Emerging Asia GDP Forecasts Cut Amid Fed Taper Concern

A slowdown in China and India is reverberating across the region with the Asian Development Bank forecasting expansion at a four-year low this year, putting pressure on policy makers to bolster their economies.

Developing Asia, which excludes Japan, will probably expand 6 percent in 2013 and 6.2 percent next year, the Manila-based lender said in a report today. Growth this year will match the pace in 2009, according to the ADB. In July, it had forecast expansion of 6.3 percent this year and 6.4 percent in 2014.

Slowing growth in two of Asia’s biggest economies is compounded by concern that the Federal Reserve’s impending reduction of its record stimulus will drive investors away from emerging nations and spur volatility in financial markets. The MSCI Asia Pacific Index of regional stocks has gained 7 percent this year, trailing a 19 percent gain for the Standard & Poor’s 500 Index.

“Asia and the Pacific 2013 growth will come in below earlier projections due to more moderate activity in the region’s two largest economies and effects of quantitative-easing nervousness,” Changyong Rhee, the ADB’s chief economist, said in a statement.

Speculation over the future of the Fed’s quantitative easing has whipsawed global assets since May, when Chairman Ben S. Bernanke first signaled cuts may start in 2013. While the sudden outflow of capital exposed vulnerabilities, fears of a 1997-type crisis are unwarranted, given current-account surpluses and ample foreign-exchange reserves in most of the region’s developing economies, the ADB said.

Credit Bubbles

China, the world’s second-largest economy, may grow 7.6 percent this year as the government tries to curb credit bubbles and the shadow-banking system, the ADB said. India may expand 4.7 percent in the fiscal year to March 2014 as weak infrastructure and lagging investment constrain growth, it said.

Southeast Asia will probably grow 4.9 percent this year and 5.3 percent next year, the ADB said. Consumer prices in developing Asia are forecast to rise 3.6 percent in 2013 and 3.7 percent in 2014 as constrained expansion and commodity prices hold inflation in check, it said.

Developing Asia faces the twin challenges of maintaining financial stability and sustaining growth, the ADB said. The threat of diminished global liquidity from cuts in the Fed’s purchases had earlier sparked the biggest emerging-market currency selloff in five years, with the Indian rupee and Turkish lira hitting record lows.

Financial Regulation

The Fed last month said it wants more evidence of an economic recovery before paring its $85 billion-a-month bond buying program, surprising analysts who predicted a $5 billion cut to purchases of Treasuries. The U.S. has begun final extraordinary measures to avoid breaching its debt limit, Treasury Secretary Jacob J. Lew said, after the government this week had its first shutdown in 17 years after Congress’ inability to pass a budget caused a partial closure of services.

The largest developing nations for the first time have the worst market opportunities as optimism for stronger growth shifts to the U.S. and Europe, according to a Bloomberg Global Poll last month. India fared the poorest, followed by Brazil, Russia and China, a worldwide poll of investors, analysts and traders who are Bloomberg subscribers showed.

Still, “compared with 1997, most regional economies now have robust current account surpluses and much higher foreign reserves relative to their modest amounts of short-term external debt,” the ADB said. Also, the countries have “significantly strengthened their macroeconomic management, financial regulation and supervision, and corporate governance.”

Growth Engines

Developed economies are turning into global growth engines as some emerging-market counterparts decelerate, the International Monetary Fund said in a report for Group of 20 leaders this month.

China’s economy slowed last quarter as growth in manufacturing and transportation weakened, and increases in business-investment and real estate revenue eased, a survey from New York-based China Beige Book International showed last month. In India, central bank Governor Raghuram Rajan surprised analysts by raising the benchmark rate in his first policy review on Sept. 20, seeking to rein in inflation that’s hurt the poor and dimmed economic prospects.

China’s economic expansion isn’t slow compared to other countries, with policy makers determined to stabilize growth and focus on quality and efficiency, the New Straits Times cited President Xi Jinping as saying, following an interview with some Malaysian and Indonesian media.

Xi, who is touring Southeast Asia this week ahead of a summit in Bali of leaders from the Asia-Pacific Economic Cooperation forum, called on emerging markets to boost their preparedness against risks and urged major developed economies to adopt responsible macro-economic policies to avoid negative spillover effects, according to the report.

Elsewhere in the world, Australia’s trade deficit widened more than estimated in August, while building permits fell more than economists predicted from a month earlier.

The European Central Bank will probably leave its benchmark interest rate unchanged at a meeting today, according to a Bloomberg survey. In the U.S., a report from the ADP Research Institute may show companies added 180,000 workers to their payrolls in September, according to a separate survey.

Before it's here, it's on the Bloomberg Terminal.