Bangkok--14 Dec--Fitch Ratings Fitch Ratings says that economic growth is forecast to slow across much of Emerging Asia next year, while mounting upward pressure on prices raises the risk of higher average inflation rates. Regional GDP growth is forecast to decline to 7.7% in 2008 from 8.7% in 2007, but inflation is projected to increase to 4.8% from 4.3%. "The weaker growth outlook affects most countries in Emerging Asia, including China, India and Vietnam, which have led the region in recent years," said James McCormack, head of Asia sovereigns at Fitch. As notable exceptions, however, the agency expects growth in Indonesia to hold up based on strong domestic demand, and a modest economic recovery in Thailand following the return of a democratically elected government. In a special report entitled "Emerging Asia 2008 Outlook" to be released today, Fitch indicated that greater openness to trade and investment flows implies regional economies are increasingly affected by global developments and investor sentiment. The agency forecasts reductions in GDP growth in the US and Europe next year, and does not believe that increased intra-regional trade in Emerging Asia will forestall the effects of weaker activity in industrialised countries. Fitch said that the prospect of slower GDP and export growth poses no immediate threats to Emerging Asian sovereign ratings, since most countries continue to run current account surpluses and have record-high levels of official foreign exchange reserves. While Fitch judged that Emerging Asian economies are able to absorb a moderate external shock, the agency noted that a slowdown in the US that is more severe than anticipated would test regional external balance sheets more thoroughly. Moreover, if a sharp US slowdown were accompanied by a pronounced depreciation of the US dollar, the implications for Emerging Asia could be even greater. Currency appreciation pressures are nothing new to the region, and central banks clearly manage exchange rates to varying degrees, but Fitch suggested that it could be difficult to preserve Asian competitiveness via exchange rates if the US dollar were under intense downward pressure. A more immediate threat to Emerging Asian competitiveness is the increase in regional inflation. Rising food, energy and housing prices are evident in several countries, and there are risks that inflation could become more entrenched. The People's Bank of China has adopted a clear policy tightening bias, but it is uncertain how effective monetary policy will be if, as is possible, the authorities are reluctant to initiate actions that could undermine economic growth. Policymakers may also hesitate to raise interest rates if resultant increases in capital inflows put further upward pressure on exchange rates. Fitch views that central banks around the region may face similar policy dilemmas in 2008, trying to manage weaker growth, higher inflation and ongoing exchange rate appreciations. Fitch's "Emerging Asia 2008 Outlook" special report will be available shortly on www.fitchratings.com. Contact: James McCormack, Hong Kong, +852 2263 9925, [email protected]. Media Relations: Lisa Lim, Singapore, Tel: +65 6796 7214. Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, 'www.fitchratings.com'. Published ratings, criteria and methodologies are available from this site, at all times. Fitch's code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures are also available from the 'Code of Conduct' section of this site.