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Thursday, 12 November 2009

Asia faces new risks of overheating: Zoellick

By Martin Abbugao from AFP

Asia’s rapid recovery from the economic crisis carries new risks of overheating, and governments must carefully unwind their huge stimulus injections, the head of the World Bank warned Wednesday.

Robert Zoellick said there were signs in some markets of a “substantial” rise in equity and property prices that could lead to asset bubbles — the very ingredients that triggered the global crisis in the first place.

The International Monetary Fund on Tuesday said Hong Kong faced a potential surge in property prices and endorsed a government plan to cool any overheating in the market.

And in September, the head of the UN’s trade and development think-tank also cautioned against a new financial bubble following the massive liquidity that was pumped into the economic system to counter the global crisis.

“In East Asia, if you start to get a strong rebound in growth, and you’ve got a lot of liquidity, there is the question of whether one could start to face asset bubbles in particular markets,” Zoellick told the Foreign Correspondents Association of Singapore.

He said this was one reason why Australia had become the first industrialised nation to raise interest rates since the crisis erupted, but the response could differ among countries.

“I think one of the questions here will be the timing of how they manage the interest rates and the risk that they could get some inflation and even asset bubbles which obviously, if they become a serious issue, could undermine confidence going forward,” he said.

“It’s a fine balance so I’m not suggesting there’s an easy answer to this.”

Asia has rebounded faster than the rest of the world from the global slump, and there are fears the multi-billion-dollar government spending packages could be terminated prematurely as confidence returns.

Zoellick said Asian governments must take care in winding down the packages, which were implemented to soften the impact of the downturn that was triggered in part by problems in the US property market.

Most of the packages will run until next year, and governments must find a way to transition smoothly back to growth led by the private sector, he said.

“And so when that stimulus money has run its course, then the question will be, will the private sector rebuild demand?”

Zoellick was speaking on the margins of annual meetings of the Asia-Pacific Economic Cooperation (APEC) forum in Singapore, leading up to a summit this weekend of regional leaders including US President Barack Obama.

The APEC leaders are expected to say they will maintain their hefty stimulus packages until they secure a “durable” recovery from the world’s worst slowdown since the 1930s, according to a draft communique seen by AFP.

The Obama administration implemented a 787-billion-dollar Recovery Act in February that the White House says has saved or created nearly 650,000 jobs, and likely more than a million.

Asian governments have rolled out more than one trillion dollars in stimulus packages, led by 585 billion dollars in spending by China.

Zoellick also identified continued high unemployment, weak consumption and protectionism as among the risks for the global economy next year, adding however that he was “relatively comfortable” about growth prospects this year.

Jobless rates, currently at around 10 percent in the United States, could lead to “second- and third-order wave effects in the financial sector,” he said.

“You will have problems of deliquencies of credit card loans, consumer loans, people won’t be able to pay their mortgages… That will mean that some banks that are in that line of business are going to continue to be troubled by bad loans.”

Asset bubbles are “not an immediate danger but one needs to anticipate the risks,” he said. – AFP

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