Current Account Imbalances in ASEAN Countries
Jonathan D. Ostry

 

Current account deficits in a number of ASEAN countries have widened in the 1990s. While these deficits have generally been regarded as being sustainable over the medium term--mainly on account of the high investment levels that have accompanied them--conventional wisdom suggests that they are not without risks. Against this background, this paper assesses the sustainability of these deficits from a number of perspectives.

First, a model is estimated in which the current account acts as a buffer to smooth consumption in the face of transitory shocks to output, investment, and government spending. A key conclusion of the model is that excessive external borrowing for 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. The paper thus confirms that the deficits are primarily a reflection of high levels of investment rather than excessive private consumption.

Beyond the model, the paper discusses other factors that affect 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 financial systems. The paper concludes that, even when the external position appears sustainable, there is a need to pay special attention to these factors and to reduce current account deficits over time in order to minimize risks that may arise from such factors.


Jonathan D. Ostry is a Senior Economist in the Fund's Southeast Asia and Pacific Department. Prior to that, he was an economist in the Fund's Research Department and at the Bank of Canada. He was educated at Oxford University and the London School of Economics, and holds a Ph.D. from the University of Chicago.

 

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