Financial storm could hit Asia economies

Published on The Brunei Times (http://www.bt.com.bn/en)
Financial storm could hit Asia economies

Rupiah bundle: Workers remove stacks of rupiah notes in a state bank in Jakarta on Monday. Picture: Reuters
MANILA/HONG KONG

Wednesday, September 17, 2008

ASIA'S developing economies, the fastest growing in the world, should expand by 7.5 per cent this year but financial convulsions in the West could hurt growth, the Asian Development Bank (ADB) yesterday said.

"The risks to Asia today are much, much higher than what we had projected in April," Ifzal Ali, ADB chief economist, told journalists in Hong Kong.

The biggest risk was that the US financial crisis would affect G3 economies indefinitely, hurting Asian exports and financial markets. "If the impact goes beyond 2009 that will be very, very negative for Asia."

For now though, Asia still needed to tackle inflation rather than focus on growth, Ali said.

The Manila-based bank's latest 2008 growth forecast, worked out before Lehman Brothers collapsed and Merrill Lynch was sold in the worst financial crisis in the US in decades, was only slightly lower than an 7.6 per cent estimate in April.

But it is the slowest growth in the region since 2003.

"The silver lining so far has been that US growth though slower has held up. The turmoil of the last eight days points to clear and present danger that growth in the United States could slip very, very sharply," Ali said.

The ADB also slashed the 2009 growth forecast to 7.2 per cent from 7.8 per cent as it said the global slowdown, high inflation and tight monetary policy would cut back on expansion.

The 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.

"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," the bank said in the report.

The ADB said average inflation in Asia-Pacific was likely to reach 7.8 per cent in 2008, a sharp increase from a forecast of 5.1 per cent made in April. Next year, inflation is likely to come in at six per cent. Oil prices would average US$109 in 2009, it said.

"Inflation is the greatest risk in emerging economies in Asia," ADB President Haruhiko Kuroda told Reuters last week, adding that rather than supporting growth, the top policy challenge was inflation.

The ADB kept its 2008 growth forecast for China, the world's fastest growing big economy, at 10 per cent and said it was one of few countries with room to ease monetary policy.

China's move on Monday to cut interest rates for the first time in six years showed it was refocusing on protecting growth.

But Ali said the cut's small magnitude, just 27 basis points, and the fact that a cut in the reserve requirement would not apply to the biggest banks, showed policy easing would be slow.

The ADB said growth in India was likely to expand only at 7.4 per cent in 2008 against the April forecast of eight per cent. In 2009, China is seen growing 9.5 per cent and India seven per cent.

The ADB also said Asian central banks had responded well, albeit late, to sky-rocketing inflation.Reuters

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