Search

This analyses the impact of unexpected changes in monetary policy on the South African equity market over the period 2005 -2018. In an attempt to understand this relationship, two main views have emerged. The wealth effect suggests that monetary policy changes have an indirect effect on the stock market, via changes in the value of private portfolios. On the other hand, it has been argued that the stock market is an independent source of macroeconomic volatility to which policy makers may wish to consider. This paper applies an event study approach to examine the stock market reaction to monetary policy. Furthermore, to understand the economic sources underpinning that reaction a Vector autoregressive model is estimated. The results suggest that on average, a surprise rate hike of 100 basis points causes short term JSE All Share index total returns to decline by 2.71%. We also find that the stock market reacts positively (negatively) to expansionary (contractionary) unexpected monetary policy actions due to revised market expectations about future dividends, excess premiums and the discount rate. The findings are crucial for central bank policy makers and JSE stock market investors.

This paper builds on recent research examining the impact of finance on growth, looking at the effect of the financial system on volatility in gross domestic product per capita and consumption per capita growth. It also examines the impact of credit on the composition of growth. The findings show that financial development smooths growth in gross domestic product and consumption per capita, but only up to a point. At high levels of credit, further credit is positively associated with volatility even after controlling for the quality of institutions and periods of financial crises. In large financial systems, finance may not help individuals smooth consumption volatility. The threshold at which finance's effect may be volatility enhancing may be lower than previously thought. In terms of the impact on growth, total credit (and credit to firms) has a nonlinear relationship, with rising credit supporting higher growth up to a point, beyond which the additional impact of finance on growth is negative. This can be explained by finance flowing into less productive activities (or drawing other resources into less productive activities). In addition, household credit is negatively related to manufacturing sector growth, although credit to firms has a positive relationship to manufacturing growth. This may be explained by the fact that much of household credit is used to finance the consumption (including imports) of goods and services broadly (not just manufacturing sector goods) or investment in housing.

Benign financing conditions since the global financial crisis and, more recently, rising financing needs have fueled a rapid increase in credit to the nonfinancial private sector, especially to the corporate sector, in emerging markets and developing economies. Credit growth has been most pronounced, and nearing the pace associated with past credit booms, in commodity exporting countries. In contrast, in commodity importers, credit-to-gross domestic product ratios are elevated but have been stable or shrinking over the past few years. That said, in a few, mostly energy exporting, emerging and developing countries, credit to the private sector is now near levels that have been associated with past episodes of financial stress.

South Asia emerged as the fastest growing region in the world in 2015, posting GDP growth of 7 percent. Weak oil and commodity prices, slowing capital flows and shrinking global trade contributed towards a deceleration of growth in most of the world's economies. South Asia - as a net importer of oil - was an anomaly, growing significantly on the back of higher private consumption and public investment. Higher remittances and reserve buffers throughout the region offset the fall in exports caused by the drop in global demand. The region is set to maintain real GDP growth above 7 percent over the next few years. However, the tailwinds are now fading - capital flows have declined and remittances are starting to feel the reality of low oil prices. Pakistan, while not growing as quickly as its neighbors, has continued its steady growth recovery in H1FY16. Strong growth in consumption, rising foreign exchange reserves, fast-growing workers' remittances and a lower import bill compensated for a significant fall in exports. Low oil prices generated a significant boost, driving a 9.1 percent fall in the import bill and reducing inflation significantly, in turn creating scope to reduce the policy rate. Private sector consumption, propelled by higher remittances and a loosened monetary policy, is expected to account for over half of FY16 GDP growth.

This paper studies how the sensitivity of consumption to income has changed over time as the degree of financial integration has risen. In standard theory, greater financial integration facilitates international borrowing and lending, helping to reduce the sensitivity of consumption growth to fluctuations in income. The paper examines the empirical validity of this prediction using an array of indicators of financial integration for a large sample of advanced and developing countries over the period 1960-2011. Two main results are reported. First, the sensitivity of consumption to income has declined over time as the degree of financial integration has risen. The decline has been more pronounced in advanced economies than in developing ones. Second, the regression analysis indicates that a higher degree of financial integration is associated with a lower sensitivity of consumption to income. This finding is robust to the use of a wide range of empirical specifications, country-specific characteristics, and other controls, such as interest rates and outcome-based measures of financial integration. The paper also discusses other potential sources of the temporal changes in the sensitivity of consumption to income.

