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ADB economist stresses need to put stability first

Asia's developing economies must act quickly to contain overheating and move toward more flexible currencies to ensure sustainable growth, Asian Development Bank's chief economist said yesterday.

"Macroeconomic stabilization is the immediate priority," Ifzal Ali said as the ADB unveiled its annual outlook report forecasting robust growth for developing Asia of 7.6 percent this year and 7.7 percent next year.

Rapid growth

"To stay on this high growth path, Asian countries will have to quickly address macroeconomic stresses that are arising because of the very rapid [8.3 percent] rate of growth in 2006," he told reporters in Tokyo.

Fast growth wa fueling sharp increases in house, equity and consumer prices. The huge foreign currency reserves built up in developing Asia were also inflating their money supplies, leading to asset market bubbles, he said.

"These overheating pressures which are simmering will need to be addressed," Ali said.

"I think the time has now come for developing Asian countries to take a more open view on allowing greater flexibility in exchange rates," he added.

Falling oil prices and monetary tightening should help to take some steam out of the economies, Ali said. However, unless their currencies are allowed to rise, interest rates will have to go up, choking off investment, he said.

The ADB economist said developing Asia should also make better use of its foreign exchange reserves which are together worth almost US$2.3 trillion.

He said about half of that could be invested in higher yielding assets than at present -- believed to be mostly US-dollar instruments - -- with the returns used to pay down debt or invest in infrastructure and other projects.

Active management

One country that already has a policy of actively managing its reserves is Singapore, which set up an investment management company in 1981.

"The potential is there. It is a question of realizing risk in an orderly and in a prudent manner. It is a step, I think, which all countries in the region will move towards in the next few years," Ali said.

East Asia as a whole will see growth of 8.0 percent this year and next following 8.7 percent in 2006, the Manila-based ADB said.

China's economy is seen expanding 10 percent this year and India by 8 percent. In 2008, China's expansion will slow slightly to 9.8 percent but India is likely to grow 8.3 percent.

US effect

South Korea's export-led economy is likely to cool this year with growth slowing to 4.5 percent from 5 percent because of a moderate slowdown in the US, the ADB said. But it predicted an uptick in growth next year.

"As 2007 progresses, the external environment could turn more favorable with the global downturn bottoming in the second half," it said.

In Southeast Asia, growth should broadly maintain its pace from 2006, the ADB said.
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