Arief Ramayandi

Financial Development and Economic Growth in Developing Asia

Economic theory suggests that sound and efficient financial systems - banks, equity markets, and bond markets - which channel capital to its most productive uses are beneficial for economic growth. Sound and efficient financial systems are especially important for sustaining growth in developing Asia because efficiency of investment will overshadow quantity of investment as the driver of growth in the region. The data indicate that the region’s financial systems have become deeper and more diversified since the early 1990s. A more formal econometric analysis on a panel data of 125 countries confirms that financial development has a significant positive effect on growth, especially in developing countries. The results also indicate that the impact of financial development on the region’s growth is not noticeably different than elsewhere, and the impact has weakened since the Asian financial crisis. Overall, our evidence supports the notion that further development of the financial sector matters for sustaining developing Asia’s growth in the postcrisis period. However, the primary role of financial sector development in growth is likely to shift away from mobilizing savings, thus augmenting the quantity of investment toward improving the efficiency of investment, and thereby contributing to higher economywide productivity.

Public debt sustainability in developing Asia

1. Introduction, Benno Ferrarini, Raghbendra Jha, and Arief Ramayandi 2. Analytical Approaches to Assessing Public Debt Sustainability, Raghbendra Jha 3. Public Debt Sustainability Assessments for Developing Asia, Benno Ferrarini and Arief Ramayandi 4. Public Debt Sustainability and Hidden Liabilities in Peoples Republic of China, Richard Hemming 5. Public Debt Sustainability and Fiscal Management in India, Mukul G. Asher 6. Public Debt Sustainability and Fiscal Vulnerability in Viet Nam, Charles Adams 7. Conclusions and Other Country Perspectives, Benno Ferrarini, Raghbendra Jha, and Arief Ramayandi

Public Debt Sustainability Assessments for Developing Asia

This paper discusses the evolution of fiscal balances and public debt ratios in developing Asia from the mid-1990s to 2010 and investigates the conditions for public debt sustainability in the region. The economies in this region have derived great benefits from having relied on rapid economic growth and low interest rates, which together have been exerting a persistent downward pressure on debt ratios. The main emphasis is on the historical and prospective evolution of public debt indicators under different macroeconomic assumptions. The discussion revolves around debt sustainability implications of a negative interest rate–growth differential, a characteristic of the macroeconomic environment in Asia during the last two decades. The debt sustainability analysis shows overwhelming evidence of a generally benign outlook for public debt sustainability in the region.

Taper Tantrum and Emerging Equity Market Slumps

ABSTRACT In the post-global financial crisis period, the central banks of the advanced economies pursued unconventional monetary policies, such as the United States (U.S.) Federal Reserve’s quantitative easing (QE). Those policies and their unwinding may significantly affect cross-border capital flows and thus destabilize the financial systems of emerging markets. For example, emerging markets experienced substantial financial instability during the taper tantrum triggered by U.S. Federal Reserve Chairman Ben Bernanke’s May 2013 announcement of the potential unwinding of QE. In this article, we examine the spillovers from the taper tantrum on emerging markets more rigorously by using econometric analysis to empirically assess the effect on equity markets in emerging markets. Our central finding that virtually all emerging-market equity markets were affected by the taper tantrum highlights the need for emerging-market authorities to remain vigilant about the effects of advanced-economy monetary policies on their financial stability.

Capital Flows During Quantitative Easing and Aftermath: Experiences of Asian Countries

A potentially important side effect of quantitative easing(QE) by the United States (US) Federal Reserve System (the Fed) is the expansion of capital flows into developing countries. As a result, there is widespread concern that QE tapering may trigger financial instability in those countries. The central objective of our paper is to empirically investigate this important issue by (1)examining the effect of QE on capital flows into developing Asia, and (2) analyzing the different factors which influence the effect of QE tapering on financial instability in order to identify the most significant factors. We find that QE1 had a bigger impact on capital flows than QE2 and QE3, and credit expansion and capital inflows magnified the effect of QE tapering on financial instability. While there is no evidence that macroprudential policies directly reduced the effect of QE tapering, they can nevertheless be useful preemptive measures.

