ADB warns of higher external risks

Political risk continues to plague Indonesia's economic recovery

In this story: International investors likely to return Political problems in Indonesia RELATED SITES

By Geoff Hiscock
CNN.com Asia business editor

MANILA, Philippines (CNN) -- External risks to Asia's five crisis economies have heightened because of the faster slowdown in the United States, the Asian Development Bank says.

But the bank still expects the five economies -- Indonesia, South Korea, Malaysia, Philippines and Thailand -- to grow by an average 4 percent this year and probably 5 percent in 2002.

The Manila-based bank, releasing its Asia Recovery Report 2001 this week, said the rapid fall-off in the growth of global electronics demand was another external risk factor.

It said Asian exports started to slow some time after September/October and the slowdown in 2001 would be "quite sharp".

But it says that while the adverse impacts will be significant, fears of a new crisis are exaggerated, with the five countries now much better placed to absorb shocks.

The five were hit hard by the 1997 Asian financial crisis which began with the floating of the Thai baht in July that year.

International investors likely to return

The bank expects lower U.S. dollar interest rates and ongoing economic recovery will tempt international investors back to regional equity markets this year, after the gains in regional equity prices and currency values posted in 1999 were largely wiped out last year.

GDP OUTLOOK 2001 Indonesia 4.2% South Korea 3.9% Malaysia 4.9% Philippines 3.1% Thailand 3.5%

"Net inflows of private capital are projected for 2001 for the first time since the (1997) crisis," it said.

The bank predicts economic growth rates this year will be 4.2 percent in Indonesia, 3.9 percent in Korea, 4.9 percent in Malaysia, 3.1 percent in the Philippines and 3.5 percent in Thailand. Its predictions are all below official forecasts, except for Thailand, where the official growth outlook for 2001 is 3.0 to 4.5 percent.

It said the incidence of poverty is beginning to fall in most of the affected countries -- a consequence of average growth last year of 7.1 percent, compared to 6.9 percent in 1999.

Political problems in Indonesia

But it warns that political problems in Indonesia -- where the Wahid administration is trying to deal with ethnic violence as well as financial difficulties such as bank and corporate restructuring -- are continuing to undermine investor confidence and could lead to "policy slippages".

"The country now faces exceptionally difficult fiscal circumstances. Interest on government debt alone absorbed 54 percent of tax revenue in 2000 and is budgeted to absorb 42.5 percent in 2001," it said.

In Malaysia, incomplete restructuring of domestic corporations and restrictions on foreign bank entry continue to undermine foreign investor confidence, it says.

Similarly, it sees Korea's slow progress in corporate restructuring as continuing to be a drag on the economy in the medium term.

Political risks have receded in Thailand and the Philippines, but policy weaknesses remain.

The bank, which targets poverty reduction in the Asia Pacific region, has 59 members. In the first nine months of last year, it lent about $1.8 billion to regional economies from Central Asia to the South Pacific. India, China, the Philippines and Indonesia were the biggest borrowers, accounting for almost $1.4 billion of the total.

Asian Development Bank
Asia Recovery Information Center

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