Jul 23, 2008. Central banks in emerging East Asian countries are “behind the curve” in fighting inflation, which poses the biggest risk to the region’s outlook, the Asian Development Bank said Tuesday.
The Manila-based multilateral bank warned that rapidly rising inflation threatens to undermine consumer spending and may lead to a wage-price spiral that could derail the region’s growth. The risks outweigh concerns of an export-led slowdown, the bank said, calling on central banks to “be more decisive in tightening monetary conditions.”
“Most countries in the region have actually fallen behind the curve in terms of monetary-policy tightening,” said Jong-Wha Lee, head of the ADB’s Office of Regional Economic Integration. Countries can “tighten gradually and anchor people’s expectations to prevent further wage increase.”
The ADB’s report said: “In the People’s Republic of China, Hong Kong, and Vietnam, in particular, relatively rigid exchange-rate regimes—combined with rising food prices, rapidly growing domestic demand, tightening labor markets and strong foreign-exchange inflows—could push inflation out of control.”
Aside from inflation, other factors that dim growth prospects for the region are a protracted slowdown in the U.S. and turmoil in financial markets.
ADB Press Release, 22 Jul 2008.
Click this link to download the full report: Asia Economic Monitor, July 2008.
Viet Nam’s economy has fallen under increased scrutiny in recent months—as perceptions over its immediate future have dimmed. In May and June, the three major rating agencies—Standard and Poor’s, Moody’s, and Fitch Ratings— all downgraded Viet Nam’s debt outlook to “negative.” The dong has come under intense pressure over the past several weeks, with the black market exchange rate some 15% below the official level—non-deliverable forward contracts suggest that the dong may drop as much as 30% against the US dollar over the next 12 months. The stock market, after gaining 23% in 2007, has plummeted about 60% since the beginning of the year. A question increasingly being asked is whether Viet Nam is on the verge of a financial disruption, perhaps similar to the 1997 collapse in Thailand, which ignited the Asian financial crisis.
Although Viet Nam’s fundamentals appear in better shape than Thailand’s in 1997, it remains critical that authorities continue to act decisively to correct economic imbalances. Viet Nam’s current plight is also sending some shivers up the economic spines of other emerging East Asian economies.