Healthy Expansion Expected in 2005 and 2006 But Challenges Loom, ADO Says

News Release | 8 September 2005

MANILA, PHILIPPINES - Developing Asia's healthy expansion is expected to continue, with growth projected of 6.6% in both 2005 and 2006, according to a major report released today by ADB. But the impact of higher oil prices constitutes a major source of uncertainty.

In 2005, solid performance at regional level masks some important revisions at country and subregional levels, according to the Asian Development Outlook 2005 Update (Update), a supplement to ADB's flagship publication that forecasts economic trends in the region.

The forecast of 6.6% growth for 2005 represents a small upward revision and next year's projection is unchanged from the projections of the Asian Development Outlook 2005 (ADO 2005) released in April. The Update revises up growth projections for the People's Republic of China (PRC), which carries a large weight in the regional aggregate, for both 2005 and 2006, and, in 2006, for India, another large regional economy.

Projections have also been revised up slightly to 6.9% for East Asia for 2005, driven by the higher than anticipated full-year growth of the PRC of 9.2%, propelled by rising investment and larger net exports. For the rest of East Asia, though, growth is revised down to 3.8%, from the 4.4% foreseen in ADO 2005, due to slower export growth.

Next year's growth projection for East Asia is marginally down from the ADO 2005 forecast at 6.9%, with a small upward revision for the PRC offset by downward revisions for the Republic of Korea and Taipei,China.

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% compared to the 6.2% forecast in ADO 2005. Here, strengthening fundamentals and the impact of large infrastructure investments are likely to outweigh the negative effect of high oil prices.

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 Viet Nam and an improving investment climate in Indonesia. But overall, 2005 growth in Southeast Asia has been revised down to 5.0% from 5.4%.

For 2006, Southeast Asia's economic growth should pick up, but at 5.4%, a slightly slower rate than predicted in ADO 2005. 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 the high oil prices expected to continue through 2006, the Update 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 Update 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 Viet Nam, 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." says Ifzal Ali, ADB's Chief Economist.

Other risks include the possibility that growth might slow in the US and threats of virulent diseases and terrorist attacks.

"Despite all of this, we continue to be cautiously optimistic on developing Asia," Mr. Ali adds. "The healthy expansion is expected to continue drawing on strong internal dynamics, particularly, growth in the PRC and structural improvements in South Asia."