Developing Asia can weather Fed's tapering, says ADB

Reuters

* ADB expects Fed to begin tapering early next year

* Poses challenges, but no crisis for developing Asia, says

ADB

* ADB says India and Indonesia have "sufficient" FX reserves

* Developing Asia's growth forecast at 6.0 pct in 2013 vs

6.1 pct in 2012

* China's growth revised down to 7.6 pct in 2013, 7.4 pct in

2014

* India's growth revised down to 4.7 pct for 2013, 5.7 pct

in 2014

By Rosemarie Francisco

MANILA, Oct 2 (Reuters) - Asian economies can ride out the

storm when the Federal Reserve finally begins ending years of

easy money, with even those most at risk, India and Indonesia,

holding enough currency reserves for rough times ahead,

according to the Asian Development Bank.

The ADB reckoned the U.S. central bank would wait till early

2014 to slow its dollar printing presses, after the Fed

surprised markets last month by leaving its $85 billion monthly

bond buying programme unchanged.

"We are anticipating that is something that would start

early next year," ADB assistant chief economist Joseph Zveglich

told a news conference, adding that it was crucial that the Fed

communicates its timeline for reducing the stimulus programme.

Updating forecasts for 2013 and 2014, the Manila-based

lender said on Wednesday that growth in developing Asia is

likely to be slower than it thought three months ago, when it

last revised forecasts to an annual outlook released in April.

It now reckons the region, grouping 45 countries in

Asia-Pacific, will grow 6.0 percent in 2013 and 6.2 percent in

2014, little changed from last year's growth of 6.1 percent.

Between May and August, emerging markets were gripped by a

sell-off after the Fed signalled that it would taper its

bond-buying stimulus once the U.S. economy improved.

The sudden capital outflows caused some alarm, but ADB said

worries over potential for a regional meltdown were misplaced.

"Fears of a repeat of the 1997 Asian financial crisis are

unwarranted," ADB said in a statement. "The region is now in a

stronger position to weather the storm, with many economies

running current account surpluses and holding large foreign

reserve stockpiles."

The bank said developing Asia's current account surplus is

expected to narrow to 1.6 percent of GDP in both 2013 and 2014

from 1.8 percent last year.

Whereas high external deficits resulted in India and

Indonesia suffering far sharper falls in their currencies during

the emerging markets' sell-off, ADB took comfort in their levels

of reserves.

"Widening current account deficits have long made both

economies more susceptible to shifts in market sentiment, as

have fiscal deficits in India. Fortunately, both have sufficient

foreign exchange reserves, enough as of August to cover imports

to India for 7 months and to Indonesia for 5 months," ADB said.

With inflation generally subdued, Zveglich did not expect

central banks in Asia to tighten monetary policy to slow a

potential exodus of capital when the tapering begins, and said

they were more likely to move in tandem with policy changes in

advanced economies.

The partial U.S. government shutdown due to the political

impasse in Washington over the budget represented a clear

downside risk the longer it lasted, but it would not have an

immediate impact on the region, the ADB economist said.

NEED FOR REFORM

China is expected to grow 7.6 percent and 7.4 percent this

year and the next, ADB said, trimming its July forecasts of 7.7

percent and 7.5 percent respectively.

The slowdown in the world's second biggest economy may usher

in a more sustainable growth path as Chinese authorities seek a

balanced development strategy away from its previous export- and

investment-led growth model, the bank said.

ADB made significant downward revisions to 2013 and 2014

growth forecasts for India, Indonesia, Malaysia and Thailand.

India is expected to expand 4.7 percent and 5.7 percent this

year and the next, sharply lower than previous forecasts of 5.8

percent and 6.5 percent, respectively, with growth hampered by

weak industry, investment and external demand and delays in

structural reforms.

The Philippines, the only country in East and Southeast Asia

whose growth forecast was revised up, is expected to grow 7

percent this year against an April forecast of 6 percent. The

country has kept pace with China to become one of the two

fastest growing nations in the region this year.

ADB also said inflation in Asia is likely to remain subdued

this year and next, but some countries were likely to see

mounting price pressures. Inflation was expected to accelerate

in Indonesia as it scales back fuel subsidies, the bank said.

ADB said the past few months' market volatility highlighted

a need for structural reform, including governance reforms.

"Recent financial market volatility and a pullback in

economic activity have added fresh urgency to long-term

structural action which can ensure development gains are not

lost, and future growth benefits all."

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