The GDP of developing Asia is still forecast to grow at 6.2% this year and 6.4% next year, according to the ADB’s Asian Development Outlook 2014, which was updated today.
“The major threat to the region is that the planned reforms that countries are banking on may not be carried out on schedule,” Wei said, referring to India and Indonesia in particular. India, the ADB predicts, will grow 5.5% this year and 6.3% next year.
Wei was less concerned about quantitative easing, despite the “taper tantrum” last year that sent capital flowing out of some countries.
The ADB expects a US interest rate hike of 25-50 basis points to take place sometime in the middle of 2015.
Should the Fed move more aggressively, it would have “modest impact” on Asia, Wei said.
“If [a more aggressive rate hike] happens, it will be happening in the context of strong US fundamentals. High interest rates may be a shock to some countries in Asia, but there is an offset: it will likely improve the demand for products [exported to the US] from Asia.”
In addition, “interest rate premiums and stock prices in developing Asia have largely returned to their May 2013 levels [and] they have done so without large inflows of short-term capital, which reduces the risk of large outflows”, the bank said.
Turning to China, the ADB kept its forecast of 7.5% GDP growth this year and 7.4% next year.
“Carrying out structural reforms in China is more important than hitting the growth target. If employment remains healthy, then [slower growth] is no cause for panic.”
He added that if China’s economic growth turns out to be much weaker than expected, then the government could do a major stimulus.
The ADB believes any new stimulus shouldn’t be just another expansion of bank credit.
Wei suggested a broad-based tax cut. “That would be very helpful to spur investment without accumulating financial risk down the road. That could be strengthened if the government can compliment it with tax reform.”
