World Bank Cuts Developing East Asia GDP Forecasts

The World Bank lowered its forecasts for East Asia’s developing nations this year and next, and said the region must boost efforts to ensure financial stability ahead of interest-rate increases in advanced economies.

Developing East Asia will probably expand 7.1 percent in 2013 and 7.2 percent in 2014, the Washington-based lender said in a report today, down from April predictions of 7.8 percent and 7.6 percent respectively. China may grow 7.5 percent in 2013, lower than an April forecast of 8.3 percent, it said.

“The risks to the global recovery from the uncertainty surrounding the fiscal deadlock in the United States, the impact of the withdrawal of monetary stimulus from the advanced economies, an abrupt slowdown of investment in China, and unrests in the Middle-East remain prominent,” the World Bank said in its East Asia and Pacific Economic Update today.

The Asian Development Bank cut its forecasts for emerging Asia this year and next last week, as a slowdown in China and India is compounded by concern that the Federal Reserve’s impending reduction of its record stimulus will drive away investors. 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 had predicted a $5 billion cut to purchases of Treasuries.

Rate Increases

The first partial U.S. government shutdown in 17 years as House Republicans failed to agree on a budget with Senate Democrats and President Barack Obama would probably shave 0.1 percentage point from growth if it lasts a week, according to a Bloomberg survey, with the amount accelerating the longer the closing lasts.

The U.S. Treasury’s cash balance will be depleted no later than Oct. 31 and “possibly quite a bit sooner,” according to a note dated Oct. 5 from Goldman Sachs Group Inc. In the event of a missed principal or interest payment, there is a possibility that fund redemptions might broadly increase due to investor concern, prompting liquidation of Treasuries by money market mutual funds, it said.

Policy makers in developing East Asia need to be ready to respond to a steady increase in interest rates in advanced economies, and step up their efforts to maintain financial stability, the World Bank said today.

Market Volatility

“Some of the headwind will be coming from the international economy, and that largely is the tapering of the unconventional monetary policies especially in the Untied States,” Bert Hofman, the World Bank’s chief economist for East Asia and Pacific, told reporters in Singapore. “It will mean an increase of global interest rates for which countries would need to prepare. And they need to prepare for potential financial market volatility in the process.”

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.

Japan’s new strategy to revive growth, also known as Abenomics, could increase Japanese investment in the region and offset the impact of tapering on capital inflows in the region, the World Bank said.

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 by New York-based China Beige Book International showed last month.

Policy Buffers

While investment growth is moderating in economies such as Indonesia, Thailand and Malaysia, consumption and resilient remittances helped boost the Philippines in the first half of the year, the World Bank said. Excluding China, the region may grow 5.2 percent in 2013 and 5.3 percent in 2014, it said.

“Reducing reliance on short term and foreign currency denominated debt, accepting a weaker exchange rate when growth is below potential, and building policy buffers to respond to changing global liquidity conditions are some of the ways that can help countries be prepared,” Hofman said.

The region covered in the bank’s report includes China, Indonesia, Malaysia, Philippines, Thailand, Vietnam, Cambodia, Laos, Mongolia, Myanmar, Timor-Leste, Fiji, Papua New Guinea, Solomon Islands and other island economies in the Pacific.

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