Irish central banker points to Asia’s strong rebound and euro zone growth

ASIA’S strong economic recovery and better-than-expected euro zone growth should help the world dodge a double-dip recession, according to Irish central bank governor Patrick Honohan.

But governments will also need to focus on consolidating reserves after extensive spending on stimulus measures taken to tackle the financial crisis, he said.

Professor Honohan, who is also a member of the European Central Bank (ECB) governing council, was speaking yesterday at an event jointly hosted by the Irish Chamber of Commerce and the Association of Banks in Singapore at Marina Mandarin hotel.

He said while Europe has been slow to rebound, there has been ‘a lot of optimism’ about Germany, which he refers to as the ‘heart of Europe’.

Europe’s largest national economy grew by 2.2 per cent in the second quarter – the fastest pace in 23 years – driven by investment and exports, according to official data released yesterday.

‘The recovery has not been as strong as people had hoped, but I’m not too pessimistic about this recovery. I think it is slow and steady but it’s getting there,’ said Prof Honohan.

He added that the low interest rate environment – the ECB has kept its main interest rate at a record low of 1 per cent for the last one year – remains relevant to current economic conditions.

‘What we see is still quite a weak economic recovery, certainly in the euro zone area after the crisis, so I think the current interest rates, which are low by historical standards, are appropriate to maintaining the possibility of making sure the recovery happens,’ he said.

But the management of government debt will be key as most have come out of the crisis with much higher debt levels than before, which adds to their macroeconomic vulnerability, he explained.

‘They no longer have much headroom for additional fiscal interventions to deal with any issues that may arise,’ he said.

‘So persisting with the fiscal consolidation that most countries… are actually in the process of doing is absolutely key to ensure the policy tools will be available for any future problems.’

Looking back at the crisis, he said while there was a sharp downturn, the recovery was ‘surprisingly faster’ in many parts of the world, especially in Asia.

‘So to some extent we may not have learnt enough to avoid a downturn, but we definitely have learnt enough in terms of monetary and economic policy response to make sure the downturn was as short-lived as possible,’ said Prof Honohan, who departs for Malaysia today.

Source: Straits Times, 14 Aug 2010

(SINGAPORE) Consumers in Singapore remain among the most optimistic in the region – despite a drop in consumer confidence in the second quarter.

The Consumer Confidence Index of Singapore, as measured by InsightAsia, fell 12 points to 126 in Q2 after witnessing a strong upward trend since the lowest point of the recession. Singapore is still far above the neutral point of 100.

Consumers were thrilled when the economy emerged from the recession sooner than expected and are now becoming accustomed to positive economic circumstances.

InsightAsia, a market research group specialising in the Asia-Pacific region surveyed 10,800 people across six Asian markets.Although economic growth in Singapore continues to accelerate, consumers expressed lower confidence in economic circumstances. The downward correction of the Consumer Confidence Index is in line with other countries in the region that are also showing healthy growth figures. China, Malaysia and Vietnam also saw a decrease in consumer confidence – even though their economies are in good shape and have GDP growth forecasts of 5-10 per cent in 2010.

An unexpectedly swift recovery from the recession led to increasing consumer optimism, which then dropped slightly in Q2. Consumers in these countries remain confident, but their initial enthusiasm has waned somewhat.

Consumers in Singapore still feel that the economy is improving, though not as strongly as before. They have also moderated their expectations for future economic growth. Singaporeans maintain a high level of satisfaction with their financial well-being, but have moderated their optimism about the coming year.

Overall, Singaporean consumers still have a very positive view of economic circumstances, resulting in a Consumer Confidence Index of 126.

Singapore trails slightly behind Vietnam (128) but leads Malaysia (118), China (114), Indonesia (93) and Thailand (83); all countries that are recording positive growth figures.

Singapore’s recovery from the recession continued into Q2. A record year-on-year GDP growth of 19.3 per cent outstrips the 16.9 per cent growth recorded in Q1 and far exceeds growth figures of other economies in the region.

