Determinants and Causality of Current Account Balance and Foreign Direct Investment: Lower Middle Income Countries in ASEAN


This study investigates the determinants and causality between current account balance and foreign direct investment in Association of Southeast Asian Nations (ASEAN) in lower middle income countries. This study uses time series from 2000-2017 and cross section of 6 countries, namely Indonesia, Philippines, Vietnam, Lao, Myanmar and Cambodia, which were analyzed using simultaneous equation model approach. There are three important findings in this study. First, current account balance is positively affected by financial development, government expenditure, real GDP and real exchange rate, while negatively affected by foreign direct investment. Second, foreign direct investment is positively affected by real GDP, real exchange rate, economic openness and current account balance, while negatively affected by inflation. Third, there is a causal relationship between current account balance and foreign direct investment, which the two variables significantly influence each other. Therefore, it is highly recommended for lower middle income countries in ASEAN to intervene in macroeconomic policy variables, so that the deficit conditions for current account balance and foreign direct investment can be reduced in the lower middle income countries in ASEAN.

Keywords: current account balance, foreign direct investment, determinants, causality, lower middle income countries, ASEAN.

[1] Sabine, H. and Adalbert, W. (2010). Real Convergence, Financial Markets, and the Current Account: Emerging Europe Versus Emerging Asia. Economic Papers, vol. 20, no. 5, pp. 123–152.

[2] Affandi, Y. and Mochtar, F. (2013). Current Account and Real Exchange Rate Dynamics in Indonesia. Procedia Economics and Finance, vol. 61, no. 2, pp. 20–29.

[3] Kumhof, M. and Laxton, D. (2013). Fiscal Deficits and Current Account Deficits. Journal of Economic Dynamics and Control, vol. 37, no. 10, pp. 2062–2082.

[4] Kurniadi, A. P. and Aimon, H. (2018). Determinants of the Current Account Balance in Indonesia, in Proceedings of International Conferences on Educational, Social Sciences and Technology. Padang: Global Conferences Index.

[5] Gossé, J. B. and Serranito, F. (2014). Long-run Determinants of Current Accounts in OECD Countries: Lessons for Intra-European Imbalances. Economic Modelling, vol. 38, pp. 451–462.

[6] Madura, J. (2011). International Financial Management 9 ed. USA: Florida Atlantic University.

[7] Steiner, A. (2016). Current Account Imbalances: The Role of Official Capital Flows. Global Imbalances, Financ. Crisis Central Bank Policies, vol. 12, no. 6, pp. 27–69.

[8] Garg, B. and Prabheesh, K. P. (2017). Do Macroeconomic Fundamentals or External Factors Reflect Current Account Behavior? Evidence from India. Journal of Asian Economics.

[9] Kurniadi, A. P. and Hasdi, A. (2018). The Analysis of Current Account Balance System in Indonesia. International Journal of Research Science and Management, vol. 5, no. 6, pp. 22–28.

[10] Hassan, K., Rao, A. and Hoque, A. (2016). Current Account Sustainability in Middle East and Africa (MEA) Countries: Evidence From Panel Data. Journal of Development Areas, vol. 50, no. 6, pp.291–304.

[11] Cecen, A. and Xiao. (2014). Capital Flows and Current Account Dynamics in Turkey: A Nonlinear Time Series Analysis. Economic Modelling, vol. 39, pp. 240–246.

[12] Benhima, K. and Havrylchyk, O. (2010). When Do Long-term Imbalances Lead to Current Account Reversals?. The World Economy, vol. 33, no. 1, pp. 107–128.

[13] Kurniadi, A. P., Aimon, H. and Sentosa, S. U. (2018). On the Sustainability of Current Account Deficits in Indonesia: Error Correction Mechanism Approach. International Journal of Scientific and Research Publications, vol. 8, no. 5, pp. 215–221.

[14] Cavdar, S. C. and Aydin, A. D. (2015). Understanding The Factors Behind Current Account Deficit Problem: A Panel Logit Approach On 16 OECD Member Countries. Procedia Economics and Finance, vol. 30, no. 15, pp. 187–194.

[15] Erauskin, I. (2015). Savings, the Size of the Net Foreign Asset Position, and the Dynamics of Current Accounts. International Review Economics & Finance, vol. 39, no. 18, pp. 353–370.

