ASEAN nations must tighten fiscal policy: Study

ASEAN nations must tighten fiscal policy: Study

MANILA (Dow Jones): Southeast Asian countries may have to
tighten fiscal policy because of mounting public debt incurred as
they battled the region's economic crisis over the past two
years, according to a report by the Association of Southeast
Asian Nations (ASEAN).

"With the already high level of external debt in crisis-
affected countries and additional public debt the governments
have incurred in financing the banking sector restructuring and
fiscal stimulation packages...expansionary fiscal policies may
not be sustainable," says a final draft of the report, obtained
Sunday at ASEAN's summit in Manila.

"With most countries expecting budget deficits next year, the
level of public debt will rise from the already-high levels in
1999," it adds.

The report, prepared by an Asean monitoring group that was
formed last year to help avert future crises, doesn't single out
individual ASEAN countries as facing particularly heavy debt
pressures, or say when fiscal policies might have to be
tightened.

But it says the fiscal issue is a potential threat to Asean's
recovery because, for the time being at least, fiscal stimulus is
expected to continue playing an important role in growth. Rising
global interest rates, especially in the U.S., could add to the
problem, it says.

The report suggests that ASEAN ministers consider ways to
reduce the cost of managing their public debt, including:
deepening domestic bond markets to allow for longer maturities
and better liquidity; securitizing state enterprises;
diversifying public debt to include more borrowing in yen as U.S.
interest rates rise; and sharing experience of debt management
between Asian members.

Another area of concern is that consumer demand in some
countries remains weak and private investment hasn't turned
around, the report says. In addition, corporate and financial
sectors are continuing to suffer from bad debt problems, and if
restructuring and reform of these sectors stalls, economies will
suffer, it adds.

It finds that the movements of banking stocks in ASEAN
countries since financial crises began suggest investors are
confident about Malaysia's bank restructuring, have doubts about
Thailand's, and don't see any sign of recovery in Indonesia's
banking sector.

The report urges ASEAN countries to strengthen public and
corporate governance and disclosure, enforce bankruptcy laws and
provide tax incentives to promote restructuring.

A possible slowdown in the U.S. economy next year could also
hurt ASEAN, though this may be offset by growth in Japan and the
European Union, the report says.

It suggests that ASEAN limit its vulnerability to external
shocks by encouraging more trade within the region. Two ways to
do this might be to create an ASEAN exchange rate system or even
an ASEAN common currency, and to establish a regional mechanism -
a kind of "Asian Monetary Fund" - to protect financial stability,
the report says.

A devaluation of China's yuan could also damage ASEAN's
recovery, the report says, though it doesn't estimate the
likelihood of this.