IMF: Asia to Lead Global Growth Despite Tightening Global Funding Conditions

Asia's economic growth is expected to be hit by weak capital inflows, but positive factors such as weaker currencies and robust domestic demand and higher exports to advanced economies would help offset weakness, according to the International Monetary Fund (IMF).

"A faster than expected tightening of global funding conditions could substantially affect Asia, with a larger impact on economies with weaker fundamentals and higher exposures," IMF Asia-Pacific Department Director Anoop Singh said, during a round-table session in Tokyo on Asia's economic outlook.

He noted that domestic structural problems such as supply bottlenecks in India and declining returns to investment in China will also drag economic growth. Countries such as India and Indonesia, which are suffering from high inflation rates and over-dependence on foreign inflows, would have to tighten their monetary policy, according to Singh.

However, a stronger growth outlook for advanced economies, weaker currencies, and robust domestic demand would help counteract the capital outflows due to the US Fed tapering concerns, he added.

Fears about a reduction in the US Fed's massive asset repurchase programme, had earlier resulted in huge capital outflows from emerging Asian countries. India and Indonesia were among the most affected countries that suffered a sharp decline in their currencies.

Singh also warned that China should take care of the growth of credit in the shadow banking system and the finances of local governments.

Asia Will Remain Global Growth Leader

The IMF had earlier lowered its growth forecast for Asia. However, it said the region will lead the global economic growth in the near future.

"For most economies a gradual pickup in exports to advanced economies and resilient domestic demand should help support growth," Singh said.

The IMF projects Asian growth of about 5% in 2013 and about 5.25% in 2014. In emerging Asia, growth rates will at around 6.25%-6.5% in the next two years.

Singh had earlier applauded Japan's "Abenomics' strategy" saying that it has helped the economy to counteract capital outflows due to fears about the US Fed tapering.

"Japan has been a forerunner in Asia in many respects: it has been and still is an incredibly dynamic economy," he said in his latest speech.

"In Japan, inflation and inflation expectations have started to rise. These are good signs, and we currently do not see a need for further monetary easing."