OUTLOOK FOR 2012
Asia in 2012: Resilient, but at Risk from Euro Downturn
By Shekhar Shankar Aiyar
IMF Asia and Pacific Department
January 5, 2012
- Further downturn in Europe would have significant spillovers for Asia
- Asia has capacity to respond to a new downturn
- Tokyo venue for 2012 IMF-World Bank meetings reflects close ties with region
Events unfolding far from Asia’s shores could shape the region’s economic outlook for 2012. But if the global economic situation deteriorates—most notably in the troubled economies of the euro zone—Asia’s policymakers still have the room to respond aggressively, say IMF economists.
Despite the prevailing global uncertainty, Asia has until now, proven to be very resilient. It has boasted strong domestic demand, low unemployment, and factories working at near-full capacity. While credit growth has slowed from the torrid pace of early 2011, it remains robust in most economies.
Japan is mounting a recovery from the March 2011 earthquake and tsunami, and in Thailand reconstruction is under way following the country’s devastating floods.
A difficult year ahead
But Asia’s heavy reliance on trade is likely to make 2012 a difficult year, suggest economists from the Asia and Pacific department at the IMF. Asia is one of the world’s most trade-dependent regions, exporting everything from commodities such as metals and rice to sophisticated electronic products and cars. So, the level of external demand will be crucial in determining the region’s economic performance.
Regional growth has already started to slow due to weaker demand, although domestic factors such as tighter macroeconomic policy stances have also played a role, especially in India and China. In the future, the IMF economists expect only relatively soft demand for exports from Asia.
Recent stresses in several regional financial markets suggest that financial channels of contagion also pose a risk for Asia.
Events in the euro zone have created a global aversion to risk, and a corresponding sharp decline in Asian stock markets. Regional currencies have depreciated. Dollar funding pressures are increasing in several economies. And the cost of insurance on several regional banks has soared to levels only previously seen in the aftermath of the Lehman Brothers bankruptcy.
Further financial turmoil in the euro zone would likely have a substantial impact on Asia by reducing access to credit. Euro zone banks are an important source of funding for many Asian banking systems, and play a crucial role in providing trade credit.
Responding to a deteriorating outlook
If threatened risks materialize, Asian policymakers have the room to react aggressively. There is still ample policy space in the region, though less than at the outset of the global financial crisis in some countries.
Some economies have already started monetary easing. Fiscal policy consolidation could be appropriately delayed if external demand were to collapse, especially where low levels of public debt afford space for measures.
Apart from these conventional measures, Asian economies can use an arsenal of additional policies, as many did in response to the global crisis in 2008.
For example, in order to maintain critical flows of credit, liquidity guarantees may be needed for certain banking systems. Programs could be designed to facilitate trade credit and lending to small and medium-sized enterprises. Central bank swap lines and regional reserve pooling arrangements could be further strengthened and activated to address shortages in particular currencies.
The region also has large accumulated foreign exchange reserves, which could be drawn down in a crisis to smooth the impact on economic activity.
Looking at the medium term
Asia remains home to some of the world’s most dynamic economies, but several reforms are needed to sustain the region’s excellent historical performance and reduce vulnerabilities to external shocks. The challenges vary widely across countries.
In China, further actions are needed for a sustained rebalancing of growth away from investment and exports toward private consumption. These include reform and liberalization of the financial system, fiscal support to household consumption, and a further expansion of the social safety net.
In Japan, lowering public debt and raising potential growth are the key challenges. These would be aided by raising labor force participation, boosting the activity of small and medium-sized businesses, and deregulating the service sector.
In Korea, productivity gains in the service sector should be targeted. And many countries within the Association of Southeast Asian Nations should focus on infrastructure investment to boost potential growth.
Structural reforms are also needed to make growth more inclusive. Despite notable progress in reducing poverty, income inequality has increased in most of Asia over the last two decades.
Asia and the IMF: The road to Tokyo Annual Meetings
In 2012, the IMF, together with the World Bank, will hold its Annual Meetings in Tokyo. The venue reflects the critical role of Asia as a bulwark of stability in the world economy, as well as the IMF’s growing and constructive partnership with the region.
Asia’s links with the IMF are being strengthened through governance reforms giving the region a greater voice in the institution, and also through the selection of key IMF personnel from the region.
Recent appointments include Singapore’s Minister for Finance, Tharman Shanmugaratnam, as Chairman of the International Monetary and Financial Committee, and Min Zhu, as Deputy Managing Director of the Fund.