The Indonesia Economic Quarterly (IEQ) has two main aims. First, it reports on the key developments over the past three months in Indonesia’s economy, and places these in a longerterm and global context. Based on these developments, and on policy changes over the period, the IEQ regularly updates the outlook for Indonesia’s economy and social welfare. Second, the IEQ provides a more in-depth examination of selected economic and policy issues, and analysis of Indonesia’s medium-term development challenges. It is intended for a wide audience, including policymakers, business leaders, financial market participants, and the community of analysts and professionals engaged in Indonesia’s evolving economy. This paper discusses about the economic conditions of Indonesia for the year 2015. Emerging market assets rebounded in October 2015 after the sharp losses recorded in August and September, when the uncertainty about the Chinese economic slowdown and the U.S. interest rate outlook was particularly high. Despite a more favorable market sentiment, capital flows to emerging economies have remained weak and borrowing costs relatively high. In addition to tight financing conditions, Indonesia faced subdued external demand for its exports in the near term and persistently low commodity prices over the medium run. In 2015, fire in Indonesia cost nearly twice that of reconstruction following the 2004 tsunami in Aceh. Agriculture and forestry have sustained losses and damages in trillions. Sustained exposure to haze could also lead to the volcano effect, i.e., a decrease in plant productivity in the short term due to limited sun exposure and a deleterious effect on plant physiology and photosynthesis. The recurring nature of Indonesia’s fire crisis is of particular concern. Another potential step in Indonesia’s new reform process was the country’s signaling its intention to join the Trans-Pacific Partnership (TPP) agreement in the near future. Whether membership materializes or not, the agreement is likely to have a limited impact on trade, because import tariffs in member countries are already low and Indonesia has trade agreements with most of them.

An export-oriented development strategy fostered the Asia Pacific region’s economic success, making it the fastest growing region in the world. In recent years, despite waning demand from the crisis-hit Western economies, the accelerating demand from China boosted intraregional trade in Asia. Although China’s Asian trading partners benefit from increasing exports to China, this stronger linkage with China has made them more vulnerable to the risk of a Chinese slowdown. This paper examines the impact of a negative Chinese gross domestic product (GDP) shock on Asian economies by employing the Global Vector Autoregressive (GVAR) model, using the dataset through the third quarter of 2014 for 33 countries. The analysis finds that a negative Chinese GDP shock impacts commodity exporters, such as Indonesia, to the greatest extent, reflecting both demand and terms of trade shocks. Export-dependent countries in the East Asian production cycle, such as Japan, Malaysia, Singapore and Thailand, are also severely affected. The analysis also finds that a negative shock to China’s real GDP would not only have an adverse effect on the price of crude oil, as some previous studies have also shown, but also on the prices of metals and agricultural products. The study also investigates the impact of a potential negative shock to the real GDP of the United States on Asian countries, and determines that although the U.S. economy has a larger influence on Asian economies than China’s economy, the Asian countries are more exposed to China than ever through increased economic ties.

The Jordan economic monitor provides an update on key economic developments and policies over the past six months. It also presents findings from recent World Bank work on Jordan. It places them in a longer-term and global context, and assesses the implications of these developments and other changes in policy for the outlook for the country. Its coverage ranges from the macro-economy to financial markets to indicators of human welfare and development. It is intended for a wide audience, including policy makers, business leaders, financial market participants, and the community of analysts and professionals engaged in Jordan.

Using the universe of all externally issued bonds by corporates and sovereigns in emerging and developing economies during 2000-14, this paper analyzes various issuance trends, including the unprecedented post-crisis surge. The paper focuses on external issuance at the country-industry and individual bond levels and finds that global factors matter greatly for emerging and developing economies issuance. A decrease in U.S. expected equity market (or interest rate) volatility, U.S. corporate credit spreads, and U.S. interbank funding costs and an increase in the Federal Reserve’s balance sheet (i) raise the odds that the monthly issuance volume of a country-industry is above its historical average; (ii) decrease individual bond yields and spreads; and (iii) raise bond maturities, after controlling for country pull factors, bond characteristics (for example, type of issuer, industry, and riskiness). Additionally, we document support that the risk-taking channel of exchange rate appreciation also operates for external bond issuance. Moreover, while the paper finds that country pull factors affect the impact of global factors, it does not find consistent evidence for this across the board. This result suggests that, during loose global funding conditions, flows are mostly driven by push factors and do not systematically discriminate between emerging and developing economies. Taken together, the findings suggest that although issuers might be able to benefit from benign international funding conditions, the large issuance volumes, currency risks, and high exposure to global factors could pose external and domestic challenges for policy makers, particularly when global cycles reverse.

