2009 will be difficult for Asian countries

HONG KONG: Economic growth in developing Asia will slow to 5.8 percent in 2009, down from a likely 6.9 percent this year and 9 percent in 2007, as the impact of the global financial crisis spreads to emerging markets, says a new report from the Asian Development Bank (ADB).

With the global economy facing a major downturn, the region’s economic resilience will be tested by weakening exports and a sharp slowdown of private capital flows, according to the December issue of ADB’s Asia Economic Monitor (AEM).

“2009 is likely to be a difficult year for developing Asia but it will be manageable if countries respond decisively and collectively,” says Jong-Wha Lee, Head of ADB’s Office of Regional Economic Integration.

“Swift action by policymakers to stem both the threat to the financial systems and the real economy will allow most of the region’s economies to sustain a healthy if slower expansion.”

The AEM, released Wednesday, says that maintaining the growth momentum in domestic demand is key to keeping the regional economy in relatively good shape amid a weakening external environment.

Economic growth in emerging East Asia—defined as the 10-country Association of Southeast Asian Nations (Asean, including the Philippines) plus China; Hong Kong, China; Taipei, China; and South Korea—will slow to 5.7 percent in 2009 down from 6.9 percent in 2008.

China, the region’s growth engine, is expected to moderate to 8.2 percent in 2009 from 9.5 percent in 2008 even as the government has undertaken measures to spur domestic demand to offset a slowdown in exports and private investment growth.

Further clouding the outlook is a deeper, more prolonged global recession creating persistent stress on the region’s financial systems.

“The risks to the region’s growth outlook are strongly tied to the global outlook through both trade and financial links,” says Lee. “Further financial disruptions could also exert a significant influence on consumer and investor confidence in the region.”

While the region’s economies and financial systems are fundamentally sound and appear better cushioned to withstand the immediate effects of the crisis than in other parts of the world, the report notes with concern that the global credit crunch is now spilling over into domestic banking systems, squeezing funding resources for corporate investment, and could boil over in some key regional economies if left unaddressed.

If banks in the region become more risk-averse, the report warns, monetary policy may have less traction than in the past and governments will have to develop more active fiscal responses to shore up domestic demand.

The AEM urges the region’s policymakers to move swiftly to reduce the risk of a regional credit crunch.

Policymakers should step up the monitoring of local financial markets and have clear policies in place to deal with stressed institutions; provide adequate provisions of foreign and domestic liquidity so that credit continues to flow into the economy; and consider a range of policies to contain the spillover effects of the worsening financial conditions and risks arising from weaker growth on regional banking systems.
–Asian Development Bank