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ADB Warns About Growing Flow of Foreign Money

Asian Development Bank economist Lee Jong-wha

Asian Development Bank economist Lee Jong-wha

The Asian Development Bank has raised its forecast economic growth for Asia's developing nations this year because of strong exports and consumption. But the bank warns about risks from the growing flow of foreign money to the region.

Robust economic expansion in China and India will lift average economic growth in developing Asia to 8.2 percent this year. The Asian Development Bank previously estimated growth at 7.5 percent.

Slowdown risk

However, growth is expected to fall to 7.3 percent next year because of the risk of a slow down among the large industrialized economies, a major destination of the region's exports.

China's economy is expected to grow 9.6 percent this year but that could slow to 9.1 percent next year. India's economic growth, however, is expected to increase next year to 8.7 percent from 8.5 percent this year.

Lee Jong-wha, the bank's chief economist, says foreign capital will continue to flow to developing Asian economies. But he warns that it comes with some risks.

"The massive inflows, and the possibility of sudden withdrawal, actually play a potential risk of disruption in the Asian2- financial markets and build pressure on the exchange rates," Lee said.

More foreign money

Last year, about $200 billion in investments flowed into the region and stayed. This contributed to an increase in foreign exchange reserves and stronger currencies - a growing concern for the region's export-dependent economies. For example, the Japanese central bank intervened in the foreign exchange market to weaken the yen to protect Japanese exports.

There are worries around the world that the fund inflow could trigger a currency war, in which central banks dump their own currencies to keep them weak. Lee says if they do, they will face another problem.

"The massive liquidity goes into the domestic financial markets so it creates another pressure on the inflation side," Lee said.

The Thai baht and the Malaysian ringgit have strengthened by nearly 11 percent since September 2008. But the Chinese yuan has appreciated only about one percent, and the Vietnamese dong has fallen nearly 15 percent because of the government's devaluation of the currency.

Expanding economies

The ADB, a non-profit development lender, forecasts Southeast Asian economies will expand an average of 7.4 percent this year. Singapore will be the fastest-growing economy in Southeast Asia this year at 14 percent, followed by Thailand at 7 percent. But growth in the sub-region will fall to 5.4 percent next year because of slowing export demand.

In Central Asia, growth this year is expected to be 5.1 percent, up slightly from the ADB's original forecast of 4.9 percent. Next year the region's economies are likely to expand about 5.7 percent. The ADB's 2010 update says exports of minerals, oil and natural gas are helping the regional expansion.