Asia now world’s largest debtor and saver; high risk of debt distress: IMF

Asia’s economies will need to focus on fiscal stability in order to offset surging debt and to support monetary policy, the International Monetary Fund has warned.

In its latest outlook for the region, the IMF said Asia is now both the world’s largest debtor and saver and that several countries are at a high risk of debt distress. That means any additional spending by governments to offset the hit from food and energy shocks needs to be targeted, temporary and budget neutral, the Washington-based lender said.

“Public and private debt dynamics are already worse following the pandemic because of slower growth, rising rates and higher debt levels,” the IMF said. “Large depreciations and rising interest rates could trigger financial stress in countries with high leverage among non-financial corporates and households as well as unhedged balance sheets and those facing refinancing risks.”

If interest rates continue to rise sharply, it will limit government spending options, the IMF said.

The warning comes as the fund, a lender of last resort, downgrades its 2022 growth forecast for the Asia-Pacific region by 0.9 percentage point to 4%. For 2023, it expects growth to be 4.3%, down 0.7 percentage point than previously seen.

“While this rate of growth is much lower than the 5.5% average growth rate enjoyed over the previous two decades, the region continues to perform better than the rest of the global economy,” the IMF said.

Other risks include large exchange rate depreciations that could stoke inflation and force faster monetary policy tightening in the region. Asia is vulnerable to geo-economic fragmentation, or decoupling, given its central role as the world’s factory, the multilateral lender said.

“Our advice for most of the region is for monetary policy to continue tightening, and for fiscal consolidation to continue,” the IMF said.