BANGKOK: The International Monetary Fund on Thursday projected Asia's economic growth would moderate next year and warned of heightening risks from the Iran war-induced energy shock, a potential correction in the AI boom and spillovers from rising global bond yields.
In a report on the outlook for the Asia-Pacific region, the global lender also said uncertainty over the US monetary policy path could keep Asian financial markets volatile.
"Exchange rates and capital flows have become more volatile since the energy shock this year," with several emerging economies experiencing depreciation pressures, the IMF said in the report issued during its annual meetings in Bangkok.
While foreign investment inflows in the region remain generally robust, such moves have coincided with some portfolio outflows such as from South Korean technology stocks, it said.
"The US monetary stance is expected to continue to tighten later this year. The combination of monetary policy tightening and fiscal pressures in most major advanced economies is likely to keep upward pressures on yields across Asia and the Pacific."
The IMF said it now expects Asia's economy to grow 4.8% in 2026 and 4.4% in 2027, higher than projections made in April but still slowing from a 5.0% expansion in 2025.
The revisions largely reflected the boost from the AI boom for advanced Asian economies, with their growth expected to accelerate to 3.2% in 2026 from 2.5% last year, it said.
Emerging Asia remains the region's main growth engine but will likely see growth moderate to 5.1% in 2026 from 5.6% last year due to the hit from higher energy prices, the report said.
"Risks to the outlook remain tilted to the downside" as a prolonged stalemate in the Middle East conflict could keep commodity prices high and deplete oil reserves, the IMF said.
A correction in AI demand could weigh on global growth, with the effects likely to be particularly pronounced in Asia given its extensive exposure to the AI production chain.
With global yields rising, market stress in major sovereign issuers like the US, the UK, euro zone and Japan could spill over to Asian bond markets, pushing up yields and exacerbating already-elevated fiscal vulnerabilities, it said.
"With public debt and borrowing needs remaining high across much of the region, an abrupt tightening of financial conditions could further strain public finances by raising debt-servicing costs," the IMF said.
Asian central banks should remain focused on price stability and "respond promptly" if inflationary pressures become more persistent, the IMF said.
Fiscal policy should be targeted and temporary, the IMF said, urging countries in the region to avoid blanket fuel subsidies or price controls that could be more costly. - Reuters
