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The Global and Regional Outlook

The global economy is expected to experience a major downturn with credit decelerating rapidly. This article highlights the potential risks and challenges facing the corporate sector and domestic demand in Asia. It also emphasizes the need for policies to support the corporate sector, address downside risks to growth, and establish a new financial architecture.

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The Global and Regional Outlook

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  1. The Global and Regional Outlook Task Force on Economic Challenges’ Meeting 8 December 2008 Olaf Unteroberdoerster Resident Representative, Hong Kong SAR, International Monetary Fund

  2. The global economy is set for a major downturn

  3. Despite aggressive policies to stabilize markets…

  4. ... credit is rapidly decelerating

  5. History suggests that banking stress brings severe and long recessions

  6. A significant slowdown is expected in the U.S. economy, raising the specter of deflation

  7. The U.S. recession is going to be more severe than in 1991

  8. However, large risks to the forecast…

  9. …because the housing downturn could be sharper than expected…

  10. ...and credit growth could be even lower than expected

  11. The corporate sector may already be coming under severe stress

  12. What does this mean for Asia? Growth to slow sharply next year…

  13. …and coming exclusively from domestic demand

  14. However, downside risks abound

  15. The forecasts assume smaller export and domestic demand slowdowns than in previous crises…

  16. ...and recent data show a sharp contraction in demand for Asian exports

  17. …as well as rapidly softening domestic demand...

  18. Slower growth and tighter funding conditions may put pressures on corporate Asia

  19. Some countries may be more vulnerable than others • Vulnerability factors differ across countries and include: • Current account deficits • Reliance on wholesale funding, including by banks • Significant foreign participation in domestic equity and bond markets • Corporate stress from sudden stops in financing • Domestic macro imbalances • Property sector booms • Lower commodity prices

  20. Policies needed to support corporate sector and aggregate demand... • In many cases, room to ease monetary and fiscal policy further to address downside risks to growth • Need for public recapitalization of banks cannot be excluded. • Action is needed to guarantee trade financing • Direct support to corporates may be required if banks do not resume lending • Aim to minimize distortions • Formulate exit strategies

  21. Longer term challenge: a new financial architecture... • The G-20 Summit on Financial Markets and the World Economy focused on reforms needed to address the weaknesses exposed by the financial crisis • Priorities for reform include: • strengthening transparency and accountability • enhancing sound regulation • promoting integrity in financial markets • reinforcing international cooperation, and • reforming international financial institutions

  22. ...and a new role for the IMF • Enhancing the resources of the Fund in line with increasing private sector flows • G-20 summit agreed to review the adequacy of resources • Resources could be increased by large Fund quota increase, in tandem with increasing voice of emerging markets and developing countries • The Fund, along with an expanded FSF, should identify vulnerabilities and provide early warnings, and develop recommendations to mitigate pro-cyclicality • All G20 members to undertake FSAPs

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