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Substantial slowdown in Asia amid global
turmoil, decisive policy actions key - IMF
Asia is facing the risk of a sharp slowdown as the global
economy enters a major downturn, and decisive actions
are warranted to maintain financial stability and support
growth in the region, the International Monetary Fund
(IMF) said on Monday in its latest report on Asia.
“Growth in Asia is expected to slow substantially
along with the rest of the world, as exports weaken
and spillovers from the global financial turmoil weigh
on domestic activity,” according to the Regional
Economic Outlook (REO) for Asia and Pacific, which was
released on Monday.
While the baseline scenario for Asia sees recovery beginning
in the second half of 2009, risks to the outlook are
significantly larger than usual and tilted to the downside,
the REO warned. A deeper and more protracted global
slowdown than currently anticipated, combined with tighter
international financial conditions from the ongoing
global deleveraging, could have significant spillovers
to the region through both exports and a range of financial
channels. It remains unclear how domestic demand in
the region would stand up to a sharp decline in export
growth and tighter financial conditions, the report
said. Despite Asia’s generally strong fundamentals—including
its substantial cushion in official reserves, improved
macroeconomic policy frameworks and generally robust
corporate balance sheets and banking systems—the
region is “being rattled by the crisis due to its
close trade and financial integration with the rest
of the world, and any hope that the region would escape
the crisis unscathed has by now evaporated.”
In this uncertain environment, the REO calls for quick
and decisive actions by policymakers in the region to
respond to heightened financial risks and slowing domestic
activity. First, their financial policies will need
to focus on addressing spillovers from the global credit
turmoil by safeguarding financial systems and maintaining
orderly credit conditions. Second, with inflation projected
to moderate in the near term, monetary policy in most
countries has room to ease to stabilize financial conditions
and address downside risks. Third, given progress in
fiscal consolidation in recent years, many countries
have room to implement fiscal stimulus to address downside
risks to growth. For countries where fiscal sustainability
is an issue, however, it would be important not to lose
sight of the need for medium-term fiscal consolidation.
In the analytic chapters, the REO addresses longer-term
issues that will affect the region’s economies
as the impact of the current crisis recedes. Chapter
II entitled “The Globalization of Asian Inflation”
examines the rising importance of commodity prices in
Asia’s inflationary process and its potential implications
for monetary policy. While in the past, inflation in
the region could largely be traced back to domestic
factors, global relative prices, notably of commodities,
have been the driving force behind rising inflation
in recent years. Despite the recent downturn , commodity
prices are expected to remain high and volatile over
the medium term, which would tend to create persistent
gaps between core and headline inflation and pose new
challenges for policymakers in facing trade-offs between
output and inflation volatility. Going forward, these
trends may require a careful consideration of monetary
policy frameworks, in particular in commodity-importing
countries.
Chapter III, “The Graying of Asia: Demographics,
Capital Flows, and Financial Markets,” analyzes
the impact of rapid demographic change in Asian countries
on their external positions and capital flows as well
as on financial markets and asset prices. In particular,
the study shows that vastly different rates of aging
across Asia are likely to have sizable effects on current
accounts and capital flows—with capital tending
to flow “uphill” from younger to older countries.
Governments can ease the potentially difficult demographic
transition by beginning to take policy measures now.
For aging countries, this may involve an emphasis on
pension and labor force reform. For younger countries,
requiring substantial capital for their growing labor
forces, enhancing financial intermediation, and boosting
productivity will take center stage.
Turmoil
makes customer service critical for financial institutions,
says Economist Intelligence Unit
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