IMF Says China, Malaysia, Thailand's Currencies are Undervalued

08 Oct 2012 22:30

SINGAPORE--China, Malaysia and Thailand's currencies are undervalued relative to the economies' medium-term fundamentals, and the countries in question should focus on fiscal policy to support growth, the International Monetary Fund said Tuesday. In its World Economic Outlook, the IMF found that while foreign exchange movements since the global financial crisis had been consistent with demand rebalancing, gains in currencies of nations with external surpluses had halted over the past eight months. It warned that continued accumulation of international reserves was contributing to global imbalances and associated weaknesses, and said these were likely to remain above desirable levels in the absence of decisive action by governments. "It must be emphasized that the policies that would most effectively lower global imbalances and related vulnerabilities serve the self-interests of the countries concerned, even when considered purely from a domestic viewpoint," the IMF said. While countries with external deficits may need strong medium-term fiscal consolidation programs, "the requirements for emerging market economies with external surpluses and undervalued currencies are to cut back official reserve accumulation, adopt more market-determined exchange systems, and implement structural reforms, for example, to broaden the social safety net." The current accounts of many Asian nations, including China, Malaysia, Singapore, South Korea and Thailand, are stronger and the currencies weaker than they would be with a more desirable set of policies, the IMF said, adding that several of them have very large official reserves or internal distortions that curb consumption. While inflation rates in emerging Asia have been low or falling, in China and India credit has expanded rapidly, and in Indonesia and to some extent Malaysia, credit growth is still quick, with property prices also booming in some of those markets. In addition, China, Malaysia and Thailand's currencies are undervalued relative to the countries' medium-term fundamentals, the IMF said. "Considering this credit and exchange rate picture, these countries should wait and see or consider modest further easing of monetary policy stances and rely mainly on fiscal policy to support demand," the IMF said. "Those with less fiscal space could proceed to more monetary easing, provided macroprudential measures keep credit growth in check." The fund advised India and Vietnam not to loosen monetary policy in the absence of fiscal tightening steps to cool domestic demand. In both countries, as well as Japan, credible fiscal consolidation should be a policy priority, it said. The IMF tips gross domestic product in developing Asia to grow 6.7% this year in inflation-adjusted terms, picking up to 7.2% in 2013, 0.4 percentage point and 0.3 point weaker than its July forecasts. In China, it expects growth of 7.8% in 2012 and 8.2% in 2013, with both forecasts being 0.2 point weaker than the IMF's July view.

IMF Says Threat of Sharp Global Slowdown Eased

Published: Thursday, 1 Mar 2012 

The probability of a sharp global slowdown has eased due to recent policy measures adopted in the euro zone to tackle its debt crisis, the International Monetary Fund said on Thursday, but it warned risks to world growth remain "squarely to the downside."

Reed Saxon / AP

In a report to G20 finance ministers in Mexico over the weekend and only published on Thursday, the IMF said the euro zone should act decisively on multiple fronts to successfully resolve its sovereign debt crisis.

"The key risk remains that policies do not shift Europe toward a 'good equilibrium' and fail to break adverse feedback loops between real, fiscal, and financial sectors," the IMF said, urging euro zone policymakers to increase a firewall by about $500 billion to protect countries from financial contagion.

The IMF said the European Central Bank should continue injecting liquidity and stay fully engaged in securities purchases to help shore up financial stability.

Meanwhile, ECB monetary policy should focus on ensuring price stability, it said, adding that there was room to lower the target policy rate if needed.

In the United States, Britain and Japan, central banks should stand ready to expand unconventional measures if the outlook worsens, the IMF said.

In emerging markets, the IMF said growth had slowed more than expected, although risk perceptions had eased and capital flows had resumed into emerging Asia, Latin America and South Africa economies since the beginning of 2012.

In emerging countries with high inflation and public debt, including India and some economies in the Middle East, a "cautious stance" to policy easing was needed, the IMF said.

The IMF said higher oil prices were a risk to global growth and repeated an earlier warning that the impact of an oil supply shock in the Middle East "could be large" if supplies were not increased elsewhere.

In particular, a halt in Iran's oil exports could trigger an initial price increase of about 20 percent to 30 percent, the IMF warned.

Saudi Arabia assured G20 finance ministers over the weekend it was prepared to release more oil if necessary to make up for supply disruptions, IMF Managing Director Christine Lagarde told a news conference on Sunday.