The Pakistani economy faced four major domestic shocks as of April 2015: (i) a political sit-in by opposition parties in Islamabad that lasted between August and December and raised significant political uncertainty; (ii) the September floods in Punjab that affected agricultural crops; (iii) the postponed sale of Oil and Gas Development Company Limited (OGDCL) equity shares in November that reduced its expected privatization proceeds and foreign direct inflows (FDI); and (iv) the terrorist attack in a school in Peshawar that heightened security concerns. However, supported by a favorable slump in international oil prices, and steady implementation of structural reforms by the government, the economy is improving. Preliminary data for the first half of FY15 show growth picking up, driven mainly by strong performance in the agriculture and services sectors. Despite the floods last year, growth improved in the cotton, wheat, and rice crops. The services sector was boosted by transport, storage, communications, finance, and insurance. On the demand side, growth continues to be driven by private consumption partly fuelled by high remittance inflows. Credit to the private sector continued to grow, but slightly less rapidly than last year: as a percentage of GDP, it fell to 13.4 percent in January 2015 compared with 14.1 percent in January 2014. Pakistan is on track to meet a fiscal deficit target of 4.8 percent of GDP in FY15. The newly elected government appears to be committed to fiscal discipline and has made fiscal consolidation the cornerstone of its economic program supported by the IMF, the World Bank and other donors. At present, Pakistan is facing three sources of risk: first is the prospect of an early reversal of the fall in oil prices. Second is the repeat of political events of the first half that keep FDI flows and private investment low; and also affects foreign reserves, privatization program and growth prospects. An uncertain political environment undermines investor confidence and depresses economic activity. Third is the continuation of a troubled domestic energy sector that continues to endure a long-due complex inheritance on its circular debt. Given past trends and the current growth rate, poverty is expected to continue to fall and shared prosperity to improve in this and the next fiscal year. However, a large mass of the population is clustered around the official poverty line, so that small improvements in household real consumption can translate into substantial movement in poverty in either direction.

Lebanon faces serious challenges from a volatile security environment and spillovers from the ongoing Syrian conflict which pose serious risks to an already fragile internal political situation. Security incidents have become increasingly more common and the volatile security environment is weakening consumer and investor sentiments and adversely affecting tourism, a central contributor to economic growth and employment in Lebanon. The influx of Syrian refugees to Lebanon persists, with officially registered refugees reaching close to 1 million (i.e., 21.6 percent of Lebanon’s pre-conflict population), which poses significant fiscal, health and educational challenges.

Kenya withstood another difficult year in 2012 as policy tightening and weaker global demand slowed economic activity. With decisive fiscal and monetary policies, the government managed to restore confidence in Kenya's medium term prospects. Kenya's growth rate is still below its potential and its peers, external imbalances remain which threaten its future growth, and the pace of economic growth is not generating enough modern sector wage jobs. With the passage of the new constitution in 2010 and its implementation, stronger institutions are emerging, putting Kenya on a sound footing ready to take off. In the very short term, what remains to be done is for Kenya to deliver a credible and peaceful election in March 2013, and thereafter a smooth transfer of power. In the medium term, Kenya will need to start building a stronger foundation for growth, and undertake structural reforms to correct the external imbalances. To generate more jobs for the burgeoning educated youth population, Kenya will also need to reduce the transaction cost for firms, by reducing job-smothering corruption and the cost of doing business (particularly in transport and energy).

The Malaysian economy maintained a vigorous pace in the first nine months of 2012 despite external headwinds. Continuing a trend in the past two years, Malaysia's stronger-than-expected Gross Domestic Product, or GDP growth in the first nine months of 2012 was driven by rapid expansion of domestic demand while external demand (and export-oriented industries) stagnated due to continuing global uncertainty. Malaysia's low participation of women in labor markets is linked to a pattern whereby women do not return to work after marriage and childbearing. Education alone is not sufficient to close gender gaps as social norms and formal institutions continue to affect the choices of all women. In the long-term, norms need to evolve for gender gaps to be bridged; in the meantime measures can be put in place to help men and women balance responsibilities. Changing prevailing social norms takes time. In the medium-term, supportive measures at all stages of the life-cycle can be put in place, ranging from flexi-work arrangements and expanded childcare options, to incentives for more female participation in 'non-female' educational fields and job types. While current initiatives to leverage on women's talent are laudable, other policy options must be explored, evaluated, and tailored, to enable Malaysian women to fully contribute to Malaysia's transformation towards a high-income, inclusive and sustainable economy.

