IMF Urges More Rate Cuts, Fiscal Measures in Asia

Economic growth in Asia could recover next year to somewhat below potential rates but that forecast is subject to downside risks and depends on monetary and fiscal conditions remaining accommodative for a while, the International Monetary Fund said on Wednesday.

The IMF's projections are for Asia's growth to pick up to 4.3 percent in 2010 from an estimated 1.3 percent in 2009, which would be below potential and below the 5.1 percent in 2008.

The forecasts were released three weeks ago as part of the IMF's World Economic Outlook following the IMF spring meeting but the organization released commentary on the region on Wednesday in its twice-yearly regional economic outlook for Asia and the Pacific.

The IMF said that risks to the outlook were tilted to the downside and relied on a recession-hit global economy stabilizing after the credit crisis.

"There are risks that financial strains will become deeper, and that macroeconomic policy support is withdrawn prematurely.

"In this case, the global downturn could continue to deepen. This would make it even more difficult for Asia to recover," the IMF said.

A second risk, the IMF said, was that corporate losses, which it now believes will remain manageable, could surge due to continued weak demand and tighter financial conditions, thereby hurting banks and leading to higher unemployment.

Another risk was from global deleveraging which could limit the access to external financing for companies and governments.

Finally, over a longer horizon, export-driven Asian economies are exposed to the risk of a structural decline in demand from advanced economies, the IMF said.

The Fund said the one significant boon for the region would be stronger than anticipated policy responses, which would help Asia emerge faster from the recession and whose costs were potentially low given the absence of inflationary pressures.

It said many economies still had room for additional interest rate reductions.

"The impact of the aggressive cuts in interest rates so far has been largely offset by declining inflation expectations, so that real interest rates have remained relatively constant, or have increased, in a number of countries," it said.

Overall financing conditions have in some countries actually tightened over the past year, threatening to put additional pressure on growth, the IMF said.  It suggested more Asian governments may need to turn to unconventional measures to improve access to credit, like Korea and Japan have done, by expanding balance sheets through tools such as purchasing longer term instruments or providing guarantees to bank lending.

Fiscal Measures

Many Asian economies entered the crisis with significant room for fiscal support to their economies, but it was important to ensure that the fiscal stimulus injected this year is not withdrawn prematurely, the IMF said.

"Only a few Asian countries have so far announced packages for 2010, creating the public perception that stimulus might be withdrawn at a time when economies are likely to remain very weak," the Fund said.

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While it was likely that fiscal policy will be kept supportive, "it would be even better to announce such measures now, to provide reassurance that governments will continue to support demand as long as necessary."

The IMF said studies showed that it might take up to about a year and a half for investment growth to return to its pre-crisis rate in countries with a large trade exposure to advanced economies such as Korea, Malaysia, Singapore, and Thailand.

Private consumption would meanwhile remain subdued as long as rising unemployment, weak confidence, and low asset prices weigh on households' spending plans, it said.

Gross domestic product in emerging Asia excluding China and India plummeted by no less than 15 percent on a seasonally adjusted annualized basis in the last quarter of 2008, while global GDP fell at an unprecedented 5 percent pace in that quarter, the IMF said.

It projected Japan will suffer a severe recession throughout 2009, experiencing its worst annual performance ever, while Singapore's economy could contract 10 percent in 2009 and output would remain marginally negative in 2010.

Headline inflation was expected to rise modestly in 2010 in most Asian economies, but core inflation was likely to remain subdued, helping to open space for monetary policy support, the IMF said.

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