This very strong growth was driven by exports and tourism. Exports increased particularly through pharmaceuticals and electronics, while new attractions drew more tourists to the island state.

The year-on-year growth figures are calculated against a low base, as the beginning of 2009 was the low point of the recession. Growth in the remaining quarters of 2010 will be calculated against higher base figures. Therefore GDP growth is expected to decelerate in the second half of 2010 and full-year growth is expected to register at 13-15 per cent.

The robust economic growth of China has benefited many other economies in the region. The Chinese government is taking measures to reduce the risks of overheating the economy. Lower demand in China will reduce the exports of other countries in Southeast Asia.

Along with a debt crisis in the EU and the hesitant recovery of the US economy, this may slow growth in South-east Asia in the second half of 2010. However, analysts are positive about growth prospects in the region. The IMF estimates regional economic growth for 2010 and 2011 of around 6 per cent.

The writer is head of Consumer Confidence Index at InsightAsia Research Group

Source: Business Times, 26 Jul 2010

Turmoil in Europe, protectionist pressures may hurt world economy

ASIA is recovering well from the financial crisis but there are still risks to the world economy, including the turmoil in Europe and protectionist pressures in many countries, according to Dr Tony Tan, deputy chairman of the Government of Singapore Investment Corporation (GIC).

Dr Tan told the Swiss Re Forum Singapore yesterday that the global recovery is likely to continue into the next year but at a more moderate pace.

But he cautioned that the rebound is ‘fragile’ and ‘negative shocks could push the global economy towards a recession sooner than expected’.

And while growth prospects are much better for Asia than for the developed world, Dr Tan does not see Asia ‘aggressively challenging’ the global order, which has benefited the region for decades.

‘Asian countries, including China, generally share the view that a multilateral, rules-based international order is critical to their long-term growth and development,’ said Dr Tan. ‘Asia’s rise therefore is not inevitably a zero-sum geopolitical game where the US and Europe must decline as Asian countries grow.’

Dr Tan flagged the turmoil in Europe, saying that growth there should be weaker at around 1 per cent.

According to some analysts, there are growing signs that Europe’s sovereign debt crisis is feeding through into the

euro-area economy in the form of a sharp rise in unemployment and a slowdown in manufacturing recovery.

Dr Tan warned that ‘protectionism also remains a risk despite the recovery, given high unemployment and what seems to be, for the first time in many years, increasing tensions between American and European businesses and the Chinese policy environment’.

Dr Tan’s comments come at a time when investors are increasingly upbeat about Asia’s growth outlook, but less bullish about the global economy.

Earlier this month, the Asian Development Bank raised its 2010 forecast for aggregate growth across Asia – embracing East Asia excluding Japan, South-east Asia, South and Central Asia as well as the Pacific island economies – from 7.5 per cent to 7.9 per cent.

Yet Citigroup forecast global growth to rise 3.7 per cent this year and 3.3 per cent next year, trimming its projections by 0.1 percentage points for each year.

Dr Tan said the post-crisis global economic and financial environment will be affected by three major trends.

The first is that the developed world will take a ‘long time’ to fully heal from the crisis.

The second is the increasing importance of the emerging economies, anchored by Brazil, Russia, India and China.

And the third major trend, as Dr Tan describes it, will be ‘increased vulnerability’ to negative events, and ‘extreme reliance’ on government policies for both support and far- reaching reforms over the next few years.

Dr Tan said: ‘The challenge for policymakers in many developed economies will be to convince markets that they have credible plans to ensure sustainable public finances over the medium to long term, while minimising the negative short-term impact on growth.’

In the emerging economies, policy-makers will have to deal with rising inflation and possible asset price bubbles, he said.

Source: Straits Times, 24 Jul 2010

First normalise monetary policy, then adjust fiscal policy, it suggests

NOW that Asia is squarely on a V-shaped recovery path, it should be withdrawing the policy stimulus put in place during the recession, said the Asian Development Bank (ADB).

