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)