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The financial crisis in Southeast Asia and Republic of Korea is likely to slow down economic growth in the Asian and Pacific region drastically in 1998, and in the process undermine the growth momentum in the rest of the world, according to an Asian Development Bank (ADB) report released today.
The Asian Development Outlook (ADO), an annual publication of the ADB which forecasts short-term economic trends in the region, projects that gross domestic product (GDP) for the Asian and Pacific region will grow by 4.0 percent in 1998 and 5.1 percent in 1999, down from 7.5 percent in 1996 and 6.1 percent in 1997.
Average GDP in Southeast Asian economies, the ones hardest hit by the crisis, is likely to contract by 0.4 percent in 1998, but should be back on a growth path in 1999 when it is expected to expand by 2.4 percent. The GDP growth rate in 1997 was 3.9 percent.
"Failure to address the crisis will not only exacerbate Southeast Asia and Korea’s economic problems, but will also further undermine the growth momentum in the rest of the world,’’ says the ADO.
In 1998, the crises are projected to slow the growth of the United States, the European Union, and the OECD (Organisation for Economic Co-operation and Development) member countries by less than one percentage point, and of Japan by 1.4 percentage points.
The ADO argues that dealing with the crisis successfully is beyond the capacity of any individual country, and requires a greater coordination among Asian nations, major industrial economies and international financial institutions.
The ADO noted that the strength of the economy of the People’s Republic of China and its currency will become the anchor for regional economic stability in 1998. The Chinese economy is projected to remain healthy, although its GDP growth rate may fall slightly to 7.2 percent in 1998, and 6.8 percent in 1999 from 8.8 percent in 1997 due to a drop in demand from neighboring countries.
The Hong Kong dollar and the Chinese renminbi will likely be subject to more speculative attacks amid the dramatic fall in some Asian stock markets in the past few months. "The success with which the authorities defend these exchange rates will have important implications for the recovery of the Asian economies," says the ADO.
In Southeast Asia, the economic outlook for 1998 is extremely uncertain and will depend largely on the extent to which countries such as Thailand and Indonesia can implement the various International Monetary Fund (IMF) rescue packages. "The huge private sector debt burden in Indonesia and Thailand in particular will have a major impact on the economic performance of Southeast Asia in 1998 and 1999," says the ADO.
The substantial depreciation of some Asian currencies will likely push up retail prices, raising Southeast Asia’s average inflation rate to 12.9 percent in 1998 from 5.6 percent in 1997. Inflation in Indonesia, in particular, is expected to soar to 20 percent in 1998, after being contained at 6.6 percent in 1997.
The ADO noted that the crises unveiled many interrelated problems that pose important challenges for macroeconomics, banking, and capital markets management; governance; institutional capabilities; and human resource development.
As a result of the financial crisis, the economy of Thailand, whose currency depreciation triggered substantial falls in other Asian currencies during the latter half of 1997, is seen as contracting by three percent in 1998 after negative growth of 0.4 percent in 1997. The economy is expected to grow by one percent in 1999. Indonesia’s economy is also seen shrinking by three percent in 1998, but expanding by one percent in 1999.
The other Southeast Asian nations such as Malaysia, the Philippines and Viet Nam, are likely to see their economies grow in 1998, though at a slower pace than in 1997. Their economies will improve slightly in 1999.
The ADO added that the economic impact on Southeast Asia of El Niño, a phenomenon caused by the warming of the surface waters of the eastern Pacific Ocean, may be appreciable. For countries such as Indonesia, Malaysia, and the Philippines, whose agriculture sector was the hardest hit by El Niño, the economic impact is projected to cause a fall in output of one percent in 1998. El Niño, which was responsible for severe drought, widespread forest fires, and marked increases in health problems, is expected to continue until May 1998.
The average GDP growth in newly industrialized economies (NIES) — Hong Kong, China; Republic of Korea; Singapore; and Taipei,China — declined to 6.0 percent in 1997 from 6.4 percent due mainly to a sharp fall in growth in the Republic of Korea. The growth rate is expected to be only 2.2 percent in 1998, and all the NIEs will experience a slowdown as the crisis will likely weigh heavily on their business.
South Korea, in particular, faced a difficult financial situation in 1997 with its GDP growth rate at 5.5 percent after 7.1 percent growth in 1996. The Korean economy will likely contract by one percent in 1998 and then resume growing by a rate of 3.1 percent in 1999.
Hong Kong, China’s growth rate is expected to slow to three percent in 1998 from 5.2 percent in 1997. The need to support the currency peg will necessitate high interest rates and the fall in asset prices is projected to continue. The decline in Southeast Asia’s purchasing power will adversely affect Hong Kong’s travel and tourist trade which has accounted for more than a quarter of its service exports in recent years.
Singapore’s growth rate is projected to fall to three percent 1998 and 4.5 percent in 1999 from 7.8 percent in 1997, and the fall in demand from Southeast Asia will also affect its tourist trade and exports.
Taipei,China will likely maintain the growth momentum with the GDP growth rate projected at 5.8 percent in 1998 and 6.2 percent in 1999. The GDP grew by 6.8 percent in 1997.
The South Asian economies grew at an average rate of 6.8 percent per year between 1994 and 1996, a higher rate than in the immediate past, despite a number of infrastructure bottlenecks. With the slowdown of the Southeast Asian economies in 1997, South Asia grew faster than Southeast Asia for the first time in this decade, even though the growth rate declined to less than 5 percent in 1997. South Asian economies are seen growing at an average rate of 6.4 percent in 1998, and 6.7 percent in 1999.
The wide disparities in growth between the subregion’s countries largely reflected differences in the growth of agriculture and manufacturing, together with the rate of investment. Pakistan is expected to growth at 5.1 percent in 1998, two percentage points faster than in 1997, and Sri Lanka is projected to grow at a rate of 5.6 percent, as opposed to 6.3 percent in 1997.
The economic performance of the Pacific islands were varied. The largest economy, Papua New Guinea, dominates the islands’ economic performance. A severe drought in Papua New Guinea in the second half of 1997 means that some 650,000 people will need food aid for several months in 1998. While rain has now provided some relief, projections indicate that the current coffee and cocoa crop will be down by 20 percent.
The three developing member countries of the ADB among the Central Asian republics — Kazakstan, Kyrgyz Republic and Uzbekistan — are in the process of converting their centrally planned economies into market -oriented systems. Their economies recorded negative GDP growth rates for several years prior to 1996. But 1996 and 1997 saw an expansion in output due to the radical economic transformation these countries have undertaken. Commitment to further structural reforms in enterprise and industry systems, and tax and public expenditure management should be a key component of the governments’ macroeconomics stabilization programs.