Current Account Imbalances in ASEAN Countries - Are they a Problem?
.Current Account Imbalances in ASEAN Countries; Are They a Problem?.
By Jonathan D. Ostry
Since the beginning of the 1990s, current account imbalances in a number of
ASEAN countries have widened, generating concern that policy measures may be
required to avoid costly and destabilizing shifts in market sentiment.
This paper uses a model of optimal external borrowing and lending to estimate
an actual time series of the optimal consumption-smoothing current account for
five ASEAN countries: Indonesia, Malaysia, the Philippines, Singapore, and
Thailand. The main prediction of the consumption-smoothing model is that the
current account acts as a buffer to smooth consumption in the face of
transitory shocks to national cash flow, defined as output net of investment
and government expenditures. The time series of the optimal current account
generated by the model serves as a benchmark against which to judge the actual
data. The analysis suggests that excessive external borrowing for private
consumption (defined as an actual deficit above the level generated by the
model) has not tended to characterize the experience of any ASEAN country in
recent years, except to a small degree in Indonesia and Malaysia. This
contrasts with the findings from estimating a similar model for Mexico and
other countries in Latin America, where the evidence of excessive consumption
was much stronger.
The paper also discusses other factors that affect external sustainability and
especially the risks of running large external deficits. The analysis
highlights the roles of the level and composition of external liabilities; the
flexibility of macroeconomic policies; the efficiency with which investment is
used; and the health of banking and financial systems. The paper concludes
that, even when the external position appears sustainable, there is a case to
reduce current account deficits over time in order to minimize risks that may
arise from such factors.