The Asian Development Outlook 2007 released by the Asian Development Bank lately reveals that economic growth in Southeast Asia is projected to slow a little to 5.6 per cent in 2007, due mainly to a softening in some major export markets. Only in Indonesia and Viet Nam is growth projected to be higher this year. Despite strong growth in recent years, Southeast Asian economies face a number of challenges to sustainable growth, social development and the reduction of poverty.
In 2007, inflation is forecast to subside significantly, to an average 4.2 per cent, on expected lower world fuel prices, appreciating subregional currencies, and the effect of assumed normal weather patterns on agricultural production. Imports to Southeast Asia are likely to record robust growth as investment is expected to pick up, especially in Indonesia. Continued buoyancy of remittances from overseas workers and in tourism receipts should provide support to current accounts in several countries.
In 2006, the economies of Southeast Asia expanded by 6%, above the average growth of the previous five years. Most countries grew at a faster rate than in 2005, reflecting strong external demand, supportive monetary conditions, and for some, the beneficial impact on agriculture of favorable weather conditions for most of the year. Export growth in Southeast Asia accelerated last year to nearly 18 per cent, with exports from Cambodia, Lao People’s Democratic Republic, and Viet Nam rising at faster rates. Exports from several economies - Philippines, Singapore, Thailand and Malaysia - benefited from the upturn in global demand for electronics. Indonesia, Malaysia, Myanmar, and Viet Nam benefited from high prices for oil or natural gas exports.
Investment was weak in 2006 in Indonesia, Philippines, and Thailand, which dampened the growth of imports. Southeast Asian inflation averaged 7.1 in 2006, up from 6.3 per cent in the previous year. The average was raised by high inflation in Indonesia, the biggest economy in Southeast Asia, which saw price pressures surge from late 2005 when the government reduced subsidies on fuel.
In Cambodia, the economy expanded strongly by 10.4% in 2006, reflecting robust clothing exports, tourism receipts, and construction activity. Forecast growth averaging just over 9% in the next 2 years will be more dependent on strengthened domestic economic activity underpinned by improved rural incomes, larger inflows of foreign direct investment, and greater government capital spending.
In Indonesia, moderate economic growth of 5.5 per cent last year was based on private consumption and exports, while fixed investment growth dwindled. Inflation eased from high levels as the year progressed, enabling a cut in interest rates. Economic growth is expected to pick up by a half percentage point in 2007, supported by greater development spending and some improvement in the poor investment climate.
In Lao PDR, foreign investment in hydropower and mining, with rising exports of minerals in 2006, continued to drive double-digit growth in industry, the major contributor to gross domestic product growth of 7.3 per cent. Inflation slowed to levels not seen for 12 years. Economic growth is projected to decelerate moderately this year to 6.8%, mainly because export markets and mineral prices will not be as strong as in 2006.
In Malaysia, consumption spending produced a pickup in growth to 5.9 per cent in 2006. Private and public investment also strengthened. Growth is projected to slow by about a half percentage point in 2007 as export markets soften and household spending and private investment decelerate. In Myanmar, high prices for natural gas exports and a good harvest led to a modest pickup in economic activity. But macroeconomic stability remains elusive with monetized fiscal deficits feeding high inflation, which returned to double-digit levels and could go higher.
In the Philippines, achievements included 5.4 per cent growth, a downtrend in inflation, and stronger fiscal and external positions. This year, still-high remittances and low real interest rates, and greater fiscal expenditures, should keep expansion at around the same level. Growth has not been strong enough to lift employment sufficiently because of a declining investment-to-gross domestic product ratio.
In Singapore, growth in 2006 hit 7.9 per cent, well above the economy’s trend rate for a third year running. External demand was the main driver, although domestic demand, especially investment, also picked up. Growth is expected to decelerate in 2007 to a still-strong but more sustainable rate of six per cent. Closer links with global economic networks and structural reforms have contributed to the healthy performance, but also led to widening income gaps.
