Watch current account deficit: IMF chief

Watch current account deficit: IMF chief

JAKARTA (JP): Managing Director of the International Monetary
Fund Michel Camdessus yesterday warned Indonesia and other
Association of Southeast Asian Nations (ASEAN) members over their
high current account deficits and their financial systems'
soundness.

"These are two financial problems you can and must overcome,"
Camdessus told an international two-day conference organized by
the IMF and Bank Indonesia here yesterday.

He said large net capital flows into Indonesia and other ASEAN
nations tended to raise aggregate expenditures, pushing up
inflationary pressures and widening current account deficits in
those countries.

ASEAN groups Indonesia, Brunei, Malaysia, the Philippines,
Singapore, Thailand and Vietnam.

However, these inflows, especially short-term ones, could be
suddenly reversed because of changes in market sentiment and
market conditions in other countries, Soedradjad said.

"So countries in such situations must pay particular attention
to the sustainability of their external positions," he said.

At the conference called Macroeconomic Issues Facing ASEAN
Countries, Camdessus said globalization had put new strains on
domestic financial systems, especially the banking system.

He noted large capital inflows often led to a rapid expansion
of the domestic credit market which could set the stage for
financial sector problems, especially if prudential supervision
and capital adequacy requirements were inadequate.

"Globalization has also quickened the pace of financial
innovation and difficulties can arise when the pace of this
innovation outstrips countries' regulatory and supervisory
capacities to ensure that the new forms of risk are being managed
prudently," he said.

Financial sector problems could not be prevented by prudential
policy alone, he said. The problems also require appropriate
monetary and fiscal policy and steps to increase the transparency
of institutions' operations and financial condition.

At the conference which was also attended by financial
executives from non-ASEAN nations, Camdessus called on ASEAN
countries to take prompt action before the situation deteriorated
because of policy makers' reluctance to tighten policies for fear
of worsening banking sector problems.

"Otherwise, delays in policy action could lead to a loss of
market confidence in domestic economic policy which could, in
turn, trigger capital outflows and put further pressure on weak
banks," he said.

Although ASEAN countries had performed well, they were not
immune to the complications of large capital inflows, he said.

In some countries, strong domestic demand had raised external
current account deficits and put pressure on private sector
credit and domestic prices, he said.

"Financial systems have inevitably come under pressure, too,"
he said, adding that in many countries, increased capital inflows
and domestic demand had stimulated excessive lending for consumer
credit and real estate.

Camdessus praised ASEAN countries' success in managing their
economies over the past two decades.

Based on current trends, by the end of the century, ASEAN will
have more than doubled its share of the world's output and income
since 1975 to almost 6 percent, he said.

"This will give ASEAN an economic weight about halfway between
those of Germany and Java," he said. Over the same period,
ASEAN's share of world trade will have increased 3.5 times to
about 8 percent, a share roughly equal to Japan's share today.

He said per capita Gross Domestic Product (GDP) in purchasing
power parity terms will have increased from less than US$1,000 to
almost $10,000 in just one generation.

Addressing the conference, Indonesia's Minister of Finance
Mar'ie Muhammad acknowledged some ASEAN countries were facing
large external debts and growing current account deficits.

"In this regard, I would like to reiterate the critical
importance of consistent, prudent fiscal and monetary policies,"
he said.

"In any circumstance we should refrain from overconfidence."

The minister said ASEAN countries should review and update
their major fiscal and monetary policies accordingly to enable
the region to deal with challenges and threats promptly and
efficiently. (hen)