IMF Warns of Overheating Risk in Asia


The International Monetary Fund has warned policymakers to “stand ready to respond” to any prospective risks of overheating, amid widening fiscal imbalances and rising asset prices in several Asian economies.

Asia will lead a three-speed global recovery, with domestic demand supported by favourable market conditions, robust consumer confidence and rising real wages, said the IMF in its annual report on Asia.

However, the Fund cautioned Asian policymakers to “stand ready to respond early and decisively to any prospective risks of overheating”, amid widening financial imbalances and rising asset prices, fuelled by strong credit growth and easy financing conditions, in several Asian economies.

While Asia has buffers to cope with such risks, the IMF said such economic imbalances require careful monitoring, adequate supervision and a timely response to critical changes.

Speaking at a press briefing in Singapore, IMF director for Asia and the Pacific, Anoop Singh, said the Fund was monitoring credit ratios and output levels in Asia closely as conditions can worsen very quickly.

Asset prices in many parts of Asia have risen rapidly over the past few years, thanks to ultra-loose monetary policy in developed economies and strong domestic growth in the 10-member Association of Southeast Asian Nations, whose members include Indonesia, Thailand, Malaysia, the Philippines, Vietnam and Myanmar.

The IMF also warned that pressures posed by capital inflows could intensify if Abenomics has the desired impact on the Japanese economy, the report said, potentially putting “downward pressure on interest rates and upward pressure on the exchange rate” in many parts of Asia.

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The report said:

Policy makers in the region face a delicate balancing act in the near term: guarding against the potential build-up of finances while delivering appropriate support for growth.

At the same time, a number of other regional risks are more difficult to anticipate but could prove disruptive given Asia’s highly integrated supply-chain network and growing dependence on regional demand and finance.

These include trade disruptions from a natural disaster or geopolitical tensions, an economic slowdown in China led by sharply lower investment, and a rise in sovereign risk in Japan in the absence of a credible medium-term fiscal and growth strategy.

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The IMF’s report echoes concerns in an April 15 World Bank report that said the risks of overheating were increasing in some Asian economies, and that policy makers should “be prepared to withdraw stimulus as the world economy recovers”.