IMF sees better days ahead for East Asia

IMF sees better days ahead for East Asia

WASHINGTON (AFP): The International Monetary Fund (IMF) on Monday said South Korea, Thailand and Malaysia faced brighter prospects in 1999, with their economies either limiting output declines or staging modest recoveries after deep recessions this year.

Indonesia too was making progress toward stability, although the process has been complicated by political uncertainty and slowness in the implementation of reforms, the IMF concluded in the latest edition of its World Economic Outlook report.

The study also found that China had been growing faster than predicted by the IMF in October and had taken effective measures to protect itself from financial upheavals elsewhere in Asia.

Hong Kong meanwhile is estimated to have suffered a 5 percent contraction in growth for 1998, partially reflecting sharp falls in property and stock market prices.

But in South Korea and Thailand, according to the IMF, "financial markets have already recovered significantly, the exchange rate collapses of late 1997 and early 1998 have been partly reversed, international reserves have been substantially replenished and stock markets have rebounded."

The report credited tighter monetary policies that the IMF said had achieved "considerable success in re-establishing financial stability" and healthier exchange rates.

With a return of investor confidence, notably in response to large current account surpluses, short-term interest rates have now come down to between 5 percent and 8 percent, rates that prevailed prior to the acute financial crises both countries suffered in 1997.

The IMF has come under sharp criticism, notably in U.S. academic circles, the U.S. Congress and in some quarters at the World Bank, for its insistence that countries receiving its support first tackle currency weaknesses by raising interest rates.

Higher rates, critics contend, impede recovery and take a heavy toll on national living standards.

In Indonesia, interest rates are also coming down following a strengthening in the local currency, the rupiah, and in light of weaker inflationary pressures, the report found.

The IMF acknowledged that the imposition of capital and exchange controls in Malaysia last September, initiatives that found little favor among Fund economists, "may have facilitated the easing of interest rates."

But it warned that maintaining controls could also hamper recovery.

Malaysia, South Korea and Thailand should be able to show real progress next year, suffering "only small declines in output" or even enjoying "modest recoveries," according to the IMF.

China should enjoy strong growth this year of 7.2 percent, the report predicted, largely in response to a fiscal stimulus package equivalent to 2.5 percent of gross domestic product and reductions in domestic interest rates.

A senior International Monetary Fund official on Monday publicly acknowledged that differences existed with the World Bank on the response to last year's Asian financial crisis.

The disagreement, which has become increasingly apparent to observers of the two Washington-based institutions, has centered on the IMF's preference for higher interest rates as a means of restoring investment confidence and stabilizing currencies.

At a press conference here Monday IMF research director Michael Mussa confirmed that there had been differences with the Bank and defended the IMF's interest rate policy.

"It is clear that the World Bank, and in particular its chief economist Mr. Stiglitz, has had a different assessment of the desirable policy responses at the time of the Asian crisis a year or more ago and has made that point on several occasions," he said.