Asia: Responding to Slower Growth and Tighter Global Liquidity

  • Region well-placed to handle fallout from potential U.S. Fed tapering
  • Potential remains for further capital outflows in coming months
  • Emphasis needed on strong macro policies, productivity enhancing structural reform
  • Speaking at a press conference to mark the launch of the IMF’s update to its Regional Economic Outlook, Anoop Singh, the head of the Asia and Pacific Department, said “we are essentially optimistic that despite the more complex global environment, Asia will remain a growth leader with emerging Asia growing above six percent this year and next year.”

    Weak growth in the United States and Europe has dampened demand for Asian exports and a slowing China is adding to pressure on manufacturers and commodity producers, particularly in emerging Asia. At the same time, homegrown impediments—such as infrastructure bottlenecks in India or overinvestment in China—have lowered the cruise speed of the region’s growth.

    Despite these headwinds, in its semiannual report on the economic health of the region, the IMF’s Asia and Pacific Department says it expects Asia’s economy to grow at 5.3 percent in 2014, up from 5.1 percent in 2013.

    Capital outflows as Fed contemplates “tapering”

    The region has been hit by growing expectations that the U.S. Federal Reserve may soon “taper” its asset purchase program and there has been a reversal of capital inflows across much of emerging Asia. Stock prices have fallen, currencies have weakened, and borrowing costs for companies and governments have risen.

    In most countries, the effects of the turnaround in capital flows have, so far, been “manageable,” says the report. Companies and banks are still healthy and, in some cases, the outflows may be welcome, slowing the run-up in asset prices that has led some investors to worry about potential overheating.

    However, India and Indonesia have been harder hit. High inflation and a reliance on foreign borrowing have left both countries exposed to shifts in global liquidity. With investors differentiating between markets more than in the past, these countries have come under more pressure. In both countries, central banks have raised interest rates and further rises will likely be needed in the coming months.

    Potential for further volatility

    The update to the Regional Economic Outlook cautions that a renewed wave of outflows from stock and bond markets is a risk, and would cause an increase in borrowing costs in many Asian countries.

    In such a global context...

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