Southeast Asian economies will grow up to 5.6 percent this year but the expansion could be jeopardised if economic stimulus is withdrawn too early, according to a report by a regional body.
Nevertheless, the governments of the 10-member Association of Southeast Asian Nations (ASEAN) need to design an orderly exit strategy to show that they have inflation expectations under control, said the latest draft of the ASEAN Surveillance Report. “Following the pace of growth in Asia, the ASEAN economy will grow by about 4.9 percent to 5.6 percent in 2010 with ASEAN economies recording moderate to strong growth,” it said. The report was presented at a meeting of deputy finance ministers and central bank governors.
ASEAN comprises an array of economies at different stages of development including Brunei, Cambodia, Laos, Indonesia, Malaysia, Myanmar, the Philippines, Singapore, Thailand and Vietnam.
Asia is leading the global recovery, in part thanks to robust stimulus policies launched during the financial crisis.
All eyes are now on how and when these countries take back the stimulus and address what some economists see as a rising risk of inflation.
The ASEAN report said “the urgency for exiting from stimulus measures was not high as the inflation risk remains benign, debt levels are sustainable and there is little evidence that private demand is self-sustaining”.
The region needed to design an exit strategy “to anchor expectations and to assure the community that expansionary policy settings will not lead to inflation and further financial instability”, it said.
“Timing is crucial as moving too early could undermine economic recovery while prolonged action could create costly distortions and volatility.”
The report advised countries to remove special financial and credit support before raising interest rates. So far, Malaysia and Vietnam are the only two ASEAN members who have raised rates.
“As economic growth is far from self-sustaining, the fiscal stimulus should continue, though fiscal consolidation measures should also be put in place,” it said.
Authorities needed to use monetary and exchange rate policy to “minimise the incentives for volatile capital flows and cross-border transactions”.
It said it might help to “tighten prudential limits on capital inflows and to monitor highly leveraged institutions and to ensure that excessive risk taking is not happening”.