48.2 18.2 84.9 41.0 14.1 23.6 7.5 1.2 -0.1 32.7 65.0 45.9 18.4 81.4 43.4 -1.2 11.5 4.7 0.7 -0.1 32.3 63.4 45.9 19.2 85.2 43.3 -0.7 2.9 3.7 1.2 -0.5 31.6 63.8 49.0 20.4 83.7 45.4 -11.0 -9.1 6.0 0.7 -0.5 32.6 63.2 45.8 20.1 84.2 44.9 -13.4 -13.9 7.1 1.0 0.2 33.0 58.6 41.4 19.8 88.3 44.3 -6.5 -10.3 5.8 0.2 -0.8 33.6 55.5 40.3 20.5 91.6 43.7 3.3 2.0 3.0 0.5 -0.1 36.8 54.8 38.1 21.0 90.7 42.8 11.1 12.7 6.3 -0.4 0.4 37.7 50.0 39.4 23.5 88.5 42.1 15.2 14.6 8.8 0.5 -1.1 38.9 47.1 31.3 20.1 88.1 43.4 21.3 19.2 7.4 0.3 -0.4 37.3 43.6 32.8 22.4 85.9 42.8 16.8 12.1 3.6 0.3 -0.2 39.3 41.8 32.3 23.2 87.1 42.3 0.3 -0.9 40.3 53.0 31.5 23.2 88.8 41.3 11.0 11.8 12.6 13.0 9.0 ... ... 1165.7 0.9 3.8 21.5 7.1 16.4 26.0 14.7 ... ... 596.9 -1.5 6.9 21.4 7.5 9.5 7.8 -13.4 45.0 42.9 351.6 -2.8 15.0 26.4 8.0 2.1 5.0 -4.8 38.9 38.6 421.0 -3.3 21.4 26.2 7.5 3.7 5.0 -11.2 17.9 17.7 341.5 -2.2 23.6 25.8 7.6 4.2 2.9 -6.6 10.5 10.5 303.5 -2.4 24.9 24.4 9.6 2.6 1.9 5.8 15.7 15.7 366.2 -1.4 31.1 ... ... 0.7 4.5 -5.8 37.4 37.0 432.7 -1.5 20.9 ... ... 0.8 3.8 -9.3 32.1 31.8 358.2 -1.1 21.8 ... ... 2.5 3.5 -13.7 22.9 22.4 304.0 -2.0 23.0 ... ... 3.7 5.0 -11.2 17.9 17.7 275.0 -4.2 23.5 ... ... 6.0 2.6 -10.5 17.6 17.4 309.8 -2.8 24.1 ... ... 6.7 3.8 -7.5 12.7 12.6 305.0 0.5 24.0 ... ... 5.3 3.5 -3.9 12.9 12.9 312.3 -2.0 24.8 ... ... 4.2 2.9 -6.6 10.5 10.5 287.1 -5.2 24.8 ... ... 5.0 2.3 -4.4 10.3 10.4 355.3 -5.3 25.3 ... ... 5.1 2.3 -1.1 10.3 10.3 390.1 2.7 25.7 ... ... 1.8 2.1 1.2 10.1 10.2 369.6 -1.1 31.3 ... ... 2.6 1.9 5.8 15.7 15.7 351.4 -1.9 31.1 ... ... 1.4 1.8 4.6 15.7 15.8 366.0 0.8 29.7 ... ... 1.7 1.4 1.4 15.7 15.9 399.6 2.5 28.8 ... ... 5.0 1.3 1.2 15.3 15.5 522.0 ... 38.3 ... ... 5.9 5.8 12.0 5.2 7.0 4.4 6.6 7.0 5.3 -5.5 -0.6 5.8 1.1 -1.4 -1.4 -2.8 -21.9 -20.5 -0.7 1.4 -25.6 -1.1 7.2 -11.3 5.6 0.9 -10.5 -11.5 3.9 -50.9 -44.3 -1.5 -10.9 -38.3 -10.0 8.2 -21.6 8.1 4.4 4.4 4.3 3.1 8.5 -3.2 2.3 11.9 -6.8 0.4 9.0 10.5 0.3 4.2 4.6 4.9 2.6 11.0 5.3 6.4 6.0 -9.5 3.7 17.5 27.3 1.6 3.6 1.9 3.7 2.9 1.7 0.9 3.3 1.4 -1.0 2.0 -4.1 -5.5 1.7 3.3 5.3 4.7 0.5 5.1 6.3 0.5 7.7 6.0 4.1 10.9 11.3 0.6 2.4 6.5 7.1 8.8 27.9 24.7 3.0 9.5 8.0 4.3 22.1 51.1 0.9 4.3 