Inflation may threaten global recovery: Indonesia

NUSA DUA, Indonesia, April 8, 2011 (AFP) - Rising food and oil prices could threaten the global economic recovery, Indonesian President Susilo Bambang Yudhoyono said Friday at a meeting of Asian finance ministers in Bali.

Indonesia's rupiah hit four-year highs against the greenback earlier this week and inflation is running at more than 6.5 percent, underlining concerns that the region's more successful economies may be close to boiling point.

"In contrast (to developed countries), emerging and developing economies have led the global economic recovery... In fact emerging and developing countries in Asia have become an engine of global growth," Yudhoyono said.

"This is of course no time to be complacent," he added, warning of upward pressure on commodity prices, the rising price of oil and the "increasing severity and impact of natural disasters and climate change".

Trade and liquidity imbalances combined with inflation "may threaten the global economic recovery, food and energy security and the achievement of millennium development goals" such as poverty reduction, he said.

"The increasing linkage of ASEAN to the global economy has enhanced the potential spillover from external shocks into our region," the ex-general added.

Yudhoyono was speaking at the opening of a meeting of finance ministers from the 10-member Association of Southeast Asian Nations (ASEAN) on the resort island of Bali.

World Bank managing director Sri Mulyani Indrawati -- a former Indonesian finance minister -- and officials from the International Monetary Fund and Asian Development Bank also attended.

With Europe's sovereign debt crisis spreading to Portugal and much of the developing world's economies still in the doldrums after the global financial downturn, Asia has become a magnet for capital seeking better returns.

But much of it has been in the form of volatile portfolio capital that can be withdrawn just as fast as it is injected, raising fears of instability in economies that are leading the global recovery.

Yudhoyono said ASEAN needed to speed up regional economic integration and progress toward the creation of a common market of more than 500 million people by 2015.

The ASEAN region grew at around five percent last year, up from 1.5 percent in 2009 in the aftermath of the global credit crunch, yet Yudhoyono said it still counted almost 120 million people who live on less than $1.25 a day.

The block includes Brunei, Cambodia, Laos, Malaysia, Myanmar, the Philippines, Singapore, Thailand and Vietnam.

Analysts say Asia's emerging economies are poised for another year of solid growth in 2011 even if the impact of the catastrophic earthquake and tsunami in Japan remains unclear.

But inflation is a key concern for the region, where policymakers have been forced to tighten interest rates to temper price rises despite the risk that this will only fuel volatile foreign capital inflows.

The ADB warned this week that some developing economies were showing signs of "potential overheating" and said more flexible exchange rates and capital controls could help curb soaring prices.

IMF Asia and Pacific director Anoop Singh told AFP capital inflows remained "robust" and the challenge for the region was to direct the money into longer-term assets.

"I think Asia has responded well with its monetary policies. The challenge is to push (capital inflows) into areas that are not short-term, or property or speculative, but into infrastructure and long-term benefits," he said.

Governments have tried a range of responses to hot money but capital controls, such as transaction taxes and currency restrictions, have until recently been scorned by economists as unnecessary interference.

In February the IMF recognised that such controls were justified in the face of destabilising imbalances in the global economy.

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