Asia is facing the risk of a sharp slowdown as the global economy enters a major downturn, and decisive actions are warranted to maintain financial stability and support growth in the region, the International Monetary Fund (IMF) said on Monday, in its latest report on Asia. "Growth in Asia is expected to slow substantially along with the rest of the world, as exports weaken and spillovers from the global financial turmoil weigh on domestic activity," according to the Regional Economic Outlook (REO) for Asia and Pacific. Also on Monday, IMF approved a $7.6 billion loan for Pakistan to support its program to stabilize and rebuild the economy while expanding its social safety net to protect the poor.

While the baseline scenario for Asia sees recovery beginning in the second half of 2009, risks to the outlook are significantly larger than usual and tilted to the downside, the REO warned. A deeper and more protracted global slowdown than currently anticipated, combined with tighter international financial conditions from the ongoing global deleveraging, could have significant spillovers to the region through both exports and a range of financial channels. It remains unclear how domestic demand in the region would stand up to a sharp decline in export growth and tighter financial conditions, the report said.Despite Asia's generally strong fundamentals—including its substantial cushion in official reserves, improved macroeconomic policy frameworks and generally robust corporate balance sheets and banking systems—the region is "being rattled by the crisis due to its close trade and financial integration with the rest of the world, and any hope that the region would escape the crisis unscathed has by now evaporated."

In this uncertain environment, the IMF calls for quick and decisive actions by policymakers in the region to respond to heightened financial risks and slowing domestic activity. First, their financial policies will need to focus on addressing spillovers from the global credit turmoil by safeguarding financial systems and maintaining orderly credit conditions. Second, with inflation projected to moderate in the near term, monetary policy in most countries has room to ease to stabilize financial conditions and address downside risks. Third, given progress in fiscal consolidation in recent years, many countries have room to implement fiscal stimulus to address downside risks to growth. For countries where fiscal sustainability is an issue, however, it would be important not to lose sight of the need for medium-term fiscal consolidation.

In the analytic chapters, the REO addresses longer-term issues that will affect the region's economies as the impact of the current crisis recedes. Chapter II entitled "The Globalization of Asian Inflation" examines the rising importance of commodity prices in Asia's inflationary process and its potential implications for monetary policy. While in the past, inflation in the region could largely be traced back to domestic factors, global relative prices, notably of commodities, have been the driving force behind rising inflation in recent years. Despite the recent downturn , commodity prices are expected to remain high and volatile over the medium term, which would tend to create persistent gaps between core and headline inflation and pose new challenges for policymakers in facing trade-offs between output and inflation volatility. Going forward, these trends may require a careful consideration of monetary policy frameworks, in particular in commodity-importing countries.

Chapter III,"The Graying of Asia: Demographics, Capital Flows, and Financial Markets," analyzes the impact of rapid demographic change in Asian countries on their external positions and capital flows as well as on financial markets and asset prices. In particular, the study shows that vastly different rates of aging across Asia are likely to have sizable effects on current accounts and capital flows—with capital tending to flow "uphill" from younger to older countries. The report says Governments can ease the potentially difficult demographic transition by beginning to take policy measures now. For aging countries, this may involve an emphasis on pension and labor force reform. For younger countries, requiring substantial capital for their growing labor forces, enhancing financial intermediation, and boosting productivity will take center stage.

IMF Video