Developing Asian countries will churn out solid 7.6% growth this year, but the region is at risk from spiraling inflation and the global credit crisis, a new report from the Asian Development Bank (ADB) said.

“Asia will not be immune to the global slowdown, neither will it be hostage to it. It remains tied to global activity through traditional trade channels, and increasingly, through its closer integration in international financial markets,” says ADB Chief Economist Ifzal Ali.

Despite government controls, the ADB predicts that inflation will spike to 5.1% in 2008 – possibly hitting a decade-long high – before cooling to 4.6% in 2009. Prices will be highest in central Asia, where inflation will remain in the double digits. China is the country most at risk, as inflation is running at an 11-year high. But economic growth in neighboring countries, such as Vietnam, is also at risk.

The report urges policymakers to tackle the problem at its root.

“For some economies, this may mean a more flexible exchange rate, while in others it may need a scrutiny of fiscal spending and priorities and, in some cases, targeted measures may be warranted to ease supply pressures that are piling on to cost pressures,” the report said.

In an interview with Reuters, Ali took on a stronger tone.

“If this genie gets out of the bottle and inflation becomes ingrained, it could bring the growth process to a grinding halt,” Ali said.

Decelerating Growth

The ADB said that growth in India and China is expected to moderate as their governments tighten policies to control inflation and accommodate “blistering” demand.

India’s economy is expected to expand by 8% and China’s is expected to grow 10%. The slowdowns in the United States, Europe and Japan will hurt China more because it’s more reliant on foreign trade.

East Asia is expected to slow from 9.3% in 2007 to 8.1% in 2008. Southeast Asia will slow from 6.5% last year to 5.7% – among the region’s countries, only Thailand is expected to post higher growth.

Growth in Central Asia is expected to decelerate sharply from double digits last year to 7.5% in 2008 because of weaker expansion in the region’s largest economy, Kazakhstan.

In the Pacific Islands – from Papua New Guinea to Fiji – growth is expected to rebound in 2008.

However, all of the developing Asian countries, collectively and individually, face the task of integrating into the global economy, sharing growth, creating conducive business and investment climates and maintaining macroeconomic stability, Ali said.

“Looking beyond the immediate bumps in the road, Asia’s long-term growth prospects will depend on how successfully countries tackle” those structural constraints facing them, says Mr. Ali.

Headquartered in Manila and financed by 67 countries, the ADB fights poverty with low-interest loans, grants, private sector investments and research about the region that is home to two-thirds of the world’s poor.