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World Bank Says Asia Has Room for Stimulus to Limit Europe Hit

World Bank Says Asia Has Room for Stimulus
A pedestrian walks past the People's Bank of China in Bejing, China. The central bank said that it can’t relax vigilance over inflation, as “the foundation of price stability is not yet solid.” Photographer: Nelson Ching/Bloomberg

Nov. 22 (Bloomberg) -- Most Asian nations have room to use fiscal stimulus to protect their economies from an escalation in the European debt crisis that may have “substantial” spillovers in the region, the World Bank said.

Developing East Asia, which excludes Japan, Hong Kong, Taiwan, South Korea, Singapore and India, will expand 7.8 percent in 2012 after growing 8.2 percent this year, the World Bank said in the semiannual East Asia and Pacific Economic Update report today.

Asian policy makers have shifted their focus to shielding growth, rather than stemming inflation, as Europe’s debt woes and a struggling U.S. economy increase the risk of another global recession. Australia and Indonesia have cut interest rates this month, while the Philippines in October unveiled a fiscal stimulus package to spur the economy.

“Investors still do not fully discount the possibility of a disorderly sovereign debt restructuring in the advanced economies,” the World Bank said. “Should such an event occur, it may well trigger another recession in Europe. Spillovers to developing East Asia will be substantial, through trade, financial flows, remittances, and consumer and investor sentiment.”

While new capital rules being introduced in Europe will constrain the ability of the region’s banks to lend in Asia, high reserves and current account surpluses in most East Asian countries will protect them from the impact of possible renewed financial stress, the World Bank said.

European De-leveraging

“Bank credit flows remained stable through the first half of 2011 but represent an important risk, should European banks start deleveraging,” the Washington-based lender said. “Even if a definitive euro zone settlement is implemented successfully, European banks would likely need to deleverage and could reduce exposure to emerging markets.”

International banks reduced loans available to East Asian companies by about $36 billion between the middle of 2008 and the first quarter of 2009, the World Bank said.

“An impact of similar proportions now could mean that over $30 billion dollars flow out, constraining credit available to the private sector,” according to the report. European banks have about $427 billion of loans outstanding to developing East Asia, it said.

Currency Reserves

Emerging Asian nations felt the impact of Europe’s woes in September, when their currencies slid against the dollar, prompting them to use some of their foreign-currency holdings to limit the impact. The World Bank said that reserves “should be sufficient to withstand further shocks.”

East Asian countries had a median value of foreign-exchange reserves equivalent to 50.4 percent of gross domestic product as of mid-2011, or enough to cover 8.9 months worth of imports, according to the World Bank.

Policy makers in the region are “likely to hold off further policy tightening and stand ready to act should further negative shocks to growth occur or in the extreme case of a disorderly resolution of the euro zone debt problem,” it said.

In China, monetary conditions “remain accommodative” and there’s space for further fiscal stimulus if necessary, the World Bank said. The central bank said Nov. 16 that it can’t relax vigilance over inflation, as “the foundation of price stability is not yet solid,” while reiterating Premier Wen Jiabao’s pledge to “fine-tune” policies when needed.

“Policy makers will need to walk a fine line guarding against the short-term risks to growth and the lingering vulnerabilities associated with a still-buoyant, if not overheated, economy,” the World Bank said. “To mitigate the vulnerabilities of continued low real interest rates, an easing of fiscal policy appears the most appropriate line of defense before the monetary policy stance is eased.”

To contact the reporter on this story: Shamim Adam in Singapore at sadam2@bloomberg.net

To contact the editor responsible for this story: Shamim Adam in Singapore at sadam2@bloomberg.net

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