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ADB tags 4 biggest risks to Asian economy

THE weakening Chinese economy, a lethal Covid-19 variant, the war in Ukraine, and the tightening of monetary policy in rich nations are the four biggest risks to the region’s economy, according to the Asian Development Bank (ADB).

In a curtain raiser for the ADB Annual Meeting on Monday, ADB President Masatsugu Asakawa said these four factors are the dark clouds hanging over the sustained recovery of the region from the economic downturn caused by the pandemic.

Asakawa noted that in 2020, the region contracted 0.8 percent, the sharpest decline in regional GDP growth in 60 years. In 2021, this rebounded to a 6.9-percent growth and this year it is expected to post a growth of 4.3 percent.

“The pace of recovery in the various economies remains very, very uneven among the economies. So we have to bear in mind, [there are] four possible downside risks to the economic outlook of this region,” Asakawa said.

The slowdown of China’s economy is being driven by what Asakawa said was a “very stringent zero-Covid policy” while there remains a possibility that a more lethal variant of Covid-19 could spread and cause economies to close once more.

Asakawa said the Russian invasion of Ukraine is one of the main reasons for commodities to see high prices, while the tightening of monetary policy in advanced economies is causing “instability in the financial markets” in the region.

However, of these risks, Asakawa said the Russia-Ukraine conflict poses the most significant risk to the region. Still, Asakawa said the impact of remittances will be limited in the region except for Central Asia, Caucasus and Mongolia which have close trade and economic ties with the Russian Federation.

There were both direct and indirect effects of the war in Ukraine that impacted countries in the region to varying degrees.

The direct impact of the war is through trade as well as remittances coming from Russia. In terms of trade, Asakawa said importers of food and energy will be significantly affected and causing their import bills to balloon.

The inflation pressure that this creates leads countries to tighten monetary policy. The ADB recently said the Bangko Sentral ng Pilipinas (BSP) is now the most aggressive in terms of raising interest rates to cool inflation. (https://businessmirror.com.ph/2022/09/15/bsp-most-aggressive-in-hiking-policy-rates/)

“A number of central banks in this region has already started to raise [their] policy interest rate to quell the inflation pressure which is an additional constraint on economic growth prospects of this region,” Asakawa said.

“And also in direct impacts includes the kind of deterioration of market sentiment, which could depress consumers, producers and investors confidence. So, flight to safety and tighter financial conditions globally, might spur some sort of capital outflow movement from this region,” he explained.

Taxation for food security, climate

These challenges are bringing other development constraints such as food insecurity, aging, and climate change to the fore, among others.

One way to mobilize financing for these, Asakawa said, is through domestic resource mobilization (DRM) or taxation. He said this may be needed in order to improve the fiscal situation of countries in the region.

The Covid-19 pandemic has led to high deficits and debts among ADB’s developing member countries (DMCs) due to the need to purchase vaccines. While vaccines remain important and ADB will still provide funding for this, other efforts to raise funds will be “inevitable” for countries in the region.

“Each country should pick up the right timing to do so. Timing cannot be too early, cannot be too late, but I’m quite sure the timing will come. So, in that process, I think DRM domestic resource mobilization [DRM], is very, very important, which means how to raise domestic tax revenue,” Asakawa said.

Asakawa said DRM is important in making the social welfare system of countries robust and financially viable. Addressing social issues such as aging, for example, will be important for countries in the region even if many still have young populations.

Efforts to design a low-cost public pension system are crucial, as well as public medical insurance schemes in order to provide the needs of the elderly. This can be financed through taxation.

Financing climate change and even the Sustainable Development Goals (SDGs) can also be done through DRM such as the imposition of carbon and environmental taxes.

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