IMF Warns Asian Crisis Could Deepen
By Adam Entous
WASHINGTON (Reuters) - The financial crisis in Asia could deepen and spread in the months ahead, the International Monetary Fund (IMF) warned on Saturday in a report urging developing countries to brace against the economic fallout.
In its interim World Economic Outlook, the IMF slashed its combined growth forecasts for Thailand, Indonesia, Malaysia and the Philippines by a whopping 3.7 percentage points to 1.7 percent for 1998, and said turmoil in Asia would dampen global growth.
It predicted growth in Japan of only 1.1 percent in 1998, and said growth in South Korea was expected to fall to 2.5 percent next year from 6.0 percent this year.
"Undoubtedly, people are going to feel the pain of this adjustment," IMF chief economist Michael Mussa said at a news conference to present the report.
In recent months, the IMF has had to put together multibillion loans to rescue South Korea, Thailand and Indonesia after the July 2 crash of the Thai baht currency sent economic shock-waves across Southeast Asia.
The extent of the financial shock to hit Asia took the international lending agency by surprise, the IMF said. Neither economic forecasts nor asset prices in the financial markets foretold the "depth and breadth" of the crisis to come, it said.
While acknowledging that some of its previous forecasts for the region were "too optimistic", the fund said it repeatedly warned authorities in Asia about the risks. But to no avail.
"When economic conditions remain generally good and when private foreign capital is flowing at a record pace and on very attractive terms, it is easy to believe that the good times will continue," the report said.
Although uncertain of how long the crisis will last, the IMF said the economic pain was far from over, and warned that market turmoil could spread.
For those countries already affected, the IMF said economic reforms must not be put off. Hesitation can only worsen the crisis, cause markets to drop further, and exacerbate contagion to other emerging markets and to more developed countries, it said.
The crisis has already led to a dramatic slowdown in private capital flows to emerging economies in all regions, with the sharpest drop in Asia, the IMF said. These flows to developing and newly industrialized economies will drop by $80 billion in 1997 alone, the fund estimated.
Painful adjustments will need to be made in emerging markets around the world, the fund said, as fiscal policies are tightened, domestic investment and consumption are compressed, imports decline, and economic growth slows or, in some cases, turns negative.
The IMF said capital flows to developing countries would remain low in the months ahead as investors become more cautious and as borrowers postpone new issues because of the high cost of accessing the international capital markets.
As the crisis drags on, the IMF said other developing countries are more likely to be drawn in.
"Many countries are vulnerable to reversals of market sentiment," the IMF said. "It is therefore critical that countries take the necessary steps to reduce their vulnerability."
To protect their economies, the fund said developing countries should contain their external deficits and strengthen their banking systems. In some cases, exchange rate policies may need to be changed.
Though bleak in the near-term, the IMF said investor sentiment toward emerging markets would begin to turn around in the course of 1998, and that countries hard hit by the Asian crisis, after a significant slowdown in growth next year, will see a pickup in 1999.
The crisis may even pass along a few benefits to the former "Asian tigers". It may help the region put a lid on large current account deficits as private capital moves elsewhere, the IMF said.
"These economies have the potential to regain the confidence of investors at home and abroad," the IMF said. "As confidence returns, growth can also be expected to recover." |
