Asia's export-dependent economies could be hurt by a downturn in Europe but countries in the region have ample room to respond aggressively by easing monetary policy and delaying fiscal consolidation, the IMF said on Thursday. Writing in a blog, economists at the International Monetary Fund noted some nations had already started loosening policy.
"There is still ample policy space in the region, though less than at the outset of the global financial crisis in some countries," they said. "Fiscal policy consolidation could be appropriately delayed if external demand were to collapse, especially where low levels of public debt afford space for measures." Asian economies' dependence on trade has left them exposed to the debt crisis in Europe. The eurozone is expected to slip into a mild recession in the first half of this year.
Weak demand for exports has already caused slower growth in Asia, though tighter policies have also played a role, especially in China and India. The IMF economists also noted the recent stresses in several regional financial markets, which they said suggested that financial channels of contagion also posed a risk for Asia.
They said apart from the conventional measures, Asian nations could demand liquidity guarantees in order to maintain critical flows of credit. "Programs could be designed to facilitate trade credit and lending to small and medium-sized enterprises," they said.
"Central bank swap lines and regional reserve pooling arrangements could be further strengthened and activated to address shortages in particular currencies." They said the region could draw down its large foreign exchange reserves in a crisis to smooth the impact on economic activity.
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