The November 2008 Asia and Pacific REO focuses on the difficult economic environment facing policymakers in the region.

Chapter 1 provides an overview of the outlook for the region. With growth slowing, and the global financial crisis increasingly affecting the region, macroeconomic and financial policies will need to be proactive.

Chapter 2 looks more closely at inflation in Asia, finding that it is increasingly imported and volatile, which raises important questions about monetary policy frameworks in the future.

Chapter 3 takes a longer-term look at how the expected rapid aging of the region may affect capital flows and financial markets in the years to come.

Executive Summary
With the global economy entering a major downturn amid a deepening financial crisis, Asia is confronting the likelihood of sharply slowing growth and increased vulnerabilities. In particular, global financial stresses and the process of deleveraging by financial institutions are expected to continue beyond next year. This will dampen economic prospects in the region via a number of potential channels, notably lower demand for Asia’s exports, tighter funding conditions, more volatile capital flows, depressed equity prices and confidence, and deteriorating loan quality.

As outlined in Chapter 1, our baseline scenario sees growth in Asia slowing substantially before beginning a recovery in late 2009. With the global slowdown dampening exports, growth in Asia is projected to come primarily from domestic demand, which is nonetheless expected to slow. With commodity prices easing and growth declining below potential, inflation should decline. In fact, there are signs that headline inflation—and to a lesser extent, core inflation—have already peaked.

Risks to the outlook are considerable and tilted firmly to the downside. A severe global recession, combined with a deeper-than-expected credit squeeze, would have significant spillovers to the region, through both exports—Asia’s trade integration with the rest of the world has increased over the last decade—and a range of financial channels. In particular, it remains unclear how domestic demand would stand up to a sharp decline in export growth and tighter financial conditions. ...

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In this Regional Economic Outlook: Asia and Pacific, the following groupings are employed:

• “Emerging Asia” refers to China, India, Hong Kong SAR, Korea, Singapore, Taiwan Province of China, Indonesia, Malaysia, the Philippines, Thailand, and Vietnam.
• “Industrial Asia” refers to Japan, Australia, and New Zealand.
• “Asia” refers to emerging Asia plus industrial Asia.
• “Newly industrialized economies” (NIEs) refers to Hong Kong SAR, Korea, Singapore, and Taiwan Province of China.
• “ASEAN-5” refers to Indonesia, Malaysia, the Philippines, Thailand, and Vietnam.

Contents
Definitions vi
Executive Summary ix
I. Overview 1
Implications of the Global Financial Crisis for Asia’s Outlook 1
The Deepening Global Financial Crisis 1
Key Risks to Asia from the Deepening Global Financial Crisis 3
2009 Baseline Forecast: Continued Slowdown in the Face of a Global Financial Shock 9
Policy Challenges to Safeguard Macro and Financial Stability 19
Appendix 23
II. The Globalization of Asian Inflation 28
Asia’s Changing Inflation Landscape 28
Asia and the Commodities Boom 31
Policy Considerations 33
Concluding Remarks 37
Appendix 37
III. The Graying of Asia: Demographics, Capital Flows, and Financial Markets 41
Demographic Trends and Patterns 41
How Demographics Affect Capital Flows and Financial Markets 43
Empirical Findings 44
Potential Policy Implications 50
Appendix 53

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