ADB Lifts Forecasts for Asia, Indonesia

The Asian Development Bank raised its forecast for the region’s economic growth this year, crediting a rapid recovery in exports even as it warned the risk of another recession in advanced countries had not completely receded.

The Manila-based development bank said on Tuesday it now expected developing Asia to grow 8.2 percent this year compared with a projection of 7.5 percent growth issued in April. The forecast, which did not include Japan, covered 44 developing and newly industrialized nations in Asia.

It forecasts Indonesia’s economy will expand 6.1 percent this year, faster than the previous projection of 5.5 percent.

“Overall, developing Asia’s recovery seems to have taken firm hold,” the ADB said in the report released in Hong Kong.

Increased consumer and business spending as a result of government stimulus also played its part in the recovery from the financial crisis, it added.

In predictions for individual economies, the ADB maintained its forecast of 9.6 percent growth for China, the world’s second-biggest economy.

South Korea and Taiwan were raised to 6 percent and 7.7 percent respectively. India’s anticipated growth was edged up from 8.2 percent to 8.5 percent, although the bank warned about high inflation due to scant monsoon rains in 2009 that suppressed harvests.

However, the ADB said governments should sustain the expansion by refraining from tightening fiscal and monetary policies “too quickly.”

“Shifting too quickly to fiscal and monetary tightening could heighten the risk of another contraction,” it said in the report.

India this month increased its benchmark interest rate for a fifth time this year.

Thailand in August raised its key rate and signaled further increases after the economy overcame political unrest to grow faster than estimated last quarter.

Taiwan, Malaysia and South Korea are also among those that have boosted borrowing costs.

Indonesia’s benchmark rate has been at a historic low of 6.5 percent since August 2009.

Developing Asian countries “are starting to raise interest rates, that means interest rate differentials between emerging Asia and industrialized countries will widen, that would attract more capital inflow,” said Jong-Wha Lee, the ADB’s chief economist.

The capital inflow presented “potential risk to the global economy” and “another threat to financial stability” should there be fund reversal, he said.

Meanwhile, inflation in Asia would generally be within central banks’ “comfort zones” and might average 4.1 percent in 2010 and 3.9 percent in 2011, the ADB said.

The bank also warned about possible weakness in the United States, Europe and Japan, highlighting sluggishness in the American housing market and the risk of sovereign debt defaults in Europe.

“The global recovery remains shaky, and downside risks lurk. The possibility of a double-dip recession in the major industrial economies has not receded completely,” the report said.

The bank called for more flexibility in the exchange rates of emerging currencies, including China’s yuan.

“I do think the emerging currencies in Asia need to be more flexible and probably need to appreciate against the G-3 currencies,” ADB president Haruhiko Kuroda said in reference to the US dollar, euro and yen.

Kuroda made the comment when asked whether the yuan should appreciate, amid claims from the United States that China was undervaluing its currency to boost exports.

“If you look at the US, Europe and Japan, their economies are recovering but their growth prospects in the medium to long-term are much lower than emerging Asia,” he said.

“That means that some exchange rate realignment would be necessary and already realignment is occurring in many parts of Asia.”

China pledged in June to loosen its grip on the yuan, which has been effectively pegged at about 6.8 to the dollar since mid-2008.

The United States maintains that Beijing is keeping its currency artificially low against the dollar to make its exports more competitive, and is showing increasing signs of frustration over the long-running row.

The US House of Representatives will this week vote on draft legislation that will open the way for retaliation against China over the yuan issue.


Bloomberg, AP & AFP