Oil prices to 'slow' East Asian growth

Oil prices to 'slow' East Asian growth

Mynardo Macaraig, Agence France-Presse, Manila

Record oil prices coupled with slowing exports are expected to clip economic growth in East Asia to 6.8 percent in 2005, down from a robust 7.6 percent notched-up last year, the Asian Development Bank (ADB) said on Tuesday.

Gross domestic product (GDP) growth in 2006 is expected to slowdown further to 6.6 percent, the ADB's Asia Economic Monitor said.

The growth forecast was "subject to risks from further increases in oil prices and a disorderly adjustment of the global payments imbalance," the report said.

The report, released at the ADB headquarters in Manila, said that a "loss of economic momentum in major industrial markets," and a drop in demand for new information technology products were the main reasons for the worsening external economic environment.

The ADB noted that exports grew at a slower rate in the first half of 2005, in all of East Asia's larger economies except China. This development, coupled with higher oil prices and "a general bias toward tighter macroeconomic policies," resulted in the slower growth in most of the region.

Excluding China, East Asia is expected to post average growth of 4.4 percent this year, compared to 5.5 percent growth last year, the ADB added.

China however will also see its growth slow to 8.9 percent this year and 8.0 percent in 2006 from 9.5 percent last year due to "a gradual softening of fixed investment... and somewhat diminished export prospects."

Singapore was expected to suffer the biggest slowdown in GDP growth from 8.4 percent in 2004 to 3.7 percent in 2005 and 4.7 percent in 2006. ` "Being a highly open economy, Singapore's economy would be adversely affected by the weak export prospects," the ADB report remarked.

Thailand will see its GDP growth fall from 6.1 percent in 2004 to 4.3 and 5.3 percent growth in 2005 and 2006 respectively.

Malaysia's GDP growth was forecast to fall from 7.1 percent last year to 5.3 percent this year and 5.7 percent next year while Philippine GDP growth would stay at 4.7 percent in both 2005 and 2006 from 6.1 percent last year.

In contrast, Indonesia would see its GDP growth accelerate from 5.1 percent in 2004 to 5.6 and 5.7 percent in 2005 and 2006 respectively.

The bank cited earlier studies showing that if the price of oil remained at 55 dollars a barrel, East Asia's GDP growth would fall by 1.6 percentage points while the inflation rate would rise 2.2 percentage points.

Net oil importers, Thailand, the Philippines, South Korea and to a lesser extent China, will be hit the hardest, the ADB said but even a net oil exporter like Malaysia will be adversely affected as higher oil prices take their toll on its industrial trading partners.

"We now face a backdrop of moderately slowing growth, a gradual build-up of inflationary pressures, and a tightening of US monetary policy," Pradumna Rana, an ADB senior director said in the report.

"The key challenge for East Asia is to calibrate fiscal, monetary, and exchange rate policies while at the same time pursuing structural reforms to strengthen domestic demand," he added.

The bank recommended a "tightening of monetary policy," in China, Indonesia, Laos, Myanmar, the Philippines, Thailand and Vietnam and to a lesser extent, Malaysia.

The ADB also praised China and Malaysia for moving away from fixed pegs for their currencies and towards more flexible exchange rate regimes, saying this would have "profound economic implications."

It said that these moves would "foster greater exchange rate flexibility in Asia as a whole," adding that it would likely be "accompanied by an appreciation of most regional currencies," and would also help lower inflationary pressures.