Softer growth prospects for the People’s Republic of China (PRC) and India, and a slow recovery in the major industrial economies, will combine to push growth in Developing Asia for 2015 and 2016 below previous projections, says a new Asian Development Bank (ADB) report.
In an update of its flagship annual economic publication, the Asian Development Outlook 2015 (ADO 2015), ADB, now sees gross domestic product (GDP) growth for the region coming in at 5.8 percent in 2015 and 6.0 percent in 2016 below the March forecasts of 6.3 percent for both years.
“Developing Asia is expected to continue to be the largest contributing region to global growth despite the moderation, but there are a number of headwinds in play such as currency pressures, and worries about capital outflows,” said ADB Chief Economist Shang-Jin Wei.
“In order to be resilient to international interest rate fluctuations and other financial shocks, it is important to implement macro-prudential regulations that, for some countries, may entail some capital flow management such as limiting reliance on foreign currency borrowing.”
Growth in the industrial economies is seen easing to 1.9 percent in 2015, down from 2.2 percent forecast in March, as consumption and investment remains soft, although there are some positive signs with improved prospects for the euro area and continued growth in the United States, the report said.
The PRC – the world’s second largest economy – has seen growth moderate due to a slowdown in investment and weak exports in the first eight months of 2015.
Growth is now seen at 6.8 percent in 2015, down from 7.2 percent projected earlier, and below the 7.3 percent posted in 2014.
External demand weakness and slower-than-expected pace of enacting key reforms are holding back India’s growth acceleration, with the pace in 2015 now seen at 7.4 percent, down from 7.8 percent forecast earlier.
Southeast Asia meanwhile is bearing the brunt of the slowdown in the PRC – one of its key markets – as well as subdued demand from industrial countries, with growth in 2015 now seen at 4.4 percent, before bouncing back to 4.9 percent in 2016.
Soft global commodity prices, including oil and food, are keeping price pressures low with regional inflation projected to decline to 2.3 percent in 2015, from 3.0 percent in 2014, although a pickup is expected in 2016.
Net capital outflows from developing Asian markets which gained pace in the first part of 2015, exceeding $125 billion in the first quarter, remain a concern as investors anticipated a near term US interest rate hike.
As a consequence the region has seen rising risk premiums and weakening exchange rates which could further impede growth momentum, the report said.
A strengthening US dollar poses a threat to Asian companies with large foreign currency exposure, with data showing that the share of foreign currency debt among firms in Viet Nam, Sri Lanka, and Indonesia exceeds 65 percent.
In addition, a declining appetite by the PRC for energy, metals and other commodities, and soft global prices, is a worry for a number of Developing Asian commodity-focused export economies, including Mongolia, Indonesia, Azerbaijan, and Kazakhstan.
To counter the impacts of a US rate rise, monetary policy authorities in Developing Asia will need to find a balance between stabilizing the financial sector and stimulating domestic demand, the report said.
Continuing steps to build liquid, well-developed domestic financial markets can help reduce the corporate sector’s reliance on foreign currency borrowings.