The Manila-based institution has upgraded its growth forecasts for the region in its latest twice- yearly Asian Economic Monitor, which it launched at the Singapore Marriott Hotel yesterday.

Growth in ‘emerging East Asia’, which the ADB defines as Asean, South Korea, China, Taiwan and Hong Kong, is now expected to come in at 8.1 per cent, up from the 7.7 per cent projected in April.

‘The stronger-than-anticipated export rebound and much-improved consumer confidence have helped the region’s economies recover faster than we expected,’ said ADB’s chief economist Jong-Wha Lee.

With the improved economic outlook, ‘it is now time for the region to unwind the policy stimulus’, said the ADB.

It recommended that the monetary policy be normalised first – that is, interest rates and exchange rates be raised to ‘normal’ pre-crisis levels – before the fiscal policy is adjusted.

This will allow economies in the region to continue using targeted fiscal measures to support domestic demand until it is clear that the private sector can take over, said Mr Srinivasa Madhur, senior director of ADB’s office of regional economic integration, which produced the Monitor.

Economies such as Singapore, South Korea, Malaysia, Taiwan and Thailand have already begun tightening their monetary policy in recent months by raising their interest rates or, in Singapore’s case, letting the exchange rate appreciate.

As DBS head of economics and currency research David Carbon said, the tightening of policy in the fast-growing region is ‘bread and butter economics’.

‘Output in Asia is now back far above pre-crisis levels. Inflation is nearly back to average and it is sure to rise above average in the coming few months,’ he said in a recent report. ‘But interest rates remain far below average. Central banks have much work to do.’

Economies that have already begun to slowly unwind stimulus should continue in that direction, and those that have not may need to start soon, said the ADB.

China, however, should accelerate policy normalisation by letting the currency appreciate, among other things, it added.

Still, the pace of unwinding the stimulus must factor in risks facing the overall global economy, Mr Madhur said.

These include a marked increase in capital flows, which can be destabilising, and uncertainty about the sustainability of recovery in the United States and Europe.

On the bright side, the threat of steeply rising inflation has yet to materialise in Asia, despite rapid growth.

This is partly due to the time lag between a rise in output and the subsequent spike in hiring and wage costs, said Mr Madhur.

‘Inflation is still manageable but don’t be complacent because that condition may not last long as labour markets tighten,’ he added.

‘Although we don’t see huge problems of inflationary pressures as of now, the signs are there… (It’s) time to unwind now rather than wait for that day to arrive and then get panicky.’

Source: Straits Times, 21 Jul 2010

Possible shocks from spillover of euro zone crisis and excessive capital flow

DAEJEON (SOUTH KOREA): Asia may be experiencing a sharp and quick rebound from the global financial crisis, but it has received a word of warning from the International Monetary Fund (IMF).

The region, said IMF chief Dominique Strauss-Kahn yesterday, should brace itself for possible further shocks, including being hit by a potential spillover from the euro zone crisis.

Or exuberant investors could pour so much capital into Asia that parts of the region could overheat, bringing about dangerous credit and asset bubbles.

The warning comes just after last week’s growth forecast by IMF for all of Asia – a buoyant 7.5 per cent this year, well above the average 4.6 per cent worldwide. But the IMF managing director also sought to soften the blow, stressing that a global double-dip recession was unlikely as recovery remains on track.

‘Asia’s time has come, no one can doubt that Asia’s economic performance will continue to grow in importance,’ he said yesterday at the opening of a high- level economic forum in the central South Korean city of Daejeon.

‘But downside risks – including the recent turmoil in Europe – mean that Asian policymakers need to remain attuned to negative shocks.’

The region also faces a real threat in the sharp rebound in capital flows that is likely to emerge as investors avoid Europe, the United States and Japan, where growth has been sluggish, for a burgeoning Asia. ‘Such huge inflow of capital can create instability,’ he warned.

