Asia-Pacific to face long period of volatility: WB

The Nation
Publication Date : 14-06-2012

Financial conditions in high-income Europe, higher oil prices and a slowdown in China would pose the largest risks to the outlook of developing countries in East Asia and the Pacific, including Thailand, which should prepare for a long period of volatility, the World Bank said in a new report on "Global Economic Prospects". With one eye on the euro area and the other on inflation, the Bank of Thailand's Monetary Policy Committee yesterday agreed unanimously to hold the policy rate at 3 per cent. "The MPC's language with regards to the external risks is somewhat stronger than before," said Su Sian Lim, Asean economist of HSBC. "To be sure, this was before economic data out of Europe and the US had started to deteriorate more notably, and before global financial market tension had flared up. While this lowers the odds that rate hikes will begin in the fourth quarter as we currently expect, on the flipside it is probably also too premature for market participants to start factoring in rate cuts in the near term. "The central bank continues to see its policy stance as 'accommodative', and from hereon only a significant external deterioration would prompt it to ease further. Furthermore it is of the view that inflationary pressures remain and will persist." In its policy statement, the central bank noted that risks to the global economy had increased relative to the previous meeting, owing to the problems in Europe. It said this could potentially have spillover effects on the US recovery as well as Asia, where export growth was moderating in line with the slowdown in China and the global economy. Nonetheless it noted that robust domestic demand and remaining fiscal and monetary policy space would help cushion the impact of softer global growth on Asia. Despite the faster-than-expected recovery, the economy may be dragged down by slow export growth, should the eurozone crisis intensify. Though inflationary pressure remained, prices have eased. As the balance of risks for the Thai economy was skewed towards growth rather than inflation, the current rate is considered accommodative to keep the recovery firm and to temper some external risks. Tensions in the euro area intensified last month. Should there be a serious deterioration of conditions in Europe, the World Bank forecasts that growth in East Asia and the Pacific could slow by as much as 2 to 4 percentage points due to reduced import demand, tighter international capital conditions and increased precautionary savings abroad and within the region. Impacts on countries in the region vary, depending on dependence on the area. Possibly to be hardest hit are countries heavily reliant on remittances like Fiji, the Philippines and Vietnam; tourism like Cambodia, Fiji, Malaysia, Thailand and Vietnam; and commodities like Indonesia, Malaysia and Thailand; as well as those with high levels of short-term debt or medium-term financing requirements like Malaysia. Overall, East Asian tourism receipts reached an estimated US$115.5 billion, or 1.5 per cent of GDP last year - a small share at the regional level, but of substantial importance for countries like Fiji, Cambodia, Malaysia, Thailand and Vietnam. Thailand's receipts in the year were $25.1 billion, up from $23.4 billion in the previous year. The World Bank also noted that a more rapid-than-expected slowdown in China poses an external risk for the rest of the region. A slowdown in China would spill over into the rest of the region in the form of reduced demand for exports, and commodity-dependent countries would be especially at risk of a slowdown in China's investment.  Disinflation in China is cited as a main reason for the easing of inflation in the region. Still, in several Asean countries, inflation is building due to strong domestic demand. For the major Asean countries, growth is viewed to be buoyant for 2012, as domestic demand should remain high until impetus from a revival in global trade comes to the fore in the second half of the year. For Malaysia, the Philippines, Thailand and Vietnam, aggregate growth is expected to step up to 5 per cent this year on activity remaining strong in Indonesia and recovering in Thailand. Due to intensifying tensions in Europe, developing countries should prepare for a long period of volatility in the global economy by re-emphasising medium-term development strategies, while preparing for tougher times. "Global capital market and investor sentiment are likely to remain volatile over the medium term - making economic policy-setting difficult. In this environment, developing countries should focus on productivity-enhancing reforms and infrastructure investment instead of reacting to day-to-day changes in the international environment," said Hans Timmer, director of development prospects at the World Bank. Increased uncertainty will add to pre-existing headwinds from budget cutting, banking-sector deleveraging and developing country capacity constraints. As a result, the World Bank projects that developing country growth will slow to a relatively weak 5.3 per cent this year, before strengthening somewhat to 5.9 per cent in 2013 and 6.0 per cent in 2014. Growth in high-income countries will also be weak, 1.4, 1.9 and 2.3 per cent for 2012, 2013 and 2014 - with GDP in the euro area declining 0.3 per cent this year. Overall, global GDP is projected to rise 2.5, 3.0 and 3.3 per cent for the same period. This baseline scenario remains the most likely outcome. However, should the situation in Europe deteriorate sharply, no developing region would be spared. "Where possible, developing countries need to move to reduce vulnerabilities by lowering short-term debt levels, cutting budget deficits and returning to a more neutral monetary policy stance. Doing so will provide them with more leeway to loosen policy, should global conditions take a sharp turn for the worse," said Andrew Burns, manager of global macroeconomics and lead author of the report.