6.1 6.5 -2.8 10.2 -2.0 13.1 8.1 -12.2 3.9 17.6 21.6 1.6 4.1 2.3 3.2 6.2 -0.2 -1.1 6.5 2.8 -13.1 2.2 21.0 29.1 2.1 2.4 3.8 2.9 -1.4 6.5 2.7 5.0 4.0 -19.0 4.3 10.4 14.0 1.6 3.6 1.6 4.0 3.8 1.7 -3.9 2.4 1.1 -6.2 2.4 -1.9 -0.4 1.4 4.8 1.9 4.2 8.7 -2.5 5.9 1.7 1.7 -10.5 2.4 -0.5 -4.1 2.5 3.5 1.8 3.4 3.0 10.3 2.5 0.5 1.2 5.6 1.6 -8.6 -10.1 1.7 2.6 2.5 3.4 -3.6 -1.4 -0.7 6.8 1.6 8.4 1.5 -4.5 -6.9 1.1 2.4 3.9 3.7 8.3 -4.3 3.2 2.6 4.2 6.3 3.1 5.1 1.8 0.5 3.2 5.1 3.9 -1.6 6.8 7.5 0.7 6.8 20.0 3.7 12.2 13.3 0.2 2.9 5.8 5.2 -2.8 10.6 6.9 0.2 9.1 0.0 4.4 13.8 16.6 0.3 1.8 6.2 6.0 -1.1 9.0 7.8 -1.2 10.5 -0.4 5.3 12.2 13.6 1.4 1.8 6.7 6.5 -5.8 10.1 6.7 6.5 11.2 -6.3 3.9 12.0 12.2 2.0 2.9 5.8 6.0 4.6 5.5 8.6 4.1 11.0 0.6 2.3 2.0 0.7 1.7 2.5 ... ... ... ... ... ... ... ... ... ... ... 1.9 ... 1997 1998 1999 2000 2001 2002 00Q1 00Q2 00Q3 00Q4 01Q1 01Q2 01Q3 01Q4 02Q1 02Q2 02Q3 02Q4 03Q1 03Q2 03Q3
Note: All growth rates are on a year-on-year basis. . . . = not available. 1 End of period. 2 Trade weighted using wholesale price index for trading partners and consumer price index for the home country. Sources: Data on output and prices, M2, real bank credit to private sector, nonperforming loan ratios of the financial and commercial banking system, central government fiscal balance, central government debt, government expenditure on education and health, merchandise exports and imports, current account balance, net foreign direct and portfolio investments, gross international reserves, and total and short-term external debts are from national sources. Data on interbank lending rate, average stock price index, and average exchange rate are from Bloomberg LP. Real effective exchange rates are based on REMU staff calculations.
Viet Nam
GDP grew an estimated 7.1% in the first three quarters. The Government estimates that GDP grew 7.1% in the first three quarters, supported by rising investment, industrial production, and exports. It expects growth for the full year will be slightly higher (Table 1). This years growth was achieved despite soft global export markets and the weakness in regional travel and tourism caused by the SARS outbreak.

