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Growth forecast is trimmed for developing nations in Asia

Bettina Wassener
Dan Istitene | Getty Images

The Asian Development Bank lowered its growth forecasts for emerging nations in the region on Wednesday and called for more structural changes to support the local economies.

In its twice-yearly economic overview of developing Asia — which includes India, China, the Philippines and Vietnam, but not Japan — the bank said it now expected the region to grow 6 percent this year and 6.2 percent in 2014.

(Read more: Emerging market rout? That was so 3 weeks ago)

Those numbers were down from the 6.6 percent and 6.7 percent, respectively, that the development bank had projected in its previous outlook report, in April. Last year, the region expanded 6.1 percent.

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Much of Asia enjoyed a sharp rebound in the years immediately after the global financial crisis, buoyed by an aggressive stimulus program in China and the cash that flowed in as investors and businesses looked for higher returns than those available in the languishing United States and European economies.

Those incentives have faded since last year. China's economy has cooled as policy makers in Beijing have sought to put growth on a stable footing. And the prospect of reduced monetary stimulus in the United States, whose economy is perking up, has prompted a big exodus of Western cash from emerging markets in Asia and elsewhere in recent months.

"Developing Asia is challenged to sustain its growth momentum as the pace in its two largest economies moderates," the Asian Development Bank said, referring to China and India. The "prospective tapering of quantitative easing in the United States destabilized emerging economy financial markets, including in developing Asia."

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At the same time, the bank said, the upturn in the U.S. economy and signs that the euro zone and Japan are turning the corner have "yet to translate into revived orders for exports from developing Asia."

India — where poor infrastructure, crippling red tape and policy squabbles have long presented huge hurdles to doing business — has been especially hard hit by the souring investor sentiment toward emerging markets. A sharp drop in the rupee since May has worsened some of the challenges facing the economy, many analysts have warned, and the biggest downward revision the Asian Development Bank made in its update on Wednesday was to the India forecast. The bank now expects the Indian economy to grow 4.7 percent this year, down from its previous estimate of 6 percent. For 2014, India is forecast grow 5.7 percent, down from 6.5 percent.

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For China, the bank lowered its forecasts to 7.6 percent growth this year and 7.4 percent next year, from 8.2 percent and 8 percent.

The bank stressed that, despite the murkier outlook, Asia remained in a stronger position than during the 1997 financial crisis, thanks to larger reserves of foreign exchange and the current-account surpluses that many countries now run. Slower growth in China and India, it said, hampers but does not hobble growth across Asia. Still, the Asian Development Bank's report said, echoing the remarks of other analysts, the recent financial turmoil has demonstrated the need for structural overhauls to support growth.

"As Asia transitions toward a more sustainable growth path, governments must watch out for volatile capital flows and financial market disruption," the bank said. "They must also continue to pursue sound macroeconomic policies that include building up fiscal space during good times. Priority areas include foreign direct investment, industrial diversification, infrastructure and human capital, fiscal consolidation, and social protection."