Friday 25 May 2018

IMF chief warns on buy-out risks

Manila, July 31, 2007

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 percent in 2007 and in 2008, compared with 5.5 percent in 2006.

He said China and India are the new engines of world economic growth, replacing the United States and other developed countries.

Rato said China overtook the United States this year to become the biggest contributor to world economic growth.

"Looking ahead, we expect this pattern of growth to continue ...we expect China -- and increasingly India -- to grow in importance as engines of global growth."

He said China would grow by more than 11 percent and India at around nine percent this year, with almost equal rates in 2008. After slowing down, the US economy would "regain momentum gradually as the drag from the current housing correction and the softness in the business sector dissipates."

"Prospects in Europe and Japan remain good," Rato added, without giving specific figures.

"The outlook for the global economy is generally good and the economic prospects of most countries in emerging Asia are also good," he said.

Rato said he expected the Philippine economy to grow close to 6 percent 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. -Reuters   

Tags: investment | Globalisation | IMF | Rato |


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