MANILA, Philippines--The International Monetary Fund on Tuesday urged Asia's emerging economies to fast-track regional financial integration and capital market development as the world seeks to resolve the US-led credit crunch and the global current account imbalances.
In a speech in Tokyo, IMF First Deputy Managing Director John Lipsky also said it was too early to party despite some signs of normalization in global credit markets and the latest reduction in the US current account deficits.
"Policy makers need to avoid complacency and take steps to restore confidence, while at the same time preparing for further pressures," Lipsky said in his speech, a copy of which was sent to the Philippine Daily Inquirer.
"And while it is reassuring that Asia has so far escaped serious downdraft from the US sub-prime crisis, capital markets are now so interlinked that it would be prudent to act proactively to respond to the risk of spillovers," he added.
The IMF official warned that the recent decline in US current account deficits did not mean that the global imbalances--referring to the phenomenon of large US current account deficits versus Asia's large surpluses--were ending. Instead, he warned of a possible shift in imbalances to some economies with flexible exchange rates--like the euro area--which now have to deal with a strong currency.
"Moreover, we are concerned that new imbalances will build up in economies with less absorptive capacity, thinner financial markets, and less established policy credibility--for example, some emerging markets," Lipsky said.
A key priority must thus be to make sure that the downside risks to growth in the advanced economies are avoided and that their growth is restored to a trend pace, he said.
"At the same time, the challenges embodied in the sharp rise in energy and commodity prices must be faced squarely," Lipsky said. "However, the pro-growth policies that may be adopted should be consistent with the underlying structural shifts in the sources of growth that will be needed if the recovery is to help reduce imbalances and promote a return to the low inflation that prevailed earlier this decade."
He noted that Asia, for its part, had not "delinked" from global capital markets and the turbulence of last year. Despite the recent rebound in stock prices and narrowing of credit spreads, the indices have not returned to pre-crisis levels, while funding costs have risen more generally. Yen-funded carry trades have also been reversed, leading to higher volatility and a strengthening of the yen.
