Developing Asia forecast to grow at 6.3% but finance sector needs to be developed

Developing Asia is forecast to grow at a steady 6.3 per cent in 2015 and 2016, according to the Asian Development Bank.

The continued growth is thanks to domestic reforms in developing Asia, inflation easing, the  fall in commodity prices which have seen a significant decline since last year, and the economic recovery that is now underway in major industrial economies such as the USA, Japan and the euro area.

The forecast is lower than the five-year average for developing Asia of 7.1 per cent between 2010 and 2014, but the region still remains the fastest growing in the world.

Juzhong Zhuang, Deputy Chief Economist of the Asian Development Bank (ADB), announced these findings at the UK launch of Asian Development Outlook 2015, Financing Asia’s Future Growth, which was held at Asia House in London.

“Developing Asia (referring to the 45 members of the Asian Development Bank)  is not just the fastest growing but also the largest contributor to global growth, as Asia has accounted for nearly 60 per cent of global GDP growth,” he said. Inflation in Asia is forecast to drop to 2.6 per cent this year from 3.1 per cent in 2014.

“Inflation pressures are easing partly due to lower commodity prices,” he said. “Lower inflation is providing the scope for lower interest rates to stimulate economic activity. Asia is a net oil importer so the drop in prices has had an impact on Asia. Low oil prices present an opportunity for fiscal reforms in these markets,” he added.

Oil importers can exploit the opportunity to reduce costly fuel subsidies and raise fuel taxes while oil exporters can use the opportunity to pursue subsidy and tax reforms and diversify their economies, he said.

The UK launch of the Asian Development Outlook 2015 took place at Asia House in front of a packed audience. Copyright Miles Willis Photography

India is expected to grow at 7.8 per cent this year, faster than the People’s Republic of China, which is only expected to grow at 7.2 per cent; India is forecast to grow at 8.2 per cent in 2016, faster than China which is forecast to grow at 7.0 per cent in 2016.

But the growth of developing Asia could be hampered if the Greek debt crisis worsened or if the recession in the Russian Federation deepened, he warned.

He said other risks were slower than expected growth in China or India and possible capital outflows due to an impending increase in US interest rates. Geopolitical tensions could also cause a spike in oil prices which would hike inflation and could unsettle the region, he explained.

He put China’s slowdown down to a shrinking labour force, rising wages and an appreciating currency. “The Chinese Government is not coming up with large-scale fiscal stimulus and incomes have increased significantly so growth has slowed down. The decline in the working age population started in 2011 and since 2007 wages have shot up and are now much higher than in India,” he added.

He said whilst India was driving growth in South Asia, Papua New Guinea was driving growth in the Pacific owing to the commencement of gas production there. Central Asia conversely was seeing a slowdown owing to lower oil prices and the recession in Russia. Inflation was expected to increase in Central Asia owing to depreciating currencies.

In India, however, reforms were beginning to bear fruit following Narendra Modi’s election last year; infrastructure bottlenecks and land acquisition issues were being dealt with, and the Indian Government was making efforts to reduce the burden of regulations on SMEs. “We expect growth to pick up from 7.4 per cent last year to 8.2 per cent next year,” Mr Zhuang said.

Delegates mingled during the breaks at the Financing Asia’s Future Growth event. Copyright Miles Willis Photography

China will account for 32 per cent of global GDP growth in 2015, whilst India will account for 15 per cent, close behind the USA which will account for 14 per cent and the euro area is expected to account for just under four per cent of global GDP growth. ASEAN will account for eight per cent of global GDP growth in 2015. China has contributed the most, namely 15 per cent, to cumulative global import growth between 2009 and 2014, the report found.

“Southeast Asia is benefitting from imports and the general improved environment of the West. We expect Indonesia and Thailand especially to pick up,” Mr Zhuang said. Indonesia’s growth was being spurred by the reduction in fuel subsidies which added a significant amount to the Treasury, he said. “The budget spend has reduced in Indonesia and consumer and business confidence has improved there,” he added. “Malaysian growth is expected to take off this year as well,” he added. The combined GDP of the 10 ASEAN economies is expected to grow by 4.9 per cent in 2015.

Mr Zhuang said the current account surplus in developing Asia was expected to go up to 2.5 per cent this year, compared to 2.3 per cent last year.

However oil exporters in Central Asia will see current account surpluses disappear and Kazakhstan will fall into current account deficit, he said.

Financial development of these markets must be pursued in order to support growth, inclusion and stability, he added. Financing Asia’s Future Growth was therefore the special theme chapter of this year’s Asian Development Outlook 2015.

“Asia lags far behind advanced economies in the financial sector resulting in high cost of capital. There are lots of opportunities to improve financial stability, which is important for growth and equity,” he said.  He said financial deepening was associated with higher investment and faster growth. Currently Asia suffers from a relatively high cost of capital and difficult to access finance.

Developing Asia’s bank deposits currently equal only 60 per cent of regional GDP, compared with the average of 110 per cent of GDP among members of the Organisation for Economic Co-operation and Development, and its bond markets equal less than half of GDP.

Many countries in developing Asia have underdeveloped bond markets, especially corporate bonds, and lack sufficient instruments for long-term finance that are needed to build capital.

