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NEWS UPDATES Asean Affairs                    21  September 2011

IMF downgrades emerging market outlook

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Weak global activity and growing downside risks have dampened prospects for emerging markets, the International Monetary said.

In the September issue of its World Economic Report, the IMF warned that the “global economy is in a dangerous new phase.”

It said a barrage of shocks—including the Japan earthquake, unrest in some oil-producing countries, anemic US economy, and financial turbulence in euro area—that hit the international economy this year have worsened the situation.

“The structural problems facing the crisis-hit advanced economies have proven even more intractable than expected, and the process of devising and implementing reforms even more complicated. The outlook for these economies is thus for a continuing, but weak and bumpy, expansion,” the IMF said.

For emerging markets, the IMF projects that growth would “remain fairly robust, especially in economies that can counter the effect on output of weaker foreign demand with less policy tightening.”

Capacity constraints, policy tightening, and slowing foreign demand are expected to dampen growth to varying extents across countries in emerging and developing economies, it said.

As a result, its growth forecast for emerging and developing economies was slashed to 6.4 percent and 6.1 percent for 2011 and 2012, respectively, from 6.6 percent and 6.4 percent in the June WEO.

“However, this assumes that European policymakers contain the crisis in the euro area periphery, that US policymakers strike a judicious balance between support for the economy and medium-term fiscal consolidation, and that volatility in global financial markets does not escalate,” the IMF said.

It however noted that homegrown risks in emerging and developing economies were “less severe,” but warned that there are still signs of overheating, particularly from the monetary and prudential authorities.

“The uneven nature of the expansion and the many risks that threaten activity are symptomatic of a global economy that continues to struggle to accomplish the two rebalancing acts identified in earlier issues of the World Economic Outlook,” the IMF said.

It added that key advanced and emerging market economies need to strengthen policies to advance rebalancing and hedge against the many downside risks.

Policies must be calibrated to reflect the transformed global environment, including lower potential output in many advanced and crisis-hit emerging market economies, unusually vulnerable financial sectors, high public deficits and debt and more sovereign credit risk differentiation among advanced economies, and the greater economic resilience of many emerging economies, the IMF said.



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