To manage such a problem, Asian nations could consider measures such as currency revaluation and even temporary capital controls, he suggested.

Jointly organised by the IMF and South Korea, the two-day forum on Asia brings together senior policymakers and economists including Singapore’s Finance Minister Tharman Shanmugaratnam and his Thai counterpart Korn Chatikavanij. Both men are due to take part in a round-table discussion today.

Yesterday, South Korea’s Finance Minister Yoon Jeung Hyun echoed Mr Strauss-Kahn’s concern, noting that developing countries were not doing enough to withstand external shocks from the high volatility of capital flows.

According to media reports, Seoul and the IMF are looking at a possible global financial safety net that would give nations quick access to funds, helping them stave off crises and also discouraging emerging market nations from hoarding foreign reserves. Details are expected to be unveiled in November when South Korea hosts the G-20 summit.

The warnings for Asia come amid emerging signs that the global economic recovery may be losing steam. China’s economic growth appears to be slowing down, while the US has reported a stream of disappointing economic data.

Last week, an IMF report also warned that Europe’s credit woes could hit bank funding and corporate financing elsewhere, especially Asian economies that are more dependent on foreign currency financing.

As if that was not enough, the European Central Bank and the Bank of England also sounded an alarm bell on a looming credit crunch.

Institutions worldwide, including banks and cash-strapped governments, will have to repay or roll over trillions of dollars they owe under short-term loans in the next two years. As they compete for the bond market’s favour, it could squeeze the credit available for business and consumers, dampening economic growth.

Together, these risks pose a longer- term challenge for export-driven Asia, as Mr Strauss-Kahn and other speakers noted.

‘It is a trigger for change,’ he said.

Asia, he pointed out, needed to nurture a ‘second engine of growth’ by boosting domestic investment and consumption.

It is a strategy that some nations in the region are already pursuing, as they try to strengthen their social safety nets to boost private consumption, and introduce more flexible exchange rates.

China, for instance, recently raised the minimum wages of workers in the hope of revving up domestic consumption, a move hailed by Mr Victor Fung, honorary chairman of Hong Kong’s International Chamber of Commerce.

He said: ‘They are putting money into the hands of those who can actually spend.’

Source: Straits Times, 13 Jul 2010

Infrastructure works, personal spending enough to carry the day, says DBS chief

(SINGAPORE) Asia’s robust growth will be affected but not derailed by what looks increasingly like a stalling of growth in the US and Europe, said DBS chief executive Piyush Gupta.

Infrastructural development and personal consumption in Asia will carry the region and take up much of the slack from the global economies, he said yesterday.

Asia today is pretty much like the US in the 1950s, with governments in the region spending on building dams, railroads and roads and there is also the rise of the middle classes, he said.

‘Asian infrastructure investment is where it was in the US in the 1950s.’

Mr Gupta was speaking last night at the Singapore Indian Chamber of Commerce & Industry-DBS awards dinner.

‘Asia’s infrastructure spending will pump growth rates up. Between infrastructure spending and personal consumption, Asia will be able to generate its own demand.’

Between now and 2020, infrastructural spending is estimated to come to US$8 trillion.

Wealth creation in Asia is the fastest growing with reports of more millionaires being formed in the region than anywhere else in the world, he said. ‘Asia is generating more of our own demand.’

The tipping point came this year, he said.

According to DBS economists, 20 years ago, for every dollar incremental growth in the US, Asia contributed less than 50 cents.

But today, for every dollar the US puts out, Asia will put out 102 cents, said Mr Gupta.

Asia’s consumption rate is up 70 per cent compared with sub-one per cent in the rest of the world, he noted. ‘While I am not overly sanguine of the global economies and credit expansion, I am sanguine about Asia.’

Last year, 138 Asian corporates were among the Fortune 500 companies and they were the fastest growing ones, he said

As for the silver tsunami which will hit Japan, China and Singapore, the ageing population will create demand and business opportunities in areas such as health care and financial planning and other related services, he said.

