Asia Economic Outlook：Cautious Optimism

Le Xia BBVA Research│Chief Economist for Asia •••• •Emerging Asian economies to contribute 58% to global growth in next decade. •We project that China will continue to be the largest contributor at 34% of global growth. Contribution to global economic growth by region, 2011-2021 (%) Source: BBVA Research and IMF WEO RMB/USD weakness continues Forecasts as of 15 April 2015 Policy rate outlook GDP growth outlook •Falling commodity and oil prices favor commodity importers •Lower oil prices foster benign inflation, aid external balances, lift real income of households, provide scope to enhance fiscal space and boost productive spending Oil Prices •Uneven global growth has led to an uncertain trade environment – Asian exports remain fragile •Softness in international commodity prices taking a toll on Asian exports as price realizations erode despite export volumes going up •Yet, net terms of trade gains and import contraction has led to narrower trade deficits External Demand •Expect volatility in global financial conditions in the run up to Fed’s policy rate normalization •Global financial markets buoyed by expectations of Fed rate normalization being pushed back into late 2015, policy easing in other advanced economies, and EMEs easing interest rates •Markets to discriminate against those with relatively weaker fundamentals and/or oil exporters Fed Rate Increase •International capital flows to favor high and sustainable growth and policy virtue •Effective implementation of structural reforms - a key differentiating factor amongst Asian EMEs •Asian economies try to establish manufacturing credentials amid rising labor costs in China Structural Reforms WTI Oil prices and price trajectory (USD/bbl) Source: CEIC data, BBVA Research 5060708090100110120130ActualBaseline ScenarioDownside risk scenarioUpside Risk Scenario•We do not expect $40-$50 per bbl WTI oil to last forever, but we do think it could last for another two quarters •When higher oil prices materialize, we don’t think we’re going back secularly to $80 per barrel WTI oil as downward cost pressures and the optimism surrounding US shale growth weighs on prices. •Falling commodity prices to foster a low inflation environment in Asia, although with a few exceptions. •Indonesia is likely to face higher inflation in 2015 amid continued fiscal reforms aimed at reducing fuel subsidies. •In general, lower oil prices to enhance room for Asian central banks to consider growth supportive monetary policies •Oil prices have a positive impact on Asia’s fiscal balance, enhances room for productive spending •Trade balance sensitivities to oil prices are positive for major oil importers such as India and Indonesia in contrast to oil exporters such as Malaysia. •Domestic currency weakness alongside hikes in excise duties on petroleum products, such as in India, have contributed to incomplete pass through of fall in crude oil prices to end consumers across most Asian economies Incomplete pass through of fall in crude oil prices to end consumers across most Asian economies *All retail gasoline prices are for non-subsidized fuel at retail level; Source: CEIC, BBVA Research China’s Energy Mix (% share, 2012) Source: NBS and BBVA Research •China’s large size helps to buffer exogenous shocks. •Coal accounts for more than two thirds of China’s energy demand, further muting any oil price impacts. •Coal prices have fallen 40% in the last two years and this has not impacted GDP significantly. 66.618.85.29.4CoalCrude OilNatural GasHydro, Nuclear & Renewables Asian Exports ( % Y/Y , Nominal $ GDP Weights) Source: CEIC data, BBVA Research •Despite relative improvement in global growth, Asian exports continue to record negative growth •Asian exports contracted 12% y/y in Q1, the sharpest since September 2009, on a nominal GDP weighted average basis. Asian Imports and Trade Deficit ( % Y/Y , USD billion) Source: CEIC data, BBVA Research •Import contraction has offset weakening exports, in turn leading to net positive trade gains for Asia. •All Asia imports contracted 23% y/y in Q1. •While Q1 import contraction is largely China driven, imports of Asia excluding China have seen extended weakness over the past two years. Slump in global commodity Prices (%Y/Y) Source: CEIC data, BBVA Research •The slump in commodity prices has been partly offset by relative currency appreciation of most Asian economies amid sharp depreciation of the Euro and JPY. Asian currency appreciation on real trade weighted basis (%Y/Y) Source: CEIC data, BBVA Research Volatility index (VIX) has trended lower in 2015 Source: CEIC data, BBVA Research •Scope for further growth supportive policy rate cuts across Asia amid subdued inflation pressures. However, aggressive policy easing is less likely as Central Banks prepare for volatile times in the run up to Fed’s liftoff. Asian economies have used the room to ease policy rates Source: CEIC data, BBVA Research 012345678910Feb-12Apr-12Jun