The number of vehicles sold at the 34th Bangkok International Motor Show was lower than last year's when transaction spiked unnaturally due to the first-car buyer scheme./EPA/NARONG SANGNAK
Developing economies in East Asia, including Thailand, are generally able to cope with external shocks, but recent developments suggest emerging risks of overheating due to excessive measures to boost domestic demand amid strong capital inflows, the World Bank says.
Driven by strong domestic demand, the economies of developing East Asia and the Pacific continue to be an engine of global growth, growing at 7.5 per cent in 2012 - higher than any other region in the world, said the World Bank in its analysis of the regional economy, released yesterday. As the global economy recovers, the report projects that regional growth will rise moderately to 7.8 per cent this year and ease to 7.6 per cent in 2014.
"Most countries in developing East Asia are well prepared to absorb external shocks, but continued demand-boosting measures may now be counterproductive, as [they] could add to inflationary pressures," said Bert Hofman, World Bank East Asia and Pacific chief economist.
"A strong rebound in capital inflows to the region induced by protracted rounds of quantitative easing in the US, EU and Japan may amplify credit and asset-price risks."
Policy-makers in East Asia and the Pacific are urged to continue to be vigilant to react to shocks in the world economy, but be prepared to withdraw stimulus as the world economy recovers.
Several countries need to manage strong capital inflows by maintaining an appropriate macro policy mix, sufficient flexibility in the exchange rate and macro-prudential policies. Most countries could increase productive capacity by investing in infrastructure and human capital, and thus pave the way for continued high and equitable growth.
For Thailand, post-flood reconstruction efforts jump-started investment activity last year. Some ambitious water-management projects are still to be launched and progress on these should keep investment activity on a high gear in the near to medium term, the report said.
However, spending on measures to boost consumption increased the fiscal deficit to 3.2 per cent of gross domestic product in 2012. The government's rice-pledging scheme, by which it buys rice from farmers at prices higher than the world market, has its costs: It could help push government debt towards the statutory ceiling of 60 per cent of GDP.
Also last year, household incomes received a boost from the introduction of a new minimum wage in six provinces. Other policy measures, including incentives for auto purchases, also boosted consumer spending. Private consumption rose 3.4 per cent in the year, from 0.5 per cent in 2011.
The report warned that the risk of an asset boom was emerging in several markets on capital inflows. Asset valuations are moving ahead of fundamentals. Stock-market indices have surged by 56 per cent in the Philippines and by 48 per cent in Thailand in the past 14 months alone.
Large capital inflows are also exerting upward pressure on the region's currencies. Most policy responses to contain excessive inflows have drawbacks on macroeconomic and financial stability. Unsterilised intervention creates excessive liquidity and feeds inflation, whereas sterilisation keeps interest rates high and attracts more inflows, while capital controls are leak-prone and distort capital flows.
Last year, Thailand's international reserves were up by US$6 billion (Bt174 billion). Flows to the banking sector have expanded significantly, comprising 2.6 per cent of GDP in 2012 in net terms, twice the size of portfolio flows into the country.
"Consequently, the Thai authorities would need to be aware of the risk of rapid credit expansion on the back of those flows," report said.
The World Bank expects inflows to the region will continue to surge on restored investor confidence and less bank deleveraging globally. Gross capital flows to the region rebounded strongly to $46.8 billion in the first quarter of 2013, up 86.3 per cent from a year ago. In 2012, the gross inflows were $139.9 billion.
Beyond the risks affecting the region as a whole, EAP economies face idiosyncratic risks. In Indonesia, an erosion of consumer real purchasing power through higher inflation, higher consumer and investor borrowing costs from tightened policy, weaker commodity markets, and regulatory uncertainties and uncertainties related with the 2014 elections may all negatively affect private investment spending. a halving of investment growth to 5.0 percent in 2013 would reduce GdP growth by one percentage point. In Malaysia, lower international commodity prices would reduce export earnings; and, post-election fiscal consolidation could disrupt the growth momentum. The Philippines is concerned with asset bubbles in the stock market and in the housing sector.
Vietnam faces several downside risks: core inflation is still high at 11 percent; foreign reserves are still low by international standards; asset quality in credit institutions is worsening; public debt could rise sharply if some contingent liabilities in the banking sector and SoEs are realised; and delayed implementation of restructuring of banks, state enterprises, and public investment will could affect investors' confidence.
While policies are needed to address short-term risks, the World Bank also urged the countries in the region to ensure inclusive growth in the medium term.
In 2012, the number of people living under $2 a day was 512 million, down from 959 million in 2002. Given the region's growth dynamism, the middle class in East Asia is likely to grow dramatically in absolute terms in the coming decade, and it is likely to be largely urban.
The challenge is to ensure that growth is sufficiently inclusive, so that inequality does not rise too fast, that lagging regions and segments of society share in the region's increasing prosperity, and that the middle class grows equally as a share of the population.
"The East Asia and Pacific region contributed around 40 per cent of global growth in 2012, and the global economy continues to rely on the region's growth, with investor confidence surging and financial markets remaining solid," said Axel van Trotsenburg, World Bank vice president for East Asia and Pacific.
"Now is the time for countries to focus on helping the remaining poor, with more and better quality investments to accelerate inclusive growth."
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