Danial Norjidi
Asia and the Pacific remains a dynamic region despite the sombre backdrop of what looks to be a challenging year for the world economy, according to the International Monetary Fund’s (IMF) May 2023 edition of the Regional Economic Outlook for Asia and the Pacific.
Published twice a year, in the spring and fall, the Outlook reviews developments in the region.
As is highlighted in the latest edition of the report, “2023 looks to be a challenging year for the global economy, with global growth decelerating as the effects of monetary tightening and the war in Ukraine continue to weigh on activity.
“Persistent inflationary pressures, and recent financial sector problems in the United States (US) and Europe, are injecting additional uncertainty into an already complex economic landscape. Against this sombre backdrop, Asia-Pacific remains a dynamic region. Despite weakening external demand – such as the downturn in demand for tech exports toward the end of 2022 – and monetary tightening, domestic demand has so far remained strong, with China’s reopening providing fresh impetus.”
Growth in Asia and the Pacific is projected to increase this year to 4.6 per cent, from 3.8 per cent in 2022, an upgrade of 0.3 per cent relative to the October 2022 World Economic Outlook, said the report.
“This means the region would contribute around 70 per cent of global growth.
“Asia’s dynamism will be driven primarily by the recovery in China and resilient growth in India, while growth in the rest of Asia is expected to bottom out in 2023, in line with other regions.”
The study added, however, that this dynamic outlook does not imply that policymakers in the region can afford to be complacent.
“The pressures from diminished global demand will weigh on the outlook. Headline inflation has been easing, but remains above targets in most countries, while core inflation has proven to be sticky.”
“Although spillovers from turmoil in the European and US banking sectors have been limited thus far, vulnerabilities to global financial tightening and volatile market conditions, especially in the corporate and household sectors, remain elevated,” according to the report.
MONITORING VULNERABILITIES
Also mentioned was that growth is expected to fall to 3.9 per cent five years out – the lowest medium-term forecast in recent history – thus contributing to one of the lowest medium-term global growth forecasts since 1990.
“Risks to the outlook are to the downside, reflecting the possibility of stickier global and regional price pressures, the disconnect between markets’ anticipation of monetary policy paths and major central banks’ communications, additional turmoil in global financial markets, adverse spillovers to the region from China’s medium-term growth slowdown, and deeper geoeconomic fragmentation.”
In addition, the report shared that monetary policy should remain tight until inflation falls durably back within target.
“The exceptions are China and Japan, where output is below potential and inflation expectations have stayed muted.
“Unless strains in financial markets increase and financial stability is at stake, central banks should separate monetary policy objectives from financial stability goals, using available tools aimed at addressing financial stability risks to allow them to continue to tighten policy to address inflationary pressures.”
“Elevated public debt and rising interest costs call for continued – and, in some cases, accelerated – fiscal consolidation, which can also support the battle against inflation, while protecting the vulnerable through targetted measures.
“Monitoring pockets of vulnerability linked to elevated debt burdens in the corporate and household sectors and market risk and corporate credit risk exposures, is essential for safeguarding financial stability.”
The report further noted that structural reforms are needed to improve growth potential, through innovation and digitalisation; accelerating the green energy transition; reducing risks from fragmentation; and ensuring food security.
Elaborating on financial risks during a press briefing, Director of the Asia and Pacific Department at IMF Krishna Srinivasan said, “The global banking stress has had a limited impact on Asian markets so far.
“Direct exposures of Asian banks and investors to Silicon Valley Bank were minimal.
“Equity prices for Asian banks have been resilient and have largely made up the losses following the global selloff at the time of the failure of the bank. There are even some signs of loosening financial conditions in the region.”
“As markets reprice the path for the federal funds rate, the US Treasury yield has fallen substantially. This has led to yields on Asian local currency bonds to fall and a strengthening of Asian currencies,” continued Srinivasan.
“Still, pockets of private sector financial stress may be emerging due to factors such as increased leverage and risks from the real estate sector.
“Asian financial systems should be able to withstand these stresses, being well capitalised and with strong liquidity buffers, but financial supervisors will need to remain alert,” he added.
