The Fed’s move to raise interest rates will slow Asia’s rise

The Federal Reserve’s move to raise interest rates and tighten policy aggressively will hamper the economic recovery in Asia, according to the International Monetary Fund.

The surplus on the current account and the reserve level is much higher among Asian countries this time compared to 2013 under the so-called “losing tantrum”, says Changyong Rhee, director of Asia and the Pacific branch of the IMF.

However, he warned that the higher debt burden is a problem for the region.

“Overall, debt has increased quite significantly after the global financial crisis. Around 2007, Asia accounted for about 27% of global debt. Now in 2021[ads1], Asia accounted for almost 40% of global debt,” he told CNBC’s “Squawk Box”. Asia “on Wednesday.

In 2013, the Fed triggered a “losing tantrum” when it began winding up its asset purchase program. Investors panicked and this triggered a sale of bonds, which led to a rise in government interest rates.

As a result, emerging markets in Asia suffered severe capital outflows and currency depreciations at the time, forcing central banks in the region to raise interest rates to protect their capital accounts.

This time around, the Fed’s higher interest rates “may not cause a major shock to the financial market, but they can definitely slow Asia’s recovery and growth,” Rhee added.

His comments come ahead of the Fed’s political statement later on Wednesday, which is expected to signal a rise in interest rates as soon as March and indicate more policy tightening on the table to curb inflation.

Asian authorities may need to prepare for faster normalization of policy following the Fed’s move to curb inflationary pressures, according to Rhee.

“The situation is quite heterogeneous in Asia. Like Singapore and [South] Korea and several Asian countries, inflation is already higher and the output gap is small. So central banks need to move fast like Singapore did this week, “he said, referring to Singapore’s central bank decision on Tuesday to tighten monetary policy due to inflation concerns.

The output gap measures the difference between the economy’s actual production and the potential output the economy can produce at full capacity.

However, there are other Asian countries with a production gap that is still relatively large because they were hit by the Covid-19 delta outbreak last year. As a result, it has hampered their recovery, Rhee noted.

“High interest rates in the United States will force them to react to monetary policy. So they have a very delicate balance sheet at the moment,” he said.

On Tuesday, the IMF cut its global growth forecast for 2022 due to concerns about rising Covid cases, supply chain disruptions and higher inflation.

It expects the global gross domestic product to weaken from 5.9% in 2021 to 4.4% in 2022 – which reduces this year’s figures by half a percentage point compared with previous estimates.

China’s growth this year is now expected to come in at just 4.8% – down from an earlier estimate of 5.6%, based on the IMF’s forecast.

Last week, China reported that the economy grew by 8.1% in 2021 compared to a year ago, according to data from the National Bureau of Statistics. GDP in the fourth quarter rose by 4% year-on-year, faster than analysts expected.

The IMF recently said that China’s zero-Covid policy looks like a “burden”, preventing economic recovery both domestically and globally.

Since the pandemic began in early 2020, China’s strict policies mean that mass quarantines and shutdowns, as well as extensive travel restrictions – either in one city or with other countries – are used to control outbreaks.

Whether China is able to achieve a 4.8% growth rate or even higher depends on the two things, Rhee noted.

“One is the dynamics of the omicron and the future dynamics of this pandemic,” which is difficult to predict, he said.

“I think they have room to spend more fiscal resources. Depending on how much they want to spend on fiscal resources, China’s growth rate will be determined,” he added.

– CNBC’s Karen Gilchrist contributed to this report.