IMF chief warns of globalisation risks

Written by Reuters | manila, July 31: | Updated: Jul 31 2007, 16:43pm hrs
The head of the International Monetary Fund warned on Tuesday that global investment and growth prospects were at risk from a dramatic rise in private equity buy-outs and threats posed by financial globalisation.

Rodrigo Rato said the trouble in the US subprime housing market was an example of such risks and called for a fresh look at lenders' underwriting standards and more borrower education.

"There is ground for concern in the recent dramatic growth in large private equity buy-outs," the IMF chief told a business audience in the Philippine capital.

Such deals financed by huge debt could trigger risk aversion when they turn sour, curtailing broad market access.

"This in turn could adversely affect investment and growth prospects, not just in the countries where the problems occur but worldwide," he said.

"I would urge regulators to remain vigilant about these deals, and pay especially close attention to deals whose failure could have systemic implications," he added.

"There are some risks associated with financial globalisation. I am very concerned that those risks are not fully appreciated," Rato said.

But, speaking later to reporters he played down the risks posed by losses in the US mortgage market for less creditworthy borrowers.

"The scale of any potential subprime losses in our opinion looks to be much lower than earlier savings and loan crises."

He also said the outlook for global economic growth remained "generally good", as well as for economies in emerging Asia despite the negative impact of expected lower growth in the United States.

In its latest projections released last week, the IMF forecast world growth of 5.2 per cent in 2007 and in 2008, compared with 5.5 per cent in 2006.

Rato said he expected the Philippine economy to grow close to 6 per cent in 2007 and 2008, in line with average growth for Southeast Asia's five main economies.

But he said emerging Asian economies, which have benefited from strong capital inflows, could be hurt by an abrupt reversal of flows in the case of financial shocks.

Inflation was forecast to remain low for most of Asia, including the Philippines and external current account positions for the region were likely to be kept at substantial surpluses, backed by strong net capital inflows.