IMF Sees 'Downside' Risks to Asia from Euro Crisis

The IMF lowered its forecasts for Asian growth and warned in a report Thursday that the region faces downside risks due to worries over the Eurozone debt crisis and a slowdown in the United States.

In its twice-yearly Asia and Pacific Regional Economic Outlook, the International Monetary Fund warned that risks for the region are "decidedly tilted to the downside."

The IMF expects growth of 6.3 percent in 2011 and 6.7 percent in 2012 for Asia on average, slightly below its forecast of 6.8 percent and 6.9 percent respectively in April's report.

It warned that any escalation in the European sovereign debt crisis would have "clear macroeconomic and financial spillovers" to Asia as the region's economy has clearly not "decoupled" from advanced economies.

"The panic sell-offs across Asian financial markets and safe-haven flows into Japan that occurred when European troubles intensified in August-September 2011 demonstrate that there is 'no place to hide' when advanced markets come under pressure," the IMF said.

"Since 2009 investors from advanced economies have built up substantial positions in Asian markets, including Indonesia and other Asian sovereign debt markets," it said.

"A sudden liquidation of these positions could trigger a loss of confidence, and contagion could spread from bond and equity markets to currency and other markets."

Asian policy makers faced a "delicate balancing act" to guard against risks to growth but also limit "the adverse impact of prolonged easy financial conditions on inflation".

The IMF noted that inflationary pressures were "elevated" in a number of Asian economies due to accommodative monetary policies, but should ease off as food and energy prices "gradually moderate".

While noting that growth in Asia has eased since the second quarter of 2011, mainly reflecting weakening external demand, the IMF said domestic demand is still resilient and should continue to sustain activity across the region.

In Japan, the March 11 earthquake and tsunami "had grave social and humanitarian costs and also set back the recovery," the IMF said.

However, "domestic demand is picking up as reconstruction efforts get under way" towards reaching the 2.3 percent growth it forecast for Japan for 2012, it said.

The IMF called on Japan to make further efforts to reduce its massive public debt through limiting spending growth and comprehensive tax reforms.

It welcomed the government's plan to double the consumption tax to 10 percent by the middle of the decade and adjusting pension benefits but said "more needs to be done to put the net debt-to-GDP ratio on a downward path."

Japan's public debt is one of the world’s highest at more than 200 percent of gross domestic product.