World Bank cuts growth forecast for East Asia

Cebu, PHILIPPINES, April 15, 2015 – China will still be the fastest growing economy in East Asia, however, the World Bank predicts that the entire East Asian region will be subject to lower, though still robust, growth, subject to rising US interest rates and the strong US dollar.

The 14 Developing East Asian economies have had their growth projections cut from 6.9% to 6.7%, however, Axel van Trotsenburg, World Bank East Asia and Pacific regional vice president, had this to say in a statement,

“Despite slightly slower growth in East Asia, the region will still account for one-third of global growth, twice the combined contribution of all other developing regions,”

As always, China is central to the region, and its slowing growth, from 7.4% in 2014 to a projected 7% in 2015, as it transitions to a consumption led economy looks likely to temper the positive effects a lower oil price might have. However, Sudhir Shetty, Chief Economist of the World Bank’s East Asia and Pacific Region stressed that the leeway provided by the low oil price was a chance for major fiscal reforms aimed at raising revenue, particularly cutting fuel subsidies as Indonesia and Malaysia have already done.

“With low oil prices, countries – whether oil importers or exporters – should reform energy pricing to usher in fiscal policies that are more sustainable and equitable.”

For the Philippines the World Bank cut forecasts for 2015 from 6.7% growth to 6.5%. The nation still figures to be one of the fastest growing economy in the region and is less exposed to the rising US Dollar and the decisions of the Fed.

While Li & Hungerford believe that the lower end of our 6.7%-7% growth projection is still a reasonable expectation, the headwinds facing an uneven world economy continue to pose risks, particularly to economies that are highly globalized. Developed economies continue to exhibit slow and uneven recovery, despite major quantitative easing in the Euro Zone and Japan, results are still inconclusive, particularly in Japan. For the Philippines, risk is entailed in the expectation of higher interest rates towards the end of the year (which have already been priced in by the US markets), and the rising US dollar, which could raise borrowing costs, and lead to reduced capital flows to the region, or even capital flight.

Domestically, in order for the Philippines to reach the growth target we believe it should, the Aquino administration must push through with infrastructure development and continue to liberalize the economy. However, with depleted political capital following the DAP controversy, P-Noy, as he is known, and his administration may not have the appetite to take these required steps for long term prosperity.

 

Key findings from the World Bank East Asia Pacific Economic Update, April 2015

  • Economic growth will ease slightly in developing countries in East Asia and Pacific this year, even as the region benefits from lower oil prices and a continued economic recovery in developed economies.
  • The region will still account for one-third of global growth, twice the combined contribution of all other developing regions
  • The developing economies of East Asia are projected to grow by 6.7% in 2015 and 2016, slightly down from 6.9% in 2014.
  • China’s growth is expected to moderate to around 7% in the next two years, compared with 7.4% in 2014.
  • Growth in the rest of developing East Asia is expected to rise by half a percentage point, to 5.1% this year, largely driven by domestic demand in the large Southeast Asian economies.
  • Several smaller economies, especially commodity exporters such as Mongolia, will see lower growth.
  • Low oil prices will benefit most developing countries in East Asia, especially Cambodia, Laos, the Philippines, Thailand, and the Pacific island countries.
  • But the region’s net fuel exporters, including Malaysia and Papua New Guinea, will see slower growth and lower government revenues.
  • In Indonesia, the net impact on growth will depend on how much a decline there will be for its coal and gas exports.
  • The recovery in high-income countries continues to be slow and uneven, and a downturn in the eurozone and Japan would weaken global trade.
  • Higher U.S. interest rates and an appreciating U.S. dollar, along with diverging monetary policy paths across advanced economies, could raise borrowing costs, generate financial volatility and reduce capital flows to East Asia.
  • The continued strengthening of the U.S. dollar against other major currencies also could hurt highly-dollarized economies such as Cambodia and Timor-Leste.
  • To address these risks, improving fiscal policy is key. With low oil prices, countries – whether oil importers or exporters – should reform energy pricing to usher in fiscal policies that are more sustainable and equitable.”
  • In most of the larger East Asian economies, efforts to bolster revenues and restructure spending can help fill the gap in infrastructure investments and create more funding for social protection and insurance programs.
  • In the major fuel exporting countries and Mongolia, fiscal consolidation is required.
  • Lower oil prices create an opportunity for governments to reduce fuel subsidies and raise energy taxes. Across much of the region, fuel subsidies and related tax expenditures have strained public finances and weakened current accounts.
  • Some countries, including Indonesia and Malaysia, recently took steps to cut fuel subsidies, but the momentum needs to be sustained and broadened, even if oil prices begin to recover.
  • In China, as it shifts to a consumption-led, rather than an investment-led, growth model, the main challenge is to implement reforms that will ensure sustainable growth in the long run.  Policies to spur growth, the report says, should support restructuring efforts.
  • In the medium term, the report says, countries should expand and upgrade physical infrastructure and improve public access to higher education and health care.
  • In the long term, countries will need to find ways to sustain productivity growth, contain health care costs and expand the revenue base for social security.

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