IMF Warns Emerging Asia about Asset Bubbles

After praising some of Asia’s emerging nations for their fast track recovery, the IMF is warning them about the structural changes need to avoid falling prey to domestic economic imbalances.

Asia needs to guard against asset bubbles and its emerging economies must improve government institutions and liberalize rigid labor and product markets if they wish to reach the level of developed countries, the International Monetary Fund said on Monday.

“Emerging Asia is potentially susceptible to the ‘middle-income trap,’ a phenomenon whereby economies risk stagnation at middle-income levels and fail to graduate into the ranks of advanced economies,” the IMF said in its latest Regional Economic Outlook for Asia and the Pacific.

“MIEs (middle-income economies) in Asia are less exposed to the risk of a sustained growth slowdown than MIEs in other regions. However, their relative performance is weaker on institutions,” the international funding agency said.

IMF’s warning about the emerging risks faced by Asian countries come at time when the region looks set to lead a global economic recovery as risks from a meltdown in Europe recede.

“While the external risk of severe economic fallout from an acute euro area crisis has diminished, regional risks are coming into clearer focus. These include some ongoing buildup of financial imbalances and rising asset prices,” the IMF said.

IMF was monitoring credit ratios and output levels in Asia closely as conditions can worsen very quickly, the fund’s director for Asia and Pacific region, Anoop Singh, told reporters at a briefing in Singapore.

He said regional authorities needed to respond early and decisively to potential overheating.

IMF, which recently cut its 2013 and 2014 growth forecasts for Greater China, India, South Korea and Singapore but raised its outlook for Malaysia and the Philippines, nevertheless sounded generally positive about near-term prospects.

“Growth in Asia is likely pick up gradually in the course of 2013, to about 5.75 percent, on strengthening external demand and continued robust domestic demand,” it said.

via Reuters

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