There are political risks to doing business in many Asian countries as they face challenges in the growing disparity between the poor and the rich, Mr Gupta said in answer to a question from the floor.

China faces significant challenges in managing its social equity, between its richer coastal areas and the poorer inland economies, and increasing pressure on wages, he said.

The financial crisis has also made borrowing in US dollars more expensive for Asian countries.

‘Asian economies are dollarised significantly,’ he said.

For instance, Chinese banks are borrowing US dollars in Hong Kong to lend onshore, pushing up US interest rates there by 100 basis points over the wholesale Libor rate, he said.

Indonesian banks are facing a similar situations, he said.

Source: Business Times, 6 Jul 2010

SYDNEY: Asia’s economies signalled they are best placed to weather Europe’s debt crisis this week, as results released yesterday – from China’s exports to job growth in South Korea and Australia – surpassed analysts’ forecasts.

China’s exports jumped the most in six years and property prices rose at a near-record pace, signs that the economy is withstanding the debt crisis in Europe and remains at risk of overheating.

Unemployment rates in South Korea and Australia fell last month, and Japan said its economy expanded more than previously estimated in the first quarter.

The resilience may amplify American calls for Asian nations to reduce their reliance on exports and increase their contribution to a world recovery clouded by Europe’s fiscal woes.

China has so far resisted letting its yuan rise against the United States dollar, seeking to shield its exporters, while Japan’s central bank has flagged the recovery in refraining from stepping up injections of cash.

‘These numbers are very positive,’ said Mr Brian Jackson, a Hong Kong-based strategist at Royal Bank of Canada. ‘Asian countries have pretty strong fiscal positions and they’ve got growing domestic demand which will help insulate against any shocks out of Europe.’

Also, the ‘sharp pick-up in China’s trade surplus will not go unnoticed in Washington, where there will be more pressure on the US administration out of Congress to take a tougher line with China’ on its currency, he said.

Regional stocks surged yesterday after Chinese shipments abroad climbed 48.5 per cent last month from the figure a year earlier. China’s property prices also rose at the second-fastest pace on record last month, jumping 12.4 per cent from the figure a year earlier, a sign that the government crackdown on speculation has yet to avert the threat of an asset price bubble.

Japan’s economy expanded at an annualised 5 per cent rate in the three months ended March 31, quicker than the 4.9 per cent rate reported last month, driven by exports and an upward revision to consumer spending.

Australia said yesterday its employers added 26,900 workers last month, more than the 20,000 forecast by analysts, pushing down the jobless rate to 5.2 per cent from 5.4 per cent – almost half the level in the US and Europe. Payrolls rose for the third straight month, underscoring the central bank’s assessment that economic growth will accelerate this year as a mining investment boom stokes hiring.

Meanwhile, South Korea’s unemployment rate declined last month to the lowest level since October 2008, as the strengthening economy prompted companies to hire.

The jobless rate fell to 3.2 per cent from 3.7 per cent in April, after reaching a 10-year high of 4.8 per cent in January, Statistics Korea said yesterday.

Asia’s growth contrasts with several European nations that may see their gross domestic product shrink, with the risk of a double-dip recession, Mr Andrew Burns, lead writer of the World Bank’s Global Economic Prospects 2010 report, said in a telecast from Washington on Wednesday. He did not single out European countries by name.

East Asia would not be unscathed by a return to recession in the advanced economies, he said. ‘That’s going to have important knock-on effects in East Asia, particularly because it is a very heavy trading region.’

Bank of Korea cited the European situation in keeping its benchmark interest rate at a record low 2 per cent yesterday.

Asia will continue to lead the global rebound, International Monetary Fund deputy managing director Naoyuki Shinohara said on Wednesday.

That brings its own challenges, with increasing capital inflows and the risk of overheating if policymakers fail to take ‘appropriate’ action, he said in a speech in Singapore.

