(EnergyAsia, December 7 2011, Wednesday)— East Asia, excluding Japan, faces rising risks from a deep global economic downturn brought on by Europe’s sovereign debt problems and an anemic US economy, said the Asian Development Bank (ADB).

But the bank added in its latest Asia Economic Monitor report that the impact on the region would manageable due to its diversified export markets and increased domestic demand as a source of growth.

In the worst case scenario with the Eurozone and US contracting as much as they did in 2009, ADB said emerging East Asia would still grow by 5.4% next year.

“That would be 1.8 percentage points below the current forecast but not as severe as the impact of the 2008/09 global crisis,” said the bank’s semi-annual report which covers the economies of Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, the Philippines, Singapore, Thailand, Vietnam, China, Hong Kong, South Korea and Taiwan.

ADB cut its forecast for the region’s economic growth in 2012 to 7.2% from the 7.5% forecast in the September Asian Development Outlook 2011 Update. Growth is still forecast at 7.5% for this year.

“The turmoil emanating from Europe poses a growing danger to trade and finance within emerging East Asia. The region’s policymakers must be prepared to act promptly, decisively, and collectively to counter what could be an extended global economic slowdown,” said Iwan J. Azis, Head of ADB’s Office of Regional Economic Integration, which produced the report.

It warned that the region’s financial systems remain just as vulnerable as they were in 2008. Heightened risk aversion would see investors slash holdings of Asian financial assets while highly leveraged European banks would cut lending, leading to tighter credit conditions.

To cope with a potentially prolonged global crisis and a slow subsequent recovery, ADB said Asia’s policymakers can use available financial, monetary, and fiscal tools. These include mechanisms in place to safeguard financial stability and ensure sufficient credit is available regionally. Monetary policy must remain flexible while exchange rate coordination would avoid competitive devaluations. And the region still has sufficient fiscal space to apply stimulus gradually and judiciously where needed while avoiding too much budgetary strain.

The report expects the Eurozone economy to expand 0.5% next year and the US economy to grow by 2.1%. For 2011, ADB is still forecasting growth of 1.7% and 1.6% for the two economies respectively.

China’s growth is likely to moderate even as domestic demand continues to rise, and is now forecast at 8.8% in 2012 after expanding 9.3% this year. In September, ADB had forecast it to grow by 9.1% in 2012.

The ADB said newly industrialised economies of Hong Kong, South Korea, Singapore and Taiwan will see slower growth both this year and next year in large part because they are more dependent on international trade than their neighbours. This leaves them highly vulnerable to an economic contraction in Europe and the US.

The 10 economies of the Association of Southeast Asian Nations (ASEAN) will also grow more slowly than previously expected.

Thailand, hit particularly hard by the recent floods, will grow by a smaller 2% but will recover from supply disruptions next year to grow by 4.5% in 2012.

Japan’s economy is forecast to bounce back from the effects of the recent natural disasters as supply chains are rebuilt, but the strong yen will likely hurt exports while domestic demand is likely to remain weak. As such, ADB continues to forecast a contraction of 0.5% this year followed by a 2.5% expansion next year.