Launch of Asian Development Outlook 2003
Speech by
John Lintjer
Vice-President, Finance and Administration
Asian Development Bank
29 April 2003
Madrid, Spain
Good Morning ladies and gentlemen,
I am very pleased to be in Madrid to launch the Asian Development Outlook 2003. The ADO is our annual forecast of economic trends for the Asia and Pacific Region and covers 41 of ADB’s developing member countries. During my presentation this morning, I would like to discuss the global and regional outlook for 2003 and 2004. Then I will focus on certain issues which are important for the analysis. These issues are SARS, the region’s strong fundamentals, changing trade patterns and regional cooperation, and special developments in the People’s Republic of China and the Republic of Korea.
Following my presentation my colleague, Douglas Brooks, will present more detailed information on the economic outlook. Ms. Carola Molitor from our European Representative Office will also be available for further information.
A. Global Outlook
First, the global outlook and prospects for the Asia and Pacific region in 2003 and 2004. Our projections for 2003 and 2004 assume that growth in industrial countries will remain rather weak this year before strengthening in 2004. Interest rates are likely to decline further in 2003, particularly in Europe, before edging up later in the year or in 2004. Oil prices are likely to remain level after the spike in the first quarter of the year and world trade volume will grow a bit faster in 2003. Our forecasts assume a limited impact of SARS over 2 months. I will return to that subject later.
B. Regional Outlook
Turning to the regional outlook, 2002 was a transition year for the Asia and Pacific region. Although business investment remained weak, growth strengthened to 5.7% from 4.1% the previous year. Domestic demand was generally stimulated by expansionary macroeconomic policies. Furthermore, exports and the current account balance improved sharply. Growth in intra-regional trade was an important feature of this performance.
Inflation in developing Asia remained low despite the acceleration in growth as a result of continued overcapacity, competition in external markets for manufactured products and continued slack commodity prices despite a spike in oil prices at the end of the year.
The outlook for 2003 and 2004 is for robust growth to continue, although at a more modest rate than in 2002. Despite the negative impact of the conflict in Iraq and the outbreak of SARS in the first quarter, the Asia and Pacific region remains a bright spot on the world economic map. The region is expected to grow at a rate of 5.3% this year. The main driving forces behind this growth will be improving export performance and a continued supportive policy environment. Optimistic prospects also stem from continued reform efforts.
The performance of the developing economies will vary from region to region. In East Asia there will be a moderation in the rate of economic growth to 5.6% in 2003, though the region’s performance will remain strong. Adverse factors include rising unemployment and a higher fiscal deficit in the People’s Republic of China while there will be a slowdown in consumer credit in Korea and a deterioration in investor sentiment stemming from uncertainties on the Korean peninsula. The SARS epidemic will also have an adverse effect on tourism generally and in the broader services sector in Hong Kong, China.
In Southeast Asia, growth this year is expected to remain steady at 4% before accelerating to 4.8% in 2004. Domestic demand should remain strong over the next two years and there should be a progressive strengthening of private investment as capacity utilization rates improve and financial sector reforms are accelerated. Fiscal policy will be less expansive although accommodative monetary polices are expected to continue. Exports are also expected to continue to perform well.
The outlook for South Asia is for further strengthening of growth over the medium term, led by India, as the outlook for both external and domestic demand improves. Export growth is projected to strengthen, particularly in Bangladesh and India, while liberalization should contribute to an increase in labor productivity, increased economic efficiency and more robust growth in investment.
In the central Asian republics the outlook is for economic growth to moderate somewhat from the rapid pace set in the past three years. Growth of 5.8% is projected for both 2003 and 2004 as a result of a leveling off of activity and exports in the oil and natural gas sector.
In the Pacific, prospects are for a modest rebound in economic performance in the next two years to levels that can sustain a small increase in per capita income after several years of decline. Factors contributing to the positive outlook include an increase in tourism and more stable macroeconomic policies.
While below potential, economic growth over the next two years will still contribute to our efforts at ADB to achieve our overarching objective of reducing poverty in the Asia and Pacific region. Growth complements the other two components of our strategic agenda, which are inclusive social development and governance for effective policies and institutions. Increasingly, the driver of growth will shift to the competitiveness of Asian firms.
