Asia Faces ‘Much Greater’ Global Risks: ADB

Asian economies are facing "much greater downside risks" now because of the possibility of a recession in the U.S. and Europe and the threat of destabilizing capital flows, the Asian Development Bank said.

The biggest challenge for policy makers in emerging East Asian nations is to safeguard growth against the threat of another global economic crisis, the Manila-based lender said in its Asia Economic Monitor report today. Uncertainty over the world economy means officials in the region must have "sufficient flexibility" to adjust policies quickly, it said.

"The cautiously optimistic outlook for emerging East Asia is subject to much greater downside risks now than just a few months ago," the ADB said. "The global economic recovery could flounder if the euro zone and the US fall back into recession, causing another global financial crisis. Large and destabilizing capital flows could complicate the region's macroeconomic management and jeopardize economic growth."

Asian policy makers have shifted their focus to shielding growth, rather than stemming inflation, as Europe's debt woes and a struggling U.S. economy increase the risk of another global recession. Indonesia and Thailand cut interest rates last month, while the Philippines in October unveiled a fiscal stimulus package to spur the economy.

Emerging East Asian economies may grow 7.2 percent next year after expanding 7.5 percent in 2011, according to the report today. That's lower than the lender's September forecast for 7.6 percent growth this year and 7.5 percent in 2012, it said.

Slower Growth

"Despite the weaker external environment, robust growth should continue into next year -- though at a slower pace," the ADB said.

Asian stocks and currencies have retreated amid concern that the region's export-reliant economies will suffer the impact of diminished global demand as the euro region struggles to stem its debt crisis. The MSCI Asia-Pacific Index (MXAP) fell about 16 percent last quarter, the biggest drop since the last three months of 2008.

"The lingering eurozone debt crisis could boost risk aversion among investors, with rapid swings in risk appetite boosting capital flow volatility beyond the spurts and stops seen in the third quarter this year," the ADB said. "Consequently, exchange rate volatility would follow from large but fickle capital movements."

Emerging East Asia won't be immune to a "major" slowdown in advanced economies, which would hurt the region's economic growth and pose "significant" policy challenges, the ADB said.

"With the euro zone's sovereign debt crisis unfolding and risks of faltering global recovery rising, macroeconomic policy must remain cautious and prudent," it said. "Should the euro zone fall into a full-blown financial and economic crisis, emerging East Asian economies must respond promptly, decisively, and collectively."