UN report warns Asian governments to prepare for financial downturn

ECONOMY: The United Nations Economic and Social Commission for Asia and the Pacific (UNESCAP) warned the region's governments to reduce exposure to the impact of a sudden or unexpected market downturn, urging a mood of protection and preparation rather than the celebratory atmosphere of current prosperity.

Asian countries have to stay alert despite the lull in financial markets recently, says UNESCAP in a new report, The Calm Before the Storm? Managing the Risks of an Asia-Pacific Financial Downturn.

"There are a number of new emerging risks which may lead to more stormy weather ahead," the report warns, citing possible interest rates hikes in developed countries, oil price shocks, housing market overheating, and investor overreaction and contagion.

The region evokes bitter memories of the Asian financial crisis in 1997 but notes that countries of the region "are now in a stronger position to handle turbulence." Governments have improved economic policies, depend less on portfolio flows, and have bigger foreign reserves and better banking sectors.

The report cautions that "as Asian economies are becoming more integrated into the global economy, they also face a higher risk from the constantly shifting global environment."

It calls for governments to focus on controlling inflation and debt, improving banking regulations, and monitoring complex financial products.

"Countries in the Asia-Pacific region must improve regional cooperation to lessen the impact of financial market volatility," the report says, recommending strengthening existing regional cooperation schemes by making more funds available against disruptive capital movements, ramping up regional surveillance of country policies and extending these schemes to more countries.

Although a major global economic crisis is unlikely, significant trade imbalances are posing a threat to long-term world economic health, meanwhile a new United Nations report warns.

The UN Conference on Trade and Development (UNCTAD), in its annual report released today, characterises the global economy as one of "relatively fast growth in developing countries, driven by strong global demand originating mainly in the United States and amplified by the rapid expansion of the large Chinese economy."

The report finds little evidence of a looming major financial crisis, comparable to the Asian or Latin American crises of 10 years ago.

It notes that many developing countries are now less vulnerable to big shocks because they have stabilized their exchange rates at low levels and are running sizeable current-account surpluses and accumulating large amounts of dollar reserves.

That approach poses a problem, however, because it "can only function as long as there is at least one country in the global economy that accepts running the corresponding trade deficit," the report says.

That country, the US, has become overburdened in its role as "global engine for growth." UNCTAD economists fear that, at some point, American demand will no longer be able to act as a bulwark against worldwide deflation and recession.

They add that other key industrial countries have not only failed to play their part, but have actually added to the US' burden by running up huge surpluses of their own.

They say countries like Japan and Germany must increase their domestic demand to prevent a sharp devaluation of the American dollar that could send shocks reverberating throughout the developing world.

The report notes that China's surging domestic demand and imports have played a positive and vital role in spreading and sustaining global growth. To prevent that process from being derailed, its currency, should not be revalued too quickly.

UNCTAD economists say that redressing global imbalances requires a responsible multilateral effort rather than pressure on the developing world.

"A well-coordinated international macroeconomic approach would considerably enhance the chances of poorer countries being able to preserve and continue recent improvements in their growth performances," the report notes.