Despite the fact that the East Asian region can benefit from lower global petroleum prices (the region is a net oil importer), slowing growth in China - the world’s second largest economy - impacts on the region. Demand for commodities from China remains sluggish thus hurting the export performance of several Southeast Asian nations as China is currently experiencing a transition from an export-driven economy to a consumption-driven economy. Chinese policymakers are also eager to tackle financial vulnerabilities and create a more sustainable environment.

Investment and manufacturing growth in China is expected to slow amid measures implemented to contain local government debt, combat shadow banking, reduce excess capacity, curb energy demand, and control pollution. On a positive note, monetary stimulus is expected to somewhat offset the negative impact of the above-mentioned factors. The central bank of China has cut interest rates twice since November 2014 in an attempt to boost economic growth which has touched its slowest growth level in over two decades.

The World Bank expects China’s economy to expand 7.1 percent (y/y) in 2015 and 7.0 (y/y) in 2016. In 2014 the Chinese economy had grown 7.4 percent (y/y). As such, the World Bank expects the slowing economic growth pace of China will continue. Moreover, the Washington-based institution downgraded economic growth as the institution’s previous growth forecasts for China’s economic growth were 7.2 percent (y/y) in 2015 and 7.1 percent (y/y) in 2016.

Growth Picture Developing East Asia (Excluding China) More Upbeat

However, economic growth in the rest of developing East Asia is estimated to climb by 0.5 percent to 5.1 percent (y/y) and 5.4 percent (y/y) in 2016 because low energy prices should boost demand in the Southeast Asian region. Low energy prices provide emerging market policy makers a unique chance to push for fiscal and structural reforms that will raise revenues and reorient public spending toward infrastructure and other productive uses, thereby improving the region’s competitiveness. The World Bank emphasized, however, that the impact of these low petroleum prices varies from country to country. For example, Malaysia, the region’s largest oil exporter, is expected to experience slowing economic growth in 2015 as low petroleum prices hit capital spending in the energy sector. Meanwhile, the country’s private consumption is likely to cool due to the implementation of the goods and services tax in April 2015.

The World Bank expects that among the emerging East Asian economies Cambodia, Laos, the Philippines, Thailand, and the Pacific island countries will benefit most from low global oil prices.

The World Bank emphasized that looming further monetary tightening in the USA (higher US interest rates) and bullish US dollar momentum implies great uncertainty and volatility in the global economy, hence implying significant risks to emerging markets in East and Southeast Asia. Capital inflows in these emerging markets may reduce more sharply than estimated previously.

Meanwhile, continued US dollar appreciation against other major currencies could hurt highly-dollarized economies such as Cambodia and Timor-Leste. To counteract this risk, the World Bank suggests improving fiscal policy in these vulnerable countries.

The World Bank cut its 2015 economic growth forecast for Indonesia to 5.2 percent (y/y), 0.4 percentage point lower than the previous projection in October.

Key Findings

Economic growth will ease slightly in developing countries in East Asia and Pacific this year, even as the region benefits from lower oil prices and a continued economic recovery in developed economies.

The region will still account for one-third of global growth, twice the combined contribution of all other developing regions.

The developing economies of East Asia are projected to grow by 6.7 percent in 2015 and 2016, slightly down from 6.9 percent in 2014.

China’s growth is expected to moderate to around 7 percent in the next two years, compared with 7.4 percent in 2014.

Growth in the rest of developing East Asia is expected to rise by half a percentage point, to 5.1 percent this year, largely driven by domestic demand in the large Southeast Asian economies.

Several smaller economies, especially commodity exporters such as Mongolia, will see lower growth.

Low oil prices will benefit most developing countries in East Asia, especially Cambodia, Laos, the Philippines, Thailand, and the Pacific island countries.

But the region’s net fuel exporters, including Malaysia and Papua New Guinea, will see slower growth and lower government revenues.

In Indonesia, the net impact on growth will depend on how much a decline there will be for its coal and gas exports.

The recovery in high-income countries continues to be slow and uneven, and a downturn in the Eurozone and Japan would weaken global trade.

Higher US interest rates and an appreciating US dollar, along with diverging monetary policy paths across advanced economies, could raise borrowing costs, generate financial volatility and reduce capital flows to East Asia.

The continued strengthening of the US dollar against other major currencies also could hurt highly-dollarized economies such as Cambodia and Timor-Leste.

To address these risks, improving fiscal policy is key. With low oil prices, countries – whether oil importers or exporters – should reform energy pricing to usher in fiscal policies that are more sustainable and equitable.

In most of the larger East Asian economies, efforts to bolster revenues and restructure spending can help fill the gap in infrastructure investments and create more funding for social protection and insurance programs.

In the major fuel exporting countries and Mongolia, fiscal consolidation is required.

Lower oil prices create an opportunity for governments to reduce fuel subsidies and raise energy taxes. Across much of the region, fuel subsidies and related tax expenditures have strained public finances and weakened current accounts.

Some countries, including Indonesia and Malaysia, recently took steps to cut fuel subsidies, but the momentum needs to be sustained and broadened, even if oil prices begin to recover.

In China, as it shifts to a consumption-led, rather than an investment-led, growth model, the main challenge is to implement reforms that will ensure sustainable growth in the long run. Policies to spur growth, the report says, should support restructuring efforts.

In the medium term, the report says, countries should expand and upgrade physical infrastructure and improve public access to higher education and health care.

In the long term, countries will need to find ways to sustain productivity growth, contain health care costs and expand the revenue base for social security.

Further Reading:

World Bank Report East Asia Pacific Economic Update (April 2015)
Developing East Asia Pacific Growth Remains Robust in 2015