ADB president says Asia can withstand external shocks

Takehiko Nakao, president of the Asian Development Bank (ADB), is bullish about growth rates across the Asia-Pacific region despite potential external shocks, such as the US Federal Reserve tightening monetary policy and a possibility that the US might act upon the trade protectionist rhetoric so far articulated by president Donald Trump’s administration.

After the 'taper tantrum' of 2013, when emerging market currencies and capital flows were hit following remarks by then US Federal Reserve chair Ben Bernanke hinting at a tightening of US monetary policy, new fears arose when the Fed hiked rates by 75 basis points in 2017. But so far, Asian economies have not suffered.

Upward trajectory

“Developing Asian countries have not faced big turbulence after some volatility. It is a sign of the strong economic performance of these countries,” says Mr Nakao. The ADB expects Asia’s developing countries (excluding Taiwan, South Korea, Singapore and Hong Kong) to grow at about 6.3% in 2018. It predicts a similar figure for 2019.

What is more, Mr Nakao argues that Asia’s central banks are not compelled to follow the Fed’s monetary policy route. “Foreign reserves in a number of Asian countries are building up. They have a large buffer, which means interest and exchange rates have been stable. So why would they need to follow the US?” he says.

“Of course, they should look at domestic and international situations, so no country is fully independent. But I don’t think they need to follow the course of US monetary policy.” 

Some market participants argue that if the US were to act on its protectionist trade rhetoric, this could be a further risk for Asia. But Mr Nakao says this is not a given. “It’s too early to tell what the impact of US trade policy would be on Asia. [But] Asian economies are more and more based on regional demand, consumption and investment. Intra-regional trade gives Asia a buffer to any developments outside the region,” he says.

Backing openness

Mr Nakao maintains Asia is a strong promoter of a multilateral world order. “Asia’s people and Asia’s authorities have very strong views that open trade and investment regimes are key to the growth of the global economy,” he says.

This does not mean, however, that the globalised trade system has been perfect so far. “At the same time, countries should pay greater attention to the jobs and living conditions of those people affected by the impact of globalisation and of technological progress. We should have appropriate policies including tax systems, social security, education and training,” says Mr Nakao.

In terms of domestic growth, Mr Nakao thinks the region’s two largest countries, China and India, are faring well despite structural changes. In China’s case, the ADB president believes Beijing is properly addressing its debt bubble, with total leverage now accounting for more than 250% of China’s gross domestic product. “[China] already recognised these issues and the challenges to the stability of the financial system and it has started taking actions – such as having a new financial stability and development committee involving the Ministry of Finance and the central bank.”

More broadly, he believes this is symptomatic of China graduating to a new growth model. “To sustain growth in a balanced manner they need to address these issues. I think growth might slow down in some respects but what they are looking at is a new era of Chinese development, a more balanced growth,” says Mr Nakao.

India's return

India is also bouncing back, says Mr Nakao, following the implementation of the goods and services tax (GST) and the demonetisation policy, which aimed to slash the level of black money in the country by making Rs500 and Rs1000 notes invalid. “There was a slowdown last year, partly because of GST and the impact of demonetisation, but now we expect a little bit more solid growth. In December, we projected India’s growth will be 7.3% in 2018,” says Mr Nakao.

Meanwhile, countries in south-east Asia are posting strong growth figures. The ADB’s 2018 growth forecast for Vietnam and Myanmar range between 6.7% and 8%, and what is more, says Mr Nakao: “Thailand is also recovering from the impact of political turmoil. It is now growing at 4%.”