Fourteen emerging countries in East Asia, with an average 2010 growth forecast of 8.1 per cent, have been advised to unwind monetary and fiscal policy stimulus on the back of strong economic recovery, the Asian Development Bank (ADB) said in this month's edition of its Asia Economic Monitor (AEM).
The growth forecast was revised up from the April figure of 7.7 per cent. The forecast for the region's economic growth in 2011 remains at 7.2 per cent.
"While most emerging East Asian economies are assured of a sharp Vshaped recovery this year, it is too early to say that the 'V' stands for victory," said Srinivasa Madhur, senior director of the ADB's Office of Regional Economic Integration, which produced the AEM.
"Ensuring the sustainability of the recovery depends heavily on the correct timing, policy mix, and pace at which economic stimulus is withdrawn. The private sector must be strong enough to take over," he said.
Emerging East Asia comprises the 10 Asean economies plus mainland China, Hong Kong, South Korea and Taiwan.
While China's economy should expand 9.6 per cent this year, Hong Kong, South Korea, Singapore and Taiwan are forecast to grow by a solid 6.2 per cent. Led by Singapore's rapid 12.5 per cent growth, these economies should benefit from a rebound in investment and rapid export growth.
Together, Asean is forecast to expand 6.7 per cent this year before moderating somewhat in 2011.
The report said it was now time for the region to unwind policy stimulus. In terms of policy mix, a strategy of normalising monetary policy first and consolidating fiscal policy subsequently was more appropriate for most of emerging East Asia.
Considering the need to rebalance the region's sources of growth, there is merit in normalising monetary conditions through a mix of currency appreciation and interestrate adjustments rather than entirely through policyrate hikes, it said. The pace at which economies unwind stimulus should depend on the speed of recovery as well as evolving risks.
In South Korea, Malaysia, Singapore, Taipei, mainland China and Thailand tightening has already begun, and should continue at what appears to be an appropriate pace, the report noted.
"It's critical for each country to withdraw the stimulus at an appropriate pace, but greater regional coordination, especially on exchange rates, could spur regional demand and help global economic rebalancing," Madhur said.
Global economic uncertainties, destabilising capital flows and unintended policy errors while unwinding the stimulus measures are highlighted as three major risks.