Developing Asia's healthy expansion is expected to continue, with growth projected at 6.6% in both 2005 and 2006, according to a report released by the Asian Development Bank (ADB). But the impact of higher oil prices constitutes a major source of uncertainty.
Projections in ADB's Outlook 2005 Update have been revised up slightly to 6.9% for East Asia for 2005, driven by the higher-than-anticipated full-year growth of China of 9.2%. For the rest of East Asia, though, growth has been revised down to 3.8% from the earlier projection of 4.4% due to slower export growth. Next year's growth projection for East Asia has been forecast at 6.9%, with a small upward revision for China offset by downward revisions for the Republic of Korea and Taiwan.
Surging net exports, strong investment, and accelerating consumption are expected to propel economic growth in the People's Republic of China (PRC) to 9.2% this year, outpacing an earlier forecast of 8.5%. According to the updated outlook, thePRC's economy showed little sign of the anticipated growth slowdown in the first half of 2005. ADB forecasts GDP growth of just below 9% for 2006. "It is expected that high economic growth will be supported by rising incomes and consumption, though the deceleration of investment and net exports expected from the second half of 2005 is likely to bring GDP growth down a little from the peak levels of recent years."
Growth in South Asia is on track for 2005, with India continuing to expand at a brisk pace, Pakistan posting its fastest growth in more than two decades, and Bangladesh growing steadily. India's outlook continues to look bullish in 2006, lifting the subregional average for South Asia to 6.6%.
Even if estimates show that India's GDP growth could be clipped by up to 1.1percentage points if oil prices remain around $70 per barrel through end 2006, "this negative impact is expected to be offset by other positive effects, including the government's initiatives on infrastructure investment", the update says. Other underlying factors are: higher private investment and the positive outlook of entrepreneurs; the rise of consumerism among a rapidly growing middle class; a more aggressive attitude by financial institutions in consumer lending as well as industrial and farm credit; the substantial business opportunities in exports; and expansion of market liberalization policies.
But a variety of factors have dimmed the outlook this year in Southeast Asia, including poor harvests and high oil prices, particularly hitting Philippines and Thailand, and a slowdown in the global electronics sector affecting Malaysia and the Philippines. These negative developments are to some degree offset by continuing robust growth in Vietnam and an improving investment climate in Indonesia. But overall, 2005 growth in Southeast Asia has been revised down to 5% from 5.4%.
High oil prices are taking their toll on Thailand's economy and the full-year growth forecast has been lowered to 4% from 5.6% projected earlier this year. The ADB holds that inflation has accelerated faster than expected in the country, and trade and current account balances are likely to record deficits this year. Thailand's GDP growth is likely to pick up in 2006 partly due to public spending programs, particularly on large infrastructure projects. The economy is forecast to expand by 5% in 2006, revised down from 5.8%. In addition to rising global oil prices, Thailand was hit by drought in the first half of the year, which reduced agricultural output.
The projected 2005 growth for the Philippines has been revised down to 4.7%from 5%. The growth forecast for 2006 has been lowered slightly to 4.8%, also from 5%. Drought early this year reduced agricultural output.
Electronic exports, which account for more than half the country's merchandise exports, rose by only 0.3% in the first six months. Moreover, capital formation, or investment, contracted by 5.5% during the first half.
"Investment is likely to remain weak through 2006, and the constrained budget position effectively rules out any major fiscal stimulus," the update points out.
The ADB has raised Indonesia's full-year growth outlook slightly to 5.7%, from an earlier forecast of 5.5%. "The investment pickup, from a low base, follows the relatively seamless transition to a new government after elections in 2004, and expectations of greater regulatory certainty and a recovery in infrastructure spending," says the outlook update. But the report also warns that a burgeoning oil subsidy bill could yet jeopardize prospects.
For 2006, Southeast Asia's economic growth should pick up, but at 5.4% -- a slightly slower rate than earlier predicted. In Thailand, the factors that held expansion in check (including the affects of the tsunami) during 2005 should recede. The global electronics sector should also bottom out and by 2006 begin a new expansionary phase, which would help lift exports and growth in Malaysia and the Philippines.
So far, Central Asia's net oil exporters have benefited from the higher oil prices and new production capacity, to the degree that subregional growth in 2005 is expected to top 9%. With high oil prices expected to continue through 2006, the ADB has revised up projected growth for next year to 9.4% from 8.8%. "The overall outlook for developing Asia is more uncertain than earlier in the year, with some risks now being more accentuated," the outlook report says.
As a large net oil importer and a comparatively energy-inefficient region, Asia is particularly vulnerable to high oil prices. Even net oil exporters such as Kazakhstan, Papua New Guinea and Vietnam also face challenges when oil prices soar. Across Asia, countries need to adjust to the possibility that high oil prices are here for some time. Oil prices have risen by almost 75% since the beginning of 2005.
Across the region, signs of strain are beginning to show. "Failure to adjust could put prospects at risk," said Ifzal Ali, ADB's chief economist. Other risks include the possibility that growth might slow in the US. "Despite all these, we continue to be cautiously optimistic on developing Asia," Ali said. "The healthy expansion is expected to continue drawing on strong internal dynamics, particularly, growth in China and structural improvements in South Asia."
Asia Times Online