SINGAPORE, Sept 3: Global economic growth will stay above four per cent this year, the head of the International Monetary Fund said on Saturday, but he warned that the high price of oil posed an increasing risk to the outlook.
IMF Managing Director Rodrigo Rato also said fuel shortages following Hurricane Katrina had shown that the United States needed to raise its oil refining capacity in the long term.
“World growth is clearly above four per cent. The tendency will continue this year and next year,” he said at a briefing after a one-day meeting with Asia-Pacific finance ministers and central bank governors on regional financial integration.
The IMF, which will release a fresh global growth forecast later this month, said in April world growth would slip to 4.3 per cent from last year’s 5.1 per cent.
“The world is more resilient to quite a rapid increase in oil prices,” he said, but added that the price of oil was a clear risk which was increasing, not decreasing.
Oil prices soared to a record high of almost $71 a barrel earlier this week as Hurricane Katrina slammed into the US Gulf Coast.
Rato said it was too early to assess the impact of the hurricane on the US economy, which grew at a 3.3 per cent annual rate in the second quarter, down from 3.8 per cent in the first quarter.
On Friday, US Treasury Secretary John Snow said that the hurricane may slow US economic growth for a quarter or so, but would not have a lasting impact.
Rato also said interest rate levels in Europe were providing sufficient scope for growth but warned of “second-round” effects from oil prices and weakness in some domestic economies.
Second round effects are when workers demand higher wages and businesses raise prices to compensate for increased energy costs, pushing up the wider inflation rate.
INDONESIA WOES: Rato said there was no reason to worry that developments in Indonesia would have a spillover effect on the rest of the region. The Indonesian rupiah plunged to a four-year-low of 11,750 per dollar last week as oil prices surged, unsettling local stock and bond markets.
He said that while the country’s economy was on a strong footing, its monetary policy should be clear and transparent and more responsive to inflation expectations. The Indonesian central bank raised its one-month reference rate by a hefty 75 basis points on Tuesday to 9.5 per cent.
“What is most important is to make clear a credible inflation policy. The decision taken by Bank Indonesia is going in that direction,” he said.
Rato said the interest rate rise was helping to tackle the biggest weaknesses in the economy but added that the central bank’s decisions should be based on rooting out inflation.
He added that Indonesia needed to reduce inefficient expenditures, referring to costly oil subsidies which make up one-fifth of the country’s budget.
Indonesian President Susilo Bambang Yudhoyono said this week fuel prices would be raised, but only once the poor have been cushioned from the blow.
ASIAN COOPERATION: Rato said the meeting of Asian officials saw a consensus for boosting financial integration initiatives. This included taking forward steps already in place to cultivate Asia’s underdeveloped capital markets.
Eleven Asia-Pacific countries have invested public money to develop Asia’s bond market and reduce corporate reliance on bank loans to raise funds.
“The Asian economies are highly open to the rest of the world,” Rato said. “There is a lot of catching up to do with financial integration.”
Delegates at the meeting saw the Chiang Mai Initiative – a region-wide scheme to ward off a repeat of the 1997/98 financial crisis — as a useful safety net to complement international financial arrangements.
Japan and Indonesia signed on Wednesday a deal to double a $3 billion bilateral currency swap facility as part of the CMI. The initiative is a network of bilateral currency swaps set up in 2000 by Asian countries.—Reuters
