Malaysia, and to a lesser degree Indonesia, Thailand and the Philippines, remain more exposed to exchange-rate risk than other developing economies in East Asia and the Pacific as global financial conditions tighten, the World Bank said.
Companies and banks in these countries have sizable external debt, although foreign-exchange reserves currently appear adequate, the Washington-based multilateral lender said yesterday in its annual economic outlook report.
Monetary authorities need to be prepared to tighten their policy stance if capital outflows prompt currency weakness, the report said.
In the case of depreciation pressures in China, officials should allow greater adjustment through relative prices and closely monitor financial sector vulnerabilities as monetary policy further tightens, it added.
Growth in the region will continue to benefit from an improving global environment and strong domestic demand, the bank said, raising its forecasts for China, Malaysia and Thailand for this year and next year, compared with estimates published in April.
China is seen expanding 6.7 percent this year and 6.4 percent next year. For all of East Asia and the Pacific, the bank forecast economic growth of 6.4 percent this year, easing to 6.2 percent next year.
Most Asian currencies have surged against the US dollar this year as stronger growth prospects lured inflows.
Some of the growth risks highlighted by the World Bank include budget deficits, which remain high or are expected to rise in most countries from this year to 2019; uncertainty about economic policies in some advanced economies; and the escalation of geopolitical tensions, referring to UN sanctions on North Korea in response to its nuclear and missile tests.
The report covers 15 countries including China, Thailand, Vietnam, Malaysia and the Philippines.
While the outlook is broadly positive, the bank said growing protectionism could chill world trade, citing proposals for changes to the North American Free Trade Agreement to restrict or discourage imports and increasing uncertainty about access to the British market as Brexit talks get underway.
“What policymakers need to do is not be lulled by the fact that it’s been a good period for the global economy,” Sudhir Shetty, chief economist for the World Bank’s East Asia and Pacific region, said in an interview with Bloomberg TV.
Officials need to look for ways to mitigate some of the vulnerabilities that have built up even as the region is generally well-prepared, he said.
East Asia’s crucial position in global shipping and manufacturing supply chains means flaring tensions could disrupt trade flows and economic activity, while commodity prices could also spike over supply concerns, the report said.
Additional reporting by AP
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