East Asia Posts Solid Growth While Bracing for A Global Downturn

News Release No. 2006/136

Contacts:
Pichaya Fitts
pfitts@worldbank.org

Buntarika Sangarun
bsangarun@worldbank.org

Thai GDP growth remains at 4.5% as consumer and investor confidence adjusts to
high oil prices, rising interest rates, and policy uncertainties

Bangkok, November 14, 2006—East Asian economies are expected to register their fifth consecutive year of strong growth in 2006,  backed up by a substantial decline in poverty, according to the World Bank’s latest East Asia Update, launched today. But on the horizon, growth rates in Transition Economies and Newly Industrialized Economies are expected to slow, reflecting a likely weakening in US growth in 2007 and a consequent drop in exports from East Asia.

Growth and Poverty Reduction

The Update shows that growth in the countries of Emerging East Asia* is likely to reach around 8 percent in 2006, the second strongest pace in the five-year long economic expansion underway in the region. Current estimates also suggest that the number of people in East Asia living on or below $2 a day will fall to around 550 million (or 29.3 percent of the population) in 2006. This 1.5 percentage point drop in the past year means that around 25 million people in the region have emerged from severe poverty since 2005. 

A growth rate in China of more than 10 percent is underpinning the region’s overall GDP growth. Strong export growth has been a common feature sustaining activity throughout the region. Domestic consumption and investment performance has been much more varied, reflecting the impact of higher oil prices and higher domestic interest rates in the first half of 2006, among other factors. Improved public finances and lower public debt also provides the fiscal space for higher public spending, if required, especially in infrastructure and social services.

“We may have seen the peak in oil prices and interest rates in the region,” says Homi Kharas, the World Bank Chief Economist for East Asia and Pacific. “So the prospects are good for domestic demand to strengthen and to offset weaker exports.”

Thailand

According to the latest Thailand Economic Monitor—the findings of which were discussed in Bangkok today in conjunction with the regional Update—Thailand ’s GDP growth will remain at 4.5% in 2006, the same as last year.  High export growth has greatly contributed to Thailand ’s economic growth this year, even as domestic demand has remained depressed as Thailand adjusted to high oil prices, rising inflation and interest rates and policy uncertainties. Growth in 2007 is projected to be only 4.6 percent slightly higher than 2006; though domestic demand is expected to perform better, export growth will be lower on account of lower growth in the global economy and world trade.

“Average GDP growth has fallen from 6 percent during 2002-04 to around 4.5 percent during 2005-07 period, and this is not good for reductions in poverty or inequality,” noted Dr. Kazi M. Matin, World Bank Lead Economist for Southeast Asia based in Bangkok.  “This is in part because the easy gains from utilization of post-crisi excess capacity are over. Higher growth can now come mainly from efficient adjustment to high oil prices, higher private investment to expand capacity, as well as higher productivity growth.” He also added,  “As a middle income country, Thailand’s growth must come more and more from more rapid productivity growth, and for that the firms have to innovate products and processes, the workers have to acquire more skills to compete with labor in China, Vietnam, India and other competitors producing technology intensive goods, and the Government has to urgently support these initiatives of firms and workers through policies and investments.”

Thailand needs to focus on supply-side reforms to promote private investment and higher productivity growth and several measures can be taken quickly with good effect.  Reducing regulatory burden is one and this could include rationalization of price controls, clarification of foreign ownership rules, speeding up customs processing, and so on. Renegotiating the US-GSP that is expiring or signing the Thai-Japan FTA are two steps that would help tto sustain strong export growth. Similarly, supporting improvements in secondary education, and vocational training including English language and IT skills and promoting greater private participation in education service delivery can relax skill-constraints that the firms identified as holding back investment and productivity growth. Also, actions to improve infrastructure services could reduce costs and raise rates of return to private investment.

Dr. Kirida Bhaopichitr, Country Economist and author of the Thailand Economic Monitor, highlighted that “Thailand ’s strengths in terms of sustained macro-stability and increasing openness remains. The fiscal situation remains strong, with the Government running a balanced budget this year and a slight deficit next year.  Public debt as a share of GDP is 41 percent, and is projected to remain below 50 % over the next 5 years.”  Furthermore, she highlighted that Thailand’s external vulnerability is low—with current account in surplus and end-August 2006 foreign reserves stood at US$59 billion (three times short-term external debt), and total external debt stood at around 28% of GDP, one of the lowest in the region.. Openness of the Thai economy, by ane measure, has increased significantly over the last five years

Dr. Bhaopichitr also noted, “Political uncertainty has diminished after the interim government was established in October 2006.  While consumer and investor confidence declined in the beginning of the year, it recovered somewhat in September 2006. Nevertheless, both consumers and investors are waiting to see the policy direction of the interim government.” 

China and Intra-Regional Trade

The Update finds that intra-regional trade is still growing more strongly, but much of this is still in parts and components. “Over the past decade, China has overtaken the US and Japan as a destination of East Asian exports,” said Update author Milan Brahmbatt. “However, two-thirds of these exports are processed and re-exported to developed countries so it is premature to claim that China is more important for the region than global markets.” 

The Update also finds that foreign exchange reserves in Emerging East Asia continue to accumulate, rising to over 2 trillion dollars at present with China holding half of these reserves.  The region’s rising current account surplus – up to over $300 billion in the year to the second quarter of 2006 - continues to finance the lion’s share of reserves growth. Net foreign direct investment inflows remain strong, totaling $101 billion in the year to the second quarter of 2006.  On the other hand there have been net outflows of portfolio and other financial capital flows from the region over recent quarters reflecting interest rates in the region that are now lower than in the US and growing acquisition of foreign assets by East Asian residents.

Investing in the Young

The report also has a special focus on the 450 million youth in the region and discusses the challenge of how to prepare this group to become the drivers of future growth. It notes the high and rising return to higher skills and the importance of connecting school and work. The report noted that failure to seize this opportunity to train them more effectively for the workplace, and to be active citizens, could lead to widespread disillusionment and social tensions.