Asia's Strong Economic Growth Continues says Asian Development Bank

The Asian Development Bank expects developing economies in Asia as a whole to grow a strong 6.6 percent this year. However, the ADB says there are large regional differences, and rising oil prices are potential threats to the overall strong trend.

Global crude oil prices have risen by nearly 75% since the start of 2005, said Asian Development Outlook 2005 Update, the supplement to ADB's flagship publication forecasting economic trends in the Asia and Pacific region. As a net oil importer, Asia is vulnerable to high international crude oil prices, which are likely to remain high for some time and could hurt the region's growth momentum, the report said. Asia, produces about 11% of the world's crude oil, but consuming more than 20% of it. And this gap is widening as the two regional giants - PRC and India - continue to need more oil. In 2003, about 44.7% of oil consumption in the region was imported, compared with just about 10% in the mid-1980s.

In spite of these pressures, the economic giants, China is expected to grow by 9.2 percent - up from the ADB's forecast in April of 8.5. The prediction for India, whose fiscal year ends next March, remains at 6.9 percent But Southeast Asian growth has been downgraded to 5 percent, from 5.4. ADB chief economist Ifzal Ali cites a number of factors.

'Of course there is the problem associated with higher oil prices, but the downturn in the electronics cycle has hurt Malaysia and the Philippines,' he explained. 'We've witnessed that Thailand and the Philippines have suffered from drought in the earlier part of this year. And Thailand has also suffered from the insurgency that is going on in the southern part of the country.'

But there are still some positive factors that vary from country to country and could influence the actual growth outcome. Despite the risks, countries in Asia are considered to be in a better position to absorb the current oil shocks than they were at the time of previous oil shocks, the report said. The recent run-up of nominal oil prices also has been more modest and gradual than the earlier shocks, it added.

'Further, external payments positions are more secure, monetary policy is more credible; fiscal strength is greater, and economic structures are more flexible and capable of adjusting more quickly than before,' the update added. Some economies, such as the Philippines and Thailand, have already tightened their monetary policy in order to help contain the inflationary impact.

'As developing Asia consumes more oil than it produces, higher oil prices are likely to eat into its income growth,' the ADB update warned. 'Higher oil prices also add to inflationary pressures, and, since many countries in developing Asia subsidize or directly control the retail prices of oil products, this will create additional fiscal burdens.'

'Although subsidies may provide short-term relief from the pain of higher oil prices, they do so at high opportunity cost and at the risk of upsetting macroeconomic stability,' the update said. Thailand has announced that all fuel subsidies would be removed by February 2006, while Malaysia has declared its intension to scrap subsidies on gasoline and diesel.

The ADB report also says a successful political transition and an improving investment climate are expected to lift growth in Indonesia, and strong growth is expected to continue in Vietnam.

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