The menaces of terror, deflation and a war-related rise in oil prices cloud an otherwise bright outlook for East Asian economies, the World Bank said Wednesday.

East Asia and Pacific economies are expected to grow 6.4 per cent this year, slightly down from 6.7 per cent in 2002, said the Bank's Global Development Finance 2003 report.

"The forecast anticipates average regional growth of more than six per cent over the next two years with China increasingly the dominant player," it said.

Exports would be key, helped by China's integration into the World Trade Organization.

Exceptions to the rosy outlook were Hong Kong and Singapore, where growth had faltered, and Indonesia, still reeling from the October 12, 2002 bombing of a Bali nightclub in which 202 people were killed.

Four key tensions overshadowed a horizon of rapid growth, low inflation and strong external accounts:

-- Oil. Every 10-dollar-a-barrel rise in the price of oil during the Iraq war costs the region's net energy imports about 0.6 per cent of gross domestic product (GDP).

-- Instability. "The unpredictability of developments on the Korean peninsula has become a new regional concern and the memory of the bombing tragedy in Bali is a recent reminder of the problem of terrorism in the region," the report said.

-- Exchange rates. With fierce competition for western markets, "the question of appropriate exchange rates is likely to emerge as a larger issue," it said.

-- Deflation. "The corrosive effects of

deflation, already painfully evident in Japan, could become more pervasive across the region if measures to promote corporate restructuring are slow."

South Asian economies, meanwhile, were tipped to grow 5.3 per cent this year, up from 4.9 per cent in 2002.

Poor weather, political insecurity and a subdued global economy had put a damper on the region's growth in 2002, although India-Pakistan tensions eased and a cease-fire was reached in Sri Lanka's civil war.

"Improving exports and a recovery in agriculture, which accounts for a quarter of the region's output, are together expected to boost GDP growth to 5.3 per cent over the next years," the Bank said.

But higher export revenue would likely be channeled into higher imports, leading to little overall change in the trade balance, it said.