As identified by Asian Development Outlook (ADO) 2016, which is a report produced annually by Asian Development Bank (ADB), developing Asia will continue to contribute at least 60 percent for the growth of the world.
With slower growth in US and Euro zone together with transition taking place in China and reforms in India, ADO forecasts a growth rate of 5.7 percent in developing Asia for the year 2016 and 2017. Developing Asia consists of 45 economies listed under ADB.
Sub regions of Asia
Asia is divided into sub-regions for easy evaluation, namely East Asia South Asia, South East Asia, Central Asia and Pacific.
South Asia is expected of having the highest growth rate of 6.9 percent in 2016 and will reach 7.3 percent with the boost of Indian economy backed by financial reforms introduced. Nepal faced extremely difficult situation with natural disaster, earthquake and political impasse, in Maldives considerable drop is seen in high end tourism, and the buildup of excessive debt in Sri Lanka which is challenging the economic stability. Both Pakistan and Bangladesh had moderate growth due to sustainable macroeconomic policy reforms.
East Asia’s growth is expected to be slower around 6.5 percent and 6.3 percent respectively in 2016 and 2017, mostly contributed by slower growth of China backed by lower investments taking place in the economy. Slowdown in Chinese economy causing downward impact to the region as well as to the globe, estimated around 1.8 percent. South Korea is likely to have a steady growth this year whilst Taipei will be benefitted by higher government investment. Lower flow of tourism will slowdown Hong Kong and China. The inflation in the sub-region was down to 1.3 percent with lower prices of oil and other commodities and is expected to reach 2 percent by 2017 with increase of domestic demand and commodity prices.
Larger economies of South East Asia such as Indonesia and Philippines are contributing positively to the region’s outlook whilst Vietnam and Thailand keep it in an upward trend where Malaysia will face problems with lower oil prices. FDIs attracted to Vietnam on manufacturing and construction sectors made the economy having the strongest expansion in 7 years. Myanmar was also coming back with high hopes even after facing serious flood situation in the country.
The inflation in Asian region was as low as 2.2 percent in 2015 and 2014 contributed by low prices of food and fuel prevailed globally. The inflation is expected to pickup and be around 2.7 percent with raising domestic demand in the region and with the pickup of commodity prices internationally.
The ADO 2016 report is advising policy makers to pay attention to facilitate producers in the economy so that It will influence their decisions on investment aspects. Furthermore it is necessary to have sound macroeconomic management, encouraging female participation in the economy, increasing productivity and capital investment.
Diverging paths of India and China
Growth of China is slowing, in 2014 the growth was 7 percent and it came down to 6.9 percent in 2015 and it will continue to slowdown. China had few worrying issues in the economy, working age population started shrinking from 2012 onwards, further the cost of labour is rising and it has come to a situation that cost of labour in China is almost four times higher than in Bangladesh and Myanmar. The economy of China is in the process of shifting from industry investment side to consumption demand side, this transition is still underway and China still does not see the economic benefits in a tangible manner. External factors such as poor performance of advanced economies is also contributing for China to have a slower growth rate.
Although a sharp slowdown of the Chinese economy is unlikely, China would be ready with necessary policy measures to respond to such an adverse situation. The advanced economies have an impact out of Chinese slowdown and the impact will be greater on Asian economies. It is estimated that the growth moderation in China will reduce developing Asia’s growth around 0.3 percent. At the same time it might open up so many export opportunities for surrounding countries.
Whilst China is on a slowdown, India is on the opposite direction with a rapid growth filling the gap. Structural reforms envisioned to attract more FDIs to the country and it is necessary to have more reforms to raise private investments, the ADO 2016 report suggests. India enjoyed 7.2 percent growth in 2014 and rose to 7.6 percent in 2015.
Uncertain global outlook
The developing Asia is facing extreme challenges in the global conditions. Lower oil prices and commodities positively affected many economies in the world but the benefits were experienced in a much slower phase. Unpredictability of global financial markets led emerging markets to difficult situations and monetary conditions in US was adding more to the global slowdown, thus developing Asia growth rates are in much of a challenge. But India and China together with some of the ASEAN nations will keep the upbeat.
