Asia warned to brace for rising debt and capital flight

The International Monetary Fund has warned that growing debt and capital flight will be Asia’s biggest economic difficulties as interest rates continue to increase. The IMF cut its forecasts for global growth in its most recent economic outlook this week and issued warnings that many parts of the world would experience a recession in the new year.

IMF Deputy Director for Asia and the Pacific Anne-Marie Gulde stated in an interview on Wednesday that debt has increased in Asia.”

“First, private sector debt has gone up since the global financial crisis but afterwards since Covid, public sector debt has gone up. So, anything that moves global interest rates provides additional headwinds for Asian economies,” he said. “We have seen capital flows increase, going to levels that we have last seen [sic] at the time of the taper tantrum and certainly anything that further raises interest rates will go through this channel will have impacts on borrowing costs in Asia. It’s a very important concern that we have.”

Investors’ frantic bond sales in response to the US Federal Reserve’s intentions to scale back quantitative easing in 2013’s “taper tantrum” led to a sharp decline in bond prices. The IMF issued a warning that many Asian nations were experiencing debt difficulties and that those whose currencies were weakening against a higher U.S. dollar risked seeing a worsening of the cost of living crisis. For instance, the U.S. dollar’s value relative to the yen is almost at a 24-year high.

Global growth will decelerate to 2.7% in 2023, according to the IMF, which is 0.2 percentage points less than its July prediction. In Asia, it also lowered China’s GDP forecast from July’s estimates to 4.4 percent, a 0.2 percentage point decrease. The ASEAN-5 nations of Indonesia, Malaysia, Philippines, Thailand, and Vietnam also saw their growth estimates reduced by the same percentage, to 4.9 percent, by the fund.

In response to the question of whether the U.K. bond crisis would have a ripple effect on Asian economies, Gulde stated that “anything that creates financial market turbulence will find a way” to disturb other economies.