Possible shocks from spillover of euro zone crisis and excessive capital flow
DAEJEON (SOUTH KOREA): Asia may be experiencing a sharp and quick rebound from the global financial crisis, but it has received a word of warning from the International Monetary Fund (IMF).
The region, said IMF chief Dominique Strauss-Kahn yesterday, should brace itself for possible further shocks, including being hit by a potential spillover from the euro zone crisis.
Or exuberant investors could pour so much capital into Asia that parts of the region could overheat, bringing about dangerous credit and asset bubbles.
The warning comes just after last week's growth forecast by IMF for all of Asia - a buoyant 7.5 per cent this year, well above the average 4.6 per cent worldwide. But the IMF managing director also sought to soften the blow, stressing that a global double-dip recession was unlikely as recovery remains on track.
'Asia's time has come, no one can doubt that Asia's economic performance will continue to grow in importance,' he said yesterday at the opening of a high- level economic forum in the central South Korean city of Daejeon.
'But downside risks - including the recent turmoil in Europe - mean that Asian policymakers need to remain attuned to negative shocks.'
The region also faces a real threat in the sharp rebound in capital flows that is likely to emerge as investors avoid Europe, the United States and Japan, where growth has been sluggish, for a burgeoning Asia. 'Such huge inflow of capital can create instability,' he warned.
To manage such a problem, Asian nations could consider measures such as currency revaluation and even temporary capital controls, he suggested.
Jointly organised by the IMF and South Korea, the two-day forum on Asia brings together senior policymakers and economists including Singapore's Finance Minister Tharman Shanmugaratnam and his Thai counterpart Korn Chatikavanij. Both men are due to take part in a round-table discussion today.
Yesterday, South Korea's Finance Minister Yoon Jeung Hyun echoed Mr Strauss-Kahn's concern, noting that developing countries were not doing enough to withstand external shocks from the high volatility of capital flows.
According to media reports, Seoul and the IMF are looking at a possible global financial safety net that would give nations quick access to funds, helping them stave off crises and also discouraging emerging market nations from hoarding foreign reserves. Details are expected to be unveiled in November when South Korea hosts the G-20 summit.
The warnings for Asia come amid emerging signs that the global economic recovery may be losing steam. China's economic growth appears to be slowing down, while the US has reported a stream of disappointing economic data.
Last week, an IMF report also warned that Europe's credit woes could hit bank funding and corporate financing elsewhere, especially Asian economies that are more dependent on foreign currency financing.
As if that was not enough, the European Central Bank and the Bank of England also sounded an alarm bell on a looming credit crunch.
Institutions worldwide, including banks and cash-strapped governments, will have to repay or roll over trillions of dollars they owe under short-term loans in the next two years. As they compete for the bond market's favour, it could squeeze the credit available for business and consumers, dampening economic growth.
Together, these risks pose a longer- term challenge for export-driven Asia, as Mr Strauss-Kahn and other speakers noted.
'It is a trigger for change,' he said.
Asia, he pointed out, needed to nurture a 'second engine of growth' by boosting domestic investment and consumption.
It is a strategy that some nations in the region are already pursuing, as they try to strengthen their social safety nets to boost private consumption, and introduce more flexible exchange rates.
China, for instance, recently raised the minimum wages of workers in the hope of revving up domestic consumption, a move hailed by Mr Victor Fung, honorary chairman of Hong Kong's International Chamber of Commerce.
He said: 'They are putting money into the hands of those who can actually spend.'
Source: Straits Times, 13 Jul 2010