Growth in Asia-Pacific will continue to outperform the rest of the world thanks to robust domestic consumption spurred by healthy labor markets, low interest rates and the recent fall in oil prices, according to the International Monetary Fund (IMF).
The region's gross domestic product (GDP) growth will hold steady at 5.6 percent in 2015, before moderating a touch to 5.5 percent in 2016, the IMF said in its biannual Regional Economic Outlook for Asia and the Pacific published on Thursday.
The global recovery, albeit moderate and uneven, will continue to support demand for Asia's exports, it said.
"These factors are expected to offset the effect of tighter financial conditions from capital flow reversals triggered in part by the prospect of monetary tightening by the Federal Reserve," the IMF said.
Nonetheless, the pace of growth in countries across the region will vary, IMF said
Among the major economies, China's economy expected to slow to a more sustainable pace of 6.8 percent in 2015 and 6.3 percent in 2016, while growth in Japan poised to pick up to 1.0 percent this year and 1.2 percent next year.
Elsewhere, there is a divergence between net commodity exporters and importers.
"Exporters of non-oil commodities whose prices have fallen sharply (Australia, Indonesia, Malaysia, and New Zealand) will be adversely affected by the terms-of-trade swing; elsewhere, however, growth is expected to stabilize or increase," it said.
India, a major beneficiary of lower commodity prices, will be a bright spot in the region. Asia's third-largest economy is projected to expand 7.5 percent this year and next, making it one of the fastest growing economies in the world.
Caution: Risks ahead
There are reasons to be cautious, however, with the balance of risks tilted to the downside, the IMF warned.
Risks include significantly slower-than-expected growth in China or Japan and persistent U.S. dollar strength, which could ramp up debt servicing costs for firms with sizable dollar-denominated debt and curtail demand.
"Debt levels — including foreign currency-denominated debt—have increased rapidly in recent years, and Asia is now more vulnerable to financial market shocks," the IMF said.
On the flip side, lower energy prices present an upside risk for Asia's growth if more of the savings on oil import bills is spent.
"The decline in oil and food prices provides a window of opportunity to further reform or phase out subsidies, thereby improving spending efficiency and shielding public spending from future commodity price fluctuations," it said.