1997 1998 1999 2000 2001 2002 2003 2004
Official 1 ADB 2 IMF3 World Bank

4
8.2
5.8
4.8
6.8
6.9
7.0
7.27.3 6.9 6.0 7.0 7.0
7.58.0 7.1 7.0 7.0 7.4
Consensus Economics 5
1 2 3
General Statistics Office. ADB, Asian Development Outlook 2003 Update, October 2003. IMF, World Economic Outlook, September 2003. 4 World Bank, East Asia Update Regional Overview, October 2003. 5 Consensus Economics Inc., Asia Pacific Consensus Forecasts, November 2003.
Industrial production shows robust growth. Industrial production was up 16% in the 11 months through November, according to official estimates. Particularly strong growth occurred in the automobile, garments, and electrical generation sectors. Private sector and foreign-owned firms generally recorded higher gains. The services sector expanded about 6.5% in the first three quarters in spite of the SARS impact on tourism, primarily because of growth in financial services. Agricultural production was up about 3% in the first three quarters, although drought in the central region and floods in the north adversely affected output. In terms of demand, both consumption and investment posted solid gains. Total investment is projected to rise 18% this year. Investment by the domestic private sector and the foreign-owned sector both increased more than 22% in the first three quarters. The investment climate was helped by sustained economic growth; a stronger, more transparent legal and administrative framework; and better prices for key export commodities such as oil and rubber. The fiscal deficit is expected to widen. Fiscal policy has been expansionary, with public expenditure rising in the first half of 2003 as the Government implemented various reforms
Interest Rate, Inflation 12 9 6 3 0 -3 98Q1 99Q1 00Q1 01Q1 02Q1 03Q1
Three-Month Treasury Bill Rate, End of Period Growth in Real Bank Credit to Private Sector, End of Period (y-o-y) Inflation Rate (y-o-y) Source: IMF, International Financial Statistics CD-ROM.
such as increasing bank capitalization. Preparations for the Southeast Asian Games in Viet Nam also had an impact on public finances. Revenues rose as well. The Government plans to significantly increase collections of income and profits taxes, along with indirect taxes, in the future. The budget deficit for 2003 is expected to widen from last years 3.5% of GDP, but will be narrower than earlier projected. Monetary policy remains expansionary, while inflation has slowed. Credit has been expanding rapidly, with strong demand to fund both consumption and investment. Broad money (M2) supply rose a rapid 23% in the second quarter from a year earlier. Bank credit to the private sector in real terms rose at a similar pace. The State Bank of Viet Nam relaxed monetary restrictions and utilized indirect monetary instruments to support lending. However, there were concerns that this pace of credit expansion increased risks for banks, which could face a rise in nonperforming loans when interest rates eventually rise. Inflation slowed from about 4% at the start of 2003 to 2.5% in November, but is expected to rise again as a result of higher food prices and wage increases (Figure 1). Both exports and imports have jumped this year. According to Government estimates, exports rose 22% in the 11 months to November from a year ago and imports surged 29% (Figure 2). Rising prices for export commodities, particularly crude oil and rubber, and strong sales of garments to the US helped propel exports. The even stronger rise in imports was caused by Viet Nams need for production inputs and capital equipment. The merchandise trade deficit was estimated at $4.3 billion through November, widening from $2.4 billion a year earlier. In November, Fitch Ratings revised the outlook on Viet Nams long-term foreign and local currency ratings to stable from positive, citing concern over the widening trade deficit and high growth in domestic credit. Foreign direct investment has picked up. FDI commitments have picked up this year, rising 37% in the first nine months from a year ago. To continue this momentum, the Foreign Investment Department will increase the number of economic and industrial zones open to FDI and allow more autonomy to foreign investors. Gross international reserves, excluding gold, increased to $6.3 billion in June from $4.1 billion at end-2002 (Figure 3). The ratio of reserves to short-term debt is about 8:1. The dong depreciated 1.4% against the dollar in the 10 months to October.
Bank Credit 250 200 150 100 50 0

60 40 20 0 -20 98Q1 99Q1 00Q1 01Q1 02Q1 03Q1
Exports Imports Source: IMF, International Financial Statistics CD-ROM.