In Thailand, strong exports drove a pickup in economic growth to 5% last year, since domestic demand was damped by several factors including rising interest rates and inflation in the first half, flooding, and political uncertainties for much of the year. Inflationary pressures eased in the second half of 2006, paving the way for the central bank to start lowering rates early in 2007. Economic growth is projected to slow to 4.0% this year, and the outlook for 2008 depends heavily on elections being held and on the incoming government providing a clear and credible economic program.
In Viet Nam, a rapid growth rate of 8% was maintained in 2006, supported by robust exports, rising consumption spending, and strong investment. Inflation also stayed high, averaging 7.5 per cent. Membership in the World Trade Organization from January 2007 has added impetus to development and market-oriented reforms. If further progress is made on structural reforms, brisk economic growth of just over 8% is projected this year and next.
East Asia
East Asia’s growth is expected to slow to 8% in 2007, down from 8.7% a year earlier, largely because of measures by the People’s Republic of China (PRC) to rein in fixed asset investment. Inflation was 1.6 per cent in 2006 and is expected to remain below 2% in 2007. While all the economies in the region will slow, they will still achieve solid growth. External demand will soften as growth rates subside in industrial nations, though domestic demand will increase in Hong Kong, China; Korea; and Taipei,China. Consumption demand in the PRC is projected to rise, providing some counter to the targeted reduction in fixed asset investment.
The PRC’s economy expanded at a cracking 10.7 per cent in 2006, the fastest rate in 10 years, with manufacturing, construction and other industry the main contributor, while investment accounted for much on the demand side. The government’s efforts to restrain fixed asset investment pulled its growth down from about 30 per cent in the first half of the year to 21 per cent in the second. Foreign exchange reserves soared above $1 trillion by year end. With excess capacity in some industries and strong competition in manufactured products, inflation slowed to 1.5 per cent.
Steps taken to cool the economy included administrative measures to restrain investment and market-oriented tightening. GDP growth is expected to ease to 10% in 2007. Growth of industry is forecast to slow about one percentage point to 11%, while agriculture is expected to benefit from a new official emphasis on rural development and services from higher incomes. Over the medium term (2007–2011), GDP growth is expected to average about 9%.
The economy of Hong Kong, China grew robustly by 6.8% in 2006, a third successive year of above-trend growth. Closer links with the booming mainland benefited the economy in several ways: through re-exports of PRC goods, and through now-substantial financial services exports to the PRC. In 2007, GDP growth is projected to slow to 5.4 per cent, given the expected slowing in the PRC and United States economies. Consumer spending is expected to strengthen on the back of generous budget givebacks announced in early 2007. Inflation is seen easing from two per cent last year to 1.6 per cent this year as the budget initiatives exert downward pressure on prices.
The Republic of Korea enjoyed its fastest growth rate in four years, at five per cent in 2006. It was spurred by a recovery in domestic demand and strong exports. Private consumption posted the best rate of expansion since the credit card crisis of 2003. The recovery broadened with a pickup in capital investment as companies invested in machinery and equipment.
This year, Korea is likely to see a continued expansion of investment in manufacturing, joined by greater housing investment. Private consumption growth, weighed down by high levels of household debt, is expected to continue, although at a moderate pace. However, growth in exports will ease as a consequence of the slowdown in the US. Rapidly rising imports, driven in part by demand for overseas travel and education, will cut by half the contribution of net exports to GDP growth. The economy is forecast to grow by 4.5% this year, slowing from 2006. Inflation will inch up from 2.2 to 2.4 per cent.
With copper and gold prices high and a mild winter, growth in Mongolia’s mining and agricultural-based economy lifted to 8.4 per cent in 2006, its fourth straight year of 6%-plus expansion. Growth is forecast to decelerate in 2007 with mineral prices tipped to stabilize, tempered PRC growth, and an expected leveling out of livestock growth rates. Inflation, which often runs at relatively high levels, receded to just over five per cent last year and will be a bit above that level in 2007. Strong exports accelerated growth to 4.6 per cent in Taipei,China in 2006. This year, consumption and investment demand are expected to pick up. On balance, that will leave GDP growth at 4.3 per cent in 2007, while inflation will remain at a low 1.6 per cent, compared to just 0.6pc in 2006.