The Indonesia economic quarterly reports on and synthesizes the past three months' key developments in Indonesia's economy. It places them in a longer-term and global context, and assesses the implications of these developments and other changes in policy for the outlook for Indonesia's economic and social welfare. The near-term global economic outlook is fragile and emerging economies, including Indonesia, again face the risk of a potential crisis that is not of their making. The growth outlook for Indonesia's major trading partners (MTP), at 3.3 percent in 2012, remains relatively weak as increased Euro zone uncertainty adds to the ongoing drags on global growth from budget cutting and deleveraging in developed economies, and capacity constraints in some developing economies. Recent international financial market turbulence looks set to continue in the near-term and, while this baseline scenario remains the most likely outcome, capital flows to emerging economies and sentiment are likely to remain volatile. Further enhancing crisis preparedness is therefore a policy priority for economies such as Indonesia but, at the same time, it is important to push ahead with reforms and investments which can support medium-term growth in what is likely to be a weaker global economic environment. Indonesia's gross domestic product (GDP) growth remained a solid 6.3 percent year-on-year in the first quarter of 2012, down slightly from an average of 6.5 percent in 2011. Seasonally-adjusted growth overall came down off the highs of the final quarter of 2011 but consumption growth held up well. However, investment growth dipped and, reflecting the relative weakness of external demand, net exports again were a drag on growth. Inflation, although picking up somewhat, has remained relatively low and price expectations came down with the reduced likelihood of a subsidized fuel price increase in 2012, as oil prices declined. In the event of a major freezing of international financial markets which contributes to a drop in trading partner growth. In a scenario in which such a crisis was accompanied, or indeed precipitated, a severe, prolonged global downturn encompassing the major emerging economies, growth in Indonesia could drop to 3.8 percent, with the impact of the slowdown felt more sharply in domestic activity as commodity price falls reduce incomes and investment. In the event of a severe crisis, it is possible that domestic consumer and business sentiment drops sharply which, combined with any potential stresses in the financial sector, could result in further downside to the growth scenarios.

The Malaysian economy grew robustly in 2011, outperforming forecasts. Growth was driven by domestic demand. Public consumption picked up more than expected toward the end of the year and fixed investment was also buoyant on higher investments by public and private companies. Private consumption spending remained strong, sustained by solid consumer credit, civil service bonus payments, and firm commodity prices benefiting smallholders. Inventories were a drag on growth as post- financial crisis restocking was completed. There is momentum to the reform agenda, but implementation could be accelerated. The government's transformation programs registered notable progress, but the challenge now is to go beyond quick wins and accelerate the implementation of more difficult, but critical, structural reforms that lie at the core of transforming the economy into a high-income one. Implementation can be assisted by increasing the coordination of related reform efforts (such as safety nets and education), building capacity within the civil service to lead reforms, and working towards consensus in key areas such as educational reform, subsidy rationalization and broadening the tax base.

Support for Enhanced Macroeconomics and Fiscal Policy Analysis (SEMEFPA), AusAID The Indonesia economic quarterly reports on and synthesizes the past three months' key developments in Indonesia's economy. It places them in a longer-term and global context, and assesses the implications of these developments and other changes in policy for the outlook for Indonesia's economic and social welfare. Its coverage ranges from the macroeconomy to financial markets to indicators of human welfare and development. It is intended for a wide audience, including policy makers, business leaders, financial market participants, and the community of analysts and professionals engaged in Indonesia's evolving economy. International developments continue to shape Indonesia's near-term economic outlook, but the focus of attention has shifted. In late 2011 the primary concern was the deteriorating and uncertain outlook for the global economy and financial markets. Since then there has been further evidence of the slowdown in global economic momentum but also some positive signs, such as from the US, and international financial market conditions have improved. The recent sharp rise in global oil prices has added a new dimension to the situation. In particular, it has increased the projected cost of Indonesia's fuel subsidies. With the benefits of these subsidies mainly going to the wealthier segments of the population, there is a clear need to redirect this spending to more pressing development needs.