Another indicator of capital market security is pension funds and mutual fund assets. On this front Asia lags far behind Brazil, Mexico, the US, UK and Australia.

Delegates networked during the coffee break. Copyright Miles Willis Photography

Developing Asia also suffers from high interest rates. The average lending rate is 16 to 17 per cent whereas in OECD countries lending rates are lower and the spread is much lower, so the financial sector is more efficient in OECD nations, Mr Zhuang said.

But he warned that financial development did not automatically lead to inclusive growth. “Financial deepening can increase inequality so financial sector development may not be inclusive,” he pointed out.

Whilst foreign banks could enhance the efficiency of state-owned banks, it was important to ensure broad access to finance for all to ensure financial inclusion, he said.

Asia has a large scope to make finance more inclusive. “In developing Asia less than 27 per cent of adults have a bank account compared to high income countries where 93 per cent of adults have one. The global median is 38 per cent.”

Only a third (33 per cent) of enterprises in developing Asia have a line of credit line or loan from a financial institution compared to more than half of enterprises in Latin America (54 per cent), he said.

Two of the major deterrents to borrowing in Asia are high interest rates and high collateral requirements. Deterrents to opening personal bank accounts are high account fees, documents required (such as ID) and geographical access. Solutions include reforming state banks, mobile banking, developing equity and bond markets, building deeper and more liquid capital markets and fostering a long-term investor base, the report said.

He said shadow banking and unrestrained household debt expansion were risks to the stability of Asia’s finance sector that could be mitigated by tighter banking regulations, especially to clamp down on insider trading and crony lending, as well as bringing out macroprudential polices (such as demanding higher deposits for mortgages and limits on foreign currency borrowing), foreign direct investment and diverse foreign funding.

The launch was followed by a panel discussion in which Madhur Jha, Senior Global Economist at Standard Chartered Bank, said there were concerns about debt in the corporate sector in China and across the board in Korea but overall the “leverage was not that high and it was manageable.”

“China will convert local government debt to local government bonds which is good for financial sector deepening. It is taking place but it will be slow,” she said. As for shadow banking in China, she said: “We have no issue with it. China is experimenting with interest rate liberalisation at the margin. They are trying to bring reforms and deregulation in their own way.”

Panellist Madhur Jha, Senior Global Economist at Standard Chartered Bank, left with CEO of Asia House Michael Lawrence, right. Copyright Miles Willis Photography

She said financial inclusion did not lead to poverty reduction if it was based on micro-lending but might if it was based in savings accounts and insurance. She added pulling the informal sector into the formal sector would help drive growth and that Asia should copy Sub-Saharan Africa where mobile and electronic banking have taken off. However she also predicted oil prices would go up in the second half of this year owing to a huge drop in the supply of shale oil and possible disruption in general supply. “If there is a deficit, prices will shoot back so the impact will only be felt for the next quarter or two,” she said. “We predict it will be US$100 a barrel in the first quarter of next year and will average US$75 a barrel this year,” she said.

Panellist Shazali Sulaiman, Partner at KPMG, Brunei Darussalam, left and Madhur Jha, Senior Global Economist at Standard Chartered Bank, right. Copyright Miles Willis Photography

Brunei is an example of a country that has been badly affected by the drop in oil prices as it is a net exporter of energy. Ninety per cent of the Brunei Government’s revenue comes from oil and gas and no one there pays taxes. Shazali Sulaiman, Partner at KPMG, Brunei Darussalam, spoke about the urgent need to diversify Brunei’s economy. He said Brunei lacked corporate governance and a bond market. A sustainability fund had been set up in 2008 to cope with a fluctuation in oil prices and money from that had been used to cover the recent shortfall, he explained. But he said political stability was crucial to make sure developing Asian economies grew and that uncertainty about the elections in Thailand and Malaysia could change the region’s growth trajectory.

Mark Bowman, Director General, International and EU at HM Treasury, said: “It is a good thing if China moves onto a more sustainable growth path and if India realises its full potential.” He continued: “The Indian Government has an ambitious agenda but whether it can implement it remains to be seen. There are risks from outside the region which include US monetary policy and the impact of that and broader economic and geopolitical risks in the world including in Europe.”

CEO of Asia House Michael Lawrence, left with panellist Director General, International and EU at HM Treasury Mark Bowman, right. Copyright Miles Willis Photography

He said other risks, apart from a slowdown in China, included “domestic reform fatigue.”

“We have been putting a lot of effort into building ties with the region and engaging in economic and financial dialogues. The UK is the most popular European destination for Chinese investment and the UK is the biggest G20 investor country in India. India invests more in the UK than in the rest of the EU combined,” he added.

Regarding the UK’s membership of the China-backed Asian Infrastructure Investment Bank (AIIB), seen by some as rival to the World Bank and the US and Japan-backed ADB , he said: “We believe very strongly that banks should be designed to complement and reinforce what each other does and there is a strong case for another player in the region’s development.” He said the UK hoped the AIIB would live up to best international standards. “Our position is to engage from the inside and to join the negotiations so we now have a seat at the table,” he added.

There were plenty of opportunities for networking at the Financing Asia’s Future Growth event. Copyright Miles Willis Photography

naomi.canton@asiahouse.co.uk

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