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Developing Asian economies will deliver strong growth in 2006 supported by a broadly favourable outlook for the international economy, the continuing trend toward improved economic management, and apparent resilience to high oil prices. ADB’s annual economic publication Asian Development Outlook (ADO) projects the region will achieve an overall economic expansion of 7.2% in 2006 and 7% in 2007, a marginal easing from 7.4% in 2005.
”The strength of the global economy remains a key determinant of growth in developing Asia,” says Ifzal Ali, ADB Chief Economist. He adds, “The major industrial economies are expected to grow close to potential and global trade will remain firm this year. Asian economies will take strength from the continuing upswing in the global electronics sector and fast growth expected in the People’s Republic of China and India.”
According to ADO, growth projections for developing Asia as a region are heavily influenced by three key economies: the People’s Republic of China (PRC), India, and South Korea. Together, these economies have a combined weight of 66% of regional income. In 2005, growth in PRC of 9.9% comes after back-to-back years of double-digit expansion. Booming exports and investment continued to propel demand, and growth of industrial output accelerated. The Chinese government is now targeting a slower growth trajectory for the economy as it intends to focus on some of the social and environmental stresses that have emerged as a consequence of rapid economic expansion in recent years. PRC growth is forecast to ease to 9.5% in 2006, softening further to about 8.8% in 2007.
In India, growth surged to 8.1% in 2005, underpinned by strong performances in industry and services, and a rebound in agriculture from a weak performance in 2004. Although South Korean growth slipped in 2005, consumption demand recovered in the latter part of the year to lift the annual average to 4%. India has ambitions to lift its growth rate to over 9% in the medium term. This is likely to require an increase the ratio of its investment to GDP and that it raise capital productivity. Both will need determined reform efforts.
India’s economy is forecast to grow 7.6% in fiscal year (FY) 2006 and 7.8% in FY2007, slightly below the expected medium-term rate of growth. Growth, particularly in consumption and investment, will be held back by the fuel price adjustment process which is likely to boost inflation. Rising interest rates will have some modest negative effects on investment.
In Southeast Asia, overall growth is expected to change little from the 5.5% expansion in 2005, but with a chequered pattern across countries. Indonesia’s growth may slow in 2006 as domestic demand is pinched by higher interest rates, but Thailand’s economy should recover as the impact of the tsunami and a bad agricultural harvest in 2005 recede.
Developing Asia’s trade surplus with the rest of the world widened by US$52 billion in 2005 to US$192 billion, with the PRC’s trade balance alone widening by about US$74 billion. In Southeast Asia, an overall rise in the current account surplus disguised a widening trade deficit in both the Philippines and Thailand. Central Asia posted a 75% increase in its trade surplus as a result of higher oil prices, and in South Asia trade deficits widened in all countries but Nepal. Developing Asia will continue to run a large current account surplus with the rest of the world in 2006 and 2007, but there is already evidence of some adjustment, with domestic demand picking up and growth of international reserves slowing.
SOUTH ASIA’S GROWTH TO MODERATE BUT REMAIN STRONG IN 2006-2007
According to ADO, South Asia’s growth is expected to moderate to 7.3% in 2006 as a result of some slowing in India and Pakistan, but then rise slightly to 7.5% in 2007. The region grew 7.8% in 2005. Average inflation for the region in 2006 is expected to increase to 6.1% as removal of subsidies on some petroleum products in a number of countries boosts domestic prices. Most countries are projected to see somewhat larger current account deficits with the regional average projected at 3% of GDP.
”Evidence is growing that South Asia is moving on to a higher growth path. But future growth will require progress on reforms across the region,” says Ali. He adds, “Focused investment aimed at breaking infrastructure bottlenecks in key economies would also open the door to stronger growth in the medium-term.”
Afghanistan continued its solid track record of macroeconomic and structural reforms in 2005 and elections were held without major disruptions. Growth is projected to remain strong at 11.7% in FY2006 and 10.6% in FY2007. Inflation is forecast to moderate to 8% this year and 5% in 2007, while the budget and balance of payments lessen their heavy dependence on grant assistance. Though insecurity and the opium trade hinder nation building, medium-term growth prospects are favourable. Transforming the economy to a sustainable footing will require the Government’s continued commitment to its reform agenda and greater effort to promote private sector activity.
GDP growth in Bangladesh is forecast at 6.5% in FY2006, reflecting a steady increase in domestic and external demand, with a moderation to 6% in FY2007. In this period inflation should remain in the 6%-7.5% range as subsidies in domestic prices of petroleum products are reduced. Continued large worker remittances will help keep the current account deficit at 1% of GDP. Major development challenges need to be tackled if investment is to rise and move the country onto the higher growth path required for rapid poverty reduction—including substantial improvements to infrastructure, public policy, and governance.
Bhutan has established a record of sustained solid growth based on utilization of its vast hydropower resources for export, sound policies, and strong support from development partners. GDP growth is expected to rise about 2 percentage points each year to 10% in 2006 and 12% in 2007, as production from the 1,020 MW Tala hydropower project is phased online.
India’s growth has averaged more than 8% over the past three years driven by broad–based domestic demand and expansive business dynamics. GDP is projected to grow 7.6% in FY2006 and 7.8% in FY 2007 as consumption and investment demand are slightly held back by price adjustments to reduce domestic petroleum subsidies and somewhat higher interest rates. India faces two key policy challenges as it continues its structural transformation. First, it must maintain consolidation of its fiscal position while ensuring spending on infrastructure improvements to support industry and services development, and investment to advance rural productivity and human development. Second, it needs to improve the investment environment by lowering the cost of doing business.
The Maldives was hit hard by the 2004 tsunami and GDP is estimated to have fallen 5.5% in 2005. This followed a strong performance in 2004 with robust growth, increasing per capita income, and macroeconomic indicators that reflected prudent policies. GDP is expected to grow 9% in 2006, moderating to 6% in 2007.
In Nepal the economy faltered in 2005, reflecting a weather-related decline in paddy production, disruption caused by insurgency, a downturn in tourism, and continued weak growth in industry. GDP growth is forecast to slow to 1.8% in FY2006 because of poor weather affecting production of both winter and summer crops. Growth is projected to pick up to 3.5% in FY2007, assuming normal weather and greater public and private investment. The outlook is hostage to the insurgency and political instability.
Pakistan grew 8.4% in 2005, its fastest rate of growth in the past two decades, but inflation also pushed higher and the current account slipped from surplus to deficit. Growth is projected to soften to 6.5% in FY2006, mainly due to slower agricultural output, and to pick up to 7.3% in FY2007. A tightening of monetary policy is expected to bring inflation down to 8.5% this year and to 7.6% in 2007. The medium-term outlook is favourable for growth in the range of 6%-8%, assuming continued robust performance in economic management, greater investment to ease infrastructure bottlenecks, continued security and political stability.
The economic impact of the tsunami on Sri Lanka was muted, despite its devastating human cost. Talks between the Government and the Liberation Tigers of Tamil Eelam in February 2006 have improved the overall climate on the status of the ceasefire. Accordingly, GDP growth is forecast at 5.3% in 2006 and 5.2% in 2007; performance in line with the long-term trend. Inflation is projected to remain high at 8%-9% as administered prices for petroleum products and power are increased to reduce subsidies.
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