1997 1998 1999 2000 2001 2002 20031 0 2 4 6 8 10 12
Gross International Reserves Total External Debt Short-Term External Debt First half Source: Joint BIS-IMF-WB-OECD statistics on external debt.
1
96
Reforms are underway in the banking sector. Important reforms are underway in the banking sector. The program aims to ensure a level playing field between state-owned and private banks, improve the legal framework for financial services, and strengthen bank supervisory agencies. The focus is on restoring the financial health of four large state-owned commercial banks. These banks are strengthening their credit risk management and external audit systems and working to resolve NPLs. New rules on loan classification and loan provisioning that conform to international best practices will be introduced. After the reforms, the state-owned banks will be recapitalized. The Government instructed the State Securities Commission to draft new regulations to govern stock market-related activities. Possible changes include the listing of foreign-invested companies and issuing shares by state-owned companies. But the restructuring of SOEs falls behind schedule. A plan to issue shares in state-owned enterprises (SOEs) and to attract strategic equity partners with skills, capital, and technology has fallen behind schedule. Some 200 SOEs were restructured in the first half and shares issued in 140, well short of the official target to restructure about 1,500 firms in 2003. The Government will establish an asset management company to restructure bad debts of the SOEs. The strong economic growth is likely to continue. The economy is expected to remain on a high growth path, driven by private consumption and private-sector investment. The Consensus Economics survey forecasts Viet Nams growth at 7% this year and 7.4% in 2004. The Government is targeting economic growth at 7.58% in 2004 and it aims to keep both inflation and the budget deficit as a percentage of GDP under 5%. Key challenges include reforms in trade and SOEs. To sustain high economic growth, Viet Nam needs to further liberalize trade policies by abolishing quantitative restrictions on imports, for example, and building a tariff structure from current non-tariff barriers. The Governments aim to join the WTO by 2005 should support the further opening of the economy. Other priorities should be SOE and financial sector reform, along with private sector development. These reforms would support the nations transition to a market economy. The Enterprise Law for private companies has helped attract greater investment, but a lack of managerial skills and knowledge about the law leaves its full potential unrealized. Revisions in the law will address
97
these concerns to promote transparency and thus boost investment further. The Government also is preparing a plan to develop the services sector, particularly banking and financial services, seaports, airports, and tourism.
98
Viet Nam: Selected ARIC Indicators

