ADB revises down regional growth

Released on September 22, the ADB report says that weaker prospects for China and India and a slow recovery in the major industrial economies will combine to push growth in developing Asia below previous projections. In an update of its Asian Development Outlook 2015 - which covers 45 economies - the bank 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.

China, 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, said the report. Growth is now seen at 6.8 percent in 2015, down from 7.2 percent projected earlier. Moreover, external demand weakness and a 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.

The Manila-based bank also said the 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 Vietnam, Sri Lanka, and Indonesia exceeds 65 percent. In a DW interview, the ADB's chief economist, Shang-Jin Wei, speaks about the factors affecting growth in developing Asia and the impact a US interest rate hike are likely to have on Asian economies.

DW: What are the major issues affecting economic growth in Asia?

Shang-Jin Wei: The two primary reasons for our downward revision are the slower-than-expected growth rates in China and India and a slow recovery in the major industrial economies. Although developing Asia is expected to continue to be the largest contributing region to global growth despite the moderation, there are a number of headwinds in play such as currency pressures, worries about capital outflows and exchange rate depreciation as well as lower commodity prices.

You are now projecting China to grow at 6.8 percent this year, less than the official target of 7 percent. How is this downturn impacting other economies in the region?

The most affected countries will be the ones that sell goods to China, as slowdown there will translate into fewer export opportunities. Clear examples would be commodities-producing nations such as Mongolia, which sells lots of copper to China or Kazakhstan which sells oil and gas.

Affected will also be those economies which are integrated with China through global value chains, such as Korea, and Southeast Asian countries such as Singapore.

However, countries such as Vietnam and Bangladesh stand to benefit from China's rising labor costs. In sectors in which they compete directly (for Vietnam this includes electronic equipment and car parts‎, for Bangladesh this means garments, which comprise 80%of its exports) the Chinese slowdown could also offer an opportunity for these countries to expand to other markets.

The US Federal Reserve is widely expected to raise interest rates by the end of this year. What consequences will such a move have on Asian countries?

There are three dimensions to this. First, if the Federal Reverse decides to raise interest rates at some point - which it will do sooner or later - it's likely to do so at a time when it judges that the US economy is experiencing relatively strong and sustainable growth. This factor per se would be good news for many developing countries, especially for those in Asia given their openness to trade.

Second, experience suggests that when the US decides to raise interest rates, it usually causes a global realignment of capital flows. Capital tends to flow from emerging markets to the US, a country with higher returns. So this change in capital flows could e a challenge for those countries that rely more heavily on foreign currency and international financing for their growth and development.

Third, a change in US interest rates can often trigger exchange rate depreciation in various countries. This could be a challenge for various countries or even companies in the developing world, especially those that have accumulated relatively large foreign currency denominated debt.

What will such a step by the US Fed force regional monetary authorities to do, in order to stem the tide of capital outflows or to maintain financial stability?

Central banks in many countries potentially face a dilemma. When the US hikes interest rates, they feel obligated to do the same to avoid capital outflows and prevent a rapid depreciation of their currency. But at the same time, if the domestic economy is relatively weak, central banks also have the desire to keep rates relatively low. So a US interest rate change does present a challenge for such economies.

In terms of potential policy responses, Asian countries have other tools at their disposal such as tax and expansionary policies as well as macroprudential policies. In order to be resilient to international interest rate fluctuations and other financial shocks, it is important to implement such regulations that, for some countries, may entail some capital flow management such as limiting reliance on foreign currency borrowing.

Shang-Jin Wei is chief economist at the Manila-based Asian Development Bank (ADB). Established in 1966, it is owned by 67 members - 48 from the region.