In its latest East Asia and Pacific Economic Update, released on Monday (05/10), the World Bank cut its forecast for economic growth in east Asian developing markets through 2017 primarily on China's economic slowdown. Developing East Asia is estimated to grow 6.5 percent in 2015, down from the 6.7 percent estimate in the World Bank April's update. However, the region remains one the world's key growth drivers.
The Washington-based lender expects economic growth in China, the world's second-largest economy, to ease to 6.9 percent in 2015 (down from the 7.1 percent growth rate predicted in April and down from the GDP growth realization of 7.3 percent last year). China's growth is then expected to slow to 6.7 percent in 2016 and 6.5 percent in 2017. The negative consequence of China's slowdown is that commodity prices will continue to be under pressure amid weaker Chinese demand. Besides commodities, pressures will also plague trade, foreign direct investment (FDI) and tourism in the East Asia region. The World Bank added that this softer outlook for the region comes at a time when authorities in involved countries have limited room to ease monetary policies as they need to safeguard financial stability ahead of looming further monetary tightening in the USA (higher US interest rates) which will most likely trigger capital outflows from emerging economies.
The World Bank sees greater-than-usual uncertainty in the region due to monetary tightening in the USA, China's hard landing and lower commodity prices. For markets such as Malaysia and Indonesia particularly this is a concern as it can trigger further currency depreciation and reduces household incomes and business profits. Malaysia's ringgit and Indonesia's rupiah are Asia's worst-performing Asian currencies (against the US dollar) so far this year. But also the currencies of Thailand and Vietnam are at risk, says the latest World Bank update. These four countries (Indonesia, Malaysia, Thailand and Vietnam) are also seen as having significant US dollar-denominated debt and will therefore suffer from further currency depreciation as debt situations deteriorate. The World Bank further stated that lower real trade-weighted exchange rates can play a key role for these commodity exporters to adjust to weaker terms of trade.
The Washington-based lender also advised against the region's central banks' efforts to intervene in markets in order to support local currencies as this would put their foreign exchange reserves at risk. The World Bank advises the region to re-evaluate fiscal incentives, boost infrastructure development, change agricultural policies and deepen integration.