IMF Warns of Overheating in Asia

By Diane Claire J. Jiao | Source: Business World Online
AS VOLATILITY in the United States and Europe eases, Asia must now look inward and guard against the risk of overheating, the International Monetary Fund (IMF) said.

The global economy has shown signs of improvement, the IMF said in its Regional Economic Outlook that was released yesterday, with the US fiscal “cliff” and a euro zone collapse averted,

Asia, though, cannot be lax, it said. “To begin with, financial imbalances and rising asset prices, fueled by strong credit growth and easy financing conditions, are building in several economies,” the IMF explained.

Amid continued global woes, central banks across the region took policy rates to record lows with the aim of spurring domestic consumption and investment. In the Philippines, the Bangko Sentral ng Pilipinas took overnight borrowing and lending rates down 100 basis points to 3.5% and 5.5%, respectively.

“With inflation remaining low and stable, this accommodative stance has been welcome. But financial imbalances are often persistent and cannot be easily unwound, and output levels are close to or slightly above trend in most economies,” the IMF said. “Hence, monetary policy makers should stand ready to respond early and decisively to any prospective risks of overheating.”

It is imperative for Asia to balance guarding against the build-up of financial imbalances and managing a transition to tighter monetary policy, the IMF stressed, while still providing support for the economy. The region has enough buffers to cope with these risks, it noted, given healthy banking and corporate sectors.

The IMF also warned countries like the Philippines against falling into the “middle-income trap” where rapidly-growing economies fail to rise to the high-income levels of developed markets. Middle-income economies in Asia — China, India, Indonesia, Malaysia, the Philippines, Thailand and Vietnam — face the danger of a period of stagnation after a spell of strong growth. Sound economic institutions, favorable demographics, adequate infrastructure, trade diversification and macroeconomic stability can reduce the likelihood of a slowdown, it said.

“India, the Philippines and Thailand are exposed to a larger risk of growth slowdown stemming from subpar infrastructure. Improving economic institutions is a further challenge for India and the Philippines, as well as for China and Indonesia,” the IMF noted.

Shrewd fiscal consolidation can help address these problems since government investment, especially in infrastructure, is still low in the Philippines. Public spending can fill in these gaps, the IMF said.

Revenue intake should be boosted since the country’s collection of value-added taxes are “especially low,” creating a “sizable” reliance on corporate income taxes.

The tax base of the Philippines is small, the IMF noted, since the system of tax holidays and reduced tax rates is “too generous and unnecessarily complex.”

Tax administration is also poor due to understaffing and insufficient training, while the shadow economy is growing.