No Brexit Impact for Southeast Asia in 2016 According to ADB

The Asian Development Bank said Monday it had cut its 2016 growth projection for developing economies in Asia and the Pacific to 5.6 percent, down from its earlier forecast of 5.7 percent, but added that the economies’ performance will remain solid and help offset softness from the US economy and near-term market shocks from Britain’s vote to exit from the European Union. ADB report said the growth forecast for 2017 of 5.7 percent made in March remains unchanged.

“Although the Brexit vote has affected developing Asia’s currency and stock markets, its impact on the real economy in the short term is expected to be small,” said Shang-Jin Wei, the ADB’s chief economist. “However, in light of the tepid growth prospects in the major industrial economies, policy makers should remain vigilant and be prepared to respond to external shocks to ensure growth in the region remains robust.”

China, the world’s second-biggest economy, is on track to meet earlier growth projections of 6.5 percent in 2016 and 6.3 percent in 2017, with the government expected to continue fiscal and monetary stimulus measures to support its targets. For East Asia as a whole, growth forecasts are unchanged at 5.7% in 2016 and 5.6% in 2017, the report said. Growth this year and next will be led by South Asia, which is expected to be the fastest growing sub-region, with India likely to meet its 2016 projected growth target of 7.4 percent and 7.8 percent next year.

In Southeast Asia, growth projections for 2016 and 2017 remain unchanged at 4.5 percent and 4.8 percent. Solid performance of most economies in the sub-region for the first half of this year was driven by private consumption, except for Vietnam where a worsening drought caused a contraction in the agricultural sector.

ADB first analysis over Brexit effect in Asia should not be to significant. According to ADB, it is still far too early to judge how Brexit will affect growth in developing Asia, as this will depend very much on how the future relationship between the UK and the EU evolves.

As things stand, the short-term economic impact of Brexit on developing Asia is expected to be small. The region’s merchandise exports to the UK accounted for only 2.2% of the total in 2015. As such, a slowdown in the UK is unlikely to significantly affect, through the trade channel, Asian growth on average, though the impact could be bigger
on some economies in South and Southeast Asia that are more dependent on the UK market. Developing Asia’s exports to the EU are higher, accounting for 13.3% in 2015 on average, with some economies shipping more than 40% of their total exports to the EU. The short term impact of Brexit on EU growth is likely to be limited.

Developing Asia has become more resilient to external shocks thanks to sound macroeconomic policy, stronger financial systems, and large buffers in the form of foreign exchange reserves. However, ADB predicts that if Brexit-induced uncertainty on global financial markets and economies turns out to persist and grow, Brexit’s impact on Asia could be greater through the channels of trade, investment, capital flows, exchange rates, and consumer and
business confidence. Brexit is a timely reminder of the need for developing Asia to continue its efforts to strengthen resilience against external shocks through sound macroeconomic management and structural reform.