The World Bank lowered its forecasts for East Asia’s developing countries on Monday, citing slower growth, lower investments and exports in most of the region's economies, and stressed the need for structural and policy reforms to stabilize growth, ahead of monetary stimulus withdrawals and interest rate hikes in advanced economies.
The Washington-based bank, in a report titled 'East Asia Pacific Economic Update’ released on Monday, said it now expects developing countries in the region to grow at 7.1 percent for 2013, and 7.2 percent for 2014, down from its April estimate of 7.8 percent and 7.6 percent, respectively.
“Growth in larger middle income countries including Indonesia, Malaysia, and Thailand is also softening in light of lower investment, lower global commodity prices and lower than expected growth of exports,” the report said.
The bank expects growth in China, which is moving from an export-oriented economy to focus on domestic demand, to be in line with the government’s estimate of 7.5 percent this year, significantly below a forecast of 8.3 percent in April. Last week, the Asian Development Bank, or ADB, revised down its 2013 growth forecast for China to 7.6 percent -- down from a 8.2 percent figure it forecast in April.
Excluding China, the region is expected to grow at 5.2 percent in 2013 and 5.3 percent in 2014, according to the report. However, the bank warned that risks associated with structural reforms in the Chinese economy would persist and negatively impact other economies in the region.
“Growth in 2014 (in China) is projected to be 7.7 percent, but risks remain related to the restructuring of China’s economy – a greater than expected slowdown of investment could have an adverse effect on the region, especially on suppliers of capital goods and industrial raw materials to China,” the report said, adding that China’s domestic debt and a rapid expansion in China’s shadow-banking system were matters of concern, because "shadow banking is closely linked to the banking system, is less regulated, and operates with implicit guarantees from banks and local governments."
The bank also noted that the eastern Asia-Pacific region continues to drive the global economy but fiscal deadlock in the U.S. and the future course of the Federal Reserve's monetary policy would pose challenges to the economies in the region, and urged countries to boost growth with the help of structural and policy reforms.
“With overall global growth accelerating, now is the time for developing economies to make structural and policy reforms to sustain growth, reduce poverty and improve the lives of the poor and vulnerable,” Axel van Trotsenburg, the bank's vice president for the East Asia and Pacific region, said in a statement.
Bert Hofman, the bank's chief economist for East Asia and Pacific, said in the statement: “Reducing reliance on short term and foreign currency denominated debt, accepting a weaker exchange rate when growth is below potential, and building policy buffers to respond to changing global liquidity conditions are some of the ways that can help countries be prepared."
The World Bank also stated that the Japanese central bank’s ultra-loose monetary policy could help offset the impact from the Fed's tapering of its $85 billion-a-month bond-buying program.
“The impact of tapering on capital inflows in the region may also be offset by “Abenomics,” Japan’s new strategy to revive growth, which could increase Japanese investment in the region,” the report said.