BRAVING THE STORMSWORLD BANK EAST ASIA AND THE PACIFIC ECONOMIC UPDATE APRIL 2022WORLD BANK EAST ASIA AND THE PACIFIC ECONOMIC UPDATE APRIL 2022Braving the Storms 2022 International Bank for Reconstruction and Development / The World Bank1818 H Street NW, Washington, DC 20433Telephone: 202-473-1000; Internet: worldbankSome rights reserved1 2 3 4 25 24 23 22 This work is a product of the staff of The World Bank with external contributions. The findings, interpretations, and conclusions expressed in this work do not necessarily reflect the views of The World Bank, its Board of Executive Directors, or the governments they represent. The World Bank does not guarantee the accuracy of the data included in this work. 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ContentsList of Abbreviations ixPreface and Acknowledgments xiSummary xiiiOverview xv1. Recent Developments 12. What Explains Economic Performance 42.1. COVID-19: shock and containment 42.2. External environment 92.3. Macroeconomic policy 123. 3. Risks, Opportunities and Outlook 173.1. New growth risks: Three international developments 173.2. New growth opportunities: Trade, digital technology and green production 313.3. Outlook 404. Policy Priorities 454.1. Enhancing efficiency of fiscal policy 454.2. Addressing macrofinancial vulnerabilities 524.3. Trade policy 564.4. Enhancing innovation 59References 63Annex 65BRAVING THE STORMSiiiLisT of ConTEnTsList of FiguresOverviewFigure O.1. Forecasts for growth in 2022 xvfigure o.2. The estimated impact on EAP countries growth of international developments xviiFigure O.3. State of recovery and macrofinancial vulnerabilities xix1. Recent Developmentsfigure1. GDP recovered in 2021Q4, after the Delta-dip in 2021Q3 1figure2. The recovery is uneven across countries . . . 1figure3. . . . uneven in terms of components of aggregate demand . . . 2figure4. . . . and uneven across sectors 2figure5. The number of poor in developing EAP countries is expected to decline to 2019 levels in 2022 3figure6. stimated income inequality in several developing EAP countries has increased during the COVID-19 pandemic 32. What Explains Economic Performancefigure7. EAP country performance is being shaped by CoViD-19 containment, external conditions, and governments support 4figure8. Thanks to increased immunity, EAPs CoViD-19-related mortality remains low even though the omicron-variant infection wave is underway. EAP governments have not heightened mobility restrictions as a result 5Figure B1.1. Correlation between vaccination and GDP growth 6Figure B1.2. Correlation between vaccination and households economic circumstances 6Figure B2.1. Critical gaps in health systems capacity in EAP countries 7Figure B2.2. Most EAP countries are ill-prepared to carry out real-time surveillance and reporting 8Figure 9. Goods exports have recovered and are growing, whereas services exports still languish, except in China 9Figure 10. Manufacturing has led growth of EAP countries good exports, whereas travel and transport are a drag on services exports 9Figure B3.1. GDP growth and dependence on tourism 10Figure B3.2. GDP growth and fishing license fees 10Figure B4.1. Immediate effects of international and domestic supply chain disruptions 11figure11. While COVID-19-related fiscal support for health has increased, support on non-health expenses has declined 12figure12. Monetary policy remained supportive, because inflation remained low in 2021 13figure13. Higher prices of food and transport are driving inflation 13Figure B5.1. Most common price controls in EAP 15Figure B5.2. Effect of price controls on inflation 15Figure B5.3. Relation between controlled energy prices and inflation in Mongolia 163. Risks and Opportunitiesfigure14. Three international developments are shaping external conditions 17figure15. Inflation outside the region is increasing fast, accelerating monetary tightening in the United States 18figure16. Global financial volatility increased and financial conditions in the region tightened as Russia invade Ukraine 18Figure 17. External sector vulnerabilities United States 20EAST ASIA AND THE PACIFIC ECONOMIC UPDATE APRIL 2022ivLisT of ConTEnTsfigure18. financial linkages of developing EAP with the Us are more important than those with China 21Figure B7.1. financial shocks from Us and China have sizeable effect on EAP countries 22figure19. China and United States are major contributors to global growth 22figure20. Chinas growing importance as the ultimate destination of the EAP countries value-added exports 23figure21. The importance of Chinese sectors as a source of demand has grown significantly 23Figure B8.1. Output growth declines in China and the United States will negatively affect growth in developing East Asia 24figure22. Declining investment in Chinas real estate sector reflects high leverage 25figure23. China Zero-CoViD Policy 25figure B9.1. simulated exogenous contraction in Chinas residential investment 27Figure B9.2. China Zero-CoViD shock in the oxford Economics Model 28figure24. EAP region is exposed to oil and food market developments 29Figure B10.1. Impact of fuel and grain price changes on real incomes 30Figure B11.1. Potential Poverty impacts of Energy and Cereal Price increases in the Philippines 31figure25. Shifting GVCs: the relocation decision will depend on the shock 32figure26. China accounts for a large share of inputs for most countries 33figure27. EAP needs to adapt to a changing trade landscape: A stylized depiction 33figure28. China a growing source of inputs for EAP exports 34figure29. As Chinas share of Us final goods imports fell, the rest of EAPs share rose 34figure30. Vietnam accounted for much of the increase in EAP countries share of Us imports 35figure31. Past shocks suggest production relocation to countries with more trade friendly conditions 35figure32. Low productivity tends to erode EAP countries labor cost advantage 36Figure B12.1. Despite widespread diffusion of basic technologies, advanced technology use is nascent in Vietnam 37figure33. Large scope for faster technology diffusion in EAP 37figure34. CoViD has accelerated technology