Asia holding up better to ongoing crisis, says IMF

The International Monetary Fund (IMF) said Asia is holding up better to the ongoing financial crisis in the US but the spillover effect on the Philippines could be larger than expected.

IMF resident representative Reza Baqir warned that although direct correlations between the Philippines and the US might have declined over the years, the spillovers have increased over time due to growing trade and financial integration.

Baqir said the world economy is entering a major downturn in the face of what he called “the most dangerous financial shock” in mature financial markets since the 1930s.

With the US widely expected to slip into recession, the Philippines could be hit harder than originally expected, together with the rest of emerging Asia.

“But these long-sample estimates of spillovers may underestimate current vulnerabilities,” he said, adding that estimated spillovers show large variations within the region.

The effect, according to Baqir, could be closer to around 0.7-percentage point slowdown in Asia for every one percentage point slowdown in US growth, especially when US demand shocks were accompanied by realistic declines in global confidence.

“Specific US recessions have in the past generated large negative spillovers to Asia, as witnessed by the 2001 recession,” he pointed out.

According to Baqir, the selloff in emerging market debt is gaining pace and spreads are widening to the highest level since 2002. “Selling is across the board in the most liquid names with the exception of the highest-rated sovereigns,” he said.

Moreover, Baqir said, emerging market equities also plunged with major bourses in the region falling three to nine percent. Emerging market currencies are also selling off sharply also across the board against the dollar and even more against the Japanese yen.

Baqir said the extraordinary banking shock was striking advanced economies and as a result, these economies are expected to come close or move into recession.

“In general, the resilience in emerging and developing economies has grown notably since the Asian crisis,” Baqir pointed out. “But countries with vulnerabilities are feeling the pressure.”