Growth of major Industrial economies namely US, Euro zone and Japan are still picking up without greater expectations. In total, said economies would reach 1.8 percent this year and would be slightly be better by 2017 reaching 1.9 percent. The private consumption, private investments and the government contribution accounted for the growth of the US economy. The private sector in US will continue to expand but would not be strong enough to reach higher growth rates, thus US economy may grow around 2.3 to 2.5 percent in 2017.
The recovery in Euro Area started by 2014, but did not keep the momentum with loosing consumer confidence and resurfacing of deflation, keeping the growth expectation at a lower level. Though the labor market situation was improving it is noteworthy that unemployment rate has reached historically high figure in Euro zone.
Japan experienced a zero growth in 2014 and reached 0.5 percent in 2015, still lacking the growth momentum. The main problem was lack of public investment and private consumption.
Behaviors of commodity prices
Over the past 4 years commodity prices have declined. Oil prices are expected to drop slightly in 2016 and recover with increase of demand and reducing of oil supply from non OPEC. International Energy Agency predicts that oil supply will exceed demand again this year (2016) but might be difficult to maintain the same supply volume as last year. Prevailing low oil prices have pushed oil producing companies to slow down investments and exploration activities, which will be a limiting factor for the oil supply. Any way demand for oil would be lower than last year due to lower global industrial growth and slowdown of China.
For the fourth consecutive year agriculture prices declined by 13 percent together with food prices. The reasons being prevailing low energy prices creating a favorable supply condition. To be specific palm oil, soybean meal and soybeans prices were dropped by 20 percent. Prices for wheat, maize, and rice also declined in 2015 with bumper harvests.
How Sri Lanka is performing
As mentioned in ADO 2016 Report widened budget deficit and drop of the foreign exchange reserves is challenging for Sri Lanka and it is vital for authorities to realign fiscal policy towards putting the country on a high and sustainable growth track. By 2015, 5.3 percent growth was visible on services sector whilst industry sector growth declined. Acceleration in financial activities and goods and passenger transportation contributed to the expansion of the services sector. Agri sector had a growth of 5.5 percent with a higher paddy, fruits and vegetable harvest. It is noteworthy that tea and rubber output were lower and below expectations. The reason for the apparel sector to stagnate was that the external demand was lower. Even the construction sector recorded a decline of almost 1 percent.
Due to decline in exports and lower remittances from the overseas workers together with capital outflow, the balance of payments came under pressure. Lower oil import bill and the increased tourist arrivals eased out the situation to some extent. The rupee was getting weaker towards late 2015 when the Central Bank stopped interfering on the foreign exchange market. As a result rupee depreciated considerably against USD in 2015. The weak demand for export crops and low prices will continue put to pressure on balance of payment. By February 2016 Fitch rating downgraded Sri Lanka to B+ from BB- due to increasing risk of refinancing and weaker public finances.
IMF is engaged on discussions to ease out the situation by offering financial assistance to face expected external imbalances. In an environment where exports will continue to suffer, GSP+ and lifting of fish export ban to EU, could be a positive expectation for the Sri Lankan economy. The government’s commitment to fiscal consolidation is critical to ensure capital inflow to the economy, ADO 2016 report says.
As per the ADO 2016, the slowness of the world economy stresses the importance of having structural reforms in Asia. It is the responsibility of the authorities in each country to bring in reforms that are required to reach the potential growth. The priorities and objectives could be different from country to country.
China would be interested in making their labor market more flexible where India might be keen in strategies on public infrastructure Investment. Sri Lanka could be more interested on a national development strategy that will facilitate investment, both domestic and foreign, together with job creation and rural development.
Every economy should be more concerned on short term risks such as hikes of US interest rates in the near future which will create difficulties for global financial market and challenges that could arise for the Agriculture sector due to adverse weather conditions. The authorities may also be challenged by unfamiliar risks such as producer price deflation, which has recently emerged in some economies in the region.
(Writer is the Secretary General / CEO
of the National Chamber
of Commerce of Sri Lanka)
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