Emerging East Asia to Maintain Strong Growth, Downside Risks Rise, Says ADB

HONG KONG, CHINA (13 December 2007) - Economic growth in emerging East Asia will ease to 8.0% in 2008 from 8.5% in 2007 as expansion in key industrialized nations moderates amid volatility in financial markets and rising oil prices, says a new report issued by the Asian Development Bank (ADB).

The risks are tilted more to the downside than before on expectations of a sharper slowdown in the U.S. economy, further tightening of global credit, an abrupt adjustment in exchange rates and continued rise in oil and commodity prices, says the December issue of Asia Economic Monitor (AEM).

Economic growth in the People’s Republic of China, the region’s growth engine, will slow to 10.5% in 2008 from 11.4% in 2007 if government measures to cool the economy begin to take hold. Growth in ASEAN (Association of South East Asian Nations) is expected to slightly moderate to 6.1% in 2008 from 6.3% in 2007.

The report says even as growth slows in emerging East Asia, inflation is rearing its head in many economies and that price pressures are likely to remain in 2008.

“Slower growth but rising inflationary pressures despite appreciating currencies pose major challenges for the region’s policymakers,” says Jong-Wha Lee, Head of ADB’s Office of Regional Economic Integration.

The report warns that a hard landing of the U.S. economy could have a significant impact on the region’s growth as trade linkages with the major industrialized economies remain strong despite rising intraregional trade. If we take into account the total share of intraregional trade that is ultimately destined for the G3 markets (Japan, Europe and United States), the share of G3 markets in the region’s total exports is still over 60%.

AEM says the region’s macroeconomic managers will gain by adopting greater flexibility of exchange rates and exploring ways to maintain stability among intraregional exchange rates. It adds that improving investment climate to boost domestic demand, managing capital inflows and strengthening domestic financial systems will also help the region to underpin growth.

So far the turmoil in the U.S. subprime market has not spilled over into emerging East Asian markets and economies as exposure of regional banks to such portfolios remain limited. However, the region remains vulnerable as its banking sector expands into new lines of businesses and exposes itself to unknown risks.

The changing structure of capital inflows, with volatile short-term capital accounting for more than 60% of total inflows, remains a cause for worry, the report says. This also puts pressure on central banks when pursuing autonomous monetary policies.

The sharp rise in asset prices is also at risk of corrections if swings in global financial markets spread to the region. Changes in asset prices could impact growth through wealth effects and higher cost of capital.

“Despite the resurgent capital inflows after the August market turmoil, a sharp reversal in investor risk appetite remains a possibility in this climate of heightened uncertainty. This could lead to a broader re-pricing of risk and unwinding of so-called carry trade,” says Mr. Lee.

The report recommends policymakers should continue to enhance risk management systems, strengthen information disclosure policy and upgrade supervisory framework to better assess potential vulnerabilities.

AEM analyzes emerging East Asia’s economic growth, financial and corporate sector restructuring, and emerging policy issues. AEM is available on OREI’s Asia Regional Information Center (ARIC) website.

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