BLOOMBERG

Source: Straits Times, 11 Jun 2010

IMF urges govts to be ready to take appropriate action

(SINGAPORE) The International Monetary Fund (IMF) warned Asia yesterday of the potential spillovers of the European debt crisis, saying it could dampen trade, make capital flows volatile and overheat economies in the region.

‘Adverse developments in Europe could disrupt global trade, with implications for Asia given the still important role of external demand,’ IMF deputy managing director Naoyuki Shinohara told a forum in Singapore.

On the financial front, he said major credit problems could result in a ‘significant spillover’ through funding channels, especially where banks were dependent on wholesale funding.

There was also increased uncertainty and potential for volatility in the outlook for capital flows, Mr Shinohara said at the forum hosted by the Monetary Authority of Singapore.

He said Asia’s bright growth prospects, together with low interest rates in major economies, would likely attract more capital that could ‘lead to risks of overheating in some economies if appropriate policy action is not taken. ‘On the other hand, further increases in global risk aversion could see capital flows change direction quickly.’

Mr Shinohara called on Asian governments to be wary of the potential risks and be prepared to take appropriate action.

‘The key will be for policymakers to keep an eye on the bigger picture and be ready to act swiftly as developments unfold,’ he said.

‘With Asia’s economic muscle growing, the policy choices made in this region will have an important impact on the global economy,’ he added.

Greece is at the epicentre of a mounting debt crisis that threatens to spread across the eurozone and has pulled down the euro to four-year lows.

Asian markets have also been affected by the impact of the crisis.

Mr Shinohara said there was a risk that sovereign debt problems being experienced in some eurozone countries could spill over to others.

He said the strong fiscal position of most Asian economies provided the ‘space’ to respond flexibly to the European crisis.

‘In the event of spillovers from Europe, there is ample room in most Asian economies to pause the withdrawal of fiscal stimulus,’ he said. — AFP

Source: Business Times, 10 Jun 2010

ASIA’S economic growth could suffer in the next few quarters as exports to the West slow sharply due to sovereign-debt troubles in Europe and a lacklustre recovery in the US, Royal Bank of Scotland (RBS) analysts warned yesterday.

Growth in China, which has been a major engine of the recovery in Asia, is also likely to slow as the effects of its stimulus measures wear off, dragging down the pace of expansion elsewhere in Asia.

The result: A period of slower growth than in the boom years before the latest financial crisis, or in the rebound since late last year.

‘One leg of Asia’s growth is going to be chopped off in the coming months,’ said Sanjay Mathur, head of research and strategy for non-Japan Asia at RBS. ‘Exports are going to slow down.’

As a result, ‘growth next year will start to slow’, he said. A slower-growing Europe, coupled with a weaker euro, means demand for Asia’s exports is likely to fall.

Even China is starting to look ‘a lot shakier’, he said. ‘We are starting to see industrial activity show some kind of fatigue.’

The purchasing managers’ index for China published by HSBC and Markit fell to 52.7 in May – the lowest reading in 11 months – from 55.2 in April, suggesting that while Chinese manufacturing activity is still expanding, the pace of growth is slowing.

In stock markets, the result could be a ‘major downgrade in earnings expectations’ as investors adjust to a slower growth outlook for the broader economy, Mr Mathur said. ‘We are in for a fairly rough ride in the financial markets.’

But a period of slow growth in Asia could benefit the region by forcing policy-makers to make structural changes to their economies needed to sustain growth in the long term without relying heavily on private consumption demand in the West, he said. ‘Once we see that growth is not going to be the same as what we’re used to, we will see greater efforts towards improving domestic demand.’

That would include more efforts to promote small and medium enterprises, and more incentives to boost the services sector – reducing the reliance on manufactured exports for economic growth.

Source: Business Times, 9 Jun 2010

As outside demand will be low, Asia will have to search for stronger domestic driver of growth

AS THE world climbs out of the deepest recession in recent history, Asia is leading the global recovery. By end-2009, output and exports had returned to pre-crisis levels in most of Asia, including the hardest-hit economies.

