Asia Should Favor Stability Over Growth as Risks Rise, AMRO Says

(Bloomberg) -- Asian policy makers need to prioritize stability over boosting economic growth in the face of global trade risks and a tightening of financial conditions, a regional body said.

With low interest rates fueling a debt build-up across many countries, authorities should consider targeted macroprudential measures to complement monetary policy, the Asean +3 Macroeconomic Research Office, known as AMRO, said in its inaugural economic outlook report on Thursday.

“The balancing act between economic growth and financial stability has become more delicate,” AMRO said. “It would be prudent for policy makers to prioritize financial stability.”

Twenty years after the Asian financial crisis and a decade since the global credit crunch, the region is battling a debt problem again. Exposure to China's slowdown, fluctuating commodity prices and currency volatility are just some of the risks. While countries have sizable buffers to cushion against shocks, the risk to financial stability can't be ignored, said AMRO.

AMRO acts as a macroeconomic surveillance unit for the region and its report, which was released at the annual meeting of the Asian Development Bank in Yokohama, covers countries in the Association of Southeast Nations, or Asean, as well as China, Japan and South Korea.

Here's a snapshot of the report:

Economic Outlook

AMRO's growth outlook for many countries in the region are similar to forecasts released last month by the International Monetary Fund. Growth in China's will probably ease to 6.5 percent this year and 6.3 percent in 2018, while expansion in Japan and South Korea this year will also fall short of 2016 levels.

In Southeast Asia, AMRO forecasts Indonesia's economy will grow at a faster pace of 5.1 percent this year and 5.2 percent next year. Growth in most economies in the region are expected to accelerate in 2017.

Growth Challenges

The global economy remains vulnerable to policy uncertainty and a slowdown in the U.S. and China, the biggest sources of trade, may have a disproportionate impact on the region's growth, AMRO said.

Faster inflation and a shift toward tighter policy by the Fed pose additional risks as it leaves central banks with less room to cut interest rates to support growth, it said.

“Economies in which financial vulnerabilities have built up with high credit growth or external debt will face the sharpest trade-off in maintaining an accommodative monetary policy to support growth and maintain financial stability,” AMRO said.

Crisis Lessons

The Asian financial crisis that began in 1997 shaped policy and the region's growth trajectory since then. At the time of the crisis, the IMF and other institutions stepped in with more than $100 billion in emergency funding to Indonesia, Thailand and South Korea to help buffer their economies. Governments were forced to cut spending, raise interest rates and sell state-owned companies in return.

Heeding those lessons, Southeast Asian economies need to manage capital flows as they can increase the risk of asset price booms and threaten the financial stability of companies, households and banks, AMRO said.

What is AMRO?

The Chiang Mai Initiative was set up in the aftermath of the Asian financial crisis and is an agreement by the Asean +3 countries to pool resources to reduce reliance on the IMF. AMRO was created as a monitoring unit and adviser to the Chiang Mai Initiative.

Under the agreement, members facing balance-of-payments or short-term liquidity difficulties can borrow from a pooled fund that's valued at $240 billion. The facility has never been tapped.

To contact the reporter on this story: David Roman in Singapore at droman16@bloomberg.net.

To contact the editors responsible for this story: Nasreen Seria at nseria@bloomberg.net, Karl Lester M. Yap