With the prospect of further re-evaluations of risk as global monetary policy begins to slowly normalise, the sustainability of Indonesia's current account will be an ongoing concern, as exogenous shocks may still present themselves. The roots of Australia's success in managing market confidence in Australia's external position in similar situations lie in a long process of economic reforms, acting to mitigate the country-specific risk component of the stability of the CAD over the long term.
Part of the difficulty of dealing with the negative perceptions of the CAD lies in its apparent simplicity. Yet, as an aggregate figure reflecting a wide range of different drivers in the economy, the CAD is not necessarily ‘good' or ‘bad'. As such, policies targeted at the headline figure risk having unintended consequences. ‘Tactical' responses to short-term CAD concerns may exacerbate wider macroeconomic imbalances that are collectively contributing to external vulnerabilities in the first place, or in the case of Bank Indonesia's stabilisation efforts, have the side effect of reducing economic growth.
Instead, longer term policies that are beneficial to the structure of the economy in general – can in turn either mitigate the potentially damaging effects of an unsustainable/unstable CAD, or contribute to reducing the CAD altogether. The key point is that the structure of the economy should be developed in such a way that natural comparative advantages are allowed to assert themselves, and that policy is transparent and foreseeable to investors through a shared understanding of the ‘rules of the game'. A well-articulated and transparent framework for policy (and its formulation) is important in this regard.
Policy reforms undertaken by Australia and outlined in Box 1 have had direct implications for the sustainability and stability of the current account. The floating of the dollar reduced the need for intervention into the external account to relieve internal pressures on the domestic economy. Additionally, Australia's commitment to robust prudential regulation and comparatively low government borrowing has encouraged a favourable perception of its economy that might otherwise be incongruous with the running of persistent CADs.7
There have also been many instances where other reforms, not explicitly targeting the CAD, have nevertheless improved the external position. For example, liberalising the banking sector has contributed to the development of Australia's financial system which has helped Australia's financial markets to absorb and manage portfolio flows in a transparent and credible manner – contributing to the stability of Australia's current account position. Improvements to the external position were unintentional and secondary benefits to a productive series of microeconomic reform.
Even further removed from concerns over the external sector was the implementation of the Higher Education Contribution Scheme (HECS)-HELP program, and its antecedents. Initially targeting productivity gains by improving the structure and functioning of the economy, these higher-education reforms have, subsequently and unintentionally, had positive effects on the trade balance and the CAD by boosting the capacity of Australia's tertiary education sector in the face of rising demand for education services exports.
7 Moreover, the majority of Government debt is denominated in Australian dollars, thereby avoiding duplication of banks' currency exposures.