Economic growth in Asia is projected to remain steady at 5.4 percent in 2014 and 5.5 percent in 2015, the International Monetary Fund (IMF) said in a report published on Monday.
External demand is set to pick up alongside the recovery in advanced economies, and domestic demand should remain solid across most of the region, said the IMF's Regional Economic Outlook for Asia and Pacific.
Entitled "Sustaining the Momentum: Vigilance and Reforms", the report said that the region has strengthened its resilience to global risks and will continue as a source of global economic dynamism.
Provided it stays the course on reforms, Asia is well positioned to meet the challenges ahead and to secure the region' s position as the global growth leader, the report said.
"Asia will continue to remain the most dynamic economy in the world even if its performance is not as stellar as it used to be a few years ago," said Chang Yong Rhee, Director of IMF's Asia and Pacific Department.
This year in particular, Asia will be able to capitalize recoveries of the advanced economies and its performance will be improved, he said in a video interview published on the IMF's official website.
Despite the growth momentum, the IMF report warned that Asia will face higher interest rates and potential bouts of capital flow and asset price volatility with the expected upcoming tightening of global liquidity and Asian economies' external risks of a sudden tightening of global financial conditions.
Since about a year ago when market participants abruptly revised their expectations of the U.S. Federal Reserve tapering, policymakers in Asia have taken actions to address vulnerabilities which have started to bear fruit.
For instance, India, Indonesia, and other Asian emerging markets were able to better weather the bout of global financial volatility in January, the report said.
In addition, the report pointed out that Asia also faces several risks originating from within the region.
Due to financial sector vulnerabilities and the temporary cost of reforms along the transition toward a more sustainable growth path, a sharper-than-envisaged slowdown in China would have significant adverse regional spillovers.
In Japan, there is a possibility that Abenomics-related measures could prove less effective in boosting growth than envisaged unless strongly supported by structural reforms.
Domestic and global political tensions could also create trade disruptions and weaken investment and growth across the region. In some frontier economies, high credit growth has led to rising external and domestic vulnerabilities, the IMF report said.
Growing regional integration is propelling Asia's growth but could also amplify the impact of global and regional shocks. Financial integration in Asia lags well behind trade integration, but it is still capable of exacerbating cycles during negative global events.
The report cited events over the past year as a reminder of Asia's exposure to policy decisions in advanced economies, and warned that Asia is twice as exposed as other regions to growth shocks originating from China.
Chang Yong Rhee said the IMF this time gave a more tailormade policy recommendation to Asian economies.
In China, dealing with credit loss and shadow-banking problem should be priority. In Japan, continuing its structure reform is essential. Inflation in India and Indonesia is still high, and anchoring inflation expectation is an important policy challenge, according to the director.
Some frontier economies with large budget deficit need to address fiscal consolidation to stabilize the market, Rhee said.
The IMF report also suggested that policymakers in Asia need to seek out ways to maximize the growth benefits while preparing to manage the vulnerabilities arising from the expanding channels for spillovers.
