Asia Is Still Hitched To US Train, Warns IMF

Source : The Business Times, Aril 12, 2008

Economic and financial spillovers are still significant

IN a report likely to shake the confidence of Asian markets and regional policy makers, the International Monetary Fund (IMF) firmly rejected yesterday the notion that Asian economies have largely decoupled from the impact of a slowdown in the US and other advanced economies.

‘Asia has not de-linked and spillovers (from turmoil and recession elsewhere) could be significant,’ the report said, while urging financial and monetary authorities to step up contingency plans to deal with possible problems ahead.

The report on the Regional Economic Outlook for Asia and the Pacific is the latest - and most bearish - of a series of official reports published this week on the economic outlook in the wake of the still-spreading US sub-prime mortgage crisis.

Forecasting a 1.25 percentage point drop in overall Asian growth to 6.2 per cent in 2008, the report says ‘risks to the outlook remain on the downside’. And chief among these is ‘a further credit market-led deterioration of global financial conditions’.

According to the IMF: ‘While foreign demand for Asian exports would be lower in such a scenario, it is likely that the financial channel would be more virulent and complicated.’

Any deepening of credit turmoil could hit Asian equity and other asset prices, as well as consumer and business confidence, and send borrowing costs soaring, it suggested.

Economic activity across much of the Asia-Pacific region ‘remains fairly buoyant’ and domestic demand is ’still robust’, the IMF noted. But ‘key activity indicators in recent months suggest that momentum is easing. Confidence indicators also point to a slowing pace of activity’.

Meanwhile, inflation pressures are rising across most of Asia, food and commodity prices have soared and producer prices have shot up as a result.

The tone of the IMF report contrasted with a more upbeat note struck this week by the World Bank in its latest East Asia Economic Update, in which it suggested Asia could emerge as a ‘growth pole’ for the world as the US and Europe slow.

The IMF’s sterner approach reflects the deeper involvement that the institution is assuming in crisis management under recently appointed managing director Dominique Strass Kahn.

Spillovers from previous slowdowns in the US economy have been moderate, the IMF report acknowledged. But ‘there are reasons to believe that the current US slowdown could have a significantly larger impact. There is evidence that spillovers from the US, in particular to China, have risen in recent years and that financial contagion and global confidence effects could raise significantly the size of (these)’.

The IMF broke ranks with other official and private sector forecasters this week by suggesting in its latest World Economic Outlook that the US will suffer a mild recession in 2008 rather than a simple slowdown. Europe too is slowing sharply, the IMF said in its report. And given its trade and financial links with the rest of the world, Asia cannot expect to emerge unscathed.

One reason why Asian economies have remained relatively buoyant so far despite a slowdown in US demand has been their growing focus on non-traditional export markets in Latin America, Eastern Europe and the Middle East, the IMF noted. But it warned that these regions too have yet to feel the full impact of the ongoing slowdown in the US and in Europe.

‘Given the financial sector risks, monetary and supervisory authorities (in Asia) should step up monitoring and reviewing contingency plans, including those for central bank liquidity provision and bank capitalisation,’ the IMF said.

The report singled out Japan, Hong Kong and Singapore as three countries where regulators have moved to ensure that small banks are adequately capitalised before moving into complex structured financial products.

Policy makers in Asia have relatively limited room to manoeuvre on the monetary front because of fast-rising inflation in many parts of the region, the IMF said. But ‘greater exchange rate flexibility in many countries would help dampen imported price pressures and could contribute to a re-balancing of global demand’.

On the more positive side, the IMF said: “If the (Asia-Pacific) region finds itself in a substantially weaker growth environment, most Asian economies would have considerable scope to ease macro-economic policies, particularly on the fiscal front.”

Prudent policies in recent years have led to fiscal space that could be ‘used to comb at any serious growth slowdown’, it believed.