Asia faces fiscal dilemma<\/p>\n
By Alan Wheatley<\/p>\n
TOKYO (Reuters): The large public debts chalked up tackling
\nAsia's financial crisis have come back to haunt the region's
\ngovernments as they seek to cushion their economies from a global
\nslowdown.<\/p>\n
The debt burden is already so great in some countries,
\nespecially Indonesia and the Philippines, that most economists
\nnow view a fiscal blow-out as a much larger risk than a re-run of
\nthe region's 1997 balance-of-payments crisis.<\/p>\n
"The ability of the poorer countries in the region to maintain
\ndeficit spending is fast approaching its sustainable limit,"
\nLehman Brothers' Asian economists said in a report.<\/p>\n
"Unfortunately, while the parlous state of government finances
\nis of growing concern to markets, political distractions are
\npreventing countries from adequately facing up to the reality of
\ntheir public debt problems," they said.<\/p>\n
Debts ballooned during the crisis as governments took banks'
\nnon-performing loans (NPLs) onto their own books.<\/p>\n
As a consequence, while private-sector debt has fallen as a
\npercentage of gross domestic product in all five countries worst
\nhit by the crisis, public-sector debt has quadrupled in Indonesia
\nand Thailand.<\/p>\n
In the Philippines it has risen further to around 110 percent
\nof GDP, the highest in the region.<\/p>\n
What alarms economists and officials is that in most countries
\nthe taxpayer's bill for the bank clean-up is still rising.<\/p>\n
Goldman Sachs says the official 15 percent figure for NPLs in
\nthe Philippines does not include sour loans in the non-bank
\nfinancial intermediary sector, while ING Barings says the new
\nThai government's plans for a national asset management company
\nto buy up NPLs could cost 5.1-7.2 percent of gross domestic
\nproduct.<\/p>\n
As William McDonough, president of the Federal Reserve Bank of
\nNew York, said in Bangkok on Monday: "Contingent liabilities
\noften remain significant, raising some concern about potential
\nfuture debt growth."<\/p>\n
Not all countries are in a fiscal bind. Economists say
\nSingapore, Hong Kong and Malaysia have plenty of scope for pump-
\npriming if need be.<\/p>\n
Taiwan, despite an untackled NPL problem of its own, could
\nafford last week to announce an increase in public infrastructure
\nspending this year of NT$111.5 billion (US$3.5 billion) with the
\naim of boosting GDP growth by 0.7 of a percentage point.<\/p>\n
But Adam Le Mesurier of Goldman Sachs in Singapore said the
\ncountries that most need to support growth as exports flag are
\nthe ones least able to afford to ease fiscal policy.<\/p>\n
"They used their fiscal bullets pretty early on in the game
\nafter the crisis in 1997-1998 in terms of socializing the bank
\nliabilities in the system. Once you've shot those bullets, it's
\ndifficult to come back and reload," he told Reuters.<\/p>\n
Le Mesurier said the case of the Philippines' debt burden was
\nespecially sobering. Even on optimistic assumptions for real
\ninterest rates and the annual budget, Manila's public-sector debt
\nis sustainable only if growth is strong, he said.<\/p>\n
The risk is that a vicious circle will develop.<\/p>\n
If the fiscal position deteriorates further, capital flight
\nwill increase as taxpayers seek to avoid future tax increases,
\ncutting into investment and making it harder to achieve the
\ngrowth rates needed to stabilize the debt.<\/p>\n
Ultimately under that scenario the government has to resort to
\nthe money-printing presses to plug the budget gap. That fuels
\ninflation, driving the currency and real interest rates lower.<\/p>\n
Le Mesurier said the next year would be critical in
\nestablishing whether the new administration of President Gloria
\nMacapagal Arroyo, which has pledged to improve tax collection,
\ncan reverse or stabilize the fiscal position.<\/p>\n
"The issue will likely remain the single most important
\ndetermination of the underlying direction of the Philippine macro
\nrisk premium," Le Mesurier said in a report.<\/p>\n
The other country debt-watchers are monitoring closely is
\nThailand. As well as offering plans to manage the country's bad
\nassets, incoming Prime Minister Thaksin Shinawatra ran for
\nelection promising to grant each of the country's 70,000 villages
\none million baht ($23,580) and freeze poor farmers' debt
\nrepayments for three years.<\/p>\n
For now, economists are not too alarmed. Arthur Woo of HSBC
\nsaid a strong dose of fiscal expansion was a timely tonic for a
\nslowing economy. John Tsao of JP Morgan Chase said Thailand's
\npublic debt, nearing 60 percent, is sustainable provided growth
\ncontinues and privatization and tax reforms are accelerated.<\/p>\n
"For a quarter or two it's not going to kill them, depending
\non the size of the package," Sailesh Jha of the Asian Development
\nBank in Manila agreed.<\/p>\n
But he said pump-priming for Thailand and other Asian
\ncountries could achieve only so much.<\/p>\n
"Given the open nature of these economies, it can only be a
\nshort-term stabilization measure for a few quarters. That's about
\nit. Then it depends on how quickly the domestic sector reacts
\nboth in terms of consumption and investment," Jha said.<\/p>",
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