Asia’s taken one on the chin. Fourth quarter growth collapsed in
virtually all countries, conjuring up memories of the Asian Financial
Crisis that swept the region 10 years ago. Be ready for more bad
news over the coming months, but growth should bottom soon and a
mild recovery take hold over H2 2009. Exports may struggle for
quite a while longer, but a massive fiscal stimulus, coupled with
falling interest rates and generally sound financial systems, should
help spur domestic demand growth.

Down for the count
They’ve never fallen this fast, even during the darker moments of the Crisis: various indicators over the
last several months point towards an almost unprecedented slump. Exports down, industrial production in
freefall, new orders drying up, confidence evaporating, and central banks selling hard currency. After
bypassing most of the region for a while, the credit crunch has truly turned into a global financial crisis,
dragging now Asia with it. Risks remain and the economic news may get a little grimmer still. But, the
powerful forces of recovery have also been marshalled: Asian governments have unveiled unprecedented
fiscal stimulus packages, ranging between 0.5% of GDP in Malaysia to over 4% in Taiwan and China;
meanwhile central banks have slashed interest rates and moved to guarantee bank deposits and inject
liquidity into local money markets. The response has been decisive, but the challenges are equally vast.
Will these policy measures work in bringing back economic growth? We think so. Growth should return
by the mid-point of this year, although the pace of the eventual recovery may not be as heady as Asia has
grown accustomed to. The assumed potency of Asia’s policy response hinges on two assumptions. First,
fiscal spending will help to blunt the drag from exports, which are unlikely to show a sustained bounce
for quite some time. Whether governments succeed in pushing the cash out the door as quickly as they
have promised remains to be seen, but at least most of them are not side-tracked by seeming intractable
dislocations in the financial sector. Second, and following from the first, financial systems are likely to
remain rather resilient. The adopted and continuing monetary stimulus, therefore, should ultimately prod
bankers in passing on, if somewhat reluctantly, the good news to their clients.
These, at least, are the assumptions. What, then, are the risks? Well, we don’t know for sure whether
policy on this scale will work. The region, and the world for that matter, has never undergone anything
close to the concurrent rates cuts and fiscal boost that are now being rolled out. Economists have, over
time, devised fairly reliable estimates of the impact of various policy measures on economic growth, rules
that have their grounding in both hard data and solid models. Under extreme circumstances, however, and

the current environment surely qualifies as such, the rule book may not necessarily hold: the linearity
underlying many economic theories, as well as the lack of any precise historical precedent, raise questions
about the reliability of current forecasts, not least because the exact impact of the proposed measures,
often of an unorthodox nature, have on economic growth is now extremely hard to judge.
More to the point, for Asia, the main questions are whether the extra public spending will help counter the
likely prolonged slump in exports. We’ve argued before that domestic demand is not entirely dependent
on growth elsewhere, as is often assumed. But whether construction spending, tax cuts, and other such
goodies will have the expected impact remains to be seen. The other big risk, of course, is that financial
systems could come under renewed pressure: the continued withdrawal of both portfolio and international
bank capital may yet expose currently hidden vulnerabilities. The region may have sufficient savings to
finance its growth, which will surely help over time, but it still relies on the risk intermediation of
Western financial institutions – an affliction that may only be cured over time. So far, local financial
systems have proven surprisingly resilient, but this fight has a few more rounds to go.
Double whammy
The view that Asia’s been knocked over entirely by collapsing exports and capital flight, most notably
since the onset of financial calamity in late September, is not entirely accurate. To be sure, overseas
shipments from October plunged, providing a crippling hit to the region’s vast export machine. But,
already before, starting over the summer, domestic demand started to buckle, with investment and
consumption, most notably in China, starting to slow rapidly. Here, the inflation surge over the first half
of 2008, and the attendant monetary tightening, are mostly to blame. Asia, in short, has been hit by two
recessions, both domestic and external. This explains the extremely weak numbers now rolling in, but it
also suggests, paradoxically, that these two cycles run somewhat independently.
Looking ahead, while exports may continue to linger, domestic demand should at least begin to perk up
as price pressures abate and interest rates come down. This, to be sure, is no recipe for an impending
boom, but it does highlight that both cyclical and structural factors are at work, with the former turning
possibly before the latter will. Add to this a powerful fiscal stimulus and you can see how growth should
at least turn positive as the year progresses.
Back from the ropes
Let’s, then, put some hard numbers on it. According to our forecasts, Asia ex Japan, in weighted terms
will grow 5.5% this year, down from 7% in 2008. Korea, Taiwan, Singapore, and Hong Kong, however,
will see their economies contract on a full-year basis, with China and India relatively more resilient given
their vast internal market and thus limited exposure to turbulence elsewhere. For almost the entire region,
moreover, with the exception perhaps of Asia’s two city-states, growth will follow the profile of a
deepening slump in the first quarter of 2009, but turn positive from the second or third quarter on. Such
deep and sharp V-shaped recoveries have been the hallmark of Asia in the past, but we suspect that this
time around the second, upward leg will not be quite as steep. Nevertheless, 2010 should see growth
strengthen further, led in large part by Asia’s resurgent giants China and India. Indonesia, Malaysia, and
the Philippines, despite slowing growth, will surprise in their resilience.

目录

Down and out in Asia? 4
A race to the bottom 4
What’s gone wrong? 5
Tough times 7
Short-term gloom 10
A year of two halves? 11
Judging policy 12
Known unknowns 12
How to think about it 12
Chasing multipliers 13
Negative multipliers? 15
Not at all crowded 16
A bag of measures 18
Not financing finance 19
Fiscal transmission 20
A rerun of ’97? 23
What lies ahead 24
Down to hard numbers 24
Monetary push 25
Bouncebackability? 26
GDP 28
Inflation 29
Industrial production &
unemployment 30
Consumption & saving 31
Investment 32
Trade 33
Exchange rates & interest rates 34
Country profiles 35
China 36
Hong Kong SAR 38
India 40
Indonesia 42
Japan 44
Korea 46
Malaysia 48
Pakistan 50
Philippines 52
Singapore 54
Sri Lanka 56
Taiwan 58
Thailand 60
Vietnam 62
Disclosure appendix 67
D isclaimer 68
Contents