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.