Recent Macroeconomic Developments and Near-Term Policy Challenges

Southeast Asian economies are recovering strongly from their most severe contraction since the 1997 Asian crisis. The recovery was initially spurred by exports and reinforced by fiscal stimulus but is now becoming dependent on private domestic demand, whose momentum has been steadily increasing. Timely and effective counter-cyclical macroeconomic and financial policies were major factors underlying the recovery. The next challenge in the near term is to exit from the stimulus measures while continuing to support real growth, beginning with monetary policy and followed by the phasing out of fiscal stimulus in the coming years. Greater flexibility in the region’s exchange rates and more effective management of capital flows are needed. Increased regional co-operation on macroeconomic and financial policies, including the development of an effective regional surveillance system, can help to achieve a successful transition in the policies.