Developing Asia to Lose Steam in 2007: ADB

TOKYO ~ Developing Asia’s fast-growing economies will slow this year after a blistering 2006 but still face risks from overheating and inflexible exchange rates, the Asian Development Bank (ADB) said.

Sizzling China and India will continue to set the pace, although the region’s growth will ease to 7.6 percent this year after an 11-year high of 8.3 percent in 2006, the ADB said in its annual outlook report released this week.

The expected slowdown is mainly due to a more moderate expansion in the major industrialized economies but growth should pick up slightly to 7.7 percent in 2008, the Manila-based development bank said.

Red-hot China will continue to set the pace although policy curbs and softer external demand should limit its expansion to 10 percent in 2007 and 9.8 percent in 2008 after 10.7 percent last year.

While the regional outlook remains upbeat, the developing economies should act swiftly to tackle areas of overheating resulting from the very rapid rate of growth in 2006, said ADB chief economist Ifzal Ali.

Fast growth was fuelling sharp increases in house, equity and consumer prices. The huge foreign currency reserves built up in developing Asia were also inflating money supply, risking asset market bubbles, he said.

“These overheating pressures which are simmering will need to be addressed,” Ali warned.

“I think the time has now come for developing Asian countries to take a more open view on allowing greater flexibility in exchange rates,” he added.

A stronger currency usually makes imports cheaper, thus encouraging domestic consumption while dampening export growth.

Falling oil prices and monetary tightening should help to take some steam out of the economies but unless their currencies were allowed to rise, interest rates would have to go up, choking off investment, Ali said.

In India, steps taken by the central bank to cool inflation are expected to slow the pace of investment and consumption spending, the ADB said.

Indian economic growth is seen easing to 8 percent this year and 8.3 percent next, after 9.2 percent in 2006. South Asia as a whole will see growth ease to 7.7 percent and 8.0 percent from 8.7 percent in 2006.

“As output growth gently slows in industrial countries, there will be modest knock-on effects in developing Asia,” the ADB report said.

“Although growth in most other countries will come off the pace set in 2006, the region’s economic pulse remains strong,” it said.

Southeast Asia’s growth will slow to 5.6 percent this year and 5.9 percent in 2008 after 6.0 percent in 2006.

The ADB said prospects were now “much more uncertain” in certain countries like post-coup Thailand, where consumer and business confidence is slipping and growth is expected to slow in 2007 after capital controls in December unsettled markets.

Thai growth will likely fall to 4 percent this year and be back at 5 percent in 2008, its 2006 rate.

The ADB also said developing Asia should also make better use of its foreign-exchange reserves, which are together worth almost US$2.3 trillion.

Ali said about half of that could be invested in higher-yielding assets – believed to be mostly US dollar instruments – than at present, with the returns used to pay down debt or invest in infrastructure and other projects.

“The potential is there,” said Ali. “It is a question of realizing risk in an orderly and in a prudent manner. It is a step, I think, which all countries in the region will move towards in the next few years.”

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