Asian countries can cope with interest rate hikes in the United States as long as the moves are gradual and reflect US economic fundamentals, Asian Development Bank (ADB) President Takehiko Nakao said on Thursday. Nakao's comments came after outgoing Federal Reserve Chair Janet Yellen told congressional leaders that the US economy has gathered steam this year and will warrant further rate increases amid a strengthened global recovery.
The Manila-based lender has flagged the risk of potential capital outflows and higher borrowing costs as the Federal Reserve begins the unwinding of a decade of aggressive monetary stimulus and continues to raise interest rates. Nakao said stable regional currencies and sound macroeconomic and monetary policies of each country, backed by ample foreign reserves and financial safety net such as currency swap lines, make Asia resilient to impacts from US rate hikes.
"Generally speaking I'm not necessarily unconcerned," Nakao, former Japanese vice finance minister for international affairs, told Reuters in an interview. "But I don't think gradual interest rate hikes that reflect strength of US economy will have large ill effects on Asian economies."
Nakao also said that China, Japan's largest trading partner, will face a gradual slowdown as it rebalances towards a services- and consumption-led economy, and as the working population decreases and a shift of people from inland to coastal areas peaks. Still, he shrugged off concerns about a sharp slowdown, while some economists warn China's economy could falter as stimulus steps taken in the run-up to the 19th Communist Party Congress last month run their course.
"A rapid slowdown is unlikely given strength in private consumption, even though China won't keep the pace of growth as before," he said, noting China is making better-than-expected progress in a shift away from investment to consumption. Turning to development in Asia, the ADB has recently issued a "gender bond" to finance projects that promote gender equality and women's empowerment to foster inclusive growth, on top of other issuance by theme such as water and clean energy.
Nakao said ADB will also cooperate as appropriate with China-led Asian Infrastructure Investment Bank (AIIB) and its Belt and Road Initiative (BRI) aimed at linking China to Europe with infrastructure projects. While closely watching social and environmental safeguards and governance of the AIIB, ADB has co-financed four infrastructure projects with AIIB in Pakistan, India, Georgia and Bangladesh, with many new projects in the pipeline, Nakao said. "While the United States and Japan stay out of AIIB, co-financing through ADB and World Bank demonstrate our effective cooperation at arm's length," he added.
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