Costly oil, high rates key risks to Asia growth

HONG KONG, May 2 (Reuters) Higher oil prices, tighter global financial conditions and current account imbalances are Some of the key risks to the broadly favourable outlook for growth in Asia, the International Monetary Fund said on Tuesday.

The global lender forecast Asia's growth rate at 7 percent for 2006, the same as last year, with rising domestic demand and a surge in exports particularly in the electronics sector underpinning economic expansion in the region.

Policymakers in the region have to strike a balance in forming monetary policy which is firm enough to keep oil-induced inflation at bay without tightening it so much as to avoid choking domestic demand, it said in a report.

The other key challenges for authorities were reducing public debt while providing for an ageing population and public infrastructure and supporting economic growth by boosting domestic demand while reducing external imbalances, it said.

It said Asia, excluding China, needed to step up investments to invigorate demand by further developing its financial sector, reducing investment uncertainties and increasing the rate of return on investments.

In its ''Asia-Pacific Regional Economic Outlook'', the IMF noted that higher oil prices had only had a modest impact on Asian growth but the impact could be more serious in future as prices are rising more due to supply related reasons.

It said higher oil prices could stoke inflation whose effect could intensify as governments increase administered domestic oil prices to bring them closer to world levels.

Financial markets in Asia, where bonds and stocks had benefited from benign global interest rates and low risk aversion, could be tested as monetary conditions tighten across the world, the IMF said.

However, it added:''The region should be able to weather such disturbances, since in sharp contrast to the mid-1990s, asset prices are not significantly overvalued and external vulnerabilities are relatively low.'' But, at the same time, it warned that household borrowings had risen rapidly and consumers could be stressed by higher interest rates and general tightening in credit conditions.

The IMF also highlighted the risk to Asian exports from ''disorderly unwinding'' of world current account balances w hich could see a significant drop in U.S. demand.

On China, the IMF said domestic consumption should be boosted if it is to maintain a sustainable high growth rate in the future while reducing dependence on exports and investment.

It said Chinese authorities should look for long lasting solutions rather than short-term measures to lift the country's household consumption which, at 40 percent of gross domestic product, was among the world's lowest.

These steps include allowing its renminbi currency to appreciate in the near term hence putting more buying power in consumers' hands and amending its education, healthcare and pension systems to reduce consumers' need for saving.

It also included reforming its banking system and developing its capital market which would allow people to spend more by borrowing against their future earnings.

REUTERS DKS RK0725