Asian Growth to Slow Sharply in 2009, IMF Says

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Growth in Asia, battered by the effects of the financial crisis that began in advanced economies and is now engulfing emerging markets, is expected to slow sharply in 2009, the IMF says.

On an annual average basis, growth in Asia is projected to slow from 7.6 percent in 2007 to 6.0 percent this year and 4.9 percent in 2009, according to the IMF's Regional Economic Outlook: Asia and Pacific, which was released on November 24.

"With the recent intensification of the global financial turmoil, any hopes that Asia would escape the crisis unscathed have evaporated. Despite its strong fundamentals-notably a substantial cushion in external reserves and robust corporate and banking sectors-the region is being buffeted by large external shocks," said Jerald Schiff, a Senior Advisor in the IMF's Asia and Pacific Department. He gave two key reasons for the slowdown:

Global demand for Asia's exports is waning, with the economies of the euro area, Japan, and the United States in a deep slump, and forward-looking indicators pointing to a sharper decline ahead.

The financial environment has become extremely challenging. Global deleveraging is contributing to tighter financing conditions, capital outflows, depressed equity prices, a weakening of a number of regional currencies, and higher sovereign and bank spreads.

Slowing economic growth and lower commodity prices are already contributing to moderating inflation, and the report expects a continued decline over the course of 2009, with headline consumer price inflation for the region falling from 6 percent this year to just over 3 percent in 2009.

While the baseline scenario for Asia sees recovery beginning in the second half of 2009, risks to the outlook are significantly larger than usual and tilted strongly to the downside, the report warned. A deeper and more protracted global slowdown than currently anticipated, combined with tighter international financial conditions from the ongoing global deleveraging, could have significant spillovers to the region through both exports and a range of financial channels. Most notably, slowing growth is likely to contribute to rising bad loans for regional banks, risking an adverse cycle of tightening credit conditions and deteriorating growth.

It also remains unclear how domestic demand would stand up to a sharp decline in export growth and tighter financial conditions, the report said. Despite Asia's generally strong fundamentals and large foreign...