IMF cuts Asia growth forecast; US seals FTA with South Korea

Updated On: Oct 14, 2011

The International Monetary Fund (IMF) has cut its growth forecasts for Asia over worries about eurozone debt and new fears for the US economy.

In its twice-yearly Asia and Pacific Regional Economic Outlook, the IMF warned that risks for the region are "decidedly tilted to the downside." An escalation in Europe’s debt crisis may “trigger a selloff in Asian assets, force foreign banks to cut lending to the region and disrupt its currency markets,” the IMF said.

The risk of another global recession has prompted Asian officials from China to Indonesia to shield growth by boosting fiscal measures or easing borrowing costs. The MSCI Asia Pacific Index of stocks slumped 16 percent last quarter, the biggest drop since 2008, and the IMF said the “panic selloffs” in the region show there is “no place to hide” when advanced nations are in turmoil.

There hasn’t been the same selloff in Asian assets than during the financial crisis of 2008, Anoop Singh, director of the IMF’s Asia-Pacific department, said in an interview in Tokyo.

Asia’s growth has slowed since the second quarter of 2011 and IMF has cut its forecast for this year’s expansion to 6.3 percent from an April estimate of 6.8 percent. Just as the IMF cuts its Asia growth forecast, many Asian export economies are concerned that the ongoing crises in Europe and the United States -- the two biggest markets for most nations -- will hurt growth at home.

Evidence of slowing growth is increasing in Asia as China reported today exports rose the least in seven months in September. The Philippines unveiled a 72 billion-peso ($1.7 billion) stimulus package yesterday as its officials cut growth forecasts for 2011, while Indonesia’s central bank unexpectedly lowered its benchmark interest rate this week for the first time in more than two years.

Singapore cut its growth forecast for 2011 and eased monetary policy as it warned that the weakening global outlook would weigh on the island state's output.

The downbeat outlook for the export-driven nation came despite data showing the economy grew more than expected in the three months to the end of September.

The Ministry of Trade and Industry (MTI) said the economy grew 5.9 percent in the third quarter from a year ago, a big improvement from the one percent jump recorded in the previous quarter.

The central bank, in its twice-yearly policy statement, said it would ease monetary policy by allowing the Singapore dollar to appreciate at a weaker pace, despite concerns over inflation, as it tries to boost exports.

"The outlook for the global economy has deteriorated sharply against the backdrop of increased uncertainty in financial markets," the Monetary Authority of Singapore (MAS) said in a statement.

As a result, the IMF cautioned that Asian policy makers are faced with a “delicate balancing act” to guard against risks to growth while limiting the impact of inflation. The IMF predicts that headline inflation may peak in the second half of 2011 and ease “gradually” in 2012 even as it remains above the mid-point target range in most countries.

Report: FTSE retreats from key level on global growth woes (Reuters, 13 Oct 2011)

Report: IMF cuts growth forecast for Asia (BBC News, 13 Oct 2011)

Report: Singapore Warns of Slower Growth ( The Wall Street Journal, 11 Oct 2011)

Meanwhile, South Korea showed little signs of slowing down its economy as they sealed a major free trade agreement (FTA) with the United States. This cements an economic and strategic alliance between the two countries that has grown at a surprising pace in recent years.

The "Korus FTA", as the pact is more commonly known, is the largest FTA the US has signed since its 1994 North American Free Trade Agreement (NAFTA) pact with Canada and Mexico, which created the world's biggest free trade zone at the time.

It was also the most significant of the three FTAs passed on Wednesday by Congress, the other two being long-delayed trade deals with Colombia and Panama.

For South Korea, the deal is expected to boost its gross domestic product by more than US$32.6 billion over the next decade and help create an additional 520,000 jobs. However, the FTA still needs ratification by the South Korean parliament, where it is expected to face some resistance. For the US, the deal is an essential step toward Obama's goal of doubling US exports during the next five years. But the US will also face competition from the European Union, which signed a bigger trade deal with South Korea in July. Nevertheless, the Korus FTA will send an important signal to Asia-Pacific countries of the US commitment to staying economically engaged with them.

Additionally, it will provide strategic reassurance to South Korean allies in the face of its growing economic dependence on China and will lend credibility to US efforts to negotiate a Trans-Pacific Partnership. It also  reaffirms the US commitment to remaining a preeminent power in the Asia-Pacific region, as Secretary of State Hillary Clinton recently outlined.

"This economic alliance will promote free trade, and send a powerful message all around the world that South Korea and the United States stand united in our commitment to rejecting all forms of protectionism, and that we are committed to free, open and fair trade," South Korean President Lee Myung Bak told business leaders at a lunch meeting on Wednesday.

Analysts say this bloom in US-South Korean ties is somewhat unexpected, and attribute it to Seoul's ability to step up to the plate at a time when Washington's ties with other major Asian powers like Tokyo and Beijing have either been adrift or hit a brick wall.

"The environment in Asia has changed in ways that were not as helpful to US policy, but South Korea kind of rose up" in recent years and successfully delivered on several major US priorities, said Victor Cha, a Korea expert at the Centre for Strategic and International Studies.

Last year for instance, Seoul sent 350 troops to Afghanistan - where the US is fighting its longest war - to protect engineers involved in reconstruction efforts. It also contributed military assets to recent counter-piracy campaigns, and backed the US administration's stance on climate change issues at international summits.

Obama also shares the tougher line Lee has taken against North Korea, particularly following recent provocations in which Pyongyang sank a warship and fired artillery shells on a South Korean island.

Obama, speaking at an official welcome ceremony for Lee at the White House yesterday, said: "The alliance between the US and the Republic of Korea is stronger than it has ever been.”

Report: Obama Welcomes South Korean President to White House (VOA, 13 Oct 2011)

Report: Obama, Lee hail trade deal, pressure N.Korea (Reuters, 13 Oct 2011)

Analysis: Joint Challenges for U.S.-South Korea Alliance (Council on Foreign Relations, 13 Oct 2011)

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