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p. 1 of 25 BACK | NEXT Foreword, Acronyms and Abbreviations, Definitions I. Developing Asia and the world II. Economic trends and prospects in developing Asia III. The challenge of higher oil prices Statistical appendix

Asian Development Outlook 2005 Update

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Foreword

The economies of developing Asia and the Pacific continued to perform well during the first half of 2005. At a regional level, gross domestic product is expected to grow at 6.6% in 2005, marginally up on the 6.5% projected in the Asian Development Outlook 2005 (ADO 2005) in April this year. Faster than anticipated growth in the People's Republic of China and a strong showing in South Asia have nudged the full-year average up. But higher oil prices and other adverse developments, including a downswing in the global electronics cycle, as well as poor agricultural harvests, have caused growth to soften in Southeast Asia. Central Asia and two net oil exporters in the Pacific have benefited from rising oil incomes.

For 2006, this Update retains the ADO 2005 projection for growth of 6.6%. Positive elements include the likelihood of a soft landing in the People's Republic of China, the consolidation of gains in South Asia, and an end to some of the temporary factors that restrained growth in Southeast Asia during 2005. Nevertheless, the Update cautions that high and still rising oil prices heighten uncertainty about prospects in 2006.

The Update features an overview of recent trends within the region and sets them in their global context. It also points to risks in the outlook and suggests appropriate responses to these risks. Recent economic trends and the outlook are reappraised and updated for selected countries in developing Asia. A major theme of the Update is the challenge presented by high oil prices for countries of the region. This is the focus of the special chapter in Part 3. A key message that emerges is that higher oil prices may be here for some time, and that countries across developing Asia need to adjust to this possibility.

The Update was prepared by the staff of the Asian Development Bank from the East and Central Asia Department, Mekong Department, Pacific Department, South Asia Department, Southeast Asia Department, the Economics and Research Department, as well as the resident missions of the Asian Development Bank. The economists who contributed the country chapters are: Ramesh Adhikari assisted by Dao Viet Dung, Nguyen Phuong Ngoc, and Bui Trong Nghia (Viet Nam); Tom Crouch, Joven Balbosa, and Xuelin Liu (Philippines); David Green assisted by Ramesh Subramaniam and Amanah Abdulkadir (Indonesia); Mohammad Zahid Hossain and Rezaul Khan (Bangladesh); Hiranya Mukhopadhyay (India); Safdar Parvez and Ghulam Qadir (Pakistan); Jean-Pierre Verbiest and Luxmon Attapich (Thailand); and Min Tang and Jian Zhuang (People's Republic of China). Kevin Chew of the Malaysian Institute of Economic Research drafted the chapter on Malaysia. Other economists who contributed inputs for the subregional summaries include: Purnima Rajapakse (Cambodia); Rattanatay Luanglatbandith (Lao People's Democratic Republic); Nirmal Ganguly (Myanmar); Michaela Prokop (Afghanistan); Abid Hussain (Bhutan and Maldives); Sungsup Ra, Bipulendu Singh, and Raju Tuladhar (Nepal); and Johanna Boestel (Sri Lanka). Ganeshan Wignaraja contributed the subregional summary on Central Asia and Craig Sugden drafted the summary on the Pacific. The subregional coordinators were Alain Borghijs and Toan Quoc Nguyen for South Asia, and William Bikales and Jayant Menon for Southeast Asia.

Frank Harrigan, Assistant Chief Economist, Macroeconomics and Finance Research Division, assisted by Charissa N. Castillo, coordinated the overall production of the publication. Frank Harrigan and Cyn-Young Park wrote the chapter on developing Asia and the world and the special chapter in Part 3 on the challenge of higher oil prices. Douglas Brooks, Xiaoqin Fan, Jesus Felipe, Akiko Terada-Hagiwara, Duo Qin, and Fan Zhai contributed to and reviewed initial drafts.

Technical and research support was provided by Edith Laviña, Ludy Pardo, Pilipinas Quising, Nedelyn Ramos, Grace Sipin, and Lea Sumulong.

IFZAL ALI

Chief Economist

Economics and Research Department

Contents

Part 1 Developing Asia and the world 1

Developing Asia and the world 3
Prospects for developing Asia, 2005 and 2006 3
Prospects for the world economy 10
Risks 13
Subregional trends and prospects 16

Part 2 Economic trends and prospects in developing Asia 31

Bangladesh 33
People's Republic of China 36
India 40
Indonesia 44
Malaysia 47
Pakistan 50
Philippines 54
Thailand 58
Viet Nam 61

Part 3 The challenge of higher oil prices 64

Adjusting to higher oil prices: The challenge for developing Asia 65
Why are oil prices so high? 66
Why high oil prices matter 67
Policy responses to higher oil prices 76

Statistical appendix 86

Statistical notes and tables 87

Boxes

Box 1.1 The challenge of high oil prices 4

Box 1.2 Foreign exchange reserves in developing Asia 8

Box 1.3 Restoring local economies after the tsunami 24

Box 2.1 Implications of the new exchange-rate policy 38

Box 2.2 Responding to the oil price rise 56

Box 3.1 How higher oil prices impact on growth, inflation, and financial balances 75

Box 3.2 Oil prices, inflation, and GDP growth, 2004-2005 78

Box 3.3 Oil subsidies and fiscal strain 80

Box 3.4 Retail fuel prices in Asia 83

Figures

Figure 1.1 Real GDP growth rate, United States, Japan, and euro zone, Q1 2003-Q2 2005 11

