A difficult year ahead for Asia

Dubai: Economic growth in developing Asia will slow to 5.8 per cent in 2009, down from a likely 6.9 per cent this year and nine per cent in 2007, as the impact of the global financial crisis spreads to emerging markets, says a new report from the Asian Development Bank.

With the global economy facing a major downturn, the region's economic resilience will be tested by weakening exports and a sharp slowdown of private capital flows, according to the December issue of Asia Economic Monitor (AEM).

"The year 2009 is likely to be a difficult year for developing Asia, but it will be manageable if countries respond decisively and collectively," says Jong-Wha Lee, Head of ADB's Office of Regional Economic Integration (OREI).

"Swift action by policymakers to stem the threat to the financial systems and the real economy will allow most of the region's economies to sustain a healthy if slower expansion."

The AEM says maintaining the growth momentum in domestic demand is key to keeping the regional economy in relatively good shape amid a weakening external environment.

Economic growth in emerging East Asia - defined as the 10 members of the Association of South East Asia Nations (Asean) plus the People's Republic of China (PRC); Hong Kong, China; Taipei, and South Korea - will slow to 5.7 per cent in 2009 down from 6.9 per cent percent in 2008.

China's expansion, the region's growth engine, is expected to moderate to 8.2 per cent in 2009 from 9.5 per cent in 2008 even as the government takes measures to spur domestic demand to offset a slowdown in exports and private investment growth.

India, South Asia's most dynamic economy in recent years, is reeling from the direct effect of the global financial crisis on its banking systems and financial markets, the special note says. The growth projection for India has been revised down to 7 per cent in 2008 and 6.5 per cent in 2009, down from 9 per cent in 2007.

"The risks to the region's growth outlook are strongly tied to the global outlook through both trade and financial links," says Lee.

If banks in the region become more risk averse, the report warns, monetary policy may have less traction than in the past and governments will have to develop more active fiscal responses to shore up domestic demand.

The AEM recommends policymakers step up their monitoring of local financial markets and have clear policies in place to deal with stressed institutions; provide adequate provisions of foreign and domestic liquidity so that credit continues to flow into the economy; and consider a range of policies to contain the spillover effects of the worsening financial conditions and risks arising from weaker growth on regional banking systems.

The AEM also recommends the region's authorities continue to improve regulation and oversight of financial systems to strengthen transparency and accountability.