1996 Output and Prices Real GDP Growth (%) Agricultural Sector Growth (%) Services Sector Growth (%) Industry Sector Growth (%) Inflation Rate (%) Unemployment Rate (%) Monetary and Fiscal Accounts Growth of Broad Money, M2 (%)1 Growth in Real Bank Credit to Private Sector( %) Government Expenditure on Education (% of Total)2 Government Expenditure on Health (% of Total)2 Fiscal Balance as % of GDP External Account, Debt, and Exchange Rate Gross International Reserves less Gold ($ Billion)1 Total External Debt as % of GDP 1.7 17.1 2.0 19.4 60.0 22.7 -6.9 26.6 4.0 2.2 116.0 2.0 22.8 55.3 17.9 -4.6 1.9 -0.8 1.7 120.3 3.3 24.9 30.4 14.1 4.1 23.3 2.1 1.4 117.6 3.4 23.9 30.7 14.0 1.7 25.2 33.2 1.3 113.2 3.7 ... 27.1 12.4 1.5 4.5 2.3 1.3 115.1 4.1 ... 23.8 9.7 -2.8 9.5 18.8 1.4 115.5 3.6 ... ... ... ... 41.5 37.9 0.2 114.2 3.5 ... ... ... ... 20.7 35.0 0.2 113.2 3.5 ... ... ... ... 21.2 42.0 0.3 112.4 3.4 ... ... ... ... 22.2 25.3 0.6 113.0 3.3 ... ... ... ... 15.0 8.8 0.2 114.2 3.4 ... ... ... ... 15.1 6.2 0.3 115.6 3.7 ... ... ... ... 3.2 -7.8 0.4 115.3 3.7 ... ... ... ... -11.5 3.4 0.4 115.5 3.9 ... ... ... ... -10.6 1.6 0.3 121.2 3.8 ... ... ... ... 2.5 10.2 0.2 116.3 3.9 ... ... ... ... 18.1 33.4 0.5 111.7 4.1 ... ... ... ... 27.7 28.5 0.5 113.0 5.4 ... ... ... ... 45.7 46.7 ... 110.6 6.3 ... ... ... ... 23.8 45.4 ... 109.8 ... ... ... ... ... ... ... ... ... 25.7 25.8 8.6 4.4 -1.3 24.3 25.8 9.3 3.9 -4.8 23.5 2.9 9.8 3.9 -2.2 66.4 223.6 9.0 3.5 -3.2 35.4 38.9 9.5 3.4 -4.8 27.3 20.8 9.4 3.2 -3.8 13.3 17.4 ... ... -3.5 73.5 241.8 ... ... ... 70.0 75.1 ... ... ... 67.4 80.9 ... ... ... 35.4 38.9 ... ... ... 34.5 37.4 ... ... ... 34.8 29.8 ... ... ... 31.0 27.5 ... ... ... 27.3 20.8 ... ... ... 18.9 17.1 ... ... ... 16.3 16.5 ... ... ... 14.6 16.7 ... ... ... 13.3 17.4 ... ... ... 17.0 18.4 ... ... ... 23.0 22.8 ... ... ... ... ... ... ... ... 9.3 4.4 8.8 14.5 5.7 5.9 8.2 4.3 7.1 12.6 3.2 6.0 4.4 2.8 3.0 7.3 7.3 6.9 4.7 5.2 2.1 7.6 4.1 6.7 6.1 4.0 4.5 9.6 -1.7 6.4 5.8 2.3 4.4 9.7 -0.4 ... 6.4 3.0 6.0 8.9 3.8 ... ... ... ... ... -1.7 ... ... ... ... ... -2.4 ... ... ... ... ... -2.3 ... ... ... ... ... -0.5 ... ... ... ... ... -1.4 ... ... ... ... ... -0.8 ... ... ... ... ... 0.3 ... ... ... ... ... 0.2 ... ... ... ... ... 2.6 ... ... ... ... ... 4.0 ... ... ... ... ... 4.3 ... ... ... ... ... 4.4 ... ... ... ... ... 3.8 ... ... ... ... ... 3.5 ... ... ... ... ... ... ... 1997 1998 1999 2000 2001 2002 00Q1 00Q2 00Q3 00Q4 01Q1 01Q2 01Q3 01Q4 02Q1 02Q2 02Q3 02Q4 03Q1 03Q2 03Q3
Short-term Debt as % of Gross International Reserves1 65.0 Short-term Debt as % Total Debt Current Account Balance as % of GDP Growth Rate of Merchandise Exports ($ fob, %)3 Growth Rate of Merchandise Imports ($ cif, %)3 Net Foreign Direct Investment ($ Billion) Real Effective Exchange Rate (1995=100)4 Average Nominal Exchange Rate (Dong per $) 26.7 -10.5 ... ... 2.4 110.1
11,015 11,572 13,344 13,935 14,164 14,800 15,267 14,053 14,074 14,117 14,418 14,547 14,641 14,963 15,045 15,131 15,239 15,320 15,373 15,429 15,468 15,519
Note: Real effective exchange rates are based on REMU staff calculations. 1 End of period. 2 Fiscal year ending September. 3 Basic data are dollar values which are directly obtained from the IFS CD-ROM. 4 Trade weighted using WPI for trading partners and CPI for the home country. Sources: Data on output, fiscal balance, and current account balance are from Asian Development Outlook 2002, 2003, 2003 Update; M2, inflation rate,real bank credit to the private sector ,merchandise exports and imports, and gross international reserves are from IMF, International Financial Statistics, CD-ROM; unemployment is from ADB Country Economic Review 2001; central government expenditure on health and education are from ADB Key Indicators 2003; nominal exchange rates are from Bloomberg; total and short-term external debt are from Joint IMF-WB-OECD-BIS Statistics on External Debt.

