Asia At Risk If US Growth Slows: ADB

Source : The Business Times, December 14, 2007

Region still depends on outside markets despite growing intra-Asian trade

ASIA'S emerging economies are likely to be hit hard by any serious slowdown in the wake of the US sub-prime mortgage crisis, the Asian Development Bank (ADB) warns in a report published yesterday.

Asia still depends heavily on the US and other outside markets despite growing trade between the region's emerging economies, the report says.

The cautious tone contrasts with that of an up-beat report published recently by the World Bank, which suggested emerging Asian economies including China would suffer only marginally even if GDP growth in the US were to slump to zero in 2008.

ADB forecasts that economic growth in emerging East Asia will ease from 8.5 per cent in 2007 to 8 per cent in 2008 amid volatility in financial markets and rising oil prices.

'Risks are tilted more to the downside on expectations of a sharper slowdown in the US economy, further tightening of global credit, an abrupt adjustment in exchange rates and continued rises in oil and commodity prices,' it says.

Growth in China is forecast to slow to 10.5 per cent next year from an expected 11.7 per cent in 2007, as government measures to cool the economy take hold.

But growth in Asean is tipped to moderate only slightly, from an expected 6.3 per cent in 2007 to 6.1 per cent in 2008.

Inflation is rising in many economies and 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.'

The report warns that a hard landing of the US economy could have a significant impact on East Asia because the region's trade with the major industrialised economies remains strong despite increasing intra-regional trade.

'If we take into account the total share of intra-regional trade that is ultimately destined for the G3 markets (Japan, Europe and US), the share of G3 markets in the region's total exports is still over 60 per cent,' ADB says.

'The region's macro-economic managers will gain by adopting greater flexibility of exchange rates and exploring ways to maintain stability among intra-regional exchange rates.'

ADB says boosting domestic demand, managing capital inflows and strengthening financial systems would help underpin growth in East Asia.

'So far the turmoil in the US sub-prime market has not spilled over into emerging East Asian markets and economies as exposure of regional banks to such portfolios remain limited,' it says. '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 per cent of total inflows, remains a cause for worry. The sharp rise in asset prices is also at risk of correction 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 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 trades.'