In our recently released Asia-Pacific Regional Economic Outlook, we envisage that, on average, Asia will grow by 7 per cent this year and next, buoyed by growth in China, India and other countries (see Figure 1).

While activity in advanced countries remains held back by high unemployment and weak household and bank balance sheets, in Asia the picture is much more encouraging.

Singapore is a case in point. The economy has rebounded strongly from the recession, benefiting from the turnaround in global trade and financial markets as well as forceful counter-cyclical policies.

It is now firmly on a recovery path, although the external environment remains key to near-term prospects. Against this backdrop, monetary, fiscal and macro-prudential policies are appropriately aimed at curbing risks in the goods and asset markets – and exits from the extraordinary policy support of yesteryear are underway.

In the near term, we expect that Asia will continue to lead the global recovery. What underlies this robust growth picture? The recovery of demand in advanced economies, particularly the United States, is expected to fuel a re-stocking of inventories through most of 2010 that will boost Asian production and exports.

And while public stimulus is being phased out in some countries, growth should be sustained by the momentum that has developed in private domestic demand. Private consumption is growing on the basis of high asset values, growing consumer confidence and good labour market prospects, and private investment is being boosted by increases in capacity utilisation to more normal levels.

At the same time, the fragile nature of the global recovery still poses a risk for Asia. The global risks remain tilted to the downside, and a turn for the worse in the outlook for advanced countries or renewed negative shocks in world financial markets would present problems for the recovery in Asia as well as other regions.

For the first time in recent history, Asia is leading a global recovery and contributing an increasing share to global growth (see Figure 2). Also historically unprecedented is the fact that, this time around, Asia’s recovery is predominantly being driven by domestic demand.

Finally, capital inflows, which returned only slowly following previous downturns, are now surging into the region. These capital inflows partly reflect the extremely high levels of global liquidity, but are also a testament to Asia’s improved resilience and growth prospects.

The strong capital flows do, however, carry risks that will need to be carefully managed. These inflows have the potential to lead to overheating in some economies and to an increase in vulnerability to asset price booms and busts, inflation and macroeconomic volatility.

Asset price inflation in most of Asia has so far been contained, but the increase in excess liquidity in many economies does raise some concerns. We, therefore, welcome the measures that many policymakers are continuing to take to ensure macroeconomic and financial stability against the build-up of imbalances in local asset and housing markets.

Still, more may be needed to be done in the future if the region’s bright economic growth prospects and its widening interest rate differentials with advanced economies attract even more capital.

While the right package of measures varies across countries, in many of them it may be appropriate to allow more exchange-rate flexibility, which could forestall short-term inflows and help make financial conditions less accommodative.

Over the medium term, a key policy challenge for Asia will be to make private domestic demand a more prominent engine of growth and to rely less heavily on exports. In advanced countries, the recovery is likely to be sluggish by historical standards and domestic demand is likely to remain below pre-crisis levels for some time to come.

External demand will be smaller and Asia will have to search for a stronger domestic driver of economic growth. Since public stimulus cannot go on forever, that source will have to be private demand which will have to be nurtured through a package of policies, including many measures that are already being taken to strengthen and develop financial sectors, improve and widen social insurance systems and lessen the motivation behind precautionary saving.

Greater exchange-rate flexibility in the region should also be part of this package and would raise household incomes and consumption.

For our part, the International Monetary Fund (IMF) remains closely engaged with the region. Our policy dialogue with the Asian authorities is being deepened through initiatives such as a Regional Advisory Group which draws senior figures from Asia to advise us in our work in the region.

In addition, in July we will hold an important conference in Seoul, in partnership with the Korean government, to bring together senior figures from the region and draw lessons from Asia’s success in managing this crisis for the future and for the rest of the world.

The writer is director of the IMF’s Asia & Pacific Department

Source: Business Times, 19 May 2010