Asia at risk from Europe, US spillover, outflows: IMF

Near-term risks to Asia’s economies are “decidedly” rising due to Europe’s debt woes and a US slowdown, requiring policymakers to be nimble and prepared to rapidly reverse course, the International Monetary Fund said on Thursday.

The IMF also warned about a risk of capital outflows from the region, saying foreign investors from advanced economies could reverse the large positions they have built in Asian markets since 2009.

“A sudden liquidation of these positions could trigger a loss of confidence, and contagion could spread from bond and equity markets to currency and other markets,” the IMF said in its regional economic outlook report for the Asia and Pacific region.

“The sell-off in Asian financial markets in August and September 2011 underscores that an escalation of euro area financial turbulence and a renewed slowdown in the United States could have severe macroeconomic and financial spillovers to Asia,” it said.

For Asia, risks are “decidedly tilted to the downside,” the IMF said.

It noted that credit flows could also dry up if European and US banks cut credit lines in Asia when faced with large losses at home.

The IMF said heightened economic risks amid persistent overheating pressures confront Asian policymakers with “a delicate balancing act.” “They need to guard against risks to growth but also limit the adverse impact of prolonged easy financial conditions on inflation.”

It said that many of the region’s countries needed to continue normalising easy macroeconomic policies to address inflation risks, both through higher interest rates and more flexible exchange rates.

“However, in economies where inflation is within central banks’ target ranges and the exposure to severe external shocks is greater, a pause in monetary tightening may be warranted until the global uncertainties have lessened,” it added.