Asian policymakers must be ready to respond "early and decisively" to overheating risks in their economies stemming from rapid credit growth and rising asset prices, the International Monetary Fund said.
Growth is set to pick up gradually this year and inflation is expected to stay within central banks' comfort zones, the lender said in a report yesterday. Greater exchange-rate flexibility in the region would play a "useful role" in curbing overheating pressures and coping with speculative capital inflows.
Asian economic growth that the IMF estimates will be almost five times faster than advanced nations this year, and increasing investor appetite for risk have spurred capital inflows into the region. The Bank of Japan this month joined counterparts in the US and Europe in unleashing monetary stimulus, which may fuel further currency gains in developing markets such as the Philippines, where policymakers have stepped up efforts to cool appreciation.
"Financial imbalances and rising asset prices, fuelled by strong credit growth and easy financing conditions, are building in several Asian economies," the IMF said. "Policymakers … face a delicate balancing act in the near term: guarding against the potential build-up of financial imbalances while delivering appropriate support for growth."
The IMF's Regional Economic Outlook for Asia and Pacific echoes concerns in an April 15 World Bank report that emerging economies in the region should consider reining in monetary stimulus. Japan needed to have a credible strategy to lower debt, while China's challenge was to unwind past credit stimulus and curb the growth of shadow banking, the lender said. Asia would lead a three-speed global recovery, with domestic demand supported by "strong" labour market conditions, "robust" consumer confidence and household disposable income, falling unemployment rates and rising real wages, the IMF said. Economies might also benefit from China's growth momentum and Japan's stimulus measures, it said.
China's economy would expand 8 per cent this year and 8.2 per cent next year, while India's gross domestic product would rise 5.7 per cent in 2013 and 6.2 per cent in 2014, the IMF said.
Still, the threat of external risks such as the euro-area crisis was substantial, and while capital inflows could provide an impetus, they could also be disruptive, the IMF said. In the event of a severe global slowdown, capital flow reversals and falling external demand would exert a powerful drag on Asia's most open economies", including lower investment and employment in export-dependent sectors and possibly lower remittances by overseas labour, it said.