The IMF Warns Asian Nations About Growing Debt and Capital Outflow
The International Monetary Fund has issued a warning. According to the alert, rising interest rates will cause more money to leave Asia and increase debt. This week, the IMF revised its projections for world growth. According to the IMF, the following year will seem to be a worldwide recession.
Recent Asian Economic Conditions
On Wednesday, Anne-Marie Gulde, the Deputy Director of the Asia and Pacific Department at the IMF, revealed some information on CNBC’s “Squawk Box Asia.” She said that Asia now had more debt. She continued by saying that since the global financial crisis, private sector debt has increased.
But the public sector’s debt has increased since Covid. She emphasized that the Asian economy would suffer from shifting global interest rates.
According to her, the rise in capital flows has reached levels last witnessed during the taper tantrum. It follows that anything that raises interest rates will impact the cost of borrowing in Asia. She identifies it as a pressing issue that they face.
2013 saw a response from investors to the Federal Reserve’s tapering plans. By quickly selling bonds, which caused bond prices to drop, the objective was to limit quantitative easing.
IMF issued a cautionary statement. It claims that Asian countries may have difficulty with the cost of living due to their currencies’ depreciation concerning the stronger U.S. Dollar. In terms of the Yen, the Dollar is at a 24-year high.
In 2023, the IMF forecasts that global growth will slacken to 2.7%. Its July prediction was 0.2 percentage points higher than this.
Additionally, it reduced China’s growth forecasts in Asia to 4.4%. This is lower by 0.2 percentage points than what was anticipated in July. The fund reduced the ASEAN-5 group’s growth estimates by the same amount to 4.9%. Malaysia, Indonesia, Philippines, Vietnam, and Thailand comprise the ASEAN-5 group.
Effects Of the U.K. Crisis
The U.K. bond issue, according to Gulde, won’t have much of an impact on Asian markets. Gulde continued by saying that anything that causes turbulence in the financial markets would affect other economies.
She said that fewer pension funds are investing in Asia than they formerly did on CNBC. She highlighted that anything that causes instability in the financial markets would find a means to spread and a channel through which to do so. She noted that they don’t know all the channels, but it’s not good news for Asian nations.
Janet Li is Mercer’s Asia Wealth Business Leader. She said Asian exposure to LDIs is lower than in the United Kingdom. She says that long-stream pensions are less common in Asia than lump-sum withdrawal schemes.
Liability-driven investments are used by pension funds to link assets with commitments and pay out pensions. When bond prices dropped, and interest rates rose, pension funds were forced to put up collateral for LDI futures, which is when the U.K. crisis started. Pension funds sold U.K. gilts to deposit more money as insurance against the depreciating value of LDIs.
On Wednesday, Li spoke with Squawk Box Asia on CNBC. The quick answer, according to her, is no when comparing and examining whether patient money in Asia is now more in danger. But she said many defined benefit plans still have long-term obligations that need to be managed. The recent increase in interest rates is to blame for this.