Figure 1.2 Commodity prices, January 2003-July 2005 13

Figure 1.3 Net capital flows to emerging markets and Asia-Pacific, 2000-2005 13

Figure 1.4 GDP growth, Central Asia, 2004-2006 17

Figure 1.5 GDP growth, East Asia, 2004-2006 19

Figure 1.6 GDP growth, South Asia, 2004-2006 21

Figure 1.7 GDP growth, Southeast Asia, 2004-2006 26

Figure 1.8 GDP growth, the Pacific, 2004-2006 29

Figure 2.1 Trends in oil imports, Bangladesh, FY2000-FY2005 34

Figure 2.2 Growth of exports and imports, and trade balance, People's Republic of China, 1996-2004 37

Figure 2.3 Oil prices, India, April 2003-July 2005 41

Figure 2.4 Growth of selected GDP components, Indonesia, H1 2004 and H1 2005 45

Figure 2.5 Growth of GDP by expenditure component, Malaysia, H1 2004 and H1 2005 49

Figure 2.6 Exports and imports, Pakistan, FY2003-FY2005 51

Figure 2.7 Revenue and budget balance, Philippines, January-July, 2004 and 2005 55

Figure 2.8 GDP growth and inflation, Thailand, 1999-2006 59

Figure 2.9 GDP and sector growth, Viet Nam, H1 2003, H1 2004, and H1 2005 62

Figure 3.1 Brent futures prices, January 2004-August 2005 67

Figure 3.2 Brent crude oil prices, 1970-2005 68

Figure 3.3 Oil self-sufficiency index, 1980-2003 70

Figure 3.4 Intensity of oil use in energy consumption, 1980-2003 72

Figure 3.5 Energy intensity of GDP, 1980-2003 ('000 BTU per unit of real GDP) 72

Tables

Table 1.1 Selected economic indicators, developing Asia, 2004-2006 6

Table 1.2 Baseline assumptions for external conditions, 2003-2006 10

Table 1.3 GDP growth rates, 2003-2005 12

Table 2.1 Selected economic indicators, Bangladesh, 2005-2006, % 35

Table 2.2 Selected economic indicators, People's Republic of China, 2005-2006, % 38

Table 2.3 Selected economic indicators, India, 2005-2006, % 42

Table 2.4 Selected economic indicators, Indonesia, 2005-2006, % 46

Table 2.5 Selected economic indicators, Malaysia, 2005-2006, % 48

Table 2.6 Selected economic indicators, Pakistan, 2005-2006, % 52

Table 2.7 Selected economic indicators, Philippines, 2005-2006, % 57

Table 2.8 Selected economic indicators, Thailand, 2005-2006, % 60

Table 2.9 Selected economic indicators, Viet Nam, 2005-2006, % 63

Table 3.1 Oil and energy use, developing Asia, 2003 71

Table 3.2 Net oil imports, developing Asia 73

Table 3.3 Export growth required to pay for a 75% rise in fuel prices 74

Table 3.4 GDP and budget balance impacts of a rise in the oil price to $70 per barrel, 2006 76

Appendix table Share in final oil consumption, 2002, selected countries, by sector and by product (%) 87

Statistical appendix tables

Table A1 Growth rate of GDP (% per year) 92

Table A2 Inflation (% per year) 93

Table A3 Current account balance (% of GDP) 94

Acronyms and Abbreviations

ASEAN Association of Southeast Asian Nations

bbl barrel

CPI consumer price index

FDI foreign direct investment

GDP gross domestic product

IMF International Monetary Fund

LPG liquefied petroleum gas

mb/d million barrels per day

OECD Organisation for Economic Co-operation and Development

OEF Oxford Economic Forecasting

OPEC Organization of the Petroleum Exporting Countries

PRC People's Republic of China

SOE state-owned enterprise

US United States

VAT value-added tax

Definitions

The economies discussed in the Asian Development Outlook 2005 Update are classified by major analytic or geographic groupings. For purposes of the Update, the following apply:

• Association of Southeast Asian Nations comprises Brunei Darussalam, Cambodia, Indonesia, Lao People's Democratic Republic, Malaysia, Myanmar, Philippines, Singapore, Thailand, and Viet Nam. ASEAN+3 consists of the above countries in addition to People's Republic of China, Japan, and Republic of Korea.



• Developing Asia refers to 42 developing member countries of the Asian ­Development Bank ­discussed in the Update.



• East Asia comprises People's Republic of China; Hong Kong, China; Republic of Korea; Mongolia; and Taipei,China.



• Industrial countries refer to the high-income OECD members defined in World Bank, available: www.worldbank.org/data/countryclass/classgroups.htm#High-income.



• Southeast Asia comprises Cambodia, Indonesia, Lao People's Democratic Republic, ­Malaysia, Myanmar, Philippines, Singapore, Thailand, and Viet Nam.



• South Asia comprises Afghanistan, Bangladesh, Bhutan, India, Maldives, Nepal, Pakistan, and Sri Lanka.



• Central Asia­--also referred to as the Central Asian republics--comprises Azerbaijan, Kazakhstan, Kyrgyz Republic, Tajikistan, Turkmenistan, and ­Uzbekistan.



• The Pacific covers Cook Islands, Fiji Islands, Kiribati, Republic of the Marshall Islands, Federated States of Micronesia, Nauru, Republic of Palau, Papua New Guinea, Samoa, Solomon Islands, Democratic Republic of Timor-Leste, Tonga, Tuvalu, and Vanuatu.



• The euro zone consists of Austria, Belgium, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, ­Netherlands, Portugal, and Spain.



• Unless otherwise specified, the symbol "$" and the word "dollar" refer to US dollars.

The Statistical Notes give a detailed explanation of how data are derived.

The Update is based on data available up to 31 August 2005.

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