I would like to move on to several issues that are important in analyzing the performance and prospects for the Asian region. The first is the Severe Acute Respiratory Syndrome, or SARS. In the last few months, the threat of the SARS has grown. It has infected around 4500 people, and is causing great concern worldwide. Hong Kong, China and Singapore have been the economies in Asia most affected by SARS. The epidemic has also impacted the economies of a number of other Asian countries, including the PRC and Malaysia, albeit to a lesser extent. The ADO estimates that GDP growth in these economies is likely to be reduced by around 0.2%-0.6% in 2003. Providing that the impact is concentrated on the second quarter, SARS will mainly exert an influence by reducing demand through generating uncertainty and fear of exposure among consumers. Service sectors such as tourism, transportation, restaurants, entertainment venues and retail sales are likely to be the hardest hit.
In addition to the effects of SARS reflected in the ADO, we have carried out two simulation exercises using our economic models. In the first scenario the impact of SARS is assumed to last one quarter and in the second simulation, two quarters. The one-quarter impact scenario sees a reduction in growth ranging from 0.2% in the PRC to 1.8% in Hong Kong, China. In the two-quarter impact scenario the impact would be much greater, in particular for the most exposed economies of Hong Kong, China and Singapore, where GDP growth would fall substantially from that forecast in the ADO. In a two quarter SARS scenario, nearly all countries in East and Southeast Asia would be seriously affected. The growth impact ranges from 0.5% for PRC to up to 4% for Hong Kong, China.
The second important issue is the strong macroeconomic fundamentals and build up in international reserves in the region. During the financial crisis, economies with the largest levels of reserves such as the PRC, Singapore and Taipei,China were able to maintain relative exchange rate stability. Others with fewer reserves suffered severe devaluations. In light of this, there has been a sustained increase in reserves in our developing member countries in recent years, even though exchange rates have been generally delinked from the US dollar. Is this build up of reserves prudent or overcautious? Our analysis suggests that the levels of reserves now held are adequate to meet short-term external debt obligations should a crisis arise and countries cut off from access to capital markets. In this regard they are in a much more favorable position than they were before the financial crisis in 1997. However, there is a risk that the reserve build up may become excessive. In such a situation such a strategy could be counterproductive and keep economic growth below potential. Excessive reserves could be accumulated at the cost of foregone imports and associated investment opportunities or used to prepay expensive external debt or to facilitate technology transfer to raise labor productivity. Each economy must determine for itself the prudent level of minimum reserves required, depending on a critical assessment of its sources and uses of foreign exchange.
Turning to the issue of international trade and foreign direct investment, concerns have been raised that the PRC is becoming an important producer and exporter of manufactured products and that it will displace other economies in the region which are also exporting these goods in global markets. The ADO analysis suggests that the pattern of trade between the PRC and its regional neighbors has shifted in favor of the PRC’s trading partners in the Asian region. These economies are exporting more and more manufactured inputs to the PRC while PRC exports are weighted towards finished goods. Hence the shift in the balance of trade is the result of rapid growth in exports of intermediate parts and components from the PRC’s trading partners in Asia, a general pattern of growth in outsourcing and the development of global value chains in electronics, telecommunications and other sub-sectors of manufacturing within East and Southeast Asia over the past several decades.
I would like to turn briefly to a discussion of the economy in the People’s Republic of China. While its economic growth is forecast to remain among the best in the world, the PRC faces a number of challenges. These include creating a sufficient number of jobs to employ new market entrants, creating a better institutional and regulatory environment for the private sector, and addressing vulnerabilities in the financial system. Reducing income inequalities between the coastal and the poorer interior provinces and between rural and urban areas, and reducing poverty generally, is perhaps the greatest challenge the country now faces.
The Republic of Korea is the only OECD member of the ADB’s group of developing member countries. Korea continued its brisk recovery in 2002 with GDP expanding by 6.3% led by exports and consumption expenditures. The latter was fueled by rapid expansion of consumer credit, including credit card debt, in the first half of the year. Korea has made significant strides in financial sector and corporate restructuring and this has enabled the economy to rebound robustly. In 2003, growth is expected to remain strong although declining to 4% as a result of slower growth in consumer spending due to tighter consumer credit and a modest revival in savings and the business investment. The outlook for Korea is colored by uncertainty over developments in the north of the peninsula and the still uncertain global recovery following the end of hostilities in Iraq.
In conclusion, ladies and gentlemen, I hope that the ADO 2003 serves as a useful contribution to our knowledge and understanding of the constraints, challenges and opportunities facing the Asian region.
Thank you.
News and Events 
Top of page
