Analysts at ANZ point out that in Asia, current account deficits (CAD) are an inescapable and integral feature of the present stage of development in India, Indonesia, and The Philippines and the more interesting debate, however, is over its right ‘size’.
“The benevolent view is that the size of the CAD does not matter as long as it can be funded whereas the more conservative views envisage a quantitative ceiling on the associated net external liabilities, at levels below those that have empirically been associated with an external crisis.”
“Our analysis suggests that the risk of a balance of payments crisis that requires an abrupt and sharp reversal in the CAD is remote in any of these economies. At the same time, persisting with a CAD at around the 2018 levels would impart considerable volatility in the FX markets.”
“There has also been a reduction in the growth that can be derived from a particular level of CAD, mainly due to a fall in savings rates. This as an unfavourable development.”
“A shift in funding towards FDI would also foster stability to the external position as it would eventually help to reduce external liabilities. This issue is particularly relevant for Indonesia.”
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