Europe may help keep Asia's recovery on track, says ADB

Europe may help keep Asia's recovery on track, says ADB

Andrew Priest, Reuters, Shanghai

Delegates began arriving here on Wednesday for the Asian
Development Bank's annual meeting as a senior ADB economist said
an unexpected pickup in European growth may insulate Asian
exporters from any cooling in U.S. demand.

A fiery recovery in U.S. demand for Asian electronics,
computer parts and other exports this year has halted a slump in
regional industrial production which dumped Taiwan, Singapore,
Hong Kong and Japan into recession last year.

The U.S. economy expanded at an annualized pace of 5.8 percent
in the first quarter but much of this growth was driven by the
restocking of company inventories, and weak company profits may
stall a much needed rebound in business investment.

Jean-Pierre Verbiest, the ADB's assistant chief economist,
said the lending agency's forecast of a steady improvement in
Asian growth this year was on track despite an uncertain U.S.
outlook, partly because European growth was picking up faster
than expected.

"Europe is not the largest market for Asia but it is still
substantial and growth there will help compensate for any U.S.
slowing," he told Reuters in an interview. About a sixth of Asian
exports go to Europe versus a quarter to the United States.

The ADB is forecasting average growth in regional gross
domestic product (GDP) this year of 4.8 percent, up from 3.7
percent last year.

Asia's exposure to U.S. growth pains was underlined by
Malaysian March industrial output data on Wednesday, which showed
a 3.5 percent fall on the year after February's 2.9 percent rise.

Shanghai, China's richest city, is the backdrop for the ADB's
35th annual meeting on Friday.

Some 3,200 delegates and Asian finance ministers and central
bankers will discuss structural reforms, Afghan reconstruction,
currency swaps, trade pacts and how to keep Asia's economic
recovery on the boil.

The meeting is also an opportunity for major foreign banks
like Citigroup and HSBC to promote their investment banking
skills to Chinese regional and city governments in areas like
debt issuance.

The 60-member ADB board, which includes 43 Asia Pacific
finance officials, will also discuss a U.S. proposal to increase
aid given to needy nations as grants, as opposed to loans.

Bruised by the 1997-1998 Asian financial crisis, finance
ministers of the 10-member Association of Southeast Asian Nations
(ASEAN) plus Japan, South Korea and China are likely to use the
meeting to strengthen a network of currency swaps.

The Chiang Mai Initiative, signed in May 2000, sees currency
swaps as a defense against future speculative attacks. Japan has
already signed bilateral swaps with Thailand, China, Malaysia,
South Korea and the Philippines.

ASEAN groups Brunei, Cambodia, Indonesia, Laos, Malaysia,
Myanmar, the Philippines, Singapore, Thailand and Vietnam.

Interest-rate increases this week in South Korea and Australia
do not signal the start of a rush to raise borrowing costs around
the region, with those two economies distinguished from their
neighbors by strong consumer demand, Verbiest said.

Rate rises are likely to be the exception rather than the rule
in Asia, with inflation still subdued and economies set for only
a moderate recovery in growth this year.

"There are no fundamental reasons why you would see monetary
policy being tightened," Verbiest said.

Australia raised its key cash rate by 25 basis points to 4.5
percent on Wednesday, in a preemptive strike against inflationary
pressure building up in one of the best-performing economies in
the industrialized world.

Korea caught most market economists off guard on Tuesday when
it raised short-term rates by a quarter-point to 4.25 percent to
head off inflationary pressures stemming from an acceleration in
growth and brisk demand for household credit.

But Verbiest said he saw no reason why Korea would need to
jack up borrowing costs sharply despite concern that credit card
fueled consumer spending could end in a bubble. Growth was still
below potential and pressure on import prices was subdued.

"You're not going to see a surge in interest rates. There may
be some increase but it won't be large," he said. "There is no
fundamental force at the moment pushing up interest rates
substantially in countries like Korea."