BNY’s Geoff Yu highlights that higher energy prices and gas market stress have not yet pushed key ASEAN economies into unsustainable external deficits. Bank Indonesia (BI) focuses on defending the Indonesian Rupiah (IDR) and strengthening the balance of payments, while the region as a whole still runs a modest trade surplus. Yu argues reserves should smooth volatility, with adjustment coming mainly via demand and fiscal measures.

Balance of payments risks but buffers

"Bank Indonesia’s (BI) interest rate decision was largely in line with expectations, and the central bank committed to preserving currency stability, calling it an “all-out” effort to maintain IDR stability."

"Intervention will remain targeted, but BI also stressed that balance of payments “must be strengthened” to mitigate the impact from the war, as the country’s current account forecasts were revised sharply down from a deficit of 0.5% of GDP to 1.3%. In our view, every emerging market (EM) net energy importer will need to address balance of payments risks in their central bank decisions, especially Indonesia’s peers in Southeast Asia."

"ASEAN’s struggles throughout the conflict have been well-documented, but the hard numbers are not insurmountable. The core ASEAN economies – Indonesia, Malaysia, Thailand, Vietnam, the Philippines and Singapore – currently run a combined rolling six-month surplus of around $25bn, 60% of which is attributable to Singapore, whose trade patterns are sui generis."

"The net shortfall is manageable, especially relative to reserve levels. The concern is more about the pace of drawdown, which can generate significant market volatility."

"We agree that in the current environment, reserves should be used as smoothing operations, and balance of payments correction should come through demand-side adjustments. Fiscal measures to restrain activity are a useful stopgap, though this falls beyond the remit of local central banks."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)