Current Account Imbalances in ASEAN Countries - Are they a Problem?

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.