ASIAN DEVELOPMENT BANK CHIEF ECONOMIST DISCUSSES THE REGION’S ECONOMIC OUTLOOK AT EMTA SPECIAL MEETING
EMTA members heard a special presentation by Ifzal Ali, the Asia Development Bank’s Chief Economist, at EMTA’s offices on Wednesday April 4, 2007. His topic: the outlook for Asian growth in 2007.
Dr. Ali began with an overview of Asia’s “stunning” economic growth in 2006, with GDP rising 8.3% (the highest in over a decade), while countries such as China, India, Singapore and South Korea amassed over $400 billion in foreign exchange reserves. The region continues to face many challenges, however, and Dr. Ali emphasized that “future development hinges on the use of Asia’s most valuable resource – its people.”
International economic conditions remain broadly favorable, with oil prices expected to drift downwards if current tensions with Iran are reduced. Interest rates are likely to decline in the second half of the year, with growth moderating while remaining positive. Potential risks which could derail Asian economies include a sharp slowdown in the US, growing protectionist sentiments, geopolitical risks such as a spike in oil prices, and domestic political threats in a number of countries. Dr. Ali also cautioned his audience not to discount the potential economic disruption of an avian flu pandemic, reminding them of the severity of the effects of SARS.
Turning to a review of individual economies, Dr. Ali noted that the official growth forecast of 7.5% by the People’s Republic of China (PRC) is probably not feasible and that instead GDP would increase 9%. He highlighted Beijing’s recent announcement that it would begin to actively manage a portion of its foreign exchange reserves. “The buildup of reserves was a backlash to the 1997 crisis, but this has gone too far, and the opportunity costs of holding reserves as they are now is too high,” he stated.
While it is unclear how the PRC will set up its asset management system, the Asian Development Bank estimates that $550 billion could be safely invested in new securities. Ali does not expect a dramatic change in policy soon and expects that initially a much smaller amount will be invested. “They will start with baby steps and won’t plunge in in a hurry,” he remarked, stressing that large losses would raise a credibility issue for the government.
Indian GDP grew 9.2% in 2006, the highest level in almost two decades, but Ali noted that “huge infrastructural bottlenecks” pose a continuing problem for New Delhi. Inflation is being fueled by rapid credit expansion, which the ADB expects will be combated by additional interest rate hikes. The country’s lagging agricultural sector also remains a key challenge.
Other countries Dr. Ali discussed in his presentation included Pakistan, whose need to develop human capital and improve the country’s educational levels is even more acute than India’s; Vietnam, whose essential tasks include providing small and medium-sized enterprises with access to credit, overcoming the shortage of skilled labor (especially in the export industries), and increasing the efficiency of investment; and the Philippines (“the country is suffering from under-investment as a result of political instability.”)
Following his formal remarks, Dr. Ali responded to a number of questions from meeting attendees. He criticized preferential trade agreements, saying that smaller countries would be marginalized as a result of “rules of origin” decisions made by more powerful countries. In addition, he observed that “the jury is still out” on Chinese non-performing loans because the rapid growth of credit suggests that unless the turnaround of state-owned enterprises continues the issue could continue.
Dr. Ali was promoted to Chief Economist of the ADB in 2002 after 18 years in positions including Deputy Treasurer, Senior Economist, Senior Strategic Planning Officer, and Assistant Treasurer in the Financial Policy Division. He holds a Ph.D. in Economics from Johns Hopkins University (1976).
EMTA members may Click Here to access Dr. Ali’s presentation on the EMTA website.