In a new simulation exercise to show trade war risks to the global economy, the International Monetary Fund modeled the effect of an all-out US-China trade war, coupled with threatened global US vehicle tariffs and retaliation from trading partners.
The IMF said a high interest burden and risks from rising yields in India also require continued focus on debt reduction to establish policy credibility and build buffers. It added that downside risks detailed in the April WEO "have become more pronounced or have partially materialized" such as trade barriers and reversal of capital flows to emerging market economies with weaker fundamentals and higher political risk.
"An intensification of trade tensions and the associated further rise in policy uncertainty could dent business and financial market sentiment, trigger financial market volatility, and slow investment and trade", the report said. -China tariff war's impact to be felt next year, the fund cut its 2019 USA growth forecast to 2.5 percent from 2.7 percent, while it cut China's 2019 growth forecast to 6.2 percent from 6.4 percent.
That's a significant downgrade from the IMF's assessment in April, when it projected a 3.9 percent growth rate.
The interest rates on the overnight lending and deposit facilities were also raised accordingly. The Shanghai Composite index recovered from early losses to gain 0.1 percent to 2,719.41, after tumbling 3.7 percent on Monday.
Growth is expected to "remain strong elsewhere in emerging and developing Asia", the International Monetary Fund said, forecasting Indian growth to increase to 7.3 per cent in 2018 and 7.4 per cent in 2019.
Following the announcement in September that SA had fallen into a recession, a number of organisations have reduced the country's growth projections. Emerging Asia includes ASEAN 5 countries plus China and India.
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The Briton Woode institution is also projecting growth of 1.9 and 0.8 percent for Nigeria and South Africa while it is predicting contraction of 0.1 percent for Angola.
But growth could weaken significantly further if additional trade protectionist measures are put in place, it said.
The growth rate of United States for 2018 is 2.9 per cent and that of 2019 has been powered to 2.5 per cent.
The region's slower growth next year mirrors the global growth's similar softening over the medium term.
The rupiah has indeed been under strong downward pressure, especially over the last three months, as a result of monetary tightening and stronger economic growth in the United States, which has caused higher capital outflows, and the upward trend in worldwide oil prices, which has increased Indonesia's trade deficit and consequently the current account deficit to more than 2.5 percent of gross domestic product (GDP).
China's economy could also take a hit: The IMF revised its forecast for economic growth in 2019 down to 6.2 percent, slightly lower than previous estimates and down from 6.6 percent this year.
Other than low foreign exchange reserves at $8.4b, not sufficient for two months imports, the country posted Jul-Aug Current Account Deficit (CAD) of $2.7b, up by 10 percent.