Financing Asia's Growth

Developing Asia has exhibited rapid growth while saddled with relatively backward financial systems. One might conclude that the coexistence of sustained rapid growth and financial underdevelopment in developing Asia implies that an efficient financial sector is not indispensable for economic development. A more considered view would be that developing Asia grew rapidly despite, not because of, financial underdevelopment. With a stronger and better financial system, it might have grown even faster or achieved the same level of growth with lower savings and investment (and hence a lower cost in terms of forgone consumption). Strengthening the regions financial sectors was made more difficult by the global financial crisis, which gave financial development a bad name. However, in developing Asia financial sector development refers less to the introduction of esoteric products than to the more basic task of building efficient banks and capital markets. There is clearly a positive relationship between financial development and growth up to a certain level of financial development. Although it is possible that the relationship turns insignificant or even negative beyond some threshold, developing Asia is well short of that possible turning point.

Population Aging and Aggregate Consumption in Developing Asia

One of developing Asia’s foremost structural economic challenges is the need to rebalance demand and growth toward domestic sources in the face of one of its most significant structural shifts—the demographic transition to an older population. The scope for investment-led growth may be quite limited, so the key to growth is stronger domestic demand, and the key to stronger domestic demand is greater consumption. We examined the impact of the old-age dependency ratio on the share of consumption in the gross domestic products of 31 developing Asian economies and 122 from outside the region from 1998 to 2007. In addition, we tested for a possible difference in its effect in the Asian economies relative to the rest of the sample. The analysis suggests a positive relationship between population aging and consumption though evidence for developing Asia was weaker than that for the rest of the sample. This implies that the aging population may not be contributing as significantly to robust consumption and domestic demand as it does in the rest of the world. In order to rebalance their economies, developing Asian governments must therefore continue to pursue a wide range of policies to promote stronger domestic demand.

Monetary Policy Discipline and Macroeconomic Performance: The Case of Indonesia

Lax monetary policy in the United States has been pointed out as one of the responsible factors behind the recent global crisis. Similar loose monetary conditions also prevailed in many European countries before the crisis and were argued to be among the accommodating factors behind the run-up in asset prices that helped trigger the 2007 financial market turmoil. Did a similar situation also prevail in Asia? This paper provides an insight by specifically looking at developments in the conduct of monetary policy in Indonesia during the first decade of this century. It uses an estimated monetary policy rule to provide a benchmark for assessing the actual conduct of the country’s monetary policy. The analysis suggests that a loose monetary policy stance also prevailed in Indonesia in the run-up to the global financial crisis. This situation helps to explain the surge in the country’s inflation and its very high growth in financial condition from late 2007 to 2008. The paper reiterates the need for monetary policy discipline to safeguard the country’s economic stability, and provides lessons to improve its macroeconomic management.

How growth deceleration in the PRC affects other Asian economies

Developing Asia has benefited greatly from the rise of the Peoples Republic of China (PRC), primarily through the trade channel. The PRC and its neighbours have collectively formed a regional production network, and the PRC is becoming an increasingly important source of final demand. Two empirical techniques are used to examine the likely economic impact of growth deceleration in the PRC on other Asian economies: (1) a single-equation approach that captures the trade channel; and (2) a global vector autoregressive model that captures the effects beyond the trade channel. The results of both analyses confirm that deceleration in the PRC will have a non-negligible negative effect on other economies, especially on East and Southeast Asian economies. An out-of-sample analysis to tease out the effects of slower growth in the PRC from the recent growth performance of selected Southeast Asian economies suggests that the PRC effect is contributing to the growth dynamics of this region but is not always dominant.

Exploring Risk-Adjusted Fiscal Sustainability Analysis for Asian Economies

The paper explores risk-based fiscal analytical approaches to complement a standard debt sustainability analysis when applied under conditions of risk and uncertainty. To outline a possible road map for risk-adjusted fiscal sustainability analysis, the paper first examines the types of vulnerability faced by different emerging economies in Asia and reviews a range of stochastic methods that attempt to explicitly incorporate risk in their analysis. Drawing on international experience, we note that the usefulness of applying a stochastic approach hinges on policy makers’ capacity to identify the sources and extent of risks in assessing fiscal sustainability, which should then allow them to simulate the impact of a hypothetical corrective action on the baseline trajectory of debt or net worth and on its stochastic distribution, including fat-tail risks of default.