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UN report warns Asian governments to prepare for financial downturn

 – (31 August 2006)

The United Nations Economic and Social Commission for Asia and the Pacific (UNESCAP) today warned the region’s governments to reduce exposure to the impact of a sudden or unexpected market downturn, urging a mood of protection and preparation rather than the celebratory atmosphere of current prosperity.

Asian countries have to stay alert despite the lull in financial markets recently, says UNESCAP in a new report, The Calm Before the Storm? Managing the Risks of an Asia-Pacific Financial Downturn. “There are a number of new emerging risks which may lead to more stormy weather ahead,” the report warns, citing possible interest rates hikes in developed countries, oil price shocks, housing market overheating, and investor overreaction and contagion.

The region evokes bitter memories of the Asian financial crisis in 1997 but notes that countries of the region “are now in a stronger position to handle turbulence.” Governments have improved economic policies, depend less on portfolio flows, and have bigger foreign reserves and better banking sectors.

The report cautions that “as Asian economies are becoming more integrated into the global economy, they also face a higher risk from the constantly shifting global environment.” It calls for governments to focus on controlling inflation and debt, improving banking regulations, and monitoring complex financial products.

“Countries in the Asia-Pacific region must improve regional cooperation to lessen the impact of financial market volatility,” the report says, recommending strengthening existing regional cooperation schemes by making more funds available against disruptive capital movements, ramping up regional surveillance of country policies and extending these schemes to more countries.

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