Media release - 12 June 2008 
 

 Media release - 12 June 2008 

Asia expected to remain a high growth region

The latest World Risk Developments report from EFIC, the Australian Government’s export credit agency, suggests Asia will probably remain a relatively high growth region that will ride out the economic slowdown and credit tightening affecting other parts of the world.

According to EFIC chief economist Roger Donnelly, most economic analysts broadly agree with the World Bank that growth in the developing countries of East Asia could fall by around 1½ percentage points to about 8½% in aggregate, while China could slow by 2 percentage points to around 9½%. 

“In other words, the slowest growth since 2002, but still high compared with growth in other regions,” he says. “A majority of observers begin their remarks with the observation that in an increasingly integrated world economy ‘of course’ Asia can’t remain insulated from slowdown in the rest of the world. But press them on their forecasts, and they foresee expanding domestic demand and intra-Asian trade compensating for most of any export shock coming from the US/G7.”

“The biggest risk to this growth comes from rising food and fuel prices, not the global credit squeeze or slowing exports. Until recently, most central banks were taking a wait-and-see position – hoping that the food and fuel price increases would be one-off jumps, rather than escalating trends that would require official interest rate increases.  But in just the past few weeks, the Indonesian, Philippine and Vietnamese central banks have raised interest rates in an effort to prevent dearer food and fuel triggering an inflation breakout.”

Food/fuel subsidies

The EFIC report notes  that countries subsidising food and fuel are in a particularly tight corner – Bangladesh, Cambodia, China, India, Indonesia, Malaysia, Pakistan, Philippines, Sri Lanka and Taiwan. Several, however, have taken steps to rein in the cost of their fuel and electricity subsidies  by raising administered prices and cutting budgetary allocations for subsidies. Indonesia, Taiwan, Malaysia, India, Nepal and Bhutan are in this category. Pakistan and Bangladesh are reportedly considering doing the same.  The cost of subsidies has soared as international oil prices have surged.  Losses at Indian state oil companies that import crude and refined oil at international prices, yet have to sell at subsidised retail prices, could reach US$50 billion this year, or 3.8% of GDP.  The administered prices have also caused fuel shortages, as fuel companies in countries such as China and Nepal refuse to sell at prices that guarantee losses.

Surging international food and energy prices are also a challenge for African governments. Food price hikes have already sparked riots in Guinea, Mozambique and Burkina Faso.