Economic policies against ‘future shocks’ sought

Support for regional recovery needed — ADB

ASIAN policymakers should come up with policies that support the region’s economic recovery, and make governments more responsive and resilient to future crises, Asian Development Bank (ADB) President Haruhiko Kuroda said yesterday.

“The time has now come for moving forward to develop macroeconomic and regulatory policies to make economies more resilient to future shocks,” he said yesterday at a regional forum on financial crisis organized by the multilateral agency at its Manila headquarters.

Mr. Kuroda said economies should be careful in injecting too much fiscal stimulus because it may reduce a country’s private investment, and affect capital accumulation, inflation and future taxation. “Accordingly, easing of fiscal stimulus measures may have to be considered in those countries that are on strong recovery paths,” he added.

Data from the United Nations Development Programme showed that during the global economic crisis that started in 2007, the Philippines adopted a fiscal stimulus package worth $6.95 billion or 4.4% of the gross domestic product (GDP) for 2008.

In absolute terms, the amount is lower than stimulus adopted by Thailand ($44.92 billion), Malaysia ($12.12 billion), Singapore ($10.21 billion), and Vietnam ($8.42 billion). However, it was higher than what Indonesia adopted ($6.3 billion).

Mr. Kuroda said economies may fall back into recession with a premature withdrawal of stimulus, but in the same breadth said it is difficult to determine the best time to withdraw while ensuring a sustainable recovery.

He added that exit strategies need to be tailor-made to each country, basing approaches from prevailing macroeconomic conditions and on where the economy is located on the recovery path.

“…[T]he global crisis adversely affected Asia and all other parts of the world. Those effects will continue to be felt for some time,” Edwin M. Truman, senior fellow at the Peterson Institute for International Economics, said in the forum.

He added that the crisis should have taught countries the importance of strengthening central institutions of international cooperation and revisiting the framework governing capital flows.

Mr. Truman also said that the International Monetary Fund should also be strengthened, which will require additional financial resources and changes in the way it does business.

A report published by ADB also said changes are needed in the operational frameworks of central banks, including higher reserve levels, management of capital inflows, widening the definition of collaterals, increasing the maturity of central bank loans to banks and timely swap arrangements between central banks to increase liquidity during global shortages.

“The crisis has reopened the debate about central banks’ role in ensuring financial stability to avoid systemic risk,” Mr. Kuroda said.

He added that there is no conclusion yet whether central banks can ensure financial stability, since there could be a trade-off between financial stability, and price stability.

He said that since many are not in favor of making financial stability as a separate objective in a monetary policy, there is a growing consensus supporting the use of “macroprudential instruments” in supporting financial stability.

Macroprudential instruments include internally-consistent macroeconomic policies involving monetary and fiscal policies, prudential policies, institutional framework for effective enforcement of regulation and monitoring, and international cooperation in terms of standard-setting, monitoring and resolutions.

Data from the Committee on the Global Financial System showed that the Philippines is one of the few Asian countries which uses macroprudential tools to manage aggregate risk over time through direct controls on lending to specific sectors.

In terms of addressing a systemic oversight, the country also implements tools such as capital surcharges for systemically important banks, liquidity requirements or funding, and limits on currency mismatches.

Sought for comment, Deputy Director-General Augusto B. Santos of the National Economic and Development Authority said the country’s monetary and fiscal policies helped the Philippines recover from the global meltdown, and the policies will help in avoiding future crises.

“We have a loose monetary policy to prevent a recession,” he told BusinessWorld in a phone interview, adding that the central bank has kept interest rates as low as possible, encouraging economic activity with increased aggregate demand.

Mr. Santos added that in 2009 and 2010, the government approved a big budget which triggered more spending. The national budget amounted to P1.41 trillion in 2009, and P1.54 trillion in 2010. For next year, the proposed budget is worth P1.65 trillion. “We don’t think we will fail. We escaped recession,” he added.

The Philippines posted a 3.8% GDP growth in 2008 and 1.1% last year. For this year, ADB gave a forecast of 6.2%. –Businessworld