Asia-Pacific ready to face US sub-prime uncertainties in 2008, says UN

Domestic demand to cushion slower exports

The robust economic growth in the Asia-Pacific region will continue in 2008, despite uncertainties in the United States and continued appreciation of regional currencies. Strong growth in China and India, sound economic fundamentals and buoyant commodity prices will underpin the region’s resilience.

The positive outlook was presented by the United Nations Economic and Social Commission for Asia and the Pacific (ESCAP), in its Key Economic Developments and Prospects in the Asia-Pacific Region 2008 report launched today in Bangkok*. Also launched was the World Economic Situation and Prospects 2008, which outlines the United Nation’s forecasts of short-term global economic, trade and financial trends and some key global economic policy and development issues.

“Asia Pacific economies are well prepared to manage continued uncertainty in the external environment over the coming months”, said Ravi Ratnayake, Chief Economist of ESCAP, at the launch.
“The region’s main strength lies in healthy macroeconomic fundamentals -- countries have the room to adopt supportive fiscal and monetary policies if faced with significantly declining export growth, financial market volatility or inflationary pressures”, he added.

Developing economies in Asia-Pacific registered an impressive 8.2 per cent growth in 2007, despite a challenging international environment of financial market instability, which muted external demand and appreciated currencies. In 2008, developing economies in the region are expected to grow at a slightly lower but still robust rate of 7.8 per cent.

Despite the positive outlook, ESCAP warns of risks for the Asia-Pacific economies arising from an unraveling of the United States sub-prime mortgage problem and a slowing U.S. economy. There is a need to tread carefully given the signs of financial market volatility over the year ahead, UN economists warn.

Mixed prospects for large economies

Japan is forecast to grow at a lower rate in 2008, with its export sector and export-related investments suffering from a slowing United States economy. However, according to the report, continued strong growth in China and buoyant commodity prices are expected to generate export opportunities for economies in the region.

China faces a moderate decrease in GDP growth in 2008, owing to a slowdown in export markets and the continued efforts by the government to cool the economy. Domestic consumption will play an increasingly important role. Government spending in rural areas and social sectors are also set to increase. However, investment will continue to be the main demand component. Inflationary pressures will remain due to overheating.

India is forecast to sustain dynamic growth in 2008, being largely insulated from weakness in the global economy. Investment in the booming manufacturing and service sectors will remain the main driver of GDP growth, the ESCAP report says.

Asian firms and state funds continue to expand globally

ESCAP highlights the dramatic rise to global prominence of Asian companies as they executed huge deals in 2007 to buy up leading foreign enterprises. Robust growth in domestic markets has provided these firms with strong balance sheets and ample access to finance, enabling them to expand overseas. India has been the most prominent recent example -- the country’s share of global outward investment has trebled in the last four years.

The report points out the growing popularity of state investment funds, also called sovereign wealth funds, within the region. These funds are playing a larger role in global capital markets and are seeking to diversify foreign exchange assets and earn higher returns by investing in a broad range of asset classes.
The ESCAP report expects sovereign wealth funds to have a major potential impact on movements in international financial markets. Estimates put the current size of the world’s 25 sovereign funds at about $2.5 trillion, with an increase of $450 billion in 2007 alone.

Amid signs of more regional investment by the sovereign funds, the ESCAP economists recommend greater transparency and information about their investment strategies and portfolio holdings, which would also help to reduce concerns from investment-receiving countries.

Environmental degradation threatens growth

ESCAP also warns that environmental degradation could undermine the sustainability of the region’s growth. Taking China as an example, the report says damage to the environment is having a destabilizing effect. Figures published in 2007 indicate that air pollution, especially in large cities, is leading to a higher incidence of lung diseases, including cancer and respiratory system problems. This is an issue the economies will need to address to ensure longer term growth, the report notes.