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Asia Has the Policy Tools to Address Pockets of Vulnerability — Report

HONG KONG, CHINA (26 September 2018) — Policymakers in Asia and the Pacific have a wide range of options at their disposal to ensure that heightened global uncertainty due to monetary policy normalization in advanced economies and rising global trade tensions does not undermine decades of continuous growth, according to a new Asian Development Bank (ADB) report.

The special theme chapter in the Asian Development Outlook (ADO) 2018 Update examines how the region can navigate the uncertain global environment by deploying well-coordinated and proactive policies designed to shore up macroeconomic stability. ADO is ADB’s flagship economic publication.

“Developing Asia has prospered since the Asian financial crisis 20 years ago, but new challenges pose threats to its resilience and growth,” said Mr. Yasuyuki Sawada, ADB’s Chief Economist. “Multiple pockets of vulnerability can be managed, however, if they are closely monitored and the policies to tackle them are well designed and carefully implemented.”

 Emerging pockets of vulnerability that can undermine stability include elevated debt levels, volatile capital flows, sharp currency depreciation, high housing prices, and cross-border contagion. Countercyclical fiscal policies can help stabilize an economy but require ample fiscal space, the report notes. Besides reducing debt or widening the tax base, governments can invest in countercyclical fiscal buffers such as well-governed sovereign wealth funds in resource rich economies, and in social safety nets to protect vulnerable communities. Monetary policy should pay attention to the credit cycle as well as the business cycle since the two cycles do not always coincide.

A more flexible exchange rate can better insulate economies against adverse external shocks but monetary authorities may need to take actions to smooth the large volatilities. Another option is to set controls on capital flows, which can reduce pressure on the exchange rate. Macroprudential policies such as caps on loan to value and debt to income have become more popular since the Global Financial Crisis. Asia became the world’s most intensive user of macroprudential measures, particularly to stabilize housing markets, the report notes.

In addition to such options, measures to strengthen macroeconomic and other fundamentals remain important. Continued efforts are needed to ensure sound fiscal policy, independent central banks which engage in domestic policy coordination, deep financial sectors, market-oriented structural reforms, and adequate social safety nets.

ADB is committed to achieving a prosperous, inclusive, resilient, and sustainable Asia and the Pacific, while sustaining its efforts to eradicate extreme poverty. Established in 1966, it is owned by 67 members—48 from the region. In 2017, ADB operations totaled $32.2 billion, including $11.9 billion in cofinancing.