Asian may need to tighten monetary policies

by Prime Sarmiento

Monetary tightening policies might need to be implemented soon to sustain recovery in the developing Asian region, according to a study commissioned by the Asian Development bank.

The swift implementation of fiscal and monetary policies -- reduction of key policy rates, decreasing bank reserve requirement and stimulus spending -- cushioned the developing Asia from the harsh impact of the global meltdown.

The region in fact leads global recovery, with the ADB forecasting the region's GDP to expand 6.6 percent this year, after slowing to 4.5 percent last year. The economic rebound has raised the question if this is the time for Asian governments to plan their exit strategies -- a time to progressively unwind prior policy and regulatory guidelines.

For Manu Bhaskaran, director of Centennial Asia Advisor, Centennial Group, the time to unwind monetary policies should be "sooner rather than later", given the stronger than expected economic growth in the region.

"It was fine to talk about the plan for exit program, but not to actually implement it, " Bhaskaran said in Thursday's ADB regional forum on the impact of the global economic and financial crisis. But Bhaskaran noted that such mindset might need to change.

This is one of the key recommendations that were included in the paper "Global Economic and Financial Crisis Impact on Developing Asia and Immediate Policy Implications," presented in Thursday's forum.

The study, commissioned by the ADB and authored by Bhaskaran, stressed "current policy settings are probably too loose given our expectations for a sustained and reasonably good recovery in Asia from the setbacks in 2008-2009."

The study noted that high fiscal deficits incurred by several Asian governments -- owing to stimulus spending -- might compromise growth over the long term. This is especially true for economies with high public debt-to-GDP ratio, such as India, Malaysia and Vietnam.

Bhaskaran and his co-author Ritwick Ghosh are questioning if a loose monetary condition is still appropriate not only because the region is poised for rapid recovery, but also because of expectations that renewed investor confidence will boost capital inflows in the region.

"Overly loose fiscal and monetary policies could actually be a greater risk -- by increasing the risks of domestic overheating and raising inflationary expectations," the authors said in their study.

Such concerns have in fact spurred some economic managers in the region to reconsider their policies. For instance, Philippine central bank deputy governor Diwa Gunigundo told reporters last week about that the existing 19-percent deposit reserve requirement could be raised again.

The Chinese government took it a step further by actually implementing a policy. The Chinese central bank announced late Tuesday that it is going to raise the deposit reserve requirement ratio by 0.5 percentage points from Jan. 18, the first increase since June, 2008.

ADB President Haruhiko Kuroda said China's move to raise the bank reserve requirement this week will help cool down the overheating real estate sector but will not undermine the country's strong recovery. But Kuroda noted the move is more of an adjustment of an otherwise extremely expansionary monetary policies.

"It appears quite appropriate," Kuroda said in Thursday's press briefing.

However, Kuroda noted exit strategies for Asia "must be carefully timed."

"The recovery could falter if policy makers tighten too early. But tightening too late may lead to higher inflation and unsustainable fiscal deficits and large debts." he said.

Source: Xinhua