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Asia Economic Monitor - December 2003

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Asia Economic Monitor 2003

Asian Development Bank

Acronyms, Abbreviations, and Notes

Note: In this publication, $ denotes US dollars, unless otherwise specified.

East Asias Growth and Restructuring Regional Overview

Real Sector Developments

Philippines Singapore Thailand1

Figure 2: Growth of Domestic Demand1 (y-o-y, %, at constant prices)

Figure 3: Growth of Exports of Goods and Services 1 (y-o-y, %, at constant prices)

Figure 4: Headline Inflation (y-o-y, %)

China, People's Rep. of Indonesia Korea, Rep. of Malaysia

Source: ARIC Indicators.

Figure 5: Core Inflation (y-o-y, %)

May Nov 2003 2003

Korea, Rep. of Malaysia Philippines

Source: Bank of Thailand and REMU staff estimates.

China, People's Rep. of Indonesia Korea, Rep. of Malaysia

Philippines Singapore Thailand

Source: REMU staff calculations derived from Bloomberg data.

1999 -4.62 30.51 15.96 14.55 -35.12 -32.11 -3.01

2000 16.58 24.61 13.08 11.53 -8.03 -10.91 2.89

2001 9.07 19.52 9.88 9.64 -10.45 -8.17 -2.28

2002e 11.10 5.23 5.83 -0.60 5.87 5.37 0.50

2003f 11.69 8.45 3.90 4.55 3.24 4.96 -1.72

2004f 13.43 11.60 5.80 5.80 1.83 2.33 -0.49

-35.32 17.81 13.54 4.26 -53.12 -47.66 -5.46

Figure 9: Nominal Effective Exchange Rate (Dec 2002=100)

Figure 10: Real Effective Exchange Rate (Dec 2002=100)

China, People's Rep. of Indonesia Korea, Rep. of Malaysia

Philippines Singapore Thailand

China, People's Rep. of Indonesia Korea, Rep. of Malaysia

Figure 11: Policy Rates1 (end of week, % per annum)

Fiscal and Monetary Policies

Indonesia Korea, Rep. of Malaysia

China, People's Rep. of Indonesia Korea, Rep. of Malaysia

China, People's Rep. of Indonesia Korea, Rep. of Malaysia

Source: ARIC Indicators. 1 Three-month interbank lending rates.

One Year Ago3

Figure 16: Fiscal Balance 1 (% of GDP)

Financial Restructuring and Prudential Indicators

Nonperforming Loans of Banks

End-2002 Latest Available

Box 2: Progress in Voluntary Corporate Workouts

Figure 18: NPLs Purchased by AMCs ($ billion)

Dec 02 Latest Available

Capital Adequacy and Bank Profitability

Figure 19: Capital Adequacy Ratios of Commercial Banks (%)

Dec 02 Latest Available

Refers to CAR of the banking system. Source: ARIC Indicators.

Figure 20: Banking Sector Profitability1 (%)

Asset Resolution by Asset Management Companies

Indonesia Korea, Rep. of Malaysia2

Asset resolution means the sale or restructuring of nonperforming assets.

Figure 21: NPLs Resolved by AMCs1 (% of NPLs purchased)

Dec 02 Latest Available

Supervisory and Regulatory Reforms

Trends in Bank Credit

Indonesia Korea, Rep. of Malaysia

Box 3: Supervisory and Regulatory Reforms

Figure 23: Credit-Deposit Ratios of Commercial Banks (%)

Figure 24: Current Account Balance (% of GDP)

0 -10 1997 1999 2001 20031

Figure 25a: Total Debt Service (% of exports of goods and services)

Figure 25b: Interest Payments (% of exports of goods and services)