SINGAPORE, Jan 5: Asia’s economic outlook remains bright, but governments must be prepared to ease monetary and fiscal policies if a potential war in Iraq does more damage to the global economy than expected, the International Monetary Fund’s director for Asia-Pacific said on Wednesday.

“Prospects for the region will depend significantly on developments in the global economy, about which there is currently considerable uncertainty,” Fund’s director for Asia-Pacific David Burton said.

Nonetheless, the most likely scenario is for Asia’s economic recovery to gather momentum during the year, registering average growth of around 6 per cent, excluding Japan, Mr Burton said in an address to the Foreign Correspondent’s Association and the Singapore Press Club.

His forecast is unchanged from what the IMF issued in its World Economic Outlook last September.

Despite efforts by the Asian governments to foster stronger domestic growth, the fact remains that economic growth in most countries remains largely skewed toward exports, Burton said.

That reliance on external demand could be a problem if a possible war in Iraq turns out to be a greater drag on the global growth than expected, he said.

Concerns about a potential war have already boosted oil prices significantly, fuelled selling in stock markets, and damped business confidence, Burton said.

“Growth in the advanced economies has slowed in recent months, and forward-looking indicators are not particularly encouraging.”

Cutting interest rates should be the “first line of defence” for most Asian countries to counter any economic slowdown that might result from a war with Iraq, Burton said.

However, for South Korea, where excessive consumer credit growth has been a problem, fiscal stimulus would be more appropriate than monetary easing, he added. In addition, both South Korea and Singapore can afford greater fiscal spending because of their strong budget positions, Burton said.

“However, in several other countries, such as India, Indonesia, Japan and the Philippines, high budget deficits and public debt levels constrain the room to manoeuvre, and reducing fiscal imbalances should remain a priority,” he said.

Burton also repeated the IMF position that China should move gradually toward a more flexible exchange-rate regime. The Chinese government manages the value of the yuan in a tight range against the dollar.

He avoided commenting directly on recent assertions by the Japanese government that the yuan is grossly undervalued and causing deflationary pressure around the world.— Dow Jones Newswires