The IMF warned Asia this week of the potential spillovers of the European debt crisis, saying it could dampen trade, make capital flows volatile and overheat economies in the region.
“Adverse developments in Europe could disrupt global trade, with implications for Asia given the still important role of external demand,” IMF deputy managing director Naoyuki Shinohara told a forum in Singapore on Wednesday.
On the financial front, he said major credit problems could result in a “significant spillover” through funding channels, especially where banks were dependent on wholesale funding.
There was also increased uncertainty and potential for volatility in the outlook for capital flows, Shinohara said at the forum hosted by the Monetary Authority of Singapore, the de facto central bank of the island state.
He said Asia’s bright growth prospects, together with low interest rates in major economies, would likely attract more capital that could “lead to risks of overheating in some economies if appropriate policy action is not taken.
“On the other hand, further increases in global risk aversion could see capital flows change direction quickly.”
Shinohara called on Asian governments to be wary of the potential risks and be prepared to take appropriate action.
“The key will be for policymakers to keep an eye on the bigger picture and be ready to act swiftly as developments unfold,” he said.
“With Asia’s economic muscle growing, the policy choices made in this region will have an important impact on the global economy,” he said.
Greece is at the epicentre of a mounting debt crisis that threatens to spread across the eurozone and has pulled down the euro to four year lows. Asian markets have also been affected by the impact of the crisis.
Shinohara said there was a risk that sovereign debt problems being experienced in some eurozone countries could spill over to others.
He said the strong fiscal position of most Asian economies provided the “space” to respond flexibly to the European crisis.
“In the event of spillovers from Europe, there is ample room in most Asian economies to pause the withdrawal of fiscal stimulus.”