HONG KONG (Reuters) - The International Monetary Fund is not too worried about recent selling pressure on assets in Indonesia and the Philippines as it was not triggered by domestic factors and Asia has stronger buffers than in the past, a Fund official said on Wednesday.
The Philippine peso PHP=, Indonesian rupiah IDR= and Indian rupee INR= have lost 5-6 percent from their peaks this year as the three countries are seen to be the most externally vulnerable of major Asian economies due to their current account deficits.
The trio has faced the double whammy in recent weeks of U.S. Treasury yields US10YT=RR reaching 3 percent, raising worries about capital outflows, and oil prices hitting 3-1/2-year highs LCoc1, increasing import costs and threatening to deepen external imbalances.
But Changyong Rhee, director of the IMF’s Asia-Pacific department, said in Hong Kong that the currencies’ weakness was a “natural adjustment” and there was no reason to panic as the three countries had more room for maneuver than during the Asian financial crisis in 1997.
“If you ask me whether we (have) concerns, I think at this moment not much,” Rhee told a news conference following the release of the IMF’s latest regional outlook update.
“There is room for interest rates in Asia to also go up and also room to rely on the flexible exchange rate system more compared with the period in 1997.”
Rhee said the pressure on exchange rates came mostly from tighter global financing conditions rather than from domestic factors, adding that in the three decades since the Asian crisis, countries had built stronger current accounts and accumulated more reserves.
Inflation and interest rates were also low, and debt was mostly denominated in domestic currencies, he added.
“Having said that, this is a time to watch things closely,” Rhee said.
In its economic outlook update, the IMF said growth prospects in Asia remained strong, but the region remained vulnerable to sudden tightening in global financial conditions, further market corrections and a shift towards protectionist policies.
The IMF projected Asia would grow 5.6 percent this year and next, up 0.1 percentage points from its last update in October and accounting for about two-thirds of global growth.
Among other risks, the Fund cited geopolitical tensions, cyber attacks and climate change. Longer term, aging demographics could be a substantial drag on economies and digitalization may be a source of uncertainty.
Most economies should, therefore, look to strengthen policy buffers as closing output gaps mean they do not need further fiscal support, the IMF said.
For now, with pressure on wages and prices still “moderate”, monetary policy can remain accommodative in most of Asia. But central banks should stand ready to adjust their stances as inflation picks up, and should use macroprudential policies to contain credit growth, it said.
An abrupt change in global risk appetite, which could be triggered by an inflation surprise in the United States or an escalation of Sino-U.S. trade tensions, could lead to a sudden tightening of global financial conditions.
Tensions between the United States and China escalated earlier this year, when President Donald Trump threatened tariffs on up to $150 billion of Chinese goods to punish Beijing over unfair joint-venture and intellectual property practices.
China, which denies allegations it coerces technology transfers through these channels, has warned of retaliation, including tariffs on U.S. soybeans and aircraft.
While Asia’s rapid growth and improved external buffers “should help, the region remains vulnerable to a global risk-off event,” the report said.
Editing by Shri Navaratnam and Jacqueline Wong