The paper is based on a scenario workshop held on January 20, 2009, where leading financial and private sector development experts from IFC, the International Monetary Fund, and the World Bank discussed the unfolding crisis. This paper is a product of the staff of the Financial and Private Sector Development Vice Presidency of the World Bank Group. The scenarios described in this paper do not necessarily reflect the views of the World Bank Group, its Executive Directors, or the governments they represent. The scenarios described serve as the basis of a planning exercise and are not to be interpreted as forecasts or projections on the part of the World Bank Group or the authors of this paper. The purpose of this paper is to sketch scenarios taking into account the information currently at hand. In this way, scenarios can provide decision makers with alternative views of the future. Decision makers can test their strategies against the different ways in which the future might play out. Scenarios provide a framework for debate, leading to better policy making and strategies. They are especially useful in situations where major global changes are under way but there is huge uncertainty over what may happen. Staffs of the World Bank Group are providing these scenarios to help governments and organizations prepare for an uncertain future. Being well prepared and open to thinking about different outcomes is much better than continually being behind the curve and having to chase events.

International financial markets remain turbulent, dominated by the political and economic challenges of the Euro zone debt crisis and signs of weakening global growth. However, to date, although portfolio outflows have been seen, Indonesia's domestic economy continues to perform strongly. The economy remains relatively well-positioned to weather future external shocks and steps have been taken to improve crisis preparedness, for example, by increasing the flexibility of any fiscal response. The Euro zone continues to grapple with the policy responses to stem the crisis. The political and policy responses to the Euro zone debt crisis have been evolving on an almost daily basis, influencing global financial markets, risk appetite and capital flows to emerging economies such as Indonesia. Increased funding stress for European financial institutions was followed by a coordinated announcement of liquidity swap arrangements by central banks including the Federal Reserve and European Central Bank. In addition to putting in place policies to address the near-term impacts of any future shocks, with a protracted weakness in external demand likely, it is an opportune time to move forward with investments and reforms which can enhance domestic productivity and growth and attract more stable and longer-term capital flows. Indeed, the 2012 budget again significantly boosts capital expenditure, although ongoing budget execution challenges could hinder the effectiveness of the increased allocation on infrastructure improved infrastructure and investment climate can help to promote further the positive recent performance of Indonesia's manufacturing sector, after its weakness in the decade following the Asian crisis. The scope for productivity growth within manufacturing and other sectors through technology adoption and adaption can also be enhanced by further improvements in the quality of education of the labor force and the institutional environment for research and development.

After a strong rebound in 2010, Philippine economic growth slowed by more than half to 3.6 percent in the first three quarters of 2011. Slower third quarter (Q3) growth of 3.2 percent was the result of significant contractions in exports and public investment. The contraction in exports largely reflected weaker demand in advanced economies while public investments continued to shrink in part because of measures to improve accountability of public spending. On the production side, industrial and agricultural activities were sluggish, leaving the services sector to buoy growth. To improve growth outcome in the remainder of the year, the government announced a PHP 72 billion (about 0.7 percent of GDP) disbursement acceleration plan to ensure that budgeted items are spent by year end. After a strong rebound in 2010, Philippine economic growth slowed by more than half to 3.6 percent in the first three quarters of 2011, bringing year to date growth below the government's revised target of 4.5 to 5.5 percent for 2011. Q3 growth of 3.2 percent was driven by private consumption and inventory build-up, which grew by 7.1 and 147.7 percent respectively. The country's slower expansion places it behind its neighbors with Indonesia, Vietnam, and Singapore growing above 6 percent, Malaysia at 5.8 percent, and Thailand, which was devastated by massive flooding in recent months, at 3.5 percent.

The Malaysian economy decelerated as solid domestic demand was not sufficient to offset a weakening external environment. Private consumption growth continued at a healthy pace. Favorable rubber and palm oil prices drove up incomes of smallholders while continued employment and wage growth supported urban incomes. In contrast, fixed investment was more volatile, with private investment showing signs of picking up while public investments lagged. Malaysia's overall balance of payments recorded a larger surplus in the first half of the year reflecting a widening current account surplus and substantial net financial inflows. Malaysia's open economy is expected to slow further in the remainder of 2011 and into early 2012 mainly due to the deterioration in the outlook for external demand. Cities are central to Malaysia's aspiration to become a high-income economy. Smart cities are skilled and innovative. They play a crucial role in catalyzing economic growth by generating productivity gains through agglomeration economies. Smart cities are green and sustainable. They ensure a high quality of life to all citizens and the sustainability of economic gains. Finally, smart cities are resilient.

