South Korea, Australia Warn Against Early Stimulus Withdrawal

By Shamim Adam

Sept. 4 (Bloomberg) -- South Korea and Australia said an early winding back of fiscal and monetary stimulus that has been pumped into economies risks derailing a recovery even as debates intensify that such policies may spur asset bubbles.

South Korea’s government will formulate an exit strategy from its stimulus program once there are signs the nation’s economic recovery is led by business and consumers, Vice Finance Minister Hur Kyung Wook said in an interview today. Australian Treasurer Wayne Swan yesterday said a premature withdrawal of stimulus would stall a global recovery.

Government pledges of more than $2 trillion in stimulus worldwide and interest rate cuts are helping the world economy pull out of the worst recession since World War II. The global equity rally has added about $15 trillion to the value of stocks since this year’s low on March 9 as the credit crunch eased and investors became more confident of a recovery.

“The global recession is still with us,” Swan said in London, where finance ministers and central bankers from the Group of 20 are meeting this week. “Getting the timing right is essential, but we have to be acutely aware of just how fragile the international economy is. I don’t sense that anybody thinks that the time is near” for stimulus to be withdrawn.

U.S. Treasury Secretary Timothy Geithner on Sept. 2 also cautioned that it’s too early to remove policies aimed at boosting growth. European Central Bank President Jean-Claude Trichet yesterday said the euro region’s recovery from recession will be “bumpy” and signaled officials are in no rush to withdraw emergency measures as it left rates at a record low.

‘First Signs’

“You’re seeing the first signs of positive growth now in this country and countries around the world,” Geithner said. “We’ve come a very long way but I think we have to be realistic, we’ve got a long way to go still.”

The U.S. economy faces a “significant chance” of contracting again after emerging from its worst recession since the 1930s, Nobel Prize-winning economist Joseph Stiglitz said yesterday.

Asia’s reliance on stimulus spending has caused public debt to swell and policy makers need to consider unwinding the measures, former Japanese Economic and Fiscal Policy Minister Heizo Takenaka said today.

“Asia is developing a dangerous amount of debt; we must look for an exit strategy,” Takenaka said in Tokyo. “If this continues, Asian economies will become too dependent on their governments.”

Southeast Asia

Policy makers in Southeast Asia’s biggest economies may begin to remove monetary stimulus in their financial systems as early as the second quarter of 2010 as growth resumes, according to UBG AG.

Singapore may shift its currency stance to one that allows for a modest and gradual appreciation of its exchange rate, while Thailand, Indonesia and the Philippines may start raising interest rates in the quarter ending June, UBS economist Edward Teather wrote in a report published yesterday. Malaysia will raise rates by 50 basis points next year, Credit Suisse predicts.

Central banks across Asia have started to signal they may soon need to raise borrowing costs as growth resumes and threatens to stoke consumer prices.

Indonesia’s central bank yesterday refrained from cutting its benchmark rate for the first time in 10 months, judging faster inflation is now a bigger risk than slowing growth.

To contact the reporter on this story: Shamim Adam in Singapore at sadam2@bloomberg.net