JP/13/Asia

JP/13/Asia

Asia to remain world's fastest-growing region: IMF

Takeshi Takeuchi
Dow Jones
Washington

Asia's 2003 economic prospects have dimmed only slightly as a
result of SARS, with the region excluding Japan still on track to
post the world's strongest growth this year, the International
Monetary Fund (IMF) said on Thursday.

The IMF, in its World Economic Outlook, also urged Asian
governments to focus on boosting domestic demand and nudged them
toward letting their currencies move more freely.

The international lender trimmed its Asia ex-Japan forecast
for 2003 economic growth to 5.9 percent from its April estimate
of 6.0 percent, saying growth remains on track with help from
increasing exports and the apparent containment of SARS.

Despite the impact of the flu-like disease - which hit China,
Hong Kong, Taiwan and Singapore especially hard in the second
quarter and damped exports and tourism region-wide - Asia's
expected expansion remains nearly double the 3.2 percent growth
that the IMF forecasts for the global economy.

Moreover, the IMF predicts in its semiannual report that Asia
will accelerate to 6.2 percent growth next year, matching its
2002 performance, as the global economy picks up.

Within Asia, gross domestic product growth is forecast to
range between 0.5 percent for Singapore and China's 7.5 percent.

Above all, Asia is benefiting from overseas demand, the IMF
said: "A notable feature of recent performance has been the
support to output growth provided by net exports."

But such export-dependent expansion is vulnerable to "the
vagaries of the global economic cycle," the IMF said, stressing
the need for Asia to boost demand at home.

A shift to a domestic-demand-led recovery is all the more
important for Asia because the dollar's recent declining trend
will inevitably cause a rebalancing of global demand and could
curb Asia's exports, the report said.

To achieve a better balance between exports and domestic
demand, the IMF urged Asian countries to adopt more flexible
exchange rates.

While saying structural reforms should be the primary means to
boost domestic demand, the IMF said, "Greater exchange-rate
flexibility in some countries would also help" by increasing
"consumption opportunities for local residents" in countries
where exchange rates are undervalued.

The IMF also said more flexible exchange rates would bring
other benefits, such as lowering the holding costs of official
foreign-exchange reserves. Asian central banks have by far the
largest foreign reserves in the world, and these have swelled
recently as some countries sell their own currencies for dollars
to keep local units from rising in value.

Calling for currency flexibility is a reiteration of standard
IMF advice but it comes at a politically charged time. The U.S.
in particular is growing impatient with China, which essentially
pegs its yuan around 8.28 to the dollar. Treasury Secretary John
Snow visited China this month and urged the government to move
toward a more flexible currency regime.

Beijing rebuffed any call to change the peg in the near
future, and Snow got little support from other Asia-Pacific
finance ministers for his currency-liberalization campaign. But
the issue continues to heat up, with U.S. lawmakers pushing the
government to take up currency "manipulation" as a trade issue.
U.S. manufacturers claim China is keeping its currency - and
therefore its exports - artificially cheap, undercutting U.S.
products and costing American jobs.

In addition to China, Hong Kong and Malaysia peg their
currencies to the dollar, which has declined significantly this
year against most other units. Singapore keeps its dollar in a
narrow range against a trade-weighted basket of currencies.

The IMF also advised Asian countries to remain alert to a re-
emergence of SARS, which many public health experts have warned
is a distinct possibility.

Although the report acknowledges SARS appears largely
contained, "There could be lagged effects on output owing to
delayed investment and further effects if the epidemic recurs in
the winter."

Monetary and fiscal policy responses of Asian countries so far
have been mostly appropriate, the IMF said.

To limit adverse effects of SARS and the U.S-led war against
Iraq in the first half of this year, "monetary policy has been
eased" and "fiscal stimulus has also been provided" in a number
of countries.

Still, the IMF said it's important to resolve bad-debt
problems in China, Indonesia, the Philippines and Thailand. It
also urged India, South Korea, the Philippines and Thailand to
strengthen insolvency laws to facilitate corporate restructuring.

IMF's Forecast GDP Growth Rates

(percent per year)

2002 2003 2004

All Emerging Asia 6.2 5.9 6.2

Newly Industrialized
Economies 4.8 2.3 4.2
- Hong Kong 2.3 1.5 2.8
- South Korea 6.3 2.5 4.7
- Singapore 2.2 0.5 4.2
- Taiwan 3.5 2.7 3.8

ASEAN-4 4.3 4.1 4.4
- Indonesia 3.7 3.5 4.0
- Malaysia 4.1 4.2 5.3
- Philippines 4.4 4.0 4.0
- Thailand 5.3 5.0 5.1

South Asia 4.6 5.5 5.8
- Bangladesh 4.9 5.4 5.8
- India 4.7 5.6 5.9
- Pakistan 4.4 5.4 5.1

Formerly Centrally
Planned Economies 7.9 7.4 7.5
- China 8.0 7.5 7.5
- Vietnam 5.8 6.0 7.0