Mission for ‘Frontier Asia’

Region’s newest emerging economies are a diverse group with great promise, but they must avoid traps similar to the ones that snared some of their peers in 1997, says the IMF.

The economic future of Asia remains bright despite slight slowdowns that may emerge from time to time, but countries need to control the volatility of fund inflows, says a senior IMF official.

“They have very good prospects for the future. These markets are enjoying about 6% [annual] growth at this moment and there’s huge potential to be the next engine of growth for the global economy,” said Naoyuki Shinohara, the deputy managing director of the International Monetary Fund (IMF).

The prospects for “Frontier Asia” in particular were very good, he said in a recent interview with Asia Focus. With a combined population of 350 million people, Frontier Asia is increasingly playing an important role within Asia and the world.

The frontier economies in Asia include Bangladesh, Cambodia, Mongolia, Laos, the Maldives, Myanmar, Nepal, Timor-Leste and the Kyrgyz Republic. The recent political and economic changes in Myanmar have ushered onto the stage another economy with great potential.

Since the onset of the global financial crisis in 2008, Asia has demonstrated an extraordinary economic resilience, emerging as an important engine of global growth and as a source of stability. While the world’s attention has tended to focus on the region’s largest economies, there has been another important development — the achievements of Frontier Asia, nations that are on a path to writing a new success story, he said.

“But at the same time there are lots of challenges that they are facing, and despite this I think they have to take advantage of the current situation to build a system, and that is one of the issues I have been talking about to central bankers,” he added.

His concern has been the inflow of funds into these countries from weaker western economies that have been using expansionary monetary policies as a stimulus. Most of the extra money pumped into the US and EU economies has ended up in Asia where investment returns are far better than in the West.

Asia has also witnessed a boom in credit growth as governments have been promoting more domestic consumption in light of the weakening export sector.

“I have noticed across this region in Asia that credit growth seems to be very strong. Although inflation expectations are being contained, the credit growth is stronger than we had expected. There are signs that a credit bubble is coming and monetary authorities need to be careful,” the former Japanese Ministry of Finance bureaucrat cautioned without naming any specific countries.

“I think the central bankers know and each of them is well aware of these issues, and at times there is a huge surge in consumption.”

He added that he was not in any way against inflows of capital as they are necessary, but what he did not want was “volatility” in the process.

Asia had a similar experience 15 years ago, when “hot money” was one of the key contributors to the 1997 financial crisis. The resulting bubble in asset prices eventually led to severe problems in the financial sector.

“Capital inflow in itself is good and it is good for the growth of the economy but it becomes a problem if it becomes volatile,” said Mr Shinohara. “In order to ride it, the right set of macroeconomic policies needs to be set in order for the economic situation of the country to remain sound.”

He even advocates that regional countries develop some short-term measures to slow the inflow of “hot money”.

“Some kind of prudential measures that some countries are using may be necessary; they could be useful as temporary measures,” he noted.

He said that although Frontier Asia is not a homogenous group and includes commodity-rich countries, manufacturing exporters, and some remittance-dependent economies, they face a number of common macroeconomic, financial, and structural challenges. The key challenges are:

The need to accelerate reforms: Economic development critically involves the dynamic reallocation of resources from less productive to more productive sectors. In the past, broad-based liberalisation (including trade and accession to WTO) facilitated a shift from agriculture to manufacturing, which in turn was accompanied by rapid growth.

However, to sustain high growth rates, reforms must be intensified, including the strengthening of institutions. Countries must continue transforming economic sectors that allow them to move up the value chain.

The need to ensure that financial development does not create vulnerabilities. Frontier Asia has experienced strong credit growth over the last decade, but rapid financial sector development can lead to stresses and a misallocation of resources that can undermine stability and the growth prospects. Better financial sector regulation and supervision are essential.

The need to ensure that all citizens benefit from economic growth. Income inequality in Frontier Asia has increased significantly. And despite financial sector deepening, a large share of the population still does not have access to financial services, with negative consequences for poverty reduction.

The IMF for its part is also trying to help the region with “soft” programmes, mainly technical assistance and training. It has increased technical assistance delivery to Frontier Asia in the past two years, and recently opened a regional technical assistance office for Myanmar and Laos in Bangkok.

Apart from this, the IMF continues to offer a range of programmes at its training facility in Singapore, in which many Asian nations’ representatives have participated over the last 15 years.

Commenting on the outlook for global growth in 2013, Mr Shinohara said it was projected to reach 3.5%, up slightly from 3.2% last year and still significantly below previous periods. “Policy actions have lowered the acute crisis risks” in the euro area, the IMF said recently, but it still expects 0.2% contraction this year instead of the slight recovery it had forecast earlier.

In addition, although Japan appears to have returned to recession in 2012, stimulus is expected to increase growth in the near term. The US is likely to achieve about 2% growth as consumption firms up in response to the slow turnaround in the housing market and supportive financial markets. But the US continues to face considerable uncertainty because of the continuing political stalemate over long-term fiscal issues.

In emerging and developing economies, policies have supported a modest pickup in growth in some economies, but others continue to struggle with weak external demand and domestic bottlenecks. “We believe that these economies are on track to grow about 5.5% in 2013 — but still not back to the high growth rates that we saw in 2010-11. Here, too, developments in advanced economies will have a great impact,” the IMF said.

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Writer: Umesh Pandey