Growth in ‘Frontier Asia’ Highlights Overheating Risk, IMF Says

Updated April 3, 2013, 12:12 p.m. ET

Growth in ‘Frontier Asia’ Highlights Overheating Risk, IMF Says

By NATASHA BRERETON-FUKUI

BANDAR SERI BEGAWAN, Brunei—Parts of Southeast Asia are experiencing very high credit growth and surging property sectors, and policy makers there should monitor conditions carefully, a senior official at the International Monetary Fund said on Wednesday.

IMF Deputy Managing Director Naoyuki Shinohara didn’t say which countries were at greatest risk of overheating, but he noted that lower-income countries in “frontier Asia” were experiencing stronger growth than other members of the Association of Southeast Asian Nations. Cambodia, Laos and Myanmar all grew faster than 6% last year.

“I don’t think the risk is imminent, but once these things start moving it’s very difficult to unwind,” Mr. Shinohara said in an interview on the sidelines of regional meetings in Brunei. “So policy makers should be careful in monitoring how the market develops, how the economy grows, and take necessary measures as the situation develops.”

Surging capital inflows—the result of loose monetary policy in industrialized nations and global investors’ hunt for yield—have sparked concerns about overheating across emerging Asia and led to preemptive steps in many countries.The worries have ebbed a bit in recent months: Flows into Asian emerging-market funds fell to $933 million in March from $1.11 billion in February and $3.64 billion in January, according to EPFR data compiled by RBC Capital Markets.

But the strong performance of the economies in Asean relative to industrialized nations means they will inevitably attract foreign funds, Mr. Shinohara said. He forecast Southeast Asia’s economy will grow around 5.75% in 2013, slightly faster than last year, and described increasing trade volumes among the bloc’s larger members as a positive trend that is likely to continue.

It could sometimes be appropriate for local authorities to adopt temporary measures to protect their economies from volatile capital flows, Mr. Shinohara said, but he played down the idea of coordinated efforts because, he said, circumstances are unique in each of Asean’s member states.

“It’s important that they talk with each other on various aspects of the capital inflows, but taking action jointly is something that’s very difficult to imagine,” Mr. Shinohara said.

One country whose stimulus policies have contributed to the capital deluge is Japan, where expectations are high that the central bank’s new leadership will propel it to buy assets more aggressively to reach its target of 2% inflation.

Mr. Shinohara said the IMF welcomed Japan’s moves toward a more expansionary monetary policy, and stressed the importance of changing the national mindset in order to boost economic activity after years of deflation.

But he highlighted the challenges posed by Japan’s unsustainable fiscal situation, with public debt more than double the country’s annual economic output, the largest ratio among industrialized nations.

“If we have expansionary monetary policy together with very ambitious fiscal policy over the medium term there’s a risk that monetary policy is dominated by fiscal needs, which could lead to the loss of independence of the central bank and a sharp rise in interest rates,” he said.

Japan’s debt burden doesn’t pose an immediate danger, thanks to the country’s huge savings and trade surplus, but how it deals with its fiscal challenge is very important, Mr. Shinohara said. He stressed the need for structural reforms, and praised the new government’s decision to participate in negotiations on the Trans-Pacific Partnership trade agreement. The U.S. and Australia are among the existing TPP members.