Source: The Wall Street Journal Asia   Date: May 8, 2010

The International Monetary Fund expects Asia's economic growth this year and next to be slightly higher than its recent estimates because of upward revisions to Singapore's forecasts, but has cautioned Asian policy makers to guard against potential bubbles in local asset markets.

The Fund’s latest ‘Regional Economic Outlook for Asia and the Pacific’ notes that surging capital inflows to Asia amid the region's recovery mark a break from previous rebounds, when such inflows were slower to return. On this occasion, "real money investors" account for the bulk of new funds, rather than leveraged investors, it said.
But the IMF indicated the risks that come with such inflows mean Asian policy makers need to consider letting their exchange rates strengthen. Letting exchange rates appreciate can forestall short-term inflows, because resistance to appreciation pressures can fuel expectations of future currency rises, it said.
The IMF also said that without more currency appreciation, the pressure to sterilize the impact of inflows on money supply will lead central banks to revert to "cheap" tools, such as reserve requirement rules on banks, to mop up liquidity. Such moves risk distorting the domestic banking system. The IMF reiterated China's yuan remains undervalued.

"Brighter economic growth prospects and widening interest rate differentials with advanced economies are likely to attract more capital to the region," it said. "This could lead to overheating in some economies and increase their vulnerability to credit and asset price booms with the risk of subsequent abrupt reversals."

"Over the medium term, currencies in the region are expected to strengthen further," the IMF said. "Further appreciation of regional currencies would be consistent with the need to safeguard Asian economies against the threat to price and financial stability from the rapid return to potential output levels and the persistence of large capital inflows."

It now projects growth for all of Asia in 2010 and 2011 to reach 7.1% in both years. In its World Economic Outlook issued April 21, the IMF had forecast Asian growth rates of 6.9% this year and 7% next year. The IMF left its forecast for economic growth in China, which underpins regional growth, unchanged at 10% this year. China's GDP expanded 8.7% last year.

For the complete IMF “Regional Economic Outlook - Asia and the Pacific” released in April, 2010, please see BCM website – Resources, Mongolia Reports.