Asian summit to weigh winding down stimulus measures

TN News

Email Print

Southeast Asian leaders will consider ways to unwind emergency stimulus policies without jeopardizing recovery in the fast-growing region at a summit this week in Hanoi, a draft statement says.

But Myanmar, due to hold its first election in two decades, could again test ASEAN's consensus when the group that includes a monarchy, a military dictatorship, communist states and democracies turns to politics at the April 8-9 summit.

Leaders of the Association of South East Asian Nations agreed at last year's summit on coordinated policies, including rate cuts, credit support and government spending after their export-oriented economies fell into a sharp but short recession during the global financial crisis.

While most of their economies having jumped back on a fast growth path, the recovery was "fragile" and required "decisive, timely and coordinated" action to maintain momentum, a draft media statement from finance ministers from the 10 ASEAN countries says.

"We will continue to pursue expansionary policies until recovery is secured, but at the same time, we will stand ready to withdraw our fiscal, monetary and financial sector support once private demand has become self-sustained," it said.

But the statement said exit strategies would be "guided by our respective economic fundamentals, consistent with the goal of medium-term fiscal sustainability, price stability and financial stability".

The ministers are meeting this week with central bank chiefs in Vietnam's southern resort of Nha Trang.

Another draft, the "ASEAN Surveillance Report", says the ASEAN economy is expected to grow by about 4.9 percent to 5.6 percent in 2010, against 1.9 percent last year. An earlier draft estimated 2010 growth at 4.5 percent.

A key challenge is to manage the robust capital inflows from foreign investors that have helped support the recovery but could pose a risk by strengthening currencies too much and reducing export competitiveness, the surveillance report says.

Policy dilemma

Leaving stimulus measures in place for too long could fuel inflationary pressures or destabilizing asset bubbles, but pulling the plug too quickly could derail economic growth.

"As economic growth is far from self-sustaining, the fiscal stimulus should continue, though fiscal consolidation measures should also be put in place," the surveillance report says.

Authorities needed to use monetary and exchange rate policy to "minimize the incentives for volatile capital flows and cross-border transactions", it says.

But the group will not be acting in concert on exiting the stimulus policies, Indonesia's deputy central bank governor, Hartadi Sarwono, said.

"I think on G20 cases, it's much more relevant rather than the ASEAN countries, although we have already seen that some countries already changed monetary policy -- Malaysia, China," he told Reuters on the sidelines of the Nha Trang meeting.

He said China's yuan currency did not come up at the meeting.

"No, basically because the currency of the Chinese ... is basically on a global China versus United States, China versus the rest of the others. It's not really ASEAN countries."

The surveillance report noted the "urgency for exiting from stimulus measures is not high, as inflation risk remains benign, debt levels are sustainable, and there is little evidence that private demand is self sustaining".

The report recommends removing credit support before raising interest rates, given that inflation remains mild. Measures to reduce budget deficits could begin when private demand recovers.

The ASEAN ministers and central bank chiefs are also meeting with officials from Japan, China and South Korea in Nha Trang.

Known as "ASEAN + 3", this group is working on a "regional surveillance" unit to provide an early warning of macroeconomic risks and an Asia bond market initiative in a region with high savings rates but undeveloped capital markets.

Community vision

ASEAN has ambitious plans to establish a political and economic community by 2015 and the theme of this year's summit is to translate that "vision into action".

The economic community aims to be a single market and production base with free flow of goods, services, capital investment and skilled labor, while the political community envisions joint foreign policy and security initiatives.

That is much easier said than done in a region with a huge disparity in income and development levels, different political systems, long-standing rivalries and territorial disputes.

Yet, incrementally, the resource-rich region of 584 million people, with a combined gross domestic product of $2.7 trillion, is stitching together the economic community, even if the political and security one is more of a pipe dream at the moment.

More World News