External events have dominated economic developments for Indonesia over the past quarter. The outlook for global growth has weakened and the euro zone sovereign debt crisis has intensified. International risk aversion and market volatility have increased, although they remain well below levels seen in late 2008. Equity markets have fallen and emerging markets have seen capital outflows, putting downward pressure on their currencies. Indonesia's domestic economic performance has continued to be strong but, as in other countries in the region, its financial markets have not been immune from this turbulence. Indonesia's domestic drivers of growth, its solid fiscal position, accumulation of reserves, and strengthened financial sector performance make it relatively well-placed to deal with shocks arising from the above scenarios. This improved resilience to external shocks, and a strong policy response, was seen during the 2008- 09 crisis. The final piece looks at the core development challenge of how to make growth more inclusive, as well as higher, focusing on an analysis of the province of East java.

The Philippines quarterly update provides an update on key economic developments and policies over the past three months. It also presents findings from recent World Bank work on the Philippines. It places them in a longer-term and global context, and assesses the implications of these developments and other changes in policy for the outlook for the Philippines. Its coverage ranges from the macro-economy to financial markets to indicators of human welfare and development. It is intended for a wide audience, including policy makers, business leaders, financial market participants, and the community of analysts and professionals engaged in the Philippines. Though the revised gross domestic product (GDP) growth estimates show small deviation from the old base year and methodology, the revision has resulted in a nominal GDP which is 6 percent larger and hence, lower fiscal statistics as a percentage of GDP (e.g., lower tax effort, but improved debt ratio), but also important sectoral growth changes. Investment is now noticeably higher due to improved coverage and transfer of items previously booked under consumption (e.g., military goods) the investment-to-GDP ratio in 2010 is now 20.5 percent instead of 15.6 percent. The demand side growth continues to post a remarkable uptick in investment. Investment grew by 37 percent year-on-year and contributed 6.8 percentage points to GDP growth, mostly driven by durable equipment and private construction. Private construction grew by 22 percent, albeit at a slower pace than the preceding three quarters, and compensated for the contraction in public construction which shrank by 37.3 percent due to continued fiscal tightening and a high base effect. Investment in durable equipment grew 17 percent with the building up of inventory in industrial machineries and road vehicles.

In the last few years, Vietnam's macroeconomic situation has followed a predictable pattern. When faced with external shocks the authorities have opted to protect the country's rapid growth rate, even if it meant tolerating higher levels of macroeconomic instability. This has meant modest growth slowdowns and frequent episodes of overheating. So when the economy started to overheat in late 2010 following the delayed withdrawal of the fiscal and monetary stimulus put in place in 2009, few expected a determined response from the government to stem the ensuing macroeconomic volatility. The current episode of macroeconomic instability has been as severe as the previous overheating episode of mid-2008. The author constructed a summary measure of macroeconomic instability, Vietnam Index of Macroeconomic Stability (VIMS), based on the movement of four variables, namely nominal exchange rate, international reserves, inflation rate and nominal interest rate. Our measure shows that the degree of macroeconomic instability during the current episode did come quite close to mid-2008, but has not surpassed it yet. But unlike 2008, when the level of instability increased sharply and fell immediately, instability has persisted over a longer period of time during the current episode, from November 2010 to February 2011, exposing Vietnam's economy to a prolonged period of nervousness and uncertainty.

In fiscal year 2010-11, India's economy has expanded at a rate close to that observed prior to the global financial crisis. However, growth in the second half of the year slowed, and the performance of industry and investment has been particularly disappointing. Despite some fiscal consolidation and monetary tightening, inflation has emerged as a serious concern because of its effects on the poor, who are usually less able to protect themselves against rising prices, and because of its dampening effects on long-term investment, which is sensitive to interest rate expectations. India's economic growth reached 8.5 percent, helped by a strong rebound of the agriculture sector because of good rains in the 2010 monsoon season against the near-drought conditions of 2009. On the external side, exports staged an extraordinary recovery and the current account deficit narrowed, while capital flows slowed driven by a pronounced decline in foreign direct investment. Foreign institutional investment remained robust, however, and external borrowing increased to compensate partially for the decline in Foreign Direct Investment (FDI). The rupee remained stable against the U.S. dollar but showed a small real appreciation against a 36-currency trade weighted index, and Reserve Bank of India foreign reserves increased to more than $310 billion. The central government budget deficit for FY2010-11 is estimated to have reached 6 percent of Gross Domestic Product (GDP), an important contraction from the widened fiscal stance of FY2009-10. Budget implementation benefited from higher-than-expected growth in nominal GDP and related higher tax intake; although the tax-to-GDP ratio is still significantly lower than in FY2007-08. The spending-to-GDP ratio, on the other hand, was reduced by 0.7 percent of GDP despite two supplementary demands for grants.

