(Bloomberg) -- Capital inflows are proving to be just as much a curse as a blessing, with the potential to harm economic growth, Singapore’s deputy prime minister said.

“There’s too much short-term capital flows dictating the future of countries,” Tharman Shanmugaratnam said in an interview with Bloomberg Television’s Haslinda Amin at the sidelines of the World Bank and International Monetary Fund meetings in Bali, Indonesia. “And countries have to respond by tightening policy far more than is warranted by domestic circumstances just to defend their currencies, and what suffers is growth.”

The deputy prime minister was speaking in his capacity as head of a G20 committee looking at how to reform the global financial system. The group released a report in Bali on Friday with proposals on how to boost cooperation and improve resilience in markets.

His comments come against the backdrop of a volatile week for financial markets and a year in which emerging economies have been pummeled because of rising U.S. interest rates and a stronger dollar.

Large capital inflows aren’t necessarily something to “cheer” about, Shanmugaratnam said. Governments should “think hard” about macro-prudential policies to smooth the flow of funds toward productive use, he said.

‘Stealth’ Erosion

As opposed to the last financial crisis when all countries faced the same disaster at once, the current slowing in the global economy means “growth is being eroded by stealth -- one country at a time, one episode at a time, one liquidity squeeze at a time,” he said. Even as today’s global economy remains “very healthy,” it will turn, he said.

The deputy prime minister also said investors shouldn’t focus solely on the current-account deficit to assess the risk of an economy, including in nation’s like Indonesia and Argentina, calling it “a very narrow metric of a country’s sustainability and its health.” What’s important is whether a country has an inviting business environment and has solid economic fundamentals, he said.

India, Indonesia and the Philippines have been among the hardest hit in Asia in the global rout that’s hit emerging markets, with their current-account deficits often cited as a key reason. Each has had to undertake policy tightening measures this year, with Indonesia and Philippines being the most aggressive, with interest rate hikes of a 150 basis points each since mid-year.

Treasury Report

Asked on his views ahead of a U.S. Treasury report assessing foreign currencies, Shanmugaratnam said China’s currency has performed more or less in line with fundamentals over the past five to 10 years. The world’s No. 2 economy has undergone gradual liberalization of the currency and capital account and overseen a yuan that’s increasingly controlled by market forces, in his view.

As for the timing of the next crisis, Shanmugaratnam declined to stage a guess.

“The next crisis will come, and we’ve got to be prepared for it,” he said. “We’ve got to be prepared for it especially outside the banking sector.”

To contact the reporter on this story: Michelle Jamrisko in Singapore at mjamrisko@bloomberg.net

To contact the editors responsible for this story: Nasreen Seria at nseria@bloomberg.net, Karl Lester M. Yap

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