Your Excellencies, ladies, and gentlemen:
I am honored to be here once again to brief you on ASEAN’s economic prospects. Given today’s uncertain environment, it is extremely important to remain vigilant in monitoring global events. Let me discuss our view of ASEAN’s short-term economic outlook, risks and policy issues.
- II. Outlook for ASEAN
Last year, as expected, growth in most ASEAN economies moderated following the robust recovery in 2010. Europe’s sovereign debt problems, along with a weak US recovery, dragged down export demand. At the same time, the region had to deal with the economic impact of catastrophic disaster in Japan; along with massive floods in several ASEAN countries.
The external environment this year remains difficult and uncertain. Europe is expected to experience a mild recession, while the US could grow about 2% this year. Both regions need to restructure, and that will take time. Clearly, ASEAN cannot rely on these advanced economies to drive export growth as they have in the past. Japan will return to modest growth thanks to strong reconstruction demand. In China, growth will continue to moderate gradually, as it continues steps to rebalance its economy. The pace of moderation, however, will be monitored closely. China has ample fiscal space to intervene if need be. Actually, we see GDP growth in China about one percentage point higher than the government’s announced target of 7.5% for this year.
Within ASEAN, Indonesia should continue robust growth on strong domestic demand. Brunei Darussalam will return to its trend growth thanks to high petroleum prices. Thailand and the Philippines, both of which suffered a severe drop in exports toward the end of last year due to supply chain disruptions, are expected to show vibrant growth. Singapore, and to some extent Malaysia, will experience some slowdown, as they will be affected more by external conditions.
Viet Nam continues to battle inflation. And Myanmar is expected to accelerate reforms. But, importantly, we expect growth in Cambodia, the Lao People’s Democratic Republic, Myanmar, and Viet Nam—the so-called CLMV countries—to continue to outpace growth in middle-income ASEAN. Speaking here in Phnom Penh, it is particularly encouraging to note that continued faster growth in CLMV countries supports a major theme in ASEAN’s economic agenda, that of economic convergence among its members. It is an important aspect of strengthening ASEAN’s centrality as a hub of Asian regionalism.
All in all, despite a difficult external environment, we still expect ASEAN growth this year to remain robust at 5.2%, above last year’s rate of 4.6%.
Looking toward 2013, we expect the external environment to improve somewhat, helping boost exports. At the same time, domestic demand should continue to grow. ASEAN members’ reforms to meet the 2015 ASEAN Economic Community target should also help economic activity. Therefore, we see GDP growth in 2013 higher nearly across the board. Overall, ASEAN GDP will likely expand above 5.5%.
- III. Risks and Policy Issues
Now, let me turn to the three major risks we see in the short term to this generally robust economic outlook.
First, while financial markets today are relatively calm following the Greek bond restructuring and second bailout approval, serious risks remain in peripheral eurozone economies and in a few core European economies as well. Should financial panic happen, contagion could spread and liquidity tighten. If European banks deleverage more sharply, banks in other advanced economies may not be able to provide sufficient liquidity due to their own financial and regulatory environment. This could place considerable pressure on ASEAN economies with strong financial links to these institutions.
So it is important for ASEAN members to stay vigilant and ready to act. Some have begun to gradually loosen macroeconomic policies and create fiscal space to counter any potential impact. While the optimum policy mix naturally varies among countries, should a crisis reoccur, any response—as in 2008—must be prompt to limit damage; decisive to maintain domestic confidence; and coordinated to minimize the impact of contagion on the real economy.
The second risk is commodity prices, especially oil. Geopolitical tensions and the expectation of supply shortages have driven prices up recently. An oil price shock this year could affect inflation to varying degrees. The question, of course, is whether any shock would be temporary or drive prices higher long term. A brief rise in price may not require any policy response as the inflationary effect is unlikely to drive inflation expectations. But a longer term trend may require policy responses—including targeting fiscal assistance to those worst affected, rather than draining budgets with general fuel subsidies.
The third risk involves coping with capital flows, which could become both large and volatile. With accommodative monetary policies in advanced economies, ASEAN’s higher interest rates and returns will continue to attract capital inflows. Although welcome, they can bring with them macroeconomic challenges by destabilizing exchange rates and hurting exporters, adding excessive credit to fuel asset bubbles, or creating the additional risk of sudden reversals, which can expose financial vulnerabilities.
Prudent macroeconomic policy is extremely important. It is also important to deepen and broaden financial markets. Although good progress has been made in financial markets in the past decade, more is required under the ASEAN Economic Community Blueprint. Banking and finance need to keep abreast of the evolving global environment in risk management, regulation, surveillance and the like. These are naturally long-term solutions. But they are key to ASEAN progress toward economic integration.
Facing these three potential challenges, ASEAN needs to upgrade its resilience and consolidate its growth momentum over the medium term by continuing its push toward greater cooperation and integration. I would like to cite five policy agendas for ASEAN in this regard, in its role as so-called “hub” of Asian regionalism.
First, ASEAN needs to improve physical connectivity. I am pleased to inform you that progress toward establishing the ASEAN Infrastructure Fund, or AIF, is going well. It should be incorporated by the end of April and begin project financing by the end of this year.
Second, it is important to ensure that the necessary and complementary software—such as transport and trade facilitation and regional power trade agreements—are in place to ease economic integration. To remain competitive, the region also needs to foster a business environment conducive to greater investment and product innovation. ASEAN can further prepare for a competitive future by accelerating investments in human capital, and turning the region’s diversity into comparative advantage.
Third, ASEAN should contribute to regional public goods, such as fostering environmental sustainability, better managing natural disasters, and pooling resources for food and energy security. This also requires strengthening institutions, such as the ASEAN Secretariat and the functional institutions that are spread among ASEAN members.
Fourth, regional policy cooperation is essential to foster the kind of economic transformation that can help mitigate the effects of external shocks, while strengthening internal resilience. The establishment of the Chiang Mai Initiative in 2001 and its multilateralization in 2009 are significant achievements for strengthening regional and global financial safety nets. Ongoing discussion on further strengthening Chiang Mai Initiative Multilateralization is also encouraging. ASEAN together with its plus-3 partners can strengthen the institutional capacity of the ASEAN+3 Macroeconomic Research Office, or AMRO, to help foster better regional surveillance and policy coordination.
Finally, the region must be ready to deal with the social impact of any slowdown in growth. Learning from recent social repercussions elsewhere, it is critical to ensure that growth opportunities are inclusive, reducing inequalities within countries as well as across ASEAN itself.
Ladies and gentlemen:
I believe ASEAN’s current outlook shows the region is doing well. Short–term risks, if not handled well, can create long-term problems. There is always the need to have policy tools ready to respond to sudden shocks, even while continuing the timeline toward an ASEAN Economic Community. I am confident that ASEAN has the strength and political will to deal with the challenges ahead. ADB stands ready to support ASEAN’s vision of becoming a true economic community, strengthening its role as the hub of Asian regionalism.
In closing, I would like to extend warm welcome to all of you. I look forward to seeing you all again in Manila in early May, where we will be discussing much of this in greater depth at ADB’s 45th Annual Meeting.