East Asia and Pacific growth expected to moderate, says WB

BANGKOK: Growth in developing East Asia and the Pacific (EAP) is projected to soften to 6.0 percent in 2019 and 2020, down from 6.3 percent in 2018, largely reflecting global headwinds and a continued gradual policy-guided slowdown in China, according to Managing Headwinds, the April 2019 edition of the World Bank East Asia and Pacific Economic Update report released here today.

Still, the region’s economies weathered the financial markets volatility of 2018 relatively well largely due to effective policy frameworks and strong fundamentals, including diversified economies, flexible exchange rates, and solid policy buffers.

While trade policy uncertainty has abated somewhat, global trade growth is likely to moderate further. Domestic demand has remained strong in much of the region, the report adds, partly offsetting the impact of slowing exports.

“The region’s resilient growth should bring about further poverty reduction, already at historic lows. By 2021, in fact, we expect extreme poverty to dip below 3 percent,” said Victoria Kwakwa, World Bank Vice President for East Asia and Pacific. “At the same time, however, half a billion people in the region remain economically insecure, at risk of falling back into poverty— an important reminder of the scale of the challenges facing policymakers.”

China’s ongoing, policy-guided slowdown will lead to 6.2 percent growth in 2019 and 2020, down from 6.6 percent in 2018. Growth in Indonesia and Malaysia is projected to remain unchanged in 2019, while growth rates in Thailand and Vietnam are expected to be slightly lower in 2019.  In the Philippines, a delay in approving the 2019 national government budget is expected to weigh on GDP growth in 2019, but growth is anticipated to pick up in 2020.

Growth prospects among the smaller economies in EAP remain favorable. Large infrastructure projects are expected to accelerate growth for Lao PDR and Mongolia. Cambodia’s growth is projected to remain robust, although at a slower pace than in 2018, mainly due to weaker-than-expected external demand.

Expansionary fiscal policy is expected to boost growth in Myanmar in the short term, while recent structural reforms are expected to support growth in the medium term. Growth is expected to pick up in Papua New Guinea in 2019 as the economy recovers from a catastrophic earthquake in 2018.

Growth in Fiji is projected to continue to rise, albeit at a more tempered pace as reconstruction efforts near completion in the aftermath of tropical cyclones.

“While the economic outlook for EAP remains largely positive, it is important to recognize that the region continues to face heightened pressures that began in 2018 and that could still have an adverse impact. Continued uncertainty stems from several factors including further deceleration in advanced economies, the possibility of a faster-than-expected slowdown in China, and unresolved trade tensions,” said Andrew Mason, World Bank Acting Chief Economist for the East Asia and Pacific region. “These continuing headwinds will need to be actively managed.”

To face these persistent risks the report details both short- and medium-term responses. In the short term, it calls for strengthening reduced buffers, including rebuilding international reserves that were drawn upon to manage exchange rate volatility in 2018.

Monetary policy may also need to be adjusted to become more neutral as risks of capital outflows have abated. The report highlights the importance of continued structural reforms in the medium term – to increase productivity, boost competitiveness, create better opportunities for the private sector, and strengthen countries’ human capital.

The intensification of some risks also highlights the need for continued investments on social assistance and insurance programs to protect the most vulnerable, the report argues. Today, developing EAP has the lowest social assistance coverage among the poorest twenty percent of the population than any other developing region.

The report also stresses the importance for the Pacific Island Countries to ensure debt sustainability by improving debt management, quality of spending, and building fiscal space.

While their public debt is relatively low, structural factors, including modest long-term economic growth prospects, high vulnerability to natural disasters, and high costs for public services and infrastructure, place the Pacific Island countries at high risk of debt distress.