https://asia.nikkei.com/Economy/Ukraine-war-s-impact-on-Asian-economies-splits-global-lenders
Ukraine war's impact on Asian economies splits global lenders
World Bank pessimistic on region's outlook, while ADB sees continued strength
TOKYO -- Two major global development banks are split on the impact of the Ukraine war on Asian economies: the World Bank is pessimistic, while the Asian Development Bank is confident that growth in the region will "continue to be strong."
In its economic outlook for 2022 published Tuesday, the World Bank projects that the East Asia and Pacific region will grow 5%, down from the 5.4% it previously projected in October. The lender warned that the Ukraine war threatens an uneven recovery from the pandemic in the region.
But the Asian Development Bank, which put out its latest outlook report on Wednesday, forecast growth in Asia at 5.2% in 2022, despite headwinds such as the disruptions of commodity supply chains triggered by the Ukraine war.
"There's no doubt that the Ukraine war is going to delay the recovery," Aaditya Mattoo, chief economist of the East Asia and Pacific Region of the World Bank, told Nikkei Asia in a recent interview.
Mattoo said that the region faces a series of shocks that will set back growth momentum. The first is the Ukraine war, which is disrupting food and fuel supplies and has already led to big spikes in prices. "It's going to increase financial volatility, reduce confidence and hurt global growth as well," he added.
Other shocks include the slowdown in China stemming from lockdowns to quell a surge in COVID cases and the U.S. responding to accelerated inflation through monetary tightening, Mattoo said.
On the other hand, Albert Park, chief economist of the Asian Development Bank, told Nikkei Asia that its projection of robust growth rates "reflects our optimism about the growth potential of Asia."
Park said that inflation in Asia is much lower than in the rest of the world, with prices of essential foods such as rice and pork having come down compared with last year. "We're cautiously optimistic that inflation will not become a huge issue in Asia as it has in the rest of the world," said Park.
Both lenders warned that some countries are particularly vulnerable to the shocks of the Ukraine war. Mongolia and other central Asian countries are prone to a direct hit as they have strong trade links with Russia. "Our growth projection... in Central Asia is a bit reduced from growth in the previous year, mainly reflecting these direct vulnerabilities," said Park.
Mattoo at the World Bank argued that a spike in fuel prices will hurt net fuel importers including Cambodia, Thailand, the Philippines, and Vietnam, while net energy exporters like Indonesia and Malaysia are less vulnerable.
The World Bank economist highlighted financial vulnerabilities as a threat to recovery, saying that U.S. Federal Reserve rate hikes mean Asian countries that rely on external financing or have large current account deficits like Laos or Cambodia are likely to be hit harder.
"Governments are less equipped to deal with it because it's coming on top of a prolonged pandemic," Mattoo said. "Fiscal space has shrunk because debt has increased, and monetary space is shrinking because inflation is increasing."
Park concurs. "When the pandemic started, governments in the region were pretty aggressive about trying to be responsive and support vulnerable groups," he said. "What they realized quickly is that they couldn't really afford to keep doing that year after year because they were running deficits and the deficits are starting to get higher than they felt comfortable with."
Both economists argue that close monitoring of weakening Asian currencies will be needed.
The depreciation of currencies "could continue," Park said. "Countries are gonna have to decide, to some extent, how to manage this."
Mattoo pointed out that weakening currencies will pose greater burden to countries with large foreign currency-denominated debt and trigger further inflation of imported goods.
"That risk of capital flight is something that might add pressure on monetary tightening, which would be a little bit premature, given that... recovery is not even complete in many countries," he said.
As energy prices surge, Park and Mattoo called on governments to target support to people who need it, so they can create fiscal space for public investment in future growth.
The pandemic continues to be a risk factor, with Park pointing to the recent lockdowns in China.
"China is really a big risk factor," said Park. "Their response is to be very aggressive in locking down so if they're locking down half the cities in China, that would have a huge global economic impact and especially in the region."
Mattoo at the World Bank argued that governments and financial institutions across Asia should think about how they can create the conditions for sustained growth in the face of new shocks.
"The main lesson here is that countries which have strong fundamentals, and good policies, are able to negotiate the shocks which are going to be increasingly important in a globalized world," said Mattoo.
"A region, which has depended a lot on trade and investment and capital flows to grow, has to recognize that it is going to be vulnerable to shocks."