Southeast Asian Growth to Hold at 5.5% in 2006, ADB Says | Asian Development Bank

Southeast Asian Growth to Hold at 5.5% in 2006, ADB Says

News Release | 6 April 2006

HONG KONG, CHINA - Growth in Southeast Asia is expected to be stable at 5.5% in 2006 before accelerating modestly to 5.7% in 2007, according to a major ADB report released today. The region grew 5.5% in 2005, above the average of the previous five years, but easing slightly from rapid 6.3% growth in 2004.

Growth in the smaller economies - Cambodia, Lao People's Democratic Republic (Lao PDR), and Viet Nam - accelerated and topped the subregional growth list. The pace of growth slowed in four of the five biggest economies, namely Malaysia, Philippines, Singapore, and Thailand. Indonesia ramped up its growth rate, despite some major hurdles.

"High oil prices strained fiscal positions in some countries and created pressures for the withdrawal of subsidies on petroleum, diesel and kerosene. This crimped growth, most obviously in Indonesia and Thailand," said ADB Chief Economist Ifzal Ali in launching the 2006 edition of ADB's flagship annual economic publication, Asian Development Outlook (ADO). "But the removal of subsidies has created fiscal space for investments in education, health, and infrastructure that will support expansion over the longer-term."

ADO 2006 forecasts overall growth for the 43 countries of developing Asia of 7.2% in 2006 and 7% in 2007.

Underpinned by stronger agricultural production, Cambodia's growth accelerated to 8.4% in 2005, buttressing the healthy trend of the previous two years. GDP growth is likely to average around 6.3% in 2006-2007. Average annual inflation is projected to moderate to 4.5% in 2006 and 3.5% in 2007, partly in view of an easing in the international price of rice. However, growth needs to move away from its dependence on the clothing and tourism industries. Development of agriculture and the private sector would broaden the expansion, as would progress in legal and judicial reforms.

Despite the tsunami and other challenges, the Indonesian economy maintained its recovery and expanded 5.6% in 2005. During the year, the Government cut fuel subsidies and redirected budget savings at spending on the poor. However, the rise in fuel prices pushed up already high inflation and prompted interest-rate rises, which curtailed consumer spending and investment later in the year. Growth is expected to slow to 5.4% in 2006, before picking up to 6% in 2007. Crucially, the investment climate is improving, but much remains to be done if the Government is to achieve its medium-term growth target of 6.6%.

Growth in Lao PDR accelerated to 7.2% in 2005 as investment in mining and hydropower projects maintained the industry sector's double-digit expansion, while agriculture and services also grew. An increase in imports of capital equipment for these projects has deepened trade and current account deficits. Fiscal concerns are the major risk factor, given a weak revenue base. GDP growth is projected at 7.3% in 2006, slowing to 6.5% in 2007. Inflation will stay relatively high at around 9%. Solid economic growth is expected into the medium term, assuming further progress on fiscal reforms.

Malaysia's growth moderated to 5.3% in 2005, in line with the five-year average, but down by nearly 2 percentage points from 2004 mainly due to weaker external demand for the country's electronic products. The electronics industry recovered late in the year and is expected to improve further in 2006, helping lift overall economic activity. On the policy front, fiscal consolidation will continue while monetary policy, despite rate rises, will remain accommodative. In this environment, the economy is likely to sustain its growth momentum, expanding 5.5% this year and 5.8% in 2007. In the medium term, constraints to stronger growth include a falling investment rate.

An assessment of economic development in Myanmar is handicapped by incomplete information and deficiencies in the reliability of data. Government estimates suggest the economy grew 13.6% in fiscal year (FY) 2004, but this is not supported by trends in inputs. Inflation appeared to rise to double-digit rates in 2005. Significant improvements in economic performance are unlikely in view of structural weaknesses in domestic policies, which include the monetization of fiscal deficits and a dual exchange rate.

Economic growth in the Philippines slowed to 5.1% in 2005 and inflation accelerated to 7.6%. Introduction of the expanded value-added tax helped lift confidence in the outlook at a time of political uncertainty, though the quality of fiscal consolidation will be watched closely. Investment continues to lag, while the dependence of growth on consumption and on remittance inflows limits prospects. As there is marginal scope for fiscal or monetary maneuver to support demand and growth, there is little prospect of growth accelerating significantly in the near term. GDP is expected to grow 5% in 2006 and 5.3% in 2007.

Strong external demand lifted Singapore's growth to 6.4% in 2005, significantly higher than the 4%-5% trend rate, but down from 8.7% in 2004 when the economy rebounded from a slump induced by the regional outbreak of severe acute respiratory syndrome (SARS). Domestic demand showed signs of recovery, especially consumption, which was bolstered by strengthening employment and a recovering property market. On the assumption of favorable external conditions and a largely accommodative domestic policy environment, the economy is forecast to grow by 6.1% in 2006 and 4.6% in 2007.

Drought, higher oil prices, and the tsunami impacted the Thai economy in 2005 as growth slowed to 4.5%, the lowest rate since 2001. Growth averaged 6.2% over 2002-2004. Inflation rose last year while the trade and current accounts switched into deficit. GDP is forecast to grow about 4.7% in 2006, supported by a moderate pickup in public investment, somewhat better performance in agriculture, robust exports, and a continuing revival of the tourism industry from the setback of the tsunami. Disbursements for large infrastructure investments are expected to become a driver of growth in 2007 and beyond.

Viet Nam's economic performance continues to be robust, with growth accelerating above 8% in 2005, fueled by surging private investment and strong domestic demand. The economy has benefited from higher global oil prices in recent years, but inflation has accelerated. The current account deficit remains manageable, with strong inflows of remittances and tourism receipts. A steady transition to a market-based system and closer integration with world markets are driving growth. These factors are likely to continue to underpin reforms and high rates of expansion into the future. GDP is expected to grow 7.8% in 2006 and 8% in 2007.