Despite the recent slowdown, the underlying growth of the global economy remains solid. After a 4 percent growth in 2010, Russia's real output is expected to grow 4.4 percent in 2011, increasingly driven by domestic demand. Russia's households have absorbed the food price shock thanks to a combination of higher wages and pensions, and resort to private and public safety nets. The country emerged from the global recession with lower unemployment and poverty than feared. But global risks and uncertainties increased with the new oil shock. Although the short-term impact will be positive for Russia's export and fiscal revenues, there is no room for complacency. Macroeconomic policy should focus on the short-term objective of controlling inflation and medium-term fiscal adjustment towards long-term, sustainable level of non-oil fiscal deficit. Improving the efficiency of public expenditure to create fiscal space for productive infrastructure and strengthening the investment climate for the private sector remain among key long-term challenges. The ongoing rethinking of the government's long-term strategy and a period of high oil revenues provide an opportunity to focus on these long-term issues more forcefully than during the global crisis.

The Indonesia economic quarterly reports on and synthesizes the past three months' key developments in Indonesia's economy. It places them in a longer-term and global context, and assesses the implications of these developments and other changes in policy for the outlook for Indonesia's economic and social welfare. Its coverage ranges from the macro economy to financial markets to indicators of human welfare and development. It is intended for a wide audience, including policy makers, business leaders, financial market participants, and the community of analysts and professionals engaged in Indonesia's evolving economy. Economic developments over the past quarter bear some strong similarities with the situation seen in the first half of 2008. Most notably, rises in domestic and international commodity prices have again brought with them a variety of risks, both positive and negative, at the macroeconomic and household level. While oil prices increased sharply with political developments in the Middle East and North Africa, strong price rises have been seen across global commodities. Non-energy commodities, including food, were up 30 percent in the six months to February 2011, similar to the increases seen in the first half of 2008. The experiences of other countries through the 2008 food price crisis suggest a range of potential policies which can provide well-targeted protection for vulnerable households and maintain and create incentives for producers to help limit future price volatility.

The law and related implementing regulations that constitute the regulatory framework affecting the capital markets in Indonesia are largely consistent with the International Organization of Securities Commissions (IOSCO) Objectives and Principles of Securities Regulation. Nevertheless this assessment finds that legislative reforms and other actions that are in the process of being implemented to clarify and expand the security regulator's authority and to cure certain self-acknowledged gaps should be accelerated. Further, the assessment concludes that attention must be paid to assure that implementation of the regulatory framework results in a system that reliably detects, deters, and sanctions securities violations and reliably identifies and prevents or mitigates prudential concerns. This may require legal reforms beyond those necessary to reform the specific capital markets law, as discussed more extensively by the separate legal assessor. How significant such further reform will be to enforcement effectiveness will depend in part on the manner in which regulatory enforcement powers and authorities are augmented and enhanced under the capital markets law revision. Capital markets operations are heavily dependent on legal certainty, and in particular reliable application of contract, company, insolvency, and other legal protections.

The capital markets in Salvador are small and relatively underdeveloped, and have played a very limited role in the economy. On average, institutional investors invest less than 10 percent of their total assets in capital market instruments. In 2009, there were only five new issuances of corporate bonds and three in the case of equity. Banks and pension funds are the main institutional investors. The current market architecture and the natural monopoly it grants to the exchange hamper market development and prevent the modernization of the regulatory framework. There is an urgent need to overhaul of the regulatory framework to promote sound market development in the short-to-medium term. The regulatory framework should guarantee a level playing field between bonds and bank deposits, which should be reflected in the investment guidelines for institutional investors. The exchange should reposition itself to become more competitive and strategic at the local and regional level. The investment funds law should be finally approved to broaden and diversify the investor base. The importance of this reform is paramount as the current reliance on just two main institutional investors (banks and pension funds), with investment limitations (35 percent each per issue), creates a major limitation for new issuances. In the medium -to long- run, it is recommended to explore gradually integrating the individual markets at the regional level. This paper is divided into following four parts: part one gives current market situation; part two gives regulatory and supervisory framework; part three gives recommendations; and part four is reference section.