[16] Wadud, M. A. and Rahman, S. M. A. (2015). Sustainability of the Current Account in Bangladesh: an Intertemporal and Cointegration Analysis. The Journal of Developing Areas, vol. 49, no. 1, pp. 354–364.

[17] Kayikci, F. (2012). Determinants of the Current Account Balance in Turkey: Vector Auto Regression (VAR) Approach. African Journal of Business Management, vol. 6, no. 17, pp. 5725–5736.

[18] Ban, I. M. and Maftei, A. S. (2014). Determinants of the Current Account Balnace in Romania. Review of Economic Studies and Research Virgil Madgearu, vol. 6, no. 2, pp. 5–23.

[19] Murat, S., Hobikoglu, E. H. and Dalyanci, L. (2014). Structure and Sustainability of Current Account Deficit in Turkish Economy. Procedia Social and Behavioral Sciences, vol. 150, pp. 977–984.

[20] Boljanović, S. (2012). A Sustainability Analysis of Serbia’s Current Account Deficit. Annual Review of Economics, vol. 57, no. 195, pp. 139–171.

[21] Boateng, A., Hua, X., Nisar, S. and Wu, J. (2015). Examining the Determinants of Inward FDI: Evidence from Norway. Economic Modelling, vol. 47, pp. 118–127.

[22] Prasanna, N. (2010). Direct and Indirect Impact of Foreign Direct Investment (FDI) on Domestic Investment (FDI) in India. Journal of Economics, vol. 1, no. 2, pp. 77–83.

[23] Khan, R. E. A. and Nawaz, M. A. (2010). Economic Determinants of Foreign Direct Investment in Pakistan. Journal of Economics, vol. 1, no. 2, pp. 99–104.

[24] Chinn, M.D., Wei, S.J. (2013). A faith-based initiative meets the evidence: does a flexible exchange rate regime really facilitate current account adjustment?. Review of Economics and Statistics, vol. 95, no. 1, pp. 168–184.

[25] Ahmed, E. M. (2012). Are the FDI Inflow Spillover Effects on Malaysia’s Economic Growth Input Driven?. Economic Modeling, vol. 29, no. 4, pp. 1498–1504.

[26] Christopoulos, D.K. and León-Ledesma, M. (2010). Current-account Sustainability in the US: What Do We Really Know About it?. Journal of International Money and Finance, vol. 2, no. 9, pp. 442–459.

[27] Elgin, C. and Kuzubas, T. (2013). Current Account Balances and Output Volatility. Economic Modelling, vol. 33, pp. 381–387.

[28] Nkuna, O. (2013). Sustainability of the Malawian Current Account Deficit: Application of Structural and Solvency Approaches. Journal of Economics and International and Finance, vol. 5, no. 5, pp. 187–198.

[29] Coulibaly, I., Gnimassoun, B. (2013). Optimality of a Monetary Union: New Evidence from Exchange Rate Misalignments in West Africa. Economic Modelling, vol. 32, pp. 463–482.

[30] Vangjeli, E., Gerdhe, S. and Teneqexhi, M. (2012). Current Account Balance in Albania and the Influence of Different Factors on it. International Journal of Trade Global Markets, vol. 5, no. 3, pp. 235–245.

[31] Turan, Z., Berkman, A. N. and Nakiboglu, A. (2016). Sustainability of the Current Account Deficit in Turkey. International Journal of Economics and Financial Issues, vol. 6, no. 2, pp. 807–812.

[32] Romelli, D. and Vasconcelos, E. (2013). Current Account and Real Exchange Rate Changes: the Impact of Trade Openness. European Economic Review, pp. 1–25.

[33] Duncan, R. (2016). Does the US Current Account Show a Symmetric Behavior Over the Business Cycle? International Review of Economics & Finance, vol. 41, no. 18, pp. 202–219.

[34] Turan, T. (2015). The Causal Relationship between Current Account and Financial Account Balance in Selected CEE Countries. Ekonomický Časopis, vol. 63, no. 9, pp. 959–974.

[35] Uddin, M. and Boateng, A. (2011). Explaining the Trends in the UK Cross-border Mergers & Acquisitions: An Analysis of Macro-economic Factors. International Business Review, vol. 20, no. 5, pp. 547–556.