The International Monetary Fund yesterday signalled global economic conditions may begin to stabilise next year but warned that there were significant downside risks if key policy moves did not materialise in coming months. The fund further downgraded its global growth estimates for next year to 2.2 per cent, from its previous forecast of 2.5 per cent. It added, however, that capital needed to return to the worst-hit countries if the forecast was to be maintained. 'While the danger of a global recession does seem to have diminished, the supply of funds to most emerging market economies is sharply reduced and conditions in financial markets remain fragile in several respects,' it said. Hong Kong would contract 5 per cent this year and 1 per cent next year, the fund said. Hong Kong's economic downturn was weakening its fiscal position and although prices and wages were rapidly adjusting, the outlook was still bleak. 'It would therefore not be desirable to tighten fiscal policy in 1999, but it will be important to set the current and prospective fiscal shortfalls in the context of a medium-term framework to restore budget balance.' The IMF said unemployment would also rise, from the present estimated 5 per cent to 6.4 per cent next year. In Asia as whole, the IMF believed certain countries had turned the corner as current account surpluses and a recovery in markets had allowed interest rate cuts and an easing of fiscal policy. Developing Asia is now expected to grow 2.6 per cent this year before racing up 4.3 per cent next year. Thailand is expected to grow 1 per cent next year after contracting 8 per cent this year while Indonesia is seen shrinking just 3.4 per cent next year after its 15.3 per cent contraction this year. The IMF has significantly downgraded its estimates for Japan, Brazil and Russia, however, predicting any improvement would not come until well into next year. It believes Japan will contract 0.5 per cent next year following a 2.8 per cent shrinkage this year. Brazil would see a 1 per cent contraction, after growing only 0.5 per cent this year. Russia would shrink 8.3 per cent next year after 5.7 per cent contraction this year. The IMF warned these estimates could be derailed if private capital flows did not return to emerging markets, Japan delayed tough banking reforms, exchange rate volatility hit industrial countries, Asia adopted protectionist policies, or developed-countries' stock markets corrected sharply, especially in the US. The IMF has started tackling the thorny issue of hedge funds, saying firms had to improve procedures in risk modelling.