05 January 2012

Asia in 2012: IMF says resilient, but at risk from euro downturn

Despite the prevailing global uncertainty, Asia has until now proven to be very resilient. It has boasted strong domestic demand, low unemployment, and factories working at near-full capacity. While credit growth has slowed from the torrid pace of early 2011, it remains robust in most economies.

Japan is mounting a recovery from the March 2011 earthquake and tsunami, and in Thailand reconstruction is under way following the country’s devastating floods.

A difficult year ahead

But Asia’s heavy reliance on trade is likely to make 2012 a difficult year, suggest economists from the Asia and Pacific department at the IMF. Asia is one of the world’s most trade-dependent regions, exporting everything from commodities such as metals and rice to sophisticated electronic products and cars. So, the level of external demand will be crucial in determining the region’s economic performance.

Regional growth has already started to slow due to weaker demand, although domestic factors such as tighter macro-economic policy stances have also played a role, especially in India and China. In the future, the IMF economists expect only relatively soft demand for exports from Asia.

Recent stresses in several regional financial markets suggest that financial channels of contagion also pose a risk for Asia.

Events in the eurozone have created a global aversion to risk, and a corresponding sharp decline in Asian stock markets. Regional currencies have depreciated. Dollar funding pressures are increasing in several economies. And the cost of insurance on several regional banks has soared to levels only previously seen in the aftermath of the Lehman Brothers bankruptcy.

Further financial turmoil in the eurozone would likely have a substantial impact on Asia by reducing access to credit. Eurozone banks are an important source of funding for many Asian banking systems, and play a crucial role in providing trade credit.

Looking at the medium term

Asia remains home to some of the world’s most dynamic economies, but several reforms are needed to sustain the region’s excellent historical performance and reduce vulnerabilities to external shocks. The challenges vary widely across countries.

In China, further actions are needed for a sustained rebalancing of growth away from investment and exports toward private consumption. These include reform and liberalisation of the financial system, fiscal support to household consumption, and a further expansion of the social safety net.

In Japan, lowering public debt and raising potential growth are the key challenges. These would be aided by raising labour force participation, boosting the activity of small and medium-sized businesses, and deregulating the service sector.

In Korea, productivity gains in the service sector should be targeted. And many countries within the Association of Southeast Asian Nations should focus on infrastructure investment to boost potential growth.

Structural reforms are also needed to make growth more inclusive. Despite notable progress in reducing poverty, income inequality has increased in most of Asia over the last two decades.

Asia and the IMF: The road to Tokyo Annual Meetings

In 2012, the IMF, together with the World Bank, will hold its Annual Meetings in Tokyo. The venue reflects the critical role of Asia as a bulwark of stability in the world economy, as well as the IMF’s growing and constructive partnership with the region.

Asia’s links with the IMF are being strengthened through governance reforms giving the region a greater voice in the institution, and also through the selection of key IMF personnel from the region.

Recent appointments include Singapore’s Minister for Finance, Tharman Shanmugaratnam, as Chairman of the International Monetary and Financial Committee, and Min Zhu, as Deputy Managing Director of the Fund.

Press release

© International Monetary Fund