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Growth forecast slashed by ADB

Predicted growth

  • Cambodia -1.5% (2.5% March GDP growth forecast)
  • Thailand -3.2% (-2%)
  • Vietnam 4.5% (4.5%)
  • Singapore -5% (-5%)
  • Malaysia -3.1% (2.5%)
  • Indonesia 4.3% (3.6%)
  • Philippines 2.5% (1.6%)
  • Laos 5.5% (5.5%)
  • China 8.2% (7%)
  • Hong Kong -4% (-2%)
  • India 6% (5%)
  • South Korea -2% (-3%)
  • Sri Lanka 4% (4.5%)
  • Bangladesh 15.7% (9%)
  • Asia ex Japan 3.9% (3.4%)
  • Southeast Asia 0.1% (0.7%) South Asia 5.6% (4.8%)
  • East Asia 4.4% (3.6%)
  • Central Asia 0.5% (3.9%)

Source: Asian Development Bank

This shouldn’t really ring alarm bells, given it mainly relates to the sharp downturn in the first half.

CAMBODIA’S reliance on exports, tourism and foreign direct investment has led the Asian Development Bank to slash its 2009 growth projection for the country, even as it says developing Asia as a whole will lead the world’s emergence from its deepest recession since the 1930s.

The country’s economy will contract 1.5 percent this year, compared with a March estimate of 2.5 percent growth, the Manila-based institution said in a report Tuesday. Asia, excluding Japan, will expand 3.9 percent, up from an earlier estimate of 3.4 percent, it said.

“A sharper-than-expected downturn in clothing exports, construction activity and tourism arrivals has prompted a downward revision in the GDP forecast [for Cambodia],” the ADB said in its Asian Development Outlook 2009 Update.

Recovery expected
In the “Asian Development Outlook 2009” and the corresponding update, also released annually, the ADB predicted that growth would resume in Cambodia in 2010 at about 3.5 percent as a gradual recovery in the global economy stimulates clothing exports and tourism. The expected recovery was a little over half the 6.4 percent growth the ADB predicted across Asia next year.

“That should provide support for growth in incomes and consumption,” the report said, adding that inflation has decelerated faster than expected in Cambodia, owing to lower international oil and food prices and weaker domestic demand as the economy contracted.

The ADB forecast Cambodia’s inflation rate for 2009 at just 0.8 percent, though it expected it to quicken to about about 5 percent next year, reflecting higher prices for imported oil and an improvement in domestic demand. Inflation across Southeast Asia was forecast at 2.5 percent, while prices in Asia, excluding Japan, were expected to grow 1.5 percent before accelerating to 3.4 percent next year as growth strengthened.

The ADB’s latest projection of a 1.5 percent contraction for Cambodia puts it in line with a forecast by the Economist Intelligence Unit earlier this month.

Better than expected
ANZ Royal CEO Stephen Higgins said a 1.5 percent contraction was optimistic given the hit the economy had taken in the first half of the year, but added that the forecast “shouldn’t really ring alarm bells”, as the worst looked to be over for the domestic economy.

“I couldn’t specify a particular number, but I would expect something lower than [negative]1.5 percent, reflecting the depth of the downturn in the first half of the year, perhaps more in line with Malaysia or Singapore,” he said. “In fact, we are already seeing signs of a turnaround in the economy ... so I’m optimistic about the medium-term outlook.”

Half of the economies in Southeast Asia were expected to shrink this year, the ADB said, including Malaysia and Singapore.

It predicted that Malaysia’s economy would shrink 3.1 percent this year after contracting 5.1 percent in the first half when the impact of a plunge in exports spread to fixed investment and private consumption. It forecast a 5 percent contraction for Singapore, saying an increase in pharmaceutical production would help counterbalance a 6.5 percent contraction in the first half of the year.

Only gains in Indonesia and Vietnam, whose economies were expected to grow 4.3 percent and 4.7 percent, respectively, on the back of expansionary fiscal policies, looked to keep economic output in the region from contracting.

Still, the ADB projected output would remain virtually flat at 0.1 percent, marking Southeast Asia’s weakest performance since the Asian financial crisis in 1997–’98 when GDP fell.

“The more positive outlook for Indonesia and Vietnam failed to offset the deteriorating prospects for the more open (Malaysia and Thailand) and smaller (Brunei Darussalam and Cambodia) economies in the subregion,” the report said.

Closer to home
The bank used its projections to repeat earlier warnings that developing Asia needed to promote closer intra-regional economic links to reduce its dependence for economic growth on exports to the developed world.

“Recognising that globalisation and openness underpinned global growth and prosperity in the last 60 years, the region must continue to embrace them,” ADB Chief Economist Jong-Wha Lee said in a media release accompanying the report.

“However, mechanisms must be put in place to safeguard developing Asian economies against excessive and unbalanced openness.”

Strengthening intraregional trade depends on boosting domestic demand, removing “behind-the-border” obstacles to freer trade in goods and services, and promoting regional cooperation, he said.

Slow transition
ADB Senior Country Economist for Cambodia Eric Sidgwick said the short-term recovery of the Cambodian economy still depends on a recovery in its main markets but acknowledged the need for the country to “expand the narrow sources of growth on which it is too dependent so that the economy becomes more resilient to exogenous shocks.

“A broader economic base would also help make growth more inclusive and help accelerate the progress made in reducing poverty over the last decade or so,” he said.

He added that the projections did not explicitly take into account Cambodia’s informal economy, aside from some estimates of subsistence activity in agricultural output.

The bad news for Cambodia and the Southeast Asia region comes even as the ADB says other parts of developing Asia are proving to be more resilient to the global downturn than was initially thought.

Asia, excluding Japan, is leading the world’s emergence from its deepest recession since the 1930s after governments boosted spending, cut taxes and slashed interest rates.

The ADB warned that withdrawing these measures too early might derail the global recovery and lead to a protracted slowdown. It also noted that recovery in Asia still hinged on the revival of growth in Europe and the United States stimulating the region’s export-dependent economies.

Federal Reserve Chairman Ben Bernanke said last week the recession in the US has probably ended.

“Any slippage in the major industrial economies’ recovery would delay the region’s return to its long-term growth path,” the ADB said.

ADDITIONAL REPORTING BY BLOOMBERG

Leading the resurgence
Expansionary fiscal policies in Asia are helping to drag the world out of its deepest recession since the 1930s, according to a report released Tuesday by the Asian Development Bank (ADB). “Despite worsening conditions in the global economic environment, developing Asia is poised to lead the recovery from the worldwide slowdown,” ADB Chief Economist Jong-Wha Lee said in a media statement accompanying the release of the ADB’s update to its Asian Development Outlook 2009. Economic growth in East Asia was projected at 4.4 percent, led by China, where a massive fiscal stimulus package bolstered the economy, which is now expected to grow by 8.2 percent in 2009 and 8.9 percent in 2010. A shallower contraction in Korea is also expected on the back of effective fiscal stimulus measures. A large fiscal stimulus announced in the July 2009 budget boosted business confidence and helped bolster India’s projected economic expansion to 6 percent this year.
NATHAN GREEN

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