ASEAN KEY DESTINATIONS
Asean economies may overheat
Fast-growing Asian economies face a risk of overheating and may need to tighten monetary policy further, the head of the International Monetary Fund said Tuesday.
Financial and structural reforms over the past decade have helped Asia weather the global economic crisis - the IMF expects growth to reach 8.5 percent in Asia ex-Japan this year, compared to just 2.5 percent in the developed world--but now "there are risks of overheating, and even a hard landing," Dominique Strauss-Kahn said in a speech at the Monetary Authority of Singapore.
"This means that macroeconomic policies should be tightened in countries where output gaps have nearly closed, or have in fact already closed," he said. "In Asia, recent rate actions were the right decision--though more may be needed."
Strauss-Kahn also sounded a warning about inflation, a growing concern for authorities across Asia. Rising energy prices reflect rapid growth in emerging economies, he said, while food inflation has "potentially devastating consequences for low-income countries."
He said the pre-crisis pattern of global imbalances is re-emerging, as economies with large external deficits, such as the US, still depend on domestic demand while surplus countries like China are being driven mainly by exports.
"It is clear for me that emerging economies with large surpluses need to diversify the drivers of growth," Strauss-Kahn said. "This is well understood in Asia, and especially in China, where policymakers are taking steps to bolster domestic demand."
Exchange-rate adjustments - a sensitive topic in China and other Asian countries that fear stronger currencies will harm their export competitiveness - "have to play an important role" and "should not be resisted," Strauss-Kahn said.
A surge of money into Asia over the past year, drawn by strong growth and rising interest rates, has created concern about market volatility and asset-price bubbles. The type of capital controls implemented in a number of countries in recent months can be of "temporary use," Strauss-Kahn said, but can't replace effective macroeconomic and macro-prudential policies.
Deeper financial and capital markets could help absorb incoming capital, he said, channeling it to meet Asia's pressing infrastructure need.
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