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ADB Sees Momentum for Asia Recovery, Puts Growth at 7.5%

Asia and Pacific economies are recovering strongly from last year's slowdown and should coordinate on unwinding easy policy and freeing up exchange rates, the Asian Development Bank (ADB) said on April 13. Developing Asia, a diverse group of 45 economies including China, Azerbaijan, India, Singapore and Papua New Guinea, was set to grow 7.5 percent in 2010 and 7.3 percent in 2011, picking up from 5.2 percent in 2009, the ADB said in its Asian Development Outlook 2010.

Last September, the ADB forecast Asian growth of 6.4 percent in 2010. Having weathered the global financial crisis better than most regions, Asia faces new risks, the bank said.

''The region's early recovery is attracting large capital flows, the perils of which were made clear in the 1997/98 Asian financial crisis; volatile capital flows could again have serious implications for exchange rates and money supply,'' the ADB said.

''Moreover, the quick return to high growth could accelerate the increase in consumer and asset prices.''

The surge of foreign money could complicate domestic policy.

The ADB said more flexible exchange rates would help manage capital flows, and as economies moved towards them it was acceptable to place some limits on foreign money flows.

''More flexible exchange rate systems are in the region's own interest, and carefully designed capital controls that mitigate disruptive capital inflows may be desirable during the transition to greater flexibility, at least in the short run.''

Governments and central banks also needed to pull back their support and allow business and consumers to sustain the recovery.

''Unusually easy monetary policy throughout the region cannot be kept for too long, and there is a need to revert to a normal stance,'' the ADB said. A shift toward more flexible exchange rates would also help wean economies of a reliance on exports.

''Reducing the excessive rigidity imposed by heavy foreign exchange market intervention would allow exchange rates to move more in line with their fundamentals, and help economies rebalance demand toward domestic sources.''

Concerns about losing export competitiveness could be allayed through coordinating a shift in exchange rate policy, and ''carefully designed'' capital controls could offer protection against disruptive short-term flows and currency volatility.

''In particular, when (China) insists on maintaining its limited flexibility of exchange rate, other Asian countries are unlikely to allow the exchange rate to strengthen,'' the report said.

''To resolve the dilemma, policy coordination among developing Asian countries should be initiated.''

The ADB also said despite the region's robust performance in the global crisis, there was plenty of room to strengthen regional policy frameworks to prevent asset price bubbles or other imbalances.

The two biggest economies covered in the report, China and India, were both expected to grow strongly in 2010.

China, the world's third-largest economy and a key driver for the region, was expected to grow 9.6 percent in 2010 and 9.1 percent in 2011 as stimulus measures were phased out.

India would lead South Asia with 8.2 percent growth in 2010 and 8.7 percent growth in 2011.

Southeast Asia growth was seen bouncing to 5.1 percent in 2010 from 1.2 percent last year - the region's slowest growth since the Asian crisis.

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