Manila: Asia’s developing nations should expand 7.5% this year but financial turmoil in the West could drag the region down, the Asian Development Bank (ADB) said on Tuesday.
The Manila-based international bank’s latest 2008 growth forecast, calculated before Lehman Brothers Holdings Inc. filed for bankruptcy and Merrill Lynch and Co. Inc. was sold in the worst financial crisis in the US in decades, was only slightly lower than an estimate of 7.6% made in April.
But it is the slowest growth in the region since 2003. ADB also slashed the 2009 growth forecast to 7.2% from the previous 7.8% as it said the global slowdown, high inflation and tight monetary policy would cut back on expansion.
ADB’s Asian Development Outlook Update said Asia’s financial systems were healthy and had so far been relatively inured to the US credit crunch.
“The one variable that could upset this optimistic assessment is the future course of the US subprime crisis,” it said.
“If the subprime crisis worsens significantly, Asia is bound to suffer much more serious financial effects, including an abrupt reversal of the capital inflows that have held up well so far.”
Reduced Expectations (Graphic)
ADB said average inflation in Asia-Pacific was likely to reach 7.8 % in 2008, a sharp increase from a forecast of 5.1% made in April. Next year, inflation is likely to come in at 6%, it said.
“Inflation is the greatest risk in emerging economies in Asia,” ADB president Haruhiko Kuroda said last week, adding that while it had peaked in China, South Korea and Thailand, it was picking up in Vietnam and Pakistan. “Rather than supporting economic growth, the biggest policy challenge is tackling inflation.”
ADB maintained its 2008 growth forecast for China, the world’s fastest growing big economy, at 10% but said India was likely to expand only at 7.4% against the April forecast of 8%. In 2009, China is seen growing 9.5% and India 7%.
“India’s very large fiscal imbalance created by the current level of subsidization of oil, fertilizer and food, as well as other off-budget items, sets a daunting task for economic management,” ADB said.
“Cutting these subsidies is a difficult task, but maintaining them would imperil any return to the high-growth path of recent years.”
Across the region, ADB said, growth would be affected by both tighter monetary policy and the slowdown in industrialised nations.
“One key message is that the region of developing Asia remained heavily reliant on G3 economies (US, Eurozone and Japan) for its major export markets and has not uncoupled from industrial countries’ business cycles,” it said. ADB also said Asian central banks had responded well, albeit late, to sky-rocketing inflation.
“Initially, responses seemed too little and too late,” it said. “Recently, central banks have become more aggressive and indeed, policy rate responses have...exceeded market expectations.
“However, if central banks become reticent once more, inflation could become ingrained in economies, eventually undermining long-term growth prospects.”