Current account deficit sustainability : the case of South East Asia countries

Abstract

This paper investigates the sustainability of current account deficit of four major South East Asia countries; Indonesia, Malaysia, the Philippines, and Thailand. The sustainability of current account deficit conveys information about the actions and expectations of all market participants in an open economy. For this reason, policy makers focus on the current account as an important macroeconomic variable to explain its movements, to assess its sustainable level, and to seek to induce changes in the current account balance through policy actions. In other words, the current account is what often referred to as an 'intermediate target'; that is, a variable which is both a broad reflection of the stance of macroeconomic policies and a source of information about the behavior of economic agents. This study uses various econometric tests that include standard cointegration tests and tests which allow for structural breaks, to evaluate the sustainability of current account deficits. To add reliability to the results, several diagnostics statistics are also given, such as heteroscedasticity, autocorrelation, normality, and specification tests. The results of this paper have shown that the hypothesis of current account deficit sustainability cannot be rejected for Indonesia case. For Malaysia and Thailand, the results represented un-sustainability condition, while the Philippines case showed inconsistent results. With conventional cointegration test, there was evidence that the Philippines current account deficit is relatively sustainable, but using a test that can verify the presence of structural change, the results failed to present the sustainability condition.