Vietnam emerges as Asia's growth leader as China slows

BANGKOK — The World Bank downgraded its annual growth forecast for the Asia-Pacific, a region buoyed by Vietnam but not by enough to offset China’s slowing economy.

In its latest economic forecast published Tuesday, the bank sharply downgraded China’s growth to 2.8% from 5% in April. That slowed the region’s forecast expansion to 3.2% for this year, down from 5% growth projected in April. The report covers East Asia, Southeast Asia and the Pacific islands, but excludes Japan and the two Koreas.

Vietnam is predicted to lead the region with annual growth of 7.2%, up from 5.3% in the April forecast. The outlook for Indonesia was unchanged at 5.1%. Excluding China, the region is expected to grow 5.3% in 2022, with projections lifted for Malaysia, the Philippines and Thailand.

“The big source of growth in the region today has been the release from the restrictions that countries were obliged to maintain, either through rules or the spontaneous restraints that people exercised on consumption during the COVID period,” said Aaditya Mattoo, chief economist for East Asia and the Pacific.

Most of the region has reopened to travel and loosened pandemic restrictions, although China maintains its zero-COVID policy and imposes sporadic lockdowns in big cities. The Philippines, Thailand and Cambodia will return to pre-pandemic output levels by the year’s end, the bank predicted. Output in China, which rebounded earlier to exceed pre-pandemic levels, continues to outpace the region despite slowing growth.

The growth forecasts for Laos and Mongolia were lowered as inflation, higher interest rates and weaker currencies squeeze the countries’ purchasing power and debt-servicing capacity. Their growth, and that of China, will be under 3% this year, but their economies are expected to bounce back next year with growth of 5.5% forecast for Mongolia, 4.5% for China and 3.8% for Laos.

Aside from Laos and Mongolia, most of the region would be able to bear the U.S. Federal Reserve’s accelerated interest rate hikes “relatively well,” Mattoo said, as more debt is domestic rather than foreign currency-denominated.

Growth in the Pacific islands will mostly come from Fiji, which is forecast to expand by 12%, while the Solomon Islands, Tonga, Samoa and Micronesia are projected to contract.

But the price caps, subsidies and trade restrictions that kept regional median inflation down to 4% — lower than most of the world — could limit long-term growth by supporting economically inefficient food production and high-carbon energy sources.

The report found that the Asia Pacific has price controls on more goods than any other developing region except the Middle East and North Africa. But support measures are skewed toward rice and other grain farmers, although consumers increasingly prefer vegetables, fruits and meat.

The current measures are also reversing years of declining subsidies for fossil fuels. In Indonesia and Malaysia, fossil fuel subsidies have risen from about 1% of GDP in 2020 to over 2%. This reversal could compromise carbon emissions reduction targets and keep countries dependent on fossil fuel imports, making them vulnerable to future price shocks, the bank warned.

The World Bank urged governments to balance long-term sustainability with short-term public welfare and political prerogatives as Indonesia, Thailand and Malaysia face elections next year. Targeted income transfers would be more cost-effective than blanket handouts and subsidies, the bank said. In Thailand, the bank found that 2.2 billion baht ($58.2 million) in cash transfers would reduce poverty by 1 percentage point, an outcome that would require 11.2 billion baht in fuel subsidies.

Prolonged price supports will swell budget deficits and draw funds away from infrastructure, health and education, the bank said. Thailand, the Philippines and Malaysia will end the year with higher public debt to GDP ratios, which are expected to exceed 60% in all three countries.

Investments to support long-term growth will be necessary, as demand for the region’s exports has shown signs of weakening. The World Bank noted quarterly reports from U.S. retailers indicating slowing demand for electronics, many of which are manufactured and assembled in China, Vietnam, and Malaysia. A recession in major economies this year could shave more than 1 percentage point off growth in the Asia-Pacific region, with Malaysia taking the biggest loss, at 0.8 percentage point.

This article was originally published on the Nikkei Asia website and has been republished with full permission from the author. To view the original article please click here.

Publication Date
Tuesday 4th October, 2022