Forecast For Developing Asia's Growth Up At 8.3%

Source : The Straits Times, Tue, Sep 18, 2007

THE United States sub-prime mortgage crisis is unlikely to take the wind out of developing Asia's sails, according to the Asian Development Bank (ADB).

The bank expressed its confidence yesterday by raising its regional growth forecast.

Despite a slowing US economy, the ADB found reason to be more bullish about Asia's prospects in an update of its Asian Development Outlook yesterday.

It raised its 2007 economic growth forecast to 8.3 per cent, from 7.6 per cent previously.

It also predicts that economic expansion next year will remain high at 8.2 per cent, up from its last forecast of 7.7 per cent - while cautioning that next year's prospects are still mired in uncertainty.

The reasons behind this positive outlook are the blistering rates of expansion in China and India, while other Asian economies such as Vietnam are just as buoyant.

China and India are projected to grow by 11.2 per cent and 8.5 per cent this year, lifting the region's overall average. The ADB is pegging Singapore's growth rate this year at 7.5 per cent.

'But there is a general pattern of high, and in some countries, accelerating, growth,' noted the ADB in its latest report. In fact, the report said, the biggest worry for developing Asian economies is not slowing growth, but rather, inflation caused by overheating.

The Manila-based bank also decided on a 25 per cent chance of the US lapsing into recession, predicting a slowdown to be more likely.

But should a widely anticipated Federal funds rate cut today fail to steer the US away from recession, developing Asia could be hit with a double whammy - on the credit front and later, on the export front, said ADB assistant chief economist Frank Harrigan.

'We don't think the US will go into recession. But if it does, this will take 1 to 2 percentage points off next year's growth for the region.'

The first round of impact of US sub-prime troubles on Asia will be credit tightening, as investors demand higher returns on risky loans.

This will translate into higher borrowing costs for the governments and companies of some developing countries, Dr Harrigan explained.

Highly indebted Asian economies such as the Philippines, Indonesia and Pakistan will be hit hard by a rate hike.

Ironically, the Philippines, whose economy is in its best shape in nearly two decades, will be one of those most affected. This is because it has a high level of debt as a proportion of economic output.

'Six months down the road, demand for exports could be hurt, as Asia has yet to replace the US as the key source of final demand,' Dr Harrigan explained.