IMF Survey: Asia in 2012: Resilient, but at Risk from Euro Downturn
IMF News, January 5, 2012
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- Authors: Shekhar Shankar Aiyar IMF Asia, Pacific Department January
- Published: January 5, 2012
Outlook for 2012
- Events unfolding in the euro zone could shape Asia’s economic outlook for 2012; a deterioration in the global economic situation—most notably in the troubled economies of the euro zone—would have significant spillovers for Asia.
- Asia has so far been resilient: strong domestic demand, low unemployment, and factories working at near-full capacity.
- Credit growth has slowed from the torrid pace of early 2011 but remains robust in most economies.
- Japan is mounting a recovery from the March 2011 earthquake and tsunami; Thailand is undergoing reconstruction after the country’s devastating floods.
- Asia’s heavy reliance on trade makes 2012 likely to be a difficult year; external demand will be crucial for regional performance.
- Regional growth has started to slow due to weaker external demand and domestic factors such as tighter macroeconomic policy stances, especially in India and China.
- IMF economists expect only relatively soft demand for exports from Asia going forward.
- Recent stresses in several regional financial markets indicate financial channels of contagion pose risks:
- Global aversion to risk has caused a sharp decline in Asian stock markets.
- Regional currencies have depreciated.
- Dollar funding pressures are increasing in several economies.
- The cost of insurance on several regional banks has soared to levels only previously seen in the aftermath of the Lehman Brothers bankruptcy.
- Euro zone turmoil would likely reduce access to credit in Asia because euro zone banks are an important source of funding and trade credit.
Responding to a deteriorating outlook
- Asian policymakers have room to react aggressively if risks materialize; 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.
- Additional policy options (examples drawn from the 2008 global crisis response) include:
- Liquidity guarantees for certain banking systems to maintain critical flows of credit.
- Programs to facilitate trade credit and lending to small and medium-sized enterprises.
- Strengthening and activation of central bank swap lines and regional reserve pooling arrangements to address shortages in particular currencies.
- Drawing down large accumulated foreign exchange reserves 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 historical performance and reduce vulnerabilities to external shocks. Challenges vary across countries:
- China: Actions needed for sustained rebalancing away from investment and exports toward private consumption, including reform and liberalization of the financial system, fiscal support to household consumption, and a further expansion of the social safety net.
- Japan: Key challenges are lowering public debt and raising potential growth; measures include raising labor force participation, boosting the activity of small and medium-sized businesses, and deregulating the service sector.
- Korea: Target productivity gains in the service sector.
- Many ASEAN countries: Focus on infrastructure investment to boost potential growth.
- Structural reforms are 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
- The 2012 IMF-World Bank Annual Meetings will be held in Tokyo, reflecting Asia’s critical role as a bulwark of stability in the world economy and the IMF’s growing partnership with the region.
- Asia’s links with the IMF are being strengthened through governance reforms that give the region a greater voice in the institution and through selection of key IMF personnel from the region.
- Recent appointments cited include:
- Tharman Shanmugaratnam, Singapore’s Minister for Finance, as Chairman of the International Monetary and Financial Committee.
- Min Zhu as Deputy Managing Director of the Fund.
IMF Survey by Shekhar Shankar Aiyar, Asia and Pacific Department — January 5, 2012