With the world economy being clouded by dark undercurrents of trade tensions and turmoil in some of the financial markets, one could assume that the recently held annual meetings of the IMF and the World Bank in Bali last week was conducted in an environment of doom and gloom.
But are the Asia’s economies a source of trouble and concern?
Contagion in the Emerging Markets
In this aspect, the key risks are Turkey and Argentina, says IMF. There are concerns that the turmoil in those economies could affect some Asian economies too – India and Indonesia in particular, the currencies of both fell to record lows recently.
But the IMF does not see any immediate spillover despite concerns of vulnerabilities in the emerging markets.
David Lipton, first deputy managing director of the IMF believes that vulnerability is more for some economies. But right now, IMF is only assessing the situation and does not want to press the panic button yet.
The fear is the if there is continued drop in the value of some of the currencies such as in India and Indonesia, there can be an outflow of funds similar to what was witnessed during the Asian Financial Crisis.
But the fundamentals of the emerging markets are much stronger than the crisis according to information from the Institute of International Finance.
China’s tackling of the trade war
The trade war has trimmed growth in both the United States and China with China potentially the greater sufferer according to data from the IMF.
IMF expects 0.2 per cent Chinese growth being shaved off next year if the current situation continuous. The fund further stated in its report that the situation could have been worse still but for the recent efforts by Chinese authorities to counter the trade war and boosting growth.
Devaluing of its currency is one of the recourse that some analysts think China will resort to.
But in a week end statement, the IMF agreed to “refrain from competitive devaluations” and not to target exchange rates for “competitive purposes”.
Some media reports suggest that this has been agreed to in principle by China. But so far this year, the Chinese yuan has lost about 10 per cent of its value against the US dollar. Many see further devaluation in the days and months ahead.
One of the Asian countries, Pakistan asked for a financial assistance package from the IMF. This will now be followed by a series of meetings between the two parties to identify the amount of money that Pakistan would require.
The economy of the country is not doing well at all and the emergency button has been pressed. According to some estimates, the country would need something in the range of $15bn in assistance from the IMF for the bailout. However, there would be implications for Pakistan against the loan.
There would be conditions of financial reforms from the IMF for the Pakistani economy and there are also predictions that Pakistan would also have to disclose the amount of loans that the country has taken from China against the Belt and Road programme.
(Adapted from BBC.com)