World Bank Says Asia Faces Asset Bubbles, Overheating Risks

Jan. 21 (Bloomberg) -- Developing Asian economies face the risk of asset bubbles or overheating as the region’s growthoutpaces the rest of the world this year, the World Bank said. Developing East Asia, which excludes Japan, Hong Kong,Taiwan, South Korea and Singapore, will expand 8.1 percent thisyear, faster than a November estimate of 7.8 percent, the Washington-based lender said its Global Economic Prospectsreport today. South Asia will grow 7 percent in 2010, it said.

Asia is leading a recovery from the deepest global recession since World War II after policy makers cut interestrates and governments announced more than $950 billion of stimulus measures. Some Asian central banks are already raisingborrowing costs or taking steps to remove the excess cash in their banking system to fend off inflationary pressures.

In East Asia, “downside risks facing the region have diminished owing to improvements in the global financialenvironment and positive growth developments,” the World Bank said. Capital inflows may spur the “risk of yet another roundof asset bubbles, this time in emerging markets, the bursting of which could carry adverse effects over the short and mediumterm.” Economies including South Korea and Hong Kong are facing rising asset prices, consumer credit and corporate loans,spurred by record-low interest rates and government stimulus. China last week unexpectedly raised the proportion of deposits that banks must set aside as reserves as a credit boomthreatens to stoke inflation and create asset bubbles. Vietnam raised its benchmark interest rate by one percentage point to 8percent in the last quarter.

China Effect

China’s economic expansion will underpin an export-led revival for the rest of the East Asian region, according to thereport. East Asian exports are forecast to grow 6.6 percent this year and 8.8 percent in 2011, the lender said. “The recovery in business investment is expected to be gradual because excess capacity will first have to be workedout,” the World Bank said. “Recognizing that prospects for export-led recovery are less favorable than in the past, policyis likely to shift further toward fostering growth in household demand, helping, in turn, to offset the profile of weakergovernment spending.”

China’s economy is forecast to expand 9 percent this year and next, according to the World Bank. Malaysia and Thailandwill return to growth this year, while the economies of Indonesia and Vietnam are expected to accelerate, it said. EastAsian economies expanded 6.8 percent last year, the World Bank estimated.

Inflationary Pressure

In South Asia, policy makers will be “particularly responsive” to signs of building inflationary pressures becauseof a strong aversion to food-price increases, the World Banksaid. “Expected progressive tightening of monetary conditions over the forecast horizon will contribute to an easing ofinflationary pressures by 2011 across the region,” it said.“External demand for goods and services is anticipated to recover, while improving consumer and business confidence,combined with the lagged effects of expansionary monetary and fiscal policy measures and a positive turn in the inventorycycle, should contribute to strengthening domestic demand.”

India’s economy will probably grow 7.6 percent this calendar year and 8 percent in 2011, according to the report. The World Bank said capital inflows to South Asian economies could also lead to an appreciation of their currenciesand hinder exports. “Failure to mop up excess liquidity in banking systems or to bring down the region’s large fiscal deficits could lead tohigher inflationary pressures,” according to the report.

Another risk faced by South Asia is reduced remittances as growth in the Middle East “could surprise on the downside,”hurting migrant workers in the Gulf, the World Bank said.