'Developing Asia will maintain strong growth'

Hong Kong, China - Developing Asia will maintain its strong economic growth in 2015 and 2016 supported by soft commodity prices and recovery in the major industrial economies, said a new Asian Development Bank (ADB) report.

ADB's flagship annual economic publication, Asian Development Outlook 2015 (ADO), released recently forecasts that developing Asia will achieve gross domestic product (GD) growth of 6.3% in both 2015 and 2016. The region also grew 6.3% in 2014. "Developing Asia is making a strong contribution to global economic growth," said ADB Chief Economist Shang-Jin Wei.

"Falling commodity prices are creating space for policy makers across the region to cut fuel subsidies or initiate other structural reforms.

This is a key opportunity to built frameworks that will support more inclusive and sustainable growth in the longer term," he said. From the trough of the global financial crisis in 2009, developing Asia has contributed 2.3 percentage points to global GDP growth - nearly 60% of the world's annual 4.0% pace.

Eight economies in the region posted growth exceeding 7.0% in nearly every year of the post-crisis period, including the People's Republic of China (PRC), the Lao People's Democratic Republic and Sri Lanka.

Growth in the United States (US), where recovery seems to have turned a corner, is leading major industrial economies. While signs are mixed in the euro area and Japan, soft oil prices and accommodative monetary policy will support growth. As a group, these economies are forecast to expand by 2.2% in 2015, up 0.6 percentage points from 2014, and 2.4% in 2016.

With improving external demand for the region's outputs, an expected pickup in India and in most members of the Association of Southeast Asian Nations (ASEAN) could help balance gradual deceleration in the RPC, the region's largest economy.

Growth slowed in the PRC in 2014 on weak fixed asset investment, particularly in real estate. As the government proceeds with its structural reform agenda, further slowing of investment is expected to diminish growth to 7.2% in 2015 and 7.0% in 2016.

This is a much more moderate rate than the average growth of 8.5% in the period since the global financial crisis. India is forecast to overtake the PRC in terms of growth as the initial phase of government efforts to remove structural bottlenecks is lifting investor confidence. With the support of stronger external demand, India is set to expand by 7.8 % in FY2015 (ending March 31, 2016), a sharp rise from 7.4% growth in FY2014. This momentum is expected to build to 8.2% growth in FY2016, aided by expected easing of monetary policy and a pickup in capital expenditure.

Financial systems in developing Asia have improved in the past decade but further deepening of banks and capital markets and greater access to finance is essential to enhance growth and equity in the region, the report said.

Inclusive growth

"Improving the efficiency of the banking sector and capital market can boost investment, productivity, and innovation," said ADB Chief Economist Shang-Jin Wei.

"Reducing the dominace of state-owned financial institutions and developing local currency bond markets are some of the important steps needed in promoting Asia's financial development," he said. Despite much progress, developing Asia's financial systems still lag advanced countries by a wide margin.

Bank deposits, for example, equal 60% of regional gross domestic product (GDP), compared with an average of 110% among members of the Organisation for Economic Cooperation and Development. Developing Asia bond markets equal less than half of GDP, or about a third of the 140% average in advanced economies.

Financing Asia's Future Growth, the special theme chapter in ADB's Asian Development Outlook 2015 (ADO), said that boosting developing Asia's average ratio to GDP of liquid liabilities - currency plus checking and interest-bearing accounts in financial institutions - from about 65% to 75% would add almost 0.4 percentage points to average annual GDP growth per capita. "Data shows that financial development does not necessarily lead to a reduction in income inequality", said Wei.

"It is, therefore, important to also pursue financial inclusion policies - measures that can boost access to financial services by low-income households and small and medium-sized enterprises," he said.

The empirical evidence in the ADB report suggests that, while financial development tends to alleviate inequality in its early stages, inclusive growth becomes more likely with concerted government efforts to improve financial inclusion.