Rising global uncertainty and weaker external demand are causing headwinds for export-dependent economies such as South Korea, the International Monetary Fund said Monday.

In its updated Global Financial Stability Report, the IMF said that conditions in regional dollar funding markets have also tightened since mid-March, although Asia appears better shielded from the euro area crisis compared to Central and Eastern Europe.

“Growth in China has also slowed, weighing on markets across Asia, as well as on global commodity prices. India is a rising concern, with the rupee recently weakening to new record lows, as the need to finance large fiscal and current account deficits is pressuring markets, though financial restrictions have facilitated the financing of the fiscal deficit,” said the report.

Emerging market countries, which include Korea, face challenges both at home and from abroad, the GFSR update said. On the domestic front, policymakers are confronted with slowing growth and the legacy of very rapid growth of credit that took place in the last few years.

“Many emerging market countries still have room for monetary easing to respond to large adverse domestic or external shocks, while fiscal stimulus remains a second line of defense for a number of countries in case of a major shock to growth. Inflation is generally within target ranges, suggesting scope for further cuts in interest rates should large shocks materialize,” the IMF said.

It warned, however, that a large policy-induced credit stimulus could be less effective, and certainly less desirable, than in 2008 and 2009.

“Expanding credit significantly at the current juncture would heighten asset quality concerns and potentially undermine GDP growth and financial stability in the years ahead,” it said.

The IMF’s Fiscal Monitor update also released on Monday said that fiscal adjustment is proceeding generally as expected in advanced and emerging economies.

Advanced economy budget deficits are forecast to decline by about 0.75 percent of GDP this year and about 1 percent of GDP in 2012, according to the report. In most emerging economies, deficits are projected to remain broadly unchanged over 2012―13, which the IMF said was appropriate given these countries’ generally stronger fiscal positions and the downside risks to the global economy.

“However, some emerging economies need to be more ambitious to reduce vulnerabilities,” said the report.

The IMF’s latest World Economic Outlook, also released on Monday, projected that the global economy will grow 3.5 percent this year, down 0.1 percentage point from the April forecast, and 3.9 percent in 2013, 0.2 percentage point lower.

By Park Min-young  (claire@heraldcorp.com)