Current account deficit sustainability in selected transition economies

The article examines the question of whether the current account deficits seen inselected transition economies in recent years mainly as a symptom of the dynamiceconomic activity of the catching-up process are a source of potentialmacroeconomic destabilisation. Given the possible significant reduction of capitalflows, as well as restrictions and lessons from recent financial crises, currentaccount deficits must be closely monitored in the region. In this respect, the issue of‘current account sustainability’ in seventeen transition economies is investigated.For this purpose, two accounting frameworks (Milesi-Ferreti and Razin, 1996;Reisen, 1998) based on certain strict assumptions are employed. The results showthat if the observed level of foreign direct investment (FDI) flows is kept in themedium run almost all countries could optimally have a higher level of externaldeficit, with the exception of countries such as Baltic States, Hungary, Macedonia,Moldova and Romania. Accordingly, the maintenance of relatively large FDIinflows (especially greenfield investments) to national economies is a key priority insecuring future external sustainability. In the end, the results indicate that currentaccount deficits of transition economies that exceed 5 percent of GDP generallyinvolve problems of their external sustainability