The Philippine economy recovered strongly from the global recession owing to a combination of transitory and permanent, as well as global and idiosyncratic factors. Similar to its regional peers, the recovery was partly driven by the rebound in global trade and domestic consumption linked to sharp increases in consumer confidence. In the Philippines, growth was also spurred by two domestic and temporary factors-continued fiscal policy easing and election-related spending-and a structural one, namely the acceleration in global outsourcing which benefited the country's business process outsourcing sector and associated sectors such as construction. The economy is projected to grow by 6.2 percent in 2010 and by 5 percent in 2011, with large but broadly balanced risks. While inflation expectations are under control, the prospects of large short-term capital inflows partly linked to renewed quantitative easing by key G7 central banks are complicating monetary policy at a time when the economy no longer needs accommodative monetary policy. The first budget of the Aquino government could be a turning point for the Philippines in the public finance area. The 2011 budget changes current dynamics in two critical areas: the (structural and cyclical) fiscal policy stance and the quality of public finances. This "reform budget" renews the fiscal consolidation effort-albeit modestly and contains significant reform measures aimed at improving spending efficiency, transparency and accountability of the budget. For the 2011 budget to indeed turn the country away from a weak fiscal position, inconsistent spending efficiency, and significant gaps in public expenditure and financial accountability, efforts initiated in this budget will have to both be sustained over time and expanded. Strengthening revenue mobilization-through a modern tax system with efficiency and equity at its core-would enable future budgets to scale up spending needed to generate inclusive growth.

The improvement in public finances since last year, coupled with buoyant revenue due to the commodity price recovery, has led to growing pressures for increased government spending. Recently approved budget amendments envisage a 4.5 percent of gross domestic product (GDP) increase in spending on the originally approved 2010 budget, while the Mid-Term Budget Framework (MTBF) for 2011-2013 projects another 12.1 percent of GDP increase in spending in 2011. The main driver for the increases is the execution of promises made by both coalition parties to distribute monthly percentage rate, or MNT 1.5million (around US$1000) to each citizen in the form of cash and non-cash handouts and large public sector wage increases planned for October of this year. If these public spending plans materialize, they will set the stage for a renewed bout of high inflation and a possible return to the macroeconomic vulnerability characteristic of the boom-and-bust cycle of the recent past. In the real sector, the impact of increasing inflation is evidenced through a decline in real wages. The latest informal wage survey indicates that on average, workers' nominal wages have increased by about 10 percent from January 2010 to June 2010; this is because of an increase in job opportunities in the construction sector. Real wages, however, have declined on average due to the significant increase in the consumer price index.

India's economic performance in FY2009/10 shows that the recovery from the slowdown during the global financial crisis is well underway. India's Gross domestic Product (GDP) growth in FY2009/10 has beaten expectations by reaching 7.4 percent compared with 6.7 percent in the previous year. In particular, agricultural sector growth was better than feared with a slightly positive growth rate despite the worst monsoon shortfall in three decades. Strong growth in the fourth quarter pushed annual GDP growth to 7.4 percent in 2009-10. Fourth quarter growth reached 8.6 percent (y-o-y), the highest quarterly growth rate since the end of FY2007/08. The industrial sector's robust recovery beat expectations. Growth in the last quarter of fiscal year FY2009/10 was an unexpectedly high 13.3 percent resulting in over 12 percent growth in the second half of year, nearly double the 6 percent growth witnessed in the first half. Higher inflation mars the bright picture, but there are clear indications of moderation. Inflation as measured by the wholesale price index (WPI) averaged 10 percent during February-May 2010. India's recovery after the slowdown seems well underway. Growth is projected to climb to 8-9 percent in the next two years. These growth rates are achievable without a renewed build-up of inflationary pressure as long as agricultural growth returns to trend, infrastructure constraints are alleviated, and international prices remain stable. Over the next year, sources of growth will shift from fiscal stimulus to manufacturing and, possibly a recovering agriculture.