adoption 38figure35. Limited Evidence that CoViD Accelerated Automation 38figure36. The COVID-induced digital diffusion is changing the structure of services trade 39figure37. Energy cost increases could make green technologies more economically viable 40Figure B13.1. GDP growth and fiscal balance 434. Policy Prioritiesfigure38. Macroeconomic policy is expected to play a demanding triple role 45figure39. COVID-19 related spending focused more on relief than on growth 46figure40. Most governments are beginning fiscal consolidation even though output remains below potential 46figure41. Government debt has grown significantly because of large primary deficits 47figure42. . . . and relatively low revenue mobilization 47Figure B15.1. Indonesia has a low tax efficiency score 48Figure B15.2. Indonesia has experienced a widening tax gap since 2005 48figure43. Although household incomes have not completely recovered, most countries have already begun to reduce support to households 51figure44. With a persistent slump in earnings, withdrawing support too rapidly could increase poverty: Example from indonesia 52figure45. Government assistance has been poorly targeted; better targeting could provide more “bang for buck” in terms of poverty reduction 52figure46. Most EAP countries have higher real interest rates than the Us and some have scope for cutting reserve requirements 53List of Figures continuedBRAVING THE STORMSvLisT of ConTEnTsfigure47. EAP countries can take advantage of changing opportunities 56figure48. Non-tariff barriers penalize exports in a GVC world 57figure49. The EAP region has seen slight but uneven improvement in logistics performance 57figure50. EAPs services trade restrictiveness index by sector (2021) 58figure51. significant heterogeneity in digital services trade restrictions across countries 58figure52. Policies that facilitate rather than inhibit labor mobility can enhance the gains from new trade opportunities 58figure53. Negotiating shifting constellations of trade agreements 59figure54. Unequal access to fast broadband across and within EAP countries 60figure55. Strengthening management quality and remedying weaknesses in human capital are critical to greater innovation in the region 61figure56. Relaxed financial constraints are associated with higher innovation quality 61AnnexFigure A1. Vaccination may help curb mortality during the Omicron wave and allow economic activity to continue 65Figure B.A1. Mobility, stringency and vaccination rates in selected PICs, 2020-2022 68Figure A2. As Chinas share of Us final goods imports fell, the rest of EAPs share rose 70Figure A3. Vietnam accounts for much of the increase in EAP countries share in Us final good imports 70figure A4. As Chinas share of EUs final goods imports fell, the rest of EAPs share rose 71figure A5. Vietnam accounts for much of the increase in EAP countries share in EU final good imports 71figure A6. As Chinas share of Japans final goods imports fell, the rest of EAPs share rose 72figure A7. Vietnam accounts for much of the increase in EAP countries share in Japans final good imports 72figure A8. Examples of relocation of production from China to Vietnam 73List of Figures continuedEAST ASIA AND THE PACIFIC ECONOMIC UPDATE APRIL 2022viLisT of ConTEnTsList of TablesOverviewTable O.1. GDP growth forecasts xxiTable O.2. Growth, the disease, trade and financial exposure, and fiscal and monetary policy space xxii2. What Explains Economic PerformanceTable1. fiscal policy space has narrowed across developing East Asian economies; monetary policy space less so 133. Risks and OpportunitiesTable2. GDP growth forecast 41Table B13.1. 2022 GDP growth forecast under fiscal policy scenarios (percent) 434. Policy PrioritiesTable 3. Government finances have worsened in most EAP countries 50Table4. Many EAP countries adopt fiscal rules to ensure fiscal discipline 50Table5. Financial sector is well-capitalized, but risks remain to solvency, liquidity and corporate health 54Table6.forward-looking measures of asset quality 55Table7. Share of firms and debt at risk (percent) 55Annex Table B.A1. COVID-19 in the PICs 67Table A1. External sector vulnerabilities 69BRAVING THE STORMSviiLisT of ConTEnTsList of Boxes2. What Explains Economic PerformanceBox 1. Vaccination, GDP growth, and household economic circumstances 6Box 2. Not all endemicity is benign 7Box 3. Tourism and growth in the Pacific 10Box 4. The effects of global supply chain disruptions 11Box 5. The role of price controls in times of high volatility 143. Risks and OpportunitiesBox 6. Sanctions imposed on Russia in response to the escalation of war with Ukraine 19Box 7. Estimated financial spillovers from the United states and China 21Box 8. Estimated growth spillovers from China and United states to developing East Asian economies 24Box 9. The simulated regional impact of Chinas property market downturn and Zero-CoViD policy 26Box 10. Impact of the Fuel and Grain Price Increase on Real Incomes 29Box 11. Possible effects on poverty: A simulation from the Philippines 30Box 12. Limited technology diffusion among East Asian firms: evidence from Vietnam 36Box 13. Chinas Growth in 2022: Between shocks and stimulus 424. Policy PrioritiesBox 14. COVID-19related policy issues examined in recent economic updates 45Box 15. indonesias tax reforms to create fiscal space 48AnnexBox A1. COVID-19 comes to the Pacific 66EAST ASIA AND THE PACIFIC ECONOMIC UPDATE APRIL 2022viiiLisT of ConTEnTsixBRAVING THE STORMS LisT of ABBREViATions AE Advanced EconomyAFC Asian Financial CrisisCPTPPComprehensive and Progressive Agreement for Trans-Pacific PartnershipDEC Development EconomicsEfi Equitable Growth finance and institutionsEMDE Emerging Markets and Developing CountriesEU European UnionFDI Foreign Direct InvestmentGDP Gross domestic productGFC Global Financial CrisisGTAP Global Trade Analysis ProjectGVC Global Value ChainHIC High Income CountryHNP Health Population and NutritionICT Information and Communications TechnologyICU Intensive Care UnitIMF International Monetary FundLMIC Lower Middle Income CountryNPL Nonperforming loansoECDorganisation for Ec