Hold the bubbly, go after the bubble, IMF cautions Asia

Identifies capital inflows, asset bubbles as possible policy challenges.

The International Monetary Fund (IMF) today asked Asian economies to be prepared for further shocks but said the chances of a double-dip recession appeared remote.

IMF Managing Director Dominique Strauss-Kahn said at the ‘Asia 21’ conference here that a part of the risks arose from the problems in Europe which could affect exports from the emerging economies. In addition, he said that managing capital inflows and related risks of overheating and credit asset bubbles were major policy challenges for Asian countries.

“There is a threat of capital inflows due to large liquidity globally and little appetite to invest in Europe, Japan or in anything other than US treasury bills. So, the money will go to the emerging markets, resulting in huge inflows…. This creates instability in the short term; and a sudden stop also creates uncertainty,” Strauss-Kahn told reporters later.

He said the Asian economies had to deal with the situation by allowing revaluation of currencies, building reserves and even by putting in place capital controls.

The conference under the theme of ‘Asia 21: Leading the Way Forward’ will conclude tomorrow.

In recent weeks, along with the rise in the stock markets, portfolio flows have returned to Asian markets. In case of India, so far in 2010, foreign institutional investors have pumped in Rs 32,800 crore in equities. The rupee, which had hit a life-time low of 52 against the US dollar in March 2009, has risen to 44 against the greenback. Following the problems in Europe, the Indian currency weakened a little and was trading at 46.78 per dollar at the end of trading hours today.

Strauss-Kahn said that the steps taken by Asian economies following the 1997 crisis had helped the region emerge stronger. “The macroeconomic, financial and corporate sector reforms put in place over the last decade have played an important role in the region’s resilience. So, despite being hit hard initially, Asia was able to bounce back quickly from the global financial crisis,” he said.

The IMF managing director said the US dollar had been “very resilient” during the crisis, surprising market players who had expected it to suffer. Major currencies such as the yen and euro had a role to play, but the dollar would remain the most important world currency, he added.

On the issue of change in quotas at the multilateral agency, a key demand of developing countries, Strauss-Kahn said steps were underway to shift the balance of power by 5 per cent. “It is a tough exercise. If Asian countries will gain, the share of some, especially some in Europe, will decrease. Political compromise is not easy but we are working for that,” he said.

IMF has come under pressure as the World Bank has already implemented the new quota structure.

Last month, members of the group of 20 economic powers, or G20, agreed to finalise the plan when they meet in Seoul in November.