An escalation in Europe’s debt crisis may trigger a selloff in Asian assets, force foreign banks to cut lending to the region and disrupt its currency markets, the International Monetary Fund (IMF) said in a report on Thursday.
Asia’s growth has slowed since the second quarter of the year, the IMF said, cutting its expansion forecast for this year to 6.3 percent from an April estimate of 6.8 percent.
Inflationary pressures across the region are still “elevated” and financial conditions remain accommodative in most of Asia, the IMF also said.
With the reduction in its growth forecast for Asia, the IMF said it now expects the Philippine economy to grow by 4.7 percent this year and 4.9 percent next year—lower than its April estimates of 5-percent growth this year and next year.
“The report cautions that risks for the Asia and Pacific region are decidedly tilted to the downside. An escalation of the euro-area financial turbulence and a more severe slowdown than anticipated in the United States would have clear macroeconomic and financial spillovers to Asia. While domestic demand remains strong, Asia has clearly not ‘decoupled’ from advanced economies,” the IMF said in a statement.
The IMF cut most of its forecasts for economies in the region. For emerging countries—East Asia, India, Indonesia, Malaysia, the Philippines, Singapore, Thailand and Vietnam—growth is now expected to be slower at 7.9 percent from 8.1 percent this year and 7.7 percent from 8 percent next year.
What will sustain growth in the region, according to the IMF, will be domestic demand, particularly from the reconstruction efforts of Japan, where it expects domestic demand to pick up next year as reconstruction efforts get under way. The IMF expects growth in Japan to reach 2.3 percent in 2012.
The IMF said countries in the region, including the Philippines, must strive to rebalance growth. This means that they need to develop “domestic engines of growth” by investing heavily on infrastructure and making the necessary social expenditures to protect the poor and the vulnerable in society.
Evidence of slowing growth is increasing in Asia, with China reporting on Thursday that exports rose the least in seven months in September.
On Wednesday President Aquino unveiled a P72-billion stimulus package, while government officials cut growth forecasts for the year.
The risk of another global recession has prompted Asian officials from China to Indonesia to step up the fight to shield growth by boosting fiscal measures or easing borrowing costs. The MSCI Asia Pacific Index of stocks slumped 16 percent last quarter and the IMF said the “panic selloffs” in the region show there is “no place to hide” when advanced nations are in turmoil.
Foreign banks may sell Asian assets, cut credit lines to the region and avoid rolling over maturing loans if they face large losses in their home markets, the IMF warned.
“Such cutbacks could have a sizable impact in Asian economies that have large exposures to European and US banks,” it said. “Contagion could also occur through Asian currency markets, as long and carry-trade positions are unwound. A loss of liquidity in cross-currency swap markets—as in 2008—could be particularly disruptive and spill over to bank funding, as many banks rely on this market to fund dollar assets or to meet regulatory currency matching requirements, notably in Korea and Japan.”
“In economies where inflation is within target and with greater vulnerability to a global slowdown, a pause in monetary tightening may be warranted at the current juncture, until the downside risks to growth abate,” it said.
