Stocksak: IMF cuts Asia’s Economic Forecasts as China’s slowdown bites.

© Stocksak. FILEPHOTO: The International Monetary Fund’s logo can be seen outside Washington, United States headquarters, September 4, 2018. REUTERS/Yuri Gripas/File Photo

By Leika Kihara

TOKYO (Stocksak), Friday, the International Monetary Fund reduced Asia’s economic forecasts as global monetary tightening and rising inflation were blamed for the war in Ukraine and China’s sharp slowdown dampened recovery prospects.

The IMF stated that while inflation in Asia is still low compared to other regions, central banks need to continue raising interest rates to keep inflation expectations from becoming de-anchored.

Krishna Srinivasan (director of the IMF’s Asia and Pacific Department) stated that “Asia’s strong economy rebound early in this year is losing momentum,”

“Further tightening the monetary policy is required to ensure that inflation returns towards target and inflation expectations stay well anchored.”

The IMF lowered Asia’s forecast for growth to 4.0% this and 4.3% next years, down 0.9% point and respectively 0.8 point from April. This follows a 6.5% growth in 2021.

The report stated that “As the pandemic’s effects diminish, the region will face new headwinds from global economic tightening and an anticipated slowdown in external demand.”

According to the IMF, China’s rapid and widespread economic slowdown is one of its biggest headwinds. Its strict COVID-19 lockdowns, and worsening property woes are two of the main culprits.

“With a rising number of property developers defaulting over the last year, the sector’s access to market finance has become increasingly difficult,” the report stated.

“Risks to banks from the real estate sector are increasing because of significant exposure.”

China’s growth will slow to 3.2% next year, according to the IMF. This is down 1.2 points from its April projection after an 8.1% increase in 2021. According to the IMF, China’s second-largest economic sector is expected to grow 4.4% next year and 4.5% by 2024.

The IMF stated that as emerging Asian economies are forced to raise rates to prevent capital outflows, a “judicious use” of foreign exchange intervention could help to ease the burden on monetary policies in some countries.

“This tool could prove particularly useful among Asia’s shallower forex markets” such as the Philippines. It also helps to identify currency mismatches in corporate or bank balances that can increase exchange-rate volatility risks like in Indonesia, according to the IMF.

It said that foreign exchange intervention should only be temporary to avoid side effect from prolonged use. This could lead to increased risk-taking in private sector.

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