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Thursday, 13 December 2007

Asia economic growth to remain strong in 2008: development bank

MANILA (AFP) - - Economic growth among the developing economies of East Asia will ease to a still robust eight percent next year, but the downside risks are rising, the Asian Development Bank said Thursday.

The forecast is half a percentage point below the bank's 8.5 percent economic growth forecast for emerging East Asia for this year.

The moderating factors are the projected slower expansion of key industrialised nations owing to volatile financial markets and rising oil prices, the Philippines-based lender said in a report.

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 a continued rise in oil and commodity prices, says the December issue of the bank's Asia Economic Monitor.

It said gross domestic product (GDP) growth in China, the region's growth engine, would slow to 10.5 percent in 2008 compared to a forecast 11.4 percent this year if government measures to cool the economy begin to take hold.

Growth in the Association of South East Asian Nations (ASEAN) economies is expected to slightly moderate to 6.1 percent in 2008 from a forecast 6.3 percent in 2007, it added.

The report also warned that 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," said Lee Jong-Wha, head of the bank's Office of Regional Economic Integration.

The report urged economic managers to adopt greater exchange rate flexibility and explore ways to maintain stability among intraregional exchange rates.

Improving investment climate to boost domestic demand, managing capital inflows and strengthening domestic financial systems will also help the region to underpin growth, it added.

So far turmoil in the US subprime mortgage market has not spilled over into emerging East Asian markets and economies as exposure of regional banks to such portfolios remain limited, the report said.

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 percent of total inflows, remains a cause for worry, the report said.

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," Lee said.

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