Inflation rather than an economic slowdown is the greatest risk and biggest policy challenge for developing countries in Asia, the head of the Asian Development Bank said on Friday. The Manila-based agency plans to slightly cut its 2008 average growth forecast for developing Asia, which excludes Japan, Australia and New Zealand, while boosting its forecasts for inflation.
"While global growth is rapidly slowing, the slowdown in emerging economies in Asia has been relatively modest. On the other hand, inflation is accelerating rapidly," ADB President Haruhiko Kuroda told Reuters in an interview. Its 2008 average growth forecast for developing Asia will drop slightly from its current projection of 7.6 percent while its 2009 estimate will likely fall to around 7 percent, down from 7.8 percent.
It will revise up its inflation forecast for developing Asia to around 7-7.5 percent this year from 5.1 percent. The ADB will issue updated growth and inflation forecasts on Tuesday. Its current estimates were made in April. Kuroda said he hoped inflation would slow to around 5 percent in 2009 but uncertainty remained over commodity prices and monetary tightening measures in some countries.
"Inflation is the greatest risk in emerging economies in Asia," Kuroda said, adding that while it has peaked in China, South Korea and Thailand, it is accelerating in countries like Vietnam and Pakistan. "Rather than supporting economic growth, the biggest policy challenge is tackling inflation."
NO CRISIS ON HORIZON IN SOUTH KOREA: Kuroda said that while China's economy was slowing, it would should still mark high growth of around 10 percent this year and next year, in line with current ADB estimates. Exports from the world's fourth-largest economy will eventually slow given the strains in the global economy, but for the time being there was no need for Beijing to carry out large-scale fiscal stimulus or loosen monetary policy, he said.
China's economic slowdown from last year and stabilising prices meant it was hard to say whether the Chinese yuan should appreciate more rapidly right now, he added. "The important thing is that the yuan steadily appreciates as a trend."
Kuroda also said he did not see a crisis developing in South Korea. There have been some concerns in financial markets about a potential capital flight out of the country. "It is true that the South Korean economy has been weakening as growth in the United States, Europe and Japan is slowing rapidly, but I don't think that will invite financial system worries or a currency crisis there."
He said he was not concerned that South Korea's foreign reserves of more than $240 billion, the world's sixth largest, may be shrinking fast due to intervention to support the won. "The size is huge relative to its economy, so there is no need to worry at all."
He said Asian economies should generally let markets decide currency levels, and questioned whether major interventions to prop up currencies to fight inflation were appropriate. Kuroda also said he did not think political instability in Thailand had made an obvious impact on markets and economic growth, and that the likelihood of that happening was small. Japan's economy shrank a bit more than initially estimated in the second quarter to log its worst performance in seven years, data showed on Friday. But Kuroda said a recession would be avoided as he was confident that